UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____________ to
- --------------
Commission File Number: 333-58059
Cluett American Corp.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2397044
(State or Other Jurisdiction of (I.R.S.
Employer
Incorporation or Organization)
Identification No.)
48 West 38th Street New York, NY 10018
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 212-984-8900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each class Name of each
exchange on which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
None
--------------------------------------
(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15
(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court.
Yes X No
No stock is held by any non-affiliates of the registrant as of December 31,
1998.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
SIGNATURES
EXHIBIT INDEX
<PAGE>
PART I
Item 1. Business
Cluett American Corp. (formerly known as Bidermann Industries Corp. ("BIC")),
a Delaware corporation organized in 1982, and its subsidiaries (the "Company"),
primarily designs, manufactures and markets men's socks and dress shirts in the
United States and Canada. The Company filed voluntary petitions for relief under
the provisions of Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York (the "Court") on July 17,
1995. On March 31, 1998, the Third Amended Plan of Reorganization (the "Plan")
was confirmed by the Court. In connection with the Company's recapitalization
and refinancing consummated on May 18, 1998, the Company entered into a new
Senior Credit Facility and issued its Senior Subordinated Notes due 2008 and
Senior Exchangeable Preferred Stock due 2010. Cluett American Corp. is a
wholly-owned subsidiary of Cluett American Group, Inc. ("CAG"). CAG is a
wholly-owned subsidiary of Cluett American Investment Corp. ("CAIC" or
"Holdings"), which was formerly known as Bidermann Industries U.S.A., Inc.
("BIUSA").
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 using 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. 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 net sales are derived from these core
offerings, the demand for which is believed to be 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 Kenneth Cole, Perry Ellis, Nautica, Jockey and The
North Face. This diverse portfolio of Company-owned and licensed brand names
enables the Company to offer different brands with unique value propositions to
different channels of distribution.
The Company identifies its reportable segments based on the segment's product
offerings. For the year ended December 31, 1998, the Company conducted its
business through three principal segments: the Sock Group, the Shirt Group and
the Designer Group. The reportable segments are each managed separately as they
manufacture and distribute distinct products with different production
processes. The Company evaluates performance based on net sales, gross profit,
operating profit and EBITDA. For the year ended December 31, 1998, the Company
realized consolidated net sales and EBITDA As Defined of $373.1 million and
$40.9 million, respectively. EBITDA As Defined is defined as operating income
before depreciation and amortization, non cash pension income and facility
closing and reengineering costs. See (7) of Item 6 Selected Financial Data on
pages 17 through 19 for a detailed discussion of EBITDA As Defined.
The Sock Group (43.2% of net sales for the fiscal year ended December 31,
1998). 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 65% 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 Arrow. 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 the fiscal year ended December 31, 1998, the Sock Group
realized net sales and EBITDA As Defined of $164.8 million and $31.4 million,
respectively.
<PAGE>
The Shirt Group (48.1% of net sales for the fiscal year ended December 31,
1998). 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 the TOURNAMENT, KHAKI by ARROW and ARROW
AMERICA'S Sport labels. Because of the name recognition of its ARROW brand,
which was established in 1851, the Company is also able to license the ARROW
trademark for shirts internationally and non-shirt products both domestically
and internationally. For the fiscal year ended December 31, 1998, the Shirt
Group realized net sales (including licensing fee revenue of $6.3 million) and
EBITDA As Defined (including net licensing income of $4.4 million) of $183.2
million and $14.2 million, respectively.
The Designer Group (7.6% of net sales for the fiscal year ended December 31,
1998). The Designer Group was established as a separate business unit in October
1995 and sells (i) dress and sport shirts under licensed Kenneth Cole, Yves
Saint Laurent ("YSL") and Burberrys trademarks, (ii) dress socks under the
licensed Kenneth Cole and YSL trademarks and (iii) tailored clothing and casual
pants under the YSL trademark. During the fiscal year ended December 31, 1998,
management decided to exit the Burberrys and YSL businesses. This decision was
driven by a lack of operating profitability in the Designer Group, combined with
a significant working capital requirement. Consequently, the Company has entered
into agreements to terminate the Burberrys and YSL license agreements and will
no longer distribute products under these brands after June 30, 1999. The net
cost to exit the Burberrys and YSL businesses during 1998 was approximately $7.1
million. For the fiscal year ended December 31, 1998, the Designer Group had net
sales and EBITDA As Defined of $29.1 and $(0.5) million, respectively. Effective
January 1, 1999, for financial reporting purposes, the dress and sport shirts
business under the Kenneth Cole trademark will be consolidated into the Shirt
Group financial results and the dress sock business under the Kenneth Cole
trademark will be consolidated into the Sock Group financial results.
Operationally, Kenneth Cole dress shirts and socks will remain distinctly
separate from the Shirt and Sock Groups in order to maintain the unique
qualities of a designer product.
The net sales and EBITDA As Defined numbers in the preceding three
paragraphs include intercompany sales of $7.8 million. For additional
information about the Company's product categories and reportable segments, see
Item 1 "Description of Business" on pages 5 through 7 and "Note 17 Segment Data"
of the Notes to the Consolidated Financial Statements on pages F-8 through F-34
of the Consolidated Financial Statements.
<PAGE>
Description of Business
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 subset of the overall United States
hosiery industry. The sock industry includes the manufacture of socks for men,
women, children and infants. Within the sock industry, the two largest segments
are casual/dress and sport/athletic. Demand is driven by the basic replenishment
needs of the consumer 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 retailers has increased as more manufacturers, including the Sock Group, have
introduced multi-pack offerings for products that were traditionally sold in
single pair offerings.
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 SILVER TOE and FRIDAY's by Cluett brands, its licensed
Jockey, Perry Ellis, Nautica, and Arrow 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.
The following table shows the percentage of the Company's net sales of socks
represented by the listed category:
1996 1997 1998
----- ---- ----
Gold Toe 61% 63% 65%
Other Branded 20 20 18
Private Label 12 11 11
Other(1) 7 6 6
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Total net sales in millions $141.1 $151.8 $164.8
===== ===== =====
(1) Includes transfers to outlet stores.
GOLD TOE socks have provided a strong foundation for the Sock Group and its
predecessors 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. Its primary competitors include private labels of the
various department stores for men's and 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 designer product for
the department store class. These lines enable 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 in an upper price range. Their
primary competitors include the brands `Polo' and `Tommy Hilfiger'.
The Sock Group markets moderate price point socks 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 `Hanes' by Sara Lee Corporation ("Sara Lee") and private
label manufacturers.
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 Renfro Corporation ("Renfro") and other private label
manufactures.
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 capable of serving the full range of its
customer's product needs.
<PAGE>
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 for the fiscal year
ended December 31, 1998. The Shirt Group distributes its products to department
stores, specialty stores, national chain stores and selected 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.
The Company's ARROW dress shirts are principally marketed 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:
1996 1997 1998
----- ---- ----
Dress Shirts:
Arrow........................... 59% 58% 58%
Other Dress Shirts.............. 3 7 7
- - -
Total............. 62% 65% 65%
Sport Shirts.................... 38% 35% 35%
-- -- --
Total Shirts.............. 100% 100% 100%
=== === ===
Total net sales in millions..... $ 194.7 $ 176.8 $ 183.2
DRESS SHIRTS
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 be a
significant player in the blended oxfo rd cloth classification and is carried in
almost every store where ARROW is sold. Leveraging the strength of the DOVER
label, a new marketing strategy was launched in 1998, and 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. This
product line is targeted at an average out-the-door retail price of
approximately $18 to $22, and its major competitors are 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. The ARROW "1851" label reinforces ARROW'S important 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 available in 100% cotton. This product line represents ARROW'S better
quality shirt 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 private label products. The average
out-the-door retail price is approximately $23 to $27.
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 certain better
department stores. The primary competition for the COLLARMAN is `Perry Ellis' by
Salant Corporation ("Salant"). The average out-the-door retail price for
COLLARMAN is approximately $28 to $32.
The Shirt Group has 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. During the fiscal year ended December 31,
1998, the Company repositioned its sportswear labels with an emphasis on three
brands: TOURNAMENT, KHAKI by ARROW and ARROW AMERICA'S Sport, which are marketed
to provide a good, better, and best product line. Approximately 35% of the Shirt
Group's business is in sportswear.
<PAGE>
The TOURNAMENT brand is a moderately priced, mostly cotton blended product
from ARROW. Starting in 1997, the Company began marketing all of its moderate
priced sportswear, primarily knit and woven shirts, under the TOURNAMENT brand.
TOURNAMENT sportswear is targeted at a retail price of approximately $18 to $22.
The major competitors of the TOURNAMENT brand are private label and `Supreme' by
Supreme International Corp. ("Supreme").
The KHAKI by ARROW and ARROW AMERICA's Sport labels represent higher quality,
100% cotton sportswear product. Traditional in styling, these products were
marketed to give the consumer a natural fiber sport shirt at a retail price of
$25 to $30. These product lines are primarily focused on the better specialty
stores and traditional department stores. The major competitors are private
label products and `Chaps' by Warnaco Inc. ("Warnaco").
The Designer Group
The Designer Group was established as a separate business unit in October,
1995 and sells: (i) dress and sport shirts under its licensed Kenneth Cole, YSL
and Burberrys trademarks; (ii) dress socks under the licensed Kenneth Cole
trademark; and (iii) tailored clothing and casual pants under the YSL trademark.
During the fiscal year ended December 31, 1998, the Company terminated the
Burberrys and YSL license agreements and will no longer distribute products
under these brands after June 30, 1999. Effective January 1, 1999, for financial
reporting purposes, net sales of dress shirts under the Kenneth Cole trademark
will be consolidated into the Shirt Group and net sales for dress socks under
the Kenneth Cole trademark will be consolidated into the Sock Group.
<PAGE>
Marketing, Sales & Distribution
The Sock Group
The Sock Group is a significant supplier to many leading department store and
national chain retailers. The Sock Group segments its use of brand names by
distribution channel to solidify the perceived value of such brands and to
maintain their integrity. The Sock Group's top ten customers accounted for 78%
of its total net sales in the fiscal year ended December 31, 1998.
The Sock Group distributes its products through the following channels:
SALES BY DISTRIBUTION CHANNEL FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
Department Stores and National Chains 88%
Specialty Stores/Other 1%
Mass Merchants and Discounters 11%
---
Total 100%
Consistent with industry practice, the Sock Group does not operate under
long-term written supply agreements with its customers.
To better serve its customers, the Sock Group installed a vendor managed
inventory system ("VMI") in 1998. The VMI provides the Sock Group with real time
information on the sales of the Sock Group's products by its customers. This
system allows the Sock Group to ship product to a customer immediately upon
learning that such customer does not have adequate inventory. As a result, the
Sock Group no longer needs to wait until a request comes directly from that
customer.
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 to promote the Sock Group's products to the
consumer. In addition to frequent personal consultation with the employees of
these customers, the Sock Group periodically meets with its customers' senior
management 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. In addition, the Sock Group 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.
As a supplement to the Sock Group's primary distribution channels, the Shirt
Group operates five outlet stores for Sock Group products. These stores sell
irregulars, and for financial reporting purposes, the financial results of these
stores are consolidated into the US Retail division, which is part of the Shirt
Group. The stores are located in factory outlet malls and average approximately
1,200 square feet per store. During the fiscal year ended December 31, 1998, two
GOLD TOE outlet stores were closed and no new stores were opened.
The Sock 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.
<PAGE>
The Shirt Group
The Shirt Group is a significant supplier to many leading department store and
national chain retailers. Consistent with industry practice, the Shirt Group
does not operate under long-term written supply agreements with its customers.
The Shirt Group's top ten customers accounted for approximately 52% of total net
sales for the fiscal year ended December 31, 1998.
The Shirt Group distributes its products through the following channels:
SALES BY DISTRIBUTION CHANNEL FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
Department Stores and National Chains 69%
Specialty Stores/Other 13%
Mass Merchants and Discounters 18%
---
Total 100%
In order to better serve its customers, the Shirt Group has installed a vendor
managed inventory 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. As an example, this system allows the Shirt Group to
monitor inventory levels at a customer and initiate replenishment orders without
having to wait for the customer's direct request. In addition, the Shirt Group
utilizes a balance of off-shore sewing and domestic manufacturing to provide its
customers with timely dress shirt replenishment. As a result of this
manufacturing strategy, the Shirt Group can deliver its core dress shirt
offerings within 48 hours of receiving an order. This order fulfillment 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 Shirt Group.
The Shirt Group works closely with its key accounts to assist them in managing
their entire dress shirt and sport shirt product categories. This close
relationship insures increased sales and promotes maximum product exposure of
the Shirt Group's products to the consumer. In addition to frequent personal
consultation with the buying teams of these key accounts, the Shirt Group
frequently meets with its customers' senior management to jointly develop
merchandise assortments and to plan promotional events specifically tailored for
that account. The Shirt Group provides merchandising assistance with in-store
presentations, fixture designs, advertising and point of sale displays.
