<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1998
REGISTRATION NO. 333-58059
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT
NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CLUETT AMERICAN CORP.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5136 22-2397044
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
48 West 38th Street
New York, New York 10018
(212) 984-8900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
Bryan P. Marsal
President and Chief Executive Officer
48 West 38th Street
New York, New York 10018
(212) 984-8900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------------
WITH A COPY TO:
<TABLE>
<S> <C>
Stephan J. Feder, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
(212) 455-2000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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(d)
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: / /
------------------------
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 OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF ADDITIONAL REGISTRANT GUARANTORS
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION
OF I.R.S. ADDRESS INCLUDING ZIP CODE, AND
EXACT NAME OF REGISTRANT INCORPORATION EMPLOYER TELEPHONE NUMBER INCLUDING AREA
GUARANTOR AS SPECIFIED OR IDENTIFICATION CODE, OF REGISTRANT GUARANTOR'S
IN ITS CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ----------------------------------------------- -------------- ------------- ---------------------------------
<S> <C> <C> <C>
Cluett Designer Group, Inc..................... Delaware 13-4008697 1330 Avenue of the Americas
New York, NY 10019
(212) 984-8500
Great American Knitting Mills, Inc............. Delaware 13-3550197 661 Plaid Street
Burlington, NC 27215
(336) 229-3700
Cluett, Peabody & Co., Inc..................... Delaware 22-3004734 4150 Boulder Ridge Rd., S.W.
Atlanta, GA 30336
(404) 346-5300
Consumer Direct Corporation.................... Delaware 22-3174425 48 West 38th Street
New York, NY 10018
(212) 883-4026
Arrow Factory Stores, Inc...................... Delaware 22-3125042 4150 Boulder Ridge Rd., S.W.
Atlanta, GA 30336
(404) 346-5300
</TABLE>
<PAGE>
PROSPECTUS STRICTLY CONFIDENTIAL
CLUETT AMERICAN CORP. [LOGO]
[LOGO]
OFFER TO EXCHANGE UP TO $112,000,000 OF ITS 10 1/8% SERIES B SENIOR SUBORDINATED
NOTES DUE 2008, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR ANY
AND ALL OF ITS OUTSTANDING 10 1/8% SENIOR SUBORDINATED NOTES
DUE 2008
OFFER TO EXCHANGE UP TO $50,000,000 OF ITS 12 1/2% SERIES B SENIOR EXCHANGEABLE
PREFERRED STOCK DUE 2010, WHICH HAS BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING 12 1/2% SENIOR EXCHANGEABLE
PREFERRED STOCK DUE 2010
---------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON NOVEMBER 24, 1998, UNLESS EXTENDED.
---------------------
Cluett American Corp. (formerly known as Bidermann Industries Corp.), a
Delaware corporation (the "Company"), hereby offers, upon the terms and subject
to the conditions set forth in this Prospectus and the accompanying Note Letter
of Transmittal and Preferred Stock Letter of Transmittal (together, the "Letters
of Transmittal"), to exchange an aggregate of up to $112,000,000 principal
amount of 10 1/8% Series B Senior Subordinated Notes Due 2008 (the "Exchange
Notes") of the Company for an identical face amount of the issued and
outstanding 10 1/8% Senior Subordinated Notes Due 2008 (the "Old Notes" and,
together with the Exchange Notes, the "Notes") of the Company from the Holders
thereof (the "Note Exchange Offer") and to exchange an aggregate of up to
$50,000,000 of 12 1/2% Series B Senior Exchangeable Preferred Stock Due 2010
(the "New Preferred Stock") of the Company for an identical face amount of the
issued and outstanding 12 1/2% Senior Exchangeable Preferred Stock Due 2010 (the
"Exchangeable Preferred Stock" and, together with the New Preferred Stock, the
"Preferred Stock") of the Company from the Holders thereof (the "Preferred Stock
Exchange Offer" and, together with the Note Exchange Offer, the "Exchange Offer"
or "Exchange Offerings"). The Exchange Notes and New Preferred Stock are
collectively referred to herein as the "Securities." As of the date of this
Prospectus, there is $112,000,000 aggregate principal amount of the Old Notes
outstanding and $50,000,000 of the Exchangeable Preferred Stock outstanding. The
terms of the Exchange Notes and New Preferred Stock are identical in all
material respects to the Old Notes and Exchangeable Preferred Stock,
respectively, except that the Exchange Notes and New Preferred Stock have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and therefore will not bear legends restricting their transfer and will not
contain certain provisions providing for an increase in the interest rate on the
Old Notes or for Liquidated Damages on the Exchangeable Preferred Stock under
certain circumstances described in the Note Registration Rights Agreement and
the Preferred Stock Registration Rights Agreement, respectively, which
provisions will terminate as to all of the Notes and Preferred Stock upon the
consummation of the Exchange Offer. The Old Notes and the Exchangeable Preferred
Stock were issued in a private offering pursuant to Section 4(2) of the
Securities Act on May 18, 1998.
The Exchange Notes mature on May 15, 2008, unless previously redeemed.
Interest on the Exchange Notes will be payable semiannually on May 15 and
November 15 of each year, commencing November 15, 1998. The Company will not be
required to make any mandatory redemption or sinking fund payment with respect
to the Exchange Notes prior to maturity. The Exchange Notes will be redeemable
at the option of the Company, in whole or in part, at any time on or after May
15, 2003 at the redemption prices set forth herein plus accrued and unpaid
interest thereon and Liquidated Damages (as defined), if any, to the date of
redemption. In addition, at the option of the Company, up to 35% of the original
aggregate principal amount of Exchange Notes may be redeemed prior to May 15,
2001 at the redemption price set forth herein, plus accrued and unpaid interest
thereon and Liquidated Damages, if any, to the date of redemption with the
proceeds of a Public Offering (as defined); PROVIDED, HOWEVER, that at least 65%
of the original aggregate principal amount of Exchange Notes remains outstanding
following such redemption. In the event of a Change of Control (as defined), (i)
the
(CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE 23 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY INVESTORS IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE SECURITIES.
-----------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 26, 1998.
<PAGE>
Company will have the option, prior to May 15, 2003 to redeem the Exchange
Notes, in whole, at a redemption price equal to 100% of the principal amount
thereof plus the Applicable Premium (as defined), together with accrued and
unpaid interest, if any, to the date of redemption, and (ii) if the Company has
not redeemed the Exchange Notes, the Company will be required to make an offer
to repurchase all outstanding Exchange Notes at 101% of the aggregate principal
amount thereof plus accrued and unpaid interest thereon and Liquidated Damages,
if any, to the date of repurchase. See "Risk Factors--Repurchase Upon a Change
of Control," for a discussion of restrictions on the Company's ability to
repurchase the Exchange Notes. There can be no assurance that in the event of a
Change of Control the Company will have sufficient funds to repurchase the
Exchange Notes.
The Exchange Notes will be general unsecured obligations of the Company,
will be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company, including indebtedness under the
Senior Credit Facility (as defined) and will rank on a parity with or senior in
right of payment to all existing and future Subordinated Indebtedness (as
defined) of the Company. The Company's payment of principal, premium, if any,
and interest on the Exchange Notes will be unconditionally guaranteed (the
"Subsidiary Guarantees"), jointly and severally, on an unsecured senior
subordinated basis by all existing and future domestic Restricted Subsidiaries
(as defined) of the Company (the "Subsidiary Guarantors"). The Subsidiary
Guarantees will be subordinated in right of payment to all existing and future
Senior Indebtedness of the Subsidiary Guarantors, including all obligations of
the Subsidiary Guarantors under the Senior Credit Facility and will rank on a
parity with or senior in right of payment to all existing and future Senior
Subordinated Indebtedness (as defined) of the Subsidiary Guarantors. However,
the Exchange Notes will be effectively subordinated to all indebtedness and
other liabilities and commitments (including trade payables and capital lease
obligations) of the Company's foreign subsidiaries. Any right of the Company to
receive assets of any of its foreign subsidiaries upon the latter's liquidation
or reorganization (and the consequent right of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
subsidiary and any indebtedness of such subsidiary senior to that held by the
Company. As of June 27, 1998, the liabilities of the Company's foreign
subsidiaries was $8.9 million. See "Description of the Exchange Notes".
As of June 27, 1998 the aggregate principal amount of Senior Indebtedness
(excluding trade payables and other accrued liabilities) of the Company and its
subsidiaries was approximately $122.5 million (excluding $18.3 million of
letters of credit). The indenture pursuant to which the Exchange Notes will be
issued will limit the ability of the Company and its subsidiaries to incur
additional indebtedness.
The Company will also issue 500,000 shares of the New Preferred Stock. Each
share of New Preferred Stock will have a liquidation preference of $100 per
share. The New Preferred Stock will not be guaranteed by the Subsidiary
Guarantors. All dividends will be cumulative from the date of issuance of the
New Preferred Stock and will be payable semiannually in arrears on May 15 and
November 15 of each year commencing on November 15, 1998. On or before May 15,
2003, the Company may, at its option, pay dividends in cash or in additional
fully-paid and non-assessable shares of New Preferred Stock having an aggregate
liquidation preference equal to the amount of such dividends. Thereafter,
dividends may be paid in cash only. It is not expected that the Company will pay
any dividends in cash for the period ending on or prior to May 15, 2003. On any
scheduled dividend payment date, the Company may, at its option, but subject to
certain conditions, exchange all but not less than all of the shares of New
Preferred Stock for the Company's 12 1/2% Subordinated Exchange Debentures Due
2010 (the "Exchange Debentures"). As of June 27, 1998, the aggregate principal
amount of indebtedness ranking senior to the New Preferred Stock (excluding
trade payables and other accrued liabilities) of the Company and its
subsidiaries was approximately $247.5 million (excluding $18.3 million of
letters of credit).
The Company will be required, subject to certain conditions, to redeem all
of the New Preferred Stock or the Exchange Debentures, as the case may be, on
May 15, 2010. Except as described below, the Company may not redeem the New
Preferred Stock or the Exchange Debentures prior to May 15, 2003. On or after
such date, the Company may, at its option, redeem the New Preferred Stock or the
Exchange Debentures, in whole or in part, for cash, at the redemption prices set
forth herein together with, in the case of the New Preferred Stock, all
accumulated and unpaid dividends to the date of redemption, or in the case of
the Exchange Debentures, all accrued and unpaid interest to the date of
redemption. In addition, at any time and from time to time prior to May 15,
2001, the New Preferred Stock and the Exchange Debentures may be redeemed, in
whole or in part, for cash, with the proceeds of one or more Equity Offerings
(as defined) at the redemption prices set forth herein, together with
accumulated and unpaid dividends, if any, to the date of redemption. Upon the
occurrence of a Change of Control, (i) the Company will have the option, prior
to May 15, 2003 to redeem the New Preferred Stock or Exchangeable Debentures, in
whole, at a redemption price equal to a percentage of the liquidation preference
equal to the sum of 100% and the dividend rate in effect with respect to the New
Preferred Stock (or the interest rate in effect with respect to the Exchange
Debentures, as applicable), together with accrued and unpaid interest, if any,
to the date of redemption, and (ii) if the Company has not redeemed the New
Preferred Stock or Exchangeable Debentures, the Company will be required to make
an offer to purchase the New Preferred Stock or the Exchange Debentures, for
cash, at a price equal to 101% of the liquidation preference or aggregate
principal amount (as the case may be) thereof, together with, in the case of the
New Preferred Stock, all accumulated and unpaid dividends to the date of
purchase, or in the case of the Exchange Debentures, all accrued and unpaid
interest thereon. There can be no assurance that in the event of a Change of
Control the Company will have sufficient funds to repurchase the New Preferred
Stock or the Exchange Debentures. See
<PAGE>
"Risk Factors--Repurchase Upon a Change of Control" for a discussion of
restrictions on the Company's ability to repurchase the New Preferred Stock and
Exchange Debentures. The Exchange Debentures will be general unsecured
obligations of the Company, will be subordinated in right of payment to all
existing and future Exchange Debenture Senior Indebtedness (as defined) of the
Company, including indebtedness under the Senior Credit Facility and the Notes.
The Exchange Debentures will be effectively subordinated to all liabilities of
the Company's subsidiaries. See "Description of the New Preferred Stock and
Exchange Debentures."
The Old Notes (the "Note Offering") and the Exchangeable Preferred Stock
(the "Preferred Stock Offering" and, together with the Note Offering,
the"Offerings") were issued and sold on May 18, 1998 in a transaction not
registered under the Securities Act in reliance upon an exemption from the
registration requirements thereof. In general, the Old Notes and Exchangeable
Preferred Stock may not be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to the Securities Act. The Exchange Notes and New Preferred Stock are
being offered hereby in order to satisfy certain obligations of the Company
contained in the Note Registration Rights Agreement and the Preferred Stock
Registration Rights Agreement, respectively. Based on interpretations by the
staff of the Securities and Exchange Commission (the "Commission" or "SEC") set
forth in no-action letters issued to third parties, the Company believes that
the Exchange Notes and New Preferred Stock issued pursuant to the Exchange Offer
in exchange for Old Notes and Exchangeable Preferred Stock, respectively, may be
offered for resale, resold or otherwise transferred by any holder thereof (other
than any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 promulgated under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, PROVIDED
that such Exchange Notes and New Preferred Stock are acquired in the ordinary
course of such holder's business, such holder has no arrangement with any person
to participate in the distribution of such Exchange Notes or New Preferred Stock
and neither such holder nor any such other person is engaging in or intends to
engage in a distribution of such Exchange Notes or New Preferred Stock. However,
the Company has not sought, and does not intend to seek, its own no-action
letter, and there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer. Notwithstanding
the foregoing, each broker-dealer that receives Exchange Notes or New Preferred
Stock for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes or New Preferred Stock. The Letters of Transmittal state that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with any resale of Exchange Notes or New
Preferred Stock received in exchange for such Old Notes or Exchangeable
Preferred Stock where such Old Notes or Exchangeable Preferred Stock were
acquired by such broker-dealer as a result of market-making activities or other
trading activities (other than Old Notes or Exchangeable Preferred Stock
acquired directly from the Company). A broker-dealer may not participate in the
Exchange Offer with respect to Old Notes or Exchangeable Preferred Stock
acquired other than as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 90 days after the date
of this Prospectus, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
The Old Notes and Exchangeable Preferred Stock are designated for trading in
the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL")
market. There is no established trading market for the Exchange Notes or New
Preferred Stock. The Company currently does not intend to list the Exchange
Notes or New Preferred Stock on any securities exchange or to seek approval for
quotation of the Exchange Notes or New Preferred Stock through any automated
quotation system. Accordingly, there can be no assurance as to the development
or liquidity of any market for the Exchange Notes or New Preferred Stock.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes or Exchangeable Preferred Stock being tendered for exchange.
The date of acceptance and exchange of the Old Notes and Exchangeable Preferred
Stock (the "Exchange Date") will be the fourth business day following the
Expiration Date. Old Notes and Exchangeable Preferred Stock tendered pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date.
The Company will not receive any proceeds from the Exchange Offer. The Company
will pay all of the expenses incident to the Exchange Offer. The Exchange Offer
will expire 5:00 p.m., New York City time, on November 24, 1998 (the "Expiration
Date"). The Company does not currently intend to extend the Expiration Date.
<PAGE>
OTHER INFORMATION
TRADEMARKS OF THE COMPANY INCLUDED IN THIS PROSPECTUS APPEAR IN ITALICS. ALL
OTHER TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR
RESPECTIVE HOLDERS.
MARKET SHARE DATA HAS BEEN DERIVED FROM DATA PROVIDED BY THE NPD GROUP, INC.
AND THE NATIONAL ASSOCIATION OF HOSIERY MANUFACTURERS. THE NPD MARKET SHARE
INFORMATION IS DERIVED FROM NPD POSTS, A SAMPLE OF LEADING DEPARTMENT STORES IN
THE CONTINENTAL UNITED STATES. THE NPD MARKET SHARE INFORMATION CONTAINED WITHIN
IS FOR DRESS SHIRTS ONLY. NPD MARKET SHARE DATA IS FOR UNITED STATES SALES ONLY.
THE COMPANY CHANGED ITS NAME TO CLUETT AMERICAN CORP. ON THE DATE OF CLOSING
OF THE TRANSACTION.
THE COMPANY'S ADDRESS IS 48 WEST 38TH STREET, NEW YORK, NEW YORK, 10018 AND
ITS TELEPHONE NUMBER IS (212) 984-8900.
i
<PAGE>
AVAILABLE INFORMATION
The Company and the Subsidiary Guarantors have filed with the Commission a
Registration Statement on Form S-4 (together with all amendments, exhibits,
schedules and supplements thereto, the "Registration Statement") under the
Securities Act with respect to the Securities being offered hereby. This
Prospectus, which forms a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement. For further
information with respect to the Company, the Subsidiary Guarantors and the
Securities, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which reference
is hereby made. The Company and the Subsidiary Guarantors are not currently
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Upon completion of the Exchange Offer,
the Company and the Subsidiary Guarantors will be subject to the information
requirements of the Exchange Act and, in accordance therewith, will file
periodic reports and other information with the Commission. The Company will not
separately report financial information for the Subsidiary Guarantors because
the Company has determined that such information is not material. The
Registration Statement, such reports and other information can be inspected and
copied at the Public Reference Section of the Commission located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at regional
public reference facilities maintained by the Commission located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material, including copies of all or any portion of the Registration Statement,
can be obtained from the Public Reference Section of the Commission at
prescribed rates. Such material may also be accessed electronically by means of
the Commission's home page on the Internet (http://www.sec.gov). In addition,
pursuant to the Indenture covering Old Notes and the Exchange Notes and the
Certificate of Designations covering the Exchangeable Preferred Stock and the
New Preferred Stock, the Company has agreed to file with the Commission and
provide to the Holders the annual reports and the information, documents and
other reports otherwise required pursuant to Section 13 of the Exchange Act.
Such requirements may be satisfied through the filing and provision of such
documents and reports which would otherwise be required pursuant to Section 13
in respect of the Company.
UNTIL JANUARY 24, 1999 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS 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.
ii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED OR THE CONTEXT CLEARLY IMPLIES OTHERWISE, ALL
REFERENCES IN THIS PROSPECTUS TO (I) THE "COMPANY" REFERS TO CLUETT AMERICAN
CORP. (FORMERLY KNOWN AS BIDERMANN INDUSTRIES CORP.), A WHOLLY-OWNED SUBSIDIARY
OF CLUETT AMERICAN GROUP, INC. AND ITS SUBSIDIARIES, (II) "CAG" REFERS TO CLUETT
AMERICAN GROUP, INC., A WHOLLY-OWNED SUBSIDIARY OF CLUETT AMERICAN INVESTMENT
CORP. AND ITS SUBSIDIARIES AND (III) "HOLDINGS" REFERS TO CLUETT AMERICAN
INVESTMENT CORP. (FORMERLY KNOWN AS BIDERMANN INDUSTRIES U.S.A., INC.) AND ITS
SUBSIDIARIES. THE COMPANY ALSO INCLUDES THE RETAIL BUSINESS OPERATED BY CONSUMER
DIRECT CORPORATION, AN AFFILIATE OF THE COMPANY WHICH WILL BE CONTRIBUTED TO THE
COMPANY ON THE DATE OF CLOSING OF THE OFFERINGS. FOR A DISCUSSION OF PRO FORMA
ADJUSTMENTS TO THE COMPANY'S HISTORICAL COMBINED FINANCIAL STATEMENTS SEE
"UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION." ADJUSTED NET SALES AND
ADJUSTED EBITDA REPRESENT HISTORICAL NET SALES AND EBITDA AS DEFINED,
RESPECTIVELY, ADJUSTED FOR: THE SALE OF THE RALPH LAUREN WOMENSWEAR LICENSE
COMPLETED IN OCTOBER 1995, THE SALE OF ARROW DE MEXICO AND ARROW GUATEMALA IN
1997 AND THE DECISION TO CLOSE CERTAIN CANADIAN RETAIL STORES, WHICH WAS MADE IN
DECEMBER 1996. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
GIVES EFFECT TO THE PLAN AND THE RECAPITALIZATION.
THE COMPANY
Based on net sales, the Company believes it is one of the leading designers,
manufacturers and marketers of men's socks and dress shirts in the United States
and has a significant market presence in women's and children's socks and a
growing presence in men's and women's sportswear. While the Company serves most
channels of distribution, its primary focus is on department and national chain
store retailers. The Company believes its core product offerings, GOLD TOE socks
and ARROW dress shirts, provide classic styles at price points which represent
exceptional value and appeal to a broad consumer base.
The Company markets its products utilizing widely recognized Company-owned
brands such as GOLD TOE, SILVER TOE and ARROW in the sock segment and ARROW and
its related trade names, including DOVER, KENT, ARROW "1851", and COLLARMAN in
the dress shirt segment. In 1997, the ARROW brand was the second leading branded
dress shirt capturing a market share of approximately 10% of the department
store channel for men's dress shirts. The Company primarily sells its products
to department and national chain stores to maintain its brand image and to
achieve the relatively higher selling prices and higher margins characterized by
sales to these retail stores. Approximately 58% of the Company's sales are
derived from these core offerings, the demand for which the Company believes is
stable and resistant to changing fashion trends.
The Company also has licensed the exclusive rights to manufacture and market
certain apparel products (generally socks and shirts) under such widely
recognized brand names as Perry Ellis, Nautica, Jockey, Stride Rite, Kenneth
Cole, Burberrys, and Yves Saint Laurent. This diverse portfolio of Company-owned
and licensed brand names enables the Company to offer different brands of unique
value-added products to different channels of distribution.
The Company conducts its business through three principal business units:
the Sock Group, the Shirt Group and the Designer Group. For the year ended
December 31, 1997, the Company realized pro forma net sales and EBITDA As
Defined of $359.2 million and $40.5 million, respectively.
- THE SOCK GROUP (42.3% OF PRO FORMA NET SALES FOR 1997). The Sock Group is
a market leader in department store sales of socks. The Sock Group's leading
brand, GOLD TOE, was established in 1934 and generates approximately 63% of the
Sock Group's net sales with the remaining sales generated through complementary
private labels and through licensed brands such as Perry Ellis, Nautica, Jockey
and Stride Rite. The Sock Group offers a comprehensive line of products across
multiple price points, ages, genders and styles, enabling it to provide its
customers with a full range of their sock requirements. For 1997 the Sock Group
realized net sales and EBITDA As Defined of $151.8 million and $27.2 million,
respectively.
1
<PAGE>
- THE SHIRT GROUP (49.0% OF PRO FORMA NET SALES FOR 1997). The Shirt Group
designs, manufactures and markets dress shirts and sportswear, focusing on men's
cotton/polyester and all cotton dress shirts which are sold under the ARROW
brand and its related trade names, including DOVER, KENT, COLLARMAN, and ARROW
"1851". Sportswear products manufactured by the Company consist primarily of
men's and women's knitted and woven sport shirts which are sold primarily under
its TOURNAMENT and ARROW AUTHENTIC labels. Because of the name recognition of
its ARROW brand, which was established in 1851, the Company is also able to
license the ARROW trademarks for shirts internationally and non-shirt products
both domestically and internationally. For 1997 the Shirt Group realized net
sales (including licensing fee revenue of $6.8 million) and EBITDA As Defined
(including net licensing income of $4.1 million) of $176.0 million and $14.7
million, respectively.
- THE DESIGNER GROUP (11.1% OF PRO FORMA NET SALES FOR 1997). The Designer
Group was established as a separate business unit in October 1995 and sells (i)
dress and sport shirts under licensed Yves Saint Laurent, Burberrys and Kenneth
Cole trademarks, (ii) dress socks under the licensed Kenneth Cole and Yves Saint
Laurent trademarks and (iii) tailored clothing and casual pants under the Yves
Saint Laurent trademark. The Designer Group's products, distributed primarily to
department and specialty stores, help complement the Company's core product
offerings. For 1997, the Designer Group had net sales and EBITDA As Defined of
$40.0 and negative $0.9 million, respectively.
The net sales and EBITDA As Defined numbers in the prior three paragraphs do
not include intercompany sales and pro forma corporate overhead charges of $8.6
million and $0.5 million, respectively.
RISK FACTORS
See "Risk Factors" for a discussion of certain risks that should be
considered in connection with the exchange offer, including, without limitation,
risks related to: (i) consequences of failure to exchange; (ii) substantial
leverage; (iii) subordination of Exchange Notes and Exchange Debentures; equity
interest; (iv) emergence from Chapter 11; (v) net losses; (vi) dividend
restrictions on New Preferred Stock and Exchange Debentures; (vii) holding
company structure; (viii) competition; industry risks; (ix) reliance on certain
customers; (x) ownership changes in the retail industry; (xi) trademarks; (xii)
dependence on licensing partners; (xiii) performance of unaffiliated
manufacturers; (xiv) possible adverse impact of change in import restrictions;
(xv) growth strategy and strategic acquisitions; (xvi) dependence on key
personnel; (xvii) labor stoppage; (xviii) control by certain stockholders; (xix)
limitations on use of net operating losses and built-in losses; (xx) restrictive
financing covenants; (xxi) repurchase upon change of control; (xxii) certain tax
considerations for holders of New Preferred Stock; (xxiii) fraudulent conveyance
considerations; (xxiv) environmental matters; (xxv) absence of public market;
and (xxvi) year 2000 risk.
COMPETITIVE STRENGTHS
Each of the Company's principal business units has secured a strong
competitive position within its respective market segment. The Company has
assembled a comprehensive portfolio of widely recognized brand names in the sock
and shirt markets, led by its owned GOLD TOE and ARROW brands. The Company also
has long-standing established relationships with many of the largest department
store and national chain store retailers including Belk Department Stores
("Belk's"), Dayton-Hudson Corporation (including Marshall Field's)
("Dayton-Hudson"), Dillard's Inc. ("Dillard's"), J.C. Penney Company ("J.C.
Penny"), The May Department Stores Company (including Lord & Taylor, Hecht's,
Foley's and Filene's) ("May Company"), Mercantile Stores Company, Inc.
("Mercantile"), Federated Department Stores, Inc. (including Macy's East and
Macy's West, Bloomingdale's, Rich's, Stern's and Burdines) ("Federated"),
Proffitt's, Inc. ("Proffitt's") and Sears Roebuck & Co. ("Sears").
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COMPETITION; INDUSTRY RISKS
The apparel industries are highly competitive. The Company competes with
numerous domestic and foreign designers, brands and manufacturers of apparel and
accessories, some of which may be significantly larger and more diversified and
have greater financial and other resources than the Company. Increased
competition from these and future competitors could reduce sales and prices,
adversely affecting the Company's results of operations. Because of the
Company's high leverage, it may be less able to respond effectively to such
competition than other participants.
THE BANKRUPTCY AND TURNAROUND
In 1990, the Company acquired Cluett Peabody & Co., Inc., which included the
Sock Group and the Shirt Group, from West Point-Pepperell, Inc. Prior to that
time, the Company had primarily been a licensed designer and marketer of premium
high fashion apparel under designer labels such as Ralph Lauren. The Company
applied the same high overhead designer business model to these less fashion-
oriented businesses. Rather than reduce costs, the Company attempted to
compensate for this inappropriate cost structure by broadening distribution and
expanding the Shirt Group's ARROW business into higher-priced, higher-fashion
dress shirts and sportswear. This effort was poorly executed and ignored both
the Company's core customer and operational capabilities, resulting in
significant excess inventory. The losses associated with this strategy, in
addition to an unsuccessful expansion into retail outlets, forced the Company to
seek protection under the Bankruptcy Code in July 1995.
In June 1995, Bryan Marsal (a managing director of Alvarez & Marsal, Inc.
("A&M")) was appointed President and Chief Executive Officer of the Company.
Since then Mr. Marsal and the rest of his management team have taken a number of
strategic and operational actions which have substantially improved the
Company's cash flow and restored profitability. As a result, the Company was
able to file the Plan (as defined) in March 1998 pursuant to which, utilizing
the proceeds of the Offerings and certain other financing, the Company repaid in
full substantially all of its outstanding indebtedness, together with all
accrued interest thereon and provide a payment to existing shareholders. See
"The Transaction." The actions taken by Mr. Marsal and his team have included
the following:
- EXPENSE MANAGEMENT. The Company significantly reduced its operating costs
and expenses by transferring administrative functions to its operating
subsidiaries and by eliminating unnecessary expenses. This
decentralization resulted in a significant reduction in corporate overhead
and expenditures being made on redundant corporate activity. It also
increased the efficiency with which administrative functions were handled.
For example, instead of the collections process being managed at the
corporate level, it is being managed by the same group responsible for the
sales, marketing and distribution of the order. This integration has
significantly lowered returns, chargebacks and retailer penalties for
execution breakdowns. Examples of operating expense reductions include the
closure of unprofitable retail stores; the relocation of offices and
showrooms to less expensive locations; the introduction of more cost
effective medical and worker's compensation benefit plans; the
consolidation of distribution centers and the elimination of related
excess capacity; the reduction of personnel; and the modification and
reduction of advertising and promotional spending from an ineffective
national media campaign to more effective regional cooperative and point
of sale advertising.
- OPERATIONAL IMPROVEMENTS. In the fourth quarter of 1995, the Company began
the elimination of excess or unnecessary capacity with the closure of the
Shirt Group's production facilities in Cedartown, Georgia and Costa Rica
and the Sock Group's manufacturing plant in Halifax, North Carolina. Also,
the Shirt Group consolidated New York and Atlanta product sourcing into
one group in Atlanta and implemented strict international vendor
qualification and monitoring programs. In addition, the Company invested
in new manufacturing equipment for the Sock Group; in new information
systems for the Sock and Shirt Groups which provided the financial tools
needed
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to reduce inventory, improve collections and assist overall planning; and
in material handling equipment and scanning technology to more cost
effectively meet customers' shipping needs.
- PRODUCT REALIGNMENT. In 1995, the Company began the process of refocusing
the Shirt Group on its blended dress shirt product and repositioning the
all cotton dress shirt and sports shirt products as complementary products
to these core cotton/polyester dress shirt offerings. Given the lead times
associated with international sourcing of sport shirts, it was not until
fall of 1997 that the Shirt Group's product line fully reflected
management's intended product mix. This realignment has contributed to
lower returns, allowances, markdowns, and off-price sales, resulting in
improved gross margins.
BUSINESS STRATEGY
Management intends to maintain its competitive position in its current
product offerings while leveraging its competitive strengths to implement the
following business strategies:
- INCREASE PENETRATION WITH EXISTING CUSTOMERS. The Sock Group intends to
leverage its existing customer relationships, recognized brand names and
established reputation for customer service to continue expanding its
branded and private label women's and children's sock businesses. The
Company has recently acquired the license to distribute children's socks
under the Stride Rite brand and has been successfully marketing a line of
women's GOLD TOE socks. By incorporating these new products into the Sock
Group's existing offerings, the Company believes it will create
opportunities for added sales and further increase its significance as a
supplier to its existing customer base.
Management intends to increase the Shirt Group's dress shirt business
through the expansion of the DOVER brand to include additional fabrics
including broadcloth and pinpoint. The Company is also selectively
expanding its sportswear business into underserved niches of the
sportswear market, such as blended men's golf shirts and women's golf
sportswear. The Company believes these products have been well received
and will further add to the Company's profitability.
- BROADEN DISTRIBUTION. Management intends to expand the Sock Group's
distribution from its strength in department and national chain stores to
include specialty chains, discount department stores and sporting goods
stores. Management believes that these new channels will complement the
Company's presence in the department store and national chain store
channels while adding incremental profit without diminishing the integrity
of its brand names.
The Shirt Group has been limited in its ability to pursue new retailers
and channels of distribution due to its operational problems and the
financial uncertainty caused by the bankruptcy. With these problems
solved, the Shirt Group intends to expand its presence with existing
customers while pursuing new opportunities with other department stores,
specialty stores and national chains.
Both the Sock Group and the Shirt Group intend to pursue mass merchants on
a selective basis, only participating in programs which are value-added
and differentiated in terms of styling, branding and execution, as opposed
to price.
- NEW LICENSES, SELECTIVE ACQUISITIONS AND LICENSING OPPORTUNITIES. As the
leading supplier of socks to the department store channel, the Sock Group
believes it has the infrastructure and access to distribution channels
most desirable to prospective designer licensors. As such, it continues to
proactively pursue new license opportunities which will complement its
core offerings. Similarly, because of its market leadership and
operational structure, management believes the Sock Group is strategically
positioned to acquire and integrate additional brands or complementary
businesses. In
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addition, the Company intends to increase its fee income by licensing its
GOLD TOE trademark internationally and has recently hired an international
sales manager to assist in that effort.
The Shirt Group believes that opportunities will arise to acquire
complementary dress shirt and sports shirt companies or licenses which
will leverage the use of its existing operating infrastructure
(distribution, sourcing, quality control and finance) and yet allow the
acquired brand to have an independent identity through use of separate
design, sales and merchandising personnel. In addition, management intends
to expand its licensing of the ARROW name to include other products and
accessories in order to create a broader apparel collection.
The Designer Group has recently acquired the dress shirt and sock licenses
for Kenneth Cole and plans to introduce these products in the fall of
1998. The Designer Group intends to continue to introduce new offerings
under its existing brands while exploring opportunities to acquire other
high-end designer labels.
THE RECAPITALIZATION
On March 31, 1998, the Company's and Holdings' Third Amended Plan of
Reorganization (the "Plan") was confirmed by the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court"). In connection
with the Plan and pursuant to a subscription agreement dated as of March 30,
1998 (the "Subscription Agreement"), Vestar Capital Partners III, L.P. or a
designated affiliate ("Vestar"), A&M or a designated affiliate, certain other
purchasers and certain members of existing management (collectively, the "Equity
Investors") made a $68.0 million equity investment (the "Equity Investment") in
Holdings. Approximately $52.7 million of the Equity Investment was provided by
Vestar in the form of a $21.3 million common equity investment in Holdings (the
"Holdings Common Stock") and a $31.4 million investment in Class C Junior
Preferred Stock of Holdings (the "Holdings Class C Junior Preferred Stock").
Approximately $8.6 million of the Equity Investment was provided by Cerberus
Partners, L.P., Montgomery Associates 1998, L.P., Golden Arrow Partners,
Gleacher V, L.P., CDI Capital Partners, John R. Woodard, Jr. and James L. Elrod,
Jr. (the "Co-Investors") in the form of a $3.5 million investment in Holdings
Common Stock and a $5.1 million investment in Holdings Class C Preferred Stock.
None of the Co-Investors, except John R. Woodward, Jr. and James L. Elrod, Jr.,
who are managing directors of Vestar, are affiliates of the Company. A&M and
certain employees of the Company (Frederick Alexander, Michelle Cannon, James
Herrel, Steven Kaufman, Mary Alice Kelly, Anne Krajewski, Peter Limeri, Kevin
Mahoney, Philip Molinari, Dean Norman, Robert Riesbeck, William Sheely, John
Voith, Jr., James Williams, Kathy Wilson and Sheldon Wolff) (the "Management
Investors") provided the remaining Equity Investment in the form of a $6.7
million investment in Holdings Common Stock. Each of these issuances of
securities were made pursuant to Section 4(2) of the Securities Act. The balance
of the Holdings Common Stock will be held by existing shareholders of Holdings.
The Company and Holdings used the proceeds from the Equity Investment in
conjunction with (i) borrowings under a new $160.0 million senior credit
facility (the "Senior Credit Facility"), (ii) the proceeds from the original
offering of Old Notes and Exchangeable Preferred Stock, (iii) the issuance of
$13.0 million in new senior subordinated notes which have terms identical to the
Exchange Notes and rank on parity with the Exchange Notes (the "Parity Notes")
to the 25 existing holders of Holdings Common Stock (approximately two-thirds of
which was owned by Societe Anonyme D'Etudes et de Participation Industrielles)
and (iv) the issuance of approximately $2.4 million in Holdings Class A
Preferred Stock (the "Holdings Class A Senior Preferred Stock"), which is junior
in ranking to the New Preferred Stock, to a plan established for the benefit of
the certain employees of the Company (all of such transactions, the
"Recapitalization" and together with the Plan, the "Transaction") to effect a
recapitalization under which substantially all of Holdings and the Company's
existing obligations, including all borrowings under the Company's
debtor-in-possession facility (the "DIP Facility"), were paid in full. The
consummation of the Recapitalization was a condition to the consummation of the
Offerings. See "The Transaction." In
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connection with the Recapitalization, the Company changed its name to Cluett
American Corp. on the date of closing.
The following table sets forth the cash sources and uses of funds for
Holdings for the Recapitalization and the application of the proceeds therefrom.
<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS)
-------------------
<S> <C>
SOURCES OF FUNDS(1):
The Senior Credit Facility(2).............................................................. $ 114.5
The Note Offering.......................................................................... 112.0
The Preferred Stock Offering............................................................... 50.0
Holdings Class C Junior Preferred Stock.................................................... 36.5
Holdings Common Stock(3)................................................................... 29.2
Available Cash............................................................................. 11.9
------
$ 354.1
------
------
USES OF FUNDS:
Payment of Allowed Claims(4)............................................................... $ 291.5
Payment of Estimated Post-Petition Interest(5)............................................. 36.7
Refinancing of Existing Debt of the Designer Group......................................... 7.0
Estimated Fees and Expenses (6)............................................................ 18.9
------
$ 354.1
------
------
</TABLE>
- ------------------------
(1) Does not include non-cash items, listed as clauses (iii) and (iv) above.
(2) Borrowings under the Senior Credit Facility bear interest at a rate per
annum equal to a margin over, at the Company's option, LIBOR or a Base Rate.
The Senior Credit Facility is secured by substantially all the assets of the
Company's domestic subsidiaries, guaranteed by the Company's domestic
subsidiaries and contains customary covenants and events of default,
including substantial restrictions on the Company's ability to declare
dividends or distributions. The Senior Credit Facility is subject to
mandatory prepayment with the proceeds of certain asset sales, certain
equity issuances and certain funded debt issuances for borrowed money, and
with a portion of the Company's excess cash flow (as defined in the Senior
Credit Facility). See "Description of Other Indebtedness."
(3) Excludes $2.3 million of Holdings Common Stock purchased with the proceeds
of loans provided by Holdings.
(4) Includes repayment of $146.5 million of the Company's pre-petition bank
debt, $22.1 million of unsecured trade payables and $122.6 million of
Holdings notes and certain other claims.
(5) Includes payments of $9.2 million of interest on pre-petition bank debt,
$3.2 million of post-petition interest on trade payables and $24.4 million
of post-petition interest on Holdings notes.
(6) Includes accountants, lawyers and certain investment banking fees related to
the Transaction.
Vestar, headquartered in New York with an office in Denver, Colorado,
manages over $1.0 billion in private equity capital. Founded in 1988, the firm
focuses on management buyouts, recapitalizations and growth capital investments.
Since 1988, the firm has completed 25 investments with an aggregate value
approaching $5.0 billion. Previous Vestar investments have included Aearo
Corporation, Anvil Knitwear, Inc., Celestial Seasonings, Inc., Clark-Schwebel,
Inc., Insight Communications Company, L.P., Prestone Products Corporation,
Pyramid Communications, Inc., Remington Products Company, Russell-Stanley Corp.,
Sun Apparel, Inc., and Westinghouse Air Brake Company.
A&M is a prominent turnaround management firm located in New York. The firm
has been involved in the successful turnaround of over 20 companies, including
Ornda Healthcorp., Phar-Mor Inc.,
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Wherehouse Entertainment Inc., Charter Medical Corporation, Anthony
Manufacturing Company and Long Manufacturing Corp., among others.
For a discussion of Vestar's and A&M's share ownership and certain voting
matters see "Outstanding Voting Securities of Holdings and Principal Holders
Thereof" and "Certain Transactions."
Prior to the Recapitalization, the Company was a wholly-owned subsidiary of
Holdings. The majority stockholder of Holdings prior to the Recapitalization was
Societe Anonyme D'Etudes et de Participation Industrielles et Commerciales.
Societe Anonyme D'Etudes et de Participation Industrielles et Commerciales
currently owns 6.9% of Holdings.
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THE NOTE EXCHANGE OFFER
<TABLE>
<S> <C>
The Note Exchange Offer........... The Company is offering to exchange pursuant to the Note
Exchange Offer up to $112,000,000 aggregate principal
amount of its Exchange Notes for a like aggregate
principal amount of its Old Notes. The terms of the
Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity)
to the terms of the Old Notes for which they may be
exchanged pursuant to the Note Exchange Offer, except
that the Exchange Notes are freely transferrable by
Holders thereof (other than as provided herein), and are
not subject to any covenant regarding registration under
the Securities Act. See "The Note Exchange Offer."
Minimum Condition................. The Note Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes being
tendered for exchange.
Expiration Date; Withdrawal of
Tender.......................... The Note Exchange Offer will expire at 5:00 p.m., New
York City time, on November 24, 1998, unless the Note
Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to
which the Note Exchange Offer is extended. The Company
does not currently intend to extend the Expiration Date.
Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. See "The
Note Exchange Offer--Withdrawal Rights."
Exchange Date..................... The date of acceptance for exchange of the Old Notes
will be the fourth business day following the Expiration
Date.
Conditions to the Note Exchange
Offer........................... The Note Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Company currently expects that each of the conditions
will be satisfied and that no waivers will be necessary.
See "The Note Exchange Offer--Certain Conditions to the
Note Exchange Offer." The Company reserves the right to
terminate or amend the Note Exchange Offer at any time
prior to the Expiration Date upon the occurrence of any
such condition.
Procedures for Tendering
Old Notes....................... Each Holder wishing to accept the Note Exchange Offer
must complete, sign and date the Note Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes and any other
required documentation to the Exchange Agent at the
address set forth therein. See "The Note Exchange
Offer-- Procedures for Tendering Old Notes" and "Plan of
Distribution."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of Notes pursuant to the Note Exchange Offer.
</TABLE>
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<TABLE>
<S> <C>
Federal Income Tax Consequences... The exchange of Notes pursuant to the Note Exchange
Offer will not be a taxable event for federal income tax
purposes. See "United States Federal Tax
Considerations."
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct
such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing
the Note Letter of Transmittal and delivering the Old
Notes, either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's
name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. See "The Note Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Note Letter of
Transmittal or any other documents required by the Note
Letter of Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Old Notes according to
the guaranteed delivery procedures set forth in "The
Note Exchange Offer--Procedures for Tendering Old
Notes."
Acceptance of Old Notes and
Delivery of Exchange Notes...... The Company will accept for exchange any and all Old
Notes which are properly tendered in the Note Exchange
Offer prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant to
the Note Exchange Offer will be delivered promptly
following the Expiration Date. See "The Note Exchange
Offer--Acceptance of Old Notes for Exchange; Delivery of
Exchange Notes."
Effect on Holders of Old Notes.... As a result of the making of, and upon acceptance for
exchange of all validly tendered Old Notes pursuant to
the terms of this Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration
Rights Agreement (the "Note Registration Rights
Agreement") dated as of May 18, 1998 among the Company
and NationsBanc Montgomery Securities LLC and NatWest
Capital Markets Limited (the "Initial Purchasers") and,
accordingly, there will be no increase in the interest
rate on the Old Notes pursuant to the terms of the Note
Registration Rights Agreement, and the holders of the
Old Notes will have no further registration or other
rights under the Note Registration Rights Agreement.
Holders of the Old Notes who do not tender their Old
Notes in the Note Exchange Offer will continue to hold
such Old Notes and will be entitled to all the rights
and limitations applicable thereto under the Indenture
dated as of May 18, 1998 between the Company and The
Bank
</TABLE>
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<TABLE>
<S> <C>
of New York relating to the Old Notes and the Exchange
Notes (the "Indenture"), except for any such rights
under the Note Registration Rights Agreement that by
their terms terminate or cease to have further
effectiveness as a result of the making of, and the
acceptance for exchange of all validly tendered Old
Notes pursuant to, the Note Exchange Offer. All
untendered Old Notes will continue to be subject to the
restrictions on transfer provided for in the Old Notes
and in the Indenture. To the extent that Old Notes are
tendered and accepted in the Note Exchange Offer, the
trading market for untendered Old Notes could be
adversely affected.
Consequence of Failure to
Exchange........................ Holders of Old Notes who do not exchange their Old Notes
for Exchange Notes pursuant to the Note Exchange Offer
will continue to be subject to the restrictions on
transfer of such Old Notes as set forth in the legend
thereon. In general, the Old Notes may not be offered or
sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. The Company does not currently
anticipate that it will register the Old Notes under the
Securities Act.
Exchange Agent.................... The Bank of New York is serving as exchange agent (the
"Note Exchange Agent") in connection with the Exchange
Offer. See "The Note Exchange Offer--Exchange Agent."
</TABLE>
THE PREFERRED STOCK EXCHANGE OFFER
<TABLE>
<S> <C>
The Preferred Stock Exchange
Offer........................... The Company is offering to exchange pursuant to the
Preferred Stock Exchange Offer up to $50,000,000 of its
New Preferred Stock for a like aggregate principal
amount of its Exchangeable Preferred Stock. The terms of
the New Preferred Stock are identical in all material
respects to the terms of the Exchangeable Preferred
Stock for which they may be exchanged pursuant to the
Preferred Stock Exchange Offer, except that the New
Preferred Stock are freely transferrable by Holders
thereof (other than as provided herein), and are not
subject to any covenant regarding registration under the
Securities Act. See "The Preferred Stock Exchange
Offer."
Minimum Condition................. The Preferred Stock Exchange Offer is not conditioned
upon any minimum aggregate principal amount of
Exchangeable Preferred Stock being tendered for
exchange.
Expiration Date; Withdrawal of
Tender.......................... The Preferred Stock Exchange Offer will expire at 5:00
p.m., New York City time, on November 24, 1998, unless
the Preferred Stock Exchange Offer is extended, in which
case the term "Expiration Date" means the latest date
and time to which the Preferred Stock Exchange Offer is
extended. The Company does not currently intend to
extend the Expiration Date. Tenders may be withdrawn at
any time prior to 5:00 p.m., New York City
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
time, on the Expiration Date. See "The Preferred Stock
Exchange Offer--Withdrawal Rights."
Exchange Date..................... The date of acceptance for exchange of the Exchangeable
Preferred Stock will be the fourth business day
following the Expiration Date.
Conditions to the Preferred Stock
Exchange Offer.................. The Preferred Stock Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company. The Company currently expects that each of the
conditions will be satisfied and that no waivers will be
necessary. See "The Preferred Stock Exchange
Offer--Certain Conditions to the Preferred Stock
Exchange Offer." The Company reserves the right to
terminate or amend the Preferred Stock Exchange Offer at
any time prior to the Expiration Date upon the
occurrence of any such condition.
Procedures for Tendering
Exchangeable Preferred Stock.... Each Holder wishing to accept the Preferred Stock
Exchange Offer must complete, sign and date the
Preferred Stock Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together with
the Exchangeable Preferred Stock and any other required
documentation to the Exchange Agent at the address set
forth therein. See "The Preferred Stock Exchange
Offer--Procedures for Tendering Exchangeable Preferred
Stock" and "Plan of Distribution."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of Preferred Stock pursuant to the Preferred
Stock Exchange Offer.
Federal Income Tax Consequences... The exchange of Preferred Stock pursuant to the
Preferred Stock Exchange Offer will not be a taxable
event for federal income tax purposes. See "United
States Federal Tax Considerations."
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Exchangeable Preferred Stock
is registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder
promptly and instruct such registered holder to tender
on such beneficial owner's behalf. If such beneficial
owner wishes to tender on such beneficial owner's own
behalf, such beneficial owner must, prior to completing
and executing the Preferred Stock Letter of Transmittal
and delivering the Exchangeable Preferred Stock, either
make appropriate arrangements to register ownership of
the Exchangeable Preferred Stock in such beneficial
owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered
ownership may take considerable time. See "The Preferred
Stock Exchange Offer-- Procedures for Tendering
Exchangeable Preferred Stock."
</TABLE>
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<TABLE>
<S> <C>
Guaranteed Delivery Procedures.... Holders of Exchangeable Preferred Stock who wish to
tender their Exchangeable Preferred Stock and whose
Exchangeable Preferred Stock is not immediately
available or who cannot deliver their Exchangeable
Preferred Stock, the Preferred Stock Letter of
Transmittal or any other documents required by the
Preferred Stock Letter of Transmittal to the Exchange
Agent prior to the Expiration Date must tender their
Exchangeable Preferred Stock according to the guaranteed
delivery procedures set forth in "The Preferred Stock
Exchange Offer--Procedures for Tendering Exchangeable
Preferred Stock."
Acceptance of Exchangeable
Preferred Stock and Delivery of
New Preferred Stock............. The Company will accept for exchange any and all
Exchangeable Preferred Stock which is properly tendered
in the Preferred Stock Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date. The
New Preferred Stock issued pursuant to the Preferred
Stock Exchange Offer will be delivered promptly
following the Expiration Date. See "The Preferred Stock
Exchange Offer--Acceptance of Exchangeable Preferred
Stock for Exchange; Delivery of New Preferred Stock."
Effect on Holders of Exchangeable
Preferred Stock................. As a result of the making of, and upon acceptance for
exchange of all validly tendered Exchangeable Preferred
Stock pursuant to the terms of this Preferred Stock
Exchange Offer, the Company will have fulfilled a
covenant contained in the Registration Rights Agreement
(the "Preferred Stock Registration Rights Agreement")
dated as of May 18, 1998 among the Company and
NationsBanc Montgomery Securities LLC and NatWest
Capital Markets Limited (the "Initial Purchasers") and,
accordingly, there will be no Liquidated Damages on the
Exchangeable Preferred Stock pursuant to the terms of
the Preferred Stock Registration Rights Agreement, and
the holders of the Exchangeable Preferred Stock will
have no further registration or other rights under the
Preferred Stock Registration Rights Agreement. Holders
of the Exchangeable Preferred Stock who do not tender
their Exchangeable Preferred Stock in the Preferred
Stock Exchange Offer will continue to hold such
Exchangeable Preferred Stock and will be entitled to all
the rights and limitations applicable thereto under the
Certificate of Designations (the "Certificate of
Designations"), except for any such rights under the
Preferred Stock Registration Rights Agreement that by
their terms terminate or cease to have further
effectiveness as a result of the making of, and the
acceptance for exchange of all validly tendered
Exchangeable Preferred Stock pursuant to, the Preferred
Stock Exchange Offer. All untendered Exchangeable
Preferred Stock will continue to be subject to the
restrictions on transfer provided for in the
Exchangeable Preferred Stock and in the Certificate of
Designations. To the extent that Exchangeable Preferred
Stock is tendered and accepted in the Preferred Stock
Exchange Offer,
</TABLE>
12
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<S> <C>
the trading market for untendered Exchangeable Preferred
Stock could be adversely affected.
Consequence of Failure to
Exchange........................ Holders of Exchangeable Preferred Stock who do not
exchange their Exchangeable Preferred Stock for New
Preferred Stock pursuant to the Preferred Stock Exchange
Offer will continue to be subject to the restrictions on
transfer of such Exchangeable Preferred Stock as set
forth in the legend thereon. In general, the
Exchangeable Preferred Stock may not be offered or sold,
unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. The Company does not currently
anticipate that it will register the Exchangeable
Preferred Stock under the Securities Act.
Exchange Agent.................... The Bank of New York is serving as exchange agent (the
"Preferred Stock Exchange Agent" and, together with the
Note Exchange Agent, the "Exchange Agent") in connection
with the Preferred Stock Exchange Offer. See "The
Preferred Stock Exchange Offer--Exchange Agent."
</TABLE>
TERMS OF THE SECURITIES
THE EXCHANGE NOTES
<TABLE>
<S> <C>
The Exchange Notes.................. $112.0 million in aggregate principal amount of
10 1/8% Series B Senior Subordinated Notes Due 2008.
Maturity............................ May 15, 2008.
Interest............................ The Exchange Notes will bear interest at the rate of
10 1/8% per annum and will be payable semiannually on
May 15 and November 15 of each year, commencing
November 15, 1998.
Optional Redemption................. The Exchange Notes may be redeemed at the option of
the Company, in whole or in part, on or after May 15,
2003, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon and Liquidated
Damages, if any, to the redemption date.
On or before May 15, 2001, the Company may, at its
option, redeem up to 35% of the original aggregate
principal amount of Exchange Notes with the proceeds
of a Public Offering (as defined), at the redemption
price set forth herein, plus accrued and unpaid
interest thereon and Liquidated Damages, if any, to
the date of redemption; PROVIDED, HOWEVER, that at
least 65% of the original aggregate principal amount
of Exchange Notes remain outstanding following such
redemption; and PROVIDED, FURTHER, that such
redemption shall occur within 60 days of the date of
the closing of such Public Offering. See "Description
of the Notes--Optional Redemption."
Change of Control................... In the event of a Change of Control, (i) the Company
will have the option, prior to May 15, 2003 to redeem
the
</TABLE>
13
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<TABLE>
<S> <C>
Exchange Notes, in whole, at a redemption price equal
to 100% of the principal amount thereof plus the
Applicable Premium (as defined), together with
accrued and unpaid interest, if any, to the date of
redemption, and (ii) if the Company has not redeemed
the Exchange Notes, the Company will be required to
make an offer to repurchase all outstanding Exchange
Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid
interest thereon and Liquidated Damages, if any, to
the date of repurchase. The Company will comply with
the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations
thereunder to the extent such laws and regulations
thereunder are applicable in connection with any
repurchase as a result of a Change of Control. There
can be no assurance that the Company will have
sufficient funds to repurchase the Exchange Notes in
the event of a Change of Control. The Senior Credit
Facility prohibits the repayment of the Exchange
Notes, New Preferred Stock and the Exchange
Debentures upon a Change of Control, unless and until
such time as the indebtedness under the Senior Credit
Facility is repaid in full. See "Risk
Factors--Repurchase Upon a Change of Control,"
"Description of the Exchange Notes--Repurchase at the
Option of Holders--Change of Control."
Ranking............................. The Exchange Notes will be general unsecured
obligations of the Company, will be subordinated in
right of payment to all existing and future Senior
Indebtedness of the Company, including indebtedness
under the Senior Credit Facility and will rank on a
parity with or senior in right of payment to all
existing and future Subordinated Indebtedness of the
Company. As of June 27, 1998 the aggregate principal
amount of Senior Indebtedness (excluding trade
payables and other accrued liabilities) of the
Company and its subsidiaries was approximately $122.5
million (excluding $18.3 million of letters of
credit). However, the Exchange Notes will be
effectively subordinated to all indebtedness and
other liabilities and commitments (including trade
payables and capital lease obligations) of the
Company's foreign subsidiaries. Any right of the
Company to receive assets of any of its foreign
subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the
holders of the Exchange Notes to participate in those
assets) will be effectively subordinated to the
claims of that subsidiary's creditors, except to the
extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims
of the Company would still be subordinate to any
security in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held
by the Company. As of June 27, 1998 the liabilities
of the Company's foreign
</TABLE>
14
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<TABLE>
<S> <C>
subsidiaries was $8.9 million. See "Description of
the Exchange Notes."
Subsidiary Guarantees............... The Company's obligations under the Exchange Notes
will be guaranteed under the Subsidiary Guarantees,
jointly and severally, on an unsecured senior
subordinated basis by the Subsidiary Guarantors. The
Subsidiary Guarantees will be subordinated in right
of payment to all existing and future Senior
Indebtedness of the Subsidiary Guarantors, including
all obligations of the Subsidiary Guarantors under
the Senior Credit Facility and will rank on a parity
with or senior in right of payment to all existing
and future Senior Subordinated Indebtedness of the
Subsidiary Guarantors. The obligations of the
Subsidiary Guarantors under the Subsidiary Guarantees
will be limited so as not to constitute a fraudulent
conveyance under applicable law.
Certain Covenants................... The indenture pursuant to which the Exchange Notes
will be issued (the "Indenture") contains certain
covenants that, among other things, limit the ability
of the Company and its Restricted Subsidiaries to
incur additional Indebtedness (as defined) and issue
preferred stock, pay dividends or make other
distributions, create certain liens, enter into
certain transactions with affiliates, sell assets of
the Company or its Restricted Subsidiaries, sell
Equity Interests (as defined) of the Company's
Restricted Subsidiaries or enter into certain mergers
and consolidations. In addition, under certain
circumstances, the Company will be required to offer
to purchase Exchange Notes at a price equal to 100%
of the principal amount thereof, plus accrued and
unpaid interest thereon and Liquidated Damages, if
any, to the date of purchase, with the proceeds of
certain Asset Sales (as defined). See "Description of
the Exchange Notes."
THE NEW PREFERRED STOCK
The New Preferred Stock............. 500,000 shares of 12 1/2% Series B Senior
Exchangeable Preferred Stock Due 2010. Each share of
Exchangeable Preferred Stock will have a liquidation
preference of $100 per share.
Dividend............................ All dividends will be cumulative from the date of
issuance of the New Preferred Stock and will be
payable semi-annually in arrears on May 15 and
November 15 of each year, commencing on November 15,
1998. On or before May 15, 2003, the Company may, at
its option, pay dividends in cash or in additional
fully paid and non-assessable shares of New Preferred
Stock having an aggregate liquidation preference
equal to the amount of such dividends. After May 15,
2003, dividends may be paid only in cash. The Senior
Credit Facility prohibits the payment of cash
dividends on the New Preferred Stock.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
Mandatory Redemption................ The Company is required, subject to certain
conditions, to redeem all of the New Preferred Stock
outstanding on May 15, 2010 at a redemption price
equal to 100% of the liquidation preference thereof,
plus, without duplication, accumulated and unpaid
dividends to the date of redemption.
Optional Redemption................. Except as described below, the Company may not redeem
the New Preferred Stock prior to May 15, 2003. On or
after such date, the Company may, at its option
redeem the New Preferred Stock, in whole or in part,
at the redemption prices set forth herein together
with accumulated and unpaid dividends, if any, to the
date of redemption. In addition, at any time and from
time to time prior to May 15, 2001, the Company, at
its option, may redeem the New Preferred Stock, in
whole or in part, with the proceeds of one or more
Equity Offerings at the redemption prices set forth
herein, together with accumulated and unpaid
dividends, if any, to the date of redemption.
Change of Control................... Upon the occurrence of a Change of Control, (i) the
Company will have the option, prior to May 15, 2003
to redeem the New Preferred Stock, in whole, at a
redemption price equal to a percentage of the
liquidation preference equal to the sum of 100% and
the dividend rate in effect with respect to the New
Preferred Stock, together with accrued and unpaid
interest, if any, to the date of redemption, and (ii)
if the Company has not redeemed the New Preferred
Stock, the Company will be required to make an offer
to purchase the New Preferred Stock for cash at a
purchase price of 101% of the liquidation preference
thereof, together with all accumulated and unpaid
dividends to the date of purchase. The Company will
comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and
regulations are applicable in connection with any
repurchase as a result of a Change of Control. There
can be no assurance that the Company will have
sufficient funds to repurchase the New Preferred
Stock in the event of a Change of Control. The Senior
Credit Facility prohibits the repayment of the
Exchange Notes, New Preferred Stock and the Exchange
Debentures upon a Change of Control, unless and until
such time as the indebtedness under the Senior Credit
Facility is repaid in full. See "Risk
Factors--Repurchase Upon Change in Control."
Ranking............................. The New Preferred Stock will rank (i) senior to all
other classes of Capital Stock (as defined) of the
Company established after the issue date of the New
Preferred Stock which do not expressly provide that
such classes rank on a parity with the New Preferred
Stock as to dividends and distributions upon the
liquidation, winding up and dissolution of the
Company and (ii) subject to certain conditions, on a
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
parity with any class of Capital Stock established
after the date of issuance of the New Preferred Stock
the terms of which expressly provide that such class
or series will rank on a parity with the New
Preferred Stock as to dividends and distributions
upon the liquidation, winding up and dissolution of
the Company. As of June 27, 1998 the aggregate
principal amount of liabilities of the Company and
its subsidiaries ranking senior to the New Preferred
Stock was approximately $301.6 million (excluding
$18.3 million of letters of credit). Creditors of the
Company will have priority over the New Preferred
Stock with respect to claims on the assets of the
Company. See "Description of the New Preferred Stock
and Exchange Debentures--New Preferred Stock--Rank."
Certain Covenants................... The Certificate of Designations for the issuance of
the New Preferred Stock contains certain covenants
that, among other things, limit the ability of the
Company and its Restricted Subsidiaries to incur
additional Indebtedness (as defined) and issue
preferred stock, pay dividends or make other
distributions, create certain liens, enter into
certain transactions with affiliates, sell assets of
the Company or its Restricted Subsidiaries, sell
Equity Interests (as defined) of the Company's
Restricted Subsidiaries or enter into certain mergers
and consolidations. See "Description of the New
Preferred Stock and Exchange Debentures--New
Preferred Stock--Certain Covenants."
Exchange Feature.................... On any scheduled dividend payment date, subject to
provisions of the Company's debt instruments,
including the Indenture, the Company may, at its
option, exchange all but not less than all of the
shares of the New Preferred Stock then outstanding
for the Company's Exchange Debentures. The Senior
Credit Facility prohibits and the Indenture restricts
the Companys ability to exchange New Preferred Stock
for Exchange Debentures. See "Description of the New
Preferred Stock and Exchange Debentures--New
Preferred Stock--Exchange."
THE EXCHANGE DEBENTURES
The Exchange Debentures............. 12 1/2% Subordinated Exchange Debentures Due 2010.
Maturity............................ May 15, 2010.
Interest............................ Interest on the Exchange Debentures will be payable
semi-annually in cash (or on or prior to May 15,
2003, in additional Exchange Debentures, at the
option of the Company) in arrears on May 15 and
November 15 of each year, commencing with the first
such date after the Exchange Date.
Optional Redemption................. Except as described below, the Company may not redeem
the Exchange Debentures prior to May 15, 2003. On or
after such date, the Company may, at its option,
redeem the Exchange Debentures, in whole or in part,
at the redemption prices set
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
forth herein together with accrued and unpaid
interest, if any, to the date of redemption. In
addition, at any time and from time to time on or
prior to May 15, 2001, the Company may, at its
option, redeem the Exchange Debentures in whole or in
part, with the proceeds of one or more Equity
Offerings at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to
the date of redemption.
Change of Control................... Upon the occurrence of a Change of Control, (i) the
Company will have the option, prior to May 15, 2003
to redeem the Exchange Debentures, in whole, at a
redemption price equal to 100% of the principal
amount thereof plus the Applicable Premium (as
defined), together with accrued and unpaid interest,
if any, to the date of redemption, and (ii) if the
Company has not redeemed the Exchange Debentures,
subject to certain restrictions in the Company's debt
instruments, the Company will be required to make an
offer to repurchase the Exchange Debentures held by
such holder at price equal to 101% of the principal
amount thereof, together with accrued and unpaid
interest, if any, to the date of repurchase. The
Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such
laws and regulations are applicable in connection
with any repurchase as a result of a Change of
Control. There can be no assurance that the Company
will have sufficient funds to repurchase the Exchange
Debentures in the event of a Change of Control. The
Senior Credit Facility prohibits the repayment of the
Exchange Notes, New Preferred Stock and the Exchange
Debentures upon a Change of Control, unless and until
such time as the indebtedness under the Senior Credit
Facility is repaid in full. See "Risk Factors--
Repurchase Upon a Change of Control," "Description of
the Exchange Notes--Repurchase at the Option of
Holders-- Change of Control" and "Description of
Other Indebtedness."
Ranking............................. The Exchange Debentures will be unsecured and will be
subordinated in right of payment to all existing and
future Exchange Debenture Senior Indebtedness (as
defined) of the Company, including the Senior Credit
Facility and the Exchange Notes, and will be
effectively subordinated to all obligations of the
subsidiaries of the Company. The Exchange Debentures
will rank senior to all other subordinated
indebtedness (as defined) of the Company. As of June
27, 1998 the aggregate principal amount of Exchange
Debenture Senior Indebtedness (excluding trade
payables and other accrued liabilities) of the
Company and its subsidiaries was approximately $247.5
million (excluding $18.3 million of letters of
credit). In addition, the Exchange Debentures will be
effectively subordinated to all liabilities of the
Company's subsidiaries. The Exchange Debenture
Indenture (as defined)
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
permits the Company to incur additional indebtedness,
including Exchange Debenture Senior Indebtedness,
subject to certain limitations. See "Risk Factors"
and "Description of the New Preferred Stock and
Exchange Debentures-- Exchange
Debentures--Subordination and Ranking."
Restrictive Covenants............... The indenture under which the Exchange Debentures
will be issued (the "Exchange Debenture Indenture")
contains certain covenants that, among other things,
limit the ability of the Company and its Restricted
Subsidiaries to incur additional Indebtedness (as
defined) and issue preferred stock, pay dividends or
make other distributions, create certain liens, enter
into certain transactions with affiliates, sell
assets of the Company or its Restricted Subsidiaries,
sell Equity Interests (as defined) of the Company's
Restricted Subsidiaries or enter into certain mergers
and consolidations. In addition, under certain
circumstances, the Company will be required to offer
to purchase Exchange Debentures at a price equal to
100% of the principal amount thereof, plus accrued
and unpaid interest thereon and Liquidated Damages,
if any, to the date of purchase, with the proceeds of
certain Asset Sales (as defined). See "Description of
the New Preferred Stock and Exchange
Debentures--Exchange Debentures--Certain Covenants."
TRANSFER RESTRICTIONS
Absence of a Public Market.......... The Securities are new securities for which there
presently is no established market. Although the
Initial Purchasers have informed the Company that
they currently intend to make a market in the
Securities, the Initial Purchasers are not obligated
to do so and any such market making may be
discontinued at any time without notice. Accordingly,
there can be no assurance as to the development or
liquidity of any market for the Securities. The
Securities are expected to be eligible for trading by
qualified buyers in the PORTAL market. The Company
does not intend to apply for listing of the
Securities on any securities exchange or for the
quotation of the Securities through the National
Association of Securities Dealers Automated Quotation
System. See "Risk Factors--Absence of Public Market"
and "Plan of Distribution."
USE OF PROCEEDS
Use of Proceeds and Borrowings...... The Company and Holdings used the proceeds from the
Offerings, together with borrowings under the Senior
Credit Facility and the Equity Investment to finance
the Transaction. See "Use of Proceeds."
</TABLE>
19
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
The following pro forma combined financial data have been derived from the
Unaudited Pro Forma Combined Financial Information and the related notes thereto
included elsewhere in this Prospectus. The pro forma information gives effect to
the Transaction and the Divested Operations (as defined). The accompanying pro
forma statement of operations data and other related data for the year ended
December 31, 1997 and for the six months ended June 27, 1998 give effect to such
transactions as if they had occurred on January 1, 1997. The pro forma data do
not purport to be indicative of the Company's results that would have actually
been obtained had such transactions been consummated as of the assumed dates and
for the periods presented, nor are they indicative of the Company's results of
operations for any future period or date. The pro forma adjustments, as
described in the notes to the Unaudited Pro Forma Combined Financial
Information, are based on available information and upon certain assumptions
which management believes are reasonable.
The Summary Pro Forma Combined Financial Information should be read in
conjunction with "Unaudited Pro Forma Combined Financial Information," "Selected
Historical Combined Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the combined financial
statements of Bidermann Industries Corp. and Affiliates (the "Financial
Statements") and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------
SIX MONTHS
YEAR ENDED ENDED JUNE 27,
DECEMBER 31, 1997 1998
----------------- -----------------
(DOLLARS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................................... $ 359.2 $ 166.9
Cost of goods sold................................................ 251.5 115.4
------ -------
Gross profit...................................................... 107.7 51.5
Selling, general and administrative expenses...................... 73.3 37.8
Facility closing and reengineering costs.......................... 4.0 1.4
------ -------
Operating income.................................................. 30.4 12.3
Interest expense, net............................................. 24.0 11.7
Other expense (income), net....................................... 1.8 --
Bankruptcy reorganization costs (credits)(1)...................... (3.9) 13.2
------ -------
Income before provision for income taxes.......................... 8.5 (12.6)
Provision for income taxes........................................ 1.3 0.6
------ -------
Net income........................................................ $ 7.2 $ (13.2)
------ -------
------ -------
OTHER DATA:
Capital expenditures.............................................. $ 10.8 $ 5.7
Depreciation and amortization..................................... 8.1 4.2
Cash flows from (used by):
Operating activities............................................ $ 3.0 $ (37.5)
Investing activities............................................ (7.5) (5.6)
Financing activities............................................ (1.3) 37.6
EBITDA As Defined (2)............................................. 40.5 16.9
Cash interest expense (3)......................................... 22.5 10.9
EBITDA As Defined to cash interest expense........................ 1.8x 1.6x
BALANCE SHEET DATA (AS OF JUNE 27, 1998): (4)
Working capital (5)............................................... 84.0
Total assets...................................................... 233.3
Long-term debt (less current portion)............................. 241.1
Preferred Stock................................................... 48.1
Stockholder's deficit............................................. (116.4)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
20
<PAGE>
(1) For the six months ended June 27, 1998, bankruptcy reorganization costs
(credits) include $10.7 million of non-recurring post-petition interest on
pre-petition claims calculated in accordance with the Plan and paid as a
result of the Transaction.
(2) EBITDA As Defined represents operating income before depreciation and
amortization, non-cash pension income and facility closing and reengineering
costs. EBITDA As Defined should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles ("GAAP") or as a measure of profitability or
liquidity. EBITDA As Defined is presented because it is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness and because certain covenants in the Company's borrowing
arrangements are tied to similar measures; however, it is not necessarily
comparable to other similarly titled captions of other companies due to
differences in methods of calculation.
The calculation of pro forma EBITDA As Defined is shown below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, 1997 ENDED JUNE 27, 1998
------------------- ---------------------
<S> <C> <C>
(IN MILLIONS)
Operating income................................................ $ 30.4 $ 12.3
Depreciation and amortization................................... 8.1 4.2
Non-cash pension income(a)...................................... (2.0) (1.0)
Facility closing and reengineering costs........................ 4.0 1.4
----- -----
EBITDA As Defined............................................... $ 40.5 $ 16.9
----- -----
----- -----
</TABLE>
- ------------------------
(a) Represents non-cash pension income arising from the Company's overfunded
pension plan.
(3) Cash interest expense excludes non-cash amortization of deferred financing
costs of $1.5 million for the year ended December 31, 1997, $0.8 million for
the six months ended June 27, 1998.
(4) The balance sheet data is historical and includes the effects of the
Transaction contemplated by the pro forma data, which occurred on May 18,
1998.
(5) Working capital is defined as current assets (less cash and cash
equivalents) minus current liabilities (less current maturities of long-term
debt).
21
<PAGE>
SUMMARY HISTORICAL COMBINED FINANCIAL INFORMATION
The following table sets forth summary historical financial data of the
Company for each of the five years ended December 31, 1997 and for the six month
periods ended June 28, 1997 and June 27, 1998. The following summary financial
data with respect to the three years ended December 31, 1997, are derived from
the Financial Statements included elsewhere in this Prospectus, which have been
audited by Ernst & Young LLP, independent auditors, as indicated in their report
included elsewhere herein. The following summary financial data should be read
in conjunction with "Selected Historical Combined Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 531.6 $ 536.8 $ 486.7 $ 368.7 $ 362.9
Cost of goods sold(1)....................... 394.2 391.5 369.8 273.8 253.8
------ ------------- ------ ------ ------
Gross profit................................ 137.4 145.3 116.9 94.9 109.1
Selling, general and administrative
expenses.................................. 132.9 145.4 137.9 85.9 74.8
Facility closing and reengineering
costs(2).................................. -- -- 22.5 11.6 2.5
------ ------------- ------ ------ ------
Operating income (loss)..................... 4.5 (0.1) (43.5) (2.6) 31.8
Interest expense, net....................... 23.0 24.6 22.7 16.9 15.2
Write-down of intangible assets(3).......... -- 74.7 -- -- --
Other expense (income), net(4).............. 1.1 (0.3) 0.5 3.3 2.0
Bankruptcy reorganization costs
(credits)(5).............................. -- -- 20.9 6.1 (3.9)
------ ------------- ------ ------ ------
Income (loss) before provision for income
taxes..................................... (19.6) (99.1) (87.6) (28.9) 18.5
Provision for income taxes.................. 1.0 1.8 1.5 1.3 1.3
------ ------------- ------ ------ ------
Net income (loss)........................... ($ 20.6) ($ 100.9) ($ 89.1) ($ 30.2) $ 17.2
------ ------------- ------ ------ ------
------ ------------- ------ ------ ------
OTHER FINANCIAL DATA:
Capital expenditures........................ $ 7.5 $ 13.8 $ 6.1 $ 9.8 $ 10.8
Depreciation and amortization(6)............ 14.7 15.3 13.3 10.9 8.1
Cash flows from (used by):
Operating activities...................... $ 22.8 $ (16.0) $ 0.4 $ 16.7 $ 13.0
Investing activities...................... (4.5) (10.3) 25.3 (8.3) (7.5)
Financing activities...................... (33.1) (22.7) (26.1) (13.3) (1.3)
EBITDA As Defined(7)........................ 16.0 13.9 (7.8) 17.5 40.4
Adjusted Net Sales(8)....................... 399.5 406.0 388.9 361.5 359.2
Adjusted EBITDA(7)(8)....................... 11.0 0.6 (8.5) 18.8 41.0
Adjusted EBITDA margin...................... 2.8% 0.1% (2.2)% 5.2% 11.4%
Ratio of earnings to fixed charges(11)...... -- -- -- -- 2.1x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(9).......................... $ 130.2 $ 141.5 $ 116.9 $ 82.1 $ 82.3
Total assets................................ 388.0 321.5 252.9 211.1 220.0
Total long-term debt, net of current
portion(10)............................... 138.8 150.4 3.6 8.6 2.0
Debt subject to compromise.................. -- -- 161.1 146.0 145.6
Preferred stock............................. 15.5 16.4 17.4 18.7 20.0
Total stockholders' equity (deficit)........ 150.4 46.9 (44.3) (74.2) (56.8)
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 28, JUNE 27,
1997 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 162.0 $ 168.6
Cost of goods sold(1)....................... 112.8 116.4
------ -------------
Gross profit................................ 49.2 52.2
Selling, general and administrative
expenses.................................. 37.2 38.8
Facility closing and reengineering
costs(2).................................. 0.3 1.0
------ -------------
Operating income (loss)..................... 11.7 12.4
Interest expense, net....................... 7.3 7.1
Write-down of intangible assets(3).......... -- --
Other expense (income), net(4).............. (1.2) 0.2
Bankruptcy reorganization costs
(credits)(5).............................. 2.9 13.2
------ -------------
Income (loss) before provision for income
taxes..................................... 2.7 (8.1)
Provision for income taxes.................. 0.5 0.6
------ -------------
Net income (loss)........................... $ 2.2 $ (8.7)
------ -------------
------ -------------
OTHER FINANCIAL DATA:
Capital expenditures........................ $ 4.7 $ 5.7
Depreciation and amortization(6)............ 4.2 4.2
Cash flows from (used by):
Operating activities...................... $ 0.2 $ (33.0)
Investing activities...................... (4.5) (5.6)
Financing activities...................... 3.5 37.6
EBITDA As Defined(7)........................ 15.2 16.6
Adjusted Net Sales(8)....................... 160.8 166.9
Adjusted EBITDA(7)(8)....................... 15.9 17.1
Adjusted EBITDA margin...................... 9.9% 10.2%
Ratio of earnings to fixed charges(11)...... 1.3x --
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(9).......................... $ 84.5 $ 84.0
Total assets................................ 215.9 223.3
Total long-term debt, net of current
portion(10)............................... 7.8 241.1
Debt subject to compromise.................. 145.9 --
Preferred stock............................. 19.3 48.1
Total stockholders' equity (deficit)........ (73.2) (116.4)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
22
<PAGE>
(1) In 1995, the Company recorded a charge of approximately $14.0 million for
the write-down of inventory, which is included in cost of goods sold.