The Shirt Group employs sales people who generally have several years of
experience in the men's shirt business. Because the turnover of buyers at retail
stores is 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 managing such businesses for its 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 consumers. These stores generally sell irregulars,
discontinued and off price goods. The retail stores offer a collection of the
Shirt Group's dress and sport shirts, GOLD TOE socks and 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 by controlling the sale of
excess inventory. During the fiscal year ended December 31, 1998, three new
retail outlet stores were opened and 12 were closed. The average size of each
store is approximately 3,000 square feet.
The Designer Group
During 1998, the Designer Group sold its licensed Kenneth Cole, YSL and
Burberrys products to a variety of specialty and department stores. 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. As discussed
above, the Designer Group has terminated its Burberrys and YSL licenses
effective December 31, 1998 and will not distribute products under these
trademarks after June 30, 1999.
<PAGE>
Raw Materials
The Sock Group
The Sock Group relies on outside suppliers to meet its raw material needs. The
Sock Group 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 Sock Group minimizes the effects of seasonal variations in yarn prices by
securing long-term contracts for yarn based on its anticipated needs for each
year. Sock manufacturers in the industry typically 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 Shirt Group maintains close relationships with the
largest suppliers of this material. The Shirt Group is not heavily dependent on
any one particular supplier.
Manufacturing
The Sock Group
The Sock Group produces its sock products through domestic manufacturing
facilities, imports and subcontracting. Approximately 74% of all production is
done at Sock Group-owned facilities, 18% 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 Sock Group'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 for retail store presentation.
The Company has spent approximately $16.2 million since 1995 upgrading the Sock
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 owned North American
manufacturing facilities and subcontracting. Approximately 44% of all dress
shirt production is done at North American, Shirt Group-owned or leased
facilities, and 56% is sourced outside of North America. All sport shirts are
sourced outside of North America. The Shirt Group owns or leases four facilities
located in Enterprise and Albertville, Alabama, Austell, Georgia and Kitchener,
Ontario.
For dress shirts, 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 the Caribbean or Central America comply with Rule 9802 of
the U.S. Tariff Code. This Rule 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 Shirt Group purchases product through individual purchase orders
specifying the price and quantity of the items to be produced. Generally, the
Shirt Group does not have any long-term, formal arrangements with any of the
suppliers which manufacture its products. The Shirt Group believes that it is
the largest customer of many of its manufacturing suppliers and that its
long-standing relationships with its suppliers provide the Shirt Group with a
competitive advantage over its competitors. No single supplier is critical to
the Shirt Group's production needs, and the Shirt Group believes that an ample
number of alternative suppliers exists should the Shirt Group need to secure
additional or replacement production capacity.
<PAGE>
The Designer Group
Kenneth Cole products are produced at domestic, Company-owned facilities and
imported. No single supplier is critical to the Company's production needs, and
the Company believes that an ample number of alternative suppliers exists should
the Company need to secure additional or replacement production capacity.
Design
The Sock Group
The Sock Group's primary product lines are timeless and are not subject to
change. These core product lines provide the Sock Group with a business base,
which is carried over from year to year, and is the result of the Sock 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 product lines exhibit the similar
timeless fashion characteristics as the Sock Group's products and are not
generally subject to material change, while sport shirt styles tend to change
significantly 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 ensure 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 Kenneth Cole trademarks, and (ii) dress socks under the licensed
Kenneth Cole trademark. The Designer Group works with the licensor to develop a
"fashion blueprint" for the products. The image, colors and styles of the
products are intended to be consistent with the other products sold by the
licensor 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.
Trademarks and License Agreements
The Sock Group
The Sock Group markets its products under its own proprietary trademarks,
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 Sock Group owns various trademarks and trade names including GOLD TOE,
SILVER TOE and ARROW. These trademarks and trade names 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.
<PAGE>
The Sock Group holds the exclusive sock licenses for the following trademarks:
TRADEMARK TERRITORY EXPIRATION
- --------- --------- ----------
Perry Ellis and Perry Ellis U.S., Canada and Mexico 12/31/1999 (1)
America
Nautica U.S. and Canada 12/31/2001
Jockey/Jockey For Her U.S. and Mexico 12/31/1999
The North Face U.S., Canada, Europe 12/31/2004 (1)
and Asia
Jaclyn Smith U.S. No termination date
(1) Option to renew.
The Sock Group is only partially dependent on these licensed product lines
(for the fiscal year ended December 31, 1998, 12% of the Sock Group's net sales
was derived from licensed products), and the loss of any individual license
would not have a material adverse affect on the Sock Group'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 Sock Group intends to more fully exploit the strength of the GOLD TOE
brand by adding new licensees.
The Shirt Group
The Shirt Group owns various trademarks and trade names, including ARROW. The
ARROW trademark is widely recognized in the industry and represents excellence
and value in product quality, fashion and design. The Shirt Group regards its
trademarks and trade names as valuable assets and rigorously protects them
against infringement.
The Shirt Group licenses the ARROW and related trademarks to 21 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 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 Shirt Group's products consistently. While product
licensing partners may employ their own designers, the Shirt Group oversees the
design of all their products. The Shirt Group also works closely with licensing
partners to coordinate marketing and distribution strategies. For the fiscal
year ended December 31, 1998, the Shirt Group had licensing fee revenue of $6.3
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 United States licensees
for use on neckwear, loungewear and men's fashion eyewear.
<PAGE>
The Designer Group
The Designer Group held the exclusive United States licenses for: (i) men's
shirts, tailored clothing and socks under the YSL trademark, (ii) men's shirts
under the Burberrys trademark and (iii) men's shirts and socks under the Kenneth
Cole trademark. The Company has terminated the Burberrys and YSL license
agreements and will no longer distribute products under these brands after June
30, 1999. The Kenneth Cole license for dress shirts expires in 2002, and the
Kenneth Cole license for socks expires in 2003.
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 electronic
data interchange ("EDI") system and vendor managed inventory systems have
resulted in shortened lead times between submission of purchase orders and
delivery and has lowered the level of backlog orders. Consequently, the Company
believes that the amount of its backlog is not an appropriate indicator of
future production levels.
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 could 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.
The Company's business is seasonal, with higher sales and income during its
third and fourth quarters. The third and fourth quarters coincide with the
Company's two peak retail selling seasons: (i) the first season runs from the
start of the back-to-school and fall selling seasons, beginning in August and
continuing through September; and (ii) the second season runs from the start of
the Christmas selling season beginning with the weekend following Thanksgiving
and continuing through the week after Christmas.
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.
Reliance On Certain Customers
The Sock Group's ten largest customers accounted for approximately 78% of its
net sales in 1998 and the Shirt Group's ten largest customers accounted for
approximately 52% of its net sales for the fiscal year ended December 31, 1998.
The Company has no long-term contracts with these customers, and no customer
accounted for more than 10% of the Company's total net 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.
Employees
As of December 31, 1998, the Company employed approximately 3,134 persons on
a full-time basis and approximately 135 persons on a part-time basis, including
1,435 persons in the Sock Group and 1,827 persons in the Shirt Group. Of the
total employees, 2,151 were engaged in manufacturing and distribution
operations, and the remainder were employed in executive, marketing and sales
and purchasing activities and in the operation of the Company's retail outlet
stores. Approximately 34% of the Company's 3,269 employees are represented by
collective bargaining agreements with one union, which expire between February
28, 2000 and March 31, 2001. The Company believes that its relations with its
employees are satisfactory.
<PAGE>
Competition and Industry Risks
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 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.
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.
The Sock Group's primary sock competitors are: Sara Lee (`Hanes' and
`Champion' brands); Renfro (`Gitano' and `Fruit-of-the-Loom' brands); Royce
Hosiery Mills, Inc. (`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.
The Shirt Group's primary dress shirt competitors are: 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.
(private label shirts). The Shirt Group's primary sports shirt competitors are:
Warnaco (`Chaps' brand); Polo/ Ralph Lauren L.P. (`Polo' brand); Phillips-Van
Heusen Corporation (`Van Heusen' brand); and Supreme (`Supreme' brand).
The Designer Group's primary competitors are numerous high-end designer labels
including `Perry Ellis', `DKNY', `Tommy Hilfiger' and `Polo'.
The Company has historically benefited 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. General
Agreements on Trade and Tariffs ("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.
Information Systems
The Company has invested $7.5 million since 1995 in state-of-the-art
information systems which have dramatically improved operations and management's
access to information. 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 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.
<PAGE>
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 more 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.
Item 2. Properties
Facilities
The Company's principal executive offices are located at 48 West 38th Street,
New York, NY 10018. The following table summarizes certain information
concerning certain of the Company's facilities:
APPROX.
LOCATION USE SQUARE FEET OWNED/LEASED
-------- --- ----------- ------------
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 Owned
Toronto, Ontario Showroom 8,100 Leased
New York NY Showroom
/Administrative 30,000 Leased
Atlanta, GA Administrative 45,760 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
Mebane, 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 9,200 Leased
In addition, the Company operates 28 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.
Item 3. Legal Proceedings
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.
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 in the Court. On March 31, 1998, the Plan of Reorganization (the
"Plan") was confirmed by the Court.
<PAGE>
In connection with the bankruptcy proceedings, the Company incurred bankruptcy
reorganization costs in 1995, 1996, 1997 and 1998 of $2.8 million, $6.1 million,
$6.1 million and $2.5 million respectively, for professional fees. Additionally,
in 1998, the Company incurred $35.0 million in post-petition interest on
pre-petition debt. In 1995, the Company also established a reserve of $9.8
million related to estimated costs associated with rejecting leases for certain
office space, facilities, retail stores and equipment and incurred costs of $4.8
million related to fees in obtaining Debtor-in-Possession financing and the
write-off of capitalized deferred finance costs on the pre-petition debt, and
$3.5 million related to potential claims and related litigation matters. During
the bankruptcy period from 1995 through 1998, 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, 1996 and 1998 were not significant. All settlements were approved by the
Court. The Company does not anticipate any future adjustments with respect to
disputed claims or other events related to the bankruptcy.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1998, no matter was submitted to a vote of
security holders of the Company by means of the solicitation of proxies or
otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
All of the Company's outstanding common stock is held by CAG and there is
no established public trading market for such stock. The Company has paid no
dividends to common stockholders since inception and does not have any present
intention to commence payment for any cash dividends. The Company's ability to
pay such dividends is limited by the terms of its Senior Credit Facility
agreement and the Indenture relating to its 10 1/8% Senior Subordinated Notes
due 2008 and its 12 1/2% Senior Exchangeable Preferred Stock due 2010. The
Company intends to retain earnings to provide funds for operation and expansion
of the Company's businesses and to repay outstanding indebtedness.
<PAGE>
Item 6. Selected Financial Data
The following table sets forth summary historical financial data of the
Company for each of the five years ended December 31, 1998. The following
summary financial data with respect to the three years ended December 31, 1998,
are derived from the Consolidated Financial Statements included elsewhere in
this document 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and notes thereto included elsewhere in this document.
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Unaudited)
(DOLLARS
IN MILLIONS)
STATEMENT OF OPERATIONS
DATA:
Net sales $536.8 $486.7 $369.0 $363.5 $373.1
Cost of goods sold (1) 391.5 369.8 273.8 253.7 264.3
------------------------------------
Gross profit
145.3 116.9 95.2 109.8 108.8
Selling, general and
administrative expense 145.4 137.9 86.3 76.3 82.4
Facility closing and
reengineering costs (2) - 22.5 11.6 2.5 2.4
------------------------------------
Operating income
(loss) (0.1) (43.5) (2.7) 31.0 24.0
Interest expense, net
24.6 22.7 16.9 15.2 20.4
Write-down of intangible
assets (3) 74.7 - - - -
Other expense (income),net(4) (0.3) 0.5 3.2 1.2 2.1
Bankruptcy reorganization
costs (credits) (5) - 20.9 6.1 (3.9) 37.5
Income (loss) before
provision for income taxes (99.1) (87.6) (28.9) 18.5 (36.0)
Provision for income
taxes 1.8 1.5 1.3 1.3 0.8
====================================
Net income (loss)
(100.9) (89.1) (30.2) 17.2 (36.8)
====================================
OTHER FINANCIAL DATA:
Capital expenditures $13.8 $6.1 $9.8 $10.8 $11.8
Depreciation and
amortization(6) 15.3 13.3 10.9 8.1 8.7
Cash flows provided by
(used in):
Operating activities $(16.0) $0.4 $16.7 $13.0 $(30.9)
Investing activities (10.3) 25.3 (8.3) (7.5) (11.7)
Financing activities (22.7) (26.1) 13.3 (1.3) 35.5
EBITDA As
Defined(7) 13.9 (7.8) 17.4 39.6 40.9
Adjusted Net Sales(8)
406.0 388.9 361.8 359.8 369.2
Adjusted EBITDA(7)(8) 0.6 (8.5) 18.7 40.2 41.6
Adjusted EBITDA margin 0.1% (2.2)% 5.2% 11.2% 11.3%
Working capital(9) $141.5 $116.9 $82.1 $82.2 $81.4
Total assets 321.5 252.9 211.1 220.0 220.8
Total long-term debt, net
of current
portion(10) 150.4 3.6 8.6 2.0 235.7
Debt subject to
compromise - 161.1 146.0 145.6 -
Preferred stock 16.4 17.4 18.7 20.0 51.3
Total stockholder's equity
(deficit) 46.9 (44.3) (74.2) (56.8)(149.0)
(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.
<PAGE>
(2) Over the four-year period 1995-1998 facility closing and reengineering
costs, which totaled $39.0 million, included $15.5 million for plant
closings,$10.5 million for store closings, $2.4 million for Other Segments (as
defined herein), $1.6 million for relocation and severance, and $8.9 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) 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. In 1997, other expense is
primarily attributable to foreign exchange losses. In 1998, other expense is
comprised primarily of failed deal costs and litigation reserves.
(5) Bankruptcy reorganization costs (credits) consist of the following:
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
Professional fees -- $ 2.8 $ 6.1 $ 6.1 $ 2.5
Post petition interest paid
in accordance with the Plan -- -- -- -- 35.0
Adjustment to lease rejection
and other pre-petition
Liabilities -- 9.8 -- (10.0) --
Write off 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) $ 37.5
==========================================
(6) Depreciation and amortization excludes amortization of deferred financing
costs of $3.6 million in 1994, $5.2 million in 1995 and $1.0 million in 1998
which is included in interest expense.
<PAGE>
(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 Other Segments.
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
principle 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 EBITDA is shown below:
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---------------------------------------------
(DOLLARS IN MILLIONS)
Operating income (loss) $ (0.1) $ (43.5) $ (2.7) $ 31.0 $ 24.0
Depreciation and amortization 15.3 13.3 10.9 8.1 8.7
Non-cash pension income (1.3) (0.1) (2.4) (2.0) (1.2)
Facility closing and
reengineering costs -- 22.5 11.6 2.5 2.3
Cost of exiting the Burberrys
& YSL businesses -- -- -- -- 7.1
------------------------------------------------
EBITDA As Defined 13.9 (7.8) 17.4 39.6 40.9
EBITDA from Other Segments (8) 13.3 0.7 (1.3) (0.6) (0.7)
------------------------------------------------
Adjusted EBITDA $ 0.6 $ (8.5) $ 18.7 $ 40.2 $ 41.6
================================================
(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 "All other").(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.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
In June 1995, the predecessor to the Company, Bidermann Industries Corp.,
hired Bryan Marsal as Chief Executive Officer. As a result of an impending
liquidity crisis, it became apparent that the Company had serious operational
and financial problems. The financial problems arose as a result of a number of
years of poor operating performance resulting in higher and higher levels of
debt and accrued interest. As a consequence, the Company's trade and bank
creditors were becoming increasingly unwilling to extend credit. As credit
tightened, it became increasingly difficult to operate the business. In July
1995, the Company sought bankruptcy protection to obtain financing and to buy
time to develop an operating and repayment plan.
The operating plan that was developed in the fall of 1995 and refined
throughout the bankruptcy consisted of the following key components: (i)
eliminate the costly and inefficient centralized corporate overhead structure;
(ii) refocus the Shirt Group back to its core competencies in dress shirts and
implement tighter control over sales forecasting and production planning; (iii)
identify and dispose of non-core or underperforming assets; (iv) support
historically under-served core operations with appropriate increases in capital.
Prior to June 1995, the Company had developed a very extensive centralized
corporate overhead structure. The size of this structure, the spending
philosophy of corporate management and the lack of accountability made this an
ineffective and costly approach. In the Fall of 1995 / Spring of 1996, the
Company aggressively dismantled this corporate overhead structure through a
combination of eliminating certain costs and transferring the balance of the
overhead to the operating units. This transfer resulted in a substantially less
expensive and more accountable and responsive structure.
Prior to June 1995, the Shirt Group had embarked on a plan of increasing
revenues by aggressively trying to build a wholesale sportswear business and a
Company owned and operated retail store group. Focus on the Shirt Group's
traditional strengths in dress shirts had been eroded. Beginning in Spring 1997
(it took longer to effect change due to the lead time on purchased line
introductions), the Shirt Group refocused itself on its traditional strengths in
dress shirts, substantially reduced its emphasis on higher fashion risk
sportswear, and aggressively moved to close 75% of its retail stores. The
remaining retail stores were converted to a pure outlet store format where the
Shirt Group's production excesses are disposed.
The Company determined that certain assets were non-core or underperforming;
these assets included the Arrow-retail store division in the US, the
Canadian-retail store division, Ralph Lauren Womenswear (license was soon to
expire), Mexico and Central American shirt operations, tailored clothing and the
Burberrys and YSL men's tops licenses. From October 1995 to mid-1998 the Company
disposed of these assets and eliminated the support or cost structure associated
with these assets.
Prior to June, 1995, the Company had inadequately supported the capital
requirements of the sock business. With the liquidity provided by the
bankruptcy, the Sock Group was able to close plants, consolidate distribution
centers, and significantly upgrade or modernize its equipment and systems. As a
result, the cost of goods sold and administrative expenses of the Sock Group
have been significantly reduced.
Key operational restructurings at the Sock Group from 1996 to 1998 include
the following: (i) absorption of all previously centralized administrative and
support services; (ii) relocation of the New York office and showroom to
substantially less expensive space; (iii) closure of the Halifax, North
Carolina, knitting facility which significantly reduced excess manufacturing
capacity; (iv) closure of the Henderson, North Carolina, knitting facility
further reducing excess manufacturing capacity; (v) and consolidation of three
smaller distribution facilities into one larger distribution center.
Key operational restructurings at the Shirt Group from 1996 to 1998 include
the following: (i) absorption of all previously centralized administrative and
support services; (ii) relocation of NewYork office and showroom to
substantially less expensive space; (iii) development and transfer to an
advanced information technology (i.e., an overall information system change was
implemented); (iv) consolidation of two large distribution centers into the
Austell, Georgia distribution center; (v) closure of the Cedartown, Georgia,
sewing facility reducing excess manufacturing capacity; (vi) closure of the
Costa Rican sewing facility and transfer of related production to lower cost
vendors; (vii) closure of 43 retail stores in the US and Canada; (viii) closure
of the Mexico and Guatamala operations and replacement with licensees.
<PAGE>
Key operational restructurings at the Designer Group from 1996 to 1998
include the following: (i) relocation of New York office and showroom to
substantially less expensive but more efficient space; (ii) transfer of all
administrative and support services to the Shirt Group to reduce expense through
improved overhead absorption; (iii) terminated and exited unprofitable Burberrys
and YSL license arrangements, requiring a significant downsizing of the Designer
Group organization.
Key operational restructurings at the corporate or parent level form 1996 to
1998 include the following: (i) transfer or elimination of 90% of all corporate
overhead; (ii) closure of Secaucus, New Jersey administrative, billing and
information technology center; (iii) relocation of New York offices and residual
corporate staff to substantially less space.
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1996, 1997 and 1998.
This discussion should be read in conjunction with the "Selected Financial Data"
and the audited consolidated financial statements of the Company and the related
notes thereto included elsewhere in this document.
Throughout the period, the Sock Group has continued to perform well. Net sales
in this group grew from $134.6 million in 1995 to $164.8 million for 1998. This
performance results from continued strength in GOLD TOE and new license brands
and brand extensions.
From 1995 to 1998, net sales in the Shirt Group declined from $230.6 million
to $183.2 million. 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 28.2% for 1998.
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 Womenswear and declined by $1.7 million in 1997 and by $0.5 million in
1998, primarily due to a sales decrease at the Arrow Asian licensees caused by
economic recessions. This level of depressed sales in Asia is expected to
continue in the near future.
The Company's fiscal year ends on December 31st of each calendar year.
<PAGE>
Results Of Operations
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31,
1997
The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net sales.
1998 1997
--------------- ---------------
(DOLLARS IN MILLIONS)
Net Sales $373.1 100.0% $363.5 100.0%
Cost of Sales 264.3 70.8 253.7 69.8
Gross Profit 108.8 29.2 109.8 30.2
Selling, general and
administrative expense 82.4 22.1 76.3 21.0
Facility closing and
reengineering costs 2.4 0.6 2.5 0.7
Operating Income 24.0 6.4 31.0 8.5
Interest expense 20.4 5.5 15.2 4.2
Other expense/(income) 2.1 0.6 1.2 0.3
Bankruptcy
reorganization 37.5 10.5 (3.9) (1.1)
Provision for income
taxes 0.8 0.2 1.3 0.4
Net income (loss) $(36.8) (9.9)% $ 17.2 4.7%
Net Sales. Net sales for the year ended December 31, 1998 increased $9.6
million, to $373.1 million compared with net sales of $363.5 million for the
year ended December 31, 1997. In 1998, total net sales for the Sock Group
increased 8.6% to $164.8 million from $151.8 million in 1997. This strong
revenue performance was primarily due to the Company's expanded product
offerings in the GOLD TOE family of socks and licensed brands including Nautica
and Jockey. Net sales in the Shirt Group of $183.2 million represent a 3.6%
increase from 1997. The key contributor of the increase was the US Wholesale
business which was 7.0% ahead of last year. These increases were offset by
reduced sales in the Designer Group where net sales for 1998 were $29.1 million
compared to $39.8 million in 1997. As is indicated above, during 1998,
management decided to exit the Burberrys and YSL businesses which make up the
bulk of the Designer Group's sales. The Shirt Group's net sales also include
license fee income of $6.3 million for the year ended December 31, 1998 compared
to $6.7 million for the year ended December 31, 1997. The decrease in license
fee income is a result of erosion in royalties from ARROW's Asian licensees
offset by a 15% ARROW royalty improvement in Europe, Africa, South America and
the United States.
Gross Profit. Gross profit for the year ended December 31, 1998 of $108.8
million, decreased $1.0 million, compared with gross profit of $109.8 million
for 1997. Gross profit margins for the year were off slightly, declining to
29.2% of net sales from 30.2% in 1997. This decline was driven primarily by
gross margin deterioration at the Designer Group where gross margins fell to
9.6% in 1998 from 25.3% in 1997. This decline is largely attributable to the
cost of exiting the Burberrys and YSL businesses in 1998. The Sock Group's gross
profit increased $3.4 million to $52.5 million for the year ended December 31,
1998 while gross margin deteriorated slightly, to 31.7% in 1998 from 32.2% in
1997, as a result of unfavorable mix changes and a general 3% wage inflation.
The Shirt Group's gross profit increased $2.5 million, from $49.2 million to
$51.6 million in fiscal years 1997 and 1998, respectively, while gross margin
increased to 28.2% in 1998 compared to 27.8% for 1997. This improvement was
attributable to reduced off-price selling, lower excess inventories and better
execution of deliveries.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1998 increased $6.1
million to $82.4 million compared with selling, general and administrative
expenses of $76.3 million for the year ended December 31, 1997. This increase
relates to increased advertising at Arrow; higher distribution expense from
volume increases, excessive overtime and a Sock Group distribution center
consolidation cost; and increased selling expense associated with new product
line and distribution channel initiatives.
Facility Closing and Reengineering Costs. The Company recorded pre-tax
non-recurring charges of $2.4 million for the year ended December 31, 1998 and
$2.5 million for the year ended December 31, 1997. These costs related to a
series of actions the Company has taken towards consolidation of manufacturing
plants in the Sock Group and closure of several domestic outlet and Canadian
retail stores.
<PAGE>
Operating Income. Operating income decreased to $24.0 million in 1998 from
$31.0 million in 1997, almost entirely due to the $7.1 million cost of exiting
the Burberrys and YSL businesses in the Designer Group.
Interest Expense. Interest expense increased $5.2 million in 1998 over the
prior year, $20.4 million in 1998 versus $15.2 million in 1997. This increase
results from the higher debt levels existing after the Recapitalization that was
completed on May 18, 1998.
Bankruptcy Reorganization Costs. Bankruptcy reorganization costs for the year
ended December 31, 1998 increased $41.4 million to $37.5 million compared with
bankruptcy reorganization credits of $3.9 million for the year ended December
31, 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 year ended December 31, 1998 of $36.8
million is primarily due to increased bankruptcy reorganization costs. The net
income for the same period in 1997 was $17.2 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.
1997 1996
--------------- ---------------
(DOLLARS IN MILLIONS)
Net Sales $363.5 100.0% $369.0 100.0%
Cost of Sales 253.7 69.8 273.8 74.2
Gross Profit 109.8 30.2 95.2 25.8
Selling, general and
administrative expense 76.3 21.0 86.3 23.4
Facility closing and
reengineering costs 2.5 0.7 (2.7) (0.7)
Interest expense 15.2 4.2 16.9 4.6
Other expense/(income) 1.2 0.3 3.2 0.9
Bankruptcy
reorganization (3.9) (1.1) 6.1 1.7
Provision for income
taxes 1.3 0.4 1.3 0.4
Net income (loss) $ 17.2 4.7% $(30.2) (8.2)%
Net Sales. Net sales were $363.5 million in 1997, a slight decrease from net
sales of $369.0 million recorded in 1996. Net sales in the Sock Group increased
7.6% to $151.8 million in 1997 from $141.1 million in 1996 and net sales in the
Shirt Group decreased 9.2% to $176.8 million in 1997 from $194.7 million in
1996. 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 $6.7
million in 1997 compared to $8.6 million in 1996. The reduction in license fee
income was caused by decreased sales by Arrow's Asian licensees which represent
approximately 47% of license fee income.