(2) Over the three year period 1995-1997 facility closing and reengineering
costs, which totalled $36.6 million, included $14.5 million for plant
closings, $9.9 million for store closings, $2.4 million for Divested
Operations, $1.6 million for relocation and severance, and $8.2 million for
software, systems development and implementation and other consulting costs.
(3) Represents the write-off of the remaining excess of the purchase price over
the fair value of net assets acquired (goodwill and other intangibles)
recorded in connection with the acquisition of the Shirt Group and the Sock
Group, in 1990.
(4) Other expense, net is primarily exchange losses. Additionally, in 1996 the
Company began liquidating its investments in its Mexican and Guatemalan
subsidiaries and wrote off $3.1 million previously recorded as a component
of equity for foreign currency translation.
(5) Bankruptcy reorganization costs (credits) consist of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
------------------------------- JUNE 28, JUNE 27,
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Professional fees.............................................. $ 2.8 $ 6.1 $ 6.1 $ 2.9 $ 2.5
Post petition interest paid in accordance with the Plan........ -- -- -- -- 10.7
Adjustment to lease rejection and other pre-petition
liabilities................................................... 9.8 -- (10.0) -- --
Write off of deferred financing costs.......................... 3.5 -- -- -- --
Fees related to obtaining the DIP Facility..................... 1.3 -- -- -- --
Claims and related litigation.................................. 3.5 -- -- -- --
--------- --------- --------- ----------- -----------
$ 20.9 $ 6.1 $ (3.9) $ 2.9 $ 13.2
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
(6) Depreciation and amortization excludes amortization of deferred financing
costs of $3.6 million in 1993, $3.6 million in 1994 and $5.2 million in
1995, which is included in interest expense.
(7) EBITDA As Defined is defined as operating income before depreciation and
amortization, non-cash pension income and facility closing and reengineering
costs. Adjusted EBITDA represents EBITDA As Defined adjusted for Divested
Operations. EBITDA As Defined should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with GAAP or as a
measure of profitability or liquidity. EBITDA As Defined is presented
because it is a widely accepted financial indicator of a company's ability
to service and/or incur indebtedness and because certain covenants in the
Company's borrowing arrangements are tied to similar measures; however, it
is not necessarily comparable to other similarly titled captions of other
companies due to differences in methods of calculation. The calculation of
EBITDA As Defined and Adjusted EBIDTA is shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Operating income (loss)...................................................... $ 4.5 $ (0.1) $ (43.5) $ (2.6)
Depreciation and amortization................................................ 14.7 15.3 13.3 10.9
Non-cash pension income...................................................... (3.2) (1.3) (0.1) (2.4)
Facility closing and reengineering costs..................................... -- -- 22.5 11.6
--------- --------- --------- ---------
EBITDA As Defined............................................................ 16.0 13.9 (7.8) 17.5
EBITDA from Divested Operations(8)........................................... 5.0 13.3 0.7 (1.3)
--------- --------- --------- ---------
Adjusted EBITDA.............................................................. $ 11.0 $ 0.6 $ (8.5) $ 18.8
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 28, JUNE 27,
1997 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
Operating income (loss)...................................................... $ 31.8 $ 11.7 $ 12.4
Depreciation and amortization................................................ 8.1 4.2 4.2
Non-cash pension income...................................................... (2.0) (1.0) (1.0)
Facility closing and reengineering costs..................................... 2.5 0.3 1.0
--------- ----- -----
EBITDA As Defined............................................................ 40.4 15.2 16.6
EBITDA from Divested Operations(8)........................................... (0.6) (0.7) (0.5)
--------- ----- -----
Adjusted EBITDA.............................................................. $ 41.0 $ 15.9 $ 17.1
--------- ----- -----
--------- ----- -----
</TABLE>
(8) Adjusted Net Sales and Adjusted EBITDA represent historical net sales and
EBITDA As Defined adjusted for (i) the sale of the Ralph Lauren Womenswear
license and associated operating assets which was completed in October 1995,
(ii) the sales of the operations of Arrow de Mexico and Arrow Guatemala in
1997 and (iii) the decision to close certain Canadian retail stores which
was made in December 1996 (collectively, the "Divested Operations"). For a
further discussion of these adjustments see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(9) Working capital is defined as current assets (less cash and cash
equivalents) minus current liabilities (less current maturities of long-term
debt).
(10) On July 17, 1995, $161.1 million of long-term debt was reclassified to
liabilities subject to compromise.
(11) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, plus fixed charges.
Fixed charges include interest expense on all indebtedness, amortization of
deferred financing charges, and one-third of rental expense, representing
that portion of rental expense deemed to be attributable to interest.
Earnings were insufficient to cover fixed charges by $19.6 million in 1993,
$99.1 million in 1994, $87.6 million in 1995, $28.9 million in 1996 and $8.1
million for the six months ended June 27, 1998.
23
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE MAKING AN
INVESTMENT IN THE SECURITIES OFFERED HEREBY.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Note Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set forth in the legend thereon.
In general, Old Notes may not be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act and applicable
state securities laws. The Company does not currently intend to register the Old
Notes under the Securities Act. Based on interpretations by the staff of the
Commission, the Company believes that Exchange Notes issued pursuant to the Note
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Old Notes were acquired in the
ordinary course of such Holders' business and such Holders have no arrangement
with any person to participate in the distribution of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Note Exchange Offer, the trading market for untendered and
tendered but unaccepted Old Notes will be adversely affected.
Holders of Exchangeable Preferred Stock who do not exchange their
Exchangeable Preferred Stock for New Preferred Stock pursuant to the Preferred
Stock Exchange Offer will continue to be subject to the restrictions on transfer
of such Exchangeable Preferred Stock as set forth in the legend thereon. In
general, Exchangeable Preferred Stock may not be offered or sold unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the registration requirements of the Securities
Act and applicable state securities laws. The Company does not currently intend
to register the Exchangeable Preferred Stock under the Securities Act. Based on
interpretations by the staff of the Commission, the Company believes that New
Preferred Stock issued pursuant to the Preferred Stock Exchange Offer in
exchange for Exchangeable Preferred Stock may be offered for resale, resold or
otherwise transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Exchangeable Preferred Stock was
acquired in the ordinary course of such Holders' business and such Holders have
no arrangement with any person to participate in the distribution of such New
Preferred Stock. Each broker-dealer that receives New Preferred Stock for its
own account in exchange for Exchangeable Preferred Stock, where such
Exchangeable Preferred Stock was acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Preferred
Stock. See "Plan of Distribution." To the extent that Exchangeable Preferred
Stock is tendered and accepted in the Preferred Stock Exchange Offer, the
trading market for untendered and tendered but unaccepted Exchangeable Preferred
Stock will be adversely affected.
SUBSTANTIAL LEVERAGE
The Company is, and will continue after the Exchange Offerings to be, highly
leveraged. As of June 27, 1998 the Company had total consolidated indebtedness
of approximately $301.6 million (of which $125.0 million consisted of the Notes
and Parity Notes), excluding $18.3 million of letter of credit. Also, the
24
<PAGE>
Company's ratio of earnings to fixed charges and combined fixed charges and
preferred stock dividend was 1.7 and 1.2, respectively, for 1997. In addition,
the Preferred Stock would have been $50.0 million (which, subject to certain
conditions, may be exchanged for Exchange Debentures in an aggregate principal
amount equal to the aggregate liquidation preference plus accumulated
dividends). After May 15, 2003, the Company will be required to pay cash
dividends on the Preferred Stock at a rate of 12 1/2% per annum. The Company and
its subsidiaries will be permitted to incur additional indebtedness in the
future. See "Capitalization" and "Selected Historical Combined Financial and
Operating Data" and "Description of the Exchange Notes."
The Company's ability to make scheduled payments of principal, interest or
Liquidated Damages, if any, on the Exchange Notes, to pay dividends on the New
Preferred Stock, to refinance or satisfy its indebtedness (including the
Exchange Notes), or to fund planned capital expenditures will depend on its
future performance and revenue growth, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based upon the current level of operations
and revenue growth, management believes that cash flow from operations and
available cash, together with available borrowings under the Senior Credit
Facility, will be adequate to meet the Company's future liquidity needs for at
least the next several years. The Company may, however, need to refinance all or
a portion of the principal of the Exchange Notes on or prior to maturity and
there can be no assurance that the Company will be able to effect any such
refinancing on commercially reasonable terms or at all. In addition, there can
be no assurance that the Company's business will generate sufficient cash flow
from operations, that anticipated revenue growth and operating improvements will
be realized or that future borrowings will be available under the Senior Credit
Facility in an amount sufficient to (i) enable the Company to service its
indebtedness (including the Exchange Notes), (ii) make periodic payments of cash
dividends on the New Preferred Stock, (iii) redeem any of the New Preferred
Stock for cash or, if the Exchange Debentures have been issued, to make payments
of principal or cash interest on the Exchange Debentures or (iv) fund its other
liquidity needs. If the Company's cash flow, availability under the Senior
Credit Facility and other capital resources are insufficient to fund the
Company's debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, restructure or refinance its indebtedness, or
seek additional equity contributions. There can be no assurance that any of such
measures could be implemented on satisfactory terms or, if implemented, would be
successful or would permit the Company to meet its debt service obligations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The degree to which the Company will be leveraged following the Exchange
Offerings could have important consequences to holders of the Securities,
including, but not limited to: (i) making it more difficult for the Company to
satisfy its obligations with respect to the Securities, (ii) increasing the
Company's vulnerability to general adverse economic and industry conditions,
(iii) limiting the Company's ability to obtain additional financing to fund
future working capital, capital expenditures, acquisitions and other general
corporate requirements, (iv) requiring the dedication of a substantial portion
of the Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund working capital, capital expenditures, acquisitions or other
general corporate purposes, (v) limiting the Company's flexibility in planning
for, or reacting to, changes in its business and the industry and (vi) placing
the Company at a competitive disadvantage vis-a-vis less leveraged competitors.
In addition, the Indenture and the Senior Credit Facility will contain financial
and other restrictive covenants that will limit the ability of the Company to,
among other things, borrow additional funds. Failure by the Company to comply
with such covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company. In addition, the
degree to which the Company is leveraged could prevent it from repurchasing all
of the Exchange Notes tendered to it upon the occurrence of a Change of Control.
See "Description of the Exchange Notes--Repurchase at Option of Holder--Change
of Control" and "Description of Other Indebtedness."
25
<PAGE>
SUBORDINATION OF EXCHANGE NOTES AND EXCHANGE DEBENTURES; EQUITY INTEREST
The Exchange Notes will be subordinated in right of payment to all Senior
Indebtedness of the Company, including all amounts owing under the Senior Credit
Facility, and indebtedness of all subsidiaries which are not Subsidiary
Guarantors. In addition, the Indenture will permit the Company to incur or have
outstanding certain other Senior Indebtedness, including indebtedness that is
secured by assets of the Company. Consequently, in the event of bankruptcy,
liquidation or reorganization of the Company, the assets of the Company will be
available to pay obligations on the Exchange Notes only after all Senior
Indebtedness (including the Senior Credit Facility) has been paid in full. There
can be no assurance that there will be sufficient assets remaining to pay
amounts due on any or all of the Exchange Notes. In addition, the subordination
provisions of the Indenture will provide that payments with respect to the
Exchange Notes will be blocked in the event of a payment default on Senior
Indebtedness and may be blocked for up to 179 days each year in the event of
certain non-payment defaults on Senior Indebtedness. In the event of a
bankruptcy, liquidation or reorganization of the Company, holders of the
Exchange Notes will participate ratably with all holders of subordinated
indebtedness of the Company that is deemed to be of the same class as the
Exchange Notes, and potentially with all other general creditors of the Company,
based upon the respective amounts owed to each holder or creditor, in the
remaining assets of the Company. In any of the foregoing events, there can be no
assurance that there would be sufficient assets to pay amounts due on the
Exchange Notes. As a result, holders of Exchange Notes may receive less,
ratably, than the holders of Senior Indebtedness. As of June 27, 1998 the
Company had $122.5 million in aggregate principal amount of Senior Indebtedness
outstanding (excluding $18.3 million of letters of credit). However, the
Exchange Notes will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and capital lease
obligations) of the Company's foreign subsidiaries. Any right of the Company to
receive assets of any of its foreign subsidiaries upon the latter's liquidation
or reorganization (and the consequent right of the holders of the Exchange Notes
to participate in those assets) will be effectively subordinated to the claims
of that subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
subsidiary and any indebtedness of such subsidiary senior to that held by the
Company. As of June 27, 1998, the liabilities of the Company's foreign
subsidiaries was $8.9 million. See "Description of the Exchange Notes".
The New Preferred Stock will rank junior to all Indebtedness and other
obligations of the Company (including the Exchange Notes). The Exchange
Debentures, if issued, will be unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Exchange Debenture
Senior Indebtedness, including the Exchange Notes. Consequently, in the event of
bankruptcy, liquidation or reorganization of the Company, payments may be made
with respect to the New Preferred Stock only after the assets of the Company
have been used to satisfy all its obligations to its creditors (including the
Exchange Notes), or if the Exchange Debentures have been issued, only after all
of the Exchange Debenture Senior Indebtedness (including the Exchange Notes) has
been paid in full. In addition, the subordination provisions of the Exchange
Debenture Indenture will provide that payments with respect to the Exchange
Debentures will be blocked in the event of a payment default on Exchange
Debenture Senior Indebtedness and may be blocked for up to 179 days each year in
the event of certain non-payment defaults on Exchange Debenture Senior
Indebtedness. In the event of a bankruptcy, liquidation or reorganization of the
Company, holders of the Exchange Debentures will participate ratably with all
holders of subordinated indebtedness of the Company that is deemed to be of the
same class as the Exchange Debentures, and potentially with all other general
creditors of the Company, based upon the respective amounts owed to each holder
or creditor, in the remaining assets of the Company. In any of the foregoing
events, there can be no assurance that there would be sufficient assets to pay
amounts due on the Exchange Debentures. As a result, holders of Exchange
Debentures may receive less, ratably, than the holders of Senior Indebtedness.
See "--Substantial Leverage" above, and "Description of Other Indebtedness,"
"Description of the Exchange Notes" and "Description of the New Preferred Stock
and Exchange Debentures."
26
<PAGE>
As of June 27, 1998 the Company had $301.6 million of liabilities which
ranked senior to the New Preferred Stock and the Company had $247.5 million in
aggregate principal amount of Exchange Debenture Senior Indebtedness which
ranked senior in right of payment to the Exchange Debentures (excluding $18.3
million letters of credit).
EMERGENCE FROM CHAPTER 11
The Company's experience in Chapter 11 may affect its ability to negotiate
favorable trade terms with manufacturers and other vendors and to negotiate
favorable lease terms with landlords. The failure to obtain such favorable terms
could have a material adverse effect on the Company and its financial
performance.
NET LOSSES
The Company has experienced net losses of $20.6 million, $100.9 million,
$89.1 million and $30.2 million in 1993, 1994, 1995 and 1996, respectively. See
"The Transaction". If the Company continues to experience net losses, the
Company will be required to find additional sources of financing to fund its
operating deficits, working capital requirements, anticipated capital
expenditures and financing commitments. There can be no assurance that such
financing will be available on terms and conditions acceptable to the Company in
such circumstances or that, if debt financing is required, such financing would
be permitted under the terms of the Company's indebtedness. If the Company
experiences losses in the future, that fact, combined with the absence of
additional financing, could impair the Company's ability to pay principal and
interest on the Exchange Notes, to pay cash dividends on the New Preferred
Stock, to redeem the Securities or, if issued, to pay principal and interest on
the Exchange Debentures.
DIVIDEND RESTRICTIONS ON NEW PREFERRED STOCK AND EXCHANGE DEBENTURES
The Senior Credit Facility prohibits the payment of cash dividends on the
New Preferred Stock or the redemption, purchase or other acquisition of any New
Preferred Stock or Exchange Debentures by the Company for cash. In addition, the
Indenture restricts the ability of the Company to pay cash dividends on the New
Preferred Stock, or redeem, purchase or otherwise acquire, the New Preferred
Stock or Exchange Debentures for cash. Moreover, under Delaware law, a dividend
on the New Preferred Stock may only be paid out of the Company's surplus or net
profits for the fiscal year in which the dividend is declared and/or the
preceding year, provided the board of directors approves the payment of such
dividend. There can be no assurances that the Company will be able to generate a
surplus or net profits after making its payments under the Senior Credit
Facility or the Exchange Notes, to other creditors or for any other reason. As a
result, the Company does not expect to be able to pay cash dividends on the New
Preferred Stock or redeem, purchase or otherwise acquire any New Preferred Stock
or Exchange Debentures for cash in the foreseeable future.
HOLDING COMPANY STRUCTURE
Cluett American Corp. is a holding company and does not have any material
operations or assets other than ownership of capital stock of its subsidiaries.
Accordingly, the New Preferred Stock and the Exchange Debentures will be
effectively subordinated to all existing and future liabilities of Cluett
American Corp.'s subsidiaries, including trade payables. As of June 27, 1998,
the New Preferred Stock and the Exchange Debentures were subordinated to $301.6
million of liabilities of Cluett American Corp. and its subsidiaries. Cluett
American Corp. and its subsidiaries may incur additional indebtedness in the
future, subject to certain limitations contained in the instruments governing
their indebtedness.
Any right of holders of the New Preferred Stock or the Exchange Debentures
to participate in any distribution of the assets of the subsidiaries of Cluett
American Corp. upon the liquidation, reorganization or insolvency of any such
subsidiary will be subject to the prior claims of the respective subsidiary's
creditors and holders of equity interests.
27
<PAGE>
COMPETITION; INDUSTRY RISKS
The apparel industries are highly competitive. The Company competes with
numerous domestic and foreign designers, brands and manufacturers of apparel and
accessories, some of which may be significantly larger and more diversified and
have greater financial and other resources than the Company. Increased
competition from these and future competitors could reduce sales and prices,
adversely affecting the Company's results of operations. Because of the
Company's high leverage, it may be less able to respond effectively to such
competition than other participants.
The industries in which the Company operates are cyclical. Purchases of
apparel tend to decline during recessionary periods and also may decline at
other times. A recession in the general economy or uncertainties regarding
future economic prospects could affect consumer spending habits and have an
adverse effect on the Company's results of operations. Weak sales and resulting
markdown requests from customers could also have a material adverse effect on
the Company's business, results of operations and financial condition.
Although the Company believes that most of its products are fashion staples,
some of the Company's products, such as those distributed by the Designer Group,
are subject to changing fashion tastes and styles. The Company's success in
these product lines depends on its ability to anticipate and react to consumer
demands in a timely manner. If the Company misjudges these markets, it may be
faced with significant excess inventory which could have a material adverse
effect on the Company's financial condition and results of operations.
RELIANCE ON CERTAIN CUSTOMERS
The Shirt Group's ten largest customers accounted for approximately 51% of
its net sales in 1997 and the Sock Group's ten largest customers accounted for
approximately 72% of its net sales in 1997. The Shirt Group's ten largest
customers are Belk's, Carson, Pirie Scott & Co., Goody's Family Clothing, May
Company, Marmaxx, Mercantile, Dayton-Hudson, National Clothing Company,
Proffitt's and Sears. The Company has no long-term contracts with these
customers. The Sock Group's ten largest customers are Belk's, Dayton-Hudson,
Dillard's, Federated, K-Mart, Marmaxx, May Company, Mercantile, J.C. Penney and
Sears. The Company has no long-term contracts with these customers. No customer
accounted for more than 10% of the Company's sales. Although the Company has
long-standing relationships with these customers, a substantial reduction in
sales to these customers could have a material adverse effect on the financial
condition and results of operations of the Company.
OWNERSHIP CHANGES IN THE RETAIL INDUSTRY
In recent years, the retail industry has experienced consolidation and other
ownership changes. In addition, some of the Company's customers have operated
under the protection of the federal bankruptcy laws. In the future, retailers in
the United States 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 any such changes.
TRADEMARKS
The Company believes that its trademarks and other proprietary rights are
important to its success and its competitive position. Accordingly, the Company
devotes substantial resources to the establishment and protection of its
trademarks on a worldwide basis. There can be no assurance that the actions
taken by the Company to establish and protect its trademarks and other
proprietary rights will be adequate to prevent imitation of its products by
others or to prevent others from seeking to block sales of the
28
<PAGE>
Company's products as violative of the trademarks and proprietary rights of
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 loss of such
trademarks and other proprietary rights, or the loss of the exclusive use of its
trademarks and other proprietary right could have a material adverse effect on
the financial condition and results of operations of the Company. See
"Business--Trademarks and License Agreements".
DEPENDENCE ON LICENSING PARTNERS
For 1997 approximately 10.1% of the Company's EBITDA As Defined was derived
from licensing revenue representing royalties received from its licensing
partners. Approximately 60.6% of such licensing revenue in 1997 was derived from
Secon Group B.V., PT Great River International, Thanulux Public Company Limited,
Bidermann Europe, Choya Corporation, Nantucket Industries, Inc., Arnold
Worldwide Inc., Chalco, S.A., Manufacturers Interamericana S.A. and Superba,
Inc. The risk factors associated with the Company's own products apply to its
licensed products as well, in addition to any number of possible risks specific
to a licensing partner's business, including, for example, risks associated with
a particular licensing partner's ability to obtain capital and manage its labor
relations and risks related to a particular country's economy. Although certain
of the Company's license agreements prohibit licensing partners from entering
into licensing arrangements with the Company's competitors, generally the
Company's licensing partners are not precluded from offering, under other
brands, the types of products covered by their license agreements with the
Company. While the Company has significant control over its licensing partners'
products and advertising, it relies on its licensing partners for, among other
things, operational and financial control over their businesses. In addition,
failure by the Company to maintain its existing licensing alliances could
adversely affect the Company's financial condition and results of operations.
Although the Company believes in most circumstances it could replace existing
licensing partners if necessary, its inability to do so for any period of time
could adversely affect the Company's revenues both directly from reduced
licensing revenue received and indirectly from reduced sales of the Company's
other products. See "Business--Trademarks and License Agreements".
In addition, a material portion of the Company's EBITDA As Defined is
derived from sales of products manufactured by the Company as licensee of
certain trademarks. The risk factors associated with the Company's own products
apply to its licensed products as well. The Company's license agreements contain
provisions that, under certain circumstances, could permit the licensor to
terminate the Company's rights to the license. Such provisions include, among
others (i) a default in the payment of certain amounts payable under the license
that continues beyond the specified grace period and (ii) the failure to comply
with the covenants contained in the license. The Company believes that it is
currently in compliance with all material provisions of such licenses and has no
reason to believe that any events are likely to occur that would permit any
licensor to terminate its license agreement.
In 1995, the licensor of Ralph Lauren purported to terminate the Company's
licensed Ralph Lauren trademark as a result of alleged breaches by the Company
under the licensing agreement. Although the Company believed that it had certain
defenses to such termination, had the licensor been successful in its
assertions, the termination of such license would have had a material adverse
effect on the Company. The Company subsequently settled its dispute with such
licensor and, in connection with such settlement, sold its rights under the
Ralph Lauren trademark and certain assets to the licensor for approximately
$41.9 million.
PERFORMANCE OF UNAFFILIATED MANUFACTURERS
During 1997, approximately 57% (by dollar value) of the Shirt Group's
products (representing substantially all of the sports shirts produced by the
Company) and 8% (by dollar volume) of the Sock
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Group's products were manufactured by foreign unaffiliated manufacturers and
approximately 14% (by dollar value) of the Sock Group's products were
manufactured in the United States by unaffiliated manufacturers. The inability
of a 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. Although the Company
enters into a number of purchase order commitments each season specifying a time
frame for delivery, method of payment, design and quality specifications and
other standard industry provisions, the Company does not have long-term
contracts with any manufacturer and competes with other companies for production
capacity. None of the manufacturers used by the Company produces the Company's
products exclusively. No manufacturer accounted for more than ten percent of
either Group's total production in fiscal 1997.
The Company requires its licensing partners and independent manufacturers to
operate in compliance with applicable laws and regulations. While the Company's
internal and vendor operating guidelines promote ethical business practices and
the Company's staff periodically visits and monitors the operations of its
independent manufacturers, 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 by one of the Company's licensing partners, or
the divergence of an independent manufacturer's or licensing partner's labor
practices from those generally accepted as ethical in the United States, could
have a material adverse effect on the Company's financial condition and results
of operations.
POSSIBLE ADVERSE IMPACT OF CHANGES IN IMPORT RESTRICTIONS
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries, including Taiwan, South Korea, and Hong Kong. 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, and other applicable statutes, impose quotas on the amounts and types
of merchandise which may be imported into the United States from these
countries. These agreements also allow the United States to impose restraints at
any time on the importation of categories of merchandise that, under the terms
of the agreements, are not currently subject to specified limits. The Company's
imported products are also subject to United States customs duties which
comprise a material portion of the cost of the merchandise. A substantial
increase in customs duties could have an adverse effect on the Company's
operating results. The United States and the countries in which the Company's
products are produced or sold may, from time to time, impose new quotas, duties,
tariffs, or other restrictions, or adversely adjust prevailing quota, duty, or
tariff levels, any of which could have a material adverse effect on the Company.
In addition, the Company has historically benefitted from import
restrictions imposed on foreign competitors in the apparel industry. The extent
of import protection afforded to domestic manufacturers such as the Company,
however, has been, and is likely to remain, subject to considerable political
deliberation. The General Agreement on Tariffs and Trade ("GATT") will
eliminate, over a number of years, restrictions on imports of apparel. In
addition, on January 1, 1994, the North American Free Trade Agreement ("NAFTA")
became effective. Each of these agreements will reduce import constraints
previously imposed on some of the Company's competitors and will increase the
likelihood of competition on the basis of price.
GROWTH STRATEGY AND STRATEGIC ACQUISITIONS
The Company believes opportunities for growth exist in men's and women's
sportswear and has begun offering men's cotton/polyester sports shirts and a
line of women's golf shirts. There can be no assurance that these products will
be successful. In the early 1990s, the Company attempted to grow sales by
expanding the Shirt Group's product line through the introduction of higher
fashion sport shirts. This
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effort was poorly executed in terms of design, sales and sourcing. As a result,
the Company built up significant excess inventory. The Company believes that the
addition of new management, its improved organizational structure, consistent
focus on its core products and new management information systems will enable
the Company to better execute this growth strategy. Nevertheless, there can be
no assurance that the Company's sportwear products will be successful.
In addition, the Company plans to increase sales by increasing the number of
customers through which its products are sold. There can be no assurance that
this strategy will be successful or that net sales will increase as a result of
an increase in the Company's customer base.
The Company continues to proactively pursue opportunities to acquire
additional brands and licenses and complementary businesses. Acquisitions that
the Company may make, or joint ventures into which the Company may enter, will
involve risks, including the successful integration and management of acquired
technology, operations and personnel. The integration of acquired businesses may
also lead to the loss of key employees of the acquired companies and diversion
of management attention from ongoing business concerns. There can be no
assurance that any acquisition will be made, that the Company will be able to
obtain additional financing needed to finance such transactions and, if any
acquisitions are so made or formed, that they will be successful.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part on the Company's Chief
Executive Officer, Bryan Marsal, and other senior management and its ability to
attract and retain other highly qualified management personnel. There can be no
assurance that the Company will be successful in hiring or retaining key
personnel. The Company has not entered into an employment agreement with Bryan
Marsal and does not, in general, enter into employment agreements with its
senior managers. See "Management." The Company does not believe it is dependent
on any other officer.
LABOR STOPPAGE
A significant percentage of the Shirt Group's employees are represented by a
union. These union members have been working without a signed contract since
August 1996. Notwithstanding, such employees were given wage increases of 3% in
March 1997 and March 1998 and the Company believes that its relationship with
its employees is good. No assurance can be given, however, that a new union
contract will be executed, or that negotiations regarding a new contract will
not result in employee slowdowns, strikes or similar actions which could have a
material adverse effect on the Company's financial condition and results of
operations.
CONTROL BY CERTAIN STOCKHOLDERS
Vestar owns approximately 60.8% of the outstanding common stock of Holdings.
As a result, Vestar is able to effectively control the outcome of certain
matters requiring a stockholder vote, including the election of directors. Such
ownership of common stock may have the effect of delaying, deferring, or
preventing a change of control of the Company and may adversely affect the
voting and other rights of other stockholders.
LIMITATION ON USE OF NET OPERATING LOSSES AND BUILT-IN LOSSES
Under the Internal Revenue Code of 1986, as amended (the "Code"), the
utilization of net operating loss carryovers against future taxable income is
subject to limitation if a company undergoes an "ownership change" as defined in
the Code (the "Section 382 limitation"). As a result of the Recapitalization, an
ownership change with respect to the Company occurred on the effective date of
the Plan (the "Change Date"). Accordingly, the Company's ability to utilize all
of its net operating losses (and "recognized built-in losses," if any) in
taxable years beginning after the Change Date (and a portion of the taxable year
which
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includes the Change Date) became subject to the Section 382 limitation. The
Company intends to determine the Section 382 limitation under the provisions of
Code section 382(l)(6), which deals with a loss corporation that exchanges stock
for debt and undergoes an ownership change in a proceeding under Chapter 11.
Under that provision, the amount of income that may be offset by net operating
loss carryovers that occur prior to the Change Date should generally be limited
to an amount (subject to a proration rule for the taxable year that includes the
Change Date) equal to the product of a rate set by the Treasury Department
(5.05% on the Change Date) and the lower of (i) the value of the Company's
assets immediately prior to the ownership change, determined without regard to
liabilities, or (ii) the aggregate new stock value immediately after the
ownership change. The limitation, as so determined, may also apply to the use of
"recognized built-in losses" to offset other income during the five-year period
after the Change Date. The built-in loss limitation will apply if the excess of
the Company's tax basis in its assets over the fair market value of such assets
as of Change Date exceeds the lesser of $10.0 million or 15% of the fair market
value of the assets before the ownership change. This limitation also limits the
Company's ability to take depreciation or amortization charges with respect to
its built-in loss assets. The annual limitation on the Company's ability to
utilize its net operating losses (and recognized built-in losses, if any) may be
significant.
RESTRICTIVE FINANCING COVENANTS
The Senior Credit Facility contains a number of significant covenants that
restrict the operations of the Company. The Company is required to comply with
specified financial ratios and tests, including minimum fixed charge coverage
and interest coverage ratios and maximum leverage ratios. There can be no
assurance that the Company will be able to comply with such covenants or
restrictions in the future. The Company's ability to comply with such covenants
and other restrictions may be affected by events beyond its control, including
prevailing economic, financial and industry conditions. The breach of any such
covenants or restrictions could result in a default under the Senior Credit
Facility that would permit the lenders to declare all amounts outstanding
thereunder to be immediately due and payable, together with accrued and unpaid
interest, and the commitments of the lenders to make further extensions of
credit thereunder could be terminated. See "Description of Other Indebtedness."
The Indenture, the Certificate of Designation for the New Preferred Stock and
the Exchange Debenture Indenture also contain covenants that will restrict the
operations of the Company. See "Description of the Exchange Notes" and
"Description of the New Preferred Stock and Exchange Debentures."
REPURCHASE UPON CHANGE OF CONTROL
The occurrence of certain of the events that would constitute a Change of
Control may result in a default, or otherwise require repayment of indebtedness,
under the Senior Credit Facility and the Exchange Notes, and redemption of the
New Preferred Stock or, in the case of the Exchange Debentures, the Exchange
Debentures. In addition, the Senior Credit Facility prohibits the repayment of
indebtedness of the Exchange Notes by the Company in such an event, unless and
until such time as the indebtedness under the Senior Credit Facility is repaid
in full. The Company's failure to make such repayments in such instances would
result in a default under the Senior Credit Facility. The inability to repay the
indebtedness under the Senior Credit Facility, if accelerated, would also
constitute an event of default under the Indenture, which could have materially
adverse consequences to the Company and to the holders of the Securities. Future
indebtedness of the Company may also contain restrictions or repayment
requirements with respect to certain events or transactions that could
constitute a Change of Control. In the event of a Change of Control, there can
be no assurance that the Company would have sufficient assets to satisfy all of
its obligations under the Senior Credit Facility or the Exchange Notes, or with
respect to the New Preferred Stock or the Exchange Debentures, as the case may
be. See "Description of the Senior Credit Facility" and "Description of the
Exchange Notes."
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CERTAIN TAX CONSIDERATIONS FOR HOLDERS OF NEW PREFERRED STOCK
Distributions on the New Preferred Stock made out of the Company's current
or accumulated earnings and profits, as determined under U.S. federal income tax
principles, will be taxable as ordinary income whether paid in cash or in
additional shares of New Preferred Stock. In addition, to the extent that there
is a difference between the redemption price and issue price of the New
Preferred Stock (the "redemption premium"), holders will be required to treat
the difference as constructive distributions that are includable in income on an
economic accrual basis. If shares of New Preferred Stock (including additional
shares of New Preferred Stock distributed by the Company in lieu of cash
dividend payments) bear redemption premium, such shares generally will have
different tax characteristics than other shares of preferred stock and might
trade separately, which might adversely affect the liquidity of such shares. See
"United States Federal Tax Considerations; New Preferred Stock; U.S. Holders --
Redemption Premium."
Holders should also note that if shares of New Preferred Stock are exchanged
for Exchange Debentures and the stated redemption price at maturity of such
Exchange Debentures exceeds their issue price by more than a DE MINIMIS amount,
the Exchange Debentures will be treated as having original issue discount equal
to the entire amount of such excess. Exchange Debentures issued on or before May
15, 2003, when the Company has the option to pay interest on the Exchange
Debentures in additional Exchange Debentures, will have original issue discount
and Exchange Debentures issued thereafter may have original issue discount. Each
holder of Exchange Debentures with original issue discount will be required to
include in gross income an amount equal to the sum of the daily portions of the
original issue discount for all days during the taxable year in which such
holder holds the Exchange Debentures, regardless of the holder's regular method
of accounting and regardless of whether interest is paid by the Company in cash
or in additional Exchange Debentures. See "United States Federal Tax
Considerations; New Preferred Stock; U.S. Holders--Original Issue Discount."
FRAUDULENT CONVEYANCE CONSIDERATIONS
The incurrence of indebtedness by the Company or any of the Guarantors,
respectively, may be subject to review under Federal bankruptcy law or relevant
state fraudulent conveyance laws if a bankruptcy case or lawsuit is commenced by
or on behalf of unpaid creditors of such entity. Under these laws, if, in a
bankruptcy or reorganization case or a lawsuit by or on behalf of unpaid
creditors of the such entity, a court were to find that, at the time such entity
incurred indebtedness, including (i) such entity incurred such indebtedness with
the intent of hindering, delaying or defrauding current or future creditors or
(ii) (a) such entity received less than reasonably equivalent value or fair
consideration for incurring such indebtedness and (b) such entity (1) was
insolvent or was rendered insolvent by reason of the Exchange Notes (in the case
of the Company) or the Guarantees (in the case of the Guarantors), (2) was
engaged, or about to engage, in a business or transaction for which its assets
constituted unreasonably small capital, (3) intended to incur, or believed that
it would incur, debts beyond its ability to pay as such debts matured (as all of
the foregoing terms are defined in or interpreted under the relevant fraudulent
transfer or conveyance statutes) or (4) was a defendant in an action for money
damages, or had a judgment for money damages docketed against it (if, in either
case, after final judgment is unsatisfied), then such court could avoid or
subordinate the amounts owing under the Exchange Notes (in the case of the
Company) or the Guarantees (in the case of the Guarantors), to presently
existing and future indebtedness of the Company or the Guarantors, respectively
and take other actions detrimental to the holders of the Exchange Notes or the
Exchange Debentures, or both, as the case may be.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, an entity would be considered insolvent if,
at the time it incurred the indebtedness, either (i) the sum of its debts
(including contingent liabilities) is greater than its assets, at a fair
valuation, or (ii) the present fair saleable value of its assets is less than
the amount required to pay the probable liability on its total existing debts
and liabilities (including contingent liabilities) as they become absolute and
matured. There can be no
33
<PAGE>
assurance as to what standards a court would use to determine whether the
Company or the Guarantors were solvent at the relevant time, or whether,
whatever standard was used, the Exchange Notes or the Guarantees would not be
avoided or further subordinated on another of the grounds set forth above. In
rendering their opinions in connection with the Offerings, no counsel for will
express any opinion as to the applicability of Federal or state fraudulent
transfer and conveyance laws.
The Company and the Guarantors believe that at the time they initially incur
the obligations constituting the Notes or the Guarantees, as the case may be,
the Company and the Guarantors (i) will be (a) neither insolvent nor rendered
insolvent thereby, (b) in possession of sufficient capital to run their
businesses effectively and (c) incurring debts within their ability to pay as
the same mature or become due and (ii) will have sufficient assets to satisfy
any probable money judgment against them in any pending action. In reaching the
foregoing conclusions, the Company and the Guarantors have relied upon its
analyses of internal cash flow projections and estimated values of assets and
liabilities of the Guarantors. There can be no assurance, however, that a court
passing on such questions would reach the same conclusions. The obligations of
the Subsidiary Guarantors under the Subsidiary Guarantees will be limited so as
not to constitute a fraudulent conveyance under applicable law.
ENVIRONMENTAL MATTERS
The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, the handling and disposal of solid and/or hazardous wastes and
the remediation of contamination associated with releases of hazardous
substances. The Company believes that its operations are in compliance with
environmental requirements, except as would not be expected to have a material
adverse effect on the Company or as otherwise stated herein. However, there can
be no assurances that environmental requirements will not change in the future
or that the Company will not incur significant costs in the future to comply
with such requirements.
ABSENCE OF PUBLIC MARKET
The Securities are new securities for which there presently is no market.
Although the Initial Purchasers have informed the Company that they currently
intend to make a market in the Exchange Notes and the New Preferred Stock, and
if issued, the Exchange Debentures, the Initial Purchasers are not obligated to
do so and any such market making may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Securities or, if issued, the Exchange Debentures. The Securities
are expected to be eligible for trading by qualified buyers in the PORTAL
market. The Company does not intend to apply for listing of the Exchange Notes
or the New Preferred Stock or, if issued, the Exchange Debentures, on any
securities exchange or for quotation of any such securities through the National
Association of Securities Dealers Automated Quotation System. See "Plan of
Distribution."
No assurance can be given as to the liquidity of the trading market for the
Exchange Notes or the New Preferred Stock, or, in the case of non-exchanging
holders of Notes or Exchangeable Preferred Stock, the trading market for the
Notes or Exchangeable Preferred Stock following the Note Exchange Offer and the
Preferred Stock Exchange Offer.
YEAR 2000 RISK
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
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Based on a recent assessment, the Company believes that it will not be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company presently believes that its existing software is
year 2000 compliant and will not pose significant operational problems for its
computer systems.
The Company has initiated formal communications with all of its significant
hardware/software suppliers and plans to communicate with large customers and
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of third party
Year 2000 Issues based on presently available information. However there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.
The Company anticipates completing the Year 2000 project not later than June
30, 1999 which is prior to any anticipated impact on its operating systems. The
total costs of the Year 2000 project is estimated at $100,000 and will be
expensed as incurred.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
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THE TRANSACTION
THE BANKRUPTCY AND TURNAROUND
In 1990, the Company acquired Cluett Peabody & Co., Inc., which included the
Sock Group and the Shirt Group, from West Point-Pepperell, Inc. Prior to that
time, the Company had primarily been a licensed designer and marketer of premium
high fashion apparel under designer labels such as Ralph Lauren. The Company
applied the same high overhead designer business model to these less fashion-
oriented businesses. Rather than reduce costs, the Company attempted to
compensate for this inappropriate cost structure by broadening distribution and
expanding the Shirt Group's ARROW business into higher-priced, higher-fashion
dress shirts and sportswear. This effort was poorly executed and ignored both
the Company's core customer and operational capabilities, resulting in
significant excess inventory. The losses associated with this strategy, in
addition to an unsuccessful expansion into retail outlets, forced the Company to
seek protection under the Bankruptcy Code in July 1995.
In June 1995, Bryan Marsal (a managing director of A&M) was appointed
President and Chief Executive Officer of the Company. Since then Mr. Marsal and
the rest of his management team have taken a number of strategic and operational
actions which have substantially improved the Company's cash flow and restored
profitability. As a result, the Company was able to file the Plan (as defined)
in March 1998 pursuant to which, utilizing the proceeds of the Offerings and
certain other financing, the Company repaid in full substantially all of its
outstanding indebtedness, together with all accrued interest thereon and provide
a payment to existing shareholders. The actions taken by Mr. Marsal and his team
have included the following:
- EXPENSE MANAGEMENT. The Company significantly reduced its operating costs
and expenses by transferring administrative functions to its operating
subsidiaries and by eliminating unnecessary expenses. This
decentralization resulted in a significant reduction in corporate overhead
and expenditures being made on redundant corporate activity. It also
increased the efficiency with which administrative functions were handled.
For example, instead of the collections process being managed at the
corporate level, it is being managed by the same group responsible for the
sales, marketing and distribution of the order. This integration has
significantly lowered returns, chargebacks and retailer penalties for
execution breakdowns. Examples of operating expense reductions include the
closure of unprofitable retail stores; the relocation of offices and
showrooms to less expensive locations; the introduction of more cost
effective medical and worker's compensation benefit plans; the
consolidation of distribution centers and the elimination of related
excess capacity; the reduction of personnel; and the modification and
reduction of advertising and promotional spending from an ineffective
national media campaign to more effective regional cooperative and point
of sale advertising.
- OPERATIONAL IMPROVEMENTS. In the fourth quarter of 1995, the Company began
the elimination of excess or unnecessary capacity with the closure of the
Shirt Group's production facilities in Cedartown, Georgia and Costa Rica
and the Sock Group's manufacturing plant in Halifax, North Carolina. Also,
the Shirt Group consolidated New York and Atlanta product sourcing into
one group in Atlanta and implemented strict international vendor
qualification and monitoring programs. In addition, the Company invested
in new manufacturing equipment for the Sock Group; in new information
systems for the Sock and Shirt Groups which provided the financial tools
needed to reduce inventory, improve collections and assist overall
planning; and in material handling equipment and scanning technology to
more cost effectively meet customers' shipping needs.
- PRODUCT REALIGNMENT. In 1995, the Company began the process of refocusing
the Shirt Group on its blended dress shirt product and repositioning the
all cotton dress shirt and sports shirt products as complementary products
to these core cotton/polyester dress shirt offerings. Given the lead times
associated with international sourcing of sport shirts, it was not until
fall of 1997 that the Shirt Group's product line fully reflected
management's intended product mix. This realignment has
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<PAGE>
contributed to lower returns, allowances, markdowns, and off-price sales,
resulting in improved gross margins.
THE PLAN CONFIRMATION
Subject to Bankruptcy Court supervision and approval of all transactions
outside the ordinary course of business, Holdings was permitted to develop the
Plan to restructure its financial affairs, including assuming or rejecting
executory contracts and leases, and to continue to manage and operate its
business as debtor-in-possession. The Plan was confirmed by the Bankruptcy Court
on March 31, 1998. In order to be confirmed, the Plan was required to satisfy
certain requirements of the Bankruptcy Code, including that each claim in a
particular class receive the same treatment as each other claim in that class
and that Holdings be adequately capitalized so that confirmation of the Plan
will not be followed by a liquidation or the need for further reorganization.
Holdings was also required to demonstrate to the satisfaction of the Bankruptcy
Code that the Plan satisfied the "best interests of creditors test." This means
that holders of claims and interests in each impaired class must have either
unanimously accepted the Plan or that such holders would not receive more in a
liquidation of Holdings than through the implementation of the Plan.
THE RECAPITALIZATION
On March 31, 1998, the Plan was confirmed by the Bankruptcy Court. In
connection with the Plan and pursuant to the Subscription Agreement, the Equity
Investors made the Equity Investment in Holdings. Approximately $52.7 million of
the Equity Investment was provided by Vestar in the form of a $21.3 million
common equity investment in Holdings Common Stock and a $31.4 million investment
in Holdings Class C Junior Preferred Stock. Approximately $8.6 million of the
Equity Investment was provided by the Co-Investors in the form of a $3.5 million
investment in Holdings Common Stock and a $5.1 million investment in Holdings
Class C Preferred Stock. A&M and the Management Investors provided the remaining
Equity Investment in the form of a $4.9 million and $1.8 million investment in
Holdings Common Stock, respectively. Each of these issuances of securities were
made in reliance on Section 4(2) of the Securities Act. The balance of the
Holdings Common Stock will be held by existing shareholders of Holdings.
The Company and Holdings used the proceeds from the Equity Investment in
conjunction with (i) borrowings under the Senior Credit Facility, (ii) the
proceeds from the Offerings, (iii) the issuance of $13.0 million in Parity Notes
to existing holders of Holdings Common Stock and (iv) the issuance of
approximately $2.4 million in Holdings Class A Senior Preferred Stock to a plan
to be established for the benefit of the certain employees of the Company to
effect the Recapitalization under which substantially all of Holdings and the
Company's existing obligations, including all borrowings under the DIP Facility,
were paid in full. The consummation of the Recapitalization was a condition to
the consummation of the Offerings. In connection with the Recapitalization, the
Company changed its name to Cluett American Corp. on the date of closing.
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The following table sets forth cash sources and uses of funds for Holdings
for the Recapitalization and the application of the proceeds therefrom.
<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS)
-------------------
<S> <C>
SOURCES OF FUNDS(1):
The Senior Credit Facility(2).............................................................. $ 114.5
The Note Offering.......................................................................... 112.0
The Preferred Stock Offering............................................................... 50.0
Holdings Class C Junior Preferred Stock.................................................... 36.5
Holdings Common Stock(3)................................................................... 29.2
Available Cash............................................................................. 11.9
------
$ 354.1
------
------
USES OF FUNDS:
Payment of Allowed Claims(4)............................................................... $ 291.5
Payment of Estimated Post-Petition Interest(5)............................................. 36.7
Refinancing of Existing Debt of the Designer Group......................................... 7.0
Estimated Fees and Expenses(6)............................................................. 18.9
------
$ 354.1
------
------
</TABLE>
- ------------------------
(1) Does not include non-cash items, listed as clauses (iii) and (iv) above.
(2) Borrowings under the Senior Credit Facility bear interest at a rate per
annum equal to a margin over, at the Company's option, LIBOR or a Base Rate.
The Senior Credit Facility is secured by substantially all the assets of the
Company's domestic subsidiaries, guaranteed by the Company's domestic
subsidiaries and contains customary covenants and events of default,
including substantial restrictions on the Company's ability to declare
dividends or distributions. The Senior Credit Facility is subject to
mandatory prepayment with the proceeds of certain asset sales, certain
equity issuances and certain funded debt issuances for borrowed money, and
with a portion of the Company's excess cash flow (as defined in the Senior
Credit Facility). See "Description of Other Indebtedness."
(3) Excludes $2.3 million of Holdings Common Stock purchased with the proceeds
of loans provided by Holdings.
(4) Includes repayment of $146.5 million of the Company's pre-petition bank
debt, $22.1 million of unsecured trade payables and $122.6 million of
Holdings notes and certain other claims.
(5) Includes payments of $9.2 million of interest on pre-petition bank debt,
$3.2 million of post-petition interest on trade payables and $24.4 million
of post-petition interest on Holdings notes.
(6) Includes accountants, lawyers and certain investment banking fees related to
the Transaction.
Vestar, headquartered in New York with an office in Denver, Colorado,
manages over $1.0 billion in private equity capital. Founded in 1988, the firm
focuses on management buyouts, recapitalizations and growth capital investments.
Since 1988, the firm has completed 25 investments with an aggregate value
approaching $5.0 billion. Previous Vestar investments have included Aearo
Corporation, Anvil Knitwear, Inc., Celestial Seasonings, Inc., Clark-Schwebel,
Inc., Insight Communications Company, L.P., Prestone Products Corporation,
Pyramid Communications, Inc., Remington Products Company, Russell-Stanley Corp.,
Sun Apparel, Inc., and Westinghouse Air Brake Company.
A&M is a prominent turnaround management firm located in New York. The firm
has been involved in the successful turnaround of over 20 companies, including
Ornda Healthcor., Phar-Mor Inc., Wherehouse Entertainment Inc., Charter Medical
Corporation, Anthony Manufacturing Company and Long Manufacturing Corp., among
others.
Prior to the Recapitalization, the Company was a wholly-owned subsidiary of
Holdings. The majority stockholder of Holdings prior to the Recapitalization was
Societe Anonyme D'Etudes et de Participation Industrielles et Commerciales.
Societe Anonyme D'Etudes et de Participation Industrielles et Commerciales
currently owns 6.9% of Holdings.
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USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes or
Preferred Stock pursuant to the Exchange Offer. The gross proceeds from the
Offerings were $162.0 million. The Company used such proceeds together with
$114.5 million of borrowings under the Senior Credit Facility and $9.0 million
of available cash to (i) pay $188.3 million in bank indebtedness (such
indebtedness had interest rates ranging from 5.95% to 10.89% and maturities
which had all been accelerated when the Company entered bankruptcy) and trade
claims due under the Plan, (ii) distribute $86.1 million to Holdings to be used
by Holdings to pay certain claims and interests under the Plan and (iii) pay
$18.9 million in fees and expenses.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 27, 1998. The table should be read in conjunction with the historical
combined financial statements of the Company and the related notes thereto
included elsewhere in this Prospectus. See "The Transaction" and "Selected
Historical Financial Data."
<TABLE>
<CAPTION>
JUNE 27,
1998
-----------
<S> <C>
ACTUAL(1)
-----------
<CAPTION>
(DOLLARS IN
MILLIONS)
<S> <C>
Cash and cash equivalents.............................................................................. $ 9.0
-----------
-----------
Short-term debt and current maturities of long-term debt (2)........................................... $ 6.4
-----------
-----------
Long-term debt (excluding current maturities):
DIP Credit Facility.................................................................................. $ --
Senior Credit Facility(3)............................................................................ 114.5
Capital lease obligations............................................................................ 1.6
Notes(4)............................................................................................. 125.0
-----------
Total long-term debt............................................................................... 241.1
Preferred Stock........................................................................................ 48.1
Shareholders' deficit.................................................................................. (116.4)
-----------
Total capitalization................................................................................... $ 172.8
-----------
-----------
</TABLE>
- ------------------------
(1) The capitalization of the Company as of June 27, 1998 includes the effect of
the Offerings, the Exchange Offerings, the Senior Credit Facility and the
effectiveness of the Plan.
(2) Includes borrowings of $5.8 million under the $15.0 million revolving credit
facility of the Company's Canadian Subsidiary and $0.6 million of capital
leases.
(3) Excludes letters of credit of $18.3 million.
(4) Includes $13.0 million of Parity Notes.
39
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma financial data has been derived by the application
of pro forma adjustments to the Company's historical combined financial
statements.
The adjustments give effect to (i) consummation of the Offerings by the
Company, (ii) entering into the Senior Credit Facility by the Company, (iii) the
issuance of $13.0 million of Parity Notes by the Company to existing holders of
Holdings' Common Stock, (iv) the distribution of $86.1 million from the Company
to Holdings (the "Distribution") which will be used by Holdings to pay claims
under the Plan, (v) consummation of the Plan, (vi) the payment by the Company of
estimated fees and expenses and (vii) the elimination of the results of the
Company's Divested Operations in Canada, Mexico and Guatemala. The Distribution,
together with the issuance of $31.5 million of Holdings' Common Stock to Vestar,
A&M, the Co-Investors and certain members of the Company's management and the
issuance by Holdings of $36.5 million of its Class C Junior Preferred Stock to
Vestar, will be used by Holdings to pay its claims pursuant to the Plan.
Each Unaudited Pro Forma Condensed Combined Statement of Operations has been
prepared as if such transactions were consummated as of January 1, 1997. The Pro
Forma Combined Financial Information is unaudited and does not purport to be
indicative of the Company's results that would have actually been obtained had
such transactions been consummated as of the assumed dates nor are they
indicative of the Company's results of operations for any future period. The pro
forma adjustments, as described in the accompanying notes, are based on
available information and upon certain assumptions which management believes are
reasonable. The Unaudited Pro Forma Combined Financial Information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and notes
thereto included elsewhere in this Prospectus.
40
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DIVESTED
HISTORICAL OPERATIONS(1) ADJUSTMENTS PRO FORMA
----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT RATIOS)
Net sales.................................................... $ 362.9 $ (3.7) $ 359.2
Cost of goods sold........................................... 253.8 (2.3) 251.5
----------- ----- -----------
Gross profit................................................. 109.1 (1.4) 107.7
Selling, general and administrative expenses................. 74.8 (2.0) $ 0.5(2) 73.3
Facility closing and reengineering costs..................... 2.5 1.5 4.0
----------- ----- ----- -----------
Operating income............................................. 31.8 (0.9) (0.5) 30.4
Interest expense, net........................................ 15.2 8.8(3) 24.0
Other expense, net........................................... 2.0 (0.2) 1.8
Bankruptcy reorganization credits............................ (3.9) (3.9)
----------- ----- ----- -----------
Income before provision for income taxes..................... 18.5 (0.7) (9.3) 8.5
Provision for income taxes................................... 1.3 1.3
----------- ----- ----- -----------
Net income................................................... $ 17.2 $ (0.7) $ (9.3) $ 7.2
----------- ----- ----- -----------
----------- ----- ----- -----------
OTHER DATA:(6)
Earnings to fixed charges(5)................................. 1.7x
Earnings to combined fixed charges and preferred stock
dividends(5)............................................... 1.2x
</TABLE>
The accompanying notes are an integral part of these statements.
41
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 27, 1998
<TABLE>
<CAPTION>
DIVESTED
HISTORICAL OPERATIONS (1) ADJUSTMENTS PRO FORMA
----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT RATIOS)
Net sales.................................................... $ 168.6 $ (1.7) $ 166.9
Cost of goods sold........................................... 116.4 (1.0) 115.4
----------- ----- -----------
Gross profit................................................. 52.2 (0.7) 51.5
Selling, general and administrative expenses................. 38.8 (1.2) $ 0.2(2) 37.8
Facility closing and reengineering costs..................... 1.0 0.4 1.4
----------- ----- ------ -----------
Operating income............................................. 12.4 0.1 (0.2) 12.3
Interest expense, net........................................ 7.1 4.6(3) 11.7
Other income, net............................................ 0.2 (0.2) --
Bankruptcy reorganization costs(4)........................... 13.2 13.2
----------- ----- ------ -----------
Income before provision for income taxes..................... (8.1) 0.3 (4.8) (12.6)
Provision for income taxes................................... 0.6 0.6
----------- ----- ------ -----------
Net income................................................... $ (8.7) $ 0.3 $ (4.8) $ (13.2)
----------- ----- ------ -----------
----------- ----- ------ -----------
OTHER DATA:(6)
Earnings to fixed charges(5)................................. --
Earnings to combined fixed charges and preferred stock
dividends(5)............................................... --
</TABLE>
The accompanying notes are an integral part of these statements.
42
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(1) Represents the elimination of the results of operations of the Company's
Canadian retail operations, which the Company decided to exit in 1996, and
the Company's Mexican and Guatemalan manufacturing operations which were
sold in 1997. For further discussion see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
(2) Represents the $0.5 million annual management fee to be paid to Vestar. See
"Certain Transactions-- Other Relationships--Management Advisory Agreement."
(3) Represents the net adjustment to interest expense as a result of the
borrowings under the Notes, the Parity Notes and the Senior Credit Facility
calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 27, 1998
----------------- -----------------
<S> <C> <C>
(IN MILLIONS)
Notes and Parity Notes(a)................................................ $ 12.7 $ 6.2
Senior Credit Facility:
Revolver(b)............................................................ 0.4 0.2
Term Loan A(c)......................................................... 3.9 1.8
Term Loan B(d)......................................................... 4.9 2.3
Commitment and letter of credit fees(e)................................ 0.1 0.1
Other(f)................................................................. 0.5 0.3
------ -----
Cash interest expense.................................................... 22.5 10.9
Amortization of deferred financing costs(g).............................. 1.5 0.8
------ -----
Pro forma interest expense............................................... 24.0 11.7
Less historical net interest expense(h).................................. (15.2) 7.1
------ -----
Net adjustment........................................................... $ 8.8 $ 4.6
------ -----
------ -----
</TABLE>
----------------------------
(a) Represents interest on the $112.0 million Notes and $13.0 million Parity
Notes using an interest rate of 10.125%.
(b) Represents interest on $4.5 million of the Revolver (as defined) which
was drawn at closing using an interest rate of 7.95%.
(c) Represents interest on the $50.0 million Term Loan A (as defined) using
an interest rate of 7.95%.
(d) Represents interest on the $60.0 million Term Loan B (as defined) using
an interest rate of 8.20%.
(e) Represents a 0.125% fee on $11.2 million of outstanding letters of
credit and a 0.5% commitment fee applied to the remaining $34.3 million
unused portion of the Revolver.
(f) Represents historical interest expense on capital lease obligations and
indebtedness under the Canadian Facility (as defined) which will remain
outstanding.
(g) Represents amortization of estimated deferred financing costs of $11.6
million which will be amortized over the term of the related debt (ten
years for the Notes and Parity Notes, six years for the Revolver and Term
Loan A, and seven years for Term Loan B).
(h) Represents the elimination of historical interest expense, net of
interest income.
43
<PAGE>
A change of 0.125% in the assumed interest rate would have the following
effect on pro forma interest expense:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 27, 1998
--------------------- ---------------
<S> <C> <C>
(IN MILLIONS)
Senior Credit Facility..................................................... $ 0.1 $ 0.1
</TABLE>
(4) Includes $10.7 million of non-recurring post-petition interest on
pre-petition claims calculated in accordance with the Plan and paid as a
result of the Transaction.
(5) For purposes of determining the pro forma ratios of earnings to fixed
charges and earnings to combined fixed charges and preferred stock
dividends, earnings are defined as historical earnings before income taxes
plus fixed charges. Fixed charges include interest expense on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense, representing that portion deemed to be attributable to
interest. Preferred stock dividends are computed by dividing the dividend
requirement on the Preferred Stock (using a dividend rate of 12.5%) by one
minus the tax rate of 40%. On a pro forma basis, earnings were insufficient
to cover fixed charges and combined fixed charges and preferred stock
dividends by $8.1 million and $13.3 million, respectively, for the six
months ended June 27, 1998.
(6) The following Other Data is provided, consistent with the "Summary
Historical Combined Financial Information," to demonstrate the effect of the
pro forma adjustments on such information. The Other Data should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and the Financial Statements and notes
thereto included elsewhere in this Prospectus.
OTHER DATA
<TABLE>
<CAPTION>
DIVESTED
HISTORICAL OPERATIONS ADJUSTMENTS PRO FORMA
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Capital expenditures............................................ $ 10.8 $ -- $ -- $ 10.8
Depreciation and amortization(A)................................ 8.1 -- -- 8.1
Cash flows from (used by):
Operating activities.......................................... 13.0 (0.7) (9.3) 3.0
Investing activities.......................................... (7.5) (7.5)
Financing activities.......................................... (1.3) (1.3)
EBITDA As Defined(B)............................................ 40.4 0.6 (0.5) 40.5
Cash interest expense (3)....................................... 15.2 -- 7.3 22.5
EBITDA As Defined to cash interest expense...................... 1.8x
SIX MONTHS ENDED JUNE 27, 1998
Capital expenditures............................................ $ 5.7 $ -- $ -- $ 5.7
Depreciation and amortization(A)................................ 4.2 -- -- 4.2
Cash flows from (used by):
Operating activities.......................................... (33.0) 0.3 (4.8) (37.5)
Investing activities.......................................... (5.6) (5.6)
Financing activities.......................................... 37.6 37.6
EBITDA As Defined(B)............................................ 16.6 0.5 (0.2) 16.9
Cash interest expense(3)........................................ 7.1 -- 3.8 10.9
EBITDA As Defined to cash interest expense...................... 1.6x
</TABLE>
44
<PAGE>
(A) Depreciation and amortization excludes pro forma amortization of deferred
financing costs of $1.5 million for the year ended December 31, 1997 and
$0.8 million for the six months ended June 27, 1998.
(B) EBITDA As Defined represents operating income before depreciation and
amortization, non-cash pension income and facility closing and reengineering
costs. EBITDA As Defined should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with GAAP or as a
measure of profitability or liquidity. EBITDA As Defined is presented
because it is a widely accepted financial indicator of a company's ability
to service and/or incur indebtedness and because certain covenants in the
Company's borrowing arrangements are tied to similar measures; however, it
is not necessarily comparable to other similarly titled captions of other
companies due to differences in methods of calculation.
The calculation of pro forma EBITDA As Defined is shown below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 27, 1998
------------------- ---------------
<S> <C> <C>
(IN MILLIONS)
Operating income........................................................... $ 30.4 $ 12.3
Depreciation and amortization.............................................. 8.1 4.2
Non-cash pension income(a)................................................. (2.0) (1.0)
Facility closing and reengineering costs................................... 4.0 1.4
----- -----
EBITDA As Defined.......................................................... $ 40.5 $ 16.9
----- -----
----- -----
</TABLE>
- ------------------------
(a) Represents non-cash pension income arising from the Company's overfunded
pension plan.
45
<PAGE>
SELECTED HISTORICAL COMBINED FINANCIAL DATA
The following selected historical combined financial data for 1995, 1996 and
1997 were derived from the Financial Statements as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997 which have
been audited by Ernst & Young LLP, independent auditors, as indicated in their
report included elsewhere herein. The combined financial data at and for the six
months ended June 28, 1997 and June 27, 1998 have been derived from unaudited
consolidated financial statements of the Company and, in the opinion of the
Company's management, have been prepared on a basis consistent with the audited
financial statements and include all adjustments (which consist of normal
recurring accruals) that are considered by management to be necessary for a fair
presentation of such financial information. Historical data and interim results
are not necessarily indicative of future results and interim data are not
necessarily indicative of results for a full year. The information set forth
below should be read in conjunction with the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 531.6 $ 536.8 $ 486.7 $ 368.7 $ 362.9
Cost of goods sold(1)....................... 394.2 391.5 369.8 273.8 253.8
------ ------------- ------ ------ ------
Gross profit................................ 137.4 145.3 116.9 94.9 109.1
Selling, general and administrative
expenses.................................. 132.9 145.4 137.9 85.9 74.8
Facility closing and reengineering
costs(2).................................. -- -- 22.5 11.6 2.5
------ ------------- ------ ------ ------
Operating income (loss)..................... 4.5 (0.1) (43.5) (2.6) 31.8
Interest expense, net....................... 23.0 24.6 22.7 16.9 15.2
Write-down of intangible assets(3).......... -- 74.7 -- -- --
Other expense (income), net(4).............. 1.1 (0.3) 0.5 3.3 2.0
Bankruptcy reorganization costs
(credits)(5).............................. -- -- 20.9 6.1 (3.9)
------ ------------- ------ ------ ------
Income (loss) before provision for income
taxes..................................... (19.6) (99.1) (87.6) (28.9) 18.5
Provision for income taxes.................. 1.0 1.8 1.5 1.3 1.3
------ ------------- ------ ------ ------
Net income (loss)........................... ($ 20.6) ($ 100.9) ($ 89.1) ($ 30.2) $ 17.2
------ ------------- ------ ------ ------
------ ------------- ------ ------ ------
OTHER FINANCIAL DATA:
Capital expenditures........................ $ 7.5 $ 13.8 $ 6.1 $ 9.8 $ 10.8
Depreciation and amortization(6)............ 14.7 15.3 13.3 10.9 8.1
Cash flows from (used by):
Operating activities...................... $ 22.8 $ (16.0) $ 0.4 $ 16.7 $ 13.0
Investing activities...................... (4.5) (10.3) 25.3 (8.3) (7.5)
Financing activities...................... (33.1) (22.7) (26.1) (13.3) (1.3)
EBITDA As Defined(7)........................ 16.0 13.9 (7.8) 17.5 40.4
Adjusted Net Sales(8)....................... 399.5 406.0 388.9 361.5 359.2
Adjusted EBITDA(7)(8)....................... 11.0 0.6 (8.5) 18.8 41.0
Adjusted EBITDA margin...................... 2.8% 0.1% (2.2)% 5.2% 11.4%
Ratio of earnings to fixed charges(9)....... -- -- -- -- 2.1 x
<CAPTION>
BALANCE SHEET DATA (AT END OF PERIOD):
<S> <C> <C> <C> <C> <C>
Working capital(10)......................... $ 130.2 $ 141.5 $ 116.9 $ 82.1 $ 82.3
Total assets................................ 388.0 321.5 252.9 211.1 220.0
Total long-term debt, net of current
portion(11)............................... 138.8 150.4 3.6 8.6 2.0
Debt subject to compromise.................. -- -- 161.1 146.0 145.6
Preferred stock............................. 15.5 16.4 17.4 18.7 20.0
Total stockholders' equity (deficit)........ 150.4 46.9 (44.3) (74.2) (56.8)
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 28, JUNE 27,
1997 1998
------------- -------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 162.0 $ 168.6
Cost of goods sold(1)....................... 112.8 116.4
------ ------
Gross profit................................ 49.2 52.2
Selling, general and administrative
expenses.................................. 37.2 38.8
Facility closing and reengineering
costs(2).................................. 0.3 1.0
------ ------
Operating income (loss)..................... 11.7 12.4
Interest expense, net....................... 7.3 7.1
Write-down of intangible assets(3).......... -- --
Other expense (income), net(4).............. (1.2) 0.2
Bankruptcy reorganization costs
(credits)(5).............................. 2.9 13.2
------ ------
Income (loss) before provision for income
taxes..................................... 2.7 (8.1)
Provision for income taxes.................. 0.5 0.6
------ ------
Net income (loss)........................... $ 2.2 $ (8.7)
------ ------
------ ------
OTHER FINANCIAL DATA:
Capital expenditures........................ $ 4.7 $ 5.7
Depreciation and amortization(6)............ 4.2 4.2
Cash flows from (used by):
Operating activities...................... $ 0.2 $ (33.0)
Investing activities...................... (4.5) (5.6)
Financing activities...................... 3.5 37.6
EBITDA As Defined(7)........................ 15.2 16.6
Adjusted Net Sales(8)....................... 161.7 166.9
Adjusted EBITDA(7)(8)....................... 15.9 17.1
Adjusted EBITDA margin...................... 9.8% 10.2%
Ratio of earnings to fixed charges(9)....... 1.3 x --
BALANCE SHEET DATA (AT END OF PERIOD):
<S> <C> <C>
Working capital(10)......................... $ 84.5 $ 84.0
Total assets................................ 215.9 223.3
Total long-term debt, net of current
portion(11)............................... 7.8 241.1
Debt subject to compromise.................. 145.9 --
Preferred stock............................. 19.3 48.1
Total stockholders' equity (deficit)........ (73.2) (116.4)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
46
<PAGE>
(FOOTNOTES FOR PRECEDING PAGE)
(1) In 1995, the Company recorded a charge of approximately $14.0 million for
the write-down of inventory, which is included in cost of goods sold.
(2) Over the three year period 1995-1997 facility closing and reengineering
costs, which totalled $36.6 million, included $14.5 million for plant
closings, $9.9 million for store closings, $2.4 million for Divested
Operations, $1.6 million for relocation and severance, and $8.2 million for
software, systems development and implementation and other consulting costs.
(3) Represents the write-off of the remaining excess of the purchase price over
the fair value of net assets acquired (goodwill and other intangibles)
recorded in connection with the acquisition of the Shirt Group and the Sock
Group, in 1990.
(4) Other expense, net is primarily exchange losses. Additionally, in 1996 the
Company began liquidating its investments in its Mexican and Guatemalan
subsidiaries and wrote off $3.1 million previously recorded as a component
of equity for foreign currency translation.
(5) Bankruptcy reorganization costs (credits) consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------------
------------------------------- JUNE 28, JUNE 27,
1995 1996 1997 1997 1998
--------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Professional fees.......................................... $ 2.8 $ 6.1 $ 6.1 $ 2.9 $ 2.5
Post petition interest paid in accordance with the Plan.... -- -- -- -- 10.7
Adjustment to lease rejection and other pre-petition
liabilities................................................ 9.8 -- (10.0) -- --
Write off of deferred financing costs...................... 3.5 -- -- -- --
Fees related to obtaining the DIP Facility................. 1.3 -- -- -- --
Claims and related litigation.............................. 3.5 -- -- -- --
--------- --------- --------- ----- -----------
$ 20.9 $ 6.1 ($ 3.9) $ 2.9 $ 13.2
--------- --------- --------- ----- -----------
---------
<CAPTION>
<S> <C>
Professional fees..........................................
Post petition interest paid in accordance with the Plan....
Adjustment to lease rejection and other pre-petition
liabilities................................................
Write off of deferred financing costs......................
Fees related to obtaining the DIP Facility.................
Claims and related litigation..............................
</TABLE>
(6) Depreciation and amortization excludes amortization of deferred financing
costs of $3.6 million in 1993, $3.6 million in 1994 and $5.2 million in
1995, which is included in interest expense.
(7) EBITDA As Defined is defined as operating income before depreciation and
amortization, non-cash pension income and facility closing and reengineering
costs. Adjusted EBITDA represents EBITDA As Defined adjusted for Divested
Operations. EBITDA As Defined should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with GAAP or as a
measure of profitability or liquidity. EBITDA As Defined is presented
because it is a widely accepted financial indicator of a company's ability
to service and/or incur indebtedness and because certain covenants in the
Company's borrowing arrangements are tied to similar measures; however, it
is not necessarily comparable to other similarly titled captions of other
companies due to differences in methods of calculation. The calculation of
EBITDA As Defined and Adjusted EBIDTA is shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Operating income (loss)................................................... $ 4.5 $ (0.1) $ (43.5) $ (2.6)
Depreciation and amortization............................................. 14.7 15.3 13.3 10.9
Non-cash pension income................................................... (3.2) (1.3) (0.1) (2.4)
Facility closing and reengineering costs.................................. -- -- 22.5 11.6
--------- --------- --------- ---------
EBITDA As Defined......................................................... 16.0 13.9 (7.8) 17.5
EBITDA from Divested Operations(8)........................................ 5.0 13.3 0.7 (1.3)
--------- --------- --------- ---------
Adjusted EBITDA........................................................... $ 11.0 $ 0.6 $ (8.5) $ 18.8
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 28, JUNE 27,
1997 1997 1998
--------- ------------- -----------
<S> <C> <C> <C>
Operating income (loss)................................................... $ 31.8 $ 11.7 $ 12.4
Depreciation and amortization............................................. 8.1 4.2 4.2
Non-cash pension income................................................... (2.0) (1.0) (1.0)
Facility closing and reengineering costs.................................. 2.5 0.3 1.0
--------- ----- -----------
EBITDA As Defined......................................................... 40.4 15.2 16.6
EBITDA from Divested Operations(8)........................................ (0.6) (0.7) (0.5)
--------- ----- -----------
Adjusted EBITDA........................................................... $ 41.0 $ 15.9 $ 17.1
--------- ----- -----------
--------- ----- -----------
</TABLE>
(8) Adjusted Net Sales and Adjusted EBITDA represent historical net sales and
EBITDA As Defined adjusted for (i) the sale of the Ralph Lauren Womenswear
license and associated operating assets which was completed in October 1995,
(ii) the sales of the operations of Arrow de Mexico and Arrow Gautemala in
1997 and (iii) the decision to close certain Canadian retail stores which
was made in December 1996. For a further discussion of these adjustments see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(9) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes, plus fixed charges. Fixed
charges include interest expense on all indebtedness, amortization of
deferred financing charges, and one-third of rental expense, representing
that portion of rental expense deemed to be attributable to interest.
Earnings were insufficient to cover fixed charges by $19.6 million in 1993,
$99.1 million in 1994, $87.6 million in 1995, $28.9 million in 1996 and $8.1
million for the six months ended June 27, 1998.
(10) Working capital is defined as current assets (less cash and cash
equivalents) minus current liabilities (less current maturities of long-term
debt).
(11) On July 17, 1995, $161.1 million of long-term debt was reclassified to
liabilities subject to compromise.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1995, 1996 and 1997
and the quarters ended June 28, 1997 and June 27, 1998. This discussion should
be read in conjunction with the audited combined financial statements of the
Company and the related notes thereto included elsewhere in this Prospectus.
OVERVIEW
In 1990, Bidermann Industries USA, Inc. ("Bidermann"), a fashion oriented
design Company with the rights to market various men's or women's apparel under
such well-known brand names as Polo and Yves Saint Laurent, acquired Cluett
Peabody & Co., which included the Sock Group and the Shirt Group.
Bidermann management applied its fashion oriented business model and
overhead structure to the Sock Group and Shirt Group. Because both the GOLD TOE
and ARROW product lines represent more basic staple apparel products, they do
not generate designer apparel gross margins. As a result, profitability for
these businesses is more dependent on tighter control of operating expenses.
They are also less dependent upon national advertising to generate sales. As a
result, the application of the designer-type cost structure led to a decline in
profitability.
Rather than reduce costs, Bidermann management addressed this decline by
attempting to rapidly increase the sales of ARROW shirts by broadening
distribution (including the opening of new retail stores) and adding higher
priced all cotton dress shirts and higher fashion sportswear. In addition to
missing ARROW'S core value oriented customer base, this effort was not aligned
with the Shirt Group's operational capabilities in terms of design, sourcing and
distribution. As a result, the Shirt Group quickly developed significant excess
inventory, particularly in sportswear, due to inaccurate sales planning and
significant late deliveries and poor quality from international vendors.