Gross Profit. Gross profit increased to $109.8 million (30.2% of net sales) in
1997 from $95.2 million (25.8% of net sales) in 1996. Gross profit for the Sock
Group was $49.1 million (32.2% of net sales) in 1997 as compared to $41.3
million (29.3% of net sales) in 1996. The increase in the Sock Group's gross
profit was attributable to the overall increase in sales and improved product
mix towards higher margin products. Gross profit for the Shirt Group was $49.2
million (27.8% of net sales) in 1997 versus $46.4 million (23.8% of net sales)
in 1996 as a result of an improved product mix, an overall reduction in returns
and allowances and lower labor costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $76.3 million in 1997 from $86.3 million in
1996. Selling, general and administrative expenses were reduced primarily due to
(i) cost savings of $3.1 million realized in the Shirt Group's consolidation of
distribution centers (ii) a reduction in national advertising expenditures of
$4.3 million, (iii) the reduction of administrative positions resulting in
approximately $2.0 million in savings, and (iv) further reductions in corporate
overhead of $0.6 million.
<PAGE>
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 Canadian retail
operations, administrative personnel reductions, and implementation of new
information systems. The Company believes that these initiatives significantly
reduced operating expenses and product costs.
Operating Income (Loss). Operating income increased to $31.0 million in 1997
from an operating loss of $2.7 million in 1996.
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
Debtor-In-Possession ("DIP") Credit Facility.
Bankruptcy Reorganization. Bankruptcy reorganization costs were a net $3.9
million credit (approximately $6.1 million expense offset by $10.0 million in
credits resulting from favorable lease settlements) in 1997 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.
Liquidity and Capital Resources
On March 31, 1998, the Company's and Holdings' Plan was confirmed by the
Court. On May 18, 1998, the Plan was consummated completing Holdings (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 $68.0 million equity investment (the "Equity
Investment") in Holdings. Vestar provided approximately $61.3 million of the
Equity Investment in the form of a $24.8 million common equity investment in
Holdings (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 Holdings Common Stock, respectively. The balance of the Holdings
Common Stock is held by the shareholders that were shareholders prior to the
bankruptcy ("Old Equity").
The Company and Holdings used the Equity Investment in conjunction with
borrowings under a new $160.0 million senior credit facility, $112.0 million in
proceeds from the Company's issuance of Senior Subordinated Notes Due 2008 and
$48.1 million in 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 Holdings' and the Company's existing
pre-petition obligations and all borrowings under the Company's
debtor-in-possession facility, were paid in full.
<PAGE>
The following table sets forth the uses of funds of Holdings and the Company
after giving effect to the Recapitalization and the application of the proceeds
therefrom:
The
Company Holdings Total
------- -------- -----
(Dollars In Millions)
Uses of Funds:
Payment of Allowed Claims $168.9 $122.6 $291.5
Payment of Estimated 12.4 24.3 36.7
Post-Petition Interest
Refinancing of Existing Debt 7.0 - 7.0
Estimated Fees and Expenses 13.5 5.4 18.9
---- --- ----
$201.8 $152.3 $354.1
====== ====== ======
In connection with the Offering, the Company issued 500,000 shares of Senior
Exchangeable preferred Stock ("Preferred Stock") Due 2010 and received net
proceeds of $48.1 million. Each preferred share has a liquidation preference of
$100. The holders of the Preferred Stock will be entitled to receive, as and if
dividends are declared by the Board of Directors, out of funds the Company has
legally available therefore, cumulative preferential dividends from the date of
issuance of the 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,
commencing on November 15, 1998, to the holders of record as of the preceding
May 1 and November 1. On or prior to May 15, 2003, the Company may, at its
option, pay dividends in cash or in additionally fully paid and non-assessable
shares of Preferred Stock having an aggregate Liquidation Preference equal to
the amount of such dividends. As of December 31, 1998, the Company has issued
30,730 additional shares of Preferred Stock to holders of record on November 15,
1998.
The Senior Credit Facility is comprised of three different loans: a $50.0
million revolving credit facility (the "Revolver"), a $50.0 million term loan
("Term A"), and a $60.0 million term loan ("Term B"). As of December 31, 1998,
there was outstanding $49.0 million, $59.7 million and $8.4 million with respect
to the Term A loan, Term B loan and the Revolver, respectively. The Revolver and
the Term A loan mature in 2004. The Term B loan matures in 2005. At the
Company's option, interest rates for borrowings under the Revolver and the Term
A loans are based on either LIBOR plus 225 basis points or the alternative base
rate (the greater of the NationsBank prime rate or the Fed Funds rate plus 50
basis points) plus 125 basis points. Interest on the Term B loan is based on
LIBOR plus 250 basis points or, at the Company's option, the alternative base
rate plus 150 basis points. In connection with the amendments discussed below,
the rates for the Revolver and Term A and Term B loans were amended, effective
December 30, 1998. The interest rate for the Revolver and the Term A loan was
modified to LIBOR plus 250 basis points or the alternative base rate plus 150
basis points, and interest on the Term B loan was modified to LIBOR plus 300
basis points or the alternative base rate plus 200 basis points. The alternative
interest rates continue to be at the Company's option.
The Senior Credit Facility (which was amended on December 18, 1998 and March
19, 1999, with a December 30, 1998 effective date) 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.
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).
<PAGE>
On May 18, 1998, the Company issued $112.0 million of 10 1/8 % Senior
Subordinated Notes due 2008 (the "Notes") pursuant to an indenture agreement
(the "Indenture"). Interest is paid semiannually on May 15 and November 15 of
each year, commencing November 15, 1998. The Company is not required to make any
mandatory redemption or sinking fund payment with respect to the Notes prior to
maturity. The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after Many 15, 2003 at the redemption price plus accrued
and unpaid interest. The Notes are subordinate in priority to the Senior Credit
Facility.
In addition to the Notes, on May 18, 1998, the Company issued $13.0 million
in new Senior Subordinated Notes (the "Parity Notes") to Old Equity. The Parity
Notes 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
Preferred Stock. As of December 31, 1998, there was $13.0 million in Parity
Notes outstanding. (The Notes and the Parity Notes are collectively referred to
as the ("Exchange Notes")).
Other than upon a Change of Control (as defined by the Indenture) 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
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. In fiscal 1996, 1997
and 1998, capital expenditures were $9.8 million, $10.8 million and $11.8
million, respectively.
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. In 1996, 1997 and 1998, the Company's net cash
provided (used) by operations totaled $16.7 million, $13.0 million and ($30.9)
million, respectively. The significant decrease in cash provided by operating
activities in 1998 was primarily due to the settlement of certain prepetition
liabilities, which were paid during the second quarter of 1998 in accordance
with the Plan.
In 1996, 1997 and 1998, net cash provided (used) by investing activities was
$(8.3) million, $(7.5) million and $(11.7) million, respectively. In fiscal
1996, 1997 and 1998, net cash provided (used) by financing activities was
$(13.3) million, $(1.3) million and $35.5 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
Revolver 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 Revolver 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.
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 Senior
Credit Facility 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 Preferred
Stock, (iii) redeem any of the Preferred Stock for cash or, to make payments of
principal or cash interest on the Exchange Notes or (iv) fund its other
liquidity needs.
The Company's Canadian division (Cluett Peabody Canada Inc. ("Cluett
Canada")) entered into a Loan Agreement dated August 8, 1997 (the "Canadian
Facility") between Cluett Canada and Congress Financial Corporation
("Congress"), as the lender. The Canadian Facility provides for a revolving loan
facility of up to $15.0 million Canadian dollars, 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
has an initial term of three years and continues year to year thereafter. The
lender under the Canadian Facility has a first priority lien on substantially
all of the assets of Cluett Canada. As of December 31, 1998, $3.6 million was
outstanding under the Canadian Facility.
<PAGE>
Income Taxes
See Note 9 "Income Taxes" of the Notes to the Consolidated Financial
Statements included on pages F-8 through F-34 of the Consolidated Financial
Statements.
New Accounting Pronouncements
See Note 2 "New Accounting Pronouncements" of the Notes to the Consolidated
Financial Statements included on pages F-8 through F-345 of the Consolidated
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. The Company's
computer equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures 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.
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter. For this purpose, the term "computer equipment and
software" includes systems that are commonly thought of as information
technology ("IT") systems, including accounting, data processing, and
telephone/PBX systems, cash registers, hand-held terminals, scanning equipment,
and other miscellaneous systems, as well as systems that are not commonly
thought of as IT systems, such as alarm systems, sprinkler systems, fax
machines, or other miscellaneous systems. Both IT and non-IT systems may contain
imbedded technology, which complicates the Company's Year 2000 identification,
assessment, remediation, and testing efforts. Based upon its identification and
assessment efforts to date, the Company believes that certain of the computer
equipment and software it currently uses will require replacement or
modification. In addition, in the ordinary course of replacing computer
equipment and software, the Company attempts to obtain replacements that it
believes are Year 2000 compliant. Utilizing both internal and external resources
to identify and assess needed Year 2000 remediation, the Company currently
anticipates that its Year 2000 identification, assessment, remediation, and
testing efforts, will be completed by June 30, 1999, and that such efforts will
be completed prior to any currently anticipated impact on its computer equipment
and software.
PERCENT
YEAR 2000 INITIATIVE TIME FRAME COMPLETE
-------------------- ---------- --------
Initial IT Systems Assessment December 1998 100%
Remediation and Testing of Central/Distributed
Systems June 1999 75%
Remediation and Testing of Store/Distribution
Systems June 1999 75%
Upgrades to Telephone/PBX/Other systems December 1998 100%
EDI Trading Partner Conversions June 1999 85%
Identification, Assessment, Remediation,
& Testing of Desktop Systems June 1999 85%
Identification, Assessment and Testing of
Non-IT Systems December 1998 100%
The Company has also mailed letters to its significant vendors, service
providers and customers to determine the extent to which interfaces with such
entities are vulnerable to Year 2000 issues and whether the products and
services purchased from or by such entities are Year 2000 compliant. As of March
24, 1999, the Company had received responses from approximately 19% of such
third parties, and 100% of the companies that have responded have provided
written assurances that they expect to address all their significant Year 2000
issues on a timely basis.
<PAGE>
The Company believes that the cost of its Year 2000 identification,
assessment, remediation, and testing efforts, as well as currently anticipated
costs to be incurred by the Company with respect to Year 2000 issues of third
parties, will not exceed $200,000, which expenditures will be funded from
operating cash flows. Such amount represents less than 1% of the Company's total
actual and anticipated IT expenditures for fiscal 1997 through fiscal 1999. As
of January 30, 1999, the Company had incurred costs of approximately $194,000
related to its Year 2000 identification, assessment, remediation, and testing
efforts. All of the $194,000 relates to analysis, repair, or replacement of
existing software, upgrades to existing software, or evaluation of information
received from significant vendors, service providers, or customers. Other
non-Year 2000 IT efforts have not been materially delayed or impacted by Year
2000 initiatives. The Company presently believes that the Year 2000 issue will
not pose significant operational problems for the Company. However, if all Year
2000 issues are not properly identified, or assessment, remediation, and testing
are not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.
The Company has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts to achieve Year 2000 compliance on a timely basis. A
contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
The Company has engaged an independent expert to evaluate its Year 2000
identification, assessment, remediation, and testing efforts.
The costs of the Company's Year 2000 identification, assessment, remediation,
and testing efforts and the dates on which the Company believes it will complete
such efforts are based upon management's best estimates, which were derived
using numerous assumptions regarding future events, including the continued
availability of certain resources, third-party remediation plans, and other
factors. There can be no assurance that these estimates will prove to be
accurate and actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in Year 2000 issues, the ability to identify, assess, remediate, and test all
relevant computer codes and imbedded technology, and similar uncertainties. In
addition, variability of definitions of "compliance with Year 2000" and the
myriad of different products and services, and combinations thereof, sold by the
Company may lead to claims whose impact on the Company is not currently
estimable. No assurance can be given that the aggregate cost of defending and
resolving such claims, if any, will not materially adversely affect the
Company's results of operations. Although some of the Company's agreements with
manufacturers and others from whom it purchases products for resale contain
provisions requiring such parties to indemnify the Company under some
circumstances, there can be no assurance that such indemnification arrangements
will cover all of the Company's liabilities and costs related to claims by third
parties related to the Year 2000 issue.
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains certain statements that describe the
Company's beliefs concerning future business conditions and the outlook for the
Company based on currently available information. The preceding Management's
Discussion and Analysis contains forward-looking statements regarding the
Company's performance, liquidity and the adequacy of its capital resources.
These forward looking statements are subject to risks, uncertainties and other
factors which could cause the Company's actual results, performance or
achievement to differ materially from those expressed in, or implied by these
statements. These risks, uncertainties and other factors include but are not
limited to, the following: (i) the financial strength of the retail industry and
the level of consumer spending for apparel, (ii) the Company's ability to
develop, market and sell its products, (iii) increased competition from other
manufacturers of men's dress shirts and socks, (iv) general economic conditions,
(v) hiring and retaining effective team members, (vi) sourcing merchandise from
domestic and international vendors, and (vii) any unanticipated problems or
delays in the completion by the Company to become Year 2000 ready or the failure
of the Company's vendors or customers to do so. Therefore, while management
believes that there is a reasonable basis for the forward-looking statements,
undue reliance should not be placed on those statements.