During this period, Bidermann also established a captive retail distribution
network of 73 stores. These stores offered a separate collection of first
quality products which competed with the Shirt Group's existing wholesale
customers. The retail store operation also required a completely separate design
and distribution effort, further adding to the operating expense burden. The
combination of these unsuccessful initiatives and the large operating and
overhead expense burden forced the Company to file for protection under Chapter
11 of the Bankruptcy Code on July 17, 1995.
One month prior to the commencement of the bankruptcy, the Company retained
A&M to act as crisis managers and appointed Bryan Marsal its President and Chief
Executive Officer. Mr. Marsal continues in this capacity today. Subsequently,
the Company replaced certain members of management of the Shirt Group. The
Company's management team focused on the elimination of excess costs and
strengthening the Company's core businesses.
One of new management's first initiatives was to address the existing
dispute with Ralph Lauren Enterprises, L.P. ("Lauren Enterprises") over the
Company's license to manufacture and sell women's apparel under the Ralph Lauren
name, which it had held since 1981. Prior to the filing of the bankruptcy case,
Lauren Enterprises alleged defaults by the Company under a certain design
services contract and the Ralph Lauren license and purported to terminate the
trademark license. In the fall of 1995, the Company sold the Ralph Lauren
license and associated operating assets to Lauren Enterprises for approximately
$41.9 million the proceeds of which were distributed to certain of the Company's
creditors.
Between 1995 and 1997, the Company reduced selling, general and
administrative expenses and corporate overhead, exclusive of those associated
with divested operations, by $32.3 million. This reduction was accomplished in
part by eliminating unnecessary expenses and by transferring several
administrative functions to the operating subsidiaries. Prior to mid-1995 the
Company had an overhead structure that allocated expenses to the operating
subsidiaries for accounting purposes only. In connection with the
48
<PAGE>
Company's expense reduction program, these expenses were transferred to the
subsidiaries, or eliminated. For example, instead of the collections process
being managed at the corporate level, it is being managed by the same group
responsible for the sales, marketing and distribution of the order. This
integration has significantly lowered returns, chargebacks and retailer
penalties for execution breakdowns because sales, marketing and accounts
receivable collection are managed by the same business unit. In addition, this
reduction in operating costs was accomplished by the closure of 42 retail
stores; the relocation of offices and showrooms to less expensive real estate;
the introduction of more cost effective medical and workers' compensation
benefit plans; the closure of the Company's excess warehouse and administrative
offices in Secaucus, New Jersey; the elimination of excess manufacturing
capacity through the closure of the Sock Group manufacturing facility in
Halifax, North Carolina, the closure of the Shirt Group manufacturing facilities
in Cedartown, Georgia and Costa Rica; the reduction of certain administrative
personnel; and the modification and reduction of advertising and promotional
spending from a national media campaign to more effective regional cooperative
and point of sale advertising.
In late 1995, new management began the process of refocusing the Shirt Group
on its core blended dress shirt product and began repositioning the all cotton
dress shirt and sports shirt products as complementary products to these core
offerings. Given the lead times associated with international sourcing of
products and the significant backlog of sport shirt deliveries, it was not until
fall of 1997 that the Shirt Group product line fully reflected management's
intended product mix. This realignment has resulted in lower returns, allowances
and markdowns.
Throughout the Company's bankruptcy, the Sock Group has continued to perform
well. Net sales in this group grew from $134.6 million in 1995 to $151.8 million
for 1997. This performance results from continued strength in GOLD TOE and new
license brands and brand extensions.
From 1995 to 1997, net sales in the Shirt Group declined from $230.6 million
to $176.0 million; however, for the six months ended June 27, 1998 net sales
increased to $82.9 million from $80.5 million for the comparable period in 1997.
Despite declining sales, as a result of management's initiatives gross profit
margin increased from 19.0% in 1995 (which includes the effect of $11.0 million
of inventory write-downs) to 27.5% for 1997.
In addition to the direct sale of apparel products, the Company generates
fee income through the licensing of the ARROW and GOLD TOE brands. License fee
revenue fell $5.5 million in 1996 primarily as a result of the sale of Ralph
Lauren, and declined by $1.7 million in 1997 primarily due to a decrease in
sales by the Company's Asian licensees caused by economic recessions suffered by
most of the economies in the region. This level of decreased sales in Asia is
expected to continue in the near future.
Having succeeded in eliminating unnecessary corporate and operating costs
and revitalizing the ARROW brand, the Company is positioned to focus on the
expansion of its revenues. The Company believes that it can leverage its
existing customer relationships, recognized brand names and established
reputation for customer service to continue expanding its lines of sock products
to include branded and private label women's and children's socks. The emergence
from bankruptcy will occur contemporaneously with the Offerings and should,
management believes, remove the uncertainty surrounding the ARROW brand and thus
provide the Company with opportunities for increased sales in its core
offerings.
The Company's fiscal year ends on December 31st of each calendar year.
DIVESTED OPERATIONS
In 1996, the Company made a strategic decision to stop its production of
shirts in Guatemala and Mexico, to exit its retail business in Canada and to
close all but three of its Canadian outlet stores. In 1996, the Company's Latin
America operations represented $2.9 million in net sales and had an operating
loss (before facility closing costs) of $0.4 million and the Canadian retail
stores represented $4.3 million in net sales and had an operating loss (before
facility closing costs) of $1.3 million. In addition, the Company has
49
<PAGE>
incurred a number of one-time costs associated with the restructuring of its
operations and has incurred a number of bankruptcy reorganization costs
associated with operating under Chapter 11 (the financial results associated
with the Ralph Lauren, Latin American and Canadian operations, are referred to
collectively as the "divested operations").
RESULTS OF OPERATIONS
COMPARISON OF JUNE 27, 1998 TO JUNE 28, 1997
The following table sets forth, for the periods indicated, statement of
operations data as percentage of net sales.
<TABLE>
<CAPTION>
1997 1998
----------------------------------------------------------- -------------------------------------
RECURRING DIVESTED TOTAL RECURRING DIVESTED
OPERATIONS OPERATIONS OPERATIONS OPERATIONS OPERATIONS
-------------------- --------------- -------------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales.................... 160.8 100.0% 1.2 162.0 100.0% 166.9 100.0% 1.7
Cost of Sales................ 112.0 69.7 0.8 112.8 69.6 115.4 69.1 1.0
Gross Profit................. 48.8 30.3 0.4 49.2 30.4 51.5 30.9 0.7
Selling, general and
administrative expenses.... 36.1 22.5 1.1 37.2 23.0 37.6 22.5 1.2
Facility closing and
reengineering costs........ 0.3 0.2 0.3 0.2 1.4 0.8 (0.4)
Operating income (loss)...... 12.4 7.7 (0.7) 11.7 7.2 12.5 7.5 (0.1)
Interest expense............. 7.3 4.5 7.3 4.5 7.1 4.3
Bankruptcy reorganization.... 2.9 1.8 2.9 1.8 13.2 7.9
Net Income (loss)............ 2.9 1.8 (0.7) 2.2 1.4 (8.4) (5.0) (0.3)
<CAPTION>
TOTAL
OPERATIONS
--------------------
<S> <C> <C>
Net Sales.................... 168.6 100.0%
Cost of Sales................ 116.4 69.0
Gross Profit................. 52.2 31.0
Selling, general and
administrative expenses.... 38.8 23.0
Facility closing and
reengineering costs........ 1.0 0.6
Operating income (loss)...... 12.4 7.4
Interest expense............. 7.1 4.2
Bankruptcy reorganization.... 13.2 7.8
Net Income (loss)............ (8.7) (5.2)
</TABLE>
NET SALES. Net sales for the twenty-six weeks ended June 27, 1998 increased
$6.6 million, or 4.1%, to $168.6 million compared with net sales of $162.0
million for the twenty-six weeks ended June 28, 1997. Exclusive of divested
operations, net sales were $166.9 million, an increase of 3.8% from net sales of
$160.8 million. Net sales for the Sock Group increased 11.0% from $64.5 million
in 1997 to $71.6 million in 1998. This increase was primarily due to the
Company's expanded product offerings in GOLD TOE and licensed brands including
Nautica and Jockey. Net sales in the Shirt Group of $86.8 million represent a
4.1% increase from 1997. The increase is a direct result of the ARROW brands
improvement in market position. These increases were offset by reduced sales in
the Designer Group. Designer Group net sales for the period were $13.3 million
compared to $16.6 million in 1997. Net sales includes license fee income of $3.6
million for the twenty-six weeks ended June 27, 1998 compared to $3.9 million
for the six month period ending June 28, 1997. The decrease in license fee
income is primarily a result of reduced revenue from licensees in the Asian
market.
GROSS PROFIT. Gross profit for the twenty-six weeks ended June 27, 1998 of
$52.2 million, increased $3.0 million, or 6.1%, compared with $49.2 million for
the same period of 1997. Exclusive of divested operations, gross profit
increased from $48.8 million (30.3% of net sales) to $51.5 million (30.9% of net
sales). Gross profit margins for the period improved to 31.0% of net sales from
30.4% in 1997. This improvement was driven by the Shirt Group with 30.3% gross
margins for the period compared to 27.7% in 1997. This improvement was
attributable to a higher level of full price sales and continued manufacturing
improvements. Gross profit as a percentage of net sales for the Sock Group was
32.0% in 1998 and 32.5% in 1997. The Designer Group's gross margins were 22.6%
and 28.3%, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the twenty-six weeks ended June 27, 1998 increased
$1.6 million, or 4.3%, to $38.8 million compared with selling, general and
administrative expenses of $37.2 million for the twenty-six weeks ended June 28,
1997. Exclusive of divested operations, these expenses increased to $37.6
million (22.5% of net sales) from $36.1 million (22.5% of net sales). This
increase is primarily a result of increased costs associated with a new
50
<PAGE>
global marketing plan for ARROW as well as costs associated with the
consolidation of distribution facilities in the Sock Group.
FACILITY CLOSING AND REENGINEERING COSTS. The Company recorded pre-tax
non-recurring charges of $1.0 million for the period ending June 27, 1998 and
$.3 million for the period ending June 28, 1997 related to a series of actions
the Company has taken towards consolidation of distribution centers in the Sock
Group. The Company believes that these initiatives will reduce ongoing
distribution expenses in the Sock Group.
OPERATING INCOME. Operating income increased by 6.0% to $12.4 million in
1998 from $11.7 million in 1997 as a result of the foregoing. Exclusive for
divested operations and facility closing and reengineering costs, operating
income increased to $12.5 (7.5% of net sales) million from $12.4 (7.7% of net
sales) million.
BANKRUPTCY REORGANIZATION COSTS. Bankruptcy reorganization costs for the
twenty-six weeks ended June 27, 1998 increased $10.3 million to $13.2 million
compared with bankruptcy reorganization costs of $2.9 million for the twenty-six
weeks ended June 28, 1997. This increase in bankruptcy reorganization costs
resulted from payment of post-petition interest, default interest, and fees to
creditors in accordance with the terms of the Plan.
NET INCOME (LOSS). Net loss for the twenty-six weeks ended June 27, 1998 of
$8.7 million is primarily due to increased bankruptcy reorganization costs. The
net income for the same period in 1997 was $2.2 million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The following table sets forth, for the periods indicated, the statement of
operations data as a percentage of net sales.
<TABLE>
<CAPTION>
1996 1997
----------------------------------------------------------- -------------------------------------
RECURRING DIVESTED TOTAL RECURRING DIVESTED
OPERATIONS OPERATIONS OPERATIONS OPERATIONS OPERATIONS
-------------------- --------------- -------------------- -------------------- ---------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 361.5 100.0% $ 7.2 $ 368.7 100.0% $ 359.2 100.0% $ 3.7
Cost of sales................. 269.0 74.4 4.8 273.8 74.3 251.5 70.0 2.3
Gross profit.................. 92.5 25.6 2.4 94.9 25.7 107.7 30.0 1.4
Selling, general and
administrative expenses..... 81.9 22.7 4.0 85.9 23.3 72.8 20.3 2.0
Facility closing and
reengineering costs......... 8.5 2.4 3.1 11.6 3.1 4.0 1.1 (1.5)
Operating income (loss)....... 2.1 0.6 (4.7) (2.6) (0.7) 30.9 8.6 0.9
Interest expense.............. 16.9 4.7 -- 16.9 4.6 15.2 4.2 --
Bankruptcy reorganization..... 6.1 1.7 -- 6.1 1.7 (3.9) (1.1) --
Net income (loss)............. (22.2) (6.1) (8.0) (30.2) (8.2) 16.5 4.6 0.7
<CAPTION>
TOTAL
OPERATIONS
--------------------
<S> <C> <C>
Net sales..................... $ 362.9 100.0%
Cost of sales................. 253.8 69.9
Gross profit.................. 109.1 30.1
Selling, general and
administrative expenses..... 74.8 20.6
Facility closing and
reengineering costs......... 2.5 0.7
Operating income (loss)....... 31.8 8.8
Interest expense.............. 15.2 4.2
Bankruptcy reorganization..... (3.9) (1.1)
Net income (loss)............. 17.2 4.7
</TABLE>
NET SALES. Net sales were $362.9 million in 1997, a slight decrease of 1.6%
from net sales of $368.7 million recorded in 1996. Exclusive of the divested
operations, net sales were $359.2 million, a decrease of 0.6% from net sales of
$361.5 million. Exclusive of the divested operations, net sales in the Sock
Group increased 7.6% from $141.1 million to $151.8 million and net sales in the
Shirt Group decreased 9.5% from $194.4 million to $176.0 million. The increase
in net sales in the Sock Group was primarily due to women's sock sales and a
full year of sales for new licensed brands, such as Nautica. The reduction in
net sales for the Shirt Group was due to the elimination of certain product
lines and the elimination of inventory liquidations taken in 1996 which did not
occur in 1997. Net sales includes license fee income of $6.9 million in 1997
compared to $8.6 million in 1996. The reduction in license fee income was caused
by decreased sales by the Company's Asian licensees which represent
approximately 47% of the Company's license fee income.
51
<PAGE>
GROSS PROFIT. Gross profit increased from $94.9 million (25.7% of net
sales) in 1996 to $109.1 million (30.1% of net sales) in 1997. Exclusive of the
divested operations, gross profit was $107.7 million in 1997 (30.0% of net
sales) versus $92.5 million in 1996 (25.6% of net sales) and gross profit for
the Sock Group was $49.1 million (32.4% of net sales) in 1997 as compared to
$41.3 million (29.3% of net sales) in 1996. The increase in gross profit was
attributable to the overall increase in sales ($3.5 million) and the improved
product mix ($4.0 million). Gross profit for the Shirt Group was $48.5 million
(27.5% of net sales) in 1997 versus $46.0 million (23.7% of net sales) in 1996
as a result of the improvement in product mix, an overall improvement in returns
and allowances and lower labor costs which offset the decline in net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $74.8 million (20.6% of net sales) in 1997
from $85.9 million (23.3% of net sales) in 1996. Exclusive of divested
operations, these expenses decreased to $72.8 million (20.3% of net sales) in
1997 from $81.9 million (22.7% of net sales) in 1996. Selling, general and
administrative expenses were reduced primarily due to (i) cost savings of $3.1
million realized in the Company's distribution centers resulting from new
management's reengineering efforts (ii) a reduction in national advertising
expenditures of $4.3 million, (iii) the reduction of approximately 60
administrative positions resulting in approximately $2.0 million in savings, and
(iv) further reductions in corporate overhead of $0.6 million. These savings
were offset by higher selling expenses and royalty payments associated with the
new product lines.
FACILITY CLOSING AND REENGINEERING COSTS. The Company recorded pre-tax
non-recurring charges of $2.5 million in 1997 and $11.6 million in 1996 related
to a series of actions the Company has taken towards shutdown of Canada retail
operations, administrative personnel reduction, and implementation of new
information systems. The Company believes that these initiatives have
significantly reduced operating expenses and product costs. The actions resulted
in a 12.9% decrease of selling, general and administrative costs to $74.8
million in 1997 from $85.9 million in 1996.
OPERATING INCOME (LOSS). Operating income increased to $31.8 million (8.8%
of net sales) in 1997 from an operating loss of $2.6 million in 1996. Exclusive
of divested operations and facility closing and reengineering costs, operating
income increased to $34.9 million (9.7% of net sales) in 1997 from $10.6 million
(3.0% of net sales) for the comparable period in 1996. The increase in operating
income as a percentage of net sales results from the foregoing factors.
INTEREST EXPENSE. Interest expense decreased to $15.2 million in 1997 from
$16.9 million in 1996, primarily due to reduced borrowings under the Company's
DIP Credit Facility.
BANKRUPTCY REORGANIZATION. Bankruptcy reorganization costs were
approximately $6.1 million in 1997 and 1996 and primarily include court costs
and legal and other professional fees incurred to litigate and settle the
bankruptcy. During the bankruptcy period from 1995 through 1997, the Company
attempted to settle all bankruptcy claims through negotiations with the
Company's vendors and lessors. In certain cases, the vendors and lessors
accepted settlements for less than the claim amount originally filed. For
example, the Company's liability for lease rejection claims was reduced to the
extent the lessors were able to mitigate their losses. As a result of these
on-going negotiations in 1997, the Company recognized approximately $10.0
million in credits resulting from these negotiated settlements with various
vendors and lessors. Settlements during 1995 and 1996 were not significant. All
settlements were approved by the United States Bankruptcy Court for the Southern
District of New York.
NET INCOME (LOSS). Net income increased to $17.2 million in 1997 from a net
loss of $30.2 million in 1996. The increase was primarily due to the factors
discussed above and a credit of $10.0 million in 1997 representing the reversal
of excess accruals taken in anticipation of certain lease rejection and other
pre-petition claims.
52
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following table sets forth, for the periods indicated, the statement of
operations data as a percentage of net sales.
<TABLE>
<CAPTION>
1995 1996
----------------------------------------------------------- -------------------------------------
RECURRING DIVESTED TOTAL RECURRING DIVESTED
OPERATIONS OPERATIONS OPERATIONS OPERATIONS OPERATIONS
-------------------- --------------- -------------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
Net sales.................. $ 388.9 100.0% $ 97.8 $ 486.7 100.0% $ 361.5 100.0% $ 7.2
Cost of sales.............. 305.0 78.4 64.8 369.8 76.0 269.0 74.4 4.8
Gross profit............... 83.9 21.6 33.0 116.9 24.0 92.5 25.6 2.4
Selling, general and
administrative
expenses................. 105.1 27.0 32.8 137.9 28.3 81.9 22.7 4.0
Facility closing and
reengineering costs...... 16.1 4.1 6.4 22.5 4.6 8.5 2.4 3.1
Operating income (loss).... (37.3) (9.6) (6.2) (43.5) (8.9) 2.1 0.6 (4.7)
Interest expense........... 22.7 5.8 -- 22.7 4.7 16.9 4.7 --
Bankruptcy
reorganization........... 20.9 5.4 -- 20.9 4.3 6.1 1.7 --
Net Income (loss).......... (82.0) (21.1) (7.1) (89.1) (18.3) (22.2) (6.1) (8.0)
<CAPTION>
TOTAL
OPERATIONS
--------------------
<S> <C> <C>
Net sales.................. $ 368.7 100.0%
Cost of sales.............. 273.8 74.3
Gross profit............... 94.9 25.7
Selling, general and
administrative
expenses................. 85.9 23.3
Facility closing and
reengineering costs...... 11.6 3.1
Operating income (loss).... (2.6) (0.7)
Interest expense........... 16.9 4.6
Bankruptcy
reorganization........... 6.1 1.7
Net Income (loss).......... (30.2) (8.2)
</TABLE>
NET SALES. Net sales were $368.7 million in 1996, a decrease of 24.2% from
net sales of $486.7 million recorded in 1995. Exclusive of divested operations,
net sales were $361.5 million in 1996, a decrease of 7.0% from net sales of
$388.9 million in 1995. Net sales in the Sock Group increased 4.8% from $134.6
million to $141.1 million and net sales in the Shirt Group decreased 15.7% from
$230.6 million to $194.4 million. The increase in net sales in the Sock Group
was primarily due to the Company's expanded product offerings, including
Nautica, ARROW and Jockey socks. The reduction in net sales in the Shirt Group
was primarily the result of uncertainty regarding ownership of the ARROW brand
as a result of the Company's bankruptcy and the poor ARROW brand positioning
discussed above. Net sales includes license fee income of $8.6 million in 1996
compared to $14.1 million in 1995. The reduction in license fee income was
caused by the sale of the Ralph Lauren license.
GROSS PROFIT. Gross profit decreased from $116.9 million (24.0% of net
sales) in 1995 to $94.9 million (25.7% of net sales) in 1996. Exclusive of the
divested operations, gross profit was $92.5 million (25.6% of sales) in 1996
versus $83.9 million (21.6% of net sales) in 1995. Gross profit for the Sock
Group was $41.3 million (29.3% of net sales) in 1996 compared to $31.0 million
(23.1% of net sales) the previous year. The improvement in the gross margin of
the Sock Group was primarily the result of lower returns and allowances ($1.6
million) and an $8.6 million gross profit improvement associated with (i)
overall product mix changes ($5.5 million), (ii) an improvement in manufacturing
costs ($1.9 million) and the elimination of costs associated with excess
inventory liquidated in the prior year ($1.2 million). Gross profit for the
Shirt Group increased from $43.8 million (19.0% of net sales) in 1995 to $46.0
million (23.7% of net sales) in 1996. Approximately $6.2 million of the
reduction is attributable to the overall lower sales associated with the
division's departure from several product lines. This reduction is offset by a
$6.8 million improvement in returns and allowances resulting from the changes
implemented by new management, an overall cost improvement of $4.5 million from
the closure of the Cedartown, Georgia facility and $2.1 million in cost savings
associated with better foreign product sourcing and offshore manufacturing. In
addition, gross profit for the Shirt Group in 1995 was lower than normal as a
result of a write-down in inventory of approximately $11.0 million consistent
with the Company's refocus on its core products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $85.9 million (23.3% of net sales) in 1996
from $137.9 million (28.3% of net sales) in 1995. Exclusive of divested
operations, these expenses decreased to $81.9 million (22.7% of net sales) in
1996 from $105.1 million (27.0% of net sales) in 1995. This reduction is
primarily a result of the cost cutting activities exercised by the Company
during its bankruptcy, as discussed in the Overview above.
53
<PAGE>
FACILITY CLOSING AND REENGINEERING COSTS. The Company recorded pre-tax
non-recurring charges of $11.6 million in 1996 and $22.5 million in 1995 related
to a series of actions the Company has taken towards: (i) decentralizing
administrative functions to its operating facilities; (ii) closure of
unprofitable retail stores; (iii) relocation of offices and showrooms to less
expensive locations; (iv) consolidation of distribution centers and the
elimination of excess capacity by closing the Sock Group's plant in Halifax,
North Carolina, Shirt Group's production facilities in Cedartown, Georgia and
Costa Rica, and a distribution facility in Secaucus, New Jersey; (v)
administrative personnel reductions; and (vi) operation and shutdown of Legacy
information systems.
The Company believes that these initiatives have significantly reduced
operating expenses and product costs. The actions resulted in a 1.7% increase in
gross margin as a percentage of sales to 25.7% from 24.0% and a 37.7% decrease
of selling, general and administrative costs to $85.9 million in 1996 from
$137.9 million in 1995.
OPERATING INCOME (LOSS). Operating loss decreased to $(2.6) million in 1996
from $(43.5) million in 1995. Exclusive of divested operations and facility
closing and reengineering costs, operating income increased to $10.6 million
(3.0% of net sales) in 1996 from $(21.2) million for the comparable period in
1995. The increase in operating income as a percentage of net sales results from
the foregoing factors.
INTEREST EXPENSE. Interest expense decreased to $16.9 million in 1996 from
$22.7 million in 1995, primarily due to reduced borrowing under the Company's
DIP working capital facility.
BANKRUPTCY REORGANIZATION. Bankruptcy reorganization costs decreased from
$20.8 million in 1995 to $6.1 million in 1996. The costs recognized in 1995
included provisions of approximately $9.8 million for lease rejection
liabilities, approximately $3.4 million relating to potential claims and
litigation matters, approximately $4.8 million in fees to obtain the
Debtor-in-Possession financing, and approximately $2.8 million in bankruptcy
related professional fees. The bankruptcy costs recognized in 1996 were limited
to professional fees.
NET INCOME (LOSS). Net loss decreased 66.1% to $(30.2) million in 1996 from
$(89.1) million in 1995 primarily as a result of the factors described above as
well as due to recognition of lease rejection claims and other bankruptcy
related costs of $20.9 million in 1995 compared to $6.1 million of such costs in
1996.
LIQUIDITY AND CAPITAL RESOURCES
Other than upon a Change of Control or as a result of certain asset sales,
the Company will not be required to make any principal payments in respect of
the Exchange Notes until maturity. The Company will be required to make interest
payments with respect to both the Senior Credit Facility and the Exchange Notes
and dividend payments with respect to the New Preferred Stock (if permitted
under the Senior Credit Facility and the Indenture). The Company typically makes
capital expenditures related primarily to the maintenance and improvement of
manufacturing facilities. The Company spent $5.7 million for the six months
ended June 27, 1998 as compared to $4.7 million for the six months ended June
28, 1997. In fiscal 1995, 1996 and 1997, capital expenditures were $6.1 million,
$9.8 million and $10.8 million, respectively. The Company estimates that capital
expenditures will be approximately $5.0 million for the last six months of 1998
and approximately $8.0 million in 1999.
The Company's principal sources of cash to fund these capital requirements
are net cash provided by operating activities as well as borrowings, if needed,
under its Senior Credit Facility. The Company's net cash provided (used) by
operating activities for the six months ended June 27, 1998 totaled $(33.0)
million as compared to $0.2 million for the six months ended June 28, 1997. The
significant decrease in cash provided by operating activities was primarily due
to the settlement of certain prepetition liabilities which were paid during the
second quarter in accordance with the Plan. In fiscal 1995, 1996 and 1997, the
Company's net cash provided by operations totaled $0.4 million, $16.7 million,
and $13.0 million, respectively.
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Net cash used by investing activities for the six months ended June 27, 1998
was $(5.6) million as compared to $(4.5) million for the six months ended June
28, 1997. In fiscal 1995, 1996 and 1997, net cash provided (used) by investing
activities was $25.3 million, $(8.3) million and $(7.5) million, respectively.
Net cash provided by financing activities for the six months ended June 27, 1998
was $37.6 million as compared to $3.5 million for the six months ended June 28,
1997. In fiscal 1995, 1996 and 1997, net cash provided (used) by financing
activities was $(26.1) million, $(13.3) million and $(1.3) million,
respectively.
The Company has a substantial amount of indebtedness. The Company relies on
internally generated funds and, to the extent necessary, on borrowings under the
revolving credit facility available under the Senior Credit Facility, which
provides for borrowings up to $50.0 million, subject to certain customary
drawing conditions, to meet its liquidity needs. In addition, the Company may
make selective acquisitions and would rely on internally generated funds, and,
to the extent necessary, on borrowings under such revolving credit facility or
from other sources to finance such acquisitions. The Company's ability to borrow
is limited by the Senior Credit Facility and the limitations on the incurrence
of indebtedness under the Indenture. See "Description of Other Indebtedness" and
"Description of the Exchange Notes."
Borrowings under the Senior Credit Facility bear interest at a rate per
annum equal to a margin over, at the Company's option, LIBOR or a Base Rate. The
Senior Credit Facility is secured by substantially all the assets of the
Company's domestic subsidiaries, guaranteed by the Company's domestic
subsidiaries and contains customary covenants and events of default, including
substantial restrictions on the Company's ability to declare dividends or
distributions. The Senior Credit Facility is subject to mandatory prepayment
with the proceeds of certain asset sales, certain equity issuances and certain
funded debt issuances for borrowed money, and with a portion of the Company's
excess cash flow (as defined in the Senior Credit Facility). See "Description of
Other Indebtedness."
Based upon the current level of operations and revenue growth, management
believes that cash flow from operations and available cash, together with
available borrowings under the Senior Credit Facility, are adequate to meet the
Company's future liquidity needs until at least the end of 1999. The Company
may, however, need to refinance all or a portion of the principal of the
Exchange Notes on or prior to maturity and there can be no assurance that the
Company will be able to effect any such refinancing on commercially reasonable
terms or at all. In addition, there can be no assurance that the Company's
business will generate sufficient cash flow from operations, that anticipated
revenue growth and operating improvements will be realized or that future
borrowings will be available under the Senior Credit Facility in an amount
sufficient to (i) enable the Company to service its indebtedness (including the
Exchange Notes), (ii) make periodic payments of cash dividends on the New
Preferred Stock, (iii) redeem any of the New Preferred Stock for cash or, if the
Exchange Debentures have been issued, to make payments of principal or cash
interest on the Exchange Debentures or (iv) fund its other liquidity needs. If
the Company's cash flow, availability under the Senior Credit Facility and other
capital resources are insufficient to fund the Company's debt service
obligations, the Company may be forced to reduce or delay capital expenditures,
sell assets, restructure or refinance its indebtedness, or seek additional
equity contributions. There can be no assurance that any of such measures could
be implemented on satisfactory terms or, if implemented, would be successful or
would permit the Company to meet its debt service obligations.
SEASONALITY
The Company's business is seasonal, with higher sales and income during its
third and fourth quarters, which coincide with the Company's two peak retail
selling seasons: the first running from the start of the back-to-school and fall
selling seasons beginning in August and continuing through September, and the
second being the Christmas selling season beginning with the weekend following
Thanksgiving and continuing through the week after Christmas.
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Also contributing to the strength of the third quarter is the high volume of
fall shipments to wholesale customers which are generally more profitable than
spring shipments. The slower spring selling season at wholesale combines with
retail seasonality to make the first half of the year particularly weak.
INCOME TAXES
As of December 31, 1997, the Company had net operating loss carryforwards
(NOLs) of approximately $180 million. The Company's Plan or significant changes
in ownership of the Company could substantially limit the use of NOLs. The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." This standard
requires, among other things, recognition of future tax benefits, measured by
enacted tax rates, attributable to deductible temporary differences between
financial statement and income tax bases of assets and liabilities and to tax
NOLs to the extent that realization of such benefits is more likely than not.
Based on the Company's history of earnings and in consideration of the Company's
Chapter 11 filing, the Company's entire balance of deferred tax assets has been
reduced by a valuation allowance of $55.3 million, as realization of these
long-term tax benefits is dependent upon future earnings. Management cannot
predict sufficient operating income to utilize fully its deferred income tax
benefit.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, REPORTING COMPREHENSIVE INCOME, and Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. Statement
130 establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Statement 131 establishes standards for the way that public business 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. Statements 130 and 131 are
effective for financial statements for fiscal years beginning after December 15,
1997, and therefore the Company will adopt the new requirements in 1998, which
will require retroactive disclosures. The Company adopted Statement 130 on
January 1, 1998 and there was no impact on net income or shareholders' equity
from the adoption of the Statement. Management has not completed its evaluation
of Statement 131 to determine its impact on the financial statements.
In June 1998, the FASB issued Statement No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal quarters of
all fiscal years beginning after June 15, 1999. Statement 133 established
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position measured at fair value. The Company will adopt
Statement 133 in 1999. Management has not determined how Statement 133 will
impact the Company's financial statements.
YEAR 2000 RISK
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company believes that it will not be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company presently believes that its existing software is
year 2000 compliant and will not pose significant operational problems for its
computer systems.
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The Company has initiated formal communications with all of its significant
hardware/software suppliers and plans to communicate with large customers and
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of third party
Year 2000 Issues based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.
The Company anticipates completing the Year 2000 project not later than June
30, 1999 which is prior to any anticipated impact on its operating systems. The
total costs of the Year 2000 project is estimated at $100,000 and will be
expensed as incurred.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
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BUSINESS
OVERVIEW
Based on net sales, the Company believes it is one of the leading designers,
manufacturers and marketers of men's socks and dress shirts in the United States
and has a significant market presence in women's and children's socks and a
growing presence in men's and women's sportswear. While the Company serves most
channels of distribution, its primary focus is on department and national chain
store retailers. The Company believes its core product offerings, GOLD TOE socks
and ARROW dress shirts, provide classic styles at price points which represent
exceptional value and appeal to a broad consumer base.
The Company markets its products utilizing widely recognized Company-owned
brands such as GOLD TOE, SILVER TOE and ARROW in the sock segment and ARROW and
its related trade names, including DOVER, KENT, ARROW "1851", and COLLARMAN in
the dress shirt segment. In 1997, the ARROW brand was the second leading branded
dress shirt capturing a market share of approximately 10% of the department
store channel for men's dress shirts. The Company primarily sells its products
to department and national chain stores to maintain its brand image and to
achieve the relatively higher selling prices and higher margins characterized by
sales to these retail stores. Approximately 58% of the Company's sales are
derived from these core offerings, the demand for which the Company believes is
stable and resistant to changing fashion trends.
The Company also has licensed the exclusive rights to manufacture and market
certain apparel products (generally socks and shirts) under such widely
recognized brand names as Perry Ellis, Nautica, Jockey, Stride Rite, Kenneth
Cole, Burberrys, and Yves Saint Laurent. This diverse portfolio of Company-owned
and licensed brand names enables the Company to offer different brands of unique
value-added products to different channels of distribution.
The Company conducts its business through three principal business units:
the Sock Group, the Shirt Group and the Designer Group. For 1997, the Company
realized pro forma net sales and EBITDA As Defined of $359.2 million and $40.5
million, respectively.
- THE SOCK GROUP (42.3% OF PRO FORMA NET SALES FOR 1997). The Sock Group is
a market leader in department store sales of socks. The Sock Group's leading
brand, GOLD TOE, was established in 1934 and generates approximately 63% of the
Sock Group's net sales with the remaining sales generated through complementary
private labels and through licensed brands such as Perry Ellis, Nautica, Jockey
and Stride Rite. The Sock Group offers a comprehensive line of products across
multiple price points, ages, genders and styles, enabling it to provide its
customers with a full range of their sock requirements. For 1997, the Sock Group
realized net sales and EBITDA As Defined of $151.8 million and $27.2 million,
respectively.
- THE SHIRT GROUP (49.0% OF PRO FORMA NET SALES FOR 1997). The Shirt Group
designs, manufactures and markets dress shirts and sportswear, focusing on men's
cotton/polyester and all cotton dress shirts which are sold under the ARROW
brand and its related trade names, including DOVER, KENT, COLLARMAN, and ARROW
"1851". Sportswear products manufactured by the Company consist primarily of
men's and women's knitted and woven sport shirts which are sold primarily under
its TOURNAMENT and ARROW AUTHENTIC labels. Because of the name recognition of
its ARROW brand, which was established in 1851, the Company is also able to
license the ARROW trademarks for shirts internationally and non-shirt products
both domestically and internationally. For 1997, the Shirt Group realized net
sales (including licensing fee revenue of $6.8 million) and EBITDA As Defined
(including net licensing income of $4.1 million) of $176.0 million and $14.7
million, respectively.
- THE DESIGNER GROUP (11.1% OF PRO FORMA NET SALES FOR 1997). The Designer
Group was established as a separate business unit in October 1995 and sells (i)
dress and sport shirts under licensed Yves Saint Laurent, Burberrys and Kenneth
Cole trademarks, (ii) dress socks under the licensed Kenneth Cole and Yves Saint
Laurent trademarks and (iii) tailored clothing and casual pants under the Yves
Saint Laurent trademark. The Designer Group's products, distributed primarily to
department and specialty stores, help
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complement the Company's core product offerings. For 1997, the Designer Group
had net sales and EBITDA As Defined of $40.0 and negative $0.9 million,
respectively.
The net sales and EBITDA As Defined numbers in the prior three paragraphs do
not include intercompany sales and pro forma corporate overhead charges of $8.6
million and $0.5 million, respectively.
COMPETITIVE STRENGTHS
Each of the Company's principal business units has secured a strong
competitive position within its respective market segment. Currently, the
Company is one of the leading designers, manufacturers and marketers of men's
socks and dress shirts in the United States. The management team will use the
following competitive strengths to further enhance the Company's position in the
marketplace:
- INDUSTRY LEADING BRANDS. The Company has assembled a portfolio of widely
recognized brand names in the sock and shirt markets, led by its owned
GOLD TOE and ARROW brands. In addition, the Company has licensed the right
to manufacture, design and distribute certain items of apparel under the
Nautica, Perry Ellis, Jockey, Stride Rite, Kenneth Cole, Burberrys, and
Yves Saint Laurent brands. This diverse portfolio of brand names allows
the Company to differentiate itself from its competitors by providing
distinct brand names, for different channels of distribution and at
different price points.
- COMPREHENSIVE PRODUCT LINES. The Company offers a comprehensive product
line of brand-name socks and men's dress shirts across all major price
points. In addition, the Company is able to provide key retailers such as
Sears, J.C. Penney and May Company with high quality, complementary
private label products. The Company also collaborates with customers to
develop exclusive or specially designed merchandising programs and is
capable of satisfying its customers' needs for prompt product delivery
across all of its product offerings. The combination of its broad array of
quality brand names and its private label programs positions the Company
to be the category manager for its customers in its core offerings.
- STRONG DISTRIBUTION CHANNELS. The Company has long-standing established
relationships with many of the largest department store and national chain
store retailers including Belk's, Dayton-Hudson, Dillard's, J.C. Penney,
May Company, Mercantile, Proffitt's, Federated and Sears. In addition, the
Company has selectively developed relationships with certain large mass
merchant and specialty retailers. Management believes that these strong
relationships will provide it a stable base from which the Company can
pursue future business and new product introductions while maintaining the
integrity of its core brand names.
- RESPONSIVE MANUFACTURING AND SERVICING CAPABILITIES. The Company's balance
of domestic and foreign manufacturing operations allows it to maintain low
inventory levels resulting in increased inventory turns and better working
capital management while permitting it to quickly respond to customer
orders. In addition, the Company's upgraded information systems provide
comprehensive order processing, production, accounting and management
information for the marketing, manufacturing, importing and distribution
functions of the Company's business. The Company has also enhanced its
customer servicing capabilities with the introduction of its vendor
managed inventory system in the Shirt Group. This system provides the
Company with real time information on the sales of its products through
participating retailers, thus enabling it to replenish a customer's
inventory without the need for a formal order. The Company anticipates
installation of its vendor managed inventory system with certain of the
Sock Group's largest customers during 1998.
The apparel industries are highly competitive. The Company competes with
numerous domestic and foreign designers, brands and manufacturers of apparel and
accessories, some of which may be significantly larger and more diversified and
have greater financial and other resources than the Company. Increased
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competition from these and future competitors could reduce sales and prices,
adversely affecting the Company's results of operations. Because of the
Company's high leverage, it may be less able to respond effectively to such
competition than other participants.
BUSINESS STRATEGY
Management intends to maintain its competitive position in its current
product offerings while leveraging its competitive strengths to implement the
following business strategies:
- INCREASE PENETRATION WITH EXISTING CUSTOMERS. The Sock Group intends to
leverage its existing customer relationships, recognized brand names and
established reputation for customer service to continue expanding its
branded and private label women's and children's sock businesses. The
Company has recently acquired the license to distribute children's socks
under the Stride Rite brand and has been successfully marketing a line of
women's GOLD TOE socks. By incorporating these new products into the Sock
Group's existing offerings, the Company believes it will create
opportunities for added sales and further increase its significance as a
supplier to its existing customer base.
Management intends to increase the Shirt Group's dress shirt business
through the expansion of the DOVER brand to include additional fabrics
including broadcloth and pinpoint. The Company is also selectively
expanding its sportswear business into underserved niches of the
sportswear market, such as blended men's golf shirts and women's golf
sportswear. The Company believes these products have been well received
and will further add to the Company's profitability.
- BROADEN DISTRIBUTION. Management intends to expand the Sock Group's
distribution from its strength in department and national chain stores to
include specialty chains, discount department stores and sporting goods
stores. Management believes that these new channels will complement the
Company's presence in the department store and national chain store
channels while adding incremental profit without diminishing the integrity
of its brand names.
The Shirt Group has been limited in its ability to pursue new retailers
and channels of distribution due to its operational problems and the
financial uncertainty caused by the bankruptcy. With these problems
solved, the Shirt Group intends to expand its presence with existing
customers while pursuing new opportunities with other department stores,
specialty stores and national chains.
Both the Sock Group and the Shirt Group intend to pursue mass merchants on
a selective basis, only participating in programs which are value-added
and differentiated in terms of styling, branding and execution, as opposed
to price.
- NEW LICENSES, SELECTIVE ACQUISITIONS AND LICENSING OPPORTUNITIES. As the
leading supplier of socks to the department store channel, the Sock Group
believes it has the infrastructure and access to distribution channels
most desirable to prospective designer licensors. As such, it continues to
proactively pursue new license opportunities which will complement its
core offerings. Similarly, because of its market leadership and
operational structure, management believes the Sock Group is strategically
positioned to acquire and integrate additional brands or complementary
businesses. In addition, the Company intends to increase its fee income by
licensing its GOLD TOE trademark internationally and has recently hired an
international sales manager to assist in that effort.
The Shirt Group believes that opportunities will arise to acquire
complementary dress shirt and sports shirt companies or licenses which
will leverage the use of its existing operating infrastructure
(distribution, sourcing, quality control and finance) and yet allow the
acquired brand to have an independent identity through use of separate
design, sales and merchandising personnel. In
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addition, management intends to expand its licensing of the ARROW name to
include other products and accessories in order to create a broader
apparel collection.
The Designer Group has recently acquired the dress shirt and sock licenses
for Kenneth Cole and plans to introduce these products in the fall of
1998. The Designer Group intends to continue to introduce new offerings
under its existing brands while exploring opportunities to acquire other
high-end designer labels.
PRODUCTS
THE SOCK GROUP
Founded in 1919, the Sock Group is one of the largest designers,
manufacturers and marketers of socks in the United States. The Sock Group
distributes its products to most channels of distribution, although it has a
concentration in the higher-margin department and national chain store segment.
The United States sock industry is a sub-segment of the overall United
States hosiery industry. The sock industry includes the manufacture of men's,
women's, children's and infant socks. Within the sock industry, the two largest
segments are casual/dress and sport/athletic. Demand is driven by the overall
level of retail sales and the general fashion trends prevalent in the market.
The sale of socks as a percentage of total hosiery sales has been increasing
steadily over the last several years. The increased demand has been driven by
the overall trend toward casual fashion. In addition, the volume of socks sold
at retail has increased as more manufacturers, including the Company, introduced
multi-pack offerings for products that were traditionally sold in single pair
offerings. In 1997, the total United States sock industry sold at retail 284.2
million dozen socks with a value of $4.6 billion. Both units and dollar volume
were up over 6% compared to 1996 levels. Since 1990, the retail dollar volume
for socks has increased 5.5% annually.
Men's socks make up the largest segment of the sock industry in both dollars
and units sold. In 1997, men's socks accounted for 43.1% of the total dollar
volume and 36.2% of the total socks sold. Women's socks represent the next
largest segment of the sock industry with 29.8% of the total dollar volume and
28.4% of the total units sold in 1997.
In response to these trends and in order to diversify its product offerings,
the Sock Group has expanded its product lines through new licensing agreements,
private label products and brand extensions. The Sock Group, through its premier
GOLD TOE brand, its licensed Jockey, Perry Ellis, Nautica, Arrow and Stride Rite
trademarks, and its private label products, is the most diversified sock company
in the United States and is able to offer its customers a majority of their sock
requirements.
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The following table shows the percentage of the Company's net sales of socks
represented by the listed category:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Gold Toe:
Men's.................................................... 49% 47% 46%
Women's.................................................. 13 12 15
Other.................................................... 2 2 2
--------- --------- ---------
Total Gold Toe......................................... 64% 61% 63%
Other Branded.............................................. 17 20 20
Private Label.............................................. 12 12 11
Other(1)................................................... 7 7 6
--------- --------- ---------
Total.................................................. 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
Total net sales in millions................................ $ 134.6 $ 141.1 $ 151.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1) Includes transfers to outlet stores.
GOLD TOE socks have provided a strong foundation for the Company for most of
its 79 year history. The GOLD TOE trademark is used on socks for all lifestyles
(dress, casual and athletic) and all genders and ages (men, women and children).
GOLD TOE socks are marketed at wholesale at the upper moderate price range
($3.75 to $12.00). Its primary competitors include Dockers by Royce Hosiery
Mills, Inc. ("Royce") for men's socks and Hue by Kayser-Roth Corporation for
women's socks.
The Sock Group also markets Perry Ellis and Nautica designer socks. The
Perry Ellis label was added in 1993 and the Nautica label was added in 1996.
Perry Ellis and Nautica are primarily a premium quality, men's and women's
designer market product for the department store class. These lines enabled the
Sock Group to enhance its position in the upper price tier of this trade class
and expand its product line. Perry Ellis and Nautica socks are marketed at
wholesale at the upper price range ($6.00 to $11.00). Their primary competitors
include Ralph Lauren by Hot Sox and Calvin Klein by America Essentials.
The Sock Group markets moderate price point socks ($3.00 to $7.50) under the
ARROW and Jockey trademarks. ARROW and Jockey socks are marketed to men and
women. Both products have the advantage of nationally recognized brand names.
Currently, Sears accounts for the majority of the ARROW sock volume. Jockey's
and ARROW'S competitors include Dockers by Royce for men and Hanes by Sara Lee
Corporation ("Sara Lee") for women.
The Sock Group also sells socks into the mass market and discount channel
under the SILVER TOE, COLORMATCH and Jaclyn Smith brands. These offerings enable
the Company to access the large mass merchant channel with a high quality and
differentiated product. The Sock Group's primary competitors in this channel of
distribution are Gitano by Renfro Corporation ("Renfro") and other private label
products.
The Sock Group supplies a number of its key customers with comprehensive
private label programs. Private label represents an opportunistic business which
leverages the Company's strong design and production capabilities. By offering
private label socks, the Sock Group is able to serve the full range of its
customer's product needs.
The Sock Group's product line also includes children's socks under the
Stride Rite trademark which was licensed to the Company in 1997. These
moderately priced socks ($3.00 to $6.00) have allowed the Sock Group to complete
its product offerings to all ages. Its primary competitors are TrimFit by
TrimFit, Inc. and Socks by the Gap, Inc.
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THE SHIRT GROUP
Founded in 1851, the Shirt Group places its primary focus on the dress shirt
segment of the market, representing 65% of its revenues in 1997. The Shirt Group
distributes its products to department stores, specialty stores, chain stores
and discount stores, although it has its highest concentration in the department
and national chain store segment. Similar to the Sock Group, the Shirt Group has
diversified its product offerings through brand extensions and private label
products. The breadth of the Shirt Group's product offerings allows it to offer
a comprehensive range of products to its customers.
DRESS SHIRTS. The total size of the men's dress shirt retail market for
1997 was $3.4 billion which was a 3.2% improvement from the $3.3 billion in
sales in 1996, this level of growth was slightly higher than the 3.0% growth in
total men's apparel for 1997. The primary channels of distribution for men's
dress shirts are department stores, major national chains, and discount stores,
accounting for 25.3%, 27.4% and 23.5%, respectively, of total retail sales in
1997.
The Company's ARROW dress shirts are currently marketed principally under
four labels: DOVER, KENT, ARROW "1851", and COLLARMAN. These labels have been
repositioned over the past year to represent a good, better and best strategy
for the ARROW product lines.
The following table shows the percentage of the Company's net sales of
shirts represented by the listed category:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Arrow:
Dover/Kent............................................... 32% 26% 24%
Arrow "1851"............................................. 27 31 30
Collarman................................................ -- 2 4
--------- --------- ---------
Total Arrow............................................ 59% 59% 58%
Other Dress Shirts......................................... 3 3 7
--------- --------- ---------
Total Dress Shirts..................................... 62% 62% 65%
Sport Shirts:
Tournament............................................... 21 26 21
Arrow Authentic.......................................... 17 12 14
--------- --------- ---------
Total Sport Shirts..................................... 38% 38% 35%
--------- --------- ---------
Total.................................................... 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
Total net sales in millions................................ $ 228.6 $ 194.4 $ 176.1
--------- --------- ---------
--------- --------- ---------
</TABLE>
Traditional in styling, the DOVER and KENT brands are names the consumer and
retailer recognize as a good quality, moderately priced, dress shirt that is a
mainstay of the ARROW assortment. This product line has allowed ARROW to
dominate the blended oxford cloth classification and is carried in almost every
store where ARROW sells. Playing off the strength of the DOVER label, a new
marketing strategy was launched for 1998. DOVER was extended to include blended
broadcloth and blended pinpoint shirts. A major design and merchandising effort
was put into these two new product offerings to show a broader fashion
assortment, while maintaining the classic DOVER styling. In 1997 the DOVER and
KENT labels represented 36% of the total ARROW dress shirt business. This
product line is targeted at an average retail price of approximately $20 with
the major competitors being Van Heusen by Phillips-Van Heusen Corporation and
private label products.
The ARROW "1851" label was launched in 1994 when ARROW was the first to
market wrinkle free shirts. As with DOVER and KENT, the ARROW "1851" wrinkle
free products are mostly cotton blends available in oxford, broadcloth, and
pinpoint. The wrinkle free oxford is the best selling wrinkle free shirt in the
department store channel. Combined with the number one selling DOVER and KENT
oxford, this reinforces ARROW'S dominant position in the blended oxford
classification. Whereas DOVER and KENT are more traditional in styling, the
ARROW "1851" label is available in more updated fashion styles and is available
in
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all cotton. This product line represents ARROW'S better quality, by offering the
consumer fashion looks with either the enhancement of the wrinkle free process
or the better 100% cotton fabric. The primary competition for the ARROW "1851"
label is Geoffrey Beene by Phillips-Van Heusen Corporation and private label
products. The average retail price is approximately $25.
COLLARMAN is a product line that was launched in 1996. Designed to be the
highest quality shirt in the ARROW product offering, these shirts are
manufactured with cotton pinpoint oxford and broadcloth fabrics. Although not a
large portion of ARROW sales, this product has been placed in the better stores
of such key customers as May Company and Profitts. The primary competition for
the COLLARMAN is Perry Ellis by Salant Corporation ("Salant"). The average
retail price for COLLARMAN is approximately $30.
The Shirt Group has also identified the private label shirt market as a
growth opportunity with existing customers as well as other channels of
distribution. A separate sales team has been established to pursue this business
opportunity. Using the Company's expertise in design, manufacturing and service,
the Shirt Group can offer a competitive advantage in helping stores manage their
private label business.
SPORT SHIRTS. The Company leverages the recognition of its well known ARROW
brand name in its sportswear product lines. With the growth of the casual
sportswear business and the higher priced designer collections, ARROW has
identified a niche for a branded, moderately priced product. Over the past year,
the Company has repositioned its sportswear labels with an emphasis on two
brands, TOURNAMENT and ARROW AUTHENTIC, marketed to provide a good and better
product line.
In 1997, the markets for men's woven and knit sport shirts were $5.2 billion
and $7.1 billion, respectively, representing increases from 1996 sales of $5.0
billion and $6.7 billion, respectively. The largest single channel for woven
sport shirts and knit sport shirts is discount stores, accounting for 28.3% and
30.4% of retail sales, respectively, in 1997. The department stores and national
chains represented 36.9% and 30.7% of woven and knit sport shirts, respectively
in 1997. Approximately 35% of the Shirt Group's business is done in sportswear.
The TOURNAMENT brand, like DOVER, is a moderately priced, mostly cotton
blended product from ARROW. Starting in 1997, the Company began marketing all
their moderate price sportswear, primarily knit and woven shirts, under the
TOURNAMENT brand. TOURNAMENT sportswear represents approximately 62% of the
ARROW sportswear business and is targeted to retail for $20 with its major
competitors being private label, Van Heusen by Phillips-Van Heusen Corporation
and Supreme by Supreme International Corp. ("Supreme") shirts.
The ARROW AUTHENTIC label represents a higher quality, 100% cotton
sportswear product. Traditional in styling, this product was marketed to give
the consumer a natural fiber sport shirt at a retail price of $25. This product
line is primarily focused for the better specialty stores and traditional
department stores such as Belk's and Proffitt's. The major competitors are
private label products, Natural Issue by Supreme and Chaps by Warnaco Inc.
("Warnaco").
THE DESIGNER GROUP
The Designer Group was established as a separate business unit, in October,
1996 and sells (i) dress and sport shirts under its licensed Yves Saint Laurent,
Burberrys and Kenneth Cole trademarks, (ii) dress socks under the licensed
Kenneth Cole trademark and (iii) tailored clothing and casual pants under the
Yves Saint Laurent trademark. The Designer Group's products help complete the
Company's one-stop shopping strategy by offering products at price points higher
than its other products.
MARKETING, SALES AND DISTRIBUTION
THE SOCK GROUP
The Sock Group is a significant supplier to many leading department store
and national chain retailers including Belk's, Dayton-Hudson, Dillard's,
Federated, J.C. Penney, May Company, Mercantile, Proffitt's and Sears. The Sock
Group segments its use of brand names by distribution channel to solidify the
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<PAGE>
perceived value of such brands and maintain their integrity. The Sock Group's
top ten customers accounted for 72.4% of total sales in 1997.
The Sock Group distributes its products through the following channels:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1997 SALES BY DISTRIBUTION CHANNEL
<S> <C>
Department Stores and National Chains 85%
Specialty Stores/Other 2%
Mass Merchants and Discounters 13%
</TABLE>
Consistent with industry practice, the Sock Group does not operate under
long-term written supply agreements with its customers.
In order to better serve its customers, the Sock Group is installing a
vendor managed inventory system. The vendor managed inventory system will
provide the Company with real time information on the sales of the Sock Group's
products by its customers. This system will allow the Company to ship product to
a customer immediately upon learning that such customer does not have adequate
inventory instead of waiting until a request comes directly from the customer.
The system will be installed with certain of the Sock Group's largest customers
during 1998.
In an effort to maximize the Sock Group's product exposure and increase
sales, the Sock Group works closely with its major customers to assist them in
managing their entire sock category and promoting the Sock Group's products to
the consumer. In addition to frequent personal consultation with the employees
of these customers, the Sock Group meets with its customers' senior management
periodically to jointly develop merchandise assortments and plan promotional
events specifically tailored to that customer. The Sock Group provides
merchandising assistance with store layouts, fixture designs, advertising and
point of sale displays and also provides customers with preprinted, customized
advertising materials designed to increase sales. The Sock Group does not
utilize national brand advertising because it has found the above described
advertising techniques to be more cost effective. In order to maintain the GOLD
TOE brand image, the Company only allows retailers to price promote GOLD TOE
twice a year.
As a supplement to its primary distribution channels, the Company operates
seven outlet stores for Sock Group products. These stores sell seconds. The
stores are located in factory outlet malls. The stores average approximately
1,200 square feet.
The Sock Group employs sales people by brand who generally have many years
of industry experience. Most sales people are compensated with a combination of
salary and discretionary bonus.
THE SHIRT GROUP
The Shirt Group is a significant supplier to many leading department store
chains including Belk's, Dayton-Hudson, Hecht's, Federated, May Company,
Proffitt's and Sears. The Shirt Group's top ten customers accounted for
approximately 51.0% of total sales for 1997.
65
<PAGE>
The Company distributes its products through the following channels:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1997 SHIRT GROUP SALES BY DISTRIBUTION
CHANNEL
<S> <C>
Department Stores and National Chains 78%
Specialty Stores/Other 10%
Mass Merchants and Discounters 12%
</TABLE>
Consistent with industry practice, the Shirt Group does not operate under
long-term written supply agreements with its customers.
In order to better serve its customers, the Shirt Group has installed a
vendor management system with most of its major customers. As a result of this
system, the Shirt Group is one of the few shirt companies that can manage a
customer's inventory. In addition, the Shirt Group utilizes a balance of
off-shore sewing and domestic manufacturing to provide its customers with timely
product replenishment. As a result of this manufacturing strategy, the Shirt
Group can deliver its core dress shirt offerings within 48 hours of an order.
This order fullfillment time compares favorably to those competitors which rely
on foreign manufacturing for a majority of their products where lead times can
be as long as five weeks. As a result, management believes certain competitors
must hold much higher inventory levels to effectively compete with the Company.
The Shirt Group works closely with its key accounts to assist them in
managing their entire dress shirt and sport shirt product category, to insure
increased sales and promote maximum product exposure of the Shirt Group's
product to the consumer. In addition to frequent personal consultation with the
buying teams of these key accounts, the Shirt Group meets with its customers'
senior management frequently to jointly develop merchandise assortments and plan
promotional events specifically tailored for that account. The Shirt Group
provides merchandising assistance with store presentations, fixture designs,
advertising and point of sale displays.
The Shirt Group employs sales people by brand who generally have several
years experience in the men's shirt business. With the turnover of buyers at
retail stores high, many retailers rely on the experience of their key vendors
to manage their business for them. The Shirt Group has developed a well
respected expertise in doing this for our key accounts. Most sales and sales
management personnel are compensated with a combination of salary and bonus,
based on established goals and objectives.
As a supplement to its primary distribution channels, the Shirt Group
operates 24 retail outlet stores in the United States and Canada which sell the
Shirt Group's products directly to customers. These stores generally sell
seconds, discontinued and off price goods. The retail stores offer a collection
of the Shirt Group's dress and sport shirts, GOLD TOE socks as well as other
products such as ties and belts supplied by Arrow licensees. The main purpose of
the retail stores is to help maintain the ARROW brand image through the control
of excess inventory. The retail stores also provide a test market for new
products. The average store size is 3,000 square feet.
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<PAGE>
THE DESIGNER GROUP
The Designer Group sells its licensed Yves Saint Laurent, Burberrys and
Kenneth Cole products to a variety of specialty stores and department stores
including Federated, Dillard's and Proffitt's. Similar to the Company's other
divisions, the Designer Group employs sales people who generally have many years
of industry experience. Most sales people are compensated with a combination of
salary and discretionary bonus.
TRADEMARKS AND LICENSE AGREEMENTS
THE SOCK GROUP
The Sock Group markets its products under its own proprietary trade marks,
trade names and customer-owned private labels, as well as certain licensed
trademarks and trade names. The Sock Group uses trademarks, trade names and
private labels as merchandising tools to assist its customers in coordinating
their product offerings and differentiating their products from those of their
competitors.
The Company owns various trademarks and trade names including GOLD TOE,
SILVER TOE and ARROW. These trademarks are recognized to represent value in
product quality and design. The Sock Group regards its trademarks and trade
names as valuable assets and rigorously protects them against infringement.
The Sock Group holds the exclusive sock licenses for the following
trademarks:
<TABLE>
<CAPTION>
TRADEMARK TERRITORY EXPIRATION
- --------------------------------- --------------------------------- ---------------------------------
<S> <C> <C>
Perry Ellis and Perry Ellis U.S., Canada and Mexico 12/31/99
America
Nautica U.S. and Canada 12/31/98(1)
Jockey/Jockey For Her U.S. and Mexico 12/31/97(2)
Stride Rite U.S., Canada, Mexico, Israel, 12/31/00(1)
Italy, France, Germany, England,
Portugal and Spain
Jaclyn Smith U.S. No termination date
</TABLE>
- ------------------------------
(1) Option to renew.
(2) The Company is currently negotiating a new license agreement.
The Company is only partially dependent on these licensed product lines (for
1997, 10.1% of the Company's EBITDA As Defined was derived from licensing
revenue) and the loss of any license would not materially adversely affect the
Company's overall profitability.
The Sock Group has licensed the GOLD TOE trademark to two licensees in
Mexico and Colombia which provide for minimum royalty payments to be paid to the
Sock Group. The Company intends to more fully exploit the strength of the GOLD
TOE brand by adding new licensees. To this end, the Sock Group has recently
hired a new international sales executive to develop these opportunities.
THE SHIRT GROUP
The Shirt Group owns various trademarks, including ARROW. The ARROW brand
name is widely recognized in the industry and represents excellence and value in
product quality, fashion and design. The Shirt Group regards its trademarks and
tradenames as valuable assets and rigorously protects them against infringement.
The Shirt Group licenses the ARROW and related trademarks to 23 licensees
for use in territories outside the United States. Through licensing alliances,
the Shirt Group combines its consumer insight and design, marketing and imaging
skills with the specific product or geographic competencies of its licensing
partners to create and build new businesses. The Shirt Group's licensing
partners, who are often leaders in their respective markets, generally
contribute the majority of product development costs, provide the
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<PAGE>
operational infrastructure required to support the business and own the
inventory. The Shirt Group works in close collaboration with its licensing
partners to ensure that products are developed, marketed and distributed to
address the intended market opportunities and present the Company's products
consistently. While product licensing partners may employ their own designers,
the Shirt Group oversees the design of all its products. The Shirt Group also
works closely with licensing partners to coordinate marketing and distribution
strategies. For 1997, the Company had licensing fee revenue of $6.8 million.
Most of the ARROW license agreements provide for a minimum royalty payment
and require the licensee to spend a percentage of net sales on advertising and
marketing of products. The licenses are for three- or five-year terms which, in
most cases, have provisions for renewal terms if the licensee has not breached
the agreement and has met certain sales goals. The Shirt Group also has the
right to supervise the quality of the licensed products.
The Shirt Group also licenses the ARROW trademark to four United States
licensees for use on leather accessories, men's fashion eyewear and neckwear.
THE DESIGNER GROUP
The Designer Group holds the exclusive United States license for men's
shirts, tailored clothing and socks under the Yves Saint Laurent trademark,
men's shirts under the Burberrys trademark and men's shirts and socks under the
Kenneth Cole trademark. Unless extended, these licenses expire in 2001, 1999 and
2002, respectively.
DESIGN
THE SOCK GROUP
The Sock Group's primary offerings are timeless and are not subject to
change. These core product lines provide the Group with a base of business which
is carried over from year to year, and is the result of the Group's quality of
design, material and brand awareness. The Sock Group does, however, employ
separate designers and merchandise product development groups as necessary,
creating a structure that focuses on a brand's special qualities and identity.
These designers and merchants consider consumer taste and fashion trends when
creating a product plan for their brand.
THE SHIRT GROUP
The Shirt Group's primary dress shirt offerings exhibit the same timeless
fashion characteristics as the Sock Group's products and are not generally
subject to change, while sport shirt styles change each season. Each Shirt Group
brand employs separate brand designers similar to the Sock Group. The design
teams begin creating new product lines up to twelve months in advance of a
season in order to insure that samples, packaging and marketing presentations
are ready for introduction, which is generally five months prior to shipping.
Lead times will vary depending on whether or not the fabric and make is domestic
or imported.
THE DESIGNER GROUP
The in-house design team at the Designer Group designs (i) dress shirts
under its licensed Yves Saint Laurent, Burberrys and Kenneth Cole trademarks,
(ii) dress socks under the licensed Kenneth Cole trademark and (iii) tailored
clothing and casual pants under the licensed Yves Saint Laurent trademark. The
Designer Group works with each of the licensors to develop a "fashion blueprint"
for each of the Designer Group's products. The image, colors and styles of the
products are intended to be consistent with the other products sold by the
respective licensors and other companies using the particular brand name.
Products are made in a wide range of fabrics that are given distinctive looks
through a variety of finishes, many of which are developed by the Designer
Group.
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<PAGE>
INFORMATION SYSTEMS
The Company has invested $6.1 million since 1995 in state-of-the-art
information systems which have dramatically improved operations and management's
access to information and are Year 2000 compliant. The Company's information
system provides, among other things, comprehensive order processing, production,
accounting and management information for the marketing, manufacturing,
importing and distribution functions of the Company's business. The Company's
distribution facilities and administrative offices are linked by the computer
system. The Company has implemented a software program that enables the Company
to track, among other things, orders, manufacturing schedules, inventory, sales
and mark-downs of its products. In addition, to support the Company's
replenishment program, the Company has an electronic data interchange ("EDI")
system, through which certain customers' orders are placed with the Company. The
Company also has a vendor managed inventory system with certain customers
through which customers' orders are automatically placed.
BACKLOG AND SEASONALITY
The amount of the Company's backlog orders at any particular time is
affected by a number of factors, including seasonality and scheduling of the
manufacturing and shipment of products. In general, the Company's EDI and vendor
managed inventory systems have resulted in shortened lead times between
submission of purchase orders and delivery and lowered the level of backlog
orders. Consequently, the Company believes that the amount of its backlog is not
an appropriate indicator of levels of future production.
RAW MATERIALS
THE SOCK GROUP
The Sock Group relies on outside suppliers to meet its raw material needs.
The division has developed key relationships with each of the largest yarn
suppliers in the industry. Due to its size, management believes the Sock Group
has developed solid supplier relationships and historically has been able to
obtain competitive pricing.
The Company minimizes the effects of seasonal variations in yarn prices by
securing long-term contracts for yarn based on its anticipated needs for each
year. The industry convention is for sock manufacturers to negotiate yarn
contracts in the third quarter of the year for the following year. Selling
prices with retailers are then negotiated in January and February based on those
yarn prices. Historically, this process has acted as a natural hedge against
rising yarn prices.
THE SHIRT GROUP
The Shirt Group also relies on outside suppliers to meet its raw material
needs, namely fabric. The division maintains close relationships with the
largest suppliers of this material.
The Shirt Group also utilizes forward commitments to purchase fabric. Under
these arrangements, the division commits to purchase a minimum amount of
materials for a fixed price.
MANUFACTURING
THE SOCK GROUP
The Sock Group produces its sock products through domestic manufacturing
facilities, imports and outsourcing. Approximately 78% of all production is done
at owned facilities, 14% is contracted in the United States with other suppliers
and 8% is imported. The Sock Group operates three manufacturing facilities
located in Newton and Burlington, North Carolina and Bally, Pennsylvania. The
Company's socks are primarily made from cotton, nylon or acrylic yarns. These
yarns are knit on a circular knitting machine in a tube-like manner with
additional courses placed in the construction to form a pocket for the wearer's
heel and toe. The sock is seamed to close the toe end of the tube, dyed to the
proper color and packaged
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for retail store presentation. The Company has spent approximately $9.7 million
since 1995 upgrading the Group's primary facilities.
The Sock Group's quality control program is designed to assure that its
products meet predetermined quality standards. The Sock Group has devoted
significant resources to support its quality improvement efforts. Each
manufacturing facility is staffed with a quality control team that identifies
and resolves quality issues.
THE SHIRT GROUP
The Shirt Group produces its shirt products through domestic manufacturing
facilities and outsourcing. Approximately 43% of all dress shirt production is
done at domestically owned or leased facilities, and 57% is sourced outside the
United States. All sport shirts are sourced outside the United States. The Shirt
Group owns or leases four facilities located in Enterprise and Albertville,
Alabama, Austell, Georgia and Kitchener, Ontario.
For dress shirts manufactured at the Company's owned facilities, the
manufacturing process begins when rolls of fabric are received by the Shirt
Group's cutting facilities. The fabric is cut using automated technology. Piece
goods are then assembled in bundles and shipped to sewing plants in the United
States, the Caribbean or Central America. Shirts that are assembled in Caribbean
or Central America make use of Rule 807 of the U.S. Tariff Code which provides
that duties are only assessed on the value that is added to the garment in the
foreign country. At the sewing facilities collars, cuffs and sleeves are first
assembled, then sewn together with the body of the shirt and finally, the
garments are inspected, pressed and packaged.
Sport shirts are sourced in the Far East and Central America. The Company's
purchases from its suppliers are effected through individual purchase orders
specifying the price and quantity of the items to be produced. Generally, the
Company does not have any long-term, formal arrangements with any of the
suppliers which manufacture its products. The Company believes that it is the
largest customer of many of its manufacturing suppliers and that its
long-standing relationships with its suppliers provide the Company with a
competitive advantage over its competitors. No single supplier is critical to
the Company's production needs, and the Company believes that an ample number of
alternative suppliers exist should the Company need to secure additional or
replacement production capacity.
THE DESIGNER GROUP
Burberrys shirts are produced for the Designer Group by the Company. All
Yves Saint Laurent and Kenneth Cole products are imported. No single supplier is
critical to the Company's production needs, and the Company believes that an
ample number of alternative suppliers exist should the Company need to secure
additional or replacement production capacity.
COMPETITION
The apparel industry is highly competitive due to its fashion orientation,
its mix of large and small producers, the flow of domestic and imported
merchandise and the wide diversity of retailing methods. The Company's apparel
wholesale divisions experience competition in branded, designer and private
label products.
The Sock Group's primary sock competitors include: Sara Lee ("Hanes" and
"Champion" brands); Renfro ("Gitano" and "Fruit-of-the-Loom" brands); Royce
("Dockers" and "Levi" brands); Kayser-Roth ("Burlington," "Hue" and "No
Nonsense" brands); American Essentials ("Calvin Klein" and "American Essentials"
brands) and Hot Sox ("Polo," "Hot Sox," "Chaps" and "Ralph Lauren" brands). The
Company believes, however, that it manufactures a more extensive line of socks
for both genders and children and in a broader price range than any of its
competitors.
Some of the larger dress shirt competitors include: Phillips-Van Heusen
Corporation ("Van Heusen" and "Geoffrey Beene" brands); Salant ("Perry Ellis"
and "John Henry" brands); Smart Shirt (private label shirt division of Kellwood
Company); Capital Mercury (private label shirts); and Oxford Industries Inc.
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(private label shirts). Some of the larger sportswear competitors include:
Warnaco ("Chaps" brand); Polo/ Ralph Lauren L.P. ("Polo" brand); Phillips-Van
Heusen Corporation ("Van Heusen" brand); Supreme (Supreme brand).
The Designer Group's competitors include numerous high-end designer labels,
including Perry Ellis, DKNY, Tommy Hilfiger and Polo.
The Company has historically benefitted from import restrictions imposed on
foreign competitors in the apparel industry. The extent of import protection
afforded to domestic manufacturers such as the Company, however, has been, and
is likely to remain, subject to considerable political deliberation. GATT will
eliminate, over a number of years, restrictions on imports of apparel. In
addition, on January 1, 1994, NAFTA became effective. Each of these agreements
will reduce import constraints previously imposed on some of the Company's
competitors and will increase the likelihood of competition on the basis of
price.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental
laws and regulations concerning, among other things, wastewater discharges,
storm water flows, air emissions, ozone depletion and solid waste disposal. The
Company's plants generate very small quantities of hazardous waste that are
either recycled or disposed of off-site. Most of its plants are required to
possess one or more discharge permits.
Environmental regulation applicable to the Company's operations is becoming
increasingly stringent. The Company continues to incur capital and other
expenditures each year in order to comply with current and future regulatory
standards. The Company does not expect, however, that the amount of such
expenditures in the future will have a material adverse effect on its financial
condition, results of operations or competitive position. There can be no
assurance, however, that future changes in federal, state or local regulations,
interpretations of existing regulations, or the discovery of currently unknown
problems or conditions will not require substantial additional expenditures.
Similarly, the extent of the Company's liability, if any, for past failures to
comply with laws, regulations and permits applicable to its operations cannot be
determined.
LITIGATION
From time to time, the Company is involved in various legal proceedings
arising from the ordinary course of its business operations, such as personal
injury claims, employment matters and contractual disputes. The Company believes
that its potential liability with respect to proceedings currently pending is
not material in the aggregate to the Company's consolidated financial position
or results of operations.
EMPLOYEES
As of June 27, 1998, the Company employed 3,165 people, including 1,442 at
the Sock Group, 1,686 at the Shirt Group and 37 at the Designer Group. The Shirt
Group has 736 employees who are represented by a union. Although union members
have been working without a contract since 1996; such employees were given wage
increases of 3% in March, 1997 and March, 1998. The Company believes that its
relationship with its employees is good.
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FACILITIES
The following table summarizes certain information concerning certain of the
Company's facilities:
<TABLE>
<CAPTION>
APPROX.
LOCATION USE SQUARE FEET OWNED/LEASED
- ----------------------------------------------------- ------------------------------ ----------- -------------
<S> <C> <C> <C>
Shirt Group:
Enterprise, AL..................................... Manufacturing 50,000 Owned
Kitchener, Ontario................................. Manufacturing 145,000 Owned
Kitchener, Ontario................................. Distribution 125,000 Leased
Albertville, AL.................................... Manufacturing 57,000 Leased
Austell, GA........................................ Manufacturing/Distribution 593,000 Leased
Toronto, Ontario................................... Showroom 8,100 Leased
New York NY........................................ Showroom 11,000 Leased
Sock Group:
Bally, PA.......................................... Manufacturing 155,000 Owned
Newton, NC......................................... Manufacturing 81,600 Owned
Burlington, NC..................................... Manufacturing 251,400 Owned
Newton, NC......................................... Warehouse 36,000 Leased
Mabene, NC......................................... Distribution 150,000 Leased
New York, NY....................................... Showrooms 11,000 Leased
Boyertown, PA...................................... Warehouse 35,000 Leased
Pottstown, PA...................................... Dye Facility 20,500 Leased
Burlington, NC..................................... Office Space 8,300 Leased
Designer Group:
New York, NY....................................... Showroom 8,200 Leased
</TABLE>
- ------------------------------
The Designer Group subcontracts the manufacture of its products to the Shirt
Group, the Sock Group and off-shore companies.
In addition, the Shirt Group operates 31 outlet stores on leased premises.
The Company believes that its existing facilities are well maintained and in
good operating condition, and are otherwise adequate for its present and
foreseeable level of operations for the next few years.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names and positions of the directors and executive
officers of Holdings, CAG and the Company who will hold these positions upon
consummation of the Offerings. All directors hold office until the next annual
meeting of stockholders of Holdings, CAG and the Company, and until their
successors are duly elected and qualified. All officers serve at the pleasure of
the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Bryan P. Marsal...................................... 47 Director and Chief Executive Officer of Holdings, CAG
and the Company
James A. Williams.................................... 55 Director of Holdings, CAG and the Company; President
and Chief Executive Officer of the Sock Group
Philip L. Molinari................................... 50 President of the Shirt Group
Robert J. Riesbeck................................... 34 Chief Financial Officer of Holdings, CAG and the
Company and Chief Operating Officer of the Shirt
Group
Kathy D. Wilson...................................... 38 Vice President and Chief Financial Officer of the
Sock Group
William S. Sheely.................................... 39 Executive Vice President--Operations of the Sock
Group
Steven J. Kaufman.................................... 51 Vice President and General Counsel of Holdings, CAG
and the Company
Norman W. Alpert..................................... 39 Director of Holdings, CAG and the Company
Sander M. Levy....................................... 36 Director of Holdings, CAG and the Company
Daniel S. O'Connell.................................. 44 Director of Holdings, CAG and the Company
Steven M. Silver..................................... 30 Director of Holdings, CAG and the Company
Neil P. DeFeo........................................ 52 Director of Holdings, CAG and the Company
</TABLE>
BRYAN P. MARSAL is a founding Managing Director of A&M, a firm that was
formed in 1983. Mr. Marsal has been Chief Executive Officer of the Company since
1995. Mr. Marsal is a director of Timex Corporation, Long Manufacturing Corp.
and Anthony Manufacturing Company. Mr. Marsal received both a B.B.A. and an
M.B.A. from the University of Michigan.
JAMES A. WILLIAMS is President of the Sock Group. Mr. Williams joined the
Sock Group in July 1986 as Senior Vice President--Sales and Marketing and was
promoted to his current position as President in August 1991. Mr. Williams is a
director of The Bibb Company and Ithaca Industries, Inc. and is the Chairman and
a director of Maidenform Worldwide Inc. Prior to joining the Company, he worked
for 15 years for Adams-Millis Corporation, where his last position was Senior
Vice President--Sales and Marketing. Mr. Williams earned a B.S. in chemistry
from the University of Southern Mississippi.
PHILIP L. MOLINARI is President of the Shirt Group. Mr. Molinari joined the
Company in May 1993 as president of the Shirt Group. Prior to joining the
Company, he was the Executive Vice President of Sales and Marketing for Bugle
Boy Industries where he worked for approximately five years. Prior to Bugle Boy,
Mr. Molinari was the Executive Vice President--Sales and Marketing of the Van
Heusen division of the Phillips-Van Heusen Corporation. Previously, he worked
for the Arrow division of Cluett, Peabody & Co. for 13 years, where his last
position was Regional Sales Manager.
ROBERT J. RIESBECK is Chief Financial Officer of Holdings, CAG and the
Company and Chief Operating Officer of the Shirt Group. Mr. Riesbeck joined the
Company in July of 1995 as Vice President--Finance
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of the Shirt Group. He was named Executive Vice President, Chief Financial and
Operating Officer of the Shirt Group in January 1997. Prior to joining the
Company, Mr. Riesbeck worked for six years as Vice President Controller of
Crystal Brands, an apparel manufacturer. Mr. Riesbeck received a B.S. in
Business Administration-Accounting from the University of Akron and an M.B.A.
from the University of Connecticut and is also a C.P.A.
KATHY D. WILSON is the Vice President and Chief Financial Officer of the
Sock Group. Ms. Wilson joined the Company in January 1994. During the three
years prior to joining the Company, Ms. Wilson had a consulting practice in
Singapore for the hotel industry. She also worked five years with various
accounting firms. Ms. Wilson earned a B.S. in Business Administration -
Accounting from the University of North Carolina and is also a C.P.A.
WILLIAM S. SHEELY is the Executive Vice President--Operations of the Sock
Group. Mr. Sheely joined the Company as Vice President of Finance and Controller
of the Sock Group in February 1993 and was promoted to his current position of
Executive Vice President -Operations in April 1994. Prior to his tenure with the
Company, Mr. Sheely was controller at Kayser-Roth's sock division where he was
employed for seven years, and with Springs Industries for five years in various
financial positions. Mr. Sheely is a graduate of the University of South
Carolina where he received a B.S. in Business Administration - Accounting and is
also a C.P.A.
STEVEN J. KAUFMAN is Vice President and General Counsel of the Company. Mr.
Kaufman joined the Company in April 1990 as Vice President and General Counsel.
Prior to joining the Company he was an Assistant General Counsel of The Times
Mirror Company for 10 years and a corporate associate for six years with Fried,
Frank, Harris, Shriver and Jacobson. Mr. Kaufman earned a J.D. from the Yale Law
School and a B.A. from Columbia College.
NORMAN W. ALPERT is a Managing Director of Vestar and was a founding partner
of Vestar at its inception in 1988. Mr. Alpert is Chairman of the Board of
Directors of Advanced Organics, Inc., International AirParts Corporation and
Aearo Corporation, and a director of Russell-Stanley Holdings, Inc.,
Clark-Schwebel, Inc. and Remington Products Company, all companies in which
Vestar or its affiliates have a significant equity interest. Mr. Alpert received
an A.B. degree from Brown University.
SANDER M. LEVY is a Managing Director of Vestar and was a founding partner
of Vestar at its inception in 1988. Mr. Levy is a director of Sun Apparel, Inc.
and Clark-Schwebel, Inc. Mr. Levy received a B.S. degree from The Wharton School
of the University of Pennsylvania and an M.B.A. degree from Columbia University.
DANIEL S. O'CONNELL is the Chief Executive Officer and founder of Vestar.
Mr. O'Connell is a director of Advanced Organics, Inc., Aearo Corporation,
Clark-Schwebel, Inc., Pinnacle Automation, Inc., Russell-Stanley Holdings, Inc.,
Sun Apparel, Inc., Reid Plastics Holdings, Inc. and Remington Products Company,
all companies in which Vestar or its affiliates have a significant equity
interest. Mr. O'Connell received an A.B. degree from Brown University and an
M.P.P.M. degree from Yale University School of Management.
STEVEN M. SILVER is a Vice President of Vestar. Mr. Silver joined Vestar in
May of 1995. Between July 1990 and July 1993, Mr. Silver was an analyst in
Wasserstein Perella & Co.'s mergers and acquisitions groups in New York and
London. Mr. Silver is a member of the Advisory Board of Insight Communications
Company, L.P. Mr. Silver holds a B.A. degree from Yale College and an M.B.A.
degree from Harvard University.
NEIL P. DEFEO has served as President, Chief Executive Officer and a
Director of Remington Products Company, L.L.C. since January 1997. Mr. DeFeo is
a director of Driscoll Strawberry Associates, Inc. From 1993 to 1996, Mr. DeFeo
was Group Vice President, U.S. Operations for The Clorox Company. For 25 years
prior to 1993, Mr. DeFeo worked for Procter & Gamble in various executive
positions, including Vice President and Managing Director, Worldwide Strategic
Planning, Laundry and Cleaning Products. Mr. DeFeo holds a B.S.E.E. from
Manhattan College.
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COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and noncash compensation earned by
the Chief Executive Officer and the four other most highly compensated executive
officers of Holdings, CAG and the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------------
SECURITIES
-------------------- UNDERLYING ALL OTHER
YEAR SALARY($) BONUS($) OPTIONS (#) COMPENSATION
--------- --------- --------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
Bryan P. Marsal(1)................................ 1997 700,000(2) 0 0 0
Chief Executive Officer of 1996 700,000 0 0 0
Holdings and the Company 1995 321,000 0 0 0
James A. Williams................................. 1997 400,000 410,000 0 0
President of the Sock Group 1996 400,000 0 0 0
1995 400,000 50,000 0 0
Philip L. Molinari................................ 1997 320,000 0 0 0
President of the Shirt Group 1996 400,000 0 0 0
1995 437,000 10,000 0 0
William S. Sheely................................. 1997 156,000 150,000 0 6,000
Executive Vice President 1996 150,000 0 0 6,000
--Operations of the Sock Group 1995 145,000 10,000 0 6,000
Kathy D. Wilson................................... 1997 136,000 140,000 0 0
Vice President and Chief Financial Officer of 1996 120,000 0 0 0
the Sock Group 1995 100,000 17,000 0 0
</TABLE>
- ------------------------
(1) Compensation paid to A&M. A&M also received, for services other than those
of Mr. Marsal, other compensation of $710,000, $815,000 and $738,000 for
each of 1995, 1996 and 1997, respectively.
(2) Commencing July 1995.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Mr. Williams entered into an employment agreement with the Sock Group
effective as of March 7, 1997, pursuant to which he serves as President and
Chief Executive Officer of the Sock Group. Such employment agreement provides
for Mr. Williams to receive an annual base salary of $400,000. Mr. Williams is
also entitled to annual incentive bonuses under the Sock Group's executive
management incentive plan, with no guaranteed minimum bonus amount. The
employment agreement continues until terminated (a) by the Sock Group with or
without cause or (b) by Mr. Williams with cause or upon 90 days notice. In the
event that Mr. Williams' employment is terminated without cause by the Sock
Group or with cause by Mr. Williams, Mr. Williams will be entitled to severance
pay in an amount equal to two times the sum of $400,000 plus his average annual
bonus calculated from prior years, up to a maximum severance of $1,200,000.
Each of Mr. Molinari, Mr. Sheely, Ms. Wilson, Robert J. Riesbeck and Steven
J. Kaufman (each an "Employee"), of the Company, the Sock Group and the Shirt
Group (each an "Employer") have entered into severance agreements, pursuant to
which they hold their respective offices. Each Employee is entitled to severance
pay equal to his or her current base salary for a period of between nine months
and one year
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(excluding bonus compensation) upon the occurrence of the termination of his or
her employment without cause. These severance payments cease upon the Employee
becoming a full-time employee or full-time consultant (including
self-employment) of another entity. Each of the severance agreements described
above terminates one year from the date of the consummation of the Plan.
INCENTIVE COMPENSATION PLANS
BONUS PLANS
Executive officers along with certain other employees (the "Participants")
of each the Shirt Group and the Sock Group participate in incentive compensation
plans pursuant to which the Participants are eligible to receive bonus
compensation based upon annual minimum EBITDA (as defined) targets and upon the
weighing of certain other performance criteria by Bryan P. Marsal. Yearly bonus
awards under the incentive plans are limited to 100% of the respective
Participant's annual salary.
MANAGEMENT EQUITY PARTICIPATION
In connection with the Recapitalization, Holdings (i) permitted the
Management Investors to subscribe in the aggregate for up to 5.1% of the
outstanding Holdings Common Stock (the "Purchased Stock") and (ii) adopted a
stock option plan (the "Option Plan") providing for options to purchase shares
of Holdings Common Stock ("Options") to be granted to the Management Investors
at the consummation of the Recapitalization and to certain other employees of
Holdings and its subsidiaries from time to time thereafter, in each case in
order to provide additional compensation and financial incentives to Management
Investors and such other employees. The Option Plan may be amended, suspended or
terminated by the Holdings' Board of Directors at any time.
PURCHASED STOCK. On May 18, 1998 (the "the Recapitalization closing date"),
the Management Investors became holders of an aggregate of $1.8 million of
Purchased Stock, representing 5.1% of the outstanding Holdings Common Stock on
the Recapitalization closing date. All Purchased Stock is subject to certain
forfeiture provisions referred to in the paragraph entitled "Puts and Calls"
below.
STOCK OPTIONS. On the Recapitalization closing date Holdings granted to the
Management Investors nonqualified Options to purchase 5% of Holdings Common
Stock (on a fully diluted basis). Such Options will (i) vest and become
exercisable in equal installments in each of the five years following the grant
date, (ii) expire ten years from the grant date, or earlier in certain instances
of termination of employment and upon certain change of control events, and
(iii) have an exercise price equal to $98.01 (the per share price at which
Vestar, A&M, the Co-Investors and the Management Investors acquired shares of
Holdings Common Stock in the Recapitalization). From time to time following the
Recapitalization, the Board of Directors of Holdings or a compensation committee
thereof may grant additional Options under the Option Plan to various employees
of Holdings, the Company and their subsidiaries on terms, including vesting
schedule, term and exercise price, determined by the Board of Directors or such
committee.
PUTS AND CALLS. Purchased Stock, Options and Holdings Common Stock
purchased upon the exercise of Options will be subject to certain put and call
provisions relating to the death, disability, retirement and termination of
employment of the holder. Put and call prices will vary depending on the number
of years since grant or purchase, the reason the put or call became exercisable,
and the fair market value and initial purchase price of Holdings Common Stock
subject to the put or call. Under certain circumstances, Holdings is permitted
(i) to defer exercise of the put or call to the extent prohibited by financing
agreements or other instruments, and (ii) to pay the purchase price under the
put or call in prime-rate junior subordinated notes with maturities up to five
years.
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OUTSTANDING VOTING SECURITIES OF HOLDINGS
AND PRINCIPAL HOLDERS THEREOF
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the issued and outstanding shares of common stock of the Company will
be held by CAG which is a wholly-owned subsidiary of Holdings. The following
table sets forth, after giving effect to the Recapitalization, certain
information regarding the beneficial ownership of the voting securities of
Holdings by each person who beneficially owns more than 5% of any class of
Holdings voting securities and by the directors and certain executive officers
of Holdings, individually, and by the directors and executive officers of
Holdings as a group.
<TABLE>
<CAPTION>
HOLDINGS COMMON STOCK
--------------------------
<S> <C> <C>
SHARES BENEFICIALLY OWNED
--------------------------
<CAPTION>
NUMBER OF PERCENT OF
SHARES COMMON
----------- -------------
<S> <C> <C>
5% STOCKHOLDERS:
Vestar Capital Partners, III, L.P................................................. 217,285 60.8%(1)
245 Park Avenue
New York, New York 10017
A&M............................................................................... 49,995 14.0%(1)
885 Third Avenue
Suite 1700
New York, New York 10022
Societe Anonyme D'Etudes et de Participation Industrielles %(1)
et Commerciales................................................................. 24,699 6.9
114 rue de Turenne
75003 Paris
Cerebus Partners, L.P............................................................. 20,622 5.8%(1)
450 Park Avenue
New York, New York 10022
OFFICERS AND DIRECTORS
Bryan P. Marsal(2)................................................................ 49,995 14.0%
James A. Williams................................................................. 4,388 1.2%
Norman W. Alpert(3)............................................................... 217,285 60.8%
Sander M. Levy(3)................................................................. 217,285 60.8%
Daniel S. O'Connell(3)............................................................ 217,285 60.8%
J. Christopher Henderson(3)....................................................... 217,285 60.8%
Philip L. Molinari................................................................ 1,020 (4)
Robert J. Riesbeck................................................................ 2,041 (4)
Kathy D. Wilson................................................................... 2,041 (4)
William S. Sheely................................................................. 1,633 (4)
Steven J. Kaufman................................................................. 816 (4)
All executive officers and directors as a group (12 persons)(2)(3)................ 279,219 78.2%
</TABLE>
- ------------------------
(1) For a discussion of certain voting arrangements among these holders see
"Certain Transactions--Stock Ownership and Stockholders' Agreement." Each of
Vestar, A&M, Societe Anonyme D'Etudes et de Participation Industrielles et
Commerciales ("SAEPIC") and Cerebus Partners, L.P. disclaims the existence
of a group and disclaims beneficial ownership of Holdings Common Stock not
owned of record by them.
(2) Includes shares owned by A&M. Mr. Marsal disclaims the existence of a group
and disclaims beneficial ownership of the Holdings Common Stock not held by
him.
(3) Includes shares owned by Vestar. Each of Mr. Alpert, Mr. O'Connell, Mr.
Levy, and Mr. Henderson disclaims the existence of a group and disclaims
beneficial ownership of the common stock not held by him.
(4) Less than 1%.
CERTAIN TRANSACTIONS
ISSUANCE OF SHARES PURSUANT TO RECAPITALIZATION
In connection with the Plan and pursuant to the Subscription Agreement, the
Equity Investors made the Equity Investment in Holdings. Approximately $52.7
million of the Equity Investment was provided by
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Vestar in the form of a $21.3 million common equity investment in Holdings
Common Stock and a $31.4 million investment in Holdings Class C Junior Preferred
Stock. Approximately $8.6 million of the Equity Investment was provided by the
Co-Investors in the form of a $3.5 million investment in Holdings Common Stock
and a $5.1 million investment in Holdings Class C Preferred Stock. A&M and the
Management Investors provided the remaining Equity Investment in the form of a
$4.9 million and $1.8 million investment in Holdings Common Stock, respectively.
Each of these issuances of securities were made in reliance on Section 4(2) of
the Securities Act. The balance of the Holdings Common Stock will be held by
existing shareholders of Holdings.
STOCK OWNERSHIP AND STOCKHOLDERS' AGREEMENT
In the Recapitalization, (i) Vestar acquired 60.8%, (ii) A&M acquired 14% of
the outstanding Holdings Common Stock, (iii) the Management Investors acquired
in the aggregate 5.1% of the outstanding Holdings Common Stock, and (iv) the
Co-Investors acquired 10% of the outstanding Holdings Common Stock. Following
the Recapitalization, the current stockholders of Holdings (the "Original Equity
Holders") retained in the aggregate 10.1% of the outstanding Holdings Common
Stock. There can be no assurance as to how long any of Vestar, A&M, the
Management Investors, the Co-Investors or the Original Equity Holders will hold
their shares of Holdings Common Stock, although certain transfers by them may be
restricted as described below.
Vestar, A&M, the Co-Investors and the Management Investors (including any
employees of Holdings and its subsidiaries who purchase Holdings Common Stock
from, or are granted options by, Holdings following the Recapitalization) (the
foregoing parties, collectively, the "Initial Investors") and SAEPIC have, and
other Original Equity Holders may (SAEPIC and such other Original Equity
Holders, the "Participating Original Equity Holders"; together with the Initial
Investors, the "Participating Stockholders"), enter into a Stockholders'
Agreement (the "Stockholders' Agreement") which provides for, among other
things, the matters described below.
TRANSFERS OF HOLDINGS COMMON STOCK AND HOLDINGS PREFERRED STOCK. Subject to
certain limitations, transfers of Holdings securities by A&M, the Management
Investors, the Co-Investors and the Participating Original Equity Holders will
be restricted unless the transferee agrees to become a party to, and be bound
by, the Stockholders' Agreement. In addition, subject to certain limitations,
A&M, the Management Investors, the Co-Investors and the Participating Original
Equity Holders will agree that, unless a public offering of Holdings securities
(a "Holdings Public Offering") has occurred, they will not transfer any Holdings
securities for a period of five years other than as described below. Under
certain circumstances, the transfer of Holdings securities by Participating
Stockholders to their respective affiliates will be permitted.
ELECTION OF DIRECTORS. Subject to certain requirements and exceptions, each
Participating Stockholder will vote all of the Holdings Common Stock owned or
held of record by such Participating Stockholder so as to elect to the Board of
Directors of Holdings and each of its subsidiaries: (i) four designees of
Vestar, (ii) three additional designees of Vestar who are not affiliates of any
Participating Stockholder or employees of Holdings or any of its affiliates and
(iii) three designees of A&M and the Management Investors. The number of
designees to which Vestar and A&M and the Management Investors are entitled
decrease according to a formula based on the number of shares owned as compared
to the number acquired in the Recapitalization. Mr. Marsal shall be Chairman of
the Board of Directors and a designee of A&M and the Management Investors so
long as he remains Chief Executive Officer of Holdings. See "Outstanding Voting
Securities of Holdings and Principal Holders Thereof" for a discussion of the
present officers and directors and their relationship to Vestar and A&M.
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<PAGE>
OTHER VOTING MATTERS. So long as Vestar and its affiliates continue to own
at least one-half of the shares of Holdings Common Stock acquired by them in the
Recapitalization, each Participating Stockholder (excluding the Original Equity
Holders) will vote all of its Holdings Common Stock in favor of adopting and
approving any action adopted and approved by the Holdings Board of Directors.
TAG-ALONG RIGHTS. So long as no Holdings Public Offering shall have
occurred and Vestar and its affiliates continue to own at least one-third of the
shares of Holdings Common Stock acquired by them in the Recapitalization,
subject to certain exceptions, with respect to any proposed transfer of Holdings
Common Stock or Holdings Class C Junior Preferred Stock by Vestar, other than
transfers to affiliates, each other Participating Stockholder will have the
right to require that the proposed transferee purchase a corresponding
percentage of any shares of Holdings Common Stock or Holdings Class C Junior
Preferred Stock, as the case may be, owned by such Participating Stockholder at
the same price and upon the same terms and conditions.
DRAG-ALONG RIGHTS. So long as no Holdings Public Offering shall have
occurred and Vestar and its affiliates continue to own at least one-third of the
shares of Holdings Common Stock acquired by them in the Recapitalization,
subject to certain limitations, each Participating Stockholder will be
obligated, in connection with an offer by a third party to Vestar to purchase
(pursuant to a sale of stock, a merger or otherwise) all of the outstanding
shares of Holdings Common Stock or Holdings Class C Junior Preferred Stock held
by the Participating Stockholders (other than shares not purchased in order to
preserve availability of recapitalization accounting treatment), to transfer all
of its shares of Holdings Common Stock or Holdings Class C Junior Preferred
Stock to such third party on the terms of the offer accepted by Vestar.
PARTICIPATION RIGHTS. So long as no Holdings Public Offering shall have
occurred and Vestar and its affiliates continue to own at least one-third of the
shares of Holdings Common Stock acquired by them in the Recapitalization, under
certain circumstances, if Holdings or its subsidiaries propose to issue any
common stock to an Initial Investor or Participating Original Equity Holder or
to an affiliate thereof, each other Initial Investor or Participating Original
Equity Holder shall have the opportunity to purchase such Holdings Common Stock
on a pro rata basis.
RIGHT OF FIRST REFUSAL. After five years and prior to a Holdings Public
Offering, if A&M, a Management Investor, the Co-Investors or a Participating
Original Equity Holder or any of their transferees receives an offer to purchase
any Holdings securities held by it, other than from its affiliate, and such
Participating Stockholder or transferee wishes to accept such offer, then such
Participating Stockholder or transferee shall be required to offer such
securities first to Holdings (or its designee) on the same terms and conditions
(provided that Holdings may pay cash consideration equivalent to any non-cash
consideration offered) before accepting such third-party offer.
REGISTRATION RIGHTS. Subject to certain limitations, upon a written request
by Vestar, its affiliates or its transferees, Holdings will use its best efforts
to effect the registration of all or part of the Holdings Common Stock owned by
Vestar or such affiliate or transferee, provided that (i) Holdings will not be
required to effect more than one registration within any 360-day period and (ii)
no more than six such registrations may be requested, unless the requesting
party agrees to pay all costs and expenses thereof.
INCIDENTAL REGISTRATION. Under certain circumstances, if Holdings proposes
to register shares of Holdings Common Stock, it will, upon the written request
of any Participating Stockholder, use all reasonable efforts to effect the
registration of such Participating Stockholder's common stock.
TERMINATION. The Stockholders' Agreement will terminate (i) in full on the
earliest of (A) the Initial Investors and their affiliates owning less than 5%
of the outstanding Holdings Common Stock (on a fully diluted basis) or (B) the
Participating Stockholders, including their affiliates and transferees, owning
less than 50% of the outstanding Holdings Common Stock (on a fully diluted
basis) and (C) ten years after the
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<PAGE>
Recapitalization and (ii) as to any Holdings securities, on the date such
securities are sold in a public offering or pursuant to Rule 144.
OTHER RELATIONSHIPS
MANAGEMENT ADVISORY AGREEMENT. Holdings will pay a $500,000 annual
management fee to Vestar in consideration for certain advisory and consulting
services provided by Vestar (excluding investment banking or other financial
advisory services and full- or part-time employment by Holdings or any of its
subsidiaries of any employee or partner of any of Vestar and its affiliates, in
each case for which Vestar and its affiliates shall be entitled to receive
additional compensation). Holdings has agreed to reimburse Vestar for expenses
incurred in connection with, and to indemnify Vestar and its affiliates for any
liabilities arising from, such advisory and consulting services. Upon
consummation of the Offerings Vestar received a one-time transaction fee of
$3.25 million. In management's opinion, their fees reflect the benefits received
by Holdings and the Company.
MANAGEMENT LOANS. At the closing of the Recapitalization, Holdings lent
$1.35 million to A&M, and $0.9 million to the Management Investors (or to A&M,
to the extent A&M purchases shares of Holdings Common Stock allocated to the
Management Investors), in order to provide A&M and such Management Investors
with funds to be applied to a portion of the purchase price of the Holdings
Common Stock to be issued to A&M and such Management Investors in connection
with the Recapitalization. Such loans (i) are secured by pledges of the Holdings
common stock purchased by the respective borrowers, (ii) have a term of seven
years, (iii) bear interest at an annual rate of 5.75%, and (iv) are subject to
mandatory prepayment (a) with the net proceeds of any sales of Holdings Common
Stock and (b) in full in certain other events including, in the case of the
Management Investors, if the employment by Holdings and its subsidiaries of such
Management Investor terminates other than as a result of death, disability or
retirement. The terms of these loans may be on terms more favorable to
Management Investors than those obtainable from an unrelated third-party.
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<PAGE>
THE NOTE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Note Letter of Transmittal
(which together constitute the Note Exchange Offer), to exchange up to $112
million aggregate principal amount of Exchange Notes for a like aggregate
principal amount of Old Notes properly tendered on or prior to the Expiration
Date and not withdrawn as permitted pursuant to the procedures described below.
The Note Exchange Offer is being made with respect to all of the Old Notes.
As of the date of this Prospectus, $112 million aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Note Letter
of Transmittal, is first being sent on or about October 26, 1998, to all holders
of Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "Material Conditions to the Note Exchange Offer" below. The Company
currently expects that each of the conditions will be satisfied and that no
waivers will be necessary.
PURPOSE OF THE NOTE EXCHANGE OFFER
The Old Notes were issued on May 18, 1998 in a transaction exempt from the
registration requirements of the Securities Act. Accordingly, the Old Notes may
not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company
entered into the Note Registration Rights Agreement, which requires the Company
to file with the Commission a registration statement relating to the Note
Exchange Offer not later than 45 days after the date of issuance of the Old
Notes, and to use its best efforts to cause the registration statement relating
to the Note Exchange Offer to become effective under the Securities Act not
later than 160 days after the date of issuance of the Old Notes and the Note
Exchange Offer to be consummated not later than 30 days after the date of the
effectiveness of the Registration Statement (or use its best efforts to cause to
become effective by the 190th calendar day after the Issuance Date a shelf
registration statement with respect to resales of the Old Notes). A copy of the
Note Registration Rights Agreement has been filed as an exhibit to the
Registration Statement.
The Note Exchange Offer is being made by the Company to satisfy its
obligations with respect to the Note Registration Rights Agreement. The term
"holder," with respect to the Note Exchange Offer, means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder, or
any person whose Old Notes are held of record by The Depository Trust Company.
Other than pursuant to the Note Registration Rights Agreement, the Company is
not required to file any registration statement to register any outstanding Old
Notes. Holders of Old Notes who do not tender their Old Notes or whose Old Notes
are tendered but not accepted would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act, if they
wish to sell their Old Notes.
The Company is making the Note Exchange Offer in reliance on the position of
the staff of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter and there can be no assurance that the staff
would make a similar determination with respect to the Note Exchange Offer as it
has in such interpretive letters to third parties. Based on these
interpretations by the staff, the Company believes that the Exchange Notes
issued pursuant to the Note Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by a Holder (other than any
Holder who is a broker-
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<PAGE>
dealer or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. See "--Resale of Exchange Notes." Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Note Letter of Transmittal accompanying this Prospectus,
$1,000 in principal amount of Exchange Notes for each $1,000 in principal amount
of the Old Notes. The terms of the Exchange Notes are identical in all material
respects to the terms of the Old Notes for which they may be exchanged pursuant
to this Note Exchange Offer, except that the Exchange Notes will generally be
freely transferable by holders thereof and will not be subject to any covenant
regarding registration. The Exchange Notes will evidence the same indebtedness
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
The Note Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Note Exchange Offer in exchange for the
Old Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Note Exchange
Offer in exchange for Old Notes may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
that is a broker-dealer or is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any other
such person is engaging in or intends to engage in a distribution of such
Exchange Notes. Since the Commission has not considered the Note Exchange Offer
in the context of a no-action letter, there can be no assurance that the staff
of the Commission would make a similar determination with respect to the Note
Exchange Offer. Any holder who is an affiliate of the Company or who tenders in
the Note Exchange Offer for the purpose of participating in a distribution of
the Exchange Notes cannot rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. A broker-dealer may not participate in the Note Exchange Offer with
respect to Old Notes acquired other than as a result of market-making activities
or other trading activities. See "Plan of Distribution."
Interest on the Exchange Notes will accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from May 18, 1998.
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Tendering holders of the Old Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Note Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Note Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Note Exchange Offer will expire at 5:00 p.m., New York City time, on
November 24, 1998, unless the Company, in its sole discretion, has extended the
period of time for which the Note Exchange Offer is open (such date, as it may
be extended, is referred to herein as the "Expiration Date") . The Expiration
Date will be at least 20 business days after the commencement of the Note
Exchange Offer in accordance with Rule 14e-1(a) under the Exchange Act. The
Company expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Note Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice to the Exchange Agent and by timely public announcement no later
than 9:00 a.m. New York City time, on the next business day after the previously
scheduled Expiration Date. During any such extension, all Old Notes previously
tendered will remain subject to the Note Exchange Offer unless properly
withdrawn. The Company does not anticipate extending the Expiration Date.
The Company expressly reserves the right to (i) terminate or amend the Note
Exchange Offer and not to accept for exchange any Old Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "Material Conditions to the Note Exchange Offer" which have not been
waived by the Company and (ii) amend the terms of the Note Exchange Offer in any
manner which, in its good faith judgment, is advantageous to the holders of the
Old Notes, whether before or after any tender of the Notes. If any such
termination or amendment occurs, the Company will notify the Exchange Agent and
will either issue a press release or give oral or written notice to the holders
of the Old Notes as promptly as practicable.
For purposes of the Note Exchange Offer, a "business day" means any day
other than Saturday, Sunday or a date on which banking institutions are required
or authorized by New York State law to be closed, and consists of the time
period from 12:01 a.m. through 12:00 midnight, New York City time. Unless the
Company terminates the Note Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date, the Company will exchange the Exchange Notes for
the Old Notes on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Note Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Note Letter of Transmittal or a facsimile thereof (all references in
this Prospectus to the Note Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Old Notes being tendered and any required
signature guarantees and any other documents required by the Note Letter of
Transmittal, to the Exchange Agent at its address set forth below on or prior to
the Expiration Date (or complying with the procedure for book-entry transfer
described below) or (ii) complying with the guaranteed delivery procedures
described below.
THE METHOD OF DELIVERY OF OLD NOTES, NOTE LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO INSURE TIMELY DELIVERY. NO OLD NOTES OR NOTE LETTERS OF TRANSMITTAL
SHOULD BE SENT TO THE COMPANY.
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If tendered Old Notes are registered in the name of the signer of the Note
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Old Notes are to be reissued) in the name
of the registered holder (which term, for the purposes described herein, shall
include any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Exchange Notes and/or Old Notes not exchanged are to be delivered to an address
other than that of the registered holder appearing on the note register for the
Old Notes, the signature in the Note Letter of Transmittal must be guaranteed by
an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Note Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Note Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Note Exchange Offer and time will not
permit a Note Letter of Transmittal or Old Notes to reach the Exchange Agent
before the Expiration Date or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if the Exchange Agent has
received at its address set forth below on or prior to the Expiration Date, a
letter, telegram or facsimile transmission (receipt confirmed by telephone and
an original delivered by guaranteed overnight courier) from an Eligible
Institution setting forth the name and address of the tendering holder, the
names in which the Old Notes are registered and, if possible, the certificate
numbers of the Old Notes to be tendered, and stating that the tender is being
made thereby and guaranteeing that within three business days after the
Expiration Date, the Old Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Old Notes into the Exchange Agent's account at the
book-entry transfer facility), will be delivered by such Eligible Institution
together with a properly completed and duly executed Note Letter of Transmittal
(and any other required documents). Unless Old Notes being tendered by the
above-described method are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Note
Letter of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of the notice of guaranteed delivery ("Note
Notice of Guaranteed Delivery") which may be used by Eligible Institutions for
the purposes described in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Note Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Note Notice of Guaranteed Delivery
or letter, telegram or facsimile transmission to similar effect (as provided
above) from an Eligible Institution is received by the Exchange Agent. Issuances
of Exchange Notes in exchange for Old Notes tendered pursuant to a Note Notice
of Guaranteed Delivery or letter, telegram or facsimile transmission to similar
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effect (as provided above) by an Eligible Institution will be made only against
deposit of the Note Letter of Transmittal (and any other required documents) and
the tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Note Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Note Exchange Offer). The interpretation of the terms and conditions of the
Note Exchange Offer (including the Note Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of Old
Notes for exchange must be cured within such reasonable period of time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
If the Note Letter of Transmittal is signed by a person or persons other
than the registered holder or holders of Old Notes, such Old Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case signed
exactly as the name or names of the registered holder or holders appear on the
Old Notes.
If the Note Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Note Exchange Offer are
being acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, or if it is an affiliate it will
comply with the registration and prospectus requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE NOTE LETTER OF TRANSMITTAL
The Note Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Note Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not
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subject to any adverse claim. The Transferor also warrants that it will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the exchange,
assignment and transfer of tendered Old Notes or transfer ownership of such Old
Notes on the account books maintained by a book-entry transfer facility. The
Transferor further agrees that acceptance of any tendered Old Notes by the
Company and the issuance of Exchange Notes in exchange therefor shall constitute
performance in full by the Company of certain of its obligations under the Note
Registration Rights Agreement. All authority conferred by the Transferor will
survive the death or incapacity of the Transferor and every obligation of the
Transferor shall be binding upon the heirs, legal representatives, successors,
assigns, executors and administrators of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes. Each holder, other than
a broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes. Each Transferor which is a
broker-dealer receiving Exchange Notes for its own account must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. By so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company will, for a period of 90 days after the Expiration Date,
make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Old Notes to be withdrawn, (iv) include a statement that such holder
is withdrawing his election to have such Old Notes exchanged, (v) be signed by
the holder in the same manner as the original signature on the Note Letter of
Transmittal by which such Old Notes were tendered or as otherwise described
above (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee under the Indenture
register the transfer of such Old Notes into the name of the person withdrawing
the tender and (vi) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. The Exchange Agent will
return the properly withdrawn Old Notes promptly following receipt of notice of
withdrawal. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the book-entry transfer facility to be credited with the
withdrawn Old Notes or otherwise comply with the book-entry transfer facility
procedure. All questions as to the validity of notices of withdrawals, including
time of receipt, will be determined by the Company and such determination will
be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Note Exchange Offer. Any Old Notes which have
been tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon
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as practicable after withdrawal, rejection of tender or termination of the Note
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "Procedures for Tendering Old Notes" above at
any time on or prior to the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Note Exchange
Offer, the Company will accept, promptly on the Exchange Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after such
acceptance. See "Material Conditions to the Note Exchange Offer" below. For
purposes of the Note Exchange Offer, the Company shall be deemed to have
accepted properly tendered Old Notes for exchange when, as and if the Company
has given oral or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes that are accepted for
exchange pursuant to the Note Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
book-entry confirmation of such Old Notes into the Exchange Agent's account at
the book-entry transfer facility, a properly completed and duly executed Note
Letter of Transmittal and all other required documents. If any tendered Old
Notes are not accepted for any reason set forth in the terms and conditions of
the Note Exchange Offer or if Old Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged Old
Notes will be returned without expense to the tendering holder thereof (or, in
the case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the book-entry transfer facility pursuant to the book-entry transfer
procedures described above, such non-exchanged Old Notes will be credited to an
account maintained with such book-entry transfer facility) as promptly as
practicable after the expiration of the Note Exchange Offer.
MATERIAL CONDITIONS TO THE NOTE EXCHANGE OFFER
Notwithstanding any other provision of the Note Exchange Offer, or any
extension of the Note Exchange Offer, the Company shall not be required to
accept for exchange, or to issue Exchange Notes in exchange for, any Old Notes
and may terminate or amend the Note Exchange Offer (by oral or written notice to
the Exchange Agent or by a timely press release) if at any time before the
acceptance of such Old Notes for exchange or the exchange of the Exchange Notes
for such Old Notes, any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Note Exchange
Offer which, in the sole judgment of the Company, might materially impair
the ability of the Company to proceed with the Note Exchange Offer or have a
material adverse effect on the contemplated benefits of the Note Exchange
Offer to the Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Notes or the Exchange
Notes or that may materially impair the contemplated benefits of the Note
Exchange Offer to the Company; or
(c) any law, rule or regulation or applicable interpretations of the
staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the Note
Exchange Offer; or
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(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of the
Note Exchange Offer; or
(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Note Exchange Offer or
have a material adverse effect on the contemplated benefits of the Note
Exchange Offer to the Company; or
(f) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Note Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes; or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any govermental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the Note Exchange Offer, (iii) a declaration of
a banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iv) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the United
States, (v) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other leading institutions in the United
States, or (vi) in the case of any of the foregoing existing at the time of
the commencement of the Note Exchange Offer, a material acceleration or
worsening thereof.
The Company expressly reserves the right to terminate the Note Exchange
Offer and not accept for exchange any Old Notes upon the occurrence of any of
the foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Note Exchange Offer at any time prior to the Expiration
Date if any of the conditions set forth above occur. Moreover, regardless of
whether any of such conditions has occurred, the Company may amend the Note
Exchange Offer in any manner which, in its good faith judgment, is advantageous
to holders of the Old Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Note Exchange Offer for a
minimum of five business days from the date that the Company first gives notice,
by public announcement or otherwise, of such waiver or amendment, if the Note
Exchange Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended. In any such event the
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Company is required to use every reasonable effort to obtain the withdrawal of
any stop order at the earliest possible time.
The Note Exchange Offer is not conditioned upon any minimum principal amount
of Old Notes being tendered for exchange.
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the Note
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
New York, New York 10005 New York, New York 10005
BY FACSIMILE:
(212) 815-6339
Attn.: Tolutope Adeyojv
Telephone: (212) 815-2824
</TABLE>
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Note Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Note Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE NOTE LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE NOTE LETTER OF TRANSMITTAL, WILL NOT
CONSTITUTE A VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the Note
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Note Exchange Offer. The Company, however, will
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Note
Exchange Offer will be paid by the Company and are estimated in the aggregate to
be approximately $40,000, which includes fees and expenses of the Exchange
Agent, Trustee, registration fees, accounting, legal, printing and related fees
and expenses.
No person has been authorized to give any information or to make any
representations in connection with the Note Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the respective dates as of which
information is given herein. The Note Exchange Offer is not being made to (nor
will tenders be accepted from or on behalf of) holders of Old Notes in any
jurisdiction in which the making of the Note Exchange Offer or the acceptance
thereof would not be in compliance with the laws of such jurisdiction. However,
the Company may, at its discretion, take such action as it may deem necessary to
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make the Note Exchange Offer in any such jurisdiction and extend the Note
Exchange Offer to holders of Old Notes in such jurisdiction. In any jurisdiction
in which the securities laws or blue sky laws of which require the Note Exchange
Offer to be made by a licensed broker or dealer, the Note Exchange Offer is
being made on behalf of the Company by one or more registered brokers or dealers
which are licensed under the laws of such jurisdication.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Note Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Note Letter of Transmittal, or if a transfer tax is imposed
for any reason other than the exchange of Old Notes pursuant to the Note
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Note Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Note Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set forth in the legend thereon.
Old Notes not exchanged pursuant to the Note Exchange Offer will continue to
remain outstanding in accordance with their terms. In general, the Old Notes may
not be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act.
Participation in the Note Exchange Offer is voluntary, and holders of Old
Notes should carefully consider whether to participate. Holders of Old Notes are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Note Exchange Offer,
the Company will have fulfilled a covenant contained in the Note Registration
Rights Agreement. Holders of Old Notes who do not tender their Old Notes in the
Note Exchange Offer will continue to hold such Old Notes and will be entitled to
all the rights and limitations applicable thereto under the Indenture, except
for any such rights under the Note Registration Rights Agreement that by their
terms terminate or cease to have further effectiveness as a result of the making
of this Note Exchange Offer. All untendered Old Notes will continue to be
subject to the restrictions on transfer set forth in the Indenture. To the
extent that Old Notes are tendered and accepted in the Note Exchange Offer, the
trading market for untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Indenture, untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or
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otherwise. The Company has no present plan to acquire any Old Notes which are
not tendered in the Note Exchange Offer.
RESALE OF EXCHANGE NOTES
The Company is making the Note Exchange Offer in reliance on the position of
the staff of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter and there can be no assurance that the staff
would make a similar determination with respect to the Note Exchange Offer as it
has in such interpretive letters to third parties. Based on these
interpretations by the staff, the Company believes that the Exchange Notes
issued pursuant to the Note Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by a Holder (other than any
Holder who is a broker-dealer or an "affiliate" of the Company within the
meaning of Rule 405 of the Securities Act) without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
Holder's business and that such Holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such Exchange Notes. However, any
holder who is an "affiliate" of the Company or who has an arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Note Exchange Offer, or any broker-dealer who purchased
Old Notes from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act (i) could not rely on the
applicable interpretations of the staff and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act. A
broker-dealer who holds Old Notes that were acquired for its own account as a
result of market-making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Note Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Note Registration Rights Agreement and subject to
certain specified limitations therein, to register or qualify the Exchange Notes
for offer or sale under the securities or blue sky laws of such jurisdictions as
any holder of the Exchange Notes reasonably requests. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
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THE PREFERRED STOCK EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Preferred Stock Letter of
Transmittal (which together constitute the Preferred Stock Exchange Offer), to
exchange up to $50 million of New Preferred Stock for a like aggregate principal
amount of Exchangeable Preferred Stock properly tendered on or prior to the
Expiration Date and not withdrawn as permitted pursuant to the procedures
described below. The Preferred Stock Exchange Offer is being made with respect
to all of the Exchangeable Preferred Stock.
As of the date of this Prospectus, $50 million of the Exchangeable Preferred
Stock is outstanding. This Prospectus, together with the Preferred Stock Letter
of Transmittal, is first being sent on or about October 26, 1998, to all holders
of Exchangeable Preferred Stock known to the Company. The Company's obligation
to accept Exchangeable Preferred Stock for exchange pursuant to the Preferred
Stock Exchange Offer is subject to certain conditions set forth under "Material
Conditions to the Preferred Stock Exchange Offer" below. The Company currently
expects that each of the conditions will be satisfied and that no waivers will
be necessary.
PURPOSE OF THE PREFERRED STOCK EXCHANGE OFFER
The Exchangeable Preferred Stock was issued on May 18, 1998 in a transaction
exempt from the registration requirements of the Securities Act. Accordingly,
the Exchangeable Preferred Stock may not be reoffered, resold, or otherwise
transferred unless so registered or unless an applicable exemption from the
registration and prospectus delivery requirements of the Securities Act is
available.
In connection with the issuance and sale of the Exchangeable Preferred
Stock, the Company entered into the Preferred Stock Registration Rights
Agreement, which requires the Company to file with the Commission a registration
statement relating to the Preferred Stock Exchange Offer not later than 45 days
after the date of issuance of the Exchangeable Preferred Stock, and to use its
best efforts to cause the registration statement relating to the Preferred Stock
Exchange Offer to become effective under the Securities Act not later than 160
days after the date of issuance of the Exchangeable Preferred Stock and the
Preferred Stock Exchange Offer to be consummated not later than 30 days after
the date of the effectiveness of the Registration Statement (or use its best
efforts to cause to become effective by the 190th calendar day after the
Issuance Date a shelf registration statement with respect to resales of the
Exchangeable Preferred Stock). A copy of the Preferred Stock Registration Rights
Agreement has been filed as an exhibit to the Registration Statement.
The Preferred Stock Exchange Offer is being made by the Company to satisfy
its obligations with respect to the Preferred Stock Registration Rights
Agreement. The term "holder," with respect to the Preferred Stock Exchange
Offer, means any person in whose name Exchangeable Preferred Stock is registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any person whose
Exchangeable Preferred Stock is held of record by The Depository Trust Company.
Other than pursuant to the Preferred Stock Registration Rights Agreement, the
Company is not required to file any registration statement to register any
outstanding Exchangeable Preferred Stock. Holders of Exchangeable Preferred
Stock who do not tender their Exchangeable Preferred Stock or whose Exchangeable
Preferred Stock is tendered but not accepted would have to rely on exemptions to
registration requirements under the securities laws, including the Securities
Act, if they wish to sell their Exchangeable Preferred Stock.
The Company is making the Preferred Stock Exchange Offer in reliance on the
position of the staff of the Commission as set forth in certain interpretive
letters addressed to third parties in other transactions. However, the Company
has not sought its own interpretive letter and there can be no assurance that
the staff would make a similar determination with respect to the Preferred Stock
Exchange Offer as it has in
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such interpretive letters to third parties. Based on these interpretations by
the staff, the Company believes that the New Preferred Stock issued pursuant to
the Preferred Stock Exchange Offer in exchange for Exchangeable Preferred Stock
may be offered for resale, resold and otherwise transferred by a Holder (other
than any Holder who is a broker-dealer or an "affiliate" of the Company within
the meaning of Rule 405 of the Securities Act) without further compliance with
the registration and prospectus delivery requirements of the Securities Act,
provided that such New Preferred Stock is acquired in the ordinary course of
such Holder's business and that such Holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such New Preferred Stock. See
"--Resale of New Preferred Stock." Each broker-dealer that receives New
Preferred Stock for its own account in exchange for New Preferred Stock, where
such Exchangeable Preferred Stock was acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Preferred
Stock. See "Plan of Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Preferred Stock Letter of Transmittal accompanying this
Prospectus, $1,000 of New Preferred Stock for each $1,000 of the Exchangeable
Preferred Stock. The terms of the New Preferred Stock are identical in all
material respects to the terms of the Exchangeable Preferred Stock for which
they may be exchanged pursuant to this Preferred Stock Exchange Offer, except
that the New Preferred Stock will generally be freely transferable by holders
thereof and will not be subject to any covenant regarding registration. The New
Preferred Stock will evidence the same indebtedness as the Exchangeable
Preferred Stock and will be entitled to the benefits of the Indenture. See
"Description of New Preferred Stock."
The Preferred Stock Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Exchangeable Preferred Stock being tendered for
exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Preferred Stock issued pursuant to the Preferred Stock Exchange Offer in
exchange for the Exchangeable Preferred Stock may be offered for sale, resold or
otherwise transferred by any holder without compliance with the registration and
prospectus delivery provisions of the Securities Act. Instead, based on an
interpretation by the staff of the Commission set forth in a series of no-action
letters issued to third parties, the Company believes that New Preferred Stock
issued pursuant to the Preferred Stock Exchange Offer in exchange for
Exchangeable Preferred Stock may be offered for sale, resold and otherwise
transferred by any holder of such New Preferred Stock (other than any such
holder that is a broker-dealer or is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Preferred Stock is acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such New Preferred Stock and
neither such holder nor any other such person is engaging in or intends to
engage in a distribution of such New Preferred Stock. Since the Commission has
not considered the Preferred Stock Exchange Offer in the context of a no-action
letter, there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Preferred Stock Exchange Offer. Any
holder who is an affiliate of the Company or who tenders in the Preferred Stock
Exchange Offer for the purpose of participating in a distribution of the New
Preferred Stock cannot rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of New Preferred Stock.
Each broker-dealer that receives New Preferred Stock for its own account in
exchange for Exchangeable Preferred Stock, where such Exchangeable Preferred
Stock was acquired by such broker-dealer as a result of market-making activities
or other
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trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Stock. A broker-dealer may not
participate in the Preferred Stock Exchange Offer with respect to Exchangeable
Preferred Stock acquired other than as a result of market-making activities or
other trading activities. See "Plan of Distribution."
Tendering holders of the Exchangeable Preferred Stock shall not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Preferred Stock Letter of Transmittal, transfer taxes with respect to the
exchange of the Exchangeable Preferred Stock pursuant to the Preferred Stock
Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Preferred Stock Exchange Offer will expire at 5:00 p.m., New York City
time, on November 24, 1998, unless the Company, in its sole discretion, has
extended the period of time for which the Preferred Stock Exchange Offer is open
(such date, as it may be extended, is referred to herein as the "Expiration
Date") . The Expiration Date will be at least 20 business days after the
commencement of the Preferred Stock Exchange Offer in accordance with Rule
14e-1(a) under the Exchange Act. The Company expressly reserves the right, at
any time or from time to time, to extend the period of time during which the
Preferred Stock Exchange Offer is open, and thereby delay acceptance for
exchange of any Exchangeable Preferred Stock, by giving oral or written notice
to the Exchange Agent and by timely public announcement no later than 9:00 a.m.
New York City time, on the next business day after the previously scheduled
Expiration Date. During any such extension, all Exchangeable Preferred Stock
previously tendered will remain subject to the Preferred Stock Exchange Offer
unless properly withdrawn. The Company does not anticipate extending the
Expiration Date.
The Company expressly reserves the right to (i) terminate or amend the
Preferred Stock Exchange Offer and not to accept for exchange any Exchangeable
Preferred Stock not theretofore accepted for exchange upon the occurrence of any
of the events specified below under "Material Conditions to the Preferred Stock
Exchange Offer" which have not been waived by the Company and (ii) amend the
terms of the Preferred Stock Exchange Offer in any manner which, in its good
faith judgment, is advantageous to the holders of the Exchangeable Preferred
Stock, whether before or after any tender of the Preferred Stock. If any such
termination or amendment occurs, the Company will notify the Exchange Agent and
will either issue a press release or give oral or written notice to the holders
of the Exchangeable Preferred Stock as promptly as practicable.
For purposes of the Preferred Stock Exchange Offer, a "business day" means
any day other than Saturday, Sunday or a date on which banking institutions are
required or authorized by New York State law to be closed, and consists of the
time period from 12:01 a.m. through 12:00 midnight, New York City time. Unless
the Company terminates the Preferred Stock Exchange Offer prior to 5:00 p.m.,
New York City time, on the Expiration Date, the Company will exchange the New
Preferred Stock for the Exchangeable Preferred Stock on the Exchange Date.
PROCEDURES FOR TENDERING EXCHANGEABLE PREFERRED STOCK
The tender to the Company of Exchangeable Preferred Stock by a holder
thereof as set forth below and the acceptance thereof by the Company will
constitute a binding agreement between the tendering holder and the Company upon
the terms and subject to the conditions set forth in this Prospectus and in the
accompanying Preferred Stock Letter of Transmittal.
A holder of Exchangeable Preferred Stock may tender the same by (i) properly
completing and signing the Preferred Stock Letter of Transmittal or a facsimile
thereof (all references in this Prospectus to the Preferred Stock Letter of
Transmittal shall be deemed to include a facsimile thereof) and delivering the
same, together with the certificate or certificates representing the
Exchangeable Preferred Stock being tendered and any required signature
guarantees and any other documents required by the Preferred Stock
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Letter of Transmittal, to the Exchange Agent at its address set forth below on
or prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below) or (ii) complying with the guaranteed delivery
procedures described below.
THE METHOD OF DELIVERY OF EXCHANGEABLE PREFERRED STOCK, PREFERRED STOCK
LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND
RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY. NO
EXCHANGEABLE PREFERRED STOCK OR PREFERRED STOCK LETTERS OF TRANSMITTAL SHOULD BE
SENT TO THE COMPANY.
If tendered Exchangeable Preferred Stock are registered in the name of the
signer of the Preferred Stock Letter of Transmittal and the New Preferred Stock
to be issued in exchange therefor are to be issued (and any untendered
Exchangeable Preferred Stock are to be reissued) in the name of the registered
holder (which term, for the purposes described herein, shall include any
participant in The Depository Trust Company (also referred to as a "book-entry
transfer facility") whose name appears on a security listing as the owner of
Exchangeable Preferred Stock), the signature of such signer need not be
guaranteed. In any other case, the tendered Exchangeable Preferred Stock must be
endorsed or accompanied by written instruments of transfer in form satisfactory
to the Company and duly executed by the registered holder, and the signature on
the endorsement or instrument of transfer must be guaranteed by a bank, broker,
dealer, credit union, savings association, clearing agency or other institution
(each an "Eligible Institution") that is a member of a recognized signature
guarantee medallion program within the meaning of Rule 17Ad-15 under the
Exchange Act. If the New Preferred Stock and/or Exchangeable Preferred Stock not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the note register for the Exchangeable Preferred Stock, the
signature in the Preferred Stock Letter of Transmittal must be guaranteed by an
Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the
Exchangeable Preferred Stock at the book-entry transfer facility for the purpose
of facilitating the Preferred Stock Exchange Offer, and subject to the
establishment thereof, any financial institution that is a participant in the
book-entry transfer facility's system may make book-entry delivery of
Exchangeable Preferred Stock by causing such book-entry transfer facility to
transfer such Exchangeable Preferred Stock into the Exchange Agent's account
with respect to the Exchangeable Preferred Stock in accordance with the
book-entry transfer facility's procedures for such transfer. Although delivery
of Exchangeable Preferred Stock may be effected through book-entry transfer into
the Exchange Agent's account at the book-entry transfer facility, an appropriate
Preferred Stock Letter of Transmittal with any required signature guarantee and
all other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Preferred Stock Exchange Offer and time
will not permit a Preferred Stock Letter of Transmittal or Exchangeable
Preferred Stock to reach the Exchange Agent before the Expiration Date or the
procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if the Exchange Agent has received at its address set
forth below on or prior to the Expiration Date, a letter, telegram or facsimile
transmission (receipt confirmed by telephone and an original delivered by
guaranteed overnight courier) from an Eligible Institution setting forth the
name and address of the tendering holder, the names in which the Exchangeable
Preferred Stock is registered and, if possible, the certificate numbers of the
Exchangeable Preferred Stock to be tendered, and stating that the tender is
being made thereby and guaranteeing that within three business days after the
Expiration Date, the Exchangeable Preferred Stock in proper form for transfer
(or a confirmation of book-entry transfer of such Exchangeable Preferred Stock
into the Exchange Agent's account at the book-entry transfer facility), will be
delivered by such Eligible Institution together with a properly completed and
duly executed Preferred Stock Letter of Transmittal (and any other required
documents). Unless Exchangeable Preferred
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Stock being tendered by the above-described method is deposited with the
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Preferred Stock Letter of Transmittal and any other
required documents), the Company may, at its option, reject the tender. Copies
of the notice of guaranteed delivery ("Preferred Stock Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Preferred Stock Letter of
Transmittal accompanied by the Exchangeable Preferred Stock (or a confirmation
of book-entry transfer of such Exchangeable Preferred Stock into the Exchange
Agent's account at the book-entry transfer facility) is received by the Exchange
Agent, or (ii) a Preferred Stock Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) from an
Eligible Institution is received by the Exchange Agent. Issuances of New
Preferred Stock in exchange for Exchangeable Preferred Stock tendered pursuant
to a Preferred Stock Notice of Guaranteed Delivery or letter, telegram or
facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against deposit of the Preferred Stock Letter of
Transmittal (and any other required documents) and the tendered Exchangeable
Preferred Stock.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Exchangeable Preferred Stock tendered for exchange
will be determined by the Company in its sole discretion, which determination
shall be final and binding. The Company reserves the absolute right to reject
any and all tenders of any particular Exchangeable Preferred Stock not properly
tendered or not to accept any particular Exchangeable Preferred Stock which
acceptance might, in the judgment of the Company or its counsel, be unlawful.
The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Preferred Stock Exchange Offer as to any
particular Exchangeable Preferred Stock either before or after the Expiration
Date (including the right to waive the ineligibility of any holder who seeks to
tender Exchangeable Preferred Stock in the Preferred Stock Exchange Offer). The
interpretation of the terms and conditions of the Preferred Stock Exchange Offer
(including the Preferred Stock Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Exchangeable
Preferred Stock for exchange must be cured within such reasonable period of time
as the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Exchangeable Preferred Stock for
exchange, nor shall any of them incur any liability for failure to give such
notification.
If the Preferred Stock Letter of Transmittal is signed by a person or
persons other than the registered holder or holders of Exchangeable Preferred
Stock, such Exchangeable Preferred Stock must be endorsed or accompanied by
appropriate powers of attorney, in either case signed exactly as the name or
names of the registered holder or holders appear on the Exchangeable Preferred
Stock.
If the Preferred Stock Letter of Transmittal or any Exchangeable Preferred
Stock or powers of attorney are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by the Company, proper evidence satisfactory to the
Company of their authority to so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the New Preferred Stock acquired pursuant to the Preferred Stock
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such New Preferred Stock, whether or not such person is the
holder, that neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Preferred Stock and that neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company, or
if it is an
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affiliate it will comply with the registration and prospectus requirements of
the Securities Act to the extent applicable.
Each broker-dealer that receives New Preferred Stock for its own account in
exchange for Exchangeable Preferred Stock where such Exchangeable Preferred
Stock was acquired by such broker-dealer as a result of market-making activities
or other trading activities must acknowledge that it will deliver a prospectus
in connection with any resale of such New Preferred Stock. See "Plan of
Distribution."
TERMS AND CONDITIONS OF THE PREFERRED STOCK LETTER OF TRANSMITTAL
The Preferred Stock Letter of Transmittal contains, among other things, the
following terms and conditions, which are part of the Preferred Stock Exchange
Offer.
The party tendering Preferred Stock for exchange (the "Transferor")
exchanges, assigns and transfers the Exchangeable Preferred Stock to the Company
and irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Exchangeable Preferred Stock to be
assigned, transferred and exchanged. The Transferor represents and warrants that
it has full power and authority to tender, exchange, assign and transfer the
Exchangeable Preferred Stock and to acquire New Preferred Stock issuable upon
the exchange of such tendered Preferred Stock, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Exchangeable Preferred Stock, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim. The
Transferor also warrants that it will, upon request, execute and deliver any
additional documents deemed by the Exchange Agent or the Company to be necessary
or desirable to complete the exchange, assignment and transfer of tendered
Exchangeable Preferred Stock or transfer ownership of such Exchangeable
Preferred Stock on the account books maintained by a book-entry transfer
facility. The Transferor further agrees that acceptance of any tendered
Exchangeable Preferred Stock by the Company and the issuance of New Preferred
Stock in exchange therefor shall constitute performance in full by the Company
of certain of its obligations under the Preferred Stock Registration Rights
Agreement. All authority conferred by the Transferor will survive the death or
incapacity of the Transferor and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
New Preferred Stock offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such New Preferred Stock. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of New Preferred Stock. Each Transferor
which is a broker-dealer receiving New Preferred Stock for its own account must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Preferred Stock. By so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Preferred Stock received in exchange for Exchangeable
Preferred Stock where such Exchangeable Preferred Stock was acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company will, for a period of 90 days after the Expiration Date,
make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
WITHDRAWAL RIGHTS
Tenders of Exchangeable Preferred Stock may be withdrawn at any time prior
to the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
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person having tendered the Exchangeable Preferred Stock to be withdrawn (the
"Depositor"), (ii) identify the Exchangeable Preferred Stock to be withdrawn
(including the certificate number or numbers and principal amount of such
Exchangeable Preferred Stock), (iii) specify the principal amount of
Exchangeable Preferred Stock to be withdrawn, (iv) include a statement that such
holder is withdrawing his election to have such Exchangeable Preferred Stock
exchanged, (v) be signed by the holder in the same manner as the original
signature on the Preferred Stock Letter of Transmittal by which such
Exchangeable Preferred Stock were tendered or as otherwise described above
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee under the Indenture register the
transfer of such Exchangeable Preferred Stock into the name of the person
withdrawing the tender and (vi) specify the name in which any such Exchangeable
Preferred Stock is to be registered, if different from that of the Depositor.
The Exchange Agent will return the properly withdrawn Exchangeable Preferred
Stock promptly following receipt of notice of withdrawal. If Exchangeable
Preferred Stock has been tendered pursuant to the procedure for book-entry
transfer, any notice of withdrawal must specify the name and number of the
account at the book-entry transfer facility to be credited with the withdrawn
Exchangeable Preferred Stock or otherwise comply with the book-entry transfer
facility procedure. All questions as to the validity of notices of withdrawals,
including time of receipt, will be determined by the Company and such
determination will be final and binding on all parties.
Any Exchangeable Preferred Stock so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Preferred Stock Exchange
Offer. Any Exchangeable Preferred Stock which have been tendered for exchange
but which are not exchanged for any reason will be returned to the holder
thereof without cost to such holder (or, in the case of Exchangeable Preferred
Stock tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Exchangeable Preferred Stock will be credited to an
account with such book-entry transfer facility specified by the holder) as soon
as practicable after withdrawal, rejection of tender or termination of the
Preferred Stock Exchange Offer. Properly withdrawn Exchangeable Preferred Stock
may be retendered by following one of the procedures described under "Procedures
for Tendering Exchangeable Preferred Stock" above at any time on or prior to the
Expiration Date.
ACCEPTANCE OF EXCHANGEABLE PREFERRED STOCK FOR EXCHANGE; DELIVERY OF NEW
PREFERRED STOCK
Upon satisfaction or waiver of all of the conditions to the Preferred Stock
Exchange Offer, the Company will accept, promptly on the Exchange Date, all
Exchangeable Preferred Stock properly tendered and will issue the New Preferred
Stock promptly after such acceptance. See "Material Conditions to the Preferred
Stock Exchange Offer" below. For purposes of the Preferred Stock Exchange Offer,
the Company shall be deemed to have accepted properly tendered Exchangeable
Preferred Stock for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
For each share of Exchangeable Preferred Stock accepted for exchange, the
holder of such Exchangeable Preferred Stock will receive a share of New
Preferred Stock having a principal amount equal to that of the surrendered
Exchangeable Preferred Stock.
In all cases, issuance of New Preferred Stock for Exchangeable Preferred
Stock that are accepted for exchange pursuant to the Preferred Stock Exchange
Offer will be made only after timely receipt by the Exchange Agent of
certificates for such Exchangeable Preferred Stock or a timely book-entry
confirmation of such Exchangeable Preferred Stock into the Exchange Agent's
account at the book-entry transfer facility, a properly completed and duly
executed Preferred Stock Letter of Transmittal and all other required documents.
If any tendered Exchangeable Preferred Stock is not accepted for any reason set
forth in the terms and conditions of the Preferred Stock Exchange Offer or if
Exchangeable Preferred Stock is submitted for a greater principal amount than
the holder desires to exchange, such unaccepted or non-exchanged Exchangeable
Preferred Stock will be returned without expense to the tendering holder thereof
(or, in the case of Exchangeable Preferred Stock tendered by book-entry transfer
into the Exchange
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Agent's account at the book-entry transfer facility pursuant to the book-entry
transfer procedures described above, such non-exchanged Exchangeable Preferred
Stock will be credited to an account maintained with such book-entry transfer
facility) as promptly as practicable after the expiration of the Preferred Stock
Exchange Offer.
MATERIAL CONDITIONS TO THE PREFERRED STOCK EXCHANGE OFFER
Notwithstanding any other provision of the Preferred Stock Exchange Offer,
or any extension of the Preferred Stock Exchange Offer, the Company shall not be
required to accept for exchange, or to issue New Preferred Stock in exchange
for, any Exchangeable Preferred Stock and may terminate or amend the Preferred
Stock Exchange Offer (by oral or written notice to the Exchange Agent or by a
timely press release) if at any time before the acceptance of such Exchangeable
Preferred Stock for exchange or the exchange of the New Preferred Stock for such
Exchangeable Preferred Stock, any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Preferred Stock
Exchange Offer which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Preferred Stock
Exchange Offer or have a material adverse effect on the contemplated
benefits of the Preferred Stock Exchange Offer to the Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Exchangeable Preferred Stock
or the New Preferred Stock or that may materially impair the contemplated
benefits of the Preferred Stock Exchange Offer to the Company; or
(c) any law, rule or regulation or applicable interpretations of the
staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Preferred Stock Exchange Offer; or
(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of the
Preferred Stock Exchange Offer; or
(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Preferred Stock
Exchange Offer or have a material adverse effect on the contemplated
benefits of the Preferred Stock Exchange Offer to the Company; or
(f) there shall occur a change in the current interpretation by the
staff of the Commission which permits the New Preferred Stock issued
pursuant to the Preferred Stock Exchange Offer in exchange for Exchangeable
Preferred Stock to be offered for resale, resold and otherwise transferred
by holders thereof (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such New Preferred Stock is acquired in the
ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Preferred Stock; or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any govermental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the
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Preferred Stock Exchange Offer, (iii) a declaration of a banking moratorium
or any suspension of payments in respect of banks by Federal or state
authorities in the United States (whether or not mandatory), (iv) a
commencement of a war, armed hostilities or other international or national
crisis directly or indirectly involving the United States, (v) any
limitation (whether or not mandatory) by any governmental authority on, or
other event having a reasonable likelihood of affecting, the extension of
credit by banks or other leading institutions in the United States, or (vi)
in the case of any of the foregoing existing at the time of the commencement
of the Preferred Stock Exchange Offer, a material acceleration or worsening
thereof.
The Company expressly reserves the right to terminate the Preferred Stock
Exchange Offer and not accept for exchange any Exchangeable Preferred Stock upon
the occurrence of any of the foregoing conditions (which represent all of the
material conditions to the acceptance by the Company of properly tendered
Exchangeable Preferred Stock). In addition, the Company may amend the Preferred
Stock Exchange Offer at any time prior to the Expiration Date if any of the
conditions set forth above occur. Moreover, regardless of whether any of such
conditions has occurred, the Company may amend the Preferred Stock Exchange
Offer in any manner which, in its good faith judgment, is advantageous to
holders of the Exchangeable Preferred Stock.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Preferred Stock Exchange
Offer for a minimum of five business days from the date that the Company first
gives notice, by public announcement or otherwise, of such waiver or amendment,
if the Preferred Stock Exchange Offer would otherwise expire within such five
business-day period. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Exchangeable
Preferred Stock tendered, and no New Preferred Stock will be issued in exchange
for any such Exchangeable Preferred Stock, if at such time any stop order shall
be threatened or in effect with respect to the Registration Statement of which
this Prospectus constitutes a part. In any such event the Company is required to
use every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible time.
The Preferred Stock Exchange Offer is not conditioned upon any minimum
principal amount of Exchangeable Preferred Stock being tendered for exchange.
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Preferred Stock Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
New York, New York 10005 New York, New York 10005
BY FACSIMILE:
(212) 815-6339
Attn.: Tolutope Adeyojv
Telephone: (212) 815-2824
</TABLE>
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Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Preferred Stock Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE PREFERRED STOCK LETTER
OF TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE PREFERRED STOCK LETTER OF TRANSMITTAL, WILL
NOT CONSTITUTE A VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Preferred Stock Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Preferred Stock Exchange Offer.
The Company, however, will pay the Exchange Agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this and other related documents to the
beneficial owners of the Exchangeable Preferred Stock and in handling or
forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Preferred
Stock Exchange Offer will be paid by the Company and are estimated in the
aggregate to be approximately $40,000, which includes fees and expenses of the
Exchange Agent, Trustee, registration fees, accounting, legal, printing and
related fees and expenses.
No person has been authorized to give any information or to make any
representations in connection with the Preferred Stock Exchange Offer other than
those contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the respective dates as of which
information is given herein. The Preferred Stock Exchange Offer is not being
made to (nor will tenders be accepted from or on behalf of) holders of
Exchangeable Preferred Stock in any jurisdiction in which the making of the
Preferred Stock Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Preferred
Stock Exchange Offer in any such jurisdiction and extend the Preferred Stock
Exchange Offer to holders of Exchangeable Preferred Stock in such jurisdiction.
In any jurisdiction in which the securities laws or blue sky laws of which
require the Preferred Stock Exchange Offer to be made by a licensed broker or
dealer, the Preferred Stock Exchange Offer is being made on behalf of the
Company by one or more registered brokers or dealers which are licensed under
the laws of such jurisdication.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Exchangeable Preferred Stock pursuant to the Preferred Stock Exchange Offer.
If, however, certificates representing New Preferred Stock or Exchangeable
Preferred Stock for principal amounts not tendered or accepted for exchange are
to be delivered to, or are to be issued in the name of, any person other than
the registered holder of the Exchangeable Preferred Stock tendered, or if
tendered Exchangeable Preferred Stock is registered in the name of any person
other than the person signing the Preferred Stock Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Exchangeable
Preferred Stock pursuant to the Preferred Stock Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with the
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Preferred Stock Letter of Transmittal, the amount of such transfer taxes will be
billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Preferred Stock will be recorded at the carrying value of the
Exchangeable Preferred Stock as reflected in the Company's accounting records on
the date of the exchange. Accordingly, no gain or loss for accounting purposes
will be recognized by the Company upon the exchange of New Preferred Stock for
Exchangeable Preferred Stock. Expenses incurred in connection with the issuance
of the New Preferred Stock will be amortized over the term of the New Preferred
Stock.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Exchangeable Preferred Stock who do not exchange their
Exchangeable Preferred Stock for New Preferred Stock pursuant to the Preferred
Stock Exchange Offer will continue to be subject to the restrictions on transfer
of such Exchangeable Preferred Stock as set forth in the legend thereon.
Exchangeable Preferred Stock not exchanged pursuant to the Preferred Stock
Exchange Offer will continue to remain outstanding in accordance with their
terms. In general, the Exchangeable Preferred Stock may not be offered or sold
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Exchangeable Preferred Stock under the Securities Act.
Participation in the Preferred Stock Exchange Offer is voluntary, and
holders of Exchangeable Preferred Stock should carefully consider whether to
participate. Holders of Exchangeable Preferred Stock are urged to consult their
financial and tax advisors in making their own decision on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Exchangeable Preferred Stock pursuant to the terms of, this
Preferred Stock Exchange Offer, the Company will have fulfilled a covenant
contained in the Preferred Stock Registration Rights Agreement. Holders of
Exchangeable Preferred Stock who do not tender their Exchangeable Preferred
Stock in the Preferred Stock Exchange Offer will continue to hold such
Exchangeable Preferred Stock and will be entitled to all the rights and
limitations applicable thereto under the Certificate of Designations, except for
any such rights under the Preferred Stock Registration Rights Agreement that by
their terms terminate or cease to have further effectiveness as a result of the
making of this Preferred Stock Exchange Offer. All untendered Exchangeable
Preferred Stock will continue to be subject to the restrictions on transfer set
forth in the Indenture. To the extent that Exchangeable Preferred Stock are
tendered and accepted in the Preferred Stock Exchange Offer, the trading market
for untendered Exchangeable Preferred Stock could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Certificate of Designations, untendered Exchangeable Preferred Stock in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plan to acquire any Exchangeable
Preferred Stock which are not tendered in the Preferred Stock Exchange Offer.
RESALE OF NEW PREFERRED STOCK
The Company is making the Preferred Stock Exchange Offer in reliance on the
position of the staff of the Commission as set forth in certain interpretive
letters addressed to third parties in other transactions. However, the Company
has not sought its own interpretive letter and there can be no assurance that
the staff would make a similar determination with respect to the Preferred Stock
Exchange Offer as it has in such interpretive letters to third parties. Based on
these interpretations by the staff, the Company believes that the New Preferred
Stock issued pursuant to the Preferred Stock Exchange Offer in exchange for
Exchangeable Preferred Stock may be offered for resale, resold and otherwise
transferred by a Holder
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(other than any Holder who is a broker-dealer or an "affiliate" of the Company
within the meaning of Rule 405 of the Securities Act) without further compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that such New Preferred Stock is acquired in the ordinary course
of such Holder's business and that such Holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such New Preferred Stock. However,
any holder who is an "affiliate" of the Company or who has an arrangement or
understanding with respect to the distribution of the New Preferred Stock to be
acquired pursuant to the Preferred Stock Exchange Offer, or any broker-dealer
who purchased Exchangeable Preferred Stock from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act (i) could
not rely on the applicable interpretations of the staff and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act. A broker-dealer who holds Exchangeable Preferred Stock that was acquired
for its own account as a result of market-making or other trading activities may
be deemed to be an "underwriter" within the meaning of the Securities Act and
must, therefore, deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of New Preferred Stock. Each such
broker-dealer that receives New Preferred Stock for its own account in exchange
for Exchangeable Preferred Stock, where such Exchangeable Preferred Stock were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge in the Preferred Stock Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such New Preferred Stock. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Preferred Stock may not be offered or sold unless they have
been registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Preferred Stock Registration Rights Agreement and
subject to certain specified limitations therein, to register or qualify the New
Preferred Stock for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the New Preferred Stock reasonably requests. Such
registration or qualification may require the imposition of restrictions or
conditions (including suitability requirements for offerees or purchasers) in
connection with the offer or sale of any New Preferred Stock.
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DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued pursuant to an Indenture (the "Indenture")
among the Company, the Subsidiary Guarantors and The Bank of New York, as
trustee (the "Trustee"). See "Notice to Investors." The terms of the Exchange
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The
Exchange Notes are subject to all such terms, and Holders of Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. Copies
of the proposed form of Indenture and Note Registration Rights Agreement are
available as set forth below under the caption "--Additional Information." The
definitions of certain terms used in the following summary are set forth below
under the caption "--Certain Definitions." For purposes of this summary, the
term "Company" refers only to Cluett American Corp. and not to any of its
Subsidiaries.
The Exchange Notes will be general unsecured obligations of the Company and
will be subordinated in right of payment to all existing and future Senior
Indebtedness, and will rank PARI PASSU or senior in right of payment to all
existing and future subordinated indebtedness of the Company. As of June 27, the
Company had Senior Indebtedness of approximately $122.5 million (excluding $18.3
million of letters of credit). The Indenture permits the incurrence of
additional Senior Indebtedness in the future. The Exchange Notes will be
effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables and capital lease obligations) of the
Company's foreign subsidiaries. Any right of the Company to receive assets of
any of its foreign subsidiaries upon the latter's liquidation or reorganization
(and the consequent right of the Holders of the Exchange Notes to participate in
those assets) will be effectively subordinated to the claims of that
subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such subsidiary, in which case the claims of the
Company would still be subordinated to any security in the assets of such
subsidiary and any indebtedness of such subsidiary senior to that held by the
Company. As of June 27, 1998, the aggregate amount of liabilities of the
Company's foreign subsidiaries was $8.9 million.
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. Under certain circumstances, however, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will be limited in aggregate principal amount to $175.0
million and will mature on May 15, 2008. Interest on the Notes will accrue at
the rate of 10 1/8% per annum and will be payable semiannually in arrears on May
15 and November 15, commencing on November 15, 1998, to Holders of record on the
immediately preceding May 1 and November 1. Additional Exchange Notes (the
"Additional Exchange Notes") may be issued from time to time after the Exchange
Offering, subject to the provisions of the Indenture described below under the
caption "--Material Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock." The Exchange Notes offered hereby, the Parity Notes and any
Additional Exchange Notes subsequently issued under the Indenture would be
treated as a single class for all purposes under the Indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase.