<PAGE>
Item 7A. Quantitative and Qualitative disclosures about Market Risk
Market Risk Factors
The Company has market risk exposure from changes in interest rates and
foreign currency exchange rates. The Company operates under a senior credit
facility at variable interest rates. Interest expense is primarily affected by
the general level of U.S. interest rates, LIBOR and European base rates. The
Company is subject to risk from sales and loans to its foreign subsidiary as
well as sales, purchases from third party customers, suppliers and creditors,
denominated in foreign currencies. Currently, the Company does not engage in any
material derivative type instruments in order to hedge against interest rate and
Canadian foreign currency exchange rate fluctuations. However, the Company feels
it is limited in its exposure of foreign currency exchange rate changes as most
inventory purchase contracts are denominated in US Dollars.
Floating Interest Rate Risk:
In order to assess the impact of changes in interest rate on future earnings
and cash flow, the Company assumed a 1% (100 basis points) unfavorable shift in
the underlying interest rate would result in additional interest expense of
$1,200,000. Additionally, as a result of the third amendment to the Senior
Credit Facility, the interest rate on the Revolver and Term A loans were
increased by 25 basis points and the interest rate on the Term B loan was
increased by 50 basis points. The incremental cost to the Company on an annual
basis for these increased interest rates is approximately $500,000.
Fixed Interest Rate Risk:
The fair value of long-term fixed interest rate debt and fixed interest rate
preferred stock is also subject to interest rate risk. Generally, the fair value
of fixed interest rate debt and preferred stock will increase as interest rates
fall and decrease as interest rates rise. A hypothetical 100 basis point
increase in the prevailing interest rates at December 31, 1998 would result in a
decrease in fair value of total long-term debt and preferred stock, by
approximately $8,900,000.
Currency:
Our Canadian operations represented approximately 11% of consolidated
long-lived assets and consolidated net operating revenues for 1998. Because of
our international operations, we are exposed to translation risk when the local
currency statements of income are translated into U.S. dollars. As currency
exchange rates fluctuate, translation of the statements of income of
international businesses into U.S. dollars will affect the comparability of
revenues and expenses between years. None of the components of our consolidated
statements of income was materially affected by exchange rate fluctuations in
1998, 1997, or 1996.
The Company's revenues are denominated in each international subsidiary's local
currency; thus, the Company is not exposed to currency transaction risk on its
revenues. The Company is exposed to currency transaction risk on certain
purchases of raw materials and equipment by its international subsidiaries. At
December 31, 1998, a hypothetical 10% adverse movement in foreign exchange rates
applied to the underlying exposures described above would not have a material
effect on our results of operations.
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Stockholder's Deficit for the years
Ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cluett American Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cluett American
Corp. and subsidiaries (formerly Bidermann Industries Corp.), a wholly owned
subsidiary of Cluett American Investment Corp. ("Holdings"), as of December 31,
1997 and 1998, and the related consolidated statements of operations,
stockholder's deficit and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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 consolidated financial position of Cluett American
Corp. at December 31, 1997 and 1998 and the consolidated results of their
operations and their cash flows for each of three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in material respects the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 19, 1999
F-2
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1997 1998
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 10,019 $ 2,868
Accounts receivable, net 48,442 46,786
Inventories 78,236 74,599
Prepaid expenses and other current assets 4,234 3,972
----- -----
Total current assets 140,931 128,225
Property, plant and equipment, net 47,698 48,124
Deferred financing costs -- 11,198
Pension assets 30,227 31,383
Other noncurrent assets 1,161 1,845
Total assets $ 220,017 $ 220,775
=========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 46,486 $ 42,439
Short-term debt and current portion
of long-term debt 9,172 10,248
Income taxes payable 2,153 1,475
----- -----
Total current liabilities 57,811 54,162
Due to parent 27,613 27,974
Long-term debt and capital lease obligations 1,960 235,681
Other noncurrent liabilities 500 111
Liabilities subject to compromise 168,932 --
Dividends payable -- 605
Senior exchangeable preferred stock,
cumulative, $.01 par value:
authorized 4,950,000, issued
and outstanding 530,730 shares
(liquidation preference) -- 51,288
Preferred stock, cumulative, $1 par value:
authorized 50,000 shares, issued and
outstanding 15,000 shares 20,009 --
Stockholder's deficit:
Common stock, $1 par value:
authorized, issued and outstanding
2,000 shares in 1997 (1000 BIC, 1,000 CDC)
and 1,000 shares in 1998 (1,000 CAC) 2 1
Additional paid-in capital 173,592 116,919
Accumulated deficit (228,099) (264,933)
Other comprehensive income (2,303) (1,033)
------ ------
Total stockholder's deficit (56,808) (149,046)
-------- ---------
Total liabilities and stockholder's deficit $220,017 $220,775
======== ========
See accompanying notes.
F-3
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1996 1997 1998
---------------------------------
(DOLLARS IN THOUSANDS)
Net sales $ 369,040 $ 363,528 $ 373,123
Cost of goods sold 273,800 253,677 264,325
------- ------- -------
Gross profit 95,240 109,851 108,798
Selling, general and administrative expenses 86,309 76,341 82,442
Facility closing and reengineering costs 11,603 2,469 2,366
------ ----- -----
Operating income (loss) (2,672) 31,041 23,990
Interest expense, net 16,928 15,233 20,355
Other expense, net 3,226 1,169 2,131
----- ----- -----
Income (loss) before reorganization costs
(credits) and income taxes (22,826) 14,639 1,504
Bankruptcy reorganization costs (credits) 6,128 (3,883) 37,528
----- ------ ------
Income (loss) before provision for
income taxes (28,954) 18,522 (36,024)
Provision for income taxes 1,246 1,326 810
----- ----- ---
Net income (loss) $ (30,200) $ 17,196 $ (36,834)
========= ========= ==========
See accompanying notes.
F-4
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL OTHER
COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,000 $ 2 $ 176,239 $ (215,095) $ (5,419) $ (44,273)
Net loss -- -- -- (30,200) -- (30,200)
Foreign currency translation
adjustment(1) -- -- -- -- 1,569 1,569
-------
Comprehensive loss (28,631)
-------
Accretion of dividend on
redeemable preferred stock -- -- (1,312) -- -- (1,312)
----- ----- ------- ------- ----- -------
Balance at December 31, 1996 2,000 2 174,927 (245,295) (3,850) (74,216)
Net income -- -- -- 17,196 -- 17,196
Foreign currency translation
adjustment (1) -- -- -- -- 1,547 1,547
--------
Comprehensive income 18,743
--------
Accretion of dividend on
redeemable preferred stock -- -- (1,335) -- -- (1,335)
----- ----- ------- ------- ----- -------
Balance at December 31, 1997 2,000 2 173,592 (228,099) (2,303) (56,808)
Net loss -- -- -- (36,834) -- (36,834)
Foreign currency translation
adjustment (1) -- -- -- -- 1,270 1,270
----- -------
Comprehensive loss (35,564)
-------
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)
Accretion of dividend on
Senior exchangeable
preferred stock -- -- (3,678) -- -- (3,678)
Accretion of fees on Senior
exchangeable preferred
stock -- -- (90) -- -- (90)
----- ----- ------- ------- ----- -------
Balance at December 31, 1998 1,000 $ 1 $ 116,919 $ (264,933) $ (1,033) $ (149,046)
===== ===== ========= ========== ======== ==========
<FN>
(1) Comphensive income items are shown before related tax effects. The aggregate income tax expense related to the total of other
comphensive income items is $533, $526 and $432, for 1996, 1997 and 1998, respectively.
See accompanying notes.
</FN>
</TABLE>
F-5
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
--------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(30,200) $17,196 $(36,834)
Adjustment to reconcile net income (loss)
to net cash and cashequivalents provided by
(used in) operating activities:
Write-off of foreign currency translation adjustment 3,100 -- --
Write-down of property, plant and equipment 742 -- 1,094
Write-down of deferred acquisition cost -- -- 489
Depreciation and amortization 10,935 8,105 9,652
Gain on sale of fixed assets -- (348) --
Adjustments (1997) Payments (1998) of liabilities subject to
compromise-reorganization -- (10,000) (22,442)
Accrual of professional fees, potential claims and related
litigation matters-reorganization 6,128 6,117 --
Changes in operating assets and liabilities:
Accounts receivable 8,217 3,917 1,070
Inventories 21,308 (6,980) 2,629
Prepaid expenses and other current assets 3,789 178 197
Pension and other noncurrent assets (1,499) (1,808) (13,772)
Accounts payable and accrued expenses (4,573) (4,430) (3,871)
Income taxes payable (76) 521 (678)
Other liabilities (1,298) (448) 435
Due to parent -- -- 27,974
Effect of changes in foreign currency 121 930 3,190
--- --- -----
Net cash and cash equivalents provided by (used in) operating
Activities 16,694 12,950 (30,867)
------ ------ -------
INVESTING ACTIVITIES
Purchase of fixed assets (9,835) (10,778) (11,841)
Proceeds on disposal of fixed assets 1,566 3,327 152
----- ----- ---
Net cash and cash equivalents used in investing activities (8,269) (7,451) (11,689)
------ ------ -------
FINANCING ACTIVITIES
Issuance of preferred stock -- -- 48,125
Distribution to parent -- -- (87,522)
Net borrowings under line-of-credit agreement -- -- 3,126
Proceeds from DIP credit facility 53,300 16,398 --
Principal payments on DIP credit facility (55,300) (16,795) --
Proceeds from issuance of long term debt 4,971 2,246 222,000
Principal payments on long term debt (16,294) (3,113) (1,300)
Payments on pre-petition liabilities -- -- (146,490)
Principal payments on capital lease -- -- (2,406)
----- ----- ------
Net cash and cash equivalents provided by (used in) financing
Activities (13,323) (1,264) 35,533
Effect of foreign currency translation (2) -- (128)
-- ----- -----
Net change in cash and cash equivalents (4,900) 4,235 (7,151)
Cash and cash equivalents at beginning of year 10,684 5,784 10,019
------ ----- ------
Cash and cash equivalents at end of year $ 5,784 $ 10,019 $ 2,868
======= ======== =======
<FN>
See accompanying notes.
</FN>
</TABLE>
F-6
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
--------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES Cash paid during the year:
Interest $ 8,773 $ 7,649 $ 17,073
======== ======== ========
Income taxes $ 674 $ 1,163 $ 1,236
======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-7
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Background
Cluett American Corp. (formerly known as Bidermann Industries Corp. ("BIC")),
a Delaware corporation organized in 1982, and its subsidiaries (the "Company"),
primarily designs, manufactures and markets men's socks and dress shirts in the
United States and Canada. The Company filed voluntary petitions for relief under
the provisions of Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York (the "Court") on July 17,
1995. On March 31, 1998, the Company's and the Company's parent's, Cluett
American Investment Corp. ("Holdings") Third Amended Plan of Reorganization (the
"Plan") was confirmed by the Court. On May 18, 1998, the Plan was consummated
completing Holdings' (and its subsidiaries) bankruptcy proceedings. In
connection with the Plan and pursuant to a subscription agreement dated as of
March 30,1998, Vestar Capital Partners III, L.P. or a designated affiliate
("Vestar"), Alverez & Marsal, Inc. or a designated affiliate ("A&M"), and
certain members of existing management (collectively, the "Equity Investors")
made a $68.0 million equity investment (the "Equity Investment") in Holdings.
Vestar provided approximately $61.3 million of the Equity Investment in the form
of a $24.8 million common equity investment in Holdings (the "Holdings Common
Stock") and a $36.5 million investment in Class C Junior Preferred Stock. A&M
and certain members of management provided additional Equity Investment of $4.9
million and $1.8 million in Holdings Common Stock, respectively. The balance of
the Holdings Common Stock is held by the shareholders that were shareholders
prior to the bankruptcy ("Old Equity").
The Company and Holdings used the Equity Investment in conjunction with
borrowings under a new $160.0 million senior credit facility, $112.0 million in
proceeds from the Company's issuance of Senior Subordinated Notes Due 2008 and
$48.1 million in net proceeds from the issuance of Senior Exchangeable Preferred
Stock Due 2010, to complete its recapitalization (the "Recapitalization") under
which all of Holdings' and the Company's existing pre-petition obligations and
all borrowings under the Company's debtor-in-possession facility, were paid in
full. In addition, the Company issued $13.0 million in Senior Subordinated Notes
Due 2008 (the "Parity Notes") to Old Equity as part of the Recapitalization.
These notes are identical in, and rank in parity with, the $112.0 million Senior
Subordinated Notes Due 2008.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include all subsidiary
companies of the Company. Significant intercompany transactions have
been eliminated in the consolidation
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.
F-8
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Significant Accounting Policies (Continued)
Inventory Valuation
Inventories are stated at the lower of cost (first-in, first-out) or market.
During 1998, the Company incurred a charge for the liquidation of excess
inventory related to exiting of the Burberrys and YSL businesses of
approximately $3.0 million, which is included in cost of goods sold.
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:
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
Deferred Financing Fees
In connection with the Recapitalization transactions discussed in Note 1, the
Company capitalized transaction costs of $12.1 million. Theses costs are being
amortized to interest expense over the lives of the related debt agreements.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109;
accordingly, 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. The Company and subsidiaries file a consolidated federal income
tax return and separate, consolidated 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 calculated on
a separate return basis.