Interest on the Exchange Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest and
Liquidated Damages on the Exchange Notes will be payable at the office or agency
of the Company maintained for such purpose within the City and State of New York
or, at the option of the Company,
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payment of interest may be made by check mailed to the Holders of the Notes at
their respective addresses set forth in the register of Holders of Exchange
Notes; PROVIDED that all payments of principal, premium and interest with
respect to Exchange Notes the Holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by the Company, the Company's office or agency in New
York will be the office of the Trustee maintained for such purpose. The Exchange
Notes will be issued in denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Exchange
Notes will be subordinated in right of payment, as set forth in the Indenture,
to the prior payment in full of all Senior Indebtedness, whether outstanding on
the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the Holders
of Exchange Notes will be entitled to receive any payment with respect to the
Exchange Notes, and until all Obligations with respect to Senior Indebtedness
are paid in full, any distribution to which the Holders of Exchange Notes would
be entitled shall be made to the holders of Senior Indebtedness (except that
Holders of Exchange Notes may receive and retain Permitted Junior Securities and
payments made from the trust described under the caption "--Legal Defeasance and
Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Exchange
Notes (except in Permitted Junior Securities or from the trust described under
the caption "--Legal Defeasance and Covenant Defeasance") if (i) a default in
the payment of the principal of, premium, if any, or interest on Designated
Senior Debt occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Debt that permits holders of the Designated Senior Debt as to which such
default relates to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the Company or the holders of
any Designated Senior Debt. Payments on the Exchange Notes may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default, the earlier
of the date on which such nonpayment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been accelerated. No new
period of payment blockage may be commenced unless and until (i) 360 days have
elapsed since the effectiveness of the immediately prior Payment Blockage Notice
and (ii) all scheduled payments of principal, premium, if any, and interest on
the Exchange Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
The Indenture will further require that the Company promptly notify holders
of Senior Indebtedness if payment of the Exchange Notes is accelerated because
of an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Exchange Notes may recover less ratably
than creditors of the Company who are holders of Senior Indebtedness. The
principal amount of Senior Indebtedness outstanding at June 27, 1998 was
approximately $122.5 million (excluding $18.3 million of letters of credit). The
Indenture limits, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Indebtedness, that the
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Company and its subsidiaries can incur. See "--Material Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Exchange Notes will be jointly
and severally guaranteed (the "Subsidiary Guarantees") by the Guarantors.
Certain of the Company's subsidiaries are not Guarantors. The Subsidiary
Guarantee of each Guarantor will be subordinated to the prior payment in full of
all Senior Indebtedness of such Guarantor, which include approximately $122.5
million (excluding $18.3 million of letters of credit) of Senior Indebtedness
outstanding as of June 27, 1998, and the amounts for which the Guarantors will
be liable under the guarantees issued from time to time with respect to Senior
Indebtedness. The obligations of each Guarantor under its Subsidiary Guarantee
will be limited so as not to constitute a fraudulent conveyance under applicable
law. See "Risk Factors--Fraudulent Conveyance Matters."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person) another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Exchange Notes, the Indenture and the Note Registration
Rights Agreement and (ii) immediately after giving effect to such transaction,
no Default or Event of Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
PROVIDED that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "Redemption or
Repurchase at Option of Holders--Asset Sales."
OPTIONAL REDEMPTION
The Exchange Notes will not be redeemable at the Company's option prior to
May 15, 2003. Thereafter, the Exchange Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on May 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------------------------------- -----------
<S> <C>
2003.................................................................................. 105.0625%
2004.................................................................................. 103.3750%
2005.................................................................................. 101.6875%
2006 and thereafter................................................................... 100.0000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the date of
this Prospectus, the Company may on any one or more occasions redeem up to 35%
of the aggregate principal amount of Exchange Notes originally issued under the
Indenture at a redemption price of 110.125% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the redemption date, with
the net cash proceeds of a Public Offering; PROVIDED that at least 65% of the
original aggregate principal amount of Exchange Notes remains outstanding
immediately after the occurrence of such redemption (excluding
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Exchange Notes held by the Company and its Subsidiaries); and PROVIDED, further,
that such redemption shall occur within 45 days of the date of the closing of
such Public Offering.
At any time prior to May 15, 2003, the Exchange Notes may also be redeemed,
as a whole but not in part, at the option of the Company upon the occurrence of
a Change of Control, upon not less than 30 nor more than 60 days prior notice
(but in no event may any such redemption occur more than 90 days after the
occurrence of such Change of Control) mailed by first-class mail to each
Holder's registered address, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium as of, and accrued and
unpaid interest to, the date of redemption (the "Redemption Date").
SELECTION AND NOTICE
If less than all of the Exchange Notes are to be redeemed at any time,
selection of Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchange Notes are listed, or, if the Exchange Notes are
not so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; PROVIDED that no Exchange Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of Exchange Notes to be redeemed at its registered address. Notices
of redemption may not be conditional. If any Exchange Note is to be redeemed in
part only, the notice of redemption that relates to such Exchange Note shall
state the portion of the principal amount thereof to be redeemed. A new Exchange
Note in principal amount equal to the unredeemed portion thereof will be issued
in the name of the Holder thereof upon cancellation of the original Exchange
Note. Exchange Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
Exchange Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Exchange Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Exchange Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (the "Change of Control
Payment"). Within 30 days following any Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Exchange Notes on
the date specified in such notice, which date shall be no earlier than 30 days
and no later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with any repurchase as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Exchange Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Trustee the Exchange Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Exchange Notes
or portions thereof being purchased by the Company. The Paying Agent will
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promptly mail to each Holder of Exchange Notes so tendered the Change of Control
Payment for such Exchange Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Exchange
Note equal in principal amount to any unpurchased portion of the Exchange Notes
surrendered, if any; PROVIDED that each such new Exchange Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture
provides that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will either
repay all outstanding Senior Indebtedness or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Indebtedness to permit
the repurchase of Exchange Notes required by this covenant. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Exchange Notes to require that the
Company repurchase or redeem the Exchange Notes in the event of a takeover,
recapitalization or similar transaction.
The Senior Credit Facility currently prohibits the Company from purchasing
any Exchange Notes and also provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Exchange Notes, the Company could seek the consent of its lenders to
the purchase of Exchange Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from purchasing Exchange
Notes. In such case, the Company's failure to purchase tendered Exchange Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Senior Credit Facility. In such circumstances,
the subordination provisions in the Indenture would likely restrict payments to
the Holders of Exchange Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Exchange Notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Exchange Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of (A) cash
or Cash Equivalents or (B) Qualified Proceeds; provided that the aggregate fair
market value of Qualified
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Proceeds (other than cash or Cash Equivalents), which may be received in
consideration for asset sales pursuant to this clause (ii) (B) shall not exceed
$5.0 million since the Issue Date; PROVIDED that the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Exchange Notes or any guarantee thereof) that are assumed by the transferee
of any such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (y) any
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are contemporaneously (subject
to ordinary settlement periods) converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently repay
Senior Indebtedness, (b) to acquire all or substantially all of the assets of,
or a majority of the Voting Stock of, another Permitted Business, (c) to make a
capital expenditure or (d) to acquire other long-term assets that are used or
useful in a Permitted Business. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce revolving credit borrowings or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0
million, the Company will be required to make an offer to all Holders of
Exchange Notes and all holders of other Indebtedness that is PARI PASSU with the
Exchange Notes containing provisions similar to those set forth in the Indenture
with respect to offers to purchase or redeem with the proceeds of sales of
assets (an "Asset Sale Offer") to purchase the maximum principal amount of
Exchange Notes and such other PARI PASSU Indebtedness that may be purchased out
of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture and such other PARI PASSU Indebtedness. To
the extent that any Excess Proceeds remain after consummation of an Asset Sale
Offer, or in the event the holders of the Exchange Notes and such other
indebtedness decline such Asset Sale Offer, the Company may use such Excess
Proceeds for any purpose not otherwise prohibited by the Indenture. If the
aggregate principal amount of Exchange Notes and such other PARI PASSU
Indebtedness tendered into such Asset Sale Offer surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Exchange
Notes and such other PARI PASSU Indebtedness to be purchased on a pro rata
basis. Upon completion of such offer to purchase, the amount of Excess Proceeds
shall be reset at zero.
The Senior Credit Facility currently prohibits the Company from purchasing
any Exchange Notes and also provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event an Asset Sale occurs at a time when the Company is prohibited from
purchasing Exchange Notes, the Company could seek the consent of its lenders to
the purchase of Exchange Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from purchasing Exchange
Notes. In such case, the Company's failure to purchase tendered Exchange Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Senior Credit Facility. In such circumstances,
the subordination provisions in the Indenture would likely restrict payments to
the Holders of Exchange Notes.
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MATERIAL COVENANTS
The Indenture contains the following material covenants:
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company or any of its Restricted Subsidiaries) or to the direct or indirect
holders of the Company's or any of its Restricted Subsidiaries' Equity Interests
in their capacity as such (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company and other than
dividends or distributions payable to the Company or a Restricted Subsidiary of
the Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company or other Affiliate of the Company (other than any
such Equity Interests owned by the Company or any Restricted Subsidiary of the
Company); (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Notes (other than Notes), except a payment of interest or
principal at Stated Maturity or as a mandatory or sinking fund payment; or (iv)
make any Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (v), (vii) and (ix) of the next
succeeding paragraph), is less than the sum, without duplication, of (i) 50%
of the Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter commencing
after the date of the Indenture to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, less 100% of such deficit), plus (ii) 100% of
the aggregate net cash proceeds received by the Company since the date of
the Indenture as a contribution to its common equity capital or from the
issue or sale of Equity Interests of the Company (other than Disqualified
Stock) or from the issue or sale of Disqualified Stock or debt securities of
the Company that have been converted into such Equity Interests (other than
Equity Interests (or Disqualified Stock or convertible debt securities) sold
to a Subsidiary of the Company), plus (iii) 100% of the fair market value of
any Person engaged in a Permitted Business or assets used by the Company or
a Restricted Subsidiary in a Permitted Business which such Person or assets
were acquired by the Company or any of its Restricted Subsidiaries since the
Issue Date, PROVIDED that the consideration for such Person or assets
consisted solely of Equity Interests of the Company (other than Disqualified
Stock), PLUS (iv) to the extent that any Restricted Investment that was made
after the date of the Indenture is sold for cash or otherwise liquidated or
repaid for cash or the receipt of properties used in a Permitted Business,
the lesser of (A) the net cash proceeds of such
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sale, liquidation or repayment or the fair market value (as determined in
good faith by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of property received in
exchange therefor and (B) the amount of such Restricted Investment.
The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any PARI PASSU or subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of, other Equity Interests of the Company (other than any Disqualified
Stock); PROVIDED that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption or repurchase of any Disqualified Stock of the Company or
any Restricted Subsidiary in exchange for, or out of the substantially
concurrent sale (other than to the Company or a Subsidiary of the Company) of
Disqualified Stock of the Company or such Restricted Subsidiary, respectively;
PROVIDED that: (A) the aggregate liquidation preference of such Disqualified
Stock does not exceed the aggregate liquidation preference of the Disqualified
Stock so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith); (B) such
Disqualified Stock has a final maturity date later than the final maturity date
of, and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Notes; and (C) such Disqualified Stock
is incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Disqualified Stock being extended, refinanced, renewed, replaced,
defeased or refunded; (iv) the defeasance, redemption, repurchase or other
acquisition of subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness; (v) the payment of any
dividend by a Restricted Subsidiary of the Company to the holders of its common
Equity Interests on a pro rata basis; (vi) so long as no Default or Event of
Default is continuing or would be caused thereby, the direct or indirect
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any direct or indirect parent corporation of
the Company held by any member of the Company's (or any of its Restricted
Subsidiaries') management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the Indenture;
PROVIDED that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $1.0 million in any
twelve-month period; (vii) dividends or other payments to Holdings sufficient to
enable Holdings to pay accounting, legal, corporate or reporting and
administrative expenses of Holdings incurred in the ordinary course of business
in an amount not to exceed $500,000 in any twelve-month period; (viii) the
making of loans by the Company or any of its Restricted Subsidiaries to officers
or directors of the Company; PROVIDED that the aggregate outstanding amount of
such loans shall not exceed, at any time, $2.0 million plus any such loans
outstanding on the date of the Indenture; (ix) payments to Holdings by the
Company or any Restricted Subsidiary with respect to taxes (including estimated
taxes) that are paid by Holdings on a combined, consolidated, unitary or similar
basis, to the extent that such payments do not exceed the amount that the
Company or such Restricted Subsidiary would have paid to the relevant taxing
authority if the Company or such Restricted Subsidiary filed a separate tax
return for the period in question; (x) so long as no Default or Event of Default
is continuing or would be caused thereby, the defeasance, redemption or
repurchase of any preferred stock or Disqualified Stock issued in connection
with the acquisition of assets or a Permitted Business, PROVIDED, that the
aggregate amount of such defeasance, redemption or repurchase payments shall not
exceed at any time $10.0 million; (xi) so long as no Default of Event of Default
is continuing or would be caused thereby, payments under the Management
Agreement as in effect on the Issue Date; (xii) the direct or indirect
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any direct or indirect parent corporation of
the Company held by any employee of the Company or a Restricted Subsidiary of
the Company upon the retirement of any such employee; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $400,000 less
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the amount of Restricted Payments made pursuant to clause (xiv) below in any
twelve-month period; (xiii) the repurchase, redemption or other acquisition or
retirement for value of the Preferred Stock or Exchange Debentures with Excess
Proceeds to the extent such Excess Proceeds are permitted to be used for general
corporate purposes under the covenant "--Asset Sales"; and (xiv) the direct or
indirect redemption, repurchase or other acquisition or retirement for value of
Class A Senior Preferred Stock of Holdings from Holdings' qualified employee
stock options plans, which Class A Senior Preferred Stock will either be issued
on the Issue Date or issued as dividends thereon in accordance with the
certificate of designations relating thereto as in effect on the Issue Date,
provided that such redemption, repurchase or other acquisition or retirement is
required by applicable law and such plans.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. In the
event of any such designation, all outstanding Investments owned by the Company
and its Restricted Subsidiaries in the Subsidiary so designated will be deemed
to be an Investment made as of the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant or Permitted Investments, as applicable. All such outstanding
Investments will be deemed to constitute Restricted Investments in an amount
equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. The Board of Directors may
redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if such
redesignation would not cause a Default.
The amount of all Restricted Payments (other than cash) and Qualified
Proceeds (other than cash) shall be the fair market value on the date of the
Restricted Payment (or date of receipt of Qualified Proceeds) of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be valued
by this covenant shall be determined by the Board of Directors whose resolution
with respect thereto shall be delivered to the Trustee, such determination to be
based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if such fair market value exceeds
$5.0 million. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the
Indenture. Accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms and the payment of dividends on Disqualified
Stock in the form of additional shares of the same class of Disqualified Stock
will not be deemed to be a Restricted Payment for purposes of this covenant;
PROVIDED, in each such case, that the amount thereof is included in Fixed
Charges of the Company as accrued.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of preferred stock; PROVIDED, HOWEVER, that the Company may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock and Guarantors may incur Indebtedness or issue preferred stock if the
Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 2 to 1, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
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The provisions of the first paragraph of this covenant do not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness under the Senior
Credit Facility in an aggregate principal amount not exceeding an amount
equal to $160.0 million less the aggregate amount of all Net Proceeds of
Asset Sales applied by the Company or any of its Restricted Subsidiaries to
permanently repay Indebtedness under the Senior Credit Facility pursuant to
the covenant described above under the caption "--Asset Sales";
(ii) the incurrence by Cluett Peabody Canada Inc. of Indebtedness under
the Canadian Credit Facility in an aggregate principal amount not exceeding
an amount equal to $15.0 million less the aggregate amount of all Net
Proceeds of Asset Sales applied by the Company or any of its Restricted
Subsidiaries to permanently repay revolving credit Indebtedness under the
Canadian Credit Facility pursuant to the covenant described above under the
caption "--Asset Sales";
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company of Indebtedness represented by the
Old Notes (other than any Additional Notes), the Exchange Notes and the
Parity Notes;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $10.0 million at any time outstanding;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Existing Indebtedness or
Indebtedness (other than intercompany Indebtedness) that was permitted by
the Indenture to be incurred under the first paragraph hereof or clauses
(iv), (v), (vi), (ix) or (xv) of this paragraph;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; PROVIDED, HOWEVER, that (i) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinated to
the prior payment in full in cash of all Obligations with respect to the
Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than the
Company or a Restricted Subsidiary thereof and (B) any sale or other
transfer of any such Indebtedness to a Person that is not either the Company
or a Restricted Subsidiary thereof shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (vii);
(viii) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the Indenture to be outstanding;
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in connection with the acquisition of assets or a new
Subsidiary; PROVIDED that such Indebtedness was incurred by the prior owner
of such assets or such Subsidiary prior to such acquisition by the Company
or one of its Restricted Subsidiaries and was not incurred in connection
with, or in contemplation of, such acquisition by the Company or one of it
Restricted Subsidiaries; and PROVIDED FURTHER that the principal amount (or
accreted value, as applicable) of such Indebtedness, together with any other
outstanding Indebtedness incurred pursuant to this clause (ix) and any
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (ix), does not exceed $5.0
million;
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(x) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(xi) indebtedness incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety and similar bonds and
completion guarantees provided by the Company or a Guarantor in the ordinary
course of business;
(xii) Indebtedness arising from guarantees of Indebtedness of the Company
or any Subsidiary or the agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or Capital Stock of a Restricted
Subsidiary, or other guarantees of Indebtedness incurred by any person
acquiring all or any portion of such business, assets or Capital Stock of a
Restricted Subsidiary for the purpose of financing such acquisition,
provided that the maximum aggregate liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds actually received by
the Company and its Restricted Subsidiaries in connection with such
disposition;
(xiii) Indebtedness of a Receivables Subsidiary that is not recourse to
the Company or any other Restricted Subsidiary of the Company (other than
Standard Securitization Undertakings) incurred in connection with a
Qualified Receivables Transaction;
(xiv) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, PROVIDED, HOWEVER, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (xiv); and
(xv) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (xv), not to exceed $10.0
million.
The Indenture also provides that the Company will not incur any Indebtedness
(including Permitted Debt) that is contractually subordinated in right of
payment to any other Indebtedness of the Company unless such Indebtedness is
also contractually subordinated in right of payment to the Notes on
substantially identical terms; PROVIDED, HOWEVER, that no Indebtedness of the
Company shall be deemed to be contractually subordinated in right of payment to
any other Indebtedness of the Company solely by virtue of being unsecured.
For purposes of determining compliance with this covenant, in the event that
an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xv) above as of
the date of incurrence thereof, or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Company shall, in its sole discretion, classify such item of Indebtedness on the
date of its incurrence in any manner that complies with this covenant. Accrual
of interest, accretion or amortization of original issue discount, the payment
of interest on any Indebtedness in the form of additional Indebtedness with the
same terms and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be deemed to
be an incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant; PROVIDED, in each such case, that the amount thereof
is included in Fixed Charges of the Company as accrued. For purposes of
determining compliance with any U.S. dollar-denominated restriction on the
incurrence of indebtedness, the U.S. dollar-equivalent principal amount of
indebtedness denominated in a foreign currency shall be calculated based on the
relevant currency exchange rate in effect on the date such indebtedness was
incurred.
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LIENS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien securing Indebtedness, on any asset now owned or
hereafter acquired, except Permitted Liens, unless all payments due under the
Indenture and the Notes are secured on an equal and ratable basis with the
Indebtedness so secured until such time as such is no longer secured by a Lien;
PROVIDED that if such Indebtedness is by its terms expressly subordinated to the
Notes or any Subsidiary Guarantee, the Lien securing such Indebtedness shall be
subordinate and junior to the Lien securing the Notes and the Subsidiary
Guarantees with the same relative priority as such subordinate or junior
Indebtedness shall have with respect to the Notes and the Subsidiary Guarantees.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i) (a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries. However, the
foregoing restrictions will not apply to encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the date of the
Indenture, (b) the Senior Credit Facility as in effect as of the date of the
Indenture, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, PROVIDED that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than those
contained in the Senior Credit Facility as in effect on the date of the
Indenture, (c) the Indenture and the Notes, (d) applicable law, (e) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so acquired,
PROVIDED that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indenture to be incurred, (f) customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (h) any
agreement for the sale or other disposition of a Restricted Subsidiary that
restricts distributions by that Restricted Subsidiary pending its sale or other
disposition, (i) Permitted Refinancing Indebtedness, PROVIDED that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those contained in
the agreements governing the Indebtedness being refinanced, (j) Liens securing
Indebtedness otherwise permitted to be incurred pursuant to the provisions of
the covenant described above under the caption "--Liens" that limit the right of
the Company or any of its Restricted Subsidiaries to dispose of the assets
subject to such Lien, (k) provisions with respect to the disposition or
distribution of assets or property in joint venture agreements and other similar
agreements entered into in the ordinary course of business, (l) restrictions on
cash or other deposits or net worth imposed by customers under contracts entered
into in the ordinary course of business, (m) any other security agreement,
instrument or document relating to Senior Indebtedness hereafter in effect,
provided that such encumbrances or restrictions are customary in connection with
such documents and that the terms and conditions of such encumbrances or
restrictions are no more restrictive than those encumbrances or restrictions
imposed in connection with the Senior Credit Facility as in effect on the Issue
Date, (n) any agreement relating to a sale and leaseback transaction
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or capital lease, but only on the property subject to such transaction or lease
and only to the extent that such restrictions or encumbrances are customary with
respect to a sale and leaseback transaction or capital lease, (o) the Canadian
Credit Facility as in effect as of the date of the Indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, PROVIDED that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive, taken as a whole, with
respect to such dividend and other payment restrictions than those contained in
the Canadian Credit Facility as in effect on the date of the Indenture or (p)
customary restrictions imposed on the payment of dividends by a Receivables
Subsidiary in connection with a Qualified Receivables Transaction.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not, directly or indirectly,
consolidate or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company is
the surviving corporation or the entity or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Note Registration Rights Agreement, the Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee; (iii) immediately after such transaction no Default or Event of
Default exists; and (iv) except in the case of a merger of the Company with or
into a Wholly Owned Restricted Subsidiary of the Company, the Company or the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (A) will have Consolidated
Net Worth immediately after the transaction equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction and
(B) will, immediately after such transaction after giving pro forma effect
thereto and any related financing transactions as if the same had occurred at
the beginning of the applicable four-quarter period, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described above
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing. Notwithstanding the foregoing, the following items shall not be deemed
to be Affiliate Transactions: (i) any employment agreement entered
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into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business and consistent with the past practice of the Company or such
Restricted Subsidiary, (ii) transactions between or among the Company and/or its
Restricted Subsidiaries, (iii) payment of reasonable directors fees to Persons
who are not otherwise Affiliates of the Company, (iv) any sale or other issuance
of Equity Interests (other than Disqualified Stock) of the Company, (v) payments
made pursuant to the Management Agreement in effect as of the Issue Date and
(vi) Restricted Payments that are permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments."
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
The Indenture provides that the Company will not permit any Restricted
Subsidiary which is not a Guarantor, directly or indirectly, to Guarantee or
pledge any assets to secure the payment of any other Indebtedness of the Company
unless such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for the Guarantee of the
payment of the Notes by such Restricted Subsidiary, which Guarantee shall be
senior to or PARI PASSU with such Restricted Subsidiary's Guarantee of or pledge
to secure such other Indebtedness unless such other Indebtedness is Senior
Indebtedness, in which case the Guarantee of the Notes may be subordinated to
the Guarantee of such Senior Indebtedness to the same extent as the Notes are
subordinated to such Senior Indebtedness. Notwithstanding the foregoing, any
such Guarantee by a Restricted Subsidiary of the Notes shall provide by its
terms that it shall be automatically and unconditionally released and discharged
upon any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's stock in, or all or substantially all the
assets of, such Restricted Subsidiary, which sale, exchange or transfer is made
in compliance with the applicable provisions of the Indenture. The form of such
Guarantee will be attached as an exhibit to the Indenture.
NO SENIOR SUBORDINATED DEBT
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Indebtedness of the Company and
senior in any respect in right of payment to the Notes, and (ii) no Guarantor
will incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any
Indebtedness of such Guarantor and senior in any respect in right of payment to
the Subsidiary Guarantees of such Guarantor.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to the Company and its Subsidiaries taken as a whole.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations," that describes the financial condition and results
of operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial condition and results of
operations of the Company and its Restricted Subsidiaries separate from the
financial condition and results of operations of the Unrestricted Subsidiaries
of the Company) and, with respect to the annual information only, a report
thereon by the Company's certified independent accountants and (ii) all current
reports that would be required to be filed with the Commission on Form
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8-K if the Company were required to file such reports, in each case within the
time periods specified in the Commission's rules and regulations. In addition,
following the consummation of the Exchange Offer, whether or not required by the
rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability within
the time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company and the Guarantors have agreed that, for so long as any Notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company or
any of its Restricted Subsidiaries to comply with the provisions described under
the caption "--Merger, Consolidation or Sale of Assets"; (iv) failure by the
Company or any of its Restricted Subsidiaries for 60 days after notice from the
Trustee or Holders of at least 25% in principal amount of outstanding Notes to
comply with any of its other agreements in the Indenture or the Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Restricted Subsidiaries (or the payment of
which is guaranteed by the Company or any of its Restricted Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or
any of its Restricted Subsidiaries to pay final judgments aggregating in excess
of $5.0 million, which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acing on behalf of any Guarantor, shall deny or disaffirm its obligations
under its Subsidiary Guarantee and (viii) certain events of bankruptcy or
insolvency with respect to the Company or any of its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Significant Subsidiary or any group
of Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default
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and its consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Exchange Notes, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Exchange Notes by
accepting an Exchange Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Exchange Notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages on
the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have
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occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"), (viii) release any Guarantor
from its obligations under its Guarantee or the Indenture or (ix) make any
change in the foregoing amendment and waiver provisions. In addition, any
amendment to the provisions of Article 10 of the Note Indenture (which relate to
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subordination) will require the consent of the Holders of at least 66 2/3% in
aggregate principal amount of the Notes then outstanding if such amendment would
adversely affect the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets, to provide for Additional Notes, to make any change
that would provide any additional rights or benefits to the Holders of Notes or
that does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Offering Memorandum may obtain a copy of the
Indenture and Registration Rights Agreement without charge by writing to Cluett
American Corp., 48 West 38th Street, New York, New York 10018, Attention:
General Counsel.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. The Exchange Notes initially will be represented by a single,
permanent global Exchange Note, in definitive, fully registered form without
interest coupons (the "Global Exchange Note") and will be deposited with the
Trustee as custodian for The Depository Trust Company, New York, New York
("DTC") and registered in the name of a nominee of DTC.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants (the "Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("indirect participants").
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So long as DTC, or its nominee, is the registered owner or holder of the
Exchange Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Exchange
Note for all purposes under the Indenture. No beneficial owner of an interest in
the Global Exchange Note will be able to transfer that interest except in
accordance with DTC's procedures, in addition to those provided for under the
Indenture with respect to the Exchange Notes.
Payments of the principal of, premium (if any), and interest on, the Global
Exchange Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any paying agent
will have any responsibility or liability for any aspect of the records,
relating to or payments made on account of beneficial ownership interests in the
Global Exchange Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest (including liquidated damages) on the
Global Exchange Note, will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Exchange Note as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Exchange Note held through such Participants
will be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
Participants.
Transfers between Participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Exchange Notes to
persons in states which require physical delivery of the Exchange Notes, or to
pledge such securities, such holder must transfer its interest in the Global
Exchange Note, in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
Participants to whose account the DTC interests in the Global Exchange Note are
credited and only in respect of such portion of the aggregate principal amount
of Exchange Notes as to which such Participant or Participants has or have given
such direction. However, if there is an Event of Default under the Indenture,
DTC will exchange the Global Exchange Note for Certificated Securities, which it
will distribute to its Participants.
Upon the issuance of the Global Exchange Note, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Exchange Note to the
accounts of persons who have accounts with such depositary. Ownership of
beneficial interests in the Global Exchange Note will be limited to Participants
or persons who hold interests through Participants. Ownership of beneficial
interests in the Global Exchange Note will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
Participants (with respect to interests of persons other than Participants).
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Exchange Note among Participants, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its Participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Exchange Note and a successor depositary is not appointed by the
Company within 90 days, Certificated Securities will be issued in exchange for
the Global Exchange Note.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"APPLICABLE PREMIUM" means, with respect to any Note on any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note or (ii) the excess
of (A) the present value at such Redemption Date of (1) the redemption price of
such Note at May 15, 2003 (such redemption price being set forth in the table
above) plus (2) all required interest payments due on such Note through May 15,
2003 (excluding accrued but unpaid interest), computed using a discount rate
equal to the Treasury Rate and such Redemption Rate plus 75 basis points over
(B) the principal amount of such Note, if greater.
"ASSET ACQUISITION" means (i) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Subsidiary of the Company or any Subsidiary of the Company, or
shall be merged with or into the Company or any Restricted Subsidiary of the
Company or (ii) the acquisition by the Company or any Restricted Subsidiary of
the Company of the assets of any Person which constitute all or substantially
all of the assets of such Person, any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (PROVIDED that the sale, lease (other than an
operating lease), conveyance or other disposition of all or substantially all of
the assets of the Company and its Restricted Subsidiaries taken as a whole will
be governed by the provisions of the Indenture described above under the caption
"--Change of Control" and/or the provisions described above under the caption
"--Merger, Consolidation or Sale of Assets" and not by the provisions of the
Asset Sale covenant), and (ii) the issue by any Restricted Subsidiaries of the
Company of any Equity Interests of such Restricted Subsidiary and the sale by
the Company or any of its Restricted Subsidiaries of Equity Interests of any of
the Company's Subsidiaries, in the case of either clause (i) or (ii), whether in
a single transaction or a series of related transactions (a) that have a fair
market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following items shall not be deemed
to be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned
Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the Company
or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of Equity
Interests by a Wholly Owned Restricted Subsidiary to the Company or to another
Wholly Owned Restricted Subsidiary, (iii) a Restricted Payment that is permitted
by the covenant described above under the caption "--Restricted Payments," (iv)
a disposition of Cash Equivalents or obsolete equipment in the ordinary course
of business or inventory or goods held for sale in the ordinary
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course of business; and (v) sale of accounts receivable, or participation
therein, in connection with any Qualified Receivables Transaction.
"BOARD OF DIRECTORS" means the board of directors of the Company.
"CANADIAN CREDIT FACILITY" means the Loan Agreement, dated as of August 8,
1997, between Cluett Peabody Canada Inc. and Burgess Financial Corporation
(Canada).
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating of "B" or better, (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (ii)
and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having the
highest rating obtainable from Moody's Investors Service, Inc. or Standard &
Poor's Corporation and in each case maturing within six months after the date of
acquisition and (vi) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (i)--(v) of this
definition.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than a Principal or a Related Party of a Principal (as
defined below), (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), other than the Principals and their
Related Parties, becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the
beneficial ownership of any particular "person," such "person" shall be deemed
to have beneficial ownership of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, of more than
50% of the Voting Stock of the Company (measured by voting power rather than
number of shares), (iv) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors or (v) the
Company consolidates with, or merges with or into, any Person, or any Person
consolidates with, or merges with or into, the Company, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock of the
Company is converted into or exchanged for cash, securities or other property,
other than any such transaction where the Voting Stock of the Company
outstanding immediately prior to such transaction is converted into or exchanged
for Voting Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting Stock of
such surviving or transferee Person (immediately after giving effect to such
issuance). For purposes of this
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definition, any transfer of an equity interest of an entity that was formed for
the purpose of acquiring Voting Stock of the Company will be deemed to be a
transfer of such portion of such Voting Stock as corresponds to the portion of
the equity of such entity that has been so transferred.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income, plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was deducted in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of such Person and
its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, minus (v) non-cash items increasing such
Consolidated Net Income for such period (other than items that were accrued in
the ordinary course of business) plus (vi) Reorganization Charges of such Person
and its Restricted Subsidiaries for such period to the extent that such
Reorganization Charges were deducted in computing such Consolidated Net Income,
in each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash expenses of, a
Subsidiary of the Company shall be added to Consolidated Net Income to compute
Consolidated Cash Flow of the Company only to the extent that a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction pursuant to the terms
of its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof; PROVIDED that if such Restricted Subsidiary is not a Guarantor, the
amount of such dividends or distributions includable in Consolidated Net Income
shall be limited to the Company's direct and indirect Equity Interests in such
Restricted Subsidiary, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
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"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"CREDIT FACILITIES" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facility) or
commercial paper facilities, in each case with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such receivables) or letters
of credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time. Indebtedness under
Credit Facilities and the Canadian Credit Facility outstanding on the date on
which Notes are first issued and authenticated under the Indenture shall be
deemed to have been incurred on such date in reliance on the exception provided
by clauses (i) and (ii), respectively, of the definition of Permitted Debt.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DESIGNATED SENIOR DEBT" means (i) any Senior Indebtedness in respect of the
Senior Credit Facility (ii) any other Senior Indebtedness permitted under the
Indenture the principal amount of which is $25.0 million or more and that has
been designated by the Company as "Designated Senior Debt."
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the Holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature; PROVIDED, HOWEVER, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "--Material Covenants-- Restricted Payments."
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
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"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Senior Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"FIXED CHARGES" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated
interest of such Person and its Restricted Subsidiaries that was capitalized
during such period, and (iii) any interest expense on Indebtedness of another
Person that is Guaranteed by such Person or one of its Restricted Subsidiaries
or secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the
product of (a) all dividend payments, whether or not in cash, on any series of
preferred stock of such Person or any of its Restricted Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity Interests of the
Company (other than Disqualified Stock) or to the Company or a Restricted
Subsidiary of the Company, times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referent Person or any of its Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income (adjusting for, in the case of an Asset
Acquisition or merger or consolidation permitted under "Material
Covenants--Merger, Consolidation or Sale of Assets," any operating expense or
cost reduction of such Person or the Person to be acquired which, in the good
faith estimate of management, will be eliminated or realized, as the case may
be, as a result of such Asset Acquisition, merger or consolidation) and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements
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by such other entity as have been approved by a significant segment of the
accounting profession, which are in effect from time to time.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"GUARANTORS" means (i) each domestic Subsidiary of the Company on the Issue
Date and (ii) any other subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture, and their respective successors
and assigns.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency swap agreements, interest rate
or currency cap agreements and interest rate or currency collar agreements and
(ii) other agreements or arrangements designed to protect such Person against
fluctuations in interest rates or currency.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments."
"ISSUE DATE" means the date of original issuance of the Old Notes.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
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"MANAGEMENT AGREEMENT" means that certain Management Agreement dated the
Issue Date among the Principals, the Company and Holdings, as in effect on the
Issue Date.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, (i) excluding, however, (x) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (y) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss) and (ii) less the aggregate amount of all Restricted Payments made by
such Person or any of its Restricted Subsidiaries for such period pursuant to
clause (vii) of the second paragraph of the covenant described above under the
caption "--Restricted Payments" times one minus the then combined federal, state
and local statutory tax rate of such plans.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Senior Indebtedness) secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender, and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Exchange Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICERS' CERTIFICATE" means a certificate signed by (i) the Chairman of
the Board of Directors, the Chief Executive Officer, the President or a Vice
President of the Company and (ii) the Chief Financial Officer or the Secretary
of the Company, which certificate shall comply with the Indenture.
"PERMITTED BUSINESS" means the business of the Company and its Restricted
Subsidiaries conducted on the Issue Date and businesses reasonably related or
ancillary thereto.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company in
a Person, if as a result of such Investment (i) such Person becomes a Restricted
Subsidiary of the Company or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of the
Company; (d) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Repurchase at the Option
of Holders--Asset Sales" or any
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transaction not constituting an Asset Sale by reason of the $1.0 million
threshold contained in the definition thereof; (e) any acquisition of assets
solely in exchange for the issuance of Equity Interests (other than Disqualified
Stock) of the Company; (f) Hedging Obligations entered into in the ordinary
course of the Company's or its Restricted Subsidiaries' businesses and otherwise
in compliance with the Indenture; (g) Investments in securities of trade
creditors or customers received in settlement of obligations or pursuant to any
plan of reorganization or similar arrangement upon the bankruptcy of insolvency
of such trade creditors of customers; (h) Investments by the Company or a
Restricted Subsidiary in a Receivables Subsidiary or any Investment by a
Receivables Subsidiary in any other Person, in each case, in connection with a
Qualified Receivables Transaction; and (i) other Investments in any Person
having an aggregate fair market value (measured on the date each such Investment
was made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (i) that are at
the time outstanding, not to exceed the greater of (A) $10.0 million and (B) 5%
of Total Assets.
"PERMITTED JUNIOR SECURITIES" means Equity Interests in the Company or debt
securities that are subordinated to all Senior Indebtedness (and any debt
securities issued in exchange for Senior Indebtedness) to substantially the same
extent as, or to a greater extent than, the Notes are subordinated to Senior
Indebtedness pursuant to Article 10 of the Indenture.
"PERMITTED LIENS" means (i) Liens on assets of the Company and the
Guarantors securing Senior Indebtedness of the Company and the Guarantors; (ii)
Liens in favor of the Company; (iii) Liens on property of a Person existing at
the time such Person is merged with or into or consolidated with the Company or
any Restricted Subsidiary of the Company; PROVIDED that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company; (iv) Liens on property existing at the time of acquisition
thereof by the Company or any Restricted Subsidiary of the Company, PROVIDED
that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (v) Liens to secure Indebtedness
(including Capital Lease Obligations) permitted by clause (vi) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness; (vii)
Liens existing on the date of the Indenture; (viii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, PROVIDED that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (ix)
Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of
Unrestricted Subsidiaries; (x) Liens of the Company or a Wholly Owned Restricted
Subsidiary on assets of any Restricted Subsidiary of the Company; (xi) Liens
securing Permitted Refinancing Indebtedness which is incurred to refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which has been incurred in accordance with the provisions of the Indenture,
PROVIDED, HOWEVER, that such Liens (A) are not materially less favorable to the
Holders and are not materially more favorable to the lienholders with respect to
such Liens than the Liens in respect of the Indebtedness being refinanced and
(B) do not extend to or cover any property or assets of the Company or any of
its Restricted Subsidiaries not securing the Indebtedness so refinanced; (xii)
Liens incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security or similar obligations, including any lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations (exclusive
of obligations for the payment of borrowed money); (xiii) judgment Liens not
giving rise to an Event of Default so long as such Lien is adequately bonded and
any appropriate legal proceedings which may have been duly initiated for the
review of such judgment shall not have been finally terminated or the period
within which such proceedings may be initiated shall not have expired;
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(xiv) easements, rights-of-way, zoning restrictions and other similar charges or
encumbrances in respect of real property not interfering in any material respect
with the ordinary conduct of the business of the company or any of its
Restricted Subsidiaries; (xv) any interest or title of a lessor under any lease,
whether or not characterized as capital or operating; provided that such Liens
do not extend to any property or assets which is not leased property subject to
such lease; (xvi) Liens upon specific items of inventory or other goods and
proceeds of any Person Securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate the
purchase, shipment or storage of such inventory or other goods; (xvii) Liens
securing reimbursement obligations with respect to letters of credit which
encumber documents and other property relating to such letters of credit and
products and proceeds thereof; (xviii) Liens encumbering deposits made to secure
obligations arising from statutory, regulatory, contractual, or warranty
requirements of the Company or any of its Restricted Subsidiaries, including
rights of offset and set-off; (xix) Liens securing Hedging Obligations which
Hedging Obligations relate to Indebtedness that is otherwise permitted under the
Indenture; (xx) leases or subleases granted to others not interfering in any
material respect with the business of the Company or its Restricted
Subsidiaries; (xxi) Liens arising out of consignment or similar arrangements for
the sale of goods entered into by the Company or any Restricted Subsidiary in
the ordinary course of business; (xxii) Liens or assets of a Receivables
Subsidiary arising on connection with a Qualified Receivables Transaction;
(xxiii) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary; and (xxiv) Liens securing Acquired Debt incurred in
accordance with clause (ix) of the covenant described under "--Material
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;"
PROVIDED, that (A) such Liens secured such Acquired Debt at the time of and
prior to the incurrence of such Acquired Debt by the Company or a Restricted
Subsidiary of the Company and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Debt by the Company or a
Restricted Subsidiary of the Company and (B) such Liens do not extend to or
cover any property or assets of the Company or any of its Restricted
Subsidiaries other than the property or assets that secured the Acquired Debt
prior to the time such Indebtedness became Acquired Debt of the Company or a
Restricted Subsidiary of the Company and are not more favorable to the
lienholders than those securing the Acquired Debt prior to the incurrence of
such Acquired Debt by the Company or a Restricted Subsidiary of the Company.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
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"PERSON" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"PRINCIPALS" means Vestar Capital Partners III, L.P.
"PUBLIC OFFERING" means one (and not more than one) offering of common stock
(other than Disqualified Stock) of the Company or any direct or indirect parent
corporation of the Company (a "Parent Corporation"), pursuant to an effective
registration statement filed with the Commission in accordance with the
Securities Act, other than an offering pursuant to Form S-8 (or any successor
thereto), provided, that in the case of an Initial Public Offering by a Parent
Corporation, such Parent Corporation contributes to the common equity of the
Company the portion of the net cash proceeds thereof necessary to pay the
aggregate redemption price of the Notes to be redeemed in connection therewith.
"PURCHASE MONEY NOTE" means a promissory note evidencing a line of credit,
or evidencing other Indebtedness owed to the Company or any Restricted
Subsidiary in connection with a Qualified Receivables Transaction, which note
shall be repaid from cash available to the maker of such note, other than
amounts required to be established as reserves pursuant to agreement, amounts
paid to investors in respect of interest, principal and other amounts owing to
such investors and amounts paid in connection with the purchase of newly
generated receivables.
"QUALIFIED PROCEEDS" means any of the following or any combination of the
following: (i) cash, (ii) Cash Equivalents, (iii) long-term assets that are used
or useful in a Permitted Business and (iv) the Capital Stock of any Person
engaged primarily in a Permitted Business if, in connection with the receipt by
the company or any Restricted Subsidiary of the Company of such Capital Stock,
(a) such Person becomes a Wholly-Owned Restricted Subsidiary and a Guarantor or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or any Wholly-Owned Restricted Subsidiary of the Company that is a
Guarantor.
"QUALIFIED RECEIVABLES TRANSACTION" means any transaction or series of
transactions that may be entered into by the Company or any Restricted
Subsidiary pursuant to which the Company or any Restricted Subsidiary may sell,
convey or otherwise transfer to (a) a Receivables Subsidiary (in the case of a
transfer by the Company or any Restricted Subsidiary) and (b) any other Person
(in the case of a transfer by a Receivables Subsidiary), or may grant a security
interest in, any accounts receivable (whether now existing or arising in the
future) of the Company or any Restricted Subsidiary and any asset related
thereto including, without limitation, all collateral securing such accounts
receivable, all contracts and all guarantees or other obligations in respect of
such accounts receivable, proceeds of such accounts receivable and other assets
which are customarily transferred, or in respect of which security interests are
customarily granted, in connection with asset securitization transactions
involving accounts receivable.
"RECEIVABLES SUBSIDIARY" means a Wholly Owned Restricted Subsidiary (other
than a Guarantor) which engages in no activities other than in connection with
the financing of accounts receivables and which is designated by the Board of
Directors of the Company (as provided below) as a Receivables Subsidiary (a) no
portion of the Indebtedness or any other Obligations (contingent or otherwise)
of which (i) is guaranteed by the Company or any other Restricted Subsidiary
(excluding guarantees of obligations (other than the principal of, and interest
on, Indebtedness) pursuant to Standard Securitization Undertakings), (ii) is
recourse to or obligates the Company or any other Restricted Subsidiary in any
way other than pursuant to Standard Securitization Undertakings or (iii)
subjects any property or asset of the Company or any other Restricted
Subsidiary, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to Standard Securitization
Undertakings, (b) with which neither the Company nor any other Restricted
Subsidiary has any material contract, agreement, arrangement or understanding
(except in connection with a Purchase Money Note or Qualified Receivables
Transaction) other than on terms no less favorable to the Company or such other
Restricted Subsidiary than those that might be obtained at the time from persons
that are not Affiliates of the Company, other than fees payable in the ordinary
course of business in connection with servicing accounts receivable, and (c) to
which neither the Company nor any
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other Restricted Subsidiary has any obligation to maintain or preserve such
entity's financial condition or cause such entity to achieve certain levels of
operating results. Any such designation by the Board of Directors of the Company
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the resolution of the Board of Directors of the Company giving effect to such
designation and an Officers' Certificate certifying, to the best of such
officers' knowledge and belief after consulting with counsel, that such
designation complied with the foregoing conditions.
"RELATED PARTY" with respect to any Principal means (A) any controlling
stockholder, Subsidiary, or spouse or immediate family member (in the case of an
individual) of such Principal or (B) any trust, corporation, partnership or
other entity, the beneficiaries, stockholders, partners, owners or Persons
beneficially holding a majority interest of which consist of such Principal
and/or such other Persons referred to in the immediately preceding clause (A).
"REORGANIZATION CHARGES" means (i) up to $3.3 million of facility closing
and re-engineering costs incurred by the Company and its Subsidiaries prior to
the Issue Date, (ii) up to $550,000 of losses incurred by the Company and its
Subsidiaries prior to the Issue Date associated with (x) the Canadian retail
operations of the Company and its Subsidiaries and (y) the Mexican and
Guatemalan operations of the Company and its Subsidiaries, (iii) up to $4.0
million of bankruptcy reorganization costs incurred by the Company and its
Restricted Subsidiaries prior to the Issue Date and (iv) the costs and expenses
of the Company and its Subsidiaries incurred in connection with the Transaction,
in each case calculated in accordance with GAAP on a consolidated basis.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary
"SENIOR CREDIT FACILITY" means the credit agreement to be entered into on or
prior to the Issue Date by and among the Company, NationsBanc Montgomery
Securities LLC, as arranger and syndication agent, certain lending parties
thereto and NationsBank, N.A., as agent, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, as such credit agreements and/or related documents may be
amended, restated, supplemented, renewed, replaced or otherwise modified from
time to time whether or not with the same agent, trustee, representative lenders
or holders, and, subject to the proviso to the next succeeding sentence,
irrespective of any changes in the terms and conditions thereof. Without
limiting the generality of the foregoing, the term "Senior Credit Facility"
shall include any amendment, amendment and restatement, renewal, extension,
restructuring, supplement or modification to any Senior Credit Facility and all
refundings, refinancings and replacements of any Senior Credit Facility
including any agreement (i) extending the maturity of any Indebtedness incurred
thereunder or contemplated thereby, (ii) adding or deleting borrowers or
guarantors thereunder, so long as the borrowers and issuers hereunder include
one or more of the Company and its Restricted Subsidiaries and their respective
successors and assigns, or (iii) increasing the amount of Indebtedness incurred
thereunder or available to be borrowed thereunder.
"SENIOR INDEBTEDNESS" means (i) all Indebtedness outstanding under Credit
Facilities and all Hedging Obligations with respect thereto, (ii) any other
Indebtedness permitted to be incurred by the Company or a Guarantor under the
terms of the Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in right
of payment to the Notes and (iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (w) any liability for federal, state, local or other taxes owed
or owing by the Company, (x) any Indebtedness of the Company to any of its
Restricted Subsidiaries or other Affiliates, (y) any trade payables or (z) any
Indebtedness that is incurred in violation of the Indenture.
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"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"STANDARD SECURITIZATION UNDERTAKINGS" means representations, warranties,
covenants and indemnities entered into by the Company or any Restricted
Subsidiary which are reasonably customary in an accounts receivable transaction.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"TOTAL ASSETS" means, with respect to any Person, the total consolidated
assets of such Person and its Restricted Subsidiaries, as shown on the most
recent balance sheet of such Person.
"TREASURY RATE" means, as of any Redemption Date, the yield to maturity as
of such Redemption Date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to the Redemption Date (or, if such Statistical Release is
no longer published, any publicly available source of similar market data)) most
nearly equal to the period from the Redemption Date to May 15, 2003; PROVIDED,
HOWEVER, that if the period from the Redemption Date to May 15, 2003 is less
than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not a party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company; (c) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (d) has not guaranteed
or otherwise directly or indirectly provided credit support for any Indebtedness
of the Company or any of its Restricted Subsidiaries. Any such designation by
the Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Material Covenants--Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant
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described under the caption "--Material Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant). The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under the covenant described under the caption "-- Material
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period, and (ii) no Default or Event of
Default would be in existence following such designation
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
or Disqualified Stock at any date, the number of years obtained by dividing (i)
the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal or liquidation preference, as applicable, including payment at
final maturity, in respect thereof, by (b) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment, by (ii) the then outstanding principal amount or liquidation
preference, as applicable, of such Indebtedness or Disqualified Stock.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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DESCRIPTION OF THE NEW PREFERRED STOCK
AND EXCHANGE DEBENTURES
DESCRIPTION OF NEW PREFERRED STOCK
GENERAL
The terms of the New Preferred Stock are set forth in the Certificate of
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (the "Certificate of Designations"). The following summary
of the material terms of the Certificate of Designations does not purport to be
complete and is qualified in its entirety by reference to the Company's Amended
and Restated Certificate of Incorporation, which includes the Certificate of
Designations, including the definitions therein of certain terms used below. The
definitions of certain terms used in the following summary are set forth below
under the caption "--Certain Definitions." For purposes of this summary, the
term "Company" refers only to Cluett American Corp. and not to any of its
Subsidiaries.
Pursuant to the Certificate of Designations, 500,000 shares of New Preferred
Stock with a liquidation preference of $100 per share (the "Liquidation
Preference") will be authorized for issuance in the Preferred Stock Offering.
The New Preferred Stock will, when issued, be fully paid and nonassessable, and
Holders thereof will have no preemptive rights in connection therewith.
The Liquidation Preference of the New Preferred Stock is not necessarily
indicative of the price at which the New Preferred Stock will actually trade at
or after the time of their issuance, and the New Preferred Stock may trade at
prices below its Liquidation Preference. The market price of the New Preferred
Stock can be expected to fluctuate with changes in the financial markets and
economic conditions, the financial condition and prospects of the Company and
other factors that generally influence the market prices of securities. See
"Risk Factors."
The transfer agent for the New Preferred Stock will be The Bank of New York
unless and until a successor is selected by the Company (the "Transfer Agent").
The offices of the Transfer Agent are located in New York City at 101 Barclay
Street, New York, New York 10005.
As of the date of the Certificate of Designations, all of the Company's
Subsidiaries were Restricted Subsidiaries. Under certain circumstances, however,
the Company will be able to designate current or future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many
of the restrictive covenants set forth in the Certificate of Designations.
RANKING
Except as otherwise described below and as to the Exchangeable Preferred
Stock, the New Preferred Stock will rank senior in right of payment to all
classes or series of capital stock of the Company as to dividends and upon
liquidation, dissolution or winding up of the Company. The Certificate of
Designations provides that the Company may not, after the Issue Date, without
the consent of the Holders of at least a majority of the then outstanding New
Preferred Stock, authorize, create (by way of reclassification or otherwise) or
issue any class or series of capital stock of the Company ranking on a parity
with the New Preferred Stock ("Parity Securities") or any obligation or security
convertible or exchangeable into or evidencing a right to purchase, stock of any
class or series of Parity Securities. The Certificate of Designations provides
that the Company may not, without the consent of the Holders of at least
two-thirds of the then outstanding New Preferred Stock, authorize, create (by
way of reclassification or otherwise) or issue any class or series of capital
stock of the Company ranking senior to the New Preferred Stock ("Senior
Securities") other than, in each case, Disqualified Stock incurred in accordance
with the Certificate of Designations or any obligation or security convertible
or exchangeable into or evidencing a
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right to purchase, stock of any class or series of Senior Securities other than
Disqualified Stock incurred in accordance with the Certificate of Designations.
DIVIDENDS
The Holders of the New Preferred Stock will be entitled to receive, when, as
and if dividends are declared by the Board of Directors out of funds of the
Company legally available therefor, cumulative preferential dividends from the
date of issuance of the New Preferred Stock accruing at the rate per share of
12 1/2% per annum, payable semiannually in arrears on May 15 and November 15 of
each year (each, a "Dividend Payment Date") commencing on November 15, 1998, to
the Holders of record as of the preceding May 1 and November 1 (each, a "Record
Date"). On or prior to May 15, 2003, the Company may, at its option, pay
dividends in cash or in additional fully-paid and non-assessable shares of New
Preferred Stock (including fractional stock) having an aggregate Liquidation
Preference equal to the amount of such dividends. Thereafter, dividends may be
paid in cash only. It is not expected that the Company will pay any dividends in
cash for the period ending on or prior to May 15, 2003. Dividends payable on the
New Preferred Stock will be computed on the basis of a 360-day year of twelve
30-day months and will be deemed to accrue on a daily basis. On any scheduled
Dividend Payment Date, the Company may, at its option, but subject to certain
conditions, exchange all but not less than all of the shares of New Preferred
Stock for the Company's 12 1/2% Subordinated Exchange Debentures due 2010 (the
"Exchange Debentures"). For a discussion of certain federal income tax
considerations relevant to the payment of dividends on the New Preferred Stock,
see "Certain Federal Income Tax Considerations-- Dividends on New Preferred
Stock."
Dividends on the New Preferred Stock accrue whether or not the Company has
earnings or profits, whether or not there are funds legally available for the
payment of such dividends and whether or not dividends are declared. Dividends
will accumulate to the extent they are not paid on the Dividend Payment Date for
the semiannual period to which they relate. Accumulated unpaid dividends will
accrue dividends at the rate of 12 1/2% per annum. The Certificate of
Designations provides that the Company will take all actions required or
permitted under Delaware law to permit the payment of dividends on the New
Preferred Stock.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding New Preferred Stock with
respect to any dividend period unless all dividends for all preceding dividend
periods have been declared and paid upon, or declared and a sufficient sum set
apart for the payment of such dividend upon, all outstanding New Preferred
Stock. Unless full cumulative dividends on all outstanding New Preferred Stock
due for all past dividend periods shall have been declared and paid, or declared
and a sufficient sum for shares for the payment thereof set apart, then: (i) no
dividend (other than a dividend payable solely in stock of any class of stock
ranking junior to the New Preferred Stock as to the payment of dividends and as
to rights in liquidation, dissolution or winding up of the affairs of the
Company ("Junior Securities")) shall be declared or paid upon, or any sum set
apart for the payment of dividends upon, any stock of Junior Securities; (ii) no
other distribution shall be declared or made upon, or any sum set apart for the
payment of any distribution upon, any stock of Junior Securities; (iii) no stock
of Junior Securities shall be purchased, redeemed or otherwise acquired or
retired for value (excluding an exchange for stock of other Junior Securities)
by the Company or any of its Restricted Subsidiaries; (iv) no warrants, rights,
calls or options to purchase any Junior Securities shall be directly or
indirectly issued by the Company or any of its Restricted Subsidiaries; and (v)
no monies shall be paid into or set apart or made available for a sinking or
other like fund for the purchase, redemption or other acquisition or retirement
for value of any stock of Junior Securities by the Company or any of its
Restricted Subsidiaries. Holders of the New Preferred Stock will not be entitled
to any dividends, whether payable in cash, property or stock, in excess of the
full cumulative dividends as herein described.
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In addition, the Senior Credit Facility and the Indenture contain
restrictions on the ability of the Company to pay dividends on the New Preferred
Stock. Any future credit agreements or other agreements relating to Indebtedness
to which the Company becomes a party may contain similar restrictions and
provisions. See "Risk Factors--Dividend Restrictions on New Preferred Stock and
Exchange Debentures" and "--Holding Company Structure."
VOTING RIGHTS
Holders of record of the Preferred Stock have no voting rights, except as
required by law and as provided in the Certificate of Designations. The
Certificate of Designations provides that upon (i) the accumulation of accrued
and unpaid dividends on the outstanding Preferred Stock in an amount equal to
three or more consecutive full semiannual dividends; (ii) failure by the Company
or any of its Restricted Subsidiaries to comply with (x) the provisions
described under the caption "--Merger, Consolidation or Sale of Assets" or (y)
any mandatory redemption obligation with respect to the Preferred Stock; (iii)
failure by the Company or any of its Restricted Subsidiaries to comply with any
of the other covenants or agreements set forth in the Certificate of
Designations and the continuance of such failure for 60 consecutive days or
more; or (iv) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries (each of the events described in
clauses (i), (ii), (iii) and (iv) being referred to as a "Voting Rights
Triggering Event"), then the number of members of the Company's Board of
Directors will be immediately and automatically increased by two, and the
Holders of a majority of the outstanding Preferred Stock, voting as a separate
class, will be entitled to elect two members to the Board of Directors of the
Company. Voting rights arising as a result of a Voting Rights Triggering Event
will continue until such time as all dividends in arrears on the Preferred Stock
are paid in full and all other Voting Rights Triggering Events have been cured
or waived.
In addition, as provided above under "--Ranking," the Company may not
authorize, create (by way of reclassification or otherwise) or issue (i) any
Parity Securities, or any obligation or security convertible into or evidencing
the right to purchase any Parity Securities, without the affirmative vote or
consent of the Holders of a majority of the then outstanding Preferred Stock;
and (ii) any Senior Securities (other than Disqualified Stock), or any
obligation or security convertible into or evidencing the right to purchase
Senior Securities (other than Disqualified Stock), without the affirmative vote
or consent of the Holders of two-thirds of the then outstanding Preferred Stock,
in each case, voting as a separate class.
EXCHANGE
The Company may, at its option on any Dividend Payment Date, exchange all
but not less than all of the shares of then outstanding New Preferred Stock for
Exchange Debentures; PROVIDED that (i) on the date of such exchange there are no
accumulated and unpaid dividends on the New Preferred Stock (including the
dividend payable on such date) or other contractual impediments to such
exchange; (ii) there shall be legally available funds sufficient therefor; (iii)
such exchange would be permitted under the terms of the Indenture and,
immediately after giving effect to such exchange, no Default or Event of Default
(each as defined in the Exchange Indenture) would exist under the Exchange
Indenture, no default or event of default would exist under the Senior Credit
Facility or the Indenture and no default or event of default under any material
instrument governing Indebtedness outstanding at the time would be caused
thereby; (iv) the Exchange Indenture has been qualified under the Trust
Indenture Act, if such qualification is required at the time of exchange; and
(v) the Company shall have delivered a written opinion to the Exchange Trustee
(as defined herein) to the effect that all conditions to be satisfied prior to
such exchange have been satisfied. The Senior Credit Facility prohibits and the
Indenture restricts the Company's ability to exchange of the New Preferred Stock
for the Exchange Debentures. See "Description of Certain Indebtedness" and
"Description of Exchange Notes."
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding New Preferred Stock will be entitled to receive, subject to the
second succeeding sentence of this paragraph, $1.00 principal
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amount of Exchange Debentures for each $1.00 of the aggregate Liquidation
Preference, plus, without duplication, accrued and unpaid dividends. The
Exchange Debentures will be issued in registered form, without coupons. For a
description of the Exchange Debentures, see "--Description of the Exchange
Debentures." The Exchange Debentures will be issued in principal amounts of
$1,000 and integral multiples thereof to the extent possible, and will also be
issuable in principal amounts less than $1,000 so that each holder of Preferred
Stock will receive interests representing the entire amount of Exchange
Debentures to which such holder's share of Preferred Stock entitle such holder;
PROVIDED that the Company may pay cash in lieu of issuing an Exchange Debenture
having a principal amount less than $1,000. Notice of the intention to exchange
will be sent by or on behalf of the Company not more than 60 days nor less than
30 days prior to the Exchange Date, by first class mail, postage prepaid, to
each Holder of record of New Preferred Stock at its registered address. In
addition to any information required by law or by the applicable rules of any
exchange upon which New Preferred Stock may be listed or admitted to trading,
such notice will state: (i) the Exchange Date; (ii) the place or places where
certificates for such stock are to be surrendered for exchange, including any
procedures applicable to exchanges to be accomplished through book-entry
transfers; and (iii) that dividends on the New Preferred Stock to be exchanged
will cease to accrue on the Exchange Date. If notice of any exchange has been
properly given, and if on or before the Exchange Date the Exchange Debentures
have been duly executed and authenticated and an amount in cash or additional
New Preferred Stock (as applicable) equal to all accrued and unpaid dividends,
if any, thereon to the Exchange Date has been deposited with the Transfer Agent,
then on and after the close of business on the Exchange Date, the New Preferred
Stock to be exchanged will no longer be deemed to be outstanding and may
thereafter be issued in the same manner as the other authorized but unissued
preferred stock, but not as New Preferred Stock, and all rights of the Holders
thereof as stockholders of the Company will cease, except the right of the
Holders to receive upon surrender of their certificates the Exchange Debentures
and all accrued and unpaid dividends, if any, thereon to the Exchange Date.
REDEMPTION
MANDATORY REDEMPTION
On May 15, 2010 (the "Mandatory Redemption Date"), the Company will be
required to redeem (subject to the legal availability of funds therefor) all
outstanding New Preferred Stock at a price in cash equal to the Liquidation
Preference thereof, plus accrued and unpaid dividends, if any, to the date of
redemption. The Company will not be required to make sinking fund payments with
respect to the New Preferred Stock. The Certificate of Designations provides
that the Company will take all actions required or permitted under Delaware law
to permit such redemption.
The Senior Credit Facility and the Indenture currently restrict the
redemption of the New Preferred Stock and additional indebtedness may restrict
the Company's ability to redeem the New Preferred Stock in the future. See
"Description of Other Indebtedness" and "Description of the Exchange Notes."
OPTIONAL REDEMPTION
The New Preferred Stock may not be redeemed at the option of the Company on
or prior to May 15, 2003. The New Preferred Stock may be redeemed, in whole or
in part, at the option of the Company on or after May 15, 2003, at the
redemption prices specified below (expressed as percentages of the Liquidation
Preference thereof), in each case, together with accrued and unpaid dividends,
if any, to the date of
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redemption, upon not less than 30 nor more than 60 days' prior written notice,
if redeemed during the 12-month period commencing on May 15 of each of the years
set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION RATE
- ------------------------------------------------------------------ ----------------
<S> <C>
2003.............................................................. 106.250%
2004.............................................................. 105.000%
2005.............................................................. 103.750%
2006.............................................................. 102.500%
2007.............................................................. 101.250%
2008 and thereafter............................................... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the Issue
Date, the Company may, on any one or more occasions, redeem the New Preferred
Stock, in whole or in part, at the redemption prices set forth below (expressed
as percentages of the Liquidated Preference thereof), in each case, together
with accrued and unpaid dividends, if any, to the redemption date, with the net
proceeds of one or more Equity Offerings if redeemed during the 12-month period
commencing on May 15 of each of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION RATE
- ------------------------------------------------------------------ ----------------
<S> <C>
1998.............................................................. 108.000%
1999.............................................................. 110.000%
2000.............................................................. 112.000%
</TABLE>
In the event of a redemption pursuant to the above paragraph (except in the
case of a redemption of all the New Preferred Stock), at least $25.0 million in
aggregate Liquidation Preference of New Preferred Stock shall remain outstanding
immediately after the occurrence of each such redemption and any such redemption
occur within 45 days of the date of closing of such Equity Offering.
At any time prior to May 15, 2003, the New Preferred Stock may also be
redeemed, as a whole but not in part, at the option of the Company upon the
occurrence of a Change of Control, upon not less than 30 nor more than 60 days
prior notice (but in no event may any such redemption occur more than 90 days
after the occurrence of such Change of Control) mailed by first-class mail to
each Holder's registered address, at a redemption price equal to a percentage of
the Liquidation Preference equal to the sum of 100% and the dividend rate then
in effect with respect to the New Preferred Stock, and accrued and unpaid
dividends, if any, to, the date of redemption.
The Senior Credit Facility and the Indenture currently restrict the
redemption of the New Preferred Stock and additional indebtedness may restrict
the Company's ability to redeem the New Preferred Stock in the future. See
"Description of Certain Indebtedness" and "Description of Capital Stock--New
Preferred Stock."
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company or reduction or decrease in its capital stock
resulting in a distribution of assets to the holders of any class or series of
the Company's capital stock (a "reduction or decrease in capital stock"), each
Holder of the New Preferred Stock will be entitled to payment out of the assets
of the Company available for distribution of an amount equal to the Liquidation
Preference per New Preferred Stock held by such Holder, plus accrued and unpaid
dividends, if any, to the date fixed for liquidation, dissolution, winding up or
reduction or decrease in capital stock, before any distribution is made on any
Junior Securities, including, without limitation, common stock of the Company.
After payment in full of the Liquidation Preference and all accrued dividends,
if any, to which Holders of New Preferred Stock are entitled, such Holders will
not be entitled to any further participation in any distribution of assets of
the Company.
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However, neither the voluntary sale, conveyance, exchange or transfer (for cash,
stock of stock, securities or other consideration) of all or substantially all
of the property or assets of the Company nor the consolidation or merger of the
Company with or into one or more corporations will be deemed to be a voluntary
or involuntary liquidation, dissolution or winding up of the Company or
reduction or decrease in capital stock, unless such sale, conveyance, exchange
or transfer shall be in connection with a liquidation, dissolution or winding up
of the business of the Company or reduction or decrease in capital stock.
The Certificate of Designations does not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the New Preferred
Stock, although such Liquidation Preference will be substantially in excess of
the par value of the New Preferred Stock.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of New Preferred
Stock will have the right to require the Company to repurchase all or any part
of such Holder's New Preferred Stock pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate Liquidation Preference thereof plus accrued and unpaid dividends, if
any, thereon to the date of purchase (the "Change of Control Payment"). Within
30 days following any Change of Control, the Company will mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase all outstanding New Preferred Stock on the
date specified in such notice, which date shall be no earlier than 30 days and
no later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), pursuant to the procedures required by the Certificate
of Designations and described in such notice. The Company will comply with the
requirements of Rule 14e-l under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the New Preferred Stock as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all New Preferred Stock or portions thereof
properly tendered pursuant to the Change of Control Offer, (2) deposit with the
Paying Agent an amount equal to the Change of Control Payment in respect of all
New Preferred Stock or portions thereof so tendered and (3) deliver or cause to
be delivered to the Transfer Agent the New Preferred Stock so accepted together
with an Officers' Certificate stating the aggregate Liquidation Preference of
the New Preferred Stock or portions thereof being purchased by the Company. The
Paying Agent will promptly mail to each Holder of New Preferred Stock so
tendered the Change of Control Payment for such New Preferred Stock, and the
Transfer Agent will promptly authenticate and mail (or cause to be transferred
by book entry) to each Holder a new certificate representing the New Preferred
Stock equal in Liquidation Preference amount to any unpurchased portion of the
New Preferred Stock surrendered, if any. The Certificate of Designations
provides that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will either
repay all outstanding Senior Indebtedness or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Indebtedness to permit
the repurchase of New Preferred Stock required by this covenant. If the Company
fails to make such repayment or obtain such consents within such time period, it
will result in a Voting Rights Triggering Event, but the obligation to commence
and consummate a Change of Control Offer will be suspended until such repayment
is made or such consents are obtained. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Certificate of Designations are applicable.
Except as described above with respect to a Change of Control, the Certificate
of Designations does not contain provisions that permit the Holders of the New
Preferred Stock to require that the Company repurchase or redeem the New
Preferred Stock in the event of a takeover, recapitalization or similar
transaction.
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The Senior Credit Facility currently prohibits the Company from purchasing
any New Preferred Stock prior to its maturity, and will also provide that
certain change of control events with respect to the Company would constitute a
default thereunder. The Indenture also contains restrictions on the ability of
the Company to repurchase New Preferred Stock. Any future credit agreements or
other agreements relating to Senior Indebtedness to which the Company becomes a
party may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing New
Preferred Stock, the Company could seek the consent of its lenders to the
purchase of New Preferred Stock or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing New
Preferred Stock. In such case, the Holders of a majority of the outstanding New
Preferred Stock, voting as a separate class, may be entitled to elect two
members to the Board of Directors of the Company. Such members shall cease to
serve for such periods thereafter as the Company shall no longer be so
prohibited and shall have paid the amounts required hereunder.
The Company is not required to make a Change of Control Offer to the Holders
of New Preferred Stock upon a Change of Control if a third party makes the
Change of Control Offer described above in the manner, at the times and
otherwise in compliance with the requirements set forth in the Certificate of
Designations and purchases all New Preferred Stock validly tendered and not
withdrawn under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of New Preferred Stock to require the
Company to repurchase such New Preferred Stock as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and, its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
The Certificate of Designations provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, consummate an Asset Sale
unless (i) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of (A) cash or Cash Equivalents or (B) Qualified Proceeds; provided
that the aggregate fair market value of Qualified Proceeds (other than cash or
Cash Equivalents), which may be received in consideration for asset sales
pursuant to this clause (ii) (B) shall not exceed $5.0 million since the Issue
Date; PROVIDED that the amount of (x) any liabilities (as shown on the Company's
or such Restricted Subsidiary's most recent balance sheet), of the Company or
any Restricted Subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the New Preferred Stock or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Restricted
Subsidiary from further liability and (y) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are contemporaneously (subject to ordinary settlement periods)
converted by the Company or such Restricted Subsidiary into cash (to the extent
of the cash received), shall be deemed to be cash for purposes of this
provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently repay
Indebtedness, or (b) to acquire all or substantially all of the assets of, or a
majority of the Voting Stock of, another Permitted Business, (c) to make a
capital expenditure or (d) to acquire other long-term assets that are used or
useful in a Permitted
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Business. Pending the final application of any such Net Proceeds, the Company
may temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Certificate of
Designations. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0
million, the Company will be required to make an offer to all Holders of New
Preferred Stock (an "Asset Sale Offer") to redeem the maximum outstanding New
Preferred Stock that may be purchased out of the Excess Proceeds, at a price in
cash equal to the Liquidation Preference thereof, plus accrued and unpaid
dividends, if any, to the date of purchase, in accordance with the procedures
set forth in the Certificate of Designations. To the extent that any Excess
Proceeds remain after consummation of an Asset Sale Offer, the Company may use
such Excess Proceeds for general corporate purposes. If the aggregate
Liquidation Preference of New Preferred Stock surrendered by Holders thereof
exceeds the amount of Excess Proceeds the Trustee shall select the New Preferred
Stock to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
The Senior Credit Facility and the Indenture currently restrict the
Company's ability to purchase any New Preferred Stock. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event an Asset Sale occurs at a time when the Company is prohibited from
purchasing New Preferred Stock, the Company could seek the consent of its
lenders to the purchase of New Preferred Stock or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing New Preferred Stock. In such case, the Holders of a majority of the
outstanding New Preferred Stock, voting as a separate class, may be entitled to
elect two members to the Board of Directors of the Company. Such members shall
cease to serve for such periods thereafter as the Company shall no longer be
prohibited and shall have sold the amounts required thereunder.
MATERIAL COVENANTS
The Certificate of Designations contains the following material covenants:
RESTRICTED PAYMENTS
The Certificate of Designations provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other payment or distribution on account
of the Company's or any of its Restricted Subsidiaries' Parity Securities or
Junior Securities (including, without limitation, any payment in connection with
any merger or consolidation involving the Company or any of its Restricted
Subsidiaries) or to the direct or indirect holders of the Company's or any of
its Restricted Subsidiaries' Parity Securities or Junior Securities in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company and other than
dividends or distributions payable to the Company or a Restricted Subsidiary of
the Company); (ii) make any payment on, purchase, redeem or otherwise acquire or
retire for value any Parity Securities or Junior Securities of the Company or
any direct or indirect parent of the Company or other Affiliate of the Company
(other than any such Parity Securities or Junior Securities owned by the Company
or any Restricted Subsidiary of the Company); or (iii) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iii) above being collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to such Restricted Payment:
(a) no Voting Rights Triggering Event shall have occurred and be
continuing or would occur as a consequence thereof, and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter
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period, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt to Cash Flow Ratio test set forth in the
first paragraph of the covenant described below under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (ii), (iii), (v) and (vii) of the next succeeding paragraph), is
less than the sum, without duplication, of (i) 50% of the Consolidated Net
Income of the Company for the period (taken as one accounting period) from
the beginning of the first fiscal quarter commencing after Issue Date to the
end of the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less 100%
of such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Company since the Issue Date as a contribution to its common equity
capital or from the issue or sale of Equity Interests of the Company (other
than Disqualified Stock) or from the issue or sale of Disqualified Stock or
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or convertible
debt securities) sold to a Subsidiary of the Company), plus (iii) 100% of
the fair market value of any Person engaged in a Permitted Business or
assets used by the Company or a Restricted Subsidiary in a Permitted
Business which such Person or assets were acquired by the Company or any of
its Restricted Subsidiaries since the Issue Date PROVIDED that the
consideration for such Person or assets consisted solely of Equity Interests
of the Company (other than Disqualified Stock), PLUS (iv) to the extent that
any Restricted Investment that was made after the Issue Date is sold for
cash or otherwise liquidated or repaid for cash or the receipt of properties
used in a Permitted Business, the lesser of (A) the net cash proceeds of
such sale, liquidation or repayment or the fair market value (as determined
in good faith by a resolution of the Board of Directors) of property
received in exchange therefor and (B) the amount of such Restricted
Investment.
The foregoing provisions do not prohibit: (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Certificate of Designations; (ii) the redemption, repurchase, retirement or
other acquisition of any Equity Interests of the Company in exchange for, or out
of the proceeds of, the substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of, other Equity Interests of the Company
(other than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase, retirement
or other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (iii) the payment of any dividend by a Restricted Subsidiary of the
Company to the holders of its common Equity Interests on a pro rata basis; (iv)
so long as no Voting Rights Triggering Event has occurred and is continuing or
would be caused thereby, the direct or indirect repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any direct or indirect parent corporation of the Company held by any member of
the Company's (or any of its Restricted Subsidiaries') management pursuant to
any management equity subscription agreement or stock option agreement in effect
as of Issue Date; PROVIDED that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$1.0 million in any twelve-month period; (v) dividends or other payments to
Holdings sufficient to enable Holdings to pay accounting, legal, corporate or
reporting and administrative expenses of Holdings incurred in the ordinary
course of business in an amount not to exceed $500,000 in any twelve-month
period; (vi) the making of loans by the Company or any of its Restricted
Subsidiaries to officers or directors of the Company; provided that the
aggregate outstanding amount of such loans shall not exceed, at any time, $2.0
million plus any such loans outstanding on the Issue Date; (vii) payments to
Holdings by the Company or any Restricted Subsidiary with respect to taxes
(including estimated taxes) that are paid by Holdings on a combined,
consolidated, unitary or similar basis, to the extent that such payments do not
exceed the amount that the Company or such Restricted Subsidiary would have paid
to the relevant taxing authority if the Company or such Restricted Subsidiary
filed a separate tax return for the period in question; (viii) so
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long as no Voting Rights Triggering Event has occurred and is continuing or
would be caused thereby, the defeasance, redemption or repurchase of any
preferred stock issued in connection with the acquisition of assets or a
Permitted Business, PROVIDED, that the aggregate amount of such defeasance,
redemption or repurchase payments shall not exceed at any time $10.0 million;
(ix) so long as no Voting Rights Triggering Event is continuing or would be
caused thereby, payments under the Management Agreement as in effect on the
Issue Date; (x) the direct or indirect repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any direct or indirect parent corporation of the Company held by any employee of
the Company or a Restricted Subsidiary of the Company upon the retirement of any
such employee; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $400,000 less
the amount of Restricted Payments made pursuant to clause (xi) below during such
period in any twelve-month period; and (xi) the direct or indirect redemption,
repurchase or other acquisition or retirement for value of Class A Senior
Preferred Stock of Holdings from Holdings' qualified employee stock options
plans, which Class A Senior Preferred Stock will either be issued on the Issue
Date or issued as dividends thereon in accordance with the certificate of
designations relating thereto as in effect on the Issue Date, provided that such
redemption, repurchase or other acquisition or retirement is required by
applicable law and such plans.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. In the
event of any such designation, all outstanding Investments owned by the Company
and its Restricted Subsidiaries in the Subsidiary so designated will be deemed
to be an Investment made as of the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant or Permitted Investments, as applicable. All such outstanding
Investments will be deemed to constitute Restricted Investments in an amount
equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. The Board of Directors may
redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if such
redesignation would not cause a Default.