Use Of Estimates
Management uses a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities in preparing the consolidated 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 $8.6 million, $6.9 million and $6.3 million in 1996, 1997 and
1998, 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).
F-9
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Significant Accounting Policies (Continued)
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 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
$2.3 million, $0.4 million and $0 of such costs during 1996, 1997 and 1998,
respectively.
New Accounting Pronouncements
As of January 1, 1998, the Company adopted the Financial Accounting Standards
Board's ("FASB") Statement No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or shareholder's deficit. SFAS No. 130
requires foreign currency translation adjustments, which prior to adoption were
reported separately in shareholder's deficit, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
Effective January 1, 1998, the Company adopted FASB Statement No. 131,
"Disclosures About Segments Of An Enterprise And Related Information" ("SFAS No.
131"). SFAS No. 131 supercedes FASB Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 establishes standards for the
way that public business enterprises report selected information about operating
segments in interim and annual financial statements. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 130 did not
affect the results of operations or financial position, but did affect the
disclosure of segment information. See Note 17.
In February 1998, the FASB issued Statement No. 132, "Employer's Disclosures
About Pensions And Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pensions and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. This
statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligation and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures.
SFAS No. 132 is effective for financial statements beginning after December 15,
1997 and the Company adopted SFAS No. 132 on January 1, 1998. There was no
impact on net income or shareholder's deficit from the adoption of this
statement.
In June 1998, the FASB issued Statement No. 133, "Accounting For Derivative
Instruments And Hedging Activities" ("SFAS No. 133"), which is effective for
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
establishes 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
balance sheet measured at fair value. The Company will adopt SFAS No. 133 on
January 1, 2000. Management has not determined how SFAS No. 133 will impact the
Company's financial statements.
F-10
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Significant Accounting Policies (Continued)
Foreign Currency Translation
The Company translates the financial statements of its foreign subsidiaries
from the local (functional) currencies to U.S. dollars in accordance with SFAS
No. 52 "Foreign Currency Translation". Substantially all assets and liabilities
of the Company's foreign subsidiaries are translated at year-end exchange rates,
while revenue, expenses and cash flow are translated at average exchange rates
prevailing during the year. Translation adjustments arising from certain foreign
operations of the Company are reflected as a separate component of stockholder's
deficit. Selling, general and administrative expense includes an aggregate
exchange loss on transactions of approximately $88,000, $816,000 and $41,000, in
1996, 1997 and 1998, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. The Company charged $11.8
million, $9.5 million and $9.3 million to advertising expense in 1996, 1997 and
1998 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. No single customer accounted for a
significant amount of the accounts receivables at December 31, 1998. Management
believes the risk associated with trade accounts receivable is adequately
provided for in the allowance for doubtful accounts (see Note 5).
Reclassifications
Certain amounts in the prior years' financial statements and footnotes have
been reclassified to conform to the current year presentation.
3. Preferred Stock
In connection with the Offering, the Company issued 500,000 shares of 12 1/2%
Senior Exchangeable Preferred Stock ("Preferred Stock") Due 2010 and received
net proceeds of $48.1 million. Each preferred share has a liquidation preference
of $100. The holders of the Preferred Stock will be entitled to receive, as and
if dividends are declared by the Board of Directors out of funds the Company has
legally available therefore, cumulative preferential dividends from the date of
issuance of the 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,
commencing on November 15, 1998, to the holders of record as of the preceding
May 1 and November 1. On or prior to May 15, 2003, the Company may, at its
option, pay dividends in cash or in additionally fully paid and non-assessable
shares of Preferred Stock having an aggregate liquidation preference equal to
the amount of such dividends. The carrying value of Senior Exchangeable
Preferred Stock reflects accretion of $90,000 in transaction fees. Additionally,
on November 15, 1998, the Company declared and paid a stock dividend of 30,730
shares on its Preferred Stock to holders of record as of the close of business
on November 15, 1998.
F-11
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 1996, 1997 and 1998, the Company incurred
expenses of $11.6 million, $2.5 million and $2.4 million, respectively, in
implementing this plan. The principal components of these expenses are as
follows:
Facility Closings -- During 1996, 1997 and 1998, the Company recorded expenses
of approximately $6.5 million, $1.0 million and $1.6 million, respectively, for
costs incurred in connection with closing 3 outlet stores in both 1996 and 1997
and 3 retail stores in 1996, as well as closing 2 manufacturing facilities in
1996. In 1998, the Company consolidated certain distribution centers, closed a
sock knitting facility and disposed of certain under performing assets.
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 $5.1 million, $1.4 million and $0.8million in 1996,
1997 and 1998, respectively, primarily related to certain professional fees
incurred to restructure and operate the Company during Bankruptcy, the write
down of impaired fixed assets and for system conversions.
The provision and related ending accruals for these costs are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Facility Closing Other Operating Expense
------------------- --------------------------------------
(Gain)
Loss
System Professional on
Plant & DC Retail Conversion Fees Relocation Disposal Total
---------- ------ ---------- ---- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 $ 2,890 $2,420 $ -- $ -- $ -- $ -- $ 5,350
Expense 4,329 2,204 4,145 82 843 -- 11,603
Applied (6,646) (774) (3,315) (82) (748) -- (11,565)
------ ---- ------ --- ---- --- -------
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
Expense 1,022 640 -- -- -- 704 2,366
Applied (675) (943) (292) -- -- (704) (2,614)
---- ---- ---- --- --- ---- ------
Balance as of December 31, 1998 $ 347 $ 437 $ 44 $ -- $ -- $ -- $ 828
======= ====== ======== ======== ======= ====== =======
</TABLE>
F-12
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Accounts Receivable
Allowances provided for accounts receivable are as follows:
DECEMBER 31,
1997 1998
---- ----
(DOLLARS IN THOUSANDS)
Doubtful accounts $ 1,802 $ 1,568
Customer allowances 8,171 6,894
----- -----
$ 9,973 $ 8,462
======= =======
6. Inventories
Inventories consist of the following:
DECEMBER 31,
1997 1998
---- ----
(DOLLARS IN THOUSANDS)
Finished goods $65,558 $60,134
Work in process 4,326 4,189
Raw materials and supplies 8,352 10,276
----- ------
$78,236 $74,599
======= =======
7. Property, Plant and Equipment
Property, plant and equipment consist of the following:
DECEMBER 31,
1997 1998
---- ----
(DOLLARS IN THOUSANDS)
Land $ 2,120 $ 2,091
Buildings and site improvements 25,764 24,267
Machinery, equipment and other 78,034 81,200
Construction in progress 2,804 4,875
----- -----
108,722 112,433
Less accumulated depreciation (61,024) (64,309)
------- -------
$47,698 $48,124
======= =======
Included in the amounts above is property held under capital leases
(principally a distribution facility) of $8.5 million and $0.8 million, at
December 31, 1997 and 1998, respectively.
F-13
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-Term Obligations and Financing Agreements
The classification of the Company's long-term obligations and financing
arrangements, including accrued interest, is as follows:
DECEMBER 31,
1997 1998
------------------
(DOLLARS IN THOUSANDS)
Short-term debt and current portion of LTD:
Current portion of capital lease obligation $ 724 $ 12
Canadian Facility 2,192 3,636
CDG operating facility 6,256 --
Senior Credit Facility:
Revolving Credit facility -- 3,000
Term Loan A -- 3,600
--- -----
Total short-term 9,172 10,248
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 1,960 231
Senior credit facility:
Revolving credit facility -- 5,350
Term A and B Loans -- 105,100
Senior subordinated notes (includes the Parity Notes) -- 125,000
--- -------
Total long-term 170,892 235,681
------- -------
Total Indebtedness $180,064 $245,698
======== ========
In conjunction with the Chapter 11 filing, The Company arranged for a
Debtor-in-Possession credit facility (the "DIP facility"). Interest charged on
borrowings under the DIP facility was prime plus 3/4 of 1% and an availability
fee of 1/2 of 1% of the unused portion of the credit facility. There were no
amounts outstanding from the DIP facility at December 31, 1997, and the facility
matured on October 17, 1998.
F-14
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-Term Obligations and Financing Agreements (Continued)
At December 31, 1997, the amount due to parent relates to two transactions
that occurred in 1991 and 1992. Holdings loaned the Company $15.0 million 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 $18.5
million. Additionally, Holdings loaned approximately $9.1 million to Consumer
Direct Corporation, a wholly-owned subsidiary of the parent, in 1992 in order
for the stores to enter favorable pricing and supply agreements with other
subsidiaries of Holdings. As a condition of the Plan, these intercompany amounts
were contributed to equity by Holdings.
At December 31, 1998, the amount due to parent related to an allocation of
post-petition interest incurred on Holdings' pre-petition debt and the receipt
of proceeds from the sale of Holdings Common Stock to the management investors,
as described in Note 1. In addition, the Company does not expect Holdings to
provide further financing in the future.
On May 18, 1998, the Company entered into a $160.0 million senior credit
facility (the "Senior Credit Facility"). The Senior Credit Facility is comprised
of three different loans: a $50.0 million revolving credit facility (the
"Revolver"), a $50.0 term loan ("Term A"), and a $60.0 million term loan ("Term
B"). As of December 31, 1998, approximately $49 million, $59.7 million and $8.4
million was outstanding on the Term A loan, the Term B loan and Revolver,
respectively. The Revolver and the Term A loan mature in 2004. The Term B loan
matures in 2005. At the Company's option, interest rates for borrowing under the
Revolver and the Term A loan are based on either LIBOR plus 225 basis points or
the alternative base rate (the greater of the NationsBank prime rate or the Fed
Funds rate plus 50 basis points) plus 125 basis points. Interest on the Term B
loan is based on LIBOR plus 250 basis points or, at the Company's option, the
alternative base rate plus 150 basis points. In connection with the amendments
discussed below, the rates for the Revolver and the Term A and Term B loans were
amended, effective December 30, 1998. The interest rate for the Revolver and the
Term A loan was modified to LIBOR plus 250 basis points or the alternative based
rate plus 150 basis points, and interest on the Term B loan was modified to
LIBOR plus 300 basis points or the alternative base rate plus 200 basis points.
The alternative interest rates continue to be at the Company's option.
The obligations of the Company under the Senior Credit Facility are
unconditionally and irrevocably guaranteed by the Company's domestic
subsidiaries (the "Guarantors"). See Note 18. 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 A and Term B loans (and in the case of (i), 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.
F-15
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-Term Obligations and Financing Agreements (Continued)
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 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 $2.5 million 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 December 31 1998, there was $117.1 million outstanding under
the Senior Credit Facility.
On May 18, 1998, the Company issued $112.0 million of 10 1/8% Senior
Subordinated Notes due 2008 and $13.0 million in Parity Notes (collectively, the
"Notes"). Interest is paid semiannually on May 15 and November 15 of each year,
which began on November 15, 1998. The Company is not required to make any
mandatory redemption or sinking fund payment with respect to the Notes prior to
maturity. The Notes are 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 in
the agreement plus accrued and unpaid interest. The Notes are subordinate in
priority to the Senior Credit Facility.
The Company's Canadian division (Cluett Peabody Canada Inc. ("Cluett
Canada")) entered into a Loan Agreement dated August 8, 1997 (the "Canadian
Facility") between Cluett Canada and Congress Financial Corporation
("Congress"), as the lender. The Canadian Facility provides for a revolving loan
facility of up to $15,000,000 Canadian dollars, 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 event of default of Cluett Canada. The Canadian Facility
has an initial term of three years and continues year to year thereafter. The
lender under the Canadian Facility has a first priority lien on substantially
all of the assets of Cluett Canada. As of December 31, 1998, $3.6 million was
outstanding under the Canadian Facility.
The scheduled maturities of the Notes and Term A and B loans outstanding at
December 31, 1998 are summarized as follows: $3.6 million in 1999, $5.6 million
in 2000, $8.6 million in 2001, $12.1 million in 2002, $14.6 million in 2003 and
$189.2 million thereafter.
F-16
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). This standard requires the uses of the liability method. Under the
liability method, deferred income taxes reflect the net tax effect (measured
using currently enacted tax rates) of temporary differences resulting from
events that have been recognized in the financial statements and will result in
taxable or deductible amounts in future years based on enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
The Company files a consolidated federal income tax return with Holdings,
its parent company. As of December 31, 1998, the Company had federal net
operating loss ("NOL") carryforwards of approximately $238 million. These NOL
carryforwards are scheduled to expire from the year 2005 through 2018. The
Internal Revenue Code and Treasury Regulations prescribe a limitation on the use
of NOL carryforwards following an ownership change. The Company experienced such
an ownership change as a result of its Plan of Reorganization following the
Company's exit from Chapter 11 of the United States Bankruptcy Code on May 18,
1998. Therefore, the Company's use of its NOL carryforwards may be limited in
future years.
Based on the Company's history of earnings, its Chapter 11 filing and the
limitation on the use of its NOL carryforwards, the Company's entire balance of
net deferred tax assets has been reduced by a valuation allowance of $78.6
million as it was not assured that such assets would be realized in the future.
Undistributed earnings of foreign subsidiaries deemed permanently invested for
which no deferred income taxes have been provided were approximately $6.8
million, $5.1 million and $0 at December 31, 1996, 1997 and 1998, respectively.
The significant components of the Company's deferred tax assets and
liabilities are as follows:
DECEMBER 31,
1997 1998
---- ----
(DOLLARS IN THOUSANDS)
Deferred tax liabilities:
Cancellation of debt income $ 10,200 $ -
Depreciation 2,067 3,493
Pension income 4,332 5,078
Other 1,187 326
----- ---
Total deferred tax liabilities 17,786 8,897
Deferred tax assets:
Net operating loss carryforwards 61,374 80,984
AMT Credits 265 119
Restructuring reserves 2,528 173
Note receivable reserves 1,931 -
Litigation reserve - 544
Interest to parent 1,056 484
Allowance for bad debts 1,154 187
Inventory overhead cost adjustment, net 632 1,064
Other 4,120 3,906
----- -----
Total deferred tax assets 73,060 87,461
Valuation allowance for deferred tax assets (55,274) (78,564)
------- -------
Net deferred taxes $ -- $ --
========= ========
F-17
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Income Taxes (Continued)
The provision for income taxes consisted of the following:
YEAR ENDED DECEMBER 31,
1996 1997 1998
----------------------------
(DOLLARS IN THOUSANDS)
Current:
Federal $ -- $4,606 $ (146)
State and local 350 485 550
Foreign(1) 896 575 406
Benefit of net operating loss carry forward -- (4,340) --
--- ------ ---
$1,246 $1,326 $ 810
====== ====== ======
(1) Includes approximately $691, $500 and $442 relating to foreign withholding
taxes for 1996, 1997 and 1998 respectively. The 1998 foreign provision includes
foreign local benefit of $36.
A reconciliation of the statutory federal income tax provision (benefit) to
the Company's provision for income taxes is as follows:
YEAR ENDED DECEMBER 31
1996 1997 1998
---- ---- ----
(DOLLARS IN THOUSANDS)
Computed at statutory rate $ (8,529) $ 4,139 $(14,562)
Effect on federal income tax expense of:
State and local income taxes, net of
federal income tax benefit 232 320 363
Differential attributed to foreign
operations 1,820 1,172 268
Changes in valuation allowance for
deferred tax assets 7,563 (4,340) 14,812
Other, net 160 35 (71)
--- -- ---
$ 1,246 $ 1,326 $ 810
======== ======= ========
F-18
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Employee Benefit Plans
The Company has a qualified defined benefit pension plan covering essentially
all employees of the Company in the United States. Commencing in 1997, the
pension plan employs a cash balance form of benefit that provides for benefits
based on salary, age and service. The benefit available for certain union
employees under the plan is based on a flat dollar per year of service. The
Company's practice is to fund amounts that 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, 1997 and 1998, the funded status of the Company's qualified
defined benefit pension plan was as follows:
DECEMBER 31,
1997 1998
---- ----
(DOLLARS IN THOUSANDS)
Benefit Obligation Information
Benefit obligation at beginning of year $71,121 $74,073
Service cost 1,675 1,724
Interest cost 5,345 5,346
Actuarial loss/(gain) (1,856) 3,794
Benefits paid (6,955) (8,232)
Amendments 4,101 -
Special termination benefits 877 642
--- ---
Benefit obligation at end of year $74,073 $77,582
======= =======
Fair Value of Plan Assets
Fair value of plan assets at beginning of year $ 99,586 $109,129
Actual return on plan assets 16,498 12,347
Benefits paid (8,232) (6,955)
------ ------
Fair value of plan assets at end of year $109,129 $113,244
Reconciliation of Funded Status, Amounts Not recognized, and
Amounts Recognized
Funded status $35,056 $35,662
Unrecognized prior service cost 3,592 3,222
Unrecognized loss/(gain) 539 765
Unrecognized reversion value discount (8,960) (8,266)
------ ------
Prepaid benefit costs $30,227 $31,383
======= =======
F-19
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Employee Benefit Plans (Continued)
The Company's two nonqualified benefit plans had benefit obligations that
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, 1997. In 1998, these liabilities were satisfied. Net
pension expense for these plans was not material in 1997.
Net pension benefit of the Company's qualified defined benefit plan for the
years ended December 31, 1996, 1997 and 1998 include the following components:
1996 1997 1998
-------------------------
(IN THOUSANDS)
Service cost $ 1,449 $ 1,675 $ 1,724
Interest cost 4,779 5,345 5,346
Actual return on plan assets (12,661) (16,498) (12,347)
Amortization of unrecognized reversion
value discount (1,230) (1,230) (1,230)
Loss deferred for later recognition 4,483 8,030 4,474
----- ----- -----
(3,180) (2,678) (2,033)
Other benefit charges:
Early retirement program / special
retirement benefits 809 642 877
--- --- ---
Net pension benefit $(2,371) $(2,036) $(1,156)
======= ======= =======
The assumptions used in determining the funded status of the Company's defined
benefit pension plans for the years ended December 31, 1996, 1997 and 1998 were
discount rates of 8.0%, 7.5% and 7.0% respectively, and an average rate of
increase in compensation levels ranging from 3.25% to 13.25% 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 $1,230,000 in 1996, 1997 and
1998, 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.
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,
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. Also as of
January 1, 1997, certain union employees formerly covered under a multi-employer
plan began accruing benefits through the Cluett Retirement Plan.
F-20
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Employee Benefit Plans (Continued)
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 $655,000, $0 and $0 in 1996, 1997, and 1998
respectively.
In addition, the Company participated in multiemployer pension plans that
provided defined benefits to employees covered by collective bargaining
agreements. Payments charged to expense for the multiemployer plans amounted to
approximately $435,000 in 1996. Participation in the multiemployer pension plans
terminated January 1, 1997.
11. Commitments and Contingencies
The Company and certain of its subsidiaries are party to litigation in
connection with the normal conduct of their businesses. In March 1999, a jury
rendered a verdict against the Company in a lawsuit brought by a former employee
for disability discrimination arising out of the termination of her employment.
The Company has, based on this adverse verdict, established a reserve as of
December 31, 1998 for $1,600,000 for the award of damages, interest and
attorneys' fees. The Company intends to appeal the judgment which would stay the
payment of the judgment until the appeal is decided. Management believes, based
in part on the opinion of counsel, that its potential liability with respect to
other proceedings currently pending is not material in the aggregate to the
Company's consolidated financial position or results of operations.
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. 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, 1998 are as follows:
CAPITAL OPERATING
LEASES LEASES
------ ------
(DOLLARS IN THOUSANDS)
Year payable:
1999 $ 35 $ 3,555
2000 35 2,693
2001 35 1,422
2002 35 1,168
2003 30 798
Later 258 1,146
--- -----
Total minimum lease payments 428 $ 10,782
=========
Amount representing interest (185)
----
Present value of net minimum lease payments 243
Current portion 12
--
Long-term portion $ 231
=====
F-21
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Commitments and Contingencies (Continued)
Rent expense amounted to approximately $5.2 million in 1996, $3.9 million in
1997 and $4.3 million in 1998. The Company has approximately $14.3 million of
open letters of credit outstanding at December 31, 1998 for the purchase of
finished goods inventory from foreign vendors. In addition, approximately $2.6
million of stand-by letters of credit were also outstanding.
12. 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 $3.1 million previously recorded as a component of equity was
expensed and is included in other expense, net.
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 $2.6 million in 1996
for closure costs has been included in the financial statements in facility
closing and reengineering 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 June 17, 1997, the Company entered an agreement with an individual to
sell 100% of the stock of the Guatemalan subsidiary for $100,000. On September
30, 1997, the Company entered an agreement with an individual to sell
substantially all of the assets of the Company's Mexican subsidiary for
approximately $1.4 million. 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.
13. Licensing Agreements
Certain of the Company's subsidiaries 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 2003.
Future minimum license fees payable in the five years succeeding December 31,
1998 are as follows (in thousands):
Year payable:
1999 $ 1,090
2000 566
2001 695
2002 955
2003 763
Thereafter --
F-22
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Related Party Transactions
The Company had an 8.74% outstanding loan receivable from an officer (and
principal indirect stockholder) for approximately $4.5 million. The accumulated
accrued interest on the loan was approximately $1.4 million at December 31, 1996
and1997. In July of 1993, the officer filed for personal protection under
Chapter 11 bankruptcy regulations. The Company recorded a reserve for
approximately $5.8 million against the unpaid interest and principal balances
outstanding at December 31, 1994. As part of the Plan, principal and accrued
interest related to this note was forgiven on May 18, 1998.
Subsequent to the emergence from bankruptcy, Holdings allocated interest
expense of $24.3 million related to post-petition interest on prepetition
obligations to the Company. This amount is included in bankruptcy reorganization
costs.
Pursuant to a management advisory agreement (the "Management Agreement")
entered into in connection with the reorganization of the Company in 1998,
Vestar receives an annual advisory fee equal to $500,000 (prorated to $250,000
for 1998) in consideration for certain advisory and consulting services
(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 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. In connection with the Offering, Vestar
received a one-time transaction fee of $3.25 million. For the year-ended
December 31, 1998, the Company paid Vestar approximately $250,000 in management
fees.
15. 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 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.
16. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
short-term borrowings, accounts payable and accrued liabilities approximate fair
value due to the short maturities of these instruments. The fair value of
long-term debt was approximately $222.5 million (book value of $235.5 million)
at December 31, 1998. The fair value of the senior exchangeable Preferred Stock
was approximately $45.7 million (book value of $51.3 million).
F-23
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Segment Data
The Company is organized by product line in three business segments.
Foreign sales, primarily Canadian, were approximately 9.9% 9.4% and 9.1% , in
1996, 1997 and 1998, respectively. There were no customers for which sales
exceeded 10% during the three-year period presented.
In 1996, the Company made a strategic decision to halt its production of
shirts in Guatemala and Mexico, to exit its retail business in Canada and to
close all but three of its Canadian retail outlet stores. In 1996, the Company's
Latin American 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
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, Canadian retail operations and
unallocated corporate overhead charges, are referred to collectively as the "All
other".
1996 1997 1998
---- ---- ----
(Dollars in Thousands)
Net Sales
Sock $ 141,113 $151,788 $164,760
Shirt 194,705 176,753 183,169
Designer 32,327 39,839 29,129
All other 7,221 3,749 3,909
Intercompany (6,326) (8,602) (7,844)
------ ------ ------
$369,040 $363,528 $373,123
Gross Profit
Sock 41,308 49,143 52,497
Shirt 46,364 49,193 51,649
Designer 5,344 10,103 2,791
All other 2,224 1,412 1,861
----- ----- -----
$95,240 $109,851 $108,798
Selling, General and Administrative
Sock 22,232 25,874 26,454
Shirt 45,932 38,319 40,650
Designer 8,678 10,781 10,415
All other 9,467 1,367 4,923
----- ----- -----
$86,309 $76,341 $82,442
Operating Income excluding facility closing and reengineering
Sock 19,076 23,269 26,043
Shirt 432 10,874 10,998
Designer (3,334) (678) (7,624)
All other (7,243) 44 (3,062)
------ -- ------
$8,931 $33,510 $26,355
Identifiable Assets
Sock 69,279 77,841 80,766
Shirt 97,293 92,412 89,040
Designer 15,349 16,232 7,947
All other 3,331 1,110 309
----- ----- ---
$185,252 $187,595 $178,062
F-24
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Segment Data (Continued)
1996 1997 1998
---- ---- ----
(Dollars in Thousands)
Depreciation and Amortization
Sock 5,014 4,640 5,403
Shirt 5,197 3,424 3,231
Designer - 11 26
All other 435 - -
--- --- ---
$10,646 $8,075 $8,660
Capital expenditure
Sock 3,887 7,475 7,987
Shirt 5,904 3,075 3,769
Designer 28 129 67
All other 12 - 18
-- --- --
$9,831 $10,679 $11,841
Reconciliation of Reportable Segments Net Sales, Operating income
and Identifiable assets
1996 1997 1998
---- ---- ----
Net Sales
Total net sales for reportable
segments 368,145 368,381 377,058
Other net sales 7,221 3,749 3,909
Eliminations of intersegment
net sales (6,326) (8,602) (7,844)
------ ------ ------
Total consolidated net sales 369,040 363,528 373,123
Operating Profit (Loss)
Total operating profit or loss
for reportable segments 16,174 34,281 29,417
Other operating profit or loss (1,661) (558) (628)
Eliminations of intersegement
operating profit (loss) (139) - -
Unallocated amounts:
Other corporate income (expense) (5,443) 603 (2,433)
Facility closing and
reengineering costs (11,603) (2,469) (2,366)
------- ------ ------
Total operating profit (loss) (2,672) 31,041 23,990
Assets
Total assets for reportable
segments 181,921 186,485 177,753
Other assets 3,331 1,110 309
Unallocated amounts:
Deferred finance costs - - 11,198
Pension assets 28,191 30,227 31,383
Other unallocated amounts (2,349) 2,195 132
------ ----- ---
Consolidated total 211,094 220,017 220,775
Capital Expenditures
Total capital expenditure for
reportable segments 9,819 10,677 11,823
Adjustments 16 101 18
-- --- --
Consolidated total 9,835 10,778 11,841
F-25
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Segment Data (Continued)
1996 1997 1998
---- ---- ----
(Dollars in Thousands)
Depreciation & Amortization
Total D&A for reportable segments 10,210 8,075 8,660
Adjustments 725 30 992
--- -- ---
Consolidated total 10,935 8,105 9,652
Geographic Information
Net Sales
United States 332,335 329,358 339,276
Foreign 36,705 34,170 33,847
------ ------ ------
Total 369,040 363,528 373,123
Operating Income (Loss)
United States 230 29,327 25,205
Foreign (2,902) 1,714 (1,215)
------ ----- ------
Total (2,672) 31,041 23,990
Identifiable Assets
United States 189,364 197,621 201,026
Foreign 21,730 22,396 19,749
------ ------ ------
Total 211,094 220,017 220,775
18. Guarantor Subsidiaries
The Company's payment obligations under the Senior Credit Facility and the
Senior Subordinated Notes (the "Notes") are 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 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 consolidating financial information for CAC
("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 consolidated in the presentation below. Investments in
subsidiaries are accounted for by CAC 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
stockholder's deficit and other intercompany balances and transactions.