The amount of all Restricted Payments (other than cash) and Qualified
Proceeds (other than cash) shall be the fair market value on the date of the
Restricted Payment (or the date of receipt of Qualified Proceeds) of the
asset(s) or securities proposed to be transferred or issued by the Company or
such Restricted Subsidiary, as the case may be, pursuant to the Restricted
Payment. The fair market value of any assets or securities that are required to
be valued by this covenant shall be determined by the Board of Directors (whose
resolutions with respect thereto shall be delivered to the Transfer Agent), such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $5.0 million. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Board of Directors and the Transfer
Agent an Officers' Certificate stating that such Restricted Payment is permitted
and setting forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed, together with a copy of any fairness
opinion or appraisal required by the Certificate of Designations.
Accrual of interest, accretion or amortization of original issue discount,
the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms and the payment of dividends on Disqualified
Stock in the form of additional shares of the same class of Disqualified Stock
will not be deemed to be Restricted Payment for purposes of this covenant;
PROVIDED, in each such case, that the amount thereof is included in Fixed
Charges of the Company as accrued.
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INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Certificate of Designations provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt) and that the Company will
not issue any Disqualified Stock and will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock; PROVIDED, HOWEVER, that the
Company may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock and Restricted Subsidiaries may incur Indebtedness and issue
preferred stock, if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2 to 1, determined on a pro forma basis (including a pro forma application
of the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, at the
beginning of such four-quarter period.
The provisions of the first paragraph of this covenant do not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness under the Senior
Credit Facility in an aggregate principal amount not exceeding an amount
equal to $160.0 million LESS the aggregate amount of all Net Proceeds of
Asset Sales applied by the Company or any of its Restricted Subsidiaries to
permanently repay Indebtedness under the Senior Credit Facility pursuant to
the covenant described above under the caption "--Asset Sales";
(ii) the incurrence by Cluett Peabody Canada Inc. of Indebtedness under
the Canadian Credit Facility in an aggregate principal amount not exceeding
an amount equal to $15.0 million LESS the aggregate amount of all Net
Proceeds of Asset Sales applied by the Company or any of its Restricted
Subsidiaries to permanently repay revolving credit Indebtedness under the
Canadian Credit Facility pursuant to the covenant described above under the
caption "--Asset Sales";
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness, including the Notes and the Guarantees thereof;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $10.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Existing Indebtedness or
Indebtedness (other than intercompany Indebtedness) that was permitted by
the Certificate of Designations to be incurred under the first paragraph
hereof or clauses (iv), (v), (viii) or (xv) of this paragraph;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; PROVIDED, HOWEVER, that (A) any subsequent issuance
or transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than the Company or a Restricted Subsidiary thereof
and (B) any sale or other transfer of any such Indebtedness to a Person that
is not either the Company or a Restricted Subsidiary thereof shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (vi);
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(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Certificate of
Designations to be outstanding;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of assets or
a new Subsidiary; PROVIDED that such Indebtedness was incurred by the prior
owner of such assets or such Subsidiary prior to such acquisition by the
Company or one of its Restricted Subsidiaries and was not incurred in
connection with, or in contemplation of, such acquisition by the Company or
one of it Restricted Subsidiaries; and PROVIDED FURTHER that the principal
amount (or accreted value, as applicable) of such Indebtedness, together
with any other outstanding Indebtedness incurred pursuant to this clause
(viii) and any Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause
(viii), does not exceed $5.0 million;
(ix) the guarantee by the Company or any Restricted Subsidiary of the
Company of Indebtedness of the Company or any Restricted Subsidiary of the
Company that was permitted to be incurred by another provision of this
covenant;
(x) indebtedness incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety and similar bonds and
completion guarantees provided by the Company in the ordinary course of
business;
(xi) Indebtedness arising from guarantees of Indebtedness of the Company
or any Restricted Subsidiary or the agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or Capital Stock of
a Restricted Subsidiary, or other guarantees of Indebtedness incurred by any
person acquiring all or any portion of such business, assets or Capital
Stock of a Restricted Subsidiary for the purpose of financing such
acquisition, provided that the maximum aggregate liability in respect of all
such Indebtedness shall at no time exceed the gross proceeds actually
received by the Company and its Restricted Subsidiaries in connection with
such disposition;
(xii) Indebtedness of a Receivables Subsidiary that is not recourse to
the Company or any other Restricted Subsidiary of the Company (other than
Standard Securitization Undertakings) incurred in connection with a
Qualified Receivables Transaction;
(xiii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, PROVIDED, HOWEVER, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (xiii); and
(xiv) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount (or
accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (xiv), not to exceed $10.0
million.
For purposes of determining compliance with this covenant, in the event that
an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiv) above as of
the date of incurrence thereof, or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Company shall, in its sole discretion, classify such item of Indebtedness on the
date of its incurrence in any manner that complies with this covenant. Accrual
of interest, accretion or amortization of original issue discount, the payment
of interest on any Indebtedness in the form of additional Indebtedness with the
same terms and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be deemed to
be an incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant; PROVIDED, in each such case, that the amount thereof
is included in Fixed Charges of the
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Company as accrued. For purposes of determining compliance with any U.S.
dollar-denominated restriction on the incurrence of indebtedness, the U.S.
dollar-equivalent principal amount of indebtedness denominated in a foreign
currency shall be calculated based on the relevant currency exchange rate in
effect on the date such indebtedness was incurred.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Certificate of Designations provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i) (a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries. However, the foregoing restrictions will not apply to encumbrances
or restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the Issue Date, (b) the Senior Credit Facility as in effect as of the
Issue Date, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
PROVIDED that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more restrictive,
taken as a whole, with respect to such dividend and other payment restrictions
than those contained in the Senior Credit Facility as in effect on the Issue
Date, (c) the Indenture and the Notes, (d) applicable law, (e) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, PROVIDED that,
in the case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred, (f) customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, (h) any agreement for the sale or other
disposition of a Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending its sale or other disposition, (i) Permitted
Refinancing Indebtedness, PROVIDED that the restrictions contained in the
agreements governing such Permitted Refinancing Indebtedness are no more
restrictive, taken as a whole, than those contained in the agreements governing
the Indebtedness being refinanced, (j) Liens securing Indebtedness otherwise
permitted to be incurred pursuant to the provisions of the covenant described
above under the caption "--Limitations on Incurrence of Indebtedness" that limit
the right of the Company or any of its Restricted Subsidiaries to dispose of the
assets subject to such Lien, (k) provisions with respect to the disposition or
distribution of assets or property in joint venture agreements and other similar
agreements entered into in the ordinary course of business, (l) restrictions on
cash or other deposits or net worth imposed by customers under contracts entered
into in the ordinary course of business, (m) any other security agreement,
instrument or document relating to Senior Indebtedness hereafter in effect,
provided that such encumbrances or restrictions are customary in connection with
such documents and that the terms and conditions of such encumbrances or
restrictions are no more restrictive than those encumbrances or restrictions
imposed in connection with the Senior Credit Facility as in effect on the Issue
Date, (n) any agreement relating to a sale and leaseback transaction or capital
lease, but only on the property subject to such transaction or lease and only to
the extent that such restrictions or encumbrances are customary with respect to
a sale and leaseback transaction or capital lease or (o) the Canadian Facility
as in effect as of the Issue Date, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, PROVIDED that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, taken as a whole, with respect to such
dividend and other payment restrictions than those
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contained in the Canadian Facility as in effect on the Issue Date or (p)
customary restrictions imposed on the payment of dividends by a Receivables
Subsidiary in connection with a Qualified Receivables Transaction.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Certificate of Designations provides that the Company may not, directly
or indirectly, consolidate or merge with or into (whether or not the Company is
the surviving corporation), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions, to another corporation, Person or entity unless
(i) the Company is the surviving corporation or the entity or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of the Company under the Preferred Stock, the Certificate of
Designations and the Preferred Stock Registration Rights Agreement; (iii)
immediately after such transaction no Voting Rights Triggering Event exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Restricted Subsidiary of the Company, the Company or the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company), or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, immediately after such
transaction after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "-- Incurrence
of Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Certificate of Designations provides that the Company will not, and will
not permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to
the Holders (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $1.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing. Notwithstanding the foregoing, the following items shall not be deemed
to be Affiliate Transactions: (i) any employment agreement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of business
and consistent with the past practice of the Company or such Restricted
Subsidiary, (ii) transactions between or among the Company and/or its Restricted
Subsidiaries, (iii) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company, (iv) any sale or other issuance of Equity
Interests (other than Disqualified Stock) of the Company, (v) payments made
pursuant to the Management Agreement in effect as of the Issue Date and (vi)
Restricted Payments that are
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permitted by the provisions of the Certificate of Designations described above
under the caption "--Restricted Payments."
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to the Company and its Subsidiaries taken as a whole.
REPORTS
The Certificate of Designations provides that, whether or not required by
the rules and regulations of the Commission, so long as any Preferred Stock is
outstanding, the Company will furnish to the Holders of Preferred Stock (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations," that describes the
financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations. In addition, following the consummation of the Exchange Offer,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the Commission
for public availability within the time periods specified in the Commission's
rules and regulations (unless the Commission will not accept such a filing) and
make such information available to securities analysts and prospective investors
upon request. In addition, the Company has agreed that, for so long as any
Preferred Stock remains outstanding, it will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Preferred Stock in accordance with the
Certificate of Designations if the requirements of the Transfer Agent for such
transfer or exchange are met. The Transfer Agent may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Certificate of Designations.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Certificate of
Designations or the Preferred Stock may be amended or supplemented with the
consent of the Holders of at least a majority in aggregate Liquidation
Preference of the Preferred Stock then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Preferred Stock), and any existing default or compliance
with any provision of the Certificate of Designations or the Preferred Stock may
be waived with the consent of the Holders of a majority in aggregate Liquidation
Preference of the then outstanding Preferred Stock (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Preferred Stock).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Preferred Stock held by a non-consenting Holder): (i) alter
the voting rights with respect to the Preferred Stock or reduce the number of
shares of Preferred Stock whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the Liquidation Preference of or change the Mandatory
Redemption
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Date of any Preferred Stock or alter the provisions with respect to the
redemption of the Preferred Stock (other than provisions relating to the
covenant described above under the caption "--Change of Control"), (iii) reduce
the rate of or change the time for payment of dividends on any Preferred Stock,
(iv) waive a default in the payment of dividends on the Preferred Stock, (v)
make any Preferred Stock payable in any form other than that stated in the
Certificate of Designations, (vi) waive a redemption payment with respect to any
Preferred Stock (other than a payment required by the covenant described above
under the caption "--Change of Control") or (vii) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of
Preferred Stock, the Company may (to the extent permitted by Delaware law) amend
or supplement the Certificate of Designations to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Preferred Stock in addition to or
in place of certificated Preferred Stock or to make any change that would
provide any additional rights or benefits to the Holders of Preferred Stock or
that does not adversely affect the legal rights under the Certificate of
Designations of any such Holder.
DESCRIPTION OF THE EXCHANGE DEBENTURES
GENERAL
The Exchange Debentures will, if and when issued, be issued pursuant to an
Indenture (the "Exchange Indenture") between the Company and The Bank of New
York, as trustee (the "Exchange Trustee"). The terms of the Exchange Debentures
include those stated in the Exchange Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture
Act"). The Exchange Debentures are subject to all such terms, and Holders of
Exchange Debentures are referred to the Exchange Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the Exchange Indenture does not purport to be complete and is
qualified in its entirety by reference to the Exchange Indenture, including the
definitions therein of certain terms used below. Copies of the proposed form of
Exchange Indenture are available as set forth below under the caption
"--Additional Information." The definitions of certain terms used in the
following summary are set forth below under the caption "--Certain Definitions."
For purposes of this summary, the term "Company" refers only to Cluett American
Corp. and not to any of its Subsidiaries.
The Exchange Debentures will be general unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future Senior
Indebtedness, and will rank PARI PASSU or senior in right of payment to all
existing and future subordinated indebtedness of the Company. As of June 27,
1998, the Company had Exchange Debenture Senior Indebtedness of approximately
$247.5 million (excluding $18.3 million of letters of credit). The Exchange
Indenture will permit the incurrence of additional Exchange Debenture Senior
Indebtedness in the future. The Exchange Debentures will be effectively
subordinated to all indebtedness and other liabilities and commitments
(including trade payables and capital lease obligations) of the Company's
subsidiaries. Any right of the Company to receive assets of any of its
subsidiaries upon the latter's liquidation or reorganization (and the consequent
right of the Holders of the Exchange Debentures to participate in those assets)
will be effectively subordinated to the claims of that subsidiary's creditors,
except to the extent that the Company is itself recognized as a creditor of such
subsidiary, in which case the claims of the Company would still be subordinated
to any security in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by the Company. As of June 27, 1998, the
aggregate amount of liabilities of the Company and its subsidiaries was $301.6
million. See "Risk Factors--Holding Company Structure."
As of the Issue Date, all of the Company's Subsidiaries were Restricted
Subsidiaries. Under certain circumstances, however, the Company will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Exchange Indenture.
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PRINCIPAL, MATURITY AND INTEREST
The Exchange Debentures will mature on May 15, 2010. Interest on the
Exchange Debentures will accrue at the rate of 12 1/2% per annum and will be
payable semiannually in arrears on May 15 and November 15 (each, an "Interest
Payment Date") to Holders of record on the immediately preceding May 1 and
November 1. Interest will be payable in cash, except that on each Interest
Payment Date occurring prior to May 15, 2003, interest may be paid, at the
Company's option, by the issuance of additional Exchange Debentures having an
aggregate principal amount equal to the amount of such interest. Interest on the
Exchange Debentures will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any, and interest and Liquidated Damages
on the Exchange Debentures will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or, at
the option of the Company, payment of interest and Liquidated Damages may be
made by check mailed to the Holders of the Exchange Debentures at their
respective addresses set forth in the register of Holders of Exchange
Debentures; PROVIDED that all payments of principal, premium, interest and
Liquidated Damages with respect to Exchange Debentures the Holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's office
or agency in New York will be the office of the Exchange Trustee maintained for
such purpose. The Exchange Debentures will be issued in denominations of $1,000
and integral multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, and interest and Liquidated
Damages, if any, on the Exchange Debentures will be subordinated in right of
payment, as set forth in the Exchange Indenture, to the prior payment in full of
all Exchange Debenture Senior Indebtedness, whether outstanding on the date of
the Exchange Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Exchange Debenture Senior Indebtedness
will be entitled to receive payment in full of all Obligations due in respect of
such Exchange Debenture Senior Indebtedness (including interest after the
commencement of any such proceeding at the rate specified in the applicable
Exchange Debenture Senior Indebtedness) before the Holders of Exchange
Debentures will be entitled to receive any payment with respect to the Exchange
Debentures, and until all Obligations with respect to Exchange Debenture Senior
Indebtedness are paid in full, any distribution to which the Holders of Exchange
Debentures would be entitled shall be made to the holders of Exchange Debenture
Senior Indebtedness (except that Holders of Exchange Debentures may receive and
retain Permitted Junior Securities and payments made from the trust described
under the caption "--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Exchange
Debentures (except in Permitted Junior Securities or from the trust described
under the caption "--Legal Defeasance and Covenant Defeasance") if (i) a default
in the payment of the principal of, premium, if any, or interest on Designated
Exchange Debenture Senior Debt occurs and is continuing beyond any applicable
period of grace or (ii) any other default occurs and is continuing with respect
to Designated Exchange Debenture Senior Debt that permits holders of the
Designated Exchange Debenture Senior Debt as to which such default relates to
accelerate its maturity and the Exchange Trustee receives a notice of such
default (a "Payment Blockage Notice") from the Company or the holders of any
Designated Exchange Debenture Senior Debt. Payments on the Exchange Debentures
may and shall be resumed (a) in the case of a payment default, upon the date on
which such default is cured or waived and (b) in case of a nonpayment default,
the earlier of the date on which such nonpayment default is cured or waived or
179 days after the
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date on which the applicable Payment Blockage Notice is received, unless the
maturity of any Designated Exchange Debenture Senior Debt has been accelerated.
No new period of payment blockage may be commenced unless and until (i) 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice and (ii) all scheduled payments of principal, premium, if any, and
interest on the Exchange Debentures that have come due have been paid in full in
cash. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Exchange Trustee shall be, or be
made, the basis for a subsequent Payment Blockage Notice.
The Exchange Indenture will further require that the Company promptly notify
holders of Exchange Debenture Senior Indebtedness if payment of the Exchange
Debentures is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Exchange Debentures may recover less
ratably than creditors of the Company who are holders of Exchange Debenture
Senior Indebtedness. The principal amount of Exchange Debenture Senior
Indebtedness outstanding at June 27, 1998 was approximately $247.5 million
(excluding $18.3 million of letters of credit). The Exchange Indenture will
limit, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Indebtedness, that the Company and its
subsidiaries can incur. See "--Material Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock."
OPTIONAL REDEMPTION
The Exchange Debentures will not be redeemable at the Company's option prior
to May 15, 2003. Thereafter, the Exchange Debentures will be subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and Liquidated Damages thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on May 15 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------ -----------
<S> <C>
2003.................................................................... 106.250%
2004.................................................................... 105.000%
2005.................................................................... 103.750%
2006.................................................................... 102.500%
2007.................................................................... 101.250%
2008 and thereafter..................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the date of
this Prospectus, the Company may on any one or more occasions redeem the
Exchange Debentures originally issued under the Exchange Indenture, in whole or
in part, at the redemption prices set forth below (expressed as percentages of
principal amount), in each case, together with accrued and unpaid interest and
Liquidated Damages thereon, if any, to the redemption date, with the net cash
proceeds of one or more Equity Offerings if redeemed during the 12-month period
commencing on May 15 of each of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION RATE
- ------------------------------------------------------------------ ----------------
<S> <C>
1998.............................................................. 108.000%
1999.............................................................. 110.000%
2000.............................................................. 112.000%
</TABLE>
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In the event of a redemption pursuant to the above paragraph (except in the
case of a redemption of all the Exchange Debentures), at least $25.0 million in
aggregate principal amount of Exchange Debentures shall remain outstanding
immediately after the occurrence of such redemption (excluding Exchange
Debentures held by the Company and its Subsidiaries) and any such redemption
shall occur within 45 days of the date of the closing of such Equity Offering.
At any time prior to May 15, 2003, the Exchange Debentures may also be
redeemed, as a whole but not in part, at the option of the Company upon the
occurrence of a Change of Control, upon not less than 30 nor more than 60 days
prior notice (but in no event may any such redemption occur more than 90 days
after the occurrence of such Change of Control) mailed by first-class mail to
each Holder's registered address, at a redemption price equal to 100% of the
principal amount thereof and the interest rate in effect with respect to the
Exchange Debentures as of, and accrued and unpaid interest and Liquidated
Damages, if any, to, the date of redemption.
SELECTION AND NOTICE
If less than all of the Exchange Debentures are to be redeemed at any time,
selection of Exchange Debentures for redemption will be made by the Exchange
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which the Exchange Debentures are listed, or, if the
Exchange Debentures are not so listed, on a pro rata basis, by lot or by such
method as the Exchange Trustee shall deem fair and appropriate; PROVIDED that no
Exchange Debentures of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of Exchange Debentures to be
redeemed at its registered address. Notices of redemption may not be
conditional. If any Exchange Debenture is to be redeemed in part only, the
notice of redemption that relates to such Exchange Debenture shall state the
portion of the principal amount thereof to be redeemed. A new Exchange Debenture
in principal amount equal to the unredeemed portion thereof will be issued in
the name of the Holder thereof upon cancellation of the original Exchange
Debenture. Exchange Debentures called for redemption become due on the date
fixed for redemption. On and after the redemption date, interest ceases to
accrue on Exchange Debentures or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Exchange Debentures.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange
Debentures will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Exchange
Debentures pursuant to the offer described below (the "Change of Control Offer")
at an offer price in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any,
to the date of purchase (the "Change of Control Payment"). Within 30 days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase Exchange Debentures on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Exchange Indenture and described in
such notice. The Company will comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Exchange Debentures as a result of a Change of Control.
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On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Exchange Debentures or portions thereof
properly tendered pursuant to the Change of Control Offer, (2) deposit with the
Paying Agent an amount equal to the Change of Control Payment in respect of all
Exchange Debentures or portions thereof so tendered and (3) deliver or cause to
be delivered to the Exchange Trustee the Exchange Debentures so accepted
together with an Officers' Certificate stating the aggregate principal amount of
Exchange Debentures or portions thereof being purchased by the Company. The
Paying Agent will promptly mail to each Holder of Exchange Debentures so
tendered the Change of Control Payment for such Exchange Debentures, and the
Exchange Trustee will promptly authenticate and mail (or cause to be transferred
by book entry) to each Holder a new Exchange Debenture equal in principal amount
to any unpurchased portion of the Exchange Debentures surrendered, if any;
PROVIDED that each such new Exchange Debenture will be in a principal amount of
$1,000 or an integral multiple thereof. The Exchange Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 90 days following a Change of Control, the Company will either repay all
outstanding Exchange Debenture Senior Indebtedness or obtain the requisite
consents, if any, under all agreements governing outstanding Exchange Debenture
Senior Indebtedness to permit the repurchase of Exchange Debentures required by
this covenant. The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Exchange Indenture are applicable. Except as
described above with respect to a Change of Control, the Exchange Indenture does
not contain provisions that permit the Holders of the Exchange Debentures to
require that the Company repurchase or redeem the Exchange Debentures in the
event of a takeover, recapitalization or similar transaction.
The Senior Credit Facility currently prohibits the Company from purchasing
any Exchange Debentures and also provides that certain change of control events
with respect to the Company would constitute a default thereunder. The Indenture
also contains restrictions on the ability of the Company to repurchase the
Exchange Debentures. Any future credit agreements or other agreements relating
to Exchange Debenture Senior Indebtedness to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing Exchange
Debentures, the Company could seek the consent of its lenders to the purchase of
Exchange Debentures or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Exchange
Debentures. In such case, the Company's failure to purchase tendered Exchange
Debentures would constitute an Event of Default under the Exchange Indenture
which would, in turn, constitute a default under the Senior Credit Facility. In
such circumstances, the subordination provisions in the Exchange Indenture would
likely restrict payments to the Holders of Exchange Debentures.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Exchange Indenture applicable to a Change of Control Offer made by the
Company and purchases all Exchange Debentures validly tendered and not withdrawn
under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Exchange Debentures to require the
Company to repurchase such Exchange Debentures as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
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ASSET SALES
The Exchange Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(i) the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Exchange Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of (A) cash or Cash Equivalents or (B) Qualified Proceeds; provided
that the aggregate fair market value of Qualified Proceeds (other than cash or
Cash Equivalents), which may be received in consideration for asset sales
pursuant to this clause (ii) (B) shall not exceed $5.0 million since the Issue
Date; PROVIDED that the amount of (x) any liabilities (as shown on the Company's
or such Restricted Subsidiary's most recent balance sheet), of the Company or
any Restricted Subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the Exchange Debentures or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Restricted
Subsidiary from further liability and (y) any securities, Exchange Debentures or
other obligations received by the Company or any such Restricted Subsidiary from
such transferee that are contemporaneously (subject to ordinary settlement
periods) converted by the Company or such Restricted Subsidiary into cash (to
the extent of the cash received), shall be deemed to be cash for purposes of
this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently repay
Exchange Debenture Senior Indebtedness, or (b) to acquire all or substantially
all of the assets of, or a majority of the Voting Stock of, another Permitted
Business, (c) to make a capital expenditure or (d) to acquire other long-term
assets that are used or useful in a Permitted Business. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce
revolving credit borrowings or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Exchange Indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $10.0 million, the Company will be required to
make an offer to all Holders of Exchange Debentures and all holders of other
Indebtedness that is PARI PASSU with the Exchange Debentures containing
provisions similar to those set forth in the Exchange Indenture with respect to
offers to purchase or redeem with the proceeds of sales of assets (an "Asset
Sale Offer") to purchase the maximum principal amount of Exchange Debentures and
such other PARI PASSU Indebtedness that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the date of purchase, in accordance with the procedures set forth in
the Exchange Indenture and such other PARI PASSU Indebtedness. To the extent
that any Excess Proceeds remain after consummation of an Asset Sale Offer, the
Company may use such Excess Proceeds for any purpose not otherwise prohibited by
the Exchange Indenture. If the aggregate principal amount of Exchange Debentures
and such other PARI PASSU Indebtedness tendered into such Asset Sale Offer
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Exchange Trustee shall select the Exchange Debentures and such other PARI PASSU
Indebtedness to be purchased on a pro rata basis. Upon completion of such offer
to purchase, the amount of Excess Proceeds shall be reset at zero.
The Senior Credit Facility currently prohibits the Company from purchasing
any Exchange Debentures and also provides that certain change of control events
with respect to the Company would constitute a default thereunder. The Indenture
also contains restrictions on the ability of the Company to repurchase the
Exchange Debentures. Any future credit agreements or other agreements relating
to Exchange Debenture Senior Indebtedness to which the Company becomes a party
may contain similar restrictions and provisions. In the event an Asset Sale
occurs at a time when the Company is prohibited from purchasing Exchange
Debentures, the Company could seek the consent of its lenders to the purchase of
Exchange Debentures or could attempt to refinance the borrowings that contain
such prohibition. If the
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Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Exchange Debentures. In such case, the
Company's failure to purchase tendered Exchange Debentures would constitute an
Event of Default under the Exchange Indenture which would, in turn, constitute a
default under the Senior Credit Facility. In such circumstances, the
subordination provisions in the Exchange Indenture would likely restrict
payments to the Holders of Exchange Debentures.
MATERIAL COVENANTS
The Exchange Indenture contains the following material covenants:
RESTRICTED PAYMENTS
The Exchange Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other payment or distribution on account
of the Company's or any of its Restricted Subsidiaries' Equity Interests
(including, without limitation, any payment in connection with any merger or
consolidation involving the Company or any of its Restricted Subsidiaries) or to
the direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than dividends
or distributions payable in Equity Interests (other than Disqualified Stock) of
the Company and other than dividends or distributions payable to the Company or
a Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value (including, without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company or other Affiliate of
the Company (other than any such Equity Interests owned by the Company or any
Wholly Owned Restricted Subsidiary of the Company); (iii) make any payment on or
with respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is subordinated to the Exchange Debentures (other
than Exchange Debentures), except a payment of interest or principal at Stated
Maturity or as a mandatory or sinking fund payment; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Issue Date (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (v), (vii) and (ix) of the next
succeeding paragraph), is less than the sum, without duplication, of (i) 50%
of the Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter commencing
after the date of the Issue Date to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, less 100% of such deficit), plus (ii) 100% of
the aggregate net cash proceeds received by the Company since the Issue Date
as a contribution to its common equity capital or from the issue or sale of
Equity Interests of the Company (other than Disqualified Stock) or from the
issue or sale of Disqualified Stock or debt securities of the Company that
have been converted into such Equity Interests (other than Equity Interests
(or Disqualified Stock or convertible debt securities) sold to a Subsidiary
of the Company),
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plus (iii) 100% of the fair market value of any Person engaged in a
Permitted Business or assets used by the Company or a Restricted Subsidiary
in a Permitted Business which such Person or assets were acquired by the
Company or any of its Restricted Subsidiaries since the Issue Date, PROVIDED
that the consideration for such Person or assets consisted solely of Equity
Interests of the Company (other than Disqualified Stock), PLUS (iv) to the
extent that any Restricted Investment that was made after the Issue Date is
sold for cash or otherwise liquidated or repaid for cash or the receipt of
properties used in a Permitted Business, the lesser of (A) the net cash
proceeds of such sale, liquidation or repayment or the fair market value (as
determined in good faith by a resolution of the Board of Directors set forth
in an Officers' Certificate delivered to the Trustee) of property received
in exchange therefor and (B) the amount of such Restricted Investment.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the Exchange
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any PARI PASSU or subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of, other Equity Interests of the Company (other than any Disqualified
Stock); PROVIDED that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption or repurchase of any Disqualified Stock of the Company or
any Restricted Subsidiary in exchange for, or out of the substantially
concurrent sale (other than to the Company or a Subsidiary of the Company) of
Disqualified Stock of the Company or such Restricted Subsidiary, respectively;
PROVIDED that: (A) the aggregate liquidation preference of such Disqualified
Stock does not exceed the aggregate liquidation preference of the Disqualified
Stock so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith); (B) such
Disqualified Stock has a final maturity date later than the final maturity date
of, and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Notes; and (C) such Disqualified Stock
is incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Disqualified Stock being extended, refinanced, renewed, replaced,
defeased or refunded; (iv) the redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (v) the payment of any dividend by a
Restricted Subsidiary of the Company to the holders of its common Equity
Interests on a pro rata basis; (vi) so long as no Default or Event of Default is
continuing or would be caused thereby, the direct or indirect repurchase,
redemption or other acquisition or retirement for value of any Equity Interests
of the Company or any direct or indirect parent corporation of the Company held
by any member of the Company's (or any of its Restricted Subsidiaries')
management pursuant to any management equity subscription agreement or stock
option agreement in effect as of the date of the Exchange Indenture; PROVIDED
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $1.0 million in any twelve-month
period, (vii) dividends or other payments to Holdings sufficient to enable
Holdings to pay accounting, legal, corporate or reporting and administrative
expenses of Holdings incurred in the ordinary course of business in an amount
not to exceed $500,000 in any twelve-month period, (viii) the making of loans by
the Company or any of its Restricted Subsidiaries to officers or directors of
the Company; provided that the aggregate outstanding amount of such loans shall
not exceed, at any time, $2.0 million plus any such loans outstanding on the
date of the Exchange Indenture; (ix) payments to Holdings by the Company or any
Restricted Subsidiary with respect to taxes (including estimated taxes) that are
paid by Holdings on a combined, consolidated, unitary or similar basis, to the
extent that such payments do not exceed the amount that the Company or such
Restricted Subsidiary would have paid to the relevant taxing authority if the
Company or such Restricted Subsidiary filed a separate tax return for the period
in question; (x) so long as no Default or Event of Default is continuing or
would be caused thereby, the defeasance, redemption or repurchase of any
preferred stock or Disqualified Stock issued in connection with the acquisition
of assets or a Permitted Business, PROVIDED, that the aggregate amount of such
defeasance, redemption or repurchase payments
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shall not exceed at any time $10.0 million; (xi) so long as no Default of Event
of Default is continuing or would be caused thereby, payments under the
Management Agreement as in effect on the Issue Date; (xii) the direct or
indirect repurchase, redemption or other acquisition or retirement for value of
any Equity Interests of the Company or any direct or indirect parent corporation
of the Company held by any employee of the Company or a Restricted Subsidiary of
the Company upon the retirement of any such employee; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $400,000 less the amount of Restricted
Payments made pursuant to clause (xiii) below during such period in any
twelve-month period; and (xiii) the direct or indirect redemption, repurchase or
other acquisition or retirement for value of Class A Senior Preferred Stock of
Holdings from Holdings' qualified employee stock options plans, which Class A
Senior Preferred Stock will either be issued on the Issue Date or issued as
dividends thereon in accordance with the certificate of designations relating
thereto as in effect on the Issue Date, provided that such redemption,
repurchase or other acquisition or retirement is required by applicable law and
such plans.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. In the
event of any such designation, all outstanding Investments owned by the Company
and its Restricted Subsidiaries in the Subsidiary so designated will be deemed
to be an Investment made as of the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant or Permitted Investments, as applicable. All such outstanding
Investments will be deemed to constitute Restricted Investments in an amount
equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. The Board of Directors may
redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if such
redesignation would not cause a Default.
The amount of all Restricted Payments (other than cash) and Qualified
Proceeds (other than cash) shall be the fair market value on the date of the
Restricted Payment (or date of receipt of Qualified Proceeds) of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be valued
by this covenant shall be determined by the Board of Directors whose resolution
with respect thereto shall be delivered to the Exchange Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $5.0 million. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Exchange Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Exchange Indenture. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms and the
payment of dividends on Disqualified Stock in the form of additional shares of
the same class of Disqualified Stock will not be deemed to be a Restricted
Payment for purposes of this covenant; PROVIDED,in each such case, that the
amount thereof is included in Fixed Charges of the Company as accrued.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Exchange Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of preferred stock; PROVIDED, HOWEVER, that the Company may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock and Restricted Subsidiaries may incur Indebtedness or issue preferred
stock if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial
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statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2 to 1, determined on a pro forma basis (including a pro forma application
of the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, at the
beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness under the Senior
Credit Facility in an aggregate principal amount not exceeding an amount
equal to $160.0 million LESS the aggregate amount of all Net Proceeds of
Asset Sales applied by the Company or any of its Restricted Subsidiaries to
permanently repay Indebtedness under the Senior Credit Facility pursuant to
the covenant described above under the caption "--Asset Sales";
(ii) the incurrence by Cluett Peabody Canada Inc. of Indebtedness under
the Canadian Credit Facility in an aggregate principal amount not exceeding
an amount equal to $15.0 million LESS the aggregate amount of all Net
Proceeds of Asset Sales applied by the Company or any of its Restricted
Subsidiaries to permanently repay revolving credit Indebtedness under the
Canadian Credit Facility pursuant to the covenant described above under the
caption "--Asset Sales";
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness, including the Notes and the Guarantees thereof;
(iv) the incurrence by the Company of Indebtedness represented by the
Exchange Debentures;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $10.0 million at any time outstanding;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Existing Indebtedness or
Indebtedness (other than intercompany Indebtedness) that was permitted by
the Exchange Indenture to be incurred under the first paragraph hereof or
clauses (iv), (v), (vi), (ix) or (xv) of this paragraph;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that (i) if the
Company is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Exchange Debentures and (ii)(A) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than the Company or a Restricted Subsidiary thereof
and (B) any sale or other transfer of any such Indebtedness to a Person that
is not either the Company or a Restricted Subsidiary thereof shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (vii);
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Exchange Indenture to be
outstanding;
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in connection with the acquisition of assets or a new
Subsidiary; PROVIDED that such Indebtedness was incurred by the prior owner
of such assets or such Subsidiary prior to such acquisition by the Company
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or one of its Restricted Subsidiaries and was not incurred in connection
with, or in contemplation of, such acquisition by the Company or one of it
Restricted Subsidiaries; and PROVIDED FURTHER that the principal amount (or
accreted value, as applicable) of such Indebtedness, together with any other
outstanding Indebtedness incurred pursuant to this clause (ix) and any
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (ix), does not exceed $5.0
million;
(x) the guarantee by the Company or any Restricted Subsidiary of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(xi) indebtedness incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety and similar bonds and
completion guarantees provided by the Company or a Guarantor in the ordinary
course of business;
(xii) Indebtedness arising from guarantees of Indebtedness of the
Company or any Subsidiary or the agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or Capital Stock of a Restricted
Subsidiary, or other guarantees of Indebtedness incurred by any person
acquiring all or any portion of such business, assets or Capital Stock of a
Restricted Subsidiary for the purpose of financing such acquisition,
provided that the maximum aggregate liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds actually received by
the Company and its Restricted Subsidiaries in connection with such
disposition;
(xiii) Indebtedness of a Receivables Subsidiary that is not recourse to
the Company or any other Restricted Subsidiary of the Company (other than
Standard Securitization Undertakings) incurred in connection with a
Qualified Receivables Transaction;
(xiv) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, PROVIDED, HOWEVER, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (xiv); and
(xv) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding,
including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause (xv),
not to exceed $10.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xv) above as of
the date of incurrence thereof, or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Company shall, in its sole discretion, classify such item of Indebtedness on the
date of its incurrence in any manner that complies with this covenant. Accrual
of interest, accretion or amortization of original issue discount, the payment
of interest on any Indebtedness in the form of additional Indebtedness with the
same terms and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be deemed to
be Disqualified Stock for purposes of this covenant; PROVIDED, in each such
case, that the amount thereof is included in Fixed Charges of the Company as
accrued. For purposes of determining compliance with any U.S. dollar-denominated
restriction on the incurrence of indebtedness, the U.S. dollar-equivalent
principal amount of indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such indebtedness was incurred.
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LIENS
The Exchange Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien of any kind securing Indebtedness, on
any asset now owned or hereafter acquired, except Permitted Liens, unless all
payments due under the Exchange Indenture and the Exchange Debentures are
secured on an equal and ratable basis with the Indebtedness so secured until
such time as such is no longer secured by a Lien; PROVIDED that if such
Indebtedness is by its terms expressly subordinated to the Exchange Debentures,
the Lien securing such Indebtedness shall be subordinate and junior to the Lien
securing the Exchange Debentures with the same relative priority as such
subordinate or junior Indebtedness shall have with respect to the Exchange
Debentures.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Exchange Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries. However, the foregoing restrictions will not apply to encumbrances
or restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the Issue Date, (b) the Senior Credit Facility as in effect as of the
Issue Date, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
PROVIDED that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more restrictive,
taken as a whole, with respect to such dividend and other payment restrictions
than those contained in the Senior Credit Facility as in effect on the Issue
Date, (c) the Exchange Indenture and the Exchange Debentures, (d) applicable
law, (e) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, PROVIDED that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Exchange Indenture to be
incurred, (f) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices, (g) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (h) any agreement for the sale or other disposition of a
Restricted Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition, (i) Permitted Refinancing Indebtedness,
PROVIDED that the restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive, taken as a whole,
than those contained in the agreements governing the Indebtedness being
refinanced, (j) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the caption
"--Liens" that limit the right of the Company or any of its Restricted
Subsidiaries to dispose of the assets subject to such Lien, (k) provisions with
respect to the disposition or distribution of assets or property in joint
venture agreements and other similar agreements entered into in the ordinary
course of business, (l) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the ordinary course of
business, (m) any other security agreement, instrument or document relating to
Senior Indebtedness hereafter in effect, provided that such encumbrances or
restrictions are customary in connection with such documents and that the terms
and conditions of such encumbrances or restrictions are no more restrictive than
those encumbrances or restrictions imposed in connection with the Senior Credit
Facility as in effect on the Issue Date, (n) any agreement relating to a sale
and leaseback transaction or capital lease, but only on the property
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subject to such transaction or lease and only to the extent that such
restrictions or encumbrances are customary with respect to a sale and leaseback
transaction or capital lease, (o) the Canadian Credit Facility as in effect as
of the date of the Exchange Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, PROVIDED that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, taken as a whole, with respect to such
dividend and other payment restrictions than those contained in the Canadian
Credit Facility as in effect on the Issue Date or (p) customary restrictions
imposed on the payment of dividends by a Receivables Subsidiary in connection
with a Qualified Receivables Transaction.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Exchange Indenture will provide that the Company may not, directly or
indirectly, consolidate or merge with or into (whether or not the Company is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions, to another corporation, Person or entity unless (i) the
Company is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of the Company under the Exchange Debentures and the
Exchange Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Exchange Trustee; (iii) immediately after such transaction
no Default or Event of Default exists; and (iv) except in the case of a merger
of the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, immediately after such transaction after
giving pro forma effect thereto and any related financing transactions as if the
same had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Exchange Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to
the Exchange Trustee (a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing. Notwithstanding the foregoing, the following items shall not be deemed
to be Affiliate Transactions: (i) any employment
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agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary, (ii) transactions between or among the
Company and/or its Restricted Subsidiaries, (iii) payment of reasonable
directors fees to Persons who are not otherwise Affiliates of the Company, (iv)
any sale or other issuance of Equity Interests (other than Disqualified Stock)
of the Company, (v) payments made pursuant to the Management Agreement in effect
as of the Issue Date, and (vi) Restricted Payments that are permitted by the
provisions of the Exchange Indenture described above under the caption
"--Restricted Payments.
NO SENIOR SUBORDINATED DEBT
The Exchange Indenture will provide that the Company will not incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to all Senior Indebtedness of the
Company and senior in any respect in right of payment to the Exchange
Debentures.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to the Company and its Subsidiaries taken as a whole.
REPORTS
The Exchange Indenture will provide that, whether or not required by the
rules and regulations of the Commission, so long as any Exchange Debentures are
outstanding, the Company will furnish to the Holders of Exchange Debentures (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations," that describes the
financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations. In addition, following the consummation of the exchange offer
contemplated by the Registration Rights Agreement, whether or not required by
the rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability within
the time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company has agreed that, for so long as any Exchange Debentures remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
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EVENTS OF DEFAULT AND REMEDIES
The Exchange Indenture will provide that each of the following constitutes
an Event of Default: (i) default for 30 days in the payment when due of interest
on, or Liquidated Damages with respect to, the Exchange Debentures (whether or
not prohibited by the subordination provisions of the Exchange Indenture); (ii)
default in payment when due of the principal of or premium, if any, on the
Exchange Debentures (whether or not prohibited by the subordination provisions
of the Exchange Indenture); (iii) failure by the Company or any of its
Restricted Subsidiaries to comply with the provisions described under the
captions "--Merger, Consolidation or Sale of Assets"; (iv) failure by the
Company or any of its Restricted Subsidiaries for 60 days after notice from the
Trustee or Holders of at least 25% in principal amount of outstanding Exchange
Debentures to comply with any of its other agreements in the Exchange Indenture
or the Exchange Debentures; (v) default under any mortgage, Exchange Indenture
or instrument under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company or
any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Exchange Indenture, which default
(a) is caused by a failure to pay principal of or premium, if any, or interest
on such Indebtedness prior to the expiration of the grace period provided in
such Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (vi) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days; and (vii)
certain events of bankruptcy or insolvency with respect to the Company or any of
its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Exchange Trustee or
the Holders of at least 25% in principal amount of the then outstanding Exchange
Debentures may declare all the Exchange Debentures to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, with respect to the
Company, any Significant Subsidiary or any group of Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Exchange
Debentures will become due and payable without further action or notice. Holders
of the Exchange Debentures may not enforce the Exchange Indenture or the
Exchange Debentures except as provided in the Exchange Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Exchange Debentures may direct the Exchange Trustee in its exercise
of any trust or power. The Exchange Trustee may withhold from Holders of the
Exchange Debentures notice of any continuing Default or Event of Default (except
a Default or Event of Default relating to the payment of principal or interest)
if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Exchange
Debentures then outstanding by notice to the Exchange Trustee may on behalf of
the Holders of all of the Exchange Debentures waive any existing Default or
Event of Default and its consequences under the Exchange Indenture except a
continuing Default or Event of Default in the payment of interest on, or the
principal of, the Exchange Debentures.
The Company is required to deliver to the Exchange Trustee annually a
statement regarding compliance with the Exchange Indenture, and the Company is
required upon becoming aware of any Default or Event of Default, to deliver to
the Exchange Trustee a statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Exchange Debentures, the Exchange Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
Exchange Debentures by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the
Exchange Debentures. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Debentures
("Legal Defeasance") except for (i) the rights of Holders of outstanding
Exchange Debentures to receive payments in respect of the principal of, premium,
if any, and interest and Liquidated Damages on such Exchange Debentures when
such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Exchange Debentures concerning issuing temporary
Exchange Debentures, registration of Exchange Debentures, mutilated, destroyed,
lost or stolen Exchange Debentures and the maintenance of an office or agency
for payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Exchange Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Exchange Indenture. In addition, the Company may, at its option and at any
time, elect to have the obligations of the Company released with respect to
certain covenants that are described in the Exchange Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Exchange
Debentures. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Exchange Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Exchange Trustee, in trust, for the
benefit of the Holders of the Exchange Debentures, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest and Liquidated Damages on the outstanding Exchange Debentures on the
stated maturity or on the applicable redemption date, as the case may be, and
the Company must specify whether the Exchange Debentures are being defeased to
maturity or to a particular redemption date; (ii) in the case of Legal
Defeasance, the Company shall have delivered to the Exchange Trustee an opinion
of counsel in the United States reasonably acceptable to the Exchange Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the Exchange
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Exchange Debentures will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Exchange Trustee an opinion
of counsel in the United States reasonably acceptable to the Exchange Trustee
confirming that the Holders of the outstanding Exchange Debentures will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) or
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insofar as Events of Default from bankruptcy or insolvency events are concerned,
at any time in the period ending on the 91st day after the date of deposit; (v)
such Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or instrument
(other than the Exchange Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Exchange Trustee an opinion
of counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Exchange Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Exchange Debentures over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Exchange Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Debentures in accordance with the
Exchange Indenture. The Registrar and the Exchange Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Exchange Indenture. The Company is not required to transfer
or exchange any Exchange Debenture selected for redemption. Also, the Company is
not required to transfer or exchange any Exchange Debenture for a period of 15
days before a selection of Exchange Debentures to be redeemed.
The registered Holder of an Exchange Debenture will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Exchange
Indenture or the Exchange Debentures may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the
Exchange Debentures then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Exchange Debentures), and any existing default or compliance with any
provision of the Exchange Indenture or the Exchange Debentures may be waived
with the consent of the Holders of a majority in principal amount of the then
outstanding Exchange Debentures (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Exchange Debentures).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Exchange Debentures held by a non-consenting Holder): (i)
reduce the principal amount of Exchange Debentures whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Note or alter the provisions with respect to the
redemption of the Exchange Debentures (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
on any Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Exchange Debentures (except
a rescission of acceleration of the Exchange Debentures by the Holders of at
least a majority in aggregate principal amount of the Exchange Debentures and a
waiver of the payment default that resulted from such acceleration), (v) make
any Note payable in money other than that stated in the Exchange Debentures,
(vi) make any change in the provisions of the Exchange Indenture relating to
waivers of past Defaults or the rights of Holders of Exchange Debentures to
receive payments of principal of or premium, if any, or interest on the Exchange
Debentures, (vii) waive a redemption payment with respect to any Note (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"), or
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(viii) make any change in the foregoing amendment and waiver provisions. In
addition, any amendment to the provisions of Article 10 of the Note Exchange
Indenture (which relate to subordination) will require the consent of the
Holders of at least 66 2/3% in aggregate principal amount of the Exchange
Debentures then outstanding if such amendment would adversely affect the rights
of Holders of Exchange Debentures.
Notwithstanding the foregoing, without the consent of any Holder of Exchange
Debentures, the Company and the Exchange Trustee may amend or supplement the
Exchange Indenture or the Exchange Debentures to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Exchange Debentures in addition to
or in place of certificated Exchange Debentures, to provide for the assumption
of the Company's obligations to Holders of Exchange Debentures in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets to make any change that would provide any additional rights or benefits
to the Holders of Exchange Debentures or that does not adversely affect the
legal rights under the Exchange Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Exchange Indenture under the Trust Exchange Indenture Act.
CONCERNING THE EXCHANGE TRUSTEE
The Exchange Indenture contains certain limitations on the rights of the
Exchange Trustee, should it become a creditor of the Company, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Exchange Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Exchange
Trustee, subject to certain exceptions. The Exchange Indenture provides that in
case an Event of Default shall occur (which shall not be cured), the Exchange
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to such
provisions, the Exchange Trustee will be under no obligation to exercise any of
its rights or powers under the Exchange Indenture at the request of any Holder
of Exchange Debentures, unless such Holder shall have offered to the Exchange
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Exchange
Indenture without charge by writing to Cluett American Corp., 48 West 38th
Street, New York, New York 10018, Attention: Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Certificate of
Designations and the Exchange Indenture. Reference is made to the Certificate of
Designations and the Exchange Indenture for a full disclosure of all such terms,
as well as any other capitalized terms used herein for which no definition is
provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this
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definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; PROVIDED that beneficial ownership of 10% or more of the Voting Stock
of a Person shall be deemed to be control.
"ASSET ACQUISITION" means (i) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Subsidiary of the Company or any Subsidiary of the Company, or
shall be merged with or into the Company or any Restricted Subsidiary of the
Company or (ii) the acquisition by the Company or any Restricted Subsidiary of
the Company of the assets of any Person which constitute all or substantially
all of the assets of such Person, any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (PROVIDED that the sale, lease (other than an
operating lease), conveyance or other disposition of all or substantially all of
the assets of the Company and its Restricted Subsidiaries taken as a whole will
be governed by the provisions of the Exchange Indenture described above under
the caption "--Change of Control" and/or the provisions described above under
the caption "--Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant), and (ii) the issue by any Restricted
Subsidiaries of the Company of any Equity Interests of such Restricted
Subsidiary and the sale by the Company or any of its Restricted Subsidiaries of
Equity Interests of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $1.0 million or (b)
for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the
following items shall not be deemed to be Asset Sales: (i) a transfer of assets
by the Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary,
(iii) a Restricted Payment that is permitted by the covenant described above
under the caption "--Restricted Payments," (iv) a disposition of Cash
Equivalents or obsolete equipment in the ordinary course of business or
inventory or goods held for sale in the ordinary course of business, and (v)
sale of accounts receivable, or participation therein, in connection with any
Qualified Receivables Transaction.
"BOARD OF DIRECTORS" means the board of directors of the Company.
"CANADIAN CREDIT FACILITY" means the Loan Agreement, added as of August 8,
1997, between Cluett Peabody Canada Inc. and Congress Financial Corporation
(Canada).
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
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more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating of "B" or better, (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (ii)
and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having the
highest rating obtainable from Moody's Investors Service, Inc. or Standard &
Poor's Corporation and in each case maturing within six months after the date of
acquisition and (vi) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (i)--(v) of this
definition.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than a Principal or a Related Party of a Principal (as
defined below), (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), other than the Principals and their
Related Parties, becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the
beneficial ownership of any particular "person," such "person" shall be deemed
to have beneficial ownership of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, of more than
50% of the Voting Stock of the Company (measured by voting power rather than
number of shares), (iv) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors or (v) the
Company consolidates with, or merges with or into, any Person, or any Person
consolidates with, or merges with or into, the Company, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock of the
Company is converted into or exchanged for cash, securities or other property,
other than any such transaction where the Voting Stock of the Company
outstanding immediately prior to such transaction is converted into or exchanged
for Voting Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting Stock of
such surviving or transferee Person (immediately after giving effect to such
issuance). For purposes of this definition, any transfer of an equity interest
of an entity that was formed for the purpose of acquiring Voting Stock of the
Company will be deemed to be a transfer of such portion of such Voting Stock as
corresponds to the portion of the equity of such entity that has been so
transferred.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income, plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was deducted in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a
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prior period) of such Person and its Restricted Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period (other than items that
were accrued in the ordinary course of business) plus (vi) Reorganization
Charges of such Person and its Restricted Subsidiaries for such period to the
extent that such Reorganization Charges were deducted in computing such
Consolidated Net Income, in each case, determined on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other non-cash expenses of, a Subsidiary of the Company shall be added to
Consolidated Net Income to compute Consolidated Cash Flow of the Company only to
the extent that a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof; PROVIDED that the amount of such dividends or distributions includable
in Consolidated Net Income shall be limited to the Company's direct and indirect
Equity Interests in such Restricted Subsidiary, (ii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, and (iv) the cumulative effect of a change in
accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
"CREDIT FACILITIES" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facility) or
commercial paper facilities, in each case with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables financing
(including
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through the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables) or letters of
credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time. Indebtedness under
Credit Facilities and the Canadian Credit Facility outstanding on the Issue Date
shall be deemed to have been incurred on such date in reliance on the exception
provided by clauses (i) and (ii), respectively, of the definition of Permitted
Debt.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DESIGNATED EXCHANGE DEBENTURE SENIOR DEBT" means (i) any Indebtedness
outstanding under the Senior Credit Facility, (ii) any Indebtedness outstanding
under the Indenture, and (iii) any other Exchange Debenture Senior Indebtedness
permitted under the Exchange Indenture the principal amount of which is $25.0
million or more and that has been designated by the Company as "Designated
Exchange Debenture Senior Debt."
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the Holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Preferred Stock mature; PROVIDED, HOWEVER, that any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require the Company to repurchase such Capital Stock
upon the occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "--Material Covenants--Restricted Payments."
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means an offering of common stock (other than Disqualified
Stock) of the Company or any direct or indirect parent corporation of the
Company (a "Parent Corporation"), other than an offering pursuant to Form S-8
(or any successor thereto) and other than common stock issued pursuant to
employee benefit plans or as compensation to employees, PROVIDED, THAT in the
case of an Equity Offering by a Parent Corporation, such Parent Corporation
contributes to the common equity of the Company the portion of the net cash
proceeds thereof necessary to pay the aggregate redemption price of the
Exchangeable Preferred Stock or Exchange Debentures, as the case may be, to be
redeemed in connection therewith.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"EXCHANGE DEBENTURE SENIOR INDEBTEDNESS" means (i) all Indebtedness
outstanding under Credit Facilities and all Hedging Obligations with respect
thereto, (ii) all Indebtedness outstanding under the Notes and the Parity Notes,
(iii) any other Indebtedness permitted to be incurred by the Company or a
Restricted Subsidiary under the terms of the Exchange Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is on a parity with or subordinated in right of payment to the Exchange
Debentures and (iv) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (w) any liability for federal, state, local or other taxes owed
or owing by the Company, (x) any Indebtedness of the Company to any of its
Restricted Subsidiaries or other Affiliates, (y) any trade payables or (z) any
Indebtedness that is incurred in violation of the Exchange Indenture.
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"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Senior Credit Facility) in
existence on the Issue Date, until such amounts are repaid.
"FIXED CHARGES" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated
interest of such Person and its Restricted Subsidiaries that was capitalized
during such period, and (iii) any interest expense on Indebtedness of another
Person that is Guaranteed by such Person or one of its Restricted Subsidiaries
or secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the
product of (a) all dividend payments, whether or not in cash, on any series of
preferred stock of such Person or any of its Restricted Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity Interests of the
Company (other than Disqualified Stock) or to the Company or a Restricted
Subsidiary of the Company, times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referent Person or any of its Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income (adjusting for, in the case of an Asset
Acquisition or merger or consolidation permitted under "Material
Covenants--Merger, Consolidation or Sale of Assets," any operating expense or
cost reduction of such Person or the Person to be acquired which, in the good
faith estimate of management, will be eliminated or realized, as the case may
be, as a result of such Asset Acquisition, merger or consolidation) and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements
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by such other entity as have been approved by a significant segment of the
accounting profession, which are in effect from time to time.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency swap agreements, interest rate
or currency cap agreements and interest rate or currency collar agreements and
(ii) other agreements or arrangements designed to protect such Person against
fluctuations in interest rates or currency.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments."
"ISSUE DATE" means the date of original issuance of the Exchangeable
Preferred Stock.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"MANAGEMENT AGREEMENT" means that certain Management Agreement dated the
Issue Date among the Principals, the Company and Holdings, as in effect on the
Issue Date.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, (i) excluding,
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however, (x) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with (a) any Asset
Sale (including, without limitation, dispositions pursuant to sale and leaseback
transactions) or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries and (y) any extraordinary gain (but
not loss), together with any related provision for taxes on such extraordinary
gain (but not loss) and (ii) less the aggregate amount of all Restricted
Payments made by such Person or any of its Restricted Subsidiaries for such
period pursuant to clause (vii) of the second paragraph of the covenant
described above under the caption "--Description of the Exchange
Debentures--Material Covenants--Restricted Payments" times one minus the then
combined federal, state and local statutory tax rate of the Company.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Senior Indebtedness) secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender, and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Exchange Debentures being offered hereby) of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity;
and (iii) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICERS' CERTIFICATE" means a certificate signed by (i) the Chairman of
the Board of Directors, the Chief Executive Officer, the President or a Vice
President of the Company and (ii) the Chief Financial Officer or the Secretary
of the Company, which certificate shall comply with the Indenture.
"PERMITTED BUSINESS" means the business of the Company and its Restricted
Subsidiaries conducted on the Issue Date and businesses reasonably related or
ancillary thereto.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company in
a Person, if as a result of such Investment (i) such Person becomes a Restricted
Subsidiary of the Company or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of the
Company; (d) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Repurchase at the Option
of Holders--Asset Sales" or any transaction not constituting an Asset Sale by
reason of the $1.0 million threshold contained in the definition thereof; (e)
any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of the Company; (f) Hedging
Obligations entered into in the ordinary course of the Company's or its
Restricted Subsidiaries' businesses and otherwise in compliance with the
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Indenture; (g) Investments in securities of trade creditors or customers
received in settlement of obligations or pursuant to any plan of reorganization
or similar arrangement upon the bankruptcy of insolvency of such trade creditors
of customers; (h) Investments by the Company or a Restricted Subsidiary in a
Receivables Subsidiary or any Investment by a Receivables Subsidiary in any
other Person, in each case, in connection with a Qualified Receivables
Transaction; and (i) other Investments in any Person having an aggregate fair
market value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (i) that are at the time
outstanding, not to exceed the greater of (A) $10.0 million and (B) 5% of Total
Assets.
"PERMITTED JUNIOR SECURITIES" means Equity Interests in the Company or debt
securities that are subordinated to all Exchange Debenture Senior Indebtedness
(and any debt securities issued in exchange for Exchange Debenture Senior
Indebtedness) to substantially the same extent as, or to a greater extent than,
the Exchange Debentures are subordinated to Exchange Debenture Senior
Indebtedness pursuant to Article 10 of the Exchange Indenture.
"PERMITTED LIENS" means (i) Liens on assets of the Company securing Exchange
Debenture Senior Indebtedness of the Company and Liens on assets of the
Company's Restricted Subsidiaries; (ii) Liens in favor of the Company; (iii)
Liens on property of a Person existing at the time such Person is merged with or
into or consolidated with the Company or any Restricted Subsidiary of the
Company; PROVIDED that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with the Company; (iv) Liens on
property existing at the time of acquisition thereof by the Company or any
Restricted Subsidiary of the Company, PROVIDED that such Liens were in existence
prior to the contemplation of such acquisition; (v) Liens to secure the
performance of statutory obligations, surety or appeal bonds, performance bonds
or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (vi) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" covering
only the assets acquired with such Indebtedness; (vii) Liens existing on the
Issue Date; (viii) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded, PROVIDED
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (ix) Liens on assets of
Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted
Subsidiaries; (x) Liens of the Company or a Wholly Owned Restricted Subsidiary
on assets of any Restricted Subsidiary of the Company; (xi) Liens securing
Permitted Refinancing Indebtedness which is incurred to refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which has been incurred in accordance with the provisions of the Indenture,
PROVIDED, HOWEVER, that such Liens (A) are not materially less favorable to the
Holders and are not materially more favorable to the lienholders with respect to
such Liens than the Liens in respect of the Indebtedness being refinanced and
(B) do not extend to or cover any property or assets of the Company or any of
its Restricted Subsidiaries not securing the Indebtedness so refinanced; (xii)
Liens incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security or similar obligations, including any lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations (exclusive
of obligations for the payment of borrowed money); (xiii) judgment Liens not
giving rise to an Event of Default so long as such Lien is adequately bonded and
any appropriate legal proceedings which may have been duly initiated for the
review of such judgment shall not have been finally terminated or the period
within which such proceedings may be initiated shall not have expired; (xiv)
easements, rights-of-way, zoning restrictions and other similar charges or
encumbrances in respect of real property not interfering in any material respect
with the ordinary conduct of the business of the company or any of its
Restricted Subsidiaries; (xv) any interest or
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title of a lessor under any lease, whether or not characterized as capital or
operating; provided that such Liens do not extend to any property or assets
which is not leased property subject to such lease; (xvi) Liens upon specific
items of inventory or other goods and proceeds of any Person Securing such
Person's obligations in respect of bankers' acceptances issued or created for
the account of such Person to facilitate the purchase, shipment or storage of
such inventory or other goods; (xvii) Liens securing reimbursement obligations
with respect to letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof; (xviii)
Liens encumbering deposits made to secure obligations arising from statutory,
regulatory, contractual, or warranty requirements of the Company or any of its
Restricted Subsidiaries, including rights of offset and set-off; (xix) Liens
securing Hedging Obligations which Hedging Obligations relate to Indebtedness
that is otherwise permitted under the Indenture; (xx) leases or subleases
granted to others not interfering in any material respect with the business of
the Company or its Restricted Subsidiaries; (xxi) Liens arising out of
consignment or similar arrangements for the sale of goods entered into by the
Company or any Restricted Subsidiary in the ordinary course of business; (xxii)
Liens or assets of a Receivables Subsidiary arising on connection with a
Qualified Receivables Transaction; (xxiii) Liens incurred in the ordinary course
of business of the Company or any Restricted Subsidiary of the Company with
respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Company or such Restricted Subsidiary; and (xxiv)
Liens securing Acquired Debt incurred in accordance with clause (ix) of the
covenant described under "--Description of the Exchange Debentures--Material
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;"
PROVIDED, that (A) such Liens secured such Acquired Debt at the time of and
prior to the incurrence of such Acquired Debt by the Company or a Restricted
Subsidiary of the Company and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Debt by the Company or a
Restricted Subsidiary of the Company and (B) such Liens do not extend to or
cover any property or assets of the Company or any of its Restricted
Subsidiaries other than the property or assets that secured the Acquired Debt
prior to the time such Indebtedness became Acquired Debt of the Company or a
Restricted Subsidiary of the Company and are not more favorable to the
lienholders than those securing the Acquired Debt prior to the incurrence of
such Acquired Debt by the Company or a Restricted Subsidiary of the Company.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); PROVIDED that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Exchange Debentures, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Exchange Debentures on terms at least as favorable to
the Holders of Exchange Debentures as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
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"PERSON" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"PRINCIPALS" means Vestar Capital Partners III, L.P.
"PURCHASE MONEY NOTE" means a promissory note evidencing a line of credit,
or evidencing other Indebtedness owed to the Company or any Restricted
Subsidiary in connection with a Qualified Receivables Transaction, which note
shall be repaid from cash available to the maker of such note, other than
amounts required to be established as reserves pursuant to agreement, amounts
paid to investors in respect of interest, principal and other amounts owing to
such investors and amounts paid in connection with the purchase of newly
generated receivables.
"QUALIFIED PROCEEDS" means any of the following or any combination of the
following: (i) cash, (ii) Cash Equivalents, (iii) long-term assets that are used
or useful in a Permitted Business and (iv) the Capital Stock of any Person
engaged primarily in a Permitted Business if, in connection with the receipt by
the company or any Restricted Subsidiary of the Company of such Capital Stock,
(a) such Person becomes a Wholly-Owned Restricted Subsidiary or (b) such Person
is merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or any
Wholly-Owned Restricted Subsidiary of the Company.
"QUALIFIED RECEIVABLES TRANSACTION" means any transaction or series of
transactions that may be entered into by the Company or any Restricted
Subsidiary pursuant to which the Company or any Restricted Subsidiary may sell,
convey or otherwise transfer to (a) a Receivables Subsidiary (in the case of a
transfer by the Company or any Restricted Subsidiary) and (b) any other Person
(in the case of a transfer by a Receivables Subsidiary), or may grant a security
interest in, any accounts receivable (whether now existing or arising in the
future) of the Company or any Restricted Subsidiary and any asset related
thereto including, without limitation, all collateral securing such accounts
receivable, all contracts and all guarantees or other obligations in respect of
such accounts receivable, proceeds of such accounts receivable and other assets
which are customarily transferred, or in respect of which security interests are
customarily granted, in connection with asset securitization transactions
involving accounts receivable.
"RECEIVABLES SUBSIDIARY" means a Wholly Owned Restricted Subsidiary (other
than a Guarantor) which engages in no activities other than in connection with
the financing of accounts receivables and which is designated by the Board of
Directors of the Company (as provided below) as a Receivables Subsidiary (a) no
portion of the Indebtedness or any other Obligations (contingent or otherwise)
of which (i) is guaranteed by the Company or any other Restricted Subsidiary
(excluding guarantees of obligations (other than the principal of, and interest
on, Indebtedness) pursuant to Standard Securitization Undertakings), (ii) is
recourse to or obligates the Company or any other Restricted Subsidiary in any
way other than pursuant to Standard Securitization Undertakings or (iii)
subjects any property or asset of the Company or any other Restricted
Subsidiary, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to Standard Securitization
Undertakings, (b) with which neither the Company nor any other Restricted
Subsidiary has any material contract, agreement, arrangement or understanding
(except in connection with a Purchase Money Note or Qualified Receivables
Transaction) other than on terms no less favorable to the Company or such other
Restricted Subsidiary than those that might be obtained at the time from persons
that are not Affiliates of the Company, other than fees payable in the ordinary
course of business in connection with servicing accounts receivable, and (c) to
which neither the Company nor any other Restricted Subsidiary has any obligation
to maintain or preserve such entity's financial condition or cause such entity
to achieve certain levels of operating results. Any such designation by the
Board of Directors of the Company shall be evidenced to the Trustee by filing
with the Trustee a certified copy of the resolution of the Board of Directors of
the Company giving effect to such designation and an Officers' Certificate
certifying, to the best of such officers' knowledge and belief after consulting
with counsel, that such designation complied with the foregoing conditions.
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"RELATED PARTY" with respect to any Principal means (A) any controlling
stockholder, Subsidiary, or spouse or immediate family member (in the case of an
individual) of such Principal or (B) any trust, corporation, partnership or
other entity, the beneficiaries, stockholders, partners, owners or Persons
beneficially holding a majority interest of which consist of such Principal
and/or such other Persons referred to in the immediately preceding clause (A).
"REORGANIZATION CHARGES" means (i) up to $3.3 million of facility closing
and reengineering costs incurred by the Company and its Subsidiaries prior to
the Issue Date, (ii) up to $550,000 of losses incurred by the Company and its
Subsidiaries prior to the Issue Date associated with (x) the Canadian retail
operations of the Company and its Subsidiaries and (y) the Mexican and
Guatemalan operations of the Company and its Subsidiaries, in each case
calculated in accordance with GAAP on a consolidated basis, (iii) up to $4.0
million of bankruptcy reorganization costs incurred by the Company and its
Restricted Subsidiaries prior to the Issue Date, and (iv) the costs and expenses
of the Company and its Subsidiaries incurred in connection with the Transaction,
in each case calculated in accordance with GAAP on a consolidated basis.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary
"SENIOR CREDIT FACILITY" means the credit agreement to be entered into on or
prior to the Issue Date by and among the Company, NationsBanc Montgomery
Securities LLC, as arranger and syndication agent, certain lending parties
thereto and NationsBank, N.A., as agent, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, as such credit agreements and/or related documents may be
amended, restated, supplemented, renewed, replaced or otherwise modified from
time to time whether or not with the same agent, trustee, representative lenders
or holders, and, subject to the proviso to the next succeeding sentence,
irrespective of any changes in the terms and conditions thereof. Without
limiting the generality of the foregoing, the term "Senior Credit Facility"
shall include any amendment, amendment and restatement, renewal, extension,
restructuring, supplement or modification to any Senior Credit Facility and all
refundings, refinancings and replacements of any Senior Credit Facility,
including any agreement (i) extending the maturity of any Indebtedness incurred
thereunder or contemplated thereby, (ii) adding or deleting borrowers or
guarantors thereunder, so long as the borrowers and issuers thereunder include
one or more of the Company and its Subsidiaries and their respective successors
and assigns, or (iii) increasing the amount of Indebtedness incurred thereunder
or available to be borrowed thereunder.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"STANDARD SECURITIZATION UNDERTAKINGS" means representations, warranties,
covenants and indemnities entered into by the Company or any Restricted
Subsidiary which are reasonably customary in an accounts receivable transaction.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or Exchange
Trustees thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the
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other Subsidiaries of that Person (or a combination thereof) and (ii) any
partnership (a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or (b) the only general
partners of which are such Person or of one or more Subsidiaries of such Person
(or any combination thereof).
"TOTAL ASSETS" means, with respect to any Person, the total consolidated
assets of such Person and its Restricted Subsidiaries, as shown on the most
recent balance sheet of such Person.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company; (c) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (d) has not guaranteed
or otherwise directly or indirectly provided credit support for any Indebtedness
of the Company or any of its Restricted Subsidiaries. Any such designation by
the Board of Directors shall be evidenced to the Exchange Trustee by filing with
the Exchange Trustee a certified copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "Material Covenants--Restricted Payments." If,
at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Exchange Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "--Material Covenants-- Incurrence of Indebtedness and Issuance of
Preferred Stock," the Company shall be in default of such covenant). The Board
of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under the caption "--Material Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period, and (ii) no Default or Event of Default or Voting Rights
Triggering Event, as applicable, would be in existence following such
designation
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
or Disqualified Stock at any date, the number of years obtained by dividing (i)
the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal or liquidation preference, as applicable, including payment at
final maturity, in respect thereof, by (b) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment, by (ii) the then outstanding principal amount or liquidation
preference, if applicable, of such Indebtedness or Disqualified Stock.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the New Preferred Stock will be issued in
fully registered form. The New Preferred Stock initially will be represented by
a single, permanent global certificate, in definitive, fully registered form
without interest coupons (the "Global Certificate") and will be deposited with
the Trustee as custodian for The Depository Trust Company, New York, New York
("DTC") and registered in the name of a nominee of DTC.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants (the "Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("indirect participants").
So long as DTC, or its nominee, is the registered owner or holder of the New
Preferred Stock, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the New Preferred Stock represented by such Global
Certificate for all purposes under the Certificate of Designations. No
beneficial owner of an interest in the Global Certificate will be able to
transfer that interest except in accordance with DTC's procedures, in addition
to those provided for under the Certificate of Designations with respect to the
New Preferred Stock.
Payments on the Global Certificate will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any paying agent will have any responsibility or liability for any
aspect of the records, relating to or payments made on account of beneficial
ownership interests in the Global Certificate or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment
(including liquidated damages) on the Global Certificate, will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global
Certificate as shown on the records of DTC or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Certificate held through such Participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such Participants.
Transfers between Participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell New Preferred Stock to
persons in states which require physical delivery of the New Preferred Stock, or
to pledge such securities, such holder must transfer its interest in the Global
Certificate, in accordance with the normal procedures of DTC and with the
procedures set forth in the Certificate of Designations.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Preferred Stock (including the presentation of New
Preferred Stock for exchange as described below) only at the direction of one or
more Participants to whose account the DTC interests in the Global Certificate
are credited and only in respect of such portion of the aggregate principal
amount of New Preferred Stock as to which such Participant or Participants has
or have given such direction.
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Upon the issuance of the Global Certificate, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Certificate to the
accounts of persons who have accounts with such depositary. Ownership of
beneficial interests in the Global Certificate will be limited to Participants
or persons who hold interests through Participants. Ownership of beneficial
interests in the Global Certificate will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
Participants (with respect to interests of persons other than Participants).
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Certificate among Participants, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its Participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Certificate and a successor depositary is not appointed by the
Company within 90 days, Certificated Securities will be issued in exchange for
the Global Certificate.
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DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Offerings, the Certificate of Incorporation of
the Company, as amended, provided that the Company has the authority to issue
5,000,000 shares of the Company's preferred stock. Upon the consummation of the
Offerings and the Recapitalization, the Company had 500,000 shares of preferred
stock consisting of the Exchangeable Preferred Stock.
The following summary of certain provisions of the common stock and such
preferred stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Certificate of Incorporation, as
amended, and by the provisions of applicable law.
Except as otherwise provided herein or as otherwise required by applicable
law, the holders of common stock shall be entitled to one vote per share on all
matters to be voted on by the Company's stockholders.
The Company's preferred stock shall have the voting powers, full or limited,
or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof as shall be stated and expressed in the resolution or
resolutions providing for the issue of such series of preferred stock adopted by
the Board of Directors of the Company. The New Preferred Stock being offered in
the Exchange Offerings is a series of the preferred stock issued pursuant to a
Certificate of Designation. See "Description of the New Preferred Stock and
Exchange Debentures."
The Certificate of Incorporation, as amended, of the Company provides that
to the fullest extent permitted by the General Corporation Law of the State of
Delaware (including, without limitation, Section 102(b)(7), as amended from time
to time) no director shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
DESCRIPTION OF OTHER INDEBTEDNESS
The description set forth below does not purport to be complete and is
qualified in its entirety by reference to certain agreements setting forth the
principal terms and conditions of the Company's Senior Credit Facility and the
Canadian Facility (as defined). Capitalized terms used but not otherwise defined
in this "Description of the Senior Credit Facility" shall have the meaning to be
ascribed to them in the Senior Credit Facility.
SENIOR CREDIT FACILITY
The Senior Credit Facility is provided by a syndicate of banks and other
financial institutions led by NationsBank, N.A. as administrative and collateral
agent and NationsBanc Montgomery Securities LLC as arranger and syndication
agent and Gleacher Natwest Inc. as document agent. The Senior Credit Facility is
senior in right of payment to the Exchange Notes, New Preferred Stock and
Exchange Debentures. The Senior Credit Facility provides senior secured
financing of up to $160.0 million, consisting of the $50.0 million Term Loan A
with a maturity of six years ("Term Loan A"), the $60.0 million Term Loan B with
a maturity of seven years ("Term Loan B") and a revolving facility for $50.0
million (the "Revolver"). The Revolver commitment terminates six years from the
date of the closing of the Senior Credit Facility.
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The Term Loans will amortize in quarterly amounts commencing June 30, 1998
based upon the annual amounts shown below:
<TABLE>
<CAPTION>
TERM LOAN A TERM LOAN B
--------------------- ---------------
<S> <C> <C>
(DOLLARS IN MILLIONS)
Year 1......................................................... $ 2.0 $ 0.6
Year 2......................................................... 4.0 0.6
Year 3......................................................... 6.0 0.6
Year 4......................................................... 10.0 0.6
Year 5......................................................... 13.0 0.6
Year 6......................................................... 15.0 0.6
Year 7......................................................... -- 56.4
----- -----
Total.......................................................... $ 50.0 $ 60.0
----- -----
----- -----
</TABLE>
The obligations of the Company under the Senior Credit Facility are
unconditionally and irrevocably guaranteed by the Company's domestic
subsidiaries (the "Guarantors"). In addition, the Senior Credit Facility is
secured by first priority or equivalent security interests in substantially all
tangible and intangible assets of the Company and the Guarantors, including all
the capital stock of, or other equity interests in, each direct or indirect
domestic subsidiary of the Company and 65% of the capital stock of, or other
equity interests in, each direct foreign subsidiary of the Company or any
Guarantor (to the extent permitted by applicable contractual and legal
provisions).
The Term Loans (and in the case of (i) below, the Revolver) will be subject
to mandatory prepayment (i) with the proceeds of certain asset sales, (ii) on an
annual basis with 50% of the Company's excess cash flow (as defined in the
Senior Credit Facility), (iii) with the proceeds of certain equity offerings and
(iv) with the proceeds from the issuance of certain funded debt of borrowed
money.
The Term Loans and the Revolver will initially bear (subject to performance
based step downs) interest at a rate equal to LIBOR plus (i) in the case of Term
Loan A and the Revolver, 225 basis points or, at the Company's option, the
administrative agent's alternate base rate (as defined in the Senior Credit
Facility) plus 125 basis points or (ii) in the case of Term Loan B, 250 basis
points or, at the Company's option, such alternate base rate plus 150 basis
points.
The Senior Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company and its subsidiaries, other than
pursuant to specified exceptions, to dispose of assets, incur additional
indebtedness, incur guarantee obligations, repay other indebtedness, pay
dividends, create liens on assets, enter into leases, make investments, loans or
advances, make acquisitions, engage in mergers or consolidations, make capital
expenditures, enter into sale and leaseback transactions, change the nature of
their business or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities. In addition, under the
Senior Credit Facility the Company is required to comply with specified
financial ratios and tests, including minimum fixed charge coverage and interest
coverage ratios and maximum leverage ratios, including a senior leverage ratio
and a total leverage ratio, each of which is tested as of the last day of each
fiscal quarter of the Company and its subsidiaries.
The senior leverage ratio covenant tests the ratio of funded indebtedness
(other than subordinated indebtedness and net of cash and equivalents) to
consolidated EBITDA. For the period from the closing date to and including
December 30, 1998, the senior leverage ratio has to be less than or equal to
3.50 to 1.00. For the period from December 31, 1998 to and including December
30, 1999, the maximum ratio allowed is 3.25 to 1.00. For the period from
December 31, 1999 to and including December 30, 2000, the maximum ratio allowed
is 2.75 to 1.00. For the period from December 31, 2000 to and including
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December 30, 2001, the maximum ratio allowed is 2.25 to 1.00. For the period
from December 31, 2001 and at all times thereafter, the maximum ratio allowed is
2.00 to 1.00. The Company is currently in compliance with the senior leverage
ratio covenant.
The total leverage ratio covenant tests the ratio of funded indebtedness
(including subordinated indebtedness, but net of cash and cash equivalents) to
consolidated EBITDA. For the period from the closing date to and including
December 30, 1998, the senior leverage ratio has to be less than or equal to
6.50 to 1.00. For the period from December 31, 1998 to and including December
30, 1999, the maximum ratio allowed is 6.25 to 1.00. For the period from
December 31, 1999 to and including December 30, 2000, the maximum ratio allowed
is 5.50 to 1.00. For the period from December 31, 2000 to and including December
30, 2001, the maximum ratio allowed is 4.75 to 1.00. For the period from
December 31, 2001 and at all times thereafter, the maximum ratio allowed is 4.00
to 1.00. The Company is currently in compliance with the total leverage ratio
covenant.
The Senior Credit Facility includes a cross-default provision which makes it
a default under the Senior Credit Facility if, with respect to other
indebtedness in excess of $2,500,000 of Holdings and the Company and its
subsidiaries, any such party defaults in any payment with respect to such
indebtedness or defaults in a manner that permits such indebtedness to be
accelerated or such indebtedness is in fact accelerated.
The consequences of a default under the Senior Credit Facility are that the
administrative agent may, upon the request and direction of the required
lenders, take any of the following actions: (i) terminate the commitments, (ii)
accelerate the Company's obligations under the Senior Credit Facility, declaring
them immediately due and payable, (iii) require the credit parties to establish
a cash collateral account as security for outstanding letters of credit and (iv)
enforce any and all other rights and interests existing under the credit
documents. As of June 27, 1998, there was $114.5 outstanding under the Senior
Credit Facility.
CANADIAN FACILITY
Cluett Peabody Canada Inc. ("Cluett Canada") has entered into a Loan
Agreement dated August 8, 1997 (the "Canadian Facility") between Cluett Canada
and Congress Financial Corporation (Canada) ("Congress"), as lender. The
Canadian Facility is senior in right of payment to the Exchange Notes, New
Preferred Stock and Exchange Debentures. The Canadian Facility provides for a
revolving loan facility of up to $15,000,000, which amount may be reduced based
upon the value of accounts receivable outstanding and inventory held by Cluett
Canada, or upon the good faith determination by Congress that the amount should
be reduced to reflect, among other things, loss contingencies or risks, letters
of credit and events of default of Cluett Canada. The Canadian Facility also
provides for letters of credit up to $8,000,000 outstanding at any one time,
subject to certain minimum inventory requirements. The Canadian Facility has an
initial term of three years and continues year to year thereafter.
Amounts borrowed under the Canadian Facility bear interest at the rate of
1 1/4% per annum over the designated reference rate, rising to 3 1/4% in the
event that the Canadian Facility is terminated or an event of default has
occurred and is continuing or, in the case of the Revolver only, where amounts
borrowed are in excess of amounts available. The Canadian Facility contains
customary covenants and restrictions on Cluett Canada's ability to engage in
certain activities including, but not limited to, merging or consolidating,
selling assets, creating liens on its property and engaging in certain
transactions with its affiliates, in addition to limitations on indebtedness,
dividends and distributions, as well as a minimum net worth requirement of not
less than $10,000,000. The Canadian Facility does not contain, however, any
financial leverage ratio covenants.
The Canadian Facility includes a cross-default provision which makes it a
default under the Canadian Facility if Cluett Canada or any obligor under the
Canadian Facility defaults with respect to any indebtedness in excess of
$100,000 or defaults under any material contract, lease, license or other
obligation to any person other than Congress.
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The consequences of a default under the Canadian Facility are that Congress
may, at its discretion, (i) exercise any of its rights under the Canadian
Facility or related agreements, (ii) accelerate Cluett Canada's obligations
under the Canadian Facility, declaring them immediately due and payable, (iii)
foreclose on the collateral securing the Canadian Facility, (iv) apply the cash
proceeds received from the collateral, or from any sale thereof, to payment of
Cluett Canada's obligations and (v) cease making loans under, and/or terminate,
the Canadian Facility. As of June 27, 1998, there was $5.8 million outstanding
under the Canadian Facility.
THE PARITY NOTES
The Parity Notes which were issued under the Indenture, have the same terms
as the Notes and are treated as a single class with the Notes for all purposes
under the Indenture, including without limitation, ranking, waivers, amendments,
events of default and remedies, offers to purchase and redemptions. The Parity
Notes are senior in right of payment to the New Preferred Stock and the Exchange
Debentures. As of June 27, 1998, there was $13.0 million in Parity Notes
outstanding.
UNITED STATES FEDERAL TAX CONSIDERATIONS
The following describes the material United States federal income tax
consequences of the acquisition, ownership and disposition of the Notes, the
Preferred Stock and the Exchange Debentures, the exchange of Old Notes for
Exchange Notes and the exchange of Exchangeable Preferred Stock for New
Preferred Stock pursuant to the Exchange Offerings as of the date hereof. It
applies only to a beneficial owner of a Note who acquires the Note at the
initial offering and for the original offering price thereof and to a U.S.
Holder (as defined below) who acquires the Preferred Stock on original issuance
and for the original offering price.
This discussion does not address the tax consequences to holders of the
Preferred Stock or the Exchange Debentures who are not U.S. Holders, and is
limited to Notes, Preferred Stock, and Exchange Debentures that are held as
capital assets. This discussion does not address all of the tax consequences
that may be relevant to particular acquirers in light of their personal
circumstances, to certain types of acquirers (such as banks and other financial
institutions, real estate investment trusts, regulated investment companies,
insurance companies, tax-exempt organizations, dealers in securities, or persons
whose functional currency is not the U.S. Dollar) or to integrated transactions
(such as certain hedging transactions, conversion transactions or "straddle"
transactions). In addition, this discussion does not include any description of
the tax laws of any state, local or non-U.S. government that may be applicable
to a particular acquirer.
As used herein, the term "U.S. Holder" means a holder of Notes, Preferred
Stock or Exchange Debentures that is, for U.S. federal income tax purposes, (a)
an individual who is a citizen or resident of the United States, (b) a
corporation or partnership created or organized in or under the laws of the
United States or any political subdivision thereof, (c) an estate whose income
is includible in gross income for U.S. federal income tax purposes regardless of
its source or (d) a trust if (i) a court within the United States is able to
exercise primary supervision over the administration of the trust and (ii) at
least one U.S. person has authority to control all substantial decisions of the
trust. A "Non-U.S. Holder" is a holder that is not a U.S. Holder.
PROSPECTIVE ACQUIRERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE EXCHANGE NOTES, THE
NEW PREFERRED STOCK AND THE EXCHANGE DEBENTURES, AS WELL AS THE TAX CONSEQUENCES
UNDER STATE, LOCAL, NON-U.S. AND OTHER U.S. FEDERAL TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN TAX LAWS.
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EXCHANGE OF NOTES AND EXCHANGEABLE PREFERRED STOCK
The exchange of Old Notes and Exchangeable Preferred Stock for Exchange
Notes and New Preferred Stock, respectively, pursuant to the Exchange Offerings
will not constitute a taxable event to holders. Consequently, no gain or loss
will be recognized by a holder upon receipt of such Exchange Note or New
Preferred Stock, the holding period of such Exchange Note or New Preferred Stock
will include the holding period of the Old Note or the Exchangeable Preferred
Stock exchanged therefor, and the basis of such Exchange Note or such New
Preferred Stock will be the same as the basis of the Old Note or Exchangeable
Preferred Stock immediately before the exchange
THE NOTES; TAXATION OF U.S. HOLDERS
PAYMENT OF INTEREST ON THE NOTES. Interest on an Note will generally be
taxable to a U.S. Holder as ordinary income from domestic sources at the time it
is paid or accrued in accordance with the U.S. Holder's method of accounting for
tax purposes.
SALE, EXCHANGE AND RETIREMENT OF EXCHANGE NOTES. A U.S. Holder's tax basis
in a Note will, in general, be the U.S. Holder's cost therefor. Upon the sale,
exchange, retirement or other disposition of a Note, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange, retirement or other disposition (less amounts attributable
to any accrued qualified stated interest, which will be taxable as such) and the
adjusted tax basis of the Note. Such gain or loss will be capital gain or loss.
Capital gains of individuals derived in respect of capital assets held for more
than one year are eligible for reduced rates of taxation which may vary
depending upon the holding period of such capital assets. The deductibility of
capital losses is subject to limitations.
THE NOTES; TAXATION OF NON-U.S. HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be required
with respect to the payment by the Company or any paying agent of principal
or interest on an Exchange Note owned by a Non-U.S. Holder, provided (i)
that the beneficial owner does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the
Company entitled to vote within the meaning of section 871(h)(3) of the Code
and the regulations thereunder, (ii) the beneficial owner is not a
controlled foreign corporation that is related to the Company through stock
ownership, (iii) the beneficial owner is not a bank whose receipt of
interest on an Exchange Note is described in section 881(c)(3)(A) of the
Code and (iv) the beneficial owner satisfies the statement requirement
(described generally below) set forth in section 871(h) and section 881(c)
of the Code and the regulations thereunder;
(b) no withholding of United States federal income tax will be required
with respect to any gain or income realized by a Non-U.S. Holder upon the
sale, exchange, retirement or other disposition of a Note; and
(c) a Note beneficially owned by an individual who at the time of death
is a Non-U.S. Holder will not be subject to United States federal estate tax
as a result of such individual's death, provided that such individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote within the
meaning of section 871(h)(3) of the Code and provided that the interest
payments with respect to such Exchange Note would not have been, if received
at the time of such individual's death, effectively connected with the
conduct of a United States trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified
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procedures, a paying agent of the Company with a statement to the effect that
the beneficial owner is not a United States person. Currently, these
requirements will be met if (1) the beneficial owner provides his name and
address, and certifies, under penalties of perjury, that he is not a United
States person (which certification may be made on an Internal Revenue Service
Form ("IRS") W-8 (or successor form)) or (2) a financial institution holding the
Note on behalf of the beneficial owner certifies, under penalties of perjury,
that such statement has been received by it and furnishes a paying agent with a
copy thereof. Under recently finalized Treasury regulations (the "Final
Regulations"), the statement requirement referred to in (a)(iv) above may also
be satisfied with other documentary evidence for interest paid after December
31, 1999 with respect to an offshore account or through certain foreign
intermediaries.
If a non-U.S. Holder cannot satisfy the requirements of the "portfolio
interest" exception described in (a) above, payments of interest made to such
non-U.S. Holder will be subject to a 30% withholding tax unless the beneficial
owner of the Note provides the Company or its paying agent, as the case may be,
with a properly executed (1) IRS Form 1001 (or successor form) claiming an
exemption from (or reduction in) withholding under the benefit of an applicable
tax treaty or (2) IRS Form 4224 (or successor form) stating that interest paid
on the Note is not subject to withholding tax because it is effectively
connected with the beneficial owner's conduct of a trade or business in the
United States. Under the Final Regulations, Non-U.S. Holders will generally be
required to provide IRS Form W-8 in lieu of IRS Form 1001 and IRS Form 4224,
although alternative documentation may be applicable in certain situations.
If a non-U.S. Holder is engaged in a trade or business in the United States
and interest on the Note is effectively connected with the conduct of such trade
or business, the Non-U.S. Holder, although exempt from the withholding tax
discussed above (provided it satisfies the certification requirements described
above), will be subject to United States federal income tax on such interest on
a net income basis in the same manner as if it were a U.S. Holder. In addition,
if such holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% (or lower applicable treaty rate) of its effectively connected
earnings and profits for the taxable year, subject to adjustments. For this
purpose, interest on an Exchange Note will be included in such foreign
corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to United States federal
income tax unless (i) such gain or income is effectively connected with a trade
or business in the United States of the Non-U.S. Holder, or (ii) in the case of
a Non-U.S. Holder who is an individual, such individual is present in the United
States for 183 days or more in the taxable year of such sale, exchange,
retirement or other disposition, and certain other conditions are met.
Special rules apply to certain Non-U.S. Holders such as "controlled foreign
corporations," "passive foreign investment companies" and "foreign personal
holding companies" and to certain U.S. shareholders of such entities that are
subject to special treatment under the Code. Such entities should consult their
own tax advisors to determine the U.S. federal, state, local and other tax
consequences that may be relevant to them.
INFORMATION REPORTING AND BACKUP WITHHOLDING.
In general, information reporting requirements will apply to certain
payments of principal and interest paid on Notes and to the proceeds of sale of
a Note made to U.S. Holders other than certain exempt recipients (such as
corporations). A 31% backup withholding tax will apply to such payments if the
U.S. Holder fails to provide a taxpayer identification number or certification
of foreign or other exempt status or fails to report in full dividend and
interest income.
In general, no information reporting or backup withholding will be required
with respect to payments made by the Company or any paying agent to Non-U.S.
Holders if a statement described in (a)(iv) above has been received (and the
payor does not have actual knowledge that the beneficial owner is a United
States person).
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In addition, backup withholding and information reporting may apply to the
proceeds of the sale of a Note within the United States or conducted through
certain U.S. related financial intermediaries unless the statement described in
(a)(iv) above has been received (and the payor does not have actual knowledge
that the beneficial owner is a United States person) or the holder otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
PREFERRED STOCK; U.S. HOLDERS
CLASSIFICATION OF PREFERRED STOCK AND EXCHANGE DEBENTURES. The remainder of
this discussion assumes that the Preferred Stock will be classified as stock and
the Exchange Debentures will be classified as debt for United States federal
income tax purposes, but no opinion is either expressed or implied on these
issues. Any change in these assumptions would alter the tax consequences
described below.
DIVIDENDS. Distributions on the Preferred Stock will constitute dividends
to the extent paid from current or accumulated earnings and profits of the
Company (as determined under United States federal income tax principles).
Dividends "paid in kind" through the issuance of additional Preferred Stock will
be treated as distributions in an amount equal to the fair market value of such
additional Preferred Stock as of the date of distribution. Such amount will also
be the issue price and initial tax basis of the newly distributed Preferred
Stock for United States federal income tax purposes. The amount of the Company's
earnings and profits at any time will depend upon the future actions and
financial performance of the Company. The Company believes that it does not
presently have any current or accumulated earnings and profits. Consequently,
unless the Company generates earnings and profits in the future, distributions
with respect to the Preferred Stock may not qualify as dividends for federal
income tax purposes. To the extent that the amount of a distribution on the
Preferred Stock exceeds the Company's current and accumulated earnings and
profits, such distribution will be treated as a nontaxable return of capital and
will be applied against and reduce the adjusted tax basis of the Preferred Stock
in the hands of each U.S. Holder (but not below zero), thus increasing the
amount of any gain (or reducing the amount of any loss) that would otherwise be
realized by such U.S. Holder upon the sale or other taxable disposition of such
Preferred Stock. The amount of any such distribution that exceeds the adjusted
tax basis of the Preferred Stock in the hands of the U.S. Holder will be treated
as capital gain.
DIVIDENDS RECEIVED DEDUCTION. Under Section 243 of the Code, corporate U.S.
Holders may be able to deduct 70% of the amount of any distribution qualifying
as a dividend. There are, however, many exceptions and restrictions relating to
the availability of such dividends received deduction.
Section 246A of the Code reduces the dividends received deduction allowed to
a corporate U.S. Holder that has incurred indebtedness "directly attributable"
to its investment in portfolio stock. Section 246(c) of the Code requires that,
in order to be eligible for the dividends received deduction, a corporate U.S.
Holder must generally hold the shares of the Preferred Stock for a minimum of 46
days (91 days in the case of certain preferred stock) during the 90 day period
beginning on the date which is 45 days before the date on which such share
becomes ex-dividend with respect to such dividend (during the 180 day period
beginning 90 days before such date in the case of certain preferred stock). A
U.S. Holder's holding period for these purposes is suspended during any period
in which it has certain options or contractual obligations with respect to
substantially identical stock or holds one or more other positions with respect
to substantially identical stock that diminishes the risk of loss from holding
the Preferred Stock.
Under Section 1059 of the Code, a corporate U.S. Holder is required to
reduce its tax basis (but not below zero) in the Preferred Stock by the nontaxed
portion of any "extraordinary dividend" if such stock has not been held for more
than two years before the earliest of the date such dividend is declared,
announced, or agreed to. Generally, the nontaxed portion of an extraordinary
dividend is the amount excluded from income by operation of the dividends
received deduction provisions of Section 243 of the
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Code. An extraordinary dividend on the Preferred Stock generally would be a
dividend that (i) equals or exceeds 5% of the corporate U.S. Holder's adjusted
tax basis in the Preferred Stock, treating all dividends having ex-dividend
dates within an 85 day period as one dividend or (ii) exceeds 20% of the
corporate U.S. Holder's adjusted tax basis in the Preferred Stock, treating all
dividends having ex-dividend dates within a 365 day period as one dividend. In
determining whether a dividend paid on the Preferred Stock is an extraordinary
dividend, a corporate U.S. Holder may elect to substitute the fair market value
of the stock for such U.S. Holder's tax basis for purposes of applying these
tests, provided such fair market value is established to the satisfaction of the
Secretary of the Treasury as of the day before the ex-dividend date. An
extraordinary dividend also includes any amount treated as a dividend in the
case of a redemption that is either non-pro rata as to all stockholders or in
partial liquidation of the Company, regardless of the stockholder's holding
period and regardless of the size of the dividend. If any part of the nontaxed
portion of an extraordinary dividend is not applied to reduce the U.S. Holder's
tax basis as a result of the limitation on reducing such basis below zero, such
part will be treated as capital gain and will be recognized in the taxable year
in which the extraordinary dividend is received.
Special rules exist with respect to extraordinary dividends for "qualified
preferred dividends." A qualified preferred dividend is any fixed dividend
payable with respect to any share of stock which (i) provides for fixed
preferred dividends payable not less frequently than annually and (ii) is not in
arrears as to dividends at the time the U.S. Holder acquired such stock. A
qualified preferred dividend does not include any dividend payable with respect
to any share of stock if the actual rate of return of such stock exceeds 15%.
Section 1059 does not apply to qualified preferred dividends if the corporate
U.S. Holder holds such stock for more than five years. If the U.S. Holder
disposes of such stock before it has been held for more than five years, the
amount subject to extraordinary dividend treatment with respect to qualified
preferred dividends is limited to the excess of the actual rate of return over
the stated rate of return. Actual or stated rates of return are the actual or
stated dividends expressed as a percentage of the lesser of (1) the U.S.
Holder's tax basis in such stock or (2) the liquidation preference of such
stock. CORPORATE U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE POSSIBLE APPLICATION OF SECTION 1059 TO THEIR OWNERSHIP OR
DISPOSITION OF THE PREFERRED STOCK.
REDEMPTION PREMIUM. Under Section 305(c) of the Code and the applicable
regulations thereunder, if the redemption price of the Preferred Stock exceeds
its issue price by more than a de minimus amount, the difference ("redemption
premium") will be taxable as a constructive distribution of additional Preferred
Stock to the U.S. Holder under a constant interest rate method similar to that
described below for accruing original issue discount ("OID") (see "Exchange
Debentures--Original Issue Discount"). Because the Preferred Stock provides for
optional rights of redemption by the Company at prices in excess of the issue
price, stockholders could be required to recognize such redemption premium if,
based on all of the facts and circumstances, the optional redemptions are more
likely than not to occur. If stock may be redeemed at more than one time, the
time and price at which such redemption is most likely to occur must be
determined based on all of the facts and circumstances. Applicable regulations
provide a "safe harbor" under which a right to redeem will not be treated as
more likely than not to occur if (i) the issuer and the U.S. Holder are not
related within the meaning of the regulations; (ii) there are no plans,
arrangements, or agreements that effectively require or are intended to compel
the issuer to redeem the stock (disregarding, for this purpose, a separate
mandatory redemption), and (iii) exercise of the right to redeem would not
reduce the yield of the stock, as determined under the regulations. Regardless
of whether the optional redemptions are more than likely not to occur,
constructive dividend treatment will not result if the redemption premium does
not exceed a DE MINIMIS amount or is in the nature of a penalty for premature
redemption. The Company intends to take the position that the existence of the
Company's optional redemption rights does not result in a constructive
distribution to U.S. Holders. It is not entirely clear how the rules under
Section 305(c) apply to the Company's rights and obligations to redeem the
Preferred Stock in the event of a Change of Control, and it is possible that
such rights and obligations will give rise to constructive distributions.
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Any additional shares of Preferred Stock distributed by the Company in lieu
of cash dividend payments on the Preferred Stock and received by Holders of the
Preferred Stock may bear redemption premium, depending upon the issue price of
such shares (I.E., the fair market value of such shares on the date of
issuance), and this may give rise to constructive distributions as described
above. If such shares bear redemption premium, such shares generally will have
different tax characteristics than other shares of Preferred Stock. This
difference in tax characteristics could adversely affect the liquidity of the
shares.
DISPOSITION OF PREFERRED STOCK. A U.S. Holder's adjusted tax basis in the
Preferred Stock will, in general, be the U.S. Holder's initial tax basis of such
Preferred Stock increased by the redemption premium previously included in
income by the U.S. Holder. A corporate U.S. Holder's tax basis may be further
adjusted by the extraordinary dividend provision discussed above. Upon the sale
or other disposition of Preferred Stock (other than by redemption) a U.S. Holder
will generally recognize capital gain or loss equal to the difference between
the amount realized upon the disposition and the adjusted tax basis of the
Preferred Stock. Such gain or loss will be capital gain or loss and will be
long-term capital gain or loss if at the time of sale, exchange, redemption or
other disposition the Preferred Stock has been held for more than one year. Net
capital gain of individuals derived in respect of capital assets held for more
than one year are eligible for reduced rates of taxation which may vary
depending upon the holding period of such capital assets. The deductibility of
capital losses is subject to limitations.
A redemption of the Preferred Stock by the Company would be treated, under
Section 302 of the Code, either as a sale or exchange giving rise to capital
gain or loss or as a dividend. In the case of a redemption of Preferred Stock
for Exchange Debentures, the amount realized on the exchange would be equal to
the "issue price" of the Exchange Debentures plus any cash received on the
exchange. The issue price of an Exchange Debenture would be equal to (i) its
fair market value as of the exchange date if the Exchange Debentures are traded
on an established securities market at any time during a specified period or
(ii) the fair market value at the exchange date of the Preferred Stock if such
Preferred Stock is traded on an established securities market during a specified
period but the Exchange Debentures are not. If neither the Preferred Stock nor
the Exchange Debentures are so traded, the issue price of the Exchange
Debentures would be determined under Section 1274 of the Code, in which case the
issue price would be the stated principal amount of the Exchange Debentures
provided that the yield on the Exchange Debentures is equal to or greater than
the "applicable federal rate" in effect at the time the Exchange Debentures are
issued. If the yield on the Exchange Debentures is less than such applicable
federal rate, their issue price under section 1274 of the Code would be equal to
the present value as of the issue date of all payments to be made on the
Exchange Debentures, discounted at the applicable federal rate. It cannot be
determined at the present time whether the Preferred Stock or the Exchange
Debentures will be, at the relevant time, traded on an established securities
market within the meaning of the Treasury Regulations or whether the yield on
the Exchange Debentures will equal or exceed the applicable federal rate, as
discussed above.
If a redemption of shares of the Preferred Stock for cash or an exchange of
the Preferred Stock for Exchange Debentures is treated as a dividend with
respect to a particular exchanging U.S. Holder under Section 302 of the Code,
such U.S. Holder (i) will not recognize any loss on the exchange, (ii) will
recognize dividend income (rather than capital gain) in an amount equal to the
fair market value of the Exchange Debentures received without regard to the U.S.
Holder's basis in the shares of Preferred Stock surrendered in the exchange, to
the extent of its proportionate share of the Company's current or accumulated
earnings and profits and (iii) the holding period for the Exchange Debentures
will begin on the day after the day on which the Exchange Debentures are
acquired by the exchanging U.S. Holder. Pursuant to Section 302 of the Code, the
redemption or exchange will not be treated as a dividend, if after giving effect
to the constructive ownership rules of Section 318 of the Code, the redemption
or exchange (i) represents a "complete termination" of the exchanging U.S.
Holder's stock interest in the Company, (ii) is "substantially disproportionate"
with respect to the exchanging U.S. Holder or (iii) is "not essentially
equivalent to a dividend" with respect to the exchanging U.S. Holder, all within
the meaning of Section
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302(b) of the Code. An exchange will be "not essentially equivalent to a
dividend" as to a particular U.S. Holder if it results in a "meaningful
reduction" in such U.S. Holder's interest in the Company (after application of
the constructive ownership rules of Section 318 of the Code). In general, there
are no fixed rules for determining whether a "meaningful reduction" has
occurred. Each U.S. Holder should consult its own tax advisor as to its ability
in light of its own particular circumstances to satisfy any of the foregoing
tests. Additionally, corporate U.S. Holders should consult their own tax
advisors concerning the availability of the corporate dividends received
deduction and the possible application of the extraordinary dividend rules of
Section 1059 of the Code to an exchange by a corporate holder for whom the
distribution is taxable as a dividend.
Depending upon a U.S. Holder's particular circumstances, the tax
consequences of holding Exchange Debentures may be less advantageous than the
tax consequences of holding Preferred Stock because, for example, payments of
interest on the Exchange Debentures will not be eligible for any dividends
received deduction that may be available to corporate United States Holders.
EXCHANGE DEBENTURES
ORIGINAL ISSUE DISCOUNT. An Exchange Debenture will be issued with original
issue discount ("OID") to the extent that its "stated redemption price at
maturity" exceeds its "issue price by more than a DE MINIMUS amount." U.S.
Holders of Exchange Debentures may be subject to special tax accounting rules,
as described in greater detail below. U.S. Holders of Exchange Debentures should
be aware that they generally must include OID in gross income for United States
federal income tax purposes on an annual basis under a constant yield method. As
a result, such U.S. Holders will include OID in income in advance of the receipt
of cash attributable to that income. However, U.S. Holders of Exchange
Debentures generally will not be required to include separately in income cash
payments received on such Debentures, even if denominated as interest, to the
extent such payments do not constitute qualified stated interest (as defined
below). The Company will report to U.S. Holders of any Exchange Debentures with
OID on a timely basis the reportable amount of OID and interest income based on
its understanding of applicable law.
The "stated redemption price at maturity" of a debt instrument is the sum of
its principal amount plus all other payments required thereunder, other than
payments of "qualified stated interest." For this purpose "qualified stated
interest" means stated interest that is unconditionally payable in cash or in
property (other than the debt instruments of the issuer), at least annually at a
single fixed rate during the entire term of the debt instrument that
appropriately takes into account the length of the intervals between payments.
If the Exchange Debentures are issued at a time when the Company has the option
to pay interest on the Exchange Debentures by issuing additional Exchange
Debentures, none of the stated interest on such Exchange Debentures will be
treated as qualified stated interest so that all of such payments will be
included in the "stated redemption price at maturity" and the Exchange
Debentures will be issued with OID. The "issue price" of an Exchange Debenture
will be determined as described under "--Disposition of Preferred Stock."
The amount of OID includible in income by the initial U.S. Holder of an
Exchange Debenture is the sum of the "daily portions" of OID with respect to the
Exchange Debenture for each day during the taxable year or portion of the
taxable year in which such U.S. Holder held such Exchange Debenture ("accrued
OID"). The daily portion is determined by allocating to each day in any "accrual
period" a pro rata portion of the OID allocable to that accrual period. The
"accrual period" for an Exchange Debenture may be of any length and may vary in
length over the term of the Exchange Debenture, provided that each accrual
period is no longer than one year and each scheduled payment of principal or
interest occurs on the first day or the final day of an accrual period. The
amount of OID allocable to any accrual period is an amount equal to the excess,
if any, of (a) the product of the Exchange Debenture's adjusted issue price at
the beginning of such accrual period and its yield to maturity (determined on
the basis of compounding at the close of each accrual period and properly
adjusted for the length of the accrual period) over (b) the
192
<PAGE>
sum of any qualified stated interest allocable to the accrual period. OID
allocable to a final accrual period is the difference between the amount payable
at maturity (other than a payment of qualified stated interest) and the adjusted
issue price at the beginning of the final accrual period. Special rules will
apply for calculating OID for an initial short accrual period. The "adjusted
issue price" of an Exchange Debenture at the beginning of any accrual period is
equal to its issue price increased by the accrued OID for each prior accrual
period and reduced by any payments made on such Exchange Debenture (other than
qualified stated interest) on or before the first day of the accrual period.
Under these rules, a U.S. Holder will have to include in income increasingly
greater amounts of OID in successive accrual periods.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
CONSEQUENCES OF OWNING EXCHANGE DEBENTURES.
AMORTIZABLE BOND PREMIUM. If at the time the Preferred Stock is exchanged
for the Exchange Debentures, the U.S. Holder's tax basis in any such Exchange
Debenture exceeds its stated redemption price at maturity, the Exchange
Debenture will be considered to have been issued at a premium. A U.S. Holder
generally may elect to amortize the premium over the term of the Exchange
Debenture on a constant yield method as an offset to interest when includible in
income under the U.S. Holder's regular accounting method. The election to
amortize premium on a constant yield method once made applies to all debt
obligations held or subsequently acquired by the electing U.S. Holder on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the IRS.
REDEMPTION, SALE OR EXCHANGE OF EXCHANGE DEBENTURES. The adjusted tax basis
of a U.S. Holder who receives Exchange Debentures in exchange for Preferred
Stock will, in general, be equal to the initial tax basis of such Exchange
Debentures, increased by OID previously included in income by the U.S. Holder
and reduced by any cash payments on the Exchange Debentures other than qualified
stated interest. Upon the redemption, sale, exchange or retirement of an
Exchange Debenture a U.S. Holder will recognize capital gain or loss equal to
the difference between the amount realized upon the redemption, sale, exchange
or retirement (less any amount attributable to accrued qualified stated
interest) and the adjusted tax basis of the Exchange Debenture. Net capital gain
of individuals derived in respect of capital assets held for more than one year
are eligible for reduced rates of taxation which may vary depending upon the
holding period of such capital assets. The deductibility of capital losses is
subject to limitations.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS. If the yield-to-maturity on
Exchange Debentures with OID equals or exceeds the sum of (x) the "applicable
federal rate" (as determined under Section 1274(d) of the Code) in effect for
the month in which such debentures are issued (the "AFR") and (y) 5%, and the
OID on such Exchange Debentures is "significant", the Exchange Debentures will
be considered "applicable high yield discount obligations" ("AHYDOs") under
Section 163(i) of the Code. Consequently, the Company would not be allowed to
take a deduction for interest (including OID) accrued on such Exchange
Debentures for U.S. federal income tax purposes until such time as the Company
actually pays such interest (including OID) in cash or in other property (other
than stock or debt of the Company or a person deemed to be related to the
Company under Section 453(f)(1) of the Code). Because the amount of OID, if any,
attributable to such Exchange Debentures will be determined at the time such
Exchange Debentures are issued, and the AFR at the time such Exchange Debentures
are issued in exchange for Preferred Stock is not predictable, it is impossible
to determine at the present time whether an Exchange Debenture will be treated
as an AHYDO.
Moreover, if the yield-to-maturity on such an Exchange Debenture exceeds the
sum of (x) the AFR and (y) 6% (such excess shall be referred to hereinafter as
the "Disqualified Yield"), the deduction for OID accrued on the Exchange
Debenture will be permanently disallowed (regardless of whether the Company
actually pays such interest or OID in cash or in other property) for U.S.
federal income tax purposes to the extent such interest or OID is attributable
to the Disqualified Yield on the Exchange Debenture ("Dividend-Equivalent
Interest"). For purposes of the dividends received deduction, such
Dividend-Equivalent Interest will be treated as a dividend to the extent it is
deemed to have been paid out
193
<PAGE>
of the Company's current or accumulated earnings and profits. Accordingly, a
corporate U.S. Holder of an Exchange Debenture may be entitled to take a
dividends-received deduction with respect to any Dividend-Equivalent Interest
received by such corporate U.S. Holder on such an Exchange Debenture.
INFORMATION REPORTING AND BACKUP WITHHOLDING.
In general, information reporting requirements will apply to dividends paid
in respect of Preferred Stock and to the proceeds received on the sale, exchange
or redemption of Preferred Stock to U.S. Holders other than certain exempt
recipients (such as corporations). A 31% backup withholding tax will apply to
such payments if the U.S. Holder fails to provide a taxpayer identification
number or certification of exempt status or fails to report in full dividend and
interest income. U.S. Holders should consult their tax advisors concerning the
application of information reporting and backup withholding to the Exchange
Debentures.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such U.S. Holder's United States federal income tax
liability provided the required information is furnished to the IRS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes or New Preferred Stock for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes or New
Preferred Stock. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes or New Preferred Stock received in exchange for Old Notes or Exchangeable
Preferred Stock where such Old Notes or Exchangeable Preferred Stock were
acquired as a result of market-making activities or other trading activities. A
broker-dealer may not participate in the Exchange Offer with respect to Old
Notes or Exchangeable Preferred Stock acquired other than as a result of
market-making activities or other trading activities. To the extent any such
broker-dealer participates in the Exchange Offer and so notifies the Company, or
causes the Company to be so notified in writing, the Company has agreed for a
period of 90 days after the date of this Prospectus, it will make this
Prospectus, as amended or supplemented, available to such broker-dealer for use
in connection with any such resale, and will promptly send additional copies of
this Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in any Letter of Transmittal. In
addition, until , 1998 (90 days after the date of this Prospectus),
all dealers effecting transactions in the Exchange Notes or New Preferred Stock
may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes or
New Preferred Stock by broker-dealers. Exchange Notes and New Preferred Stock
received by broker-dealers for their own account pursuant to the Exchange Offer
may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Notes or New Preferred Stock or a combination of such
methods of resale, at prevailing market prices at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers or any such Exchange Notes or New Preferred
Stock. Any broker-dealer that resells Exchange Notes or New Preferred Stock that
were received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes or
New Preferred Stock may be deemed to be an "underwriter" within the meaning of
the Securities Act, and any profit on any such resale of Exchange Notes or New
Preferred Stock and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letters of Transmittal state that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
194
<PAGE>
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
and Exchangeable Preferred Stock against certain liabilities, including certain
liabilities that may arise under the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that receives
Exchange Notes or New Preferred Stock pursuant to the Exchange Offer hereby
agrees to notify the Company prior to using the Prospectus in connection with
the sale or transfer of Exchange Notes or New Preferred Stock, and acknowledges
and agrees that, upon receipt of notice from the Company of the happening of any
event which makes any statement in the Prospectus untrue in any material respect
or which requires the making of any changes in the Prospectus in order to make
the statements therein not misleading or which may impose upon the Company
disclosure obligations that may have a material adverse effect on the Company
(which notice the Company agrees to deliver promptly to such broker-dealer),
such broker-dealer will suspend use of the Prospectus until the Company has
notified such broker-dealer that delivery of the Prospectus may resume and has
furnished copies of any amendment or supplement to the Prospectus to such
broker-dealer.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Simpson Thacher & Bartlett, New York, New York.
EXPERTS
The combined financial statements of the Company as of December 31, 1996 and
1997 and for each of the three years in the period ended December 31, 1997,
included in this Prospectus, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports appearing herein and elsewhere in the
Registration Statement, and are included in reliance upon such report given upon
authority of such firm as experts in accounting and auditing.
195
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Combined Financial Statements:
Combined Balance Sheets as of December 31, 1996 and 1997............................................... F-3
Combined Statements of Operations for the years ended December 31, 1995, 1996 and 1997................. F-4
Combined Statements of Stockholders' Deficit for the years ended December 31, 1995, 1996 and 1997...... F-5
Combined Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................. F-6
Notes to Combined Financial Statements................................................................. F-7
Interim Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 28, 1997 and June 27, 1998............................ F-33
Condensed Consolidated Statements of Operations for the six months ended June 28, 1997 and June 27,
1998.................................................................................................. F-34
Condensed Consolidated Statements of Stockholders' Equity.............................................. F-35
Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 1997 and June 27,
1998.................................................................................................. F-36
Notes to Condensed Consolidated Financial Statements................................................... F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Bidermann Industries Corp. and Affiliates
We have audited the accompanying combined balance sheets as of December 31,
1996 and 1997, of Bidermann Industries Corp. and Consumer Direct Corporation
(collectively, the "Company"), wholly owned subsidiaries of Bidermann Industries
U.S.A., Inc., and the related combined statements of operations, stockholders'
deficit and cash flows for each of the three years in the period ended December
31, 1997. 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company at
December 31, 1996 and 1997 and the combined results of their operations and
their cash flows for each of three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 19, 1998, except for Note 20
as to which the date is April 10, 1998
F-2
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
<S> <C> <C>
1996 1997
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 5,784 $ 10,019
Accounts receivable, net.............................................................. 52,489 48,442
Inventories........................................................................... 71,828 78,236
Prepaid expenses and other current assets............................................. 4,443 4,234
----------- -----------
Total current assets.................................................................... 134,544 140,931
Property, plant and equipment, net...................................................... 46,940 47,698
Pension asset........................................................................... 28,191 30,227
Other noncurrent assets................................................................. 1,419 1,161
----------- -----------
Total assets............................................................................ $ 211,094 $ 220,017
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses................................................. $ 44,996 $ 46,486
Short-term debt and current portion of long-term debt................................. 1,171 9,172
Income taxes payable.................................................................. 1,636 2,153
----------- -----------
Total current liabilities............................................................... 47,803 57,811
Due to parent........................................................................... 27,647 27,613
Long-term debt and capital lease obligations............................................ 8,558 1,960
Other noncurrent liabilities............................................................ 933 500
Liabilities subject to compromise....................................................... 181,695 168,932
Preferred stock, cumulative, $1 par value: authorized 50,000 shares, issued and
outstanding 15,000 shares............................................................. 18,674 20,009
Stockholders' deficit:
Common stock, $1 par value: authorized, issued and outstanding 2,000 shares (1,000
BIC, 1,000 CDC)..................................................................... 2 2
Additional paid-in capital............................................................ 174,927 173,592
Accumulated deficit................................................................... (245,295) (228,099)
Equity adjustment from foreign currency translation................................... (3,850) (2,303)
----------- -----------
Total stockholders' deficit............................................................. (74,216) (56,808)
----------- -----------
Total liabilities and stockholders' deficit............................................. $ 211,094 $ 220,017
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
----------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- ----------
<CAPTION>
(In Thousands)
<S> <C> <C> <C>
Net sales.................................................................... $ 486,733 $ 368,696 $ 362,907
Cost of goods sold........................................................... 369,817 273,800 253,792
---------- ---------- ----------
Gross profit................................................................. 116,916 94,896 109,115
Selling, general and administrative expenses................................. 137,903 85,877 74,790
Facility closing and reengineering costs..................................... 22,481 11,603 2,469
---------- ---------- ----------
160,384 97,480 77,259
Operating income (loss)...................................................... (43,468) (2,584) 31,856
Interest expense, net (contractural interest expense $28,639 in 1995)........ 22,721 16,928 15,233
Other expense, net........................................................... 532 3,314 1,984
---------- ---------- ----------
Income (loss) before reorganization costs (credits) and income taxes......... (66,721) (22,826) 14,639
Bankruptcy reorganization costs (credits).................................... 20,871 6,128 (3,883)
---------- ---------- ----------
Income (loss) before provision for income taxes.............................. (87,592) (28,954) 18,522
Provision for income taxes................................................... 1,555 1,246 1,326
---------- ---------- ----------
Net income (loss)............................................................ $ (89,147) $ (30,200) $ 17,196
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM
COMMON STOCK ADDITIONAL FOREIGN
---------------------- PAID-IN ACCUMULATED CURRENCY
SHARES AMOUNT CAPITAL DEFICIT TRANSLATION TOTAL
----------- --------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994......................... 2,000 $ 2 $ 177,159 $ (125,948) $ (4,350) $ 46,863
Foreign currency translation adjustment............ -- -- -- -- (1,069) (1,069)
Accretion of dividend on redeemable preferred
stock............................................ -- -- (920) -- -- (920)
Net loss........................................... -- -- -- (89,147) -- (89,147)
----- --------- ---------- ------------ ----------- ----------
Balance at December 31, 1995......................... 2,000 2 176,239 (215,095) (5,419) (44,273)
Foreign currency translation adjustment............ -- -- -- -- 1,569 1,569
Accretion of dividend on redeemable preferred
stock............................................ -- -- (1,312) -- -- (1,312)
Net loss........................................... -- -- -- (30,200) -- (30,200)
----- --------- ---------- ------------ ----------- ----------
Balance at December 31, 1996......................... 2,000 2 174,927 (245,295) (3,850) (74,216)
Foreign currency translation adjustment............ -- -- -- -- 1,547 1,547
Accretion of dividend on redeemable preferred
stock............................................ -- -- (1,335) -- -- (1,335)
Net income......................................... -- -- -- 17,196 -- 17,196
----- --------- ---------- ------------ ----------- ----------
Balance at December 31, 1997......................... 2,000 $ 2 $ 173,592 $ (228,099) $ (2,303) $ (56,808)
----- --------- ---------- ------------ ----------- ----------
----- --------- ---------- ------------ ----------- ----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................. $ (89,147) $ (30,200) $ 17,196
Adjustment to reconcile net income (loss) to net cash and cash
equivalents provided by operating activities:
Amortization of deferred financing activities................ 412 -- --
Write-off of foreign currency translation adjustment......... -- 3,100 --
Write-down of property, plant and equipment.................. 9,425 742 --
Depreciation................................................. 12,301 10,716 8,075
Amortization................................................. 980 219 30
Gain on sale of fixed assets................................. -- -- (348)
Adjustments of liabilities subject to
compromise-reorganization.................................. 9,793 -- (10,000)
Accrual of professional fees, potential claims and related
litigation matters-reorganization............................ 6,253 6,128 6,117
Writedown of deferred financing fees-reorganization............ 4,825 -- --
Early retirement window benefit.............................. 2,877 -- --
--------- --------- ---------
(42,281) (9,295) 21,070
Changes in operating assets and liabilities, excluding the
effect of dispositions:
Accounts receivable.......................................... 4,442 8,217 3,917
Inventories.................................................. 36,735 21,308 (6,980)
Prepaid expenses and other current assets.................... 3,814 3,789 178
Pension and other noncurrent assets.......................... (3,573) (1,499) (1,808)
Accounts payable and accrued expenses........................ (1,168) (4,573) (4,430)
Income taxes payable......................................... 267 (76) 521
Other liabilities............................................ 2,896 (1,298) (448)
Effect of changes in foreign currency........................ (734) 121 930
--------- --------- ---------
Net cash and cash equivalents provided by operating
activities................................................... 398 16,694 12,950
INVESTING ACTIVITIES
Purchase of fixed assets....................................... (6,073) (9,835) (10,778)
Proceeds from sale of Ralph Lauren............................. 30,000 -- --
Proceeds on disposal of fixed assets........................... 1,407 1,566 3,327
--------- --------- ---------
Net cash and cash equivalents used in investing activities..... 25,334 (8,269) (7,451)
FINANCING ACTIVITIES
Proceeds from DIP credit facility.............................. 11,000 53,300 16,398
Principal payments on DIP credit facility...................... (9,000) (55,300) (16,795)
Proceeds from issuance of long term debt....................... 2,579 4,971 2,246
Principal payments on long term debt........................... (30,684) (16,294) (3,113)
--------- --------- ---------
Net cash and cash equivalents provided by (used in) financing
activities................................................... (26,105) (13,323) (1,264)
Effect of foreign currency translation......................... (4) (2) --
--------- --------- ---------
Net change in cash and cash equivalents........................ (377) (4,900) 4,235
Cash and cash equivalents at beginning of year................. 11,061 10,684 5,784
--------- --------- ---------
Cash and cash equivalents at end of year....................... $ 10,684 $ 5,784 $ 10,019
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES
Cash paid during the year:
Interest..................................................... $ 17,149 $ 8,773 $ 7,649
--------- --------- ---------
--------- --------- ---------
Income taxes................................................. $ 234 $ 674 $ 1,163
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-6
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BACKGROUND
Bidermann Industries Corp. ("BIC") and its subsidiaries is a wholly-owned
subsidiary of Bidermann Industries, U.S.A., Inc. ("BIUSA") operating in the
textile and apparel industry primarily in the design, manufacture, and marketing
of apparel and the licensing of certain owned trademarks and processes relating
to the textile and apparel industry. Effective November 4, 1996, certain assets
of two BIC subsidiaries, Cluett Peabody & Co., Inc. and Bidermann Tailored
Clothing, Inc., were transferred to a newly formed company, Cluett Designer
Group, Inc. ("CDG"), a wholly-owned subsidiary of BIC. CDG has not filed
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. These assets
were purchased at net book value and paid for in cash and stock. The combined
financial statements presented herein also include financial data of Consumer
Direct Corporation ("CDC"), which is also wholly owned by BIUSA. CDC primarily
operates retail apparel stores in discount outlet malls. BIC and CDC
collectively are referred to herein as the "Company".
PETITION FOR RELIEF UNDER CHAPTER 11
On July 17, 1995, BIUSA and sixteen of its subsidiaries (the "Debtors")
filed voluntary petitions for relief under the provisions of Chapter 11 of the
Federal Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for
the Southern District of New York (the "Court"). See Note 18 for condensed
financial information of the entities included in the combined financial
statements but not included in the bankruptcy proceedings and, as such, not
subject to the provisions of Chapter 11. The separate Chapter 11 cases of the
Debtors have been consolidated for procedural purposes and are being jointly
administered pursuant to an order of the Court. By order of the Court dated
February 1, 1996, the Court procedurally deconsolidated the case of Ralph Lauren
Womenswear, Inc., from the cases of the remaining Debtors. Under Chapter 11,
certain claims against the Debtors in existence prior to the filing for relief
under the federal bankruptcy laws are stayed while the BIUSA continues business
operations as a Debtor-in-Possession subject to the supervision of the Court.
The Company filed a proposed plan of reorganization with the Court which was
approved on March 31, 1998 (see Note 20).
In connection with the bankruptcy proceedings, the Company incurred
bankruptcy reorganization costs in 1995, 1996, and 1997 of $2,772,000,
$6,128,000, and $6,117,000 respectively, for professional fees. In 1995, the
Company also established a reserve of $9,793,000 related to estimated costs
associated with rejecting leases for certain office space, facilities, retail
stores and equipment and incurred costs of $4,825,000 related to fees in
obtaining Debtor-in-Possession financing and the write-off of capitalized
deferred finance costs on the pre-petition debt, and $3,481,000 related to
potential claims and related litigation matters. During the bankruptcy period
from 1995 through 1997, the Company attempted to settle all bankruptcy claims
through negotiations with the Company's vendors and lessors. In certain cases,
the vendors and lessors accepted settlements for less than the claim amount
originally filed. For example, the Company's liability for lease rejection
claims was reduced to the extent the lessors were able to mitigate their losses.
As a result of these on-going negotiations in 1997, the Company recognized
approximately $10.0 million in credits resulting from these negotiated
settlements with various vendors and lessors. Settlements during 1995 and 1996
were not significant. All settlements were approved by the United States
Bankruptcy Court for the Southern District of New York.
The principal categories of claims classified as liabilities subject to
compromise in the combined balance sheets at December 31, 1996 and 1997 are
identified below. All amounts may be subject to future
F-7
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. BACKGROUND (CONTINUED)
adjustments depending on Court actions and further developments with respect to
disputed claims or other events.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
<S> <C> <C>
1996 1997
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Liabilities subject to compromise:
Debt and accrued interest........................................... $ 146,001 $ 145,629
Trade accounts and expenses payable................................. 28,101 18,238
Lease rejection liabilities......................................... 7,593 5,065
---------- ----------
Total................................................................. $ 181,695 $ 168,932
---------- ----------
---------- ----------
</TABLE>
Additional pre-petition claims may arise resulting from the rejection of
additional executory contracts, including leases, or from the determination by
the Court (or agreed to by the parties in interest) of allowed claims.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements include all subsidiary companies of BIC
and CDC. Significant intercompany transactions have been eliminated in the
combination. In 1995 and 1996, the Company allocated external interest expense
to all of its divisions based on a percentage of total equity. In 1997, the
Company allocated external interest expense based on a percentage of sales. All
allocations of interest expense eliminate prior to combination.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company's principal customers are retail stores and chains located in
the United States and in the countries where its foreign subsidiaries are
domiciled, primarily Canada. Royalty and licensing income is earned from a
worldwide base of licensees engaged in the sale and manufacture of textiles and
apparel. The Company generally does not require collateral on accounts
receivable.
INVENTORY VALUATION
Inventories are stated at the lower of cost (first-in, first-out) or market.
During 1995, the Company incurred a charge for the liquidation of excess
inventory of approximately $14,000,000 which is included in cost of goods sold.
F-8
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated
(including depreciation of assets recorded under capital leases) principally by
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Buildings............................ 32-39 years
Site improvements.................... 15-39 years
Machinery, equipment and other....... 3-10 years
Leasehold improvements............... The lesser of the lease term or
estimated useful life
</TABLE>
INCOME TAXES
The Company accounts for income taxes under FAS 109, "Accounting for Income
Taxes". Under the provisions of FAS 109, deferred income taxes are provided at
the enacted marginal rates on the differences between the financial statement
and income tax bases of assets and liabilities. BIUSA and subsidiaries file a
consolidated federal income tax return and separate, combined or unitary state
and local income tax returns in accordance with the filing requirements and
options applicable in the jurisdiction in which income tax returns are required.
Income tax expense for the Company is presented in the accompanying financial
statements on a separate return basis.
USE OF ESTIMATES
Management uses estimates in preparing the combined financial statements in
conformity with generally accepted accounting principles. The Company regularly
assesses these estimates and, while it is reasonably possible that actual
results may differ from these estimates, management believes that material
changes will not occur in the near term.
REVENUE RECOGNITION
The Company recognizes revenue when the apparel is shipped. Fees from the
licensing of trademarks and processes relating to the textile and apparel
industry are recognized ratably over the period of time for fixed license fees
and based on estimated sales for variable royalty fees. The Company recognized
licensing fees of $14,100,000, $8,600,000 and $6,900,000 in 1995, 1996 and 1997,
respectively, which are included in net sales in the accompanying statements of
operations. Customer returns and allowances have been provided based on
estimated returns (see Note 5).
SOFTWARE
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED FOR OR OBTAINED FOR INTERNAL-USE. The SOP is effective for the Company
beginning on January 1, 1999. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal-use. The Company currently expenses such costs
as incurred. The Company has not yet assessed what the impact of the SOP will be
on the Company's future earnings or financial position. The Company expensed
$386,000, $2,345,000 and $448,000 of such costs during 1995, 1996, and 1997,
respectively.
F-9
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Translation adjustments arising from certain foreign operations of the
Company are reflected as a separate component of stockholders' deficit. Other
expense, net includes an aggregate exchange loss on transactions of
approximately $502,000, $88,000, and $816,000 in 1995, 1996, and 1997
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to financial risks from movements in foreign exchange
rates through its foreign operations. To manage these risks, the Company
selectively uses forward contracts as hedges of foreign currency commitments.
The Company had no forward contracts outstanding at December 31, 1997.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company charged
$12,662,000, $11,503,000, and $8,659,000 to advertising expense in 1995, 1996,
and 1997 respectively.
CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Financial instruments which subject the Company to credit risk are primarily
trade accounts receivable. Concentration of credit risk with respect to accounts
receivable is limited due to the large number and diversity of customers
comprising the Company's customer base. Management believes the risk associated
with trade accounts receivable is adequately provided for in the allowance for
doubtful accounts (see Note 5).
3. PREFERRED STOCK
During 1993, the Board of Directors authorized (50,000 shares) and issued
15,000 shares of Series A Redeemable Preferred Stock (Preferred Stock) to BIUSA
for an aggregate purchase price of $15,000,000. Each preferred share has a par
value of $1 and is recorded at its stated value on the date of issuance. The
Preferred Stock is redeemable for cash by the holders or the Company for $1,000
per share, together with accrued and unpaid dividends, whether or not earned or
declared, to the redemption date. The Company is prohibited under its Credit
Agreement (see Note 8-Long-Term Obligations and Financing Agreements) from
redeeming any of its outstanding stock. Dividends on the preferred shares are
cumulative and payable semiannually on the first day of January and July,
respectively, when and as declared by the Company's Board of Directors, but only
out of funds legally available. Cumulative cash dividends have been calculated
at a rate per annum equal to 3% over the six months London Inter Bank Offering
Rate date at December 31, 1996 and 1997 (8.84% at December 31, 1997).
In the event of any voluntary liquidation, dissolution or winding up of the
affairs of the Company, the holders of the Preferred Stock shall be entitled,
before any distribution or payment is made to holders of any junior stock, to be
paid in full an amount equal to $1,000 per share together with accrued dividends
to such date whether or not earned or declared. In the event six consecutive
preferred stock dividend payments are in arrears, holders of the preferred stock
may vote separately as a class to elect two members to the Board of Directors of
the Company until all such dividends have been paid.
The carrying value of Redeemable Preferred Stock reflects accretion of
$5,009,000 cumulative, undeclared dividends through December 31, 1997.
F-10
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. FACILITY CLOSING AND REENGINEERING COSTS
In connection with developing a plan of reorganization during 1995, the
Company developed and implemented a program designed to reduce operating
expenses and improve overall productivity. During 1995, 1996, and 1997, the
Company incurred expenses of $22,481,000, $11,599,000 and $2,469,000,
respectively, in implementing this plan. The principal components of these
expenses are as follows:
FACILITY CLOSINGS -- During 1995, 1996, and 1997, the Company recorded
expenses of approximately $16,794,000, $6,533,000, and $1,048,000 respectively,
for costs incurred in connection with closing 27, 3, and 3 outlet stores and 6,
3, and 0 retail stores as well as closing 3, 2, and 0 manufacturing facilities
in 1995, 1996, 1997, respectively, and closing the Company's administrative
headquarters and a distribution center in 1995.
The significant cost components related to the retail and outlet store
closings are primarily lease rejections, fixed asset write-offs, inventory
write-downs, and to a lesser extent severance pay. The significant components
related to closing manufacturing facilities are fixed asset write-downs,
facility shutdown and environmental clean-up costs, and severance related
expenses.
OTHER OPERATING EXPENSES -- In addition to the above items, the Company
incurred other operating expenses of $2,930,000, $5,066,000, $1,421,000 in 1995,
1996, and 1997, respectively, primarily related to certain professional fees
incurred to restructure and operate the Company during Bankruptcy and for system
conversion. The Company also recognized a loss of $2,757,000 in 1995 on the sale
of its Ralph Lauren Womenswear, Inc. subsidiary.
The provision and related ending accruals for these costs are summarized as
follows:
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSES
FACILITY CLOSING -----------------------------------------
---------------------- SYSTEM PROFESSIONAL (GAIN) LOSS
PLANT & DC RETAIL CONVERSION FEES RELOCATION ON DISPOSAL TOTAL
----------- --------- ----------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1995........... -- -- -- -- -- -- --
Expense..................... 9,550 7,244 1,725 639 566 2,757 22,481
Applied..................... (6,660) (4,824) (1,725) (639) (566) (2,757) (17,171)
----------- --------- ----------- ------ --- ----------- ---------
Balance as of
December 31, 1995......... 2,890 2,420 -- -- -- -- 5,310
Expense..................... 4,329 2,204 4,145 82 839 -- 11,599
Applied..................... (6,646) (774) (3,315) (82) (744) -- (11,561)
----------- --------- ----------- ------ --- ----------- ---------
Balance as of
December 31, 1996......... 573 3,850 830 -- 95 -- 5,348
Expense..................... 635 413 942 604 224 (349) 2,469
Applied..................... (1,208) (3,523) (1,436) (604) (319) 349 (6,741)
----------- --------- ----------- ------ --- ----------- ---------
Balance as of
December 31, 1997......... -- 740 336 -- -- -- 1,076
----------- --------- ----------- ------ --- ----------- ---------
----------- --------- ----------- ------ --- ----------- ---------
</TABLE>
F-11
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. ACCOUNTS RECEIVABLE
Allowances provided for accounts receivable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Doubtful accounts........................................................ $ 3,292 $ 1,802
Customer allowances...................................................... 12,122 8,171
--------- ---------
$ 15,414 $ 9,973
--------- ---------
--------- ---------
</TABLE>
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Finished goods.......................................................... $ 56,269 $ 65,558
Work in process......................................................... 6,168 4,326
Raw materials and supplies.............................................. 9,391 8,352
--------- ---------
$ 71,828 $ 78,236
--------- ---------
--------- ---------
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Land.................................................................. $ 2,661 $ 2,120
Buildings and site improvements....................................... 26,013 25,764
Machinery, equipment and other........................................ 73,723 78,034
Construction in progress.............................................. 1,363 2,804
---------- ----------
103,760 108,722
Less accumulated depreciation......................................... (56,820) (61,024)
---------- ----------
$ 46,940 $ 47,698
---------- ----------
---------- ----------
</TABLE>
Included in the amounts above is property held under capital leases
(principally a distribution facility) of $9,523,000 and $8,450,000, at December
31, 1996 and 1997, respectively.
8. LONG-TERM OBLIGATIONS AND FINANCING AGREEMENTS
In conjunction with the Chapter 11 filing, BIC arranged for a $75,000,000
Debtor-in-Possession credit facility (the "DIP facility"). Interest charged on
borrowings under the DIP facility is the reference rate (defined as the greater
of the federal funds rate plus 1/2% or the prime rate) plus 2% and an
availability fee of 1/2 of 1% of the unused portion of the credit facility. As a
result of the sale of certain assets to CDG, the
F-12
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM OBLIGATIONS AND FINANCING AGREEMENTS (CONTINUED)
DIP facility was reduced to $65,000,000. CDG secured a $15,000,000 asset-based
lending facility with interest of prime plus 1% charged on borrowings. On April
10, 1997, the Bankruptcy Court granted final approval for replacement of the
$65,000,000 DIP facility which closed on April 17, 1997. The new $55,000,000 DIP
facility, which was set to mature on April 17, 1998, has been extended to mature
on October 17, 1998. Interest charged on borrowings under the new DIP facility
is prime plus 3/4 of 1%. Any borrowing under the Company's 1990 credit facility
(as amended, the "pre-petition facility") ceased on or before July 17, 1995. To
provide protection for the lenders under the pre-petition facility, payments are
being made at a rate of 10% per annum on the pre-petition amount owed to the
lenders and is payable monthly in arrears. Half of this payment is being applied
to the principal and the other half is applied to accrued interest, which is
subject to reclassification pending final approval of the Plan of Reorganization
(see Note 20).
The Company has accrued interest on the obligations outstanding under the
pre-petition facility at the pre-petition contractual rates through December 31,
1997. The new DIP facility requires the Company to maintain various financial
covenants including minimum earnings.
At the time of the Chapter 11 filing, the pre-petition facility consisted of
(i) a revolving credit facility which allowed for revolving loans, letters of
credit and bankers acceptances and (ii) a term loan facility. Availability under
the revolving facility was limited to the lesser of a cap or a borrowing base
amount calculated based on certain percentages of eligible accounts receivable
and eligible inventory. Interest on outstanding borrowings under the revolving
credit facility was charged at the reference rate plus 1- 1/2%. Interest on the
term loan facility was charged at the reference rate plus 2%. The Company is
currently in default of this agreement.
The lenders under the new DIP facility have a first priority lien on
substantially all of the assets of BIC and certain other subsidiaries included
in the Chapter 11 filings. The lenders under the pre-petition facility have a
subordinate lien to the DIP lenders on substantially all of the assets of BIC
and those subsidiaries of BIC included in the Chapter 11 filings. The holders of
BIUSA Bond and Equity Notes, to the extent determined to be valid debt
obligations, have a first priority lien on substantially all of the assets of
CDC and the assets of its wholly-owned subsidiary, Arrow Factory Stores. The
lender under the Canadian Operating loan has a first priority lien on
substantially all of the assets of Cluett Canada.
The amount due to parent relates to two transactions, which occurred in 1991
and 1992. The Company's parent loaned the Company $15,000,000 in the form of an
interest bearing note in 1991. The balance of this note plus accrued interest
(interest was accrued until bankruptcy) was approximately $18,541,000 at
December 31, 1997. Additionally, the Company's parent loaned approximately
$9,072,000 to Consumer Direct Corporation in 1992 in order for the stores to
enter favorable pricing and supply agreements with other subsidiaries of the
parent. As a condition of the Plan, these intercompany amounts were contributed
by the Company's parent. In addition, the Company does not expect the parent
company to provide further financing in the future.
F-13
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM OBLIGATIONS AND FINANCING AGREEMENTS (CONTINUED)
The classification of the Company's long-term obligations and financing
arrangements, including accrued interest, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
---------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUBJECT TO LONG- SUBJECT TO LONG-
CURRENT COMPROMISE TERM TOTAL CURRENT COMPROMISE TERM
----------- ----------- --------- --------- ----------- ----------- ---------
CDG operating facility (U.S. Prime +
1.5%).................................. $ -- $ -- $ 4,971 $ 4,971 $ 6,256 $ -- $ --
D.I.P. operating facility................ -- -- -- -- -- -- --
Pre-petition facility:
Revolving credit facility.............. -- 55,391 -- 55,391 -- 52,638 --
Term debt.............................. -- 74,252 -- 74,252 -- 70,459 --
Accrued interest....................... -- 16,358 -- 16,358 -- 22,532 --
----------- ----------- --------- --------- ----------- ----------- ---------
-- 146,001 -- 146,001 -- 145,629 --
Canada operating loan
(Canadian prime + 1%).................. 402 -- -- 402 2,192 -- --
Capital lease obligations................ 769 -- 3,587 4,356 724 -- 1,960
----------- ----------- --------- --------- ----------- ----------- ---------
$ 1,171 $ 146,001 $ 8,558 $ 155,730 $ 9,172 $ 145,629 $ 1,960
----------- ----------- --------- --------- ----------- ----------- ---------
----------- ----------- --------- --------- ----------- ----------- ---------
<CAPTION>
<S> <C>
TOTAL
---------
CDG operating facility (U.S. Prime +
1.5%).................................. $ 6,256
D.I.P. operating facility................ --
Pre-petition facility:
Revolving credit facility.............. 52,638
Term debt.............................. 70,459
Accrued interest....................... 22,532
---------
145,629
Canada operating loan
(Canadian prime + 1%).................. 2,192
Capital lease obligations................ 2,684
---------
$ 156,761
---------
---------
</TABLE>
The Company has two notes payable to its parent (BIUSA) aggregating
$27,647,000; since filing for relief under the provision of the Bankruptcy Code
in 1995, the notes have been non-interest bearing.
9. INCOME TAXES
The Company files a consolidated Federal income tax return with BIUSA. At
December 31, 1997, the Company had net domestic operating loss carryforwards of
approximately $180 million. The operating loss carryforwards are scheduled to
expire from the year 2005 to 2011. As defined under the Internal Revenue Code
and Regulations, utilization of net operating loss carryforwards are subject to
limitation after an ownership change. Under these regulations, the Company
believes that shareholder transactions of BIUSA in prior years did not result in
an ownership change, as defined. However, the utilization of the net operating
loss carryforwards may be limited in the future depending upon the outcome of
events discussed in Note 1.
Undistributed earnings of foreign subsidiaries deemed permanently invested
for which no deferred income taxes have been provided were approximately
$10,942,000 at December 31, 1995, $6,814,000 at December 31, 1996, and
$5,091,000 at December 31, 1997.
F-14
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
<S> <C> <C>
1996 1997
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Cancellation of debt income......................................... $ 10,200 $ 10,200
Depreciation........................................................ 2,618 2,067
Pension income...................................................... 3,992 4,332
Other............................................................... 1,187 1,187
---------- ----------
Total deferred tax liabilities........................................ 17,997 17,786
Deferred tax assets:
Net operating loss carryforwards.................................... 65,411 61,374
AMT Credits......................................................... -- 265
Restructuring reserves.............................................. 2,844 2,528
Note receivable reserves............................................ 1,931 1,931
Interest to parent.................................................. 1,056 1,056
Allowance for bad debts............................................. 1,147 1,154
Inventory overhead cost adjustment, net............................. 828 632
Other............................................................... 4,377 4,120
---------- ----------
Total deferred tax assets............................................. 77,594 73,060
Valuation allowance for deferred tax assets........................... (59,597) (55,274)
---------- ----------
Net deferred taxes.................................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................................ $ -- $ -- $ 4,606
State and local................................................ 850 350 485
Foreign(1)..................................................... 705 896 575
Benefit of net operating loss carry forward...................... -- -- (4,340)
--------- --------- ---------
$ 1,555 $ 1,246 $ 1,326
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Includes approximately $510, $691, and $500 relating to foreign withholding
taxes for 1995, 1996, and 1997, respectively.
F-15
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the statutory Federal income tax provision (benefit) to
the Company's provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Computed at statutory rate.................................... $ (31,404) $ (8,529) $ 4,139
Effect on federal income tax expense of:
State and local income taxes, net of federal income tax
benefit................................................... 561 232 320
Differential attributed to foreign operations............... 3,315 1,820 1,172
Changes in valuation allowance for deferred tax assets...... 29,151 7,563 (4,340)
Other, net.................................................... (68) 160 35
---------- --------- ---------
$ 1,555 $ 1,246 $ 1,326
---------- --------- ---------
---------- --------- ---------
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has a qualified and a number of nonqualified noncontributory
defined benefit pension plans covering essentially all employees of the Company
in the United States. The benefits are based on years of service and average
compensation for the highest five consecutive years of earnings preceding
retirement date (or earlier termination of employment), subject to certain
limitations. The Company's practice is to fund amounts which are required by
statute and applicable regulations and which are tax deductible. Assets of the
plans are investments in cash equivalents, publicly traded fixed income and
equity securities, and real estate. Assets are valued using a method which
recognizes the difference between actual and expected market values over a
period of five years.
At December 31, 1996 and 1997, the funded status of the Company's qualified
defined benefit pension plan was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1996 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation:
Vested benefits......................................................... $ 64,294 $ 65,321
Nonvested benefits...................................................... 552 666
--------- ---------
Accumulated benefit obligation.......................................... 64,846 65,987
--------- ---------
Effect of projected salary levels....................................... 6,275 8,086
Projected benefit obligation............................................ 71,121 74,073
Plan assets at fair value............................................... 99,586 109,129
--------- ---------
Plan assets in excess of projected benefit obligation................... 28,465 35,056
Unrecognized net loss................................................... (2,902) (8,421)
Unrecognized prior service cost......................................... 2,628 3,592
--------- ---------
Pension asset included in combined balance sheets....................... $ 28,191 $ 30,227
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company's two nonqualified benefit plans had benefit obligations which
exceeded plan assets at December 31, 1996 and 1997. As of December 31, 1996 and
1997, these plans had net liabilities of $1,018,000 which relate primarily to
vested benefits. These liabilities are included in liabilities subject to
compromise at December 31, 1996 and 1997. Net pension expense for these plans
was not material in 1995, 1996, or 1997.
Net pension benefit of the Company's qualified defined benefit plan for the
years ended December 31, 1995, 1996, and 1997 include the following components:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost.............................................. $ 1,249 $ 1,449 $ 1,675
Interest cost............................................. 4,982 4,779 5,345
Actual return on plan assets.............................. (17,643) (12,661) (16,498)
Amortization of unrecognized reversion value discount..... (900) (1,230) (1,230)
Loss deferred for later recognition....................... 9,069 4,483 8,030
---------- ---------- ----------
(3,243) (3,180) (2,678)
Other benefit charges:
Early retirement program / special termination benefits... 3,028 809 642
Settlement benefits....................................... 82 -- --
---------- ---------- ----------
Net pension benefit....................................... $ (133) $ (2,371) $ (2,036)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The assumptions used in determining the funded status of the Company's
defined benefit pension plans for the years ended December 31, 1995, 1996, and
1997 were discount rates of 9.0%, 8.0%, and 8.0%, respectively, and an average
rate of increase in compensation levels ranging from 3.25% to 18.5% depending on
the participant's age at the valuation date. In addition, the expected long-term
rate of return on plan assets was 9.5% for all periods.
During 1990, in connection with the acquisition of certain businesses, the
Company adjusted the actuarial valuation of certain estimated pension assets to
reflect their net realizable value based upon a planned reversion to the
Company. In August 1991, the Company decided not to revert the assets. As a
result of this change, the excess pension assets are being recognized over the
Average Future Working Lifetime of the plan participants, estimated to be a
period of 14 years. Amortization of this amount was $900,000 in 1995, $1,230,000
in 1996, and $1,230,000 in 1997 and is included in pension benefit for each
respective year. The Company periodically performs an actuarial valuation of
these pension assets and adjusts the amount of the pension assets and the annual
amortization based on the results of the valuation.
During 1995, the Company's qualified defined benefit plan was amended to
provide an Enhanced Retirement Program ("ERP"). The total charge for 1995, 1996,
and 1997 related to this program was $3,028,000, $809,000 and $642,000,
respectively.
As of January 1, 1997, the Company's defined benefit pension plan was
amended into a cash balance pension plan. Provisions of the plan in effect prior
to January 1, 1997 continue to apply to participants who terminated, retired, or
became disabled prior to January 1, 1997 and not reemployed after December 31,
F-17
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
1996. As of January 1, 1997, active participants' account balances were valued
equal to the present value of the lump sum accrued benefit payable as of January
1, 1997 under the plan provisions in effect prior to January 1, 1997. Benefits
accruing after January 1, 1997 are calculated using a formula based on a
participant's years of service, age, and actual compensation.
The Company also has defined contribution pension plans covering certain
employees. Contributions and costs are either a percent of each covered
employee's salary or basic contribution. The Company funds contributions to
these plans as they come due. Payments charged to expenses for these plans
amounted to approximately $795,000, $655,000, and $0 in 1995, 1996, and 1997,
respectively.
In addition, the Company participated in mutiemployer pension plans that
provided defined benefits to employees covered by collective bargaining
agreements. Payments charged to expense for the multiemployer plans amounted to
approximately $212,000, $435,000, and $0 in 1995, 1996, and 1997, respectively.
Participation in the multiemployer pension plans terminated January 1, 1997.
F-18
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDER'S DEFICIT
The separate stockholder's deficit of each of BIC and CDC is as follows:
<TABLE>
<CAPTION>
BIC CDC COMBINED
---------- --------- ----------
<S> <C> <C> <C>
Balance at December 31, 1995:
Common Stock and Additional Paid In Capital.................................... $ 161,240 $ 15,001 $ 176,241
Accumulated Deficit............................................................ (202,168) (12,927) (215,095)
Foreign Currency Translation Adjustment........................................ (5,419) -- (5,419)
---------- --------- ----------
$ (46,347) $ (2,074) $ (44,273)
---------- --------- ----------
---------- --------- ----------
Balance at December 31, 1996:
Common Stock and Additional Paid In Capital.................................... $ 159,928 $ 15,001 $ 174,929
Accumulated Deficit............................................................ (221,810) (23,485) (245,295)
Foreign Currency Translation Adjustment........................................ (3,850) -- (3,850)
---------- --------- ----------
$ (65,732) $ (8,484) $ (74,216)
---------- --------- ----------
---------- --------- ----------
Balance at December 31, 1997:
Common Stock and Additional Paid In Capital.................................... $ 158,593 $ 15,001 $ 173,594
Accumulated Deficit............................................................ (204,570) (23,529) (228,099)
Foreign Currency Translation Adjustment........................................ (2,303) -- (2,303)
---------- --------- ----------
$ (48,280) $ (8,528) $ (56,808)
---------- --------- ----------
---------- --------- ----------
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company and certain of its subsidiaries are party to litigation in
connection with the normal conduct of their businesses. Management believes,
based in part on the opinion of counsel, that pending litigation in the
aggregate will not have a material effect on the Company's financial position.
The Company leases certain land, buildings and equipment under both capital
and noncancelable operating leases that expire in various years through 2013.
Certain of the operating leases contain rent escalation clauses and require the
Company to pay maintenance costs, property taxes, and insurance obligations on
the leased property.
F-19
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Excluding lease contracts which have been rejected by the Company, future
minimum lease payments under noncancelable operating leases and capital leases,
together with the present value of the net minimum lease payments as of December
31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Year payable:
1998....................................................................................... $ 959 $ 2,993
1999....................................................................................... 776 2,472
2000....................................................................................... 771 1,759
2001....................................................................................... 405 1,058
2002....................................................................................... 40 987
Later...................................................................................... 360 1,666
--------- -----------
Total minimum lease payments................................................................. 3,311 $ 10,935
-----------
-----------
Amount representing interest................................................................. (627)
---------
---------
Present value of net minimum lease payments.................................................. 2,684
Current portion.............................................................................. 724
---------
---------
Long-term portion............................................................................ $ 1,960
---------
---------
</TABLE>
Rent expense amounted to approximately $8,128,000 in 1995, $5,153,000 in
1996, and $3,861,000 in 1997.
The Company has approximately $19,075,000 of open letters of credit
outstanding at December 31, 1997 for the purchase of finished goods inventory
from foreign vendors. In addition, approximately $4,811,000 of stand-by letters
of credit were also outstanding.
13. SUBSIDIARY OPERATIONS
In 1996, the Company began the process of liquidating its investment in its
Mexican and Guatemalan subsidiaries. Accordingly, a translation adjustment of
approximately $3,100,000 previously recorded as a component of equity was
expensed and is included in other expense, net.
On June 17, 1997, the Company entered into an agreement with a private
individual to sell 100% of the stock of the Guatemalan subsidiary for $100,000.
The proceeds are currently being held in escrow pending determination of
distribution by the Court.
On September 30, 1997, the Company entered into an agreement with a private
individual to sell substantially all of the assets of the Company's Mexican
subsidiary for approximately $1,441,000. Substantially all of the proceeds were
used to reduce intercompany obligations of the Mexican subsidiary. The Company
recognized a net gain of $348,000 on the sale of its Mexican and Guatemalan
subsidiaries.
During 1996, Canadian management assessed the Company's operations in the
Canadian retail stores and concluded that the Company should close these stores
other than retaining three of the Company's Canadian outlet stores to dispose of
certain discounted inventory items. The resulting charge of $2,559,000 in 1996
for closure costs has been included in the financial statements in Facility
closing and reengineering
F-20
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSIDIARY OPERATIONS (CONTINUED)
costs and included charges to write down fixed assets ($0.9 million) and
inventory ($0.5 million) to net realizable value and accrual of salaries,
severance and other operating costs to close the stores ($1.2 million).
On August 23, 1995, the Company entered into an agreement with Polo Ralph
Lauren Enterprises, L.P. (the "Buyer") to sell substantially all of the assets
of the Company's Ralph Lauren Womenswear, Inc. subsidiary ("RLW") to an
affiliate of the Buyer for approximately $41,934,000. These assets were sold as
of October 15, 1995. In 1995, the Buyer paid approximately $30,967,000 into an
escrow account for the assets which was used to reduce the pre-petition debt.
Approximately $873,000 of the purchase price was used to offset obligations due
to affiliates of the Buyer at closing. The remaining sale proceeds were received
in 1996 and were used to reduce secured debt and fund certain liabilities of
RLW.
14. LICENSING AGREEMENTS
Certain of the Company's subsidiaries (Licensees) have licensing agreements
which give them the exclusive rights to use certain trademarks, logos and
related trade names in connection with the manufacture and sale of certain men's
and women's apparel in specified territories. License fees are based on
percentages of net sales, as defined, for the various products sold, but not
less than specified minimum amounts. The licensing agreements have various
renewal dates. Certain of the license agreements contain automatic renewals and
are noncancelable. The renewal terms range to five years and expire in various
years through 2002.
Future minimum license and technical assistance fees payable in the five
years succeeding December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Year payable:
1998.............................................................. $ 3,228
1999.............................................................. 3,362
2000.............................................................. 2,980
2001.............................................................. 2,120
2002.............................................................. 360
</TABLE>
15. RELATED PARTY TRANSACTIONS
The Company has an 8.74% outstanding loan receivable from an officer (and
principal indirect stockholder) in the amount of approximately $4,456,000. The
accumulated accrued interest on the loan is $1,352,000 at December 31, 1995,
1996, and 1997. In July of 1993, the officer filed for personal protection under
Chapter 11 bankruptcy regulations. The Company recorded a reserve for
approximately $5,808,000 against the unpaid interest and principal balances
outstanding at December 31, 1994. As part of the Plan (See Note 20), all
principal and accrued interest related to this note was forgiven on May 18,
1998.
16. RISKS, UNCERTAINTIES AND SIGNIFICANT CONCENTRATIONS
The Company manufactures and sources a portion of its products and raw
materials from foreign subsidiaries or vendors. The Company attempts to limit
the concentration with any one manufacturer or vendor. The Company believes it
has alternative manufacturing and raw material sources available to meet
F-21
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
16. RISKS, UNCERTAINTIES AND SIGNIFICANT CONCENTRATIONS (CONTINUED)
its current and future production requirements in the event the Company is
required to change current manufacturers or vendors are unavailable to fulfill
the Company's needs.
The Company's principal customer base, the retail industry, has experienced
significant changes and difficulties over the past several years, including
consolidation of ownership, increased centralization of buying decisions and
restructurings. The Company cannot predict what effect, if any, continued
changes within this industry will have on the Company's operations.
17. FAIR MARKET VALUE
It was not practicable to estimate the fair market value of the Company's
pre-petition debt obligations as the Company is currently in Chapter 11
proceedings. As more fully described in Note 1, the ultimate plan of
reorganization could significantly impact the estimated fair value of these
obligations (see Note 20).
18. CONDENSED FINANCIAL INFORMATION FOR ENTITIES NOT IN CHAPTER 11
In 1996 and 1997, Cluett Designer Group, Cluett Peabody Canada, Inc., Arrow
Mexico and Arrow Guatemala are included in the Combined Financial Statements but
have not filed petitions for relief under Chapter 11 of the U.S. Bankruptcy
Code. Condensed combined financial statements of these entities are as follows
as of December 31, 1996 and 1997 and for each of the three years in the year
ended December 31, 1997:
<TABLE>
<CAPTION>
CONDENSED BALANCE
SHEET
DECEMBER 31
--------------------
<S> <C> <C>
1996 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Current assets.......................................................... $ 32,258 $ 34,735
Total assets............................................................ 37,079 38,628
Current liabilities..................................................... (8,653) (16,461)
Total liabilities....................................................... (15,058) (17,202)
</TABLE>
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENT
YEAR ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales.................................................... $ 78,930 $ 69,288 $ 75,526
Gross profit................................................. 17,642 14,586 19,164
Net loss..................................................... 15,807 15,845 5,942
</TABLE>
19. SEGMENT DATA
The Company operates in a single business segment. Foreign sales, primarily
Canada, were approximately 16.2%, 18.8% and 20.8% in 1995, 1996 and 1997,
respectively. There were no customers for which sales exceeded 10% during the
three year period presented. All revenues and expenses are allocated to
F-22
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
19. SEGMENT DATA (CONTINUED)
geographical areas in determining net income. Assets are specifically identified
to the geographical area to which they provide benefit.
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Net Sales:
United States.......................................... $ 433,909 $ 323,104 $ 320,412
Foreign (includes export sales)........................ 52,824 45,592 42,495
Intracompany transfers................................. (386) 139 --
Eliminations........................................... 386 (139) --
---------- ---------- ----------
Total.................................................. 486,733 368,696 362,907
---------- ---------- ----------
---------- ---------- ----------
Operating income (loss):
United States.......................................... $ (43,547) $ (5,861) $ 25,493
Foreign................................................ 79 3,277 6,363
---------- ---------- ----------
Total.................................................. $ (43,468) $ (2,584) $ 31,856
---------- ---------- ----------
---------- ---------- ----------
Identifiable Assets:
United States.......................................... $ 221,979 $ 186,726 $ 196,282
Foreign................................................ 30,931 24,368 23,735
---------- ---------- ----------
Total.................................................. $ 252,910 $ 211,094 $ 220,017
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
20. SUBSEQUENT EVENT
On March 31, 1998, the Company's and BIUSA's Third Amended Plan of
Reorganization (the "Plan") was confirmed by the Court. When consummated, the
Plan will complete BIUSA's (and its subsidiaries) bankruptcy proceeding which
began on July 17, 1995. In connection with the Plan and pursuant to a
subscription agreement dated as of March 30, 1998 (the "Subscription
Agreement"), Vestar Capital Partners III, L.P. or a designated affiliate
("Vestar"), Alvarez & Marsal, Inc. or a designated affiliate ("A&M"), a
turnaround management firm assisting the Company, and certain members of
existing management will make a $68 million equity investment (the "Equity
Investment") in BIUSA. Approximately $61.3 million of the Equity Investment will
be provided by Vestar in the form of a $24.8 million common equity investment in
BIUSA (the "Holdings Common Stock") and a $36.5 million investment in Class C
Junior Preferred Stock (the "Class C Junior Preferred Stock"). A&M and certain
members of management will provide the remaining Equity Investment in the form
of a $4.9 million and $1.8 million investment in BIUSA Common Stock,
respectively. The Subscription Agreement also provides that Vestar will purchase
any BIUSA Common Stock allocated to A&M or management which A&M or management
does not elect to purchase, resulting in a maximum investment in BIUSA Common
Stock by Vestar of $31.5 million (89.9% of the outstanding BIUSA Common Stock).
The balance of the BIUSA Common Stock will be held by existing shareholders of
BIUSA.
The Company and BIUSA used the Equity Investment in conjunction with (i)
borrowings under a new $160.0 million senior credit facility, (ii) the proceeds
from the Company's issuance of Senior Subordinated Notes Due 2008 and Senior
Exchangeable Preferred Stock Due 2010 collectively the "Offerings," (iii) the
issuance of $13.0 million in new senior subordinated notes which will rank on
parity with the Notes to existing holders of BIUSA Common Stock and (iv) the
issuance of approximately $2.4 million in BIUSA
F-23
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
20. SUBSEQUENT EVENT (CONTINUED)
Class A Preferred Stock to a plan to be established for the benefit of the
certain employees of the Company to effect a recapitalization (the
"Recapitalization") under which substantially all of BIUSA and the Company's
existing pre-petition obligations and all borrowing under the Company's
debtor-in-possession facility, were paid in full. The consummation of the
Recapitalization was a condition to the consummation of the Offerings.
The following table sets forth the uses of funds for BIUSA and the Company
after giving effect to the Recapitalization and the application of the proceeds
therefrom:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
THE COMPANY BIUSA TOTAL
------------- --------- ---------
USES OF FUNDS:
Payment of Allowed Claims..................................................... $ 169.3 $ 122.5 $ 291.8
Payment of Estimated Post-Petition Interest................................... 11.1 24.3 35.4
Payment of Estimated Bankruptcy Administrative Fees........................... 1.5 -- 1.5
Refinancing of Existing Debt.................................................. 7.7 -- 7.7
Estimated Fees and Expenses................................................... 12.0 5.0 17.0
------ --------- ---------
$ 201.6 $ 151.8 $ 353.4
------ --------- ---------
------ --------- ---------
</TABLE>
21. GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Senior Subordinated Notes (the
"Notes") will be fully and unconditionally guaranteed on a joint and several
basis by its current domestic subsidiaries, principally: Cluett Peabody & Co.,
Inc., Great American Knitting Mills, Inc., Cluett Designer Group Inc., Consumer
Direct Corporation and Arrow Factory Stores Inc. (collectively the "Guarantor
Subsidiaries"). Each of the Guarantor Subsidiaries is or will be a direct or
indirect wholly-owned subsidiary of the Company. The Company's payment
obligations under the Notes are not guaranteed by the remaining subsidiaries:
Bidermann Womenswear Corp. (formerly Ralph Lauren Womenswear Inc.), Cluett,
Peabody Canada Inc., Arrow de Mexico S.A. de C.V., and Arrow Inter-America &
Co., Ltd. (collectively the "Non-Guarantor Subsidiaries"). The obligations of
each Guarantor Subsidiary under its Guarantee are subordinated to such
subsidiary's obligations under its guarantee of the new senior credit facility.
Presented below is condensed combining financial information for Bidermann
Industries Corp. ("Parent Company"), the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries. In the Company's opinion, separate financial
statements and other disclosures concerning each of the Guarantor Subsidiaries
would not provide additional information that is material to investors.
Therefore, the Guarantor Subsidiaries are combined in the presentation below.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method of accounting. Earnings of subsidiaries are, therefore, reflected
in the Parent Company's investments in and advances to/from subsidiaries account
and earnings (losses). The elimination entries eliminate investments in
subsidiaries, the related stockholders' deficit and other intercompany balances
and transactions.
F-24
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS COMBINED
---------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ -- $ 5,578 $ 206 $ -- $ 5,784
Accounts receivable, net...................... -- 48,518 3,971 -- 52,489
Inventories................................... -- 59,765 12,063 -- 71,828
Prepaid expenses and other current assets..... -- 3,628 815 -- 4,443
---------- ----------- ------- ------------ ----------
Total current assets.......................... -- 117,489 17,055 -- 134,544
Investment in subsidiaries.................... (66,692) -- -- 66,692 --
Intercompany receivable (payable)............. 15,000 (15,000) -- -- --
Property, plant and equipment, net............ -- 42,310 4,630 -- 46,940
Pension asset................................. -- 28,191 -- -- 28,191
Other noncurrent assets....................... -- 1,374 45 -- 1,419
---------- ----------- ------- ------------ ----------
Total assets.................................. $ (51,692) $ 174,364 $ 21,730 $ 66,692 $ 211,094
---------- ----------- ------- ------------ ----------
---------- ----------- ------- ------------ ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses......... $ -- $ 39,723 $ 5,273 $ -- $ 44,996
Short-term debt and current portion of
long-term debt.............................. -- 769 402 -- 1,171
Income taxes payable.......................... -- 1,281 355 -- 1,636
---------- ----------- ------- ------------ ----------
Total current liabilities..................... -- 41,773 6,030 -- 47,803
Due to BIUSA.................................. -- 27,612 35 -- 27,647
Long-term debt and capital lease
obligations................................. -- 7,328 1,230 -- 8,558
Other noncurrent liabilities.................. -- 141 792 -- 933
Liabilities subject to compromise............. -- 181,695 -- -- 181,695
Preferred stock, $1 par value: authorized
50,000 shares, issued and outstanding 15,000
shares...................................... 18,674 -- -- -- 18,674
Stockholders' deficit......................... (70,366) (84,185) 13,643 66,692 (74,216)
---------- ----------- ------- ------------ ----------
Total liabilities and stockholders' deficit... $ (51,692) $ 174,364 $ 21,730 $ 66,692 $ 211,094
---------- ----------- ------- ------------ ----------
---------- ----------- ------- ------------ ----------
</TABLE>
F-25
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS COMBINED
---------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ -- $ 9,551 $ 468 $ -- $ 10,019
Accounts receivable, net.................... -- 45,494 2,948 -- 48,442
Inventories................................. -- 63,806 14,430 -- 78,236
Prepaid expenses and other current assets... -- 3,359 875 -- 4,234
---------- ----------- -------------- ------------ ----------
Total current assets.......................... -- 122,210 18,721 -- 140,931
Investment in subsidiaries.................... (49,496) -- -- 49,496 --
Intercompany receivable (payable) 15,000 (15,000) -- -- --
Property, plant and equipment, net............ -- 44,035 3,663 -- 47,698
Pension asset................................. -- 30,227 -- -- 30,227
Other noncurrent assets....................... -- 1,149 12 -- 1,161
---------- ----------- -------------- ------------ ----------
Total assets.................................. $ (34,496) $ 182,621 $ 22,396 $ 49,496 $ 220,017
---------- ----------- -------------- ------------ ----------
---------- ----------- -------------- ------------ ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses....... $ -- $ 41,930 $ 4,556 $ -- $ 46,486
Short-term debt and current portion of
long-term debt............................ -- 6,980 2,192 -- 9,172
Income taxes payable........................ -- 1,799 354 -- 2,153
---------- ----------- -------------- ------------ ----------
Total current liabilities..................... -- 50,709 7,102 -- 57,811
Due to BIUSA.................................. -- 27,613 -- -- 27,613
Long-term debt and capital lease
obligations................................. -- 1,619 341 -- 1,960
Other noncurrent liabilities.................. -- 100 400 -- 500
Liabilities subject to compromise............. -- 168,932 -- -- 168,932
Preferred stock, $1 par value: authorized
50,000 shares, issued and outstanding 15,000
shares...................................... 20,009 -- -- -- 20,009
Stockholders' deficit......................... (54,505) (66,352) 14,553 49,496 (56,808)
---------- ----------- -------------- ------------ ----------
Total liabilities and stockholders' deficit... $ (34,496) $ 182,621 $ 22,396 $ 49,496 $ 220,017
---------- ----------- -------------- ------------ ----------
---------- ----------- -------------- ------------ ----------
</TABLE>
F-26
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS COMBINED
---------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales..................................... $ -- $ 444,731 $ 42,002 $ -- $ 486,733
Cost of goods sold............................ -- 337,713 32,104 -- 369,817
---------- ----------- -------------- ------------ ----------
Gross profit.................................. -- 107,018 9,898 -- 116,916
Selling, general and administrative
expenses.................................... -- 126,066 11,837 -- 137,903
Facility closing and reengineering costs...... -- 18,808 3,673 -- 22,481
---------- ----------- -------------- ------------ ----------
144,874 15,510 -- 160,384
Operating loss................................ -- (37,856) (5,612) -- (43,468)
Loss on investments in subsidiaries........... (89,147) -- -- 89,147 --
Interest expense, net (contractural interest
expense $28,936)............................ -- 19,563 3,158 -- 22,721
Other expense, net............................ -- -- 532 -- 532
---------- ----------- -------------- ------------ ----------
Loss before reorganization costs and income
taxes....................................... (89,147) (57,419) (9,302) 89,147 (66,721)
Bankruptcy reorganization costs............... -- 20,871 -- -- 20,871
---------- ----------- -------------- ------------ ----------
Loss before provision for income taxes........ (89,147) (78,290) (9,302) 89,147 (87,592)
Provision for income taxes.................... -- 1,449 106 -- 1,555
---------- ----------- -------------- ------------ ----------
Net loss...................................... $ (89,147) $ (79,739) $ (9,408) $ 89,147 $ (89,147)
---------- ----------- -------------- ------------ ----------
---------- ----------- -------------- ------------ ----------
</TABLE>
F-27
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS COMBINED
---------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales..................................... $ -- $ 331,720 $ 36,976 $ -- $ 368,696
Cost of goods sold............................ -- 246,081 27,719 -- 273,800
---------- ----------- -------------- ------------ ----------
Gross profit.................................. -- 85,639 9,257 -- 94,896
Selling, general and administrative
expenses.................................... -- 76,804 9,073 -- 85,877
Facility closing and reengineering costs...... -- 8,517 3,086 -- 11,603
---------- ----------- -------------- ------------ ----------
-- 85,321 12,159 -- 97,480
Operating income (loss)....................... -- 318 (2,902) -- (2,584)
Loss on investments in subsidiaries........... (30,200) -- -- 30,200 --
Interest expense, net......................... -- 13,686 3,242 -- 16,928
Other expense, net............................ -- (747) 4,061 -- 3,314
---------- ----------- -------------- ------------ ----------
Loss before reorganization costs and income
taxes....................................... (30,200) (12,621) (10,205) 30,200 (22,826)
Bankruptcy reorganization costs............... -- 6,128 -- -- 6,128
---------- ----------- -------------- ------------ ----------
Loss before provision for income taxes........ (30,200) (18,749) (10,205) 30,200 (28,954)
Provision for income taxes.................... -- 1,042 204 -- 1,246
---------- ----------- -------------- ------------ ----------
Net loss...................................... $ (30,200) $ (19,791) $ (10,409) $ 30,200 $ (30,200)
---------- ----------- -------------- ------------ ----------
---------- ----------- -------------- ------------ ----------
</TABLE>
F-28
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS COMBINED
----------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales...................................... $ -- $ 327,335 $ 35,572 $ -- $ 362,907
Cost of goods sold............................. -- 227,281 26,511 -- 253,792
----------- ----------- ------- ------------ ----------
Gross profit................................... -- 100,054 9,061 -- 109,115
Selling, general and administrative expenses... -- 66,817 7,973 -- 74,790
Facility closing and reengineering costs....... -- 3,911 (1,442) -- 2,469
----------- ----------- ------- ------------ ----------
-- 70,728 6,531 -- 77,259
Operating income............................... -- 29,326 2,530 -- 31,856
Income on investments in subsidiaries.......... 17,196 (17,196)
Interest expense, net.......................... -- 12,275 2,958 -- 15,233
Other expense, net............................. -- 852 1,132 -- 1,984
----------- ----------- ------- ------------ ----------
Income (loss) before reorganization costs
(credits) and income taxes................... 17,196 16,199 (1,560) (17,196) 14,639
Bankruptcy reorganization credits.............. -- (3,883) -- -- (3,883)
----------- ----------- ------- ------------ ----------
Income (loss) before provision for income
taxes........................................ 17,196 20,082 (1,560) (17,196) 18,522
Provision for income taxes..................... -- 1,326 -- 1,326
----------- ----------- ------- ------------ ----------
Net income (loss).............................. $ 17,196 $ 18,756 $ (1,560) $ (17,196) $ 17,196
----------- ----------- ------- ------------ ----------
----------- ----------- ------- ------------ ----------
</TABLE>
F-29
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR-END DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS COMBINED
---------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................... $ (89,147) $ (79,739) $ (9,408) $ 89,147 $ (89,147)
Adjustment to reconcile net loss to net cash
and cash equivalents provided by (used in)
operating activities:
Loss on investments in subsidiaries......... 89,147 -- -- (89,147) --
Amortization of deferred financing
activity.................................. -- 412 -- -- 412
Write-down of deferred financing
activities................................ -- 4,825 -- -- 4,825
Write-down of property, plant and
equipment................................. -- 9,425 -- -- 9,425
Depreciation................................ 10,097 2,204 -- 12,301
Amortization................................ -- 980 980
Adjustments of liabilities subject to
compromise................................ -- 9,793 -- -- 9,793
Accrual of professional fees, potential
claims and related litigation matters-
reorganization............................ -- 6,253 -- -- 6,253
Early retirement window benefit............. 2,877 2,877
Changes in operating assets and liabilities... -- 38,962 3,717 -- 42,679
---------- ----------- ------- ------------ ----------
Net cash and cash equivalents provided by
(used in) operating activities.............. -- 3,885 (3,487) 398
INVESTING ACTIVITIES
Purchase of fixed assets...................... -- (5,593) (480) -- (6,073)
Proceeds on disposal of fixed assets.......... -- 1,407 -- -- 1,407
Proceeds from sale of Ralph Lauren............ -- 30,000 -- -- 30,000
---------- ----------- ------- ------------ ----------
Net cash and cash equivalents used in
investing activities........................ -- 25,814 (480) -- 25,334
FINANCING ACTIVITIES
Proceeds from DIP credit facility............. -- 11,000 -- -- 11,000
Principal payments on DIP credit facility..... -- (9,000) -- -- (9,000)
Proceeds from issuance of long term debt...... -- 995 1,584 -- 2,579
Principal payments on long term debt.......... -- (30,684) -- -- (30,684)
---------- ----------- ------- ------------ ----------
Net cash and cash equivalents provided by
financing activities........................ -- (27,689) 1,584 -- (26,105)
---------- ----------- ------- ------------ ----------
Effect of changes in foreign currency......... -- -- (4) -- (4)
Net change in cash and cash equivalents....... -- 2,010 (2,387) -- (377)
Cash and cash equivalents at beginning of
year........................................ -- 8,330 2,731 -- 11,061
---------- ----------- ------- ------------ ----------
Cash and cash equivalents at end of year...... $ -- $ 10,340 $ 344 $ -- $ 10,684
---------- ----------- ------- ------------ ----------
---------- ----------- ------- ------------ ----------
</TABLE>
F-30
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR-END DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS COMBINED
---------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................... $ (30,200) $ (19,791) $ (10,409) $ 30,200 $ (30,200)
Adjustment to reconcile net loss to net cash
and cash equivalents provided by (used in)
operating activities:
Loss on investments in subsidiaries....... 30,200 -- -- (30,200) --
Write-off of foreign currency translation
adjustment.............................. -- -- 3,100 -- 3,100
Write-down of property, plant and
equipment............................... -- 742 -- -- 742
Depreciation.............................. -- 10,282 434 -- 10,716
Amortization.............................. -- 219 -- -- 219
Accrual of professional fees, potential
claims and related litigation
matters-reorganization.................. -- 6,128 -- -- 6,128
Changes in operating assets and liabilities... -- 18,858 7,131 -- 25,989
---------- ----------- -------------- ------------ ----------
Net cash and cash equivalents provided by
(used in) operating activities.............. -- 16,438 256 -- 16,694
INVESTING ACTIVITIES
Purchase of fixed assets...................... -- (9,167) (668) -- (9,835)
Proceeds on disposal of fixed assets.......... -- 927 639 -- 1,566
---------- ----------- -------------- ------------ ----------
Net cash and cash equivalents provided by
(used in) investing activities.............. -- (8,240) (29) -- (8,269)
FINANCING ACTIVITIES
Proceeds from DIP credit facility............. -- 53,300 -- -- 53,300
Principal payments on DIP credit facility..... -- (55,300) -- -- (55,300)
Proceeds from issuance of long term debt...... -- 4,971 -- -- 4,971
Principal payments on long term debt.......... -- (15,931) (363) -- (16,294)
---------- ----------- -------------- ------------ ----------
Net cash and cash equivalents provided by
(used in) financing activities.............. -- (12,960) (363) -- (13,323)
---------- ----------- -------------- ------------ ----------
Effect of foreign currency translation........ -- -- (2) -- (2)
Net change in cash and cash equivalents....... -- (4,762) (138) -- (4,900)
Cash and cash equivalents at beginning of
year........................................ -- 10,340 344 -- 10,684
---------- ----------- -------------- ------------ ----------
Cash and cash equivalents at end of year...... $ -- $ 5,578 $ 206 $ -- $ 5,784
---------- ----------- -------------- ------------ ----------
---------- ----------- -------------- ------------ ----------
</TABLE>
F-31
<PAGE>
BIDERMANN INDUSTRIES CORP. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
21. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR-END DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS COMBINED
----------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................. $ 17,196 $ 18,756 $ (1,560) $ (17,196) $ 17,196
Adjustment to reconcile net income (loss) to
net cash and cash equivalents provided by
(used in) operating activities:
(Income) loss on investments in
subsidiaries............................... (17,196) -- -- 17,196 --
Depreciation................................. -- 7,749 326 -- 8,075
Amortization................................. -- 30 -- -- 30
Gain on sale of assets....................... -- -- (348) -- (348)
Accrual of professional fees, potential
claims and related litigation matters-
reorganization............................. -- 6,117 -- -- 6,117
Adjustments of liabilities subject to
compromise................................. -- (10,000) -- -- (10,000)
Changes in operating assets and liabilities.... -- (7,746) (374) -- (8,120)
----------- ----------- ------- ------------ ----------
Net cash and cash equivalents provided by (used
in) operating activities...................... -- 14,906 (1,956) -- 12,950
INVESTING ACTIVITIES
Purchase of fixed assets....................... -- (10,554) (224) -- (10,778)
Proceeds on disposal of fixed assets........... -- 1,786 1,541 -- 3,327
----------- ----------- ------- ------------ ----------
Net cash and cash equivalents provided by (used
in) investing activities...................... -- (8,768) 1,317 -- (7,451)
FINANCING ACTIVITIES
Proceeds from DIP credit facility.............. -- 16,398 -- -- 16,398
Principal payments on DIP credit facility...... -- (16,398) (397) -- (16,795)
Proceeds from issuance of long term debt....... -- 456 1,790 -- 2,246
Principal payments on long term debt........... -- (2,621) (492) -- (3,113)
----------- ----------- ------- ------------ ----------
Net cash and cash equivalents provided by (used
in) financing activities...................... -- (2,165) 901 -- (1,264)
----------- ----------- ------- ------------ ----------
Net change in cash and cash equivalents........ -- 3,973 262 -- 4,235
Cash and cash equivalents at beginning of
year.......................................... -- 5,578 206 -- 5,784
----------- ----------- ------- ------------ ----------
Cash and cash equivalents at end of year....... $ -- $ 9,551 $ 468 $ -- $ 10,019
----------- ----------- ------- ------------ ----------
----------- ----------- ------- ------------ ----------
</TABLE>
F-32
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 27, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 9,015 $ 10,019
Accounts receivable, net............................................................ 36,259 48,442
Inventories (Note 3)................................................................ 92,393 78,236
Prepaid expenses and other current assets........................................... 3,777 4,234
----------- ------------
Total current assets.................................................................. 141,444 140,931
Property, plant and equipment, net.................................................... 47,202 47,698
Pension asset......................................................................... 31,224 30,227
Deferred financing fees............................................................... 11,560 --
Other noncurrent assets............................................................... 1,895 1,161
----------- ------------
Total assets.......................................................................... $ 233,325 $ 220,017
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses............................................... $ 46,942 $ 46,486
Short-term debt and current portion of long-term debt............................... 6,405 9,172
Income taxes payable................................................................ 1,454 2,153
----------- ------------
Total current liabilities............................................................. 54,801 57,811
Due to parent......................................................................... 2,995 27,613
Long-term debt and capital lease obligations.......................................... 241,073 1,960
Other noncurrent liabilities.......................................................... 2,744 500
Liabilities subject to compromise..................................................... -- 168,932
Preferred stock, cumulative, $1 par value: authorized 50,000 shares, issued and
outstanding 15,000 shares........................................................... -- 20,009
Senior exchangeable preferred stock, cumulative, $.1 par value: authorized 4,950,000,
issued and outstanding 500,000 shares (liquidation preference $50,000,000).......... 48,125 --
Stockholders' deficit:
Common stock, $1 par value: authorized, issued and outstanding 1,000 shares at June
27, 1998, 2,000 shares (1,000 BIC, 1,000 CDC) at December 31, 1997................ 1 2
Additional paid-in capital.......................................................... 120,687 173,592
Accumulated deficit................................................................. (236,783) (228,099)
Equity adjustment from foreign currency translation................................. (318) (2,303)
----------- ------------
Total stockholders' deficit........................................................... (116,413) (56,808)
----------- ------------
Total liabilities and stockholders' deficit........................................... $ 233,325 $ 220,017
----------- ------------
----------- ------------
</TABLE>
See accompanying notes.
F-33
<PAGE>
CLUETT AMERICAN CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------- ----------------------
<S> <C> <C> <C> <C>
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
---------- --------- ---------- ----------
Net sales.......................................................... $ 76,279 $ 74,540 $ 168,634 $ 162,006
Cost of goods sold................................................. 52,532 50,535 116,438 112,791
---------- --------- ---------- ----------
Gross profit....................................................... 23,747 24,005 52,196 49,215
Selling, general and administrative expenses....................... 19,272 18,519 38,812 37,265
Facility closing and reengineering costs........................... 82 81 1,022 283
---------- --------- ---------- ----------
19,354 18,600 39,834 37,548
Operating income................................................... 4,393 5,405 12,362 11,667
Interest expense, net.............................................. 3,310 3,716 7,121 7,303
Other (income) expense, net........................................ 142 (1,762) 142 (1,236)
---------- --------- ---------- ----------
Income before reorganization costs and income taxes................ 941 3,451 5,099 5,600
Bankruptcy reorganization costs.................................... 11,644 1,315 13,179 2,921
Income (loss) before provision for income taxes.................... (10,703) 2,136 (8,080) 2,679
Provision for income taxes......................................... 322 295 604 498
---------- --------- ---------- ----------
Net income (loss).................................................. $ (11,025) $ 1,841 $ (8,684) $ 2,181
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
See accompanying notes.
F-34
<PAGE>
CLUETT AMERICAN CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM
COMMON STOCK ADDITIONAL FOREIGN
---------------------- PAID-IN ACCUMULATED CURRENCY
SHARES AMOUNT CAPITAL DEFICIT TRANSLATION TOTAL
--------- ----------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997....................... 2,000 $ 2 $ 173,592 $ (228,099) $ (2,303) $ (56,808)
Foreign Currency Translation Adjustment............ -- -- 1,985 1,985
Accretion of dividend on redeemable preferred
stock............................................ (2,078) -- -- (2,078)
Distribution to CAIC............................... (87,522) -- -- (87,522)
Contribution of intercompany debt due to CAIC...... 27,609 -- -- 27,609
Distribution to CAIC for debt purchase............. (13,000) -- -- (13,000)
Contribution of preferred stock from CAIC.......... 22,086 -- -- 22,086
Contribution of CDC to CAC from CAIC............... (1,000) (1) -- -- -- (1)
Net loss........................................... (8,684) (8,684)
--
--------- ---------- ------------ ----------- -----------
Balance at June 27, 1998........................... 1,000 $ 1 $ 120,687 $ (236,783) $ (318) $ (116,413)
--
--
--------- ---------- ------------ ----------- -----------
--------- ---------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
F-35
<PAGE>
CLUETT AMERICAN CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
----------------------
<S> <C> <C>
JUNE 27, JUNE 28,
1998 1997
--------- -----------
OPERATING ACTIVITIES
Net income (loss)........................................................................................ $ (8,684) $ 2,181
Adjustment to reconcile net income to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization.......................................................................... 4,195 4,156
Loss on disposal....................................................................................... 1,905 --
Changes of liabilities subject to compromise--reorganization........................................... (22,442) (2,234)
--------- -----------
(25,026) 4,103
Changes in operating assets and liabilities:
Accounts receivable.................................................................................... 12,070 14,833
Inventories............................................................................................ (14,553) (21,140)
Prepaid expenses and other current assets.............................................................. (11,878) (195)
Pension and other noncurrent assets.................................................................... (997) (325)
Accounts payable and accrued expenses.................................................................. (657) 2,973
Income taxes payable................................................................................... (555) 27
Other liabilities...................................................................................... 8,560 (113)
--------- -----------
Net cash and cash equivalents provided by (used in) operating activities................................. (33,036) 163
INVESTING ACTIVITIES
Purchase of fixed assets................................................................................. (5,740) (4,704)
Proceeds on disposal of fixed assets..................................................................... 178 2
Other, net............................................................................................... -- 166
--------- -----------
Net cash and cash equivalents used in investing activities............................................... (5,562) (4,536)
FINANCING ACTIVITIES
Issuance of preferred stock.............................................................................. 48,125 --
Distribution to parent................................................................................... (87,524) --
Proceeds from DIP credit facility........................................................................ -- 5,062
Principal payments on DIP credit facility................................................................ -- (5,062)
Principal payments on pre-petition credit facility....................................................... (146,490) --
Proceeds from long term debt (Note 4).................................................................... 226,000 --
Payments on long term debt (Note 4)...................................................................... (4,000) --
Proceeds from operating credit facility (Note 4)......................................................... 38,563 38,294
Principal payments on operating credit facility (Note 4)................................................. (36,626) (34,411)
Principal payments on capital leases..................................................................... (445) (405)
--------- -----------
Net cash and cash equivalents provided by financing activities........................................... 37,603 3,478
Effect of foreign currency translation................................................................... (9) 533
Net change in cash and cash equivalents.................................................................. (1,004) (362)
Cash and cash equivalents at beginning of year........................................................... 10,019 5,784
--------- -----------
Cash and cash equivalents at end of period............................................................... $ 9,015 $ 5,422
--------- -----------
--------- -----------
SUPPLEMENTAL DISCLOSURES
Cash paid during this period:
Interest................................................................................................. $ 3,561 $ 3,652
--------- -----------
--------- -----------
Income taxes............................................................................................. $ 1,303 $ 582
--------- -----------
--------- -----------
</TABLE>
See accompanying notes.
F-36
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Cluett American Corp. (CAC), formerly known as Bidermann Industries Corp. and
Affiliates, (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
thirteen and twenty-six week periods ending June 27, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the annual financial statements and
footnotes thereto of Bidermann Industries Corp. and Affiliates included in the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on June 29, 1998.
The consolidated financial statements include all subsidiary companies of
CAC including Consumer Direct Corp. (CDC). Significant intercompany transactions
have been eliminated in consolidation. Certain consolidated foreign subsidiaries
have fiscal years ending November 30.
2. GENERAL
On March 31, 1998, the Company's and Cluett American Investment Corp.'s
(CAIC) Third Amended Plan of Reorganization (the "Plan") was confirmed by the
Court. On May 18, 1998, the Plan was consummated completing CAIC's (and its
subsidiaries) bankruptcy proceeding which began on July 17, 1995. In connection
with the Plan and pursuant to a subscription agreement dated March 30, 1998 (the
"Subscription Agreement"), Vestar Capital Partners III, L.P. or a designated
affiliate ("Vestar"), Alvarez & Marsal, Inc. or a designated affiliate ("A&M"),
a turnaround management firm assisting the Company, and certain members of
existing management made a $68 million equity investment (the "Equity
Investment") in CAIC. Vestar provided approximately $61.3 million of the Equity
Investment in the form of a $24.8 million common equity investment in CAIC (the
"Holdings Common Stock") and a $36.5 million investment in Class C Junior
Preferred Stock (the "Class C Junior Preferred Stock"). A&M and certain members
of management provided additional Equity Investments of $4.9 million and $1.8
million in CAIC Common Stock, respectively. The balance of the CAIC Common Stock
is held by the shareholders that were shareholders prior to the bankruptcy ("Old
Equity"). Holdings Common Stock is held as follows: Vestar--70.8%, A&M--14%,
Management--5.1%, Old Equity--10.1%.
The Company and CAIC used the Equity Investment in conjunction with (i)
borrowings under a new $160.0 million senior credit facility, (ii) $112.0
million proceeds from the Company's issuance of Senior Subordinated Notes Due
2008 and $48.125 million net proceeds from the issuance of Senior Exchangeable
Preferred Stock Due 2010, collectively the "Offerings," to effect a
recapitalization (the "Recapitalization") under which all of CAIC and the
Company's existing pre-petition obligations and all borrowing under the
Company's debtor-in-possession facility, will be paid in full.
In connection with the Plan, the Company incurred approximately $13.2
million of bankruptcy reorganization costs during the twenty-six weeks ended
June 27, 1998. The costs include professional fees and approximately $10.7
million of post-petition interest on pre-petition claims which was paid in
accordance with the Plan.
F-37
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. GENERAL (CONTINUED)
The following table sets forth the uses of funds for CAIC and the Company
after giving effect to the Recapitalization and the application of the proceeds
therefrom:
<TABLE>
<CAPTION>
THE COMPANY CAIC TOTAL
------------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
USES OF FUNDS:
Payment of Allowed Claims................................. $ 169.3 $ 122.5 $ 291.8
Payment of Estimated Post-Petition Interest............... 11.1 24.3 35.4
Payment of Estimated Bankruptcy Administrative Fees....... 1.5 -- 1.5
Refinancing of Existing Debt.............................. 7.7 -- 7.7
Estimated Fees and Expenses............................... 13.5 5.4 18.9
------ --------- ---------
$ 203.1 $ 152.2 $ 355.3
------ --------- ---------
------ --------- ---------
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 27 DECEMBER 31
1998 1997
--------- ------------
<S> <C> <C>
(IN THOUSANDS)
Finished goods....................................................... $ 76,071 $ 65,558
Work in process...................................................... 5,519 4,326
Raw materials and supplies........................................... 10,803 8,352
--------- ------------
$ 92,393 $ 78,236
--------- ------------
--------- ------------
</TABLE>
4. INCOME TAXES
Because of the ownership change (as described in Note 2--General), the
Company's net operating loss (NOL) carryforwards are subject to limitation.
Although management has not completed its calculations to determine the extent
of the NOL limitation, the impact on the financial statements will not be
significant since a valuation allowance has been provided for the NOL benefits.
5. INDEBTEDNESS AND FINANCIAL ARRANGEMENTS
On May 18, 1998 the Company entered into a $160,000,000 senior secured
credit facility. The facility is comprised of three different loans: a
$50,000,000 revolving credit facility, a $50,000,000 term loan ("Term A"), and a
$60,000,000 term loan ("Term B"). The revolving credit facility and the Term A
loan mature in 2004. The Term B loan matures in 2005. Interest rates for
borrowings under the revolving credit facility and the Term A loans are based on
either LIBOR plus 225 basis points or the alternative base rate
F-38
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INDEBTEDNESS AND FINANCIAL ARRANGEMENTS (CONTINUED)
(the greater of the NationsBank prime rate or the Fed Funds rate) plus 125 basis
points. Interest on the Term B loan is based on LIBOR plus 250 basis points or
the alternative base rate plus 150 basis points.
<TABLE>
<CAPTION>
JUNE 27, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
(IN THOUSANDS)
Short-term Debt
Current portion of capital lease obligations..................... $ 599 $ 724
Canada operating loan............................................ 5,806 2,192
CDG operating facility........................................... -- 6,256
---------- ------------
6,405 9,172
Long-term Debt
Liabilities Subject to Compromise:
Revolving credit facility...................................... -- 52,638
Term loan...................................................... -- 70,459
Accrued interest............................................... -- 22,532
Trade accounts and expenses payable............................ -- 18,238
Lease rejection liabilities.................................... -- 5,065
Capital lease obligations.......................................... 1,573 1,960
Revolving credit facility.......................................... 4,500 --
Senior credit facility............................................. 110,000 --
Senior subordinated 10 1/8 notes................................... 125,000 --
---------- ------------
241,073 170,892
---------- ------------
$ 247,478 $ 180,064
---------- ------------
---------- ------------
</TABLE>
6. FACILITY CLOSING AND REENGINEERING COSTS
In January 1998, the Company implemented a plan to consolidate its sock
distribution facilities and close a sock knitting facility. In connection with
the plan, the Company recognized approximately $1.0 million in facility closing
and reengineering costs. These expenses primarily include employee severance,
write-down of the book value of the land and building (knitting facility) to its
net realizable value and certain labor and relocation costs for the new sock
distribution center.
7. GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Senior Subordinated Notes (the
"Notes") will be unconditionally guaranteed on a joint and several basis by its
principal domestic subsidiaries: Cluett, Peabody & Co., Inc., Great American
Knitting Mills, Inc., Cluett Designer Group Inc., Consumer Direct Corporation
and Arrow Factory Stores Inc. (collectively the "Guarantor Subsidiaries"). The
obligations of each Guarantor Subsidiary under its guarantee of the Notes are
subordinated to such subsidiary's obligations under its guarantee of the new
senior credit facility.
Presented below is condensed consolidating financial information for Cluett
American Corp. ("Parent Company"), the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries (primarily Cluett Peabody Canada, Inc. and Arrow de
Mexico S.A.). In the Company's opinion, separate financial statements and other
disclosures concerning each of the Guarantor Subsidiaries would not provide
additional information
F-39
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
that is material to investors. Therefore, the Guarantor Subsidiaries are
combined in the presentation below.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method of accounting. Earnings of subsidiaries are, therefore, reflected
in the Parent Company's investments in and advances to/from subsidiaries account
and earnings. The elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ -- $ 9,551 $ 468 $ -- $ 10,019
Accounts receivable, net............................ -- 45,494 2,948 -- 48,442
Inventories......................................... -- 63,806 14,430 -- 78,236
Prepaid expenses and other current assets........... -- 3,359 875 -- 4,234
---------- ----------- ----------- ------------ ------------
Total current assets.................................. -- 122,210 18,721 -- 140,931
Investment in subsidiaries............................ (49,496) -- -- 49,496 --
Intercompany receivables (payable).................... 15,000 (15,000) -- -- --
Property, plant and equipment, net.................... -- 44,035 3,663 -- 47,698
Pension asset......................................... -- 30,227 -- -- 30,227
Other noncurrent assets............................... -- 1,149 12 -- 1,161
---------- ----------- ----------- ------------ ------------
Total assets.......................................... $ (34,496) $ 182,621 $ 22,396 $ 49,496 $ 220,017
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses............... $ -- $ 41,930 $ 4,556 $ -- $ 46,486
Short-term debt and current portion of long-term
debt.............................................. -- 6,980 2,192 -- 9,172
Income taxes payable................................ -- 1,799 354 -- 2,153
---------- ----------- ----------- ------------ ------------
Total current liabilities............................. -- 50,709 7,102 -- 57,811
Due to parent......................................... -- 27,613 -- -- 27,613
Long-term debt and capital lease obligations.......... -- 1,619 341 -- 1,960
Other noncurrent liabilities.......................... -- 100 400 -- 500
Liabilities subject to compromise..................... -- 168,932 -- -- 168,932
Preferred stock, $1 par value: authorized 50,000
shares, issued and outstanding 15,000 shares........ 20,009 -- -- -- 20,009
Stockholders' deficit................................. (54,505) (66,352) 14,553 49,496 (56,808)
---------- ----------- ----------- ------------ ------------
Total liabilities and stockholders' deficit........... $ (34,496) $ 182,621 $ 22,396 $ 49,496 $ 220,017
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
F-40
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ -- $ 8,371 $ 644 $ -- $ 9,015
Accounts receivable, net............................ -- 31,711 4,548 -- 36,259
Inventories......................................... -- 79,072 13,321 -- 92,393
---------- ----------- ----------- ------------ ------------
Prepaid expenses and other current assets........... -- 2,769 1,008 -- 3,777
Total current assets.................................. -- 121,923 19,521 -- 141,444
Investment in subsidiaries............................ (32,114) -- -- 32,114 --
Property, plant and equipment, net.................... -- 45,141 2,061 -- 47,202
Deferred finance fees................................. -- 11,560 -- -- 11,560
Pension asset......................................... -- 31,224 -- -- 31,224
Other noncurrent assets............................... -- 1,110 785 -- 1,895
---------- ----------- ----------- ------------ ------------
Total assets.......................................... $ (32,114) $ 210,958 $ 22,367 $ 32,114 $ 233,325
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses............... $ -- $ 44,362 $ 2,580 $ -- $ 46,942
Short-term debt and current portion of long-term
debt.............................................. -- 586 5,819 -- 6,405
Income taxes payable................................ -- 1,198 256 -- 1,454
---------- ----------- ----------- ------------ ------------
Total current liabilities............................. -- 46,146 8,655 -- 54,801
Due to parent......................................... -- 2,995 -- -- 2,995
Long-term debt and capital lease obligations.......... -- 240,823 250 -- 241,073
Other noncurrent liabilities.......................... -- 2,744 -- -- 2,744
Preferred stock, $.1 par value: authorized, issued and
outstanding 500,000 shares.......................... 48,125 -- -- -- 48,125
Stockholders' deficit................................. (80,239) (81,750) 13,462 32,114 (116,413)
---------- ----------- ----------- ------------ ------------
Total liabilities and stockholders' deficit........... $ (32,114) $ 210,958 $ 22,367 $ 32,114 $ 233,325
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
See accompanying notes.
F-41
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 28, 1997
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.............................................. $ -- $ 67,794 $ 6,746 $ -- $ 74,540
Cost of goods sold..................................... -- 46,113 4,422 -- 50,535
----- ----------- ----------- ----- ------------
Gross profit........................................... -- 21,681 2,324 -- 24,005
Selling, general and administrative expenses........... -- 16,542 1,977 -- 18,519
Facility closing and reengineering costs............... -- 81 -- -- 81
----- ----------- ----------- ----- ------------
-- 16,623 1,977 -- 18,600
Operating income....................................... -- 5,058 347 -- 5,405
Income from investments in subsidiaries................ (322) -- -- 322 --
Interest expense, net.................................. -- 2,989 727 -- 3,716
Other expense, net..................................... -- (1,669) (93) -- (1,762)
----- ----------- ----------- ----- ------------
Income (loss) before reorganization costs and income
taxes................................................ (322) 3,738 (287) 322 3,451
Bankruptcy reorganization costs........................ -- 1,315 -- -- 1,315
Income (loss) before provision for income taxes........ (322) 2,423 (287) 322 2,136
Provision for income taxes............................. -- 260 35 -- 295
----- ----------- ----------- ----- ------------
Net income (loss)...................................... $ (322) $ 2,163 $ (322) $ 322 $ 1,841
----- ----------- ----------- ----- ------------
----- ----------- ----------- ----- ------------
</TABLE>
See accompanying notes
F-42
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 27, 1998
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.............................................. $ -- $ 67,761 $ 8,518 $ -- $ 76,279
Cost of goods sold..................................... -- 46,263 6,269 -- 52,532
----- ----------- ----------- ----- ------------
Gross profit........................................... -- 21,498 2,249 -- 23,747
Selling, general and administrative expenses........... -- 16,900 2,372 -- 19,272
Facility closing and reengineering cost................ -- 82 -- -- 82
----- ----------- ----------- ----- ------------
--........ 16,982 2,372 -- 19,354
Operating income (loss)................................ -- 4,516 (123) -- 4,393
Income from investments in subsidiaries................ 432 -- -- (432) --
Interest expense, net.................................. -- 3,856 (546) -- 3,310
Other expense, net..................................... -- 151 (9) -- 142
----- ----------- ----------- ----- ------------
Income (loss) before reorganization costs (credits) and
income taxes......................................... 432 509 432 (432) 941
Bankruptcy reorganization costs (credits).............. -- 11,644 -- -- 11,644
----- ----------- ----------- ----- ------------
Income (loss) before provision for income taxes........ 432 (11,135) 432 (432) (10,703)
Provision for income taxes............................. -- 322 -- -- 322
----- ----------- ----------- ----- ------------
Net income (loss)...................................... $ 432 $ (11,457) $ 432 $ (432) $ (11,025)
----- ----------- ----------- ----- ------------
----- ----------- ----------- ----- ------------
</TABLE>
F-43
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
TWENTY-SIX WEEKS ENDED JUNE 28, 1997
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.............................................. $ -- $ 144,934 $ 17,072 $ -- $ 162,006
Cost of goods sold..................................... -- 100,540 12,251 -- 112,791
----- ----------- ----------- ----- ------------
Gross profit........................................... -- 44,394 4,821 -- 49,215
Selling, general and administrative expenses........... -- 32,986 4,279 -- 37,265
Facility closing and reengineering cost................ -- 283 -- -- 283
----- ----------- ----------- ----- ------------
-- 33,269 4,279 -- 37,548
Operating income....................................... -- 11,125 542 -- 11,667
Income from investments in subsidiaries................ (915) -- -- 915 --
Interest expense, net.................................. -- 5,850 1,453 -- 7,303
Other income, net...................................... -- (1,164) (72) -- (1,236)
----- ----------- ----------- ----- ------------
Income (loss) before reorganization costs (credits) and
income taxes......................................... (915) 6,439 (839) 915 5,600
Bankruptcy reorganization costs (credits).............. -- 2,921 -- -- 2,921
----- ----------- ----------- ----- ------------
Income (loss) before provision for income taxes........ (915) 3,518 (839) 915 2,679
Provision for income taxes............................. -- 422 76 -- 498
----- ----------- ----------- ----- ------------
Net income (loss)...................................... $ (915) $ 3,096 $ (915) $ 915 $ 2,181
----- ----------- ----------- ----- ------------
----- ----------- ----------- ----- ------------
</TABLE>
F-44
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
TWENTY-SIX WEEKS ENDED JUNE 27, 1998
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.............................................. $ -- $ 150,611 $ 18,023 $ -- $ 168,634
Cost of goods sold..................................... -- 103,586 12,852 -- 116,438
--
----------- ----------- --- ------------
Gross profit........................................... -- 47,025 5,171 -- 52,196
Selling, general and administrative expenses........... -- 34,032 4,780 -- 38,812
Facility closing and reengineering cost................ -- 1,022 -- -- 1,022
--
----------- ----------- --- ------------
-- 35,054 4,780 -- 39,834
Operating income....................................... -- 11,971 391 -- 12,362
Income from investments in subsidiaries................ (9) -- -- 9 --
Interest expense, net.................................. -- 6,899 222 -- 7,121
Other (income) expense, net............................ -- (2) 144 -- 142
--
----------- ----------- --- ------------
Income (loss) before reorganization costs (credits) and
income taxes......................................... (9) 5,074 25 9 5,099
Bankruptcy reorganization costs (credits).............. -- 13,179 -- -- 13,179
--
----------- ----------- --- ------------
Income (loss) before provision for income taxes........ (9) (8,105) 25 9 (8,080)
Provision for income taxes............................. -- 570 34 -- 604
--
----------- ----------- --- ------------
Net income (loss)...................................... $ (9) $ (8,675) $ (9) $ 9 $ (8,684)
--
--
----------- ----------- --- ------------
----------- ----------- --- ------------
</TABLE>
F-45
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
TWENTY-SIX WEEKS ENDED JUNE 28, 1997
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................. $ 2,181 $ 3,096 $ (915) $ (2,181) $ 2,181
Adjustment to reconcile net income to net cash
and cash equivalents provided by (used in)
operating activities:
Loss on investments on subsidiaries.......... (2,181) -- -- 2,181 --
Depreciation and amortization................ 4,012 144 4,156
Changes of liabilities subject to
compromise................................. -- (2,234) -- -- (2,234)
----------- ----------- ----------- ------------ ------------
-- 4,874 (771) -- 4,103
Changes in operating assets and liabilities:
Accounts receivable.......................... -- 16,911 (2,078) -- 14,833
Inventories.................................. -- (19,569) (1,571) -- (21,140)
Prepaid expenses and other current assets.... -- (3) (192) -- (195)
Pension and other noncurrent assets.......... -- (325) -- -- (325)
Accounts payable and accrued expenses........ -- 424 2,549 -- 2,973
Income taxes payable......................... -- (21) 48 -- 27
Other liabilities............................ -- 381 (494) -- (113)
----------- ----------- ----------- ------------ ------------
Net cash and cash equivalents provided by (used
in) operating activities..................... -- 2,672 (2,509) -- 163
INVESTING ACTIVITIES
Purchase of fixed assets....................... -- (4,622) (82) -- (4,704)
Proceeds on disposal of fixed assets........... -- 2 -- 2
Other, net..................................... -- 1,103 (937) -- 166
----------- ----------- ----------- ------------ ------------
Net cash and cash equivalents used in investing
activities................................... -- (3,519) (1,017) -- (4,536)
FINANCING ACTIVITIES
Proceeds from DIP credit facility.............. -- 5,062 -- -- 5,062
Principal payments on DIP credit facility...... -- (5,062) -- -- (5,062)
Proceeds from operating credit facility........ -- 19,383 18,911 -- 38,294
Principal payments on operating credit
facility..................................... -- (18,522) (15,889) -- (34,411)
Principal payments on capital leases........... -- (385) (20) -- (405)
----------- ----------- ----------- ------------ ------------
Net cash and cash equivalents provided by
financing activities......................... -- 476 3,002 -- 3,478
Effect of foreign currency translation......... -- -- 533 -- 533
Net change in cash and cash equivalents........ -- (371) 9 -- (362)
Cash and cash equivalents at beginning of
year......................................... -- 5,578 206 -- 5,784
----------- ----------- ----------- ------------ ------------
Cash and cash equivalents at end of period..... $ -- $ 5,207 $ 215 $ -- $ 5,422
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
F-46
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTH PERIOD ENDED JUNE 27, 1998
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C> <C>
Net income (loss).............................. $ (8,684) $ (8,675) $ (9) $ 8,684 $ (8,684)
Adjustment to reconcile net income to net cash
and cash equivalents provided by (used in)
operating activities:
Loss on investments in subsidiaries.......... 8,684 -- -- (8,684) --
Depreciation and amortization................ -- 4,029 166 -- 4,195
Loss on disposal............................. 442 1,463 1,905
Changes of liabilities subject to compromise... -- (22,442) -- -- (22,442)
----------- ----------- ----------- ------------ ------------
-- (26,646) 1,620 -- (25,026)
Changes in operating assets and liabilities:
Accounts receivable.......................... -- 13,783 (1,713) -- 12,070
Inventories.................................. -- (15,266) 713 -- (14,553)
Prepaid expenses and other current assets.... -- (10,931) (947) -- (11,878)
Pension and other noncurrent assets.......... -- (997) -- -- (997)
Accounts payable and accrued expenses........ -- (1,031) 374 -- (657)
Income taxes payable......................... -- (457) (98) -- (555)
Other liabilities............................ -- 12,048 (3,488) -- 8,560
----------- ----------- ----------- ------------ ------------
Net cash and cash equivalents provided by (used
in) operating activities..................... -- (29,497) (3,539) -- (33,036)
INVESTING ACTIVITIES
Purchase of fixed assets....................... -- (5,605) (135) -- (5,740)
Proceeds on disposal of fixed assets........... -- -- 178 -- 178
----------- ----------- ----------- ------------ ------------
Net cash and cash equivalents used in investing
activities................................... -- (5,605) 43 -- (5,562)
FINANACING ACTIVITIES
Issuance of preferred stock.................... -- 48,125 -- -- 48,125
Distribution to parent......................... -- (87,524) -- -- (87,524)
Proceeds from long term debt................... -- 226,000 -- -- 226,000
Payments on long term debt..................... -- (4,000) -- -- (4,000)
Proceeds from operating credit facility........ -- 18,163 20,400 -- 38,563
Principal payments on pre-petition credit
facility..................................... -- (146,490) -- -- (146,490)
Principal payments on operating credit
facility..................................... -- (19,919) (16,707) -- (36,626)
Principal payments on capital leases........... -- (433) (12) -- (445)
----------- ----------- ----------- ------------ ------------
Net cash and cash equivalents provided by
financing activities......................... -- 33,922 3,681 -- 37,603
Effect of foreign currency translation......... -- (9) -- (9)
Net change in cash and cash equivalents........ -- (1,180) 176 -- (1,004)
Cash and cash equivalents at beginning of
year......................................... -- 9,551 468 -- 10,019
----------- ----------- ----------- ------------ ------------
Cash and cash equivalents at end of period..... $ -- $ 8,371 $ 644 $ -- $ 9,015
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
F-47
<PAGE>
CLUETT AMERICAN CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. ACCOUNTING STANDARDS RECENTLY ADOPTED
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" establishes new rules for reporting comprehensive income
and its components. SFAS 130 is effective for periods beginning after December
15, 1997, and was adopted by the Company for the fiscal year beginning January
1, 1998. There was no impact on net income or shareholders' equity from the
adoption of the statement.
For the periods ending June 27, 1998 and June 28, 1997, accumulated other
comprehensive income as shown in the consolidated balance sheets was comprised
of foreign currency translation adjustments which prior to adoption was reported
separately in shareholders' equity. The components of comprehensive income, net
of tax, for these periods were as follows:
<TABLE>
<CAPTION>
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
--------------------- --------------------
6/27/98 6/28/97 6/27/98 6/27/97
---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss)................................... $ (11,025) $ 1,841 $ (8,684) $ 2,181
Translation adjustment.............................. 1,267 1,477 1,985 (496)
---------- --------- --------- ---------
Comprehensive income................................ $ (9,758) $ 3,318 $ (6,699) $ 1,685
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
F-48
<PAGE>
- -----------------------------------------------
-----------------------------------------------
- -----------------------------------------------
-----------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERINGS CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES 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 AN IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary............................................... 1
Summary Pro Forma Combined Financial Information...... 20
Summary Historical Combined Financial Information..... 22
Risk Factors.......................................... 24
The Transaction....................................... 36
Use of Proceeds....................................... 39
Capitalization........................................ 39
Unaudited Pro Forma Combined Financial Information.... 40
Selected Historical Combined Financial Data........... 46
Management's Discussion and Analysis of Financial
Condition and Results of
Operations.......................................... 48
Business.............................................. 58
Management............................................ 73
Outstanding Voting Securities of Holdings and
Principal Holders Thereof........................... 77
Certain Transactions.................................. 77
The Note Exchange Offer............................... 81
The Preferred Stock Exchange Offer.................... 92
Description of the Exchange Notes..................... 104
Description of the New Preferred Stock and Exchange
Debentures.......................................... 136
Description of Capital Stock.......................... 183
Description of Other Indebtedness..................... 183
United States Federal Tax Considerations.............. 186
Plan of Distribution.................................. 194
Legal Matters......................................... 195
Experts............................................... 195
Index to Combined Financial Statements................ F-1
</TABLE>
CLUETT AMERICAN CORP.
OFFER TO EXCHANGE UP TO $112,000,000 OF ITS 10 1/8% SERIES B SENIOR SUBORDINATED
NOTES DUE 2008, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND
ALL OF ITS OUTSTANDING 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008
OFFER TO EXCHANGE UP TO $50,000,000 OF ITS 12 1/2% SERIES B SENIOR EXCHANGEABLE
PREFERRED STOCK DUE 2010, WHICH HAS ANY BEEN REGISTERED UNDER THE SECURITIES
ACT, FOR ANY AND ALL OF ITS OUTSTANDING 12 1/2% SENIOR EXCHANGEABLE PREFERRED
STOCK DUE 2010
------------------------
PROSPECTUS
--------------------------
NATIONSBANC MONTGOMERY
SECURITIES LLC
NATWEST CAPITAL MARKETS LIMITED
OCTOBER 26, 1998
- -----------------------------------------------
-----------------------------------------------
- -----------------------------------------------
-----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
charter, bylaws, disinterested director vote, stockholder vote, agreement or
otherwise. Article V of the Registrant's By-laws requires indemnification to the
fullest extent permitted by Delaware law. The Registrant has also obtained
officers' and directors' liability insurance which insures against liabilities
that officers and directors of the Registrant, in such capacities, may incur.
Such 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except for liability (i) for any
transaction from which the director derives an improper personal benefit, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for improper payment of dividends or
redemption of shares, or (iv) for any breach of a director's duty of loyalty to
the company or its stockholders. Article Tenth of the Registrants' Restated
Certificate of Incorporation includes such a provision.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*2.1 Third Amended Plan of Reorganization of Cluett American Corp. and Cluett American Investment Corp.
*2.2 Subscription Agreement dated as of March 30, 1998 among Bidermann Industries U.S.A., Inc., Vestar
Capital Partners III, L.P. and Alvarez & Marsal, Inc.
*2.3 Stockholders' Agreement dated as of May 18, 1998 among Cluett American Investment Corp., Vestar Capital
Partners III, L.P., A&M Investment Associates #7, LLC, the Co-Investors named therein, the Original
Equity Holders named therein and the Management Investors named therein.
*2.4 Joinder Agreement dated as of June 30, 1998 among Cluett American Investment Corp., Vestar Capital
Partners III, L.P. and each other signatory thereto (an "Additional Stockholder").
*3.1 Restated Certificate of Incorporation of Cluett American Corp.
*3.2 Bylaws of Cluett American Corp.
*4.1 Indenture between Cluett American Corp. and The Bank of New York, as Trustee
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*4.2 Exchange Debenture Indenture between Cluett American Corp. and The Bank of New York, as Trustee
*4.3 Certificate of Designations of the 12 1/2% Senior Exchangeable Preferred Stock Due 2010
*4.4 Form of 10 1/8% Senior Subordinated Notes Due 2008
*4.5 Form of 10 1/8% Series B Senior Subordinated Notes Due 2008
*4.6 Form of 12 1/2% Senior Exchangeable Preferred Stock Due 2010
*4.7 Form of 12 1/2% Series B Senior Exchangeable Preferred Stock Due 2010
*4.8 Note Registration Rights Agreement dated May 18, 1998 among Cluett American Corp., NationsBanc
Montgomery Securities LLC and NatWest Capital Markets Limited
*4.9 Preferred Stock Registration Rights Agreement dated May 18, 1998 among Cluett American Corp.,
NationsBanc Montgomery Securities LLC and NatWest Capital Markets Limited
*5 Opinion of Simpson Thacher & Bartlett
*10.1 $160,000,000 Credit Agreement dated as of May 18, 1998 among Cluett American Corp., as the Borrower,
NationsBank, N.A., as Administrative Agent and Collateral Agent, NationsBanc Montgomery Securities
LLC, as Arranger and Syndication Agent, and lenders
*10.2 First Amendment to the Credit Agreement and Assignment dated May 27, 1998 by an among Cluett American
Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the
Existing Lenders, New Lenders, and agents
*10.3 Security Agreement dated as of May 18, 1998 made by Cluett American Corp., Cluett American Investment
Corp., Cluett American Group, Inc. and certain Subsidiaries of Cluett American Investment Corp. in
favor of NationsBank, N.A. as agent
*10.4 Pledge Agreement dated as of May 18, 1998 made by Cluett American Corp., Cluett American Investment
Corp., Cluett American Group, Inc. and certain Subsidiaries of Cluett American Investment Corp. in
favor of NationsBank, N.A., as agent
*10.5 Joinder Agreement dated as of May 18, 1998 by and between Bidermann Tailored Clothing, Inc., and
NationsBank, N.A., in its capacity as Agent under that certain Credit Agreement dated as of May 18,
1998
*10.6 CDN $15,000,000 Loan Agreement dated as of August 8, 1997 between Cluett, Peabody Canada Inc., as the
Borrower, and Congress Financial Corporation (Canada), as Lender
*10.7 Employment Agreement dated March 7, 1997 by and between Great American Knitting Mills, Inc. and James
A. Williams
*10.8 Severance Agreement dated as of August 8, 1997 by and between Cluett, Peabody & Co., Inc. and Phil
Molinari
*10.9 Severance Agreement dated as of May 5, 1997 by and between Great American Knitting Mills, Inc. and
William Sheely
*10.10 Severance Agreement dated as of May 5, 1997 by and between Great American Knitting Mills, Inc. and
Kathy Wilson
*10.11 Advisory Agreement dated May 18, 1998 among Cluett American Investment Corp., Cluett American Corp. and
Vestar Capital Partners
*10.12 Secured Promissary Note dated May 18, 1998 made by A&M Investment Associates #7, LLC in favor of Cluett
American Investment Corp.
*10.13 Form of Secured Promissory Note made by the Management Investors in favor of Cluett American Investment
Corp.
*10.14 Severance Agreement dated as of August 8, 1997 by and between Cluett, Peabody & Co., Inc. and Robert
Riesbeck
*10.15 Severance Agreement dated as of January 16, 1996 by and between Bidermann Industries Corp. and Steven
J. Kaufman
*12 Computation of Ratio of Earnings to Fixed Charges
*21 List of Subsidiaries
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5 hereto)
**23.2 Consent of Ernst & Young LLP, independent certified public accountants
*23.3 Consent of The NPD Group, Inc.
*23.4 Consent of National Association of Hosiery Manufacturers
*24 Powers of Attorney (included on pages II-5--II-11)
*25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of The Bank
of New York, as Trustee for the 10 1/8% Senior Subordinated Notes Due 2008
*25.2 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of The Bank
of New York, as Trustee for the 12 1/2% Subordinated Exchange Debentures Due 2010
*27 Financial Data Schedule
*99.1 Form of Note Letter of Transmittal
*99.2 Form of Preferred Stock Letter of Transmittal
*99.3 Form of Note Notice of Guaranteed Delivery
*99.4 Form of Preferred Stock Notice of Guaranteed Delivery
</TABLE>
- ----------------------------------
* Previously filed.
** Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors................................................................... II-12
Schedule II--Valuation and Qualifying Accounts--
Three years ended December 31, 1997 and period ended June 27, 1998............................. II-13
</TABLE>
Schedules other than the above have omitted because they are either not
applicable or the required information has been disclosed in the financial
statements or notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the DGCL, the Certificate of
Incorporation and By-laws, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to
II-3
<PAGE>
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other times of the applicable form.
(2) that every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes 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 file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
securities Act of 1933;
(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
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(4) 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.
(5) 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.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-4
<PAGE>
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 the 23rd day of October 1998.
<TABLE>
<S> <C> <C>
CLUETT AMERICAN CORP.
By: *
-----------------------------------------
Name: Bryan P. Marsal
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the 23rd day of October 1998 by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ -----------------------------------------------------
<C> <S>
*
------------------------------------------- Director, President and Chief Executive Officer
Bryan P. Marsal
*
------------------------------------------- Chief Financial and Accounting Officer
Robert J. Riesbeck
/s/ STEVEN J. KAUFMAN
------------------------------------------- General Counsel
Steven J. Kaufman
*
------------------------------------------- Director
James A. Williams
*
------------------------------------------- Director
Norman W. Alpert
/s/ STEVEN M. SILVER
------------------------------------------- Director
Steven M. Silver
*
------------------------------------------- Director
Sander M. Levy
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ -----------------------------------------------------
<C> <S>
*
------------------------------------------- Director
Daniel S. O'Connell
/s/ NEIL DEFEO
------------------------------------------- Director
Neil DeFeo
</TABLE>
<TABLE>
<S> <C>
/s/ STEVEN J. KAUFMAN
--------------------------------------
*By: Attorney-in Fact
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused the Registration Statement or amendments thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 23, 1998.
<TABLE>
<S> <C> <C>
ARROW FACTORY STORES, INC.
By: *
-----------------------------------------
Name: Bryan P. Marsal
Title: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 23rd day of October, 1998 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------
<C> <S>
*
------------------------------------------- Director, Chairman and Chief Executive Officer
Bryan P. Marsal
*
------------------------------------------- Chief Financial and Accounting Officer
Robert J. Riesbeck
/s/ STEVEN J. KAUFMAN
------------------------------------------- General Counsel
Steven J. Kaufman
</TABLE>
<TABLE>
<S> <C>
/s/ STEVEN J. KAUFMAN
--------------------------------------
*By: Attorney-in Fact
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused the Registration Statement or amendments thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 23, 1998.
<TABLE>
<S> <C> <C>
CLUETT DESIGNER GROUP, INC.
By: *
-----------------------------------------
Name: Bryan P. Marsal
Title: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 23rd day of October, 1998 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ -----------------------------------------------------
<C> <S>
*
------------------------------------------- Director, Chairman and Chief Executive Officer
Bryan P. Marsal
*
------------------------------------------- Chief Financial and Accounting Officer
Robert J. Riesbeck
/s/ STEVEN J. KAUFMAN
------------------------------------------- General Counsel
Steven J. Kaufman
/s/ STEVEN J. KAUFMAN
--------------------------------------
*By: Attorney-in Fact
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused the Registration Statement or amendments thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 23, 1998.
<TABLE>
<S> <C> <C>
CLUETT, PEABODY & CO., INC.
By: *
-----------------------------------------
Name: Bryan P. Marsal
Title: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 23rd day of October, 1998 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------
<C> <S>
*
------------------------------------------- Director, Chairman and Chief Executive Officer
Bryan P. Marsal
*
------------------------------------------- Chief Financial and Accounting Officer
Robert J. Riesbeck
/s/ STEVEN J. KAUFMAN
------------------------------------------- General Counsel
Steven J. Kaufman
</TABLE>
<TABLE>
<S> <C>
/s/ STEVEN J. KAUFMAN
--------------------------------------
*By: Attorney-in-Fact
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused the Registration Statement or amendments thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 23, 1998.
<TABLE>
<S> <C> <C>
CONSUMER DIRECT CORPORATION
By: *
-----------------------------------------
Name: Bryan P. Marsal
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 23rd day of October, 1998 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ -----------------------------------------------------
<C> <S>
*
------------------------------------------- Director, President and Chief Executive Officer
Bryan P. Marsal
*
------------------------------------------- Chief Financial and Accounting Officer
Robert J. Riesbeck
/s/ STEVEN J. KAUFMAN
------------------------------------------- General Counsel
Steven J. Kaufman
</TABLE>
<TABLE>
<S><C> <C>
/s/ STEVEN J. KAUFMAN
------------------------------
*By: Attorney-in-Fact
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused the Registration Statement or amendments thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 23, 1998.
<TABLE>
<S> <C> <C>
GREAT AMERICAN KNITTING MILLS, INC.
By: *
-----------------------------------------
Name: Bryan P. Marsal
Title: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 23rd day of October, 1998 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<C> <S>
*
-------------------------------------------- Director, Chairman and Chief Executive Officer
Bryan P. Marsal
*
-------------------------------------------- Chief Financial Accounting Officer
Kathy D. Wilson
/s/ STEVEN J. KAUFMAN
-------------------------------------------- General Counsel
Steven J. Kaufman
</TABLE>
<TABLE>
<S><C> <C>
/s/ STEVEN J. KAUFMAN
------------------------------
*By: Attorney-in-Fact
</TABLE>
II-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cluett American Corp.
We have audited the combined financial statements of Cluett American Corp.
(formerly Bidermann Industries Corp. and Affiliates), as of December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
and have issued our report thereon dated March 19, 1998, except for Note 20 as
to which the date is April 10, 1998 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 21(b). The schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 19, 1998, except for Note 20
as to which the date is April 10, 1998
II-12
<PAGE>
SCHEDULE II
CLUETT AMERICAN CORP.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------- ----------- ------------------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
ADDITIONS
------------------------
CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION BALANCE EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1995:
Deduction from asset account:
Allowance for Doubtful Accounts.......... 1,923 2,180 -- 325(1) 3,778
Allowance for Sales Discounts............ 75 (10) -- 38(1) 27
Customer Allowances...................... 9,259 10,733 -- 8,161(1) 11,831
Total................................ 11,257 12,903 -- 8,524(1) 15,636
YEAR ENDED DECEMBER 31, 1996:
Deduction from asset account:
Allowance for Doubtful Accounts.......... 3,778 591 -- 1,077(1) 3,292
Allowance for Sales Discounts............ 27 42 -- (59)(1) 128
Customer Allowances...................... 11,831 9,346 -- 9,183(1) 11,994
Total 15,636 9,979 -- 10,201(1) 15,414
YEAR ENDED DECEMBER 31, 1997:
Deduction from asset account:
Allowance for Doubtful Accounts.......... 3,292 (717) -- 773(1) 1,802
Allowance for Sales Discounts............ 128 22 -- 141(1) 9
Customer Allowances...................... 11,994 6,855 -- 10,687(1) 8,162
Total................................ 15,414 6,160 -- 11,601(1) 9,973
PERIOD ENDED JUNE 27, 1998 (UNAUDITED):
Deduction from asset account:
Allowance for Doubtful Accounts.......... 1,802 454 -- 68(1) 2,188
Allowance for Sales Discounts............ 9 10 -- 260(1) (241)
Customer Allowances...................... 8,162 4,792 -- 6,496(1) 6,458
Total................................ 9,973 5,256 -- 6,824(1) 8,405
</TABLE>
II-13
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary
Historical Combined Financial Information," "Selected Historical Combined
Financial Data" and "Experts" in the Registration Statement (Form S-4
Amendment No. 3) and related prospectus of Cluett American Corp., formerly
Bidermann Industries Corp., for the registration of $112,000,000 10 1/8%
Senior Subordinated Notes Due 2008 and $50,000,000 12 1/2% Senior
Exchangeable Preferred Stock Due 2010 and to the inclusion of our report
dated March 19, 1998 (except for Note 20, as to which the date is April 10,
1998) with respect to the combined financial statements of Bidermann
Industries Corp. and Affiliates for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Atlanta, Georgia
October 22, 1998