In 1997 and 1998, the Company allocated external interest expense to its
subsidiaries, based on a percentage of net sales.
F-26
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31,1997
(DOLLARS IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES 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 receivable (payable) 15,000 (15,000) -- -- --
Property, plant and equipment, net -- 44,035 3,663 -- 47,698
Pension assets -- 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 STOCKHOLDER'S 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
Stockholder's deficit (54,505) (66,352) 14,553 49,496 (56,808)
--------- --------- --------- --------- ---------
Total liabilities and
stockholder's deficit $ (34,496) $ 182,621 $ 22,396 $ 49,496 $ 220,017
========= ========= ========= ========= =========
</TABLE>
F-27
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31,1998
(DOLLARS IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 2,396 $ 472 $ -- $ 2,868
Accounts receivable, net -- 42,599 4,187 -- 46,786
Inventories -- 63,158 11,441 -- 74,599
Prepaid expenses and other current assets -- 3,168 804 -- 3,972
--------- --------- --------- --------- ---------
Total current assets -- 111,321 16,904 -- 128,225
Investment in subsidiaries (86,330) -- -- 86,330 --
Intercompany receivable (payable) 15,000 (15,000) -- -- --
Property, plant and equipment, net -- 46,112 2,012 -- 48,124
Deferred finance costs 11,198 -- -- 11,198
Pension assets -- 31,383 -- -- 31,383
Other noncurrent assets -- 1,012 833 -- 1,845
--------- --------- --------- --------- ---------
Total assets $ (71,330) $ 186,026 19,749 $ 86,330 $ 220,775
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ -- $ 37,781 $ 4,658 $ -- $ 42,439
Short-term debt and current portion of
long-term debt -- 6,600 3,648 -- 10,248
Income taxes payable -- 1,268 207 -- 1,475
--------- --------- --------- --------- ---------
Total current liabilities -- 45,649 8,513 -- 54,162
Due to Parent -- 27,974 -- -- 27,974
Long-term debt and capital lease obligations -- 235,450 231 -- 235,681
Other noncurrent liabilities -- 111 -- -- 111
Dividends payable 605 -- -- -- 605
Senior exchangeable preferred stock,
cumulative, $.01 par value: authorized
4,950,000, issued and outstanding 530,730
shares (liquidation preference) 51,288 -- -- -- 51,288
Stockholder's deficit (123,223) (123,158) 11,005 86,330 (149,046)
--------- --------- --------- --------- ---------
Total liabilities and stockholder's deficit $ (71,330) $ 186,026 $ 19,749 $ 86,330 $ 220,775
========= ========= ========= ========= =========
</TABLE>
F-28
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 332,335 $ 36,705 $ -- $ 369,040
Cost of goods sold -- 246,696 27,104 -- 273,800
--- ------- ------ --- -------
Gross profit -- 85,639 9,601 -- 95,240
Selling, general and administrative -- 76,892 9,417 -- 86,309
Facility closing and reengineering costs -- 8,517 3,086 -- 11,603
--- ----- ----- --- ------
Operating income (loss) -- 230 (2,902) -- (2,672)
Loss on investments in subsidiaries (30,200) -- -- 30,200 --
Interest expense, net -- 13,686 3,242 -- 16,928
Other (income) expense, net -- (835) 4,061 -- 3,226
--- ---- ----- --- -----
Income (loss) before reorganization costs
and income taxes (30,200) (12,621) (10,205) 30,200 (22,826)
Bankruptcy reorganization costs -- 6,128 -- -- 6,128
Income (loss) before provision for (30,200) (18,749) (10,205) 30,200 (28,954)
income taxes
Provision for income taxes -- 1,042 204 -- 1,246
--- ----- --- --- -----
Net income (loss) $ (30,200) $ (19,791) $(10,409) $30,200 $ (30,200)
========= ========= ======== ======= =========
</TABLE>
F-29
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 329,358 $ 34,170 $ -- $ 363,528
Cost of goods sold -- 229,303 24,374 -- 253,677
--- ------- ------ --- -------
Gross profit -- 100,055 9,796 -- 109,851
Selling, general and administrative expenses -- 66,817 9,524 -- 76,341
Facility closing and reengineering costs -- 3,911 (1,442) -- 2,469
--- ----- ------ --- -----
Operating income -- 29,327 1,714 -- 31,041
Income on investments in subsidiaries 17,196 -- -- (17,196) --
Interest expense, net -- 12,275 2,958 -- 15,233
Other expense, net -- 853 316 -- 1,169
--- --- --- --- -----
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-30
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 339,276 $ 33,847 $ -- $ 373,123
Cost of goods sold -- 239,479 24,846 -- 264,325
--------- --------- --------- --------- ---------
Gross profit -- 99,797 9,001 -- 108,798
Selling, general and administrative -- 72,866 9,576 -- 82,442
Facility closing and reengineering costs -- 1,726 640 -- 2,366
--------- --------- --------- --------- ---------
Operating income (loss) -- 25,205 (1,215) -- 23,990
Loss on investments in subsidiaries (36,834) -- -- 36,834 --
Interest expense, net -- 16,907 3,448 -- 20,355
Other expense, net -- 2,131 -- -- 2,131
--------- --------- --------- --------- ---------
Income (loss) before reorganization
costs and income taxes (36,834) 6,167 (4,663) 36,834 1,504
Bankruptcy reorganization costs -- 37,528 -- -- 37,528
--------- --------- --------- --------- ---------
Loss before provision for income taxes (36,834) (31,361) (4,663) 36,834 (36,024)
Provision for income taxes -- 851 (41) -- 810
--------- --------- --------- --------- ---------
Net loss $ (36,834) $ (32,212) $ (4,622) $ 36,834 $ (36,834)
========= ========= ========= ========= =========
</TABLE>
F-31
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR-END DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
<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-down of property, plant and equipment -- 742 -- -- 742
Write-down foreign currency translation adjustment -- -- 3,100 -- 3,100
Depreciation and amortization -- 10,501 434 -- 10,935
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
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
(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 (used in)
provided by financing activities -- (12,960) 371 -- (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-32
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR-END DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
<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) on investments in subsidiaries (17,196) -- -- 17,196 --
Depreciation and amortization -- 7,779 326 -- 8,105
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-33
<PAGE>
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (86,330) $ (32,212) $ (4,622) $ 86,330 $ (36,834)
Adjustment to reconcile net loss to net cash
and cash equivalents used in operating activities:
Loss on investments in subsidiaries 86,330 -- -- (86,330) --
Write-down of deferred acquisition activities -- 489 -- -- 489
Write-down of property, plant and equipment -- 1,094 -- -- 1,094
Depreciation -- 9,340 312 -- 9,652
Adjustments of liabilities subject to compromise -- (22,442) -- -- (22,442)
Changes in operating assets and liabilities -- 13,640 3,534 -- 17,174
--- ------ ----- --- ------
Net cash and cash equivalents used in
operating activities -- (30,091) (776) -- (30,867)
INVESTING ACTIVITIES
Purchase of fixed assets -- (11,482) (359) -- (11,841)
Proceeds on disposal of fixed assets -- 152 -- -- 152
--- --- --- --- ---
Net cash and cash equivalents used in
investing activities -- (11,330) (359) -- (11,689)
FINANCING ACTIVITIES
Issuance of preferred stock -- 48,125 -- -- 48,125
Distribution to parent -- (87,522) -- -- (87,522)
Net proceeds from DIP credit facility -- 2,124 1,002 -- 3,126
Net proceeds from issuance of long term debt -- 222,000 -- -- 222,000
Principal payments on long term debt -- (1,300) -- -- (1,300)
Principle payments on pre-petition -- (146,490) -- -- (146,490)
Principle payments on capital lease -- (2,377) (29) -- (2,406)
--- ------ --- --- ------
Net cash and cash equivalents provided by
financing activities -- 34,560 973 -- 35,533
Effect of foreign currency translations -- -- (128) -- (128)
--- --- ---- --- ----
Net change in cash and cash equivalents -- (6,861) (290) -- (7,151)
Cash and cash equivalents at beginning of year -- 9,551 468 -- 10,019
--- ----- --- --- ------
Cash and cash equivalents at end of year $ -- $ 2,690 $ 178 $ -- $ 2,868
========= ========= ========= ========= =========
</TABLE>
F-34
<PAGE>
Item 9. Changes in and disagreements with Accountants on Accounting
and Financial Disclosures
None.
PART III
Item 10.Directors and Executive Officers of the Registrant
Set forth below are the names and positions of the directors and executive
officers of Holdings, CAG and the Company. 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 48 Director and Chief Executive Officer of Holdings, CAG and the Company
James A. Williams 56 Director of Holdings, CAG and the Company; President and Chief Executive Officer of the Sock Group
Robert J. Riesbeck 35 Executive Vice President--Chief Operating and Financial Officer of the Shirt Group
Kathy D. Wilson 39 Senior Vice President and Chief Financial Officer of the Sock Group
William S. Sheely 40 Executive Vice President--Operations of the Sock Group
W. Todd Walter 33 Vice President and Chief Financial Officer of Holdings, CAG and the Company
Steven J. Kaufman 52 Vice President and General Counsel of Holdings, CAG and the Company
Norman W. Alpert 40 Director of Holdings, CAG and the Company
Sander M. Levy 37 Director of Holdings, CAG and the Company
Daniel S. O'Connell 45 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 and Aearo Corporation. 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 Ithaca Industries, Inc. and Esprit de Corp. 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.
ROBERT J. RIESBECK is the Executive Vice President -- Chief Operating and
Financial Officer of the Shirt Group. Mr. Riesbeck joined the Company in July of
1995 as Vice President--Finance of the Shirt Group. He was named Executive Vice
President, Chief Operating and Financial Officer of the Shirt Group in January
1997. He served as Chief Financial Officer of Holdings, CAG and the Company
until the appointment of Mr. Walter in March of 1999. Prior to joining the
Company, Mr. Riesbeck worked for six years in various financial and operational
roles for 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 Senior Vice President and Chief Financial Officer of
the Sock Group. Ms. Wilson joined the Company in January 1994 and became Vice
President of Finance in April 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.
W. TODD WALTER is a Director of A&M and became the Chief Financial Officer of
Holdings, CAG and the Company effective March 1999. Mr. Walter joined A&M in May
1996 and has served in various financial and operating positions at client
companies. Between June 1992 and April 1996, Mr. Walter was a Vice President in
the Special Loan Group at Chemical Bank in New York. Mr. Walter earned a B.A
degree from Middlebury College and an M.B.A. degree from the Darden Graduate
School of Business Administration, University of Virginia.
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., Siegel &
Gale Holdings, Inc. and Remington Products Company, L.L.C., 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 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,
Siegel & Gale Holdings, Inc., Russell-Stanley Holdings, Inc., Remington Products
Company, L.L.C. and is a member of the Advisory Board of Insight Communications
Company, L.P., 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.
Compliance with Section 16(a) of the Exchange Act
Each of the then directors and executive officers of the Company was required
to file an Initial Statement of Beneficial Ownership of Securities on Form 3 to
report his or her beneficial ownership of equity securities of the Company by
October 26, 1998, the effective date of the Company's registration statement
under the Securities Exchange Act of 1934, as amended, relating to the New
Preferred Stock. Through an oversight such forms were not filed until early in
1999. None of such directors or officers reported beneficial ownership of any
equity securities of the Company.
Item 11. Executive Compensation
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.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
----------
ANNUAL COMPENSATION SECURITIES ALL
--------------------------- UNDERLYING OTHER
YEAR SALARY($) BONUS($) OPTIONS (#) COMPENSATION
---- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Bryan P. Marsal(1) ................. 1998 700,000 0 0 0
Chief Executive Officer of ....... 1997 700,000 0 0 0
Holdings and the Company ......... 1996 700,000 0 0 0
James A. Williams .................. 1998 412,000 400,000 0 0
President of the Sock Group ...... 1997 400,000 410,000 0 0
1996 400,000 0 0 0
Philip L. Molinari ................. 1998 330,000 150,000 0 52,000(2)
President of the Shirt Group ..... 1997 320,000 0 0 0
1996 400,000 0 0 0
Robert J. Riesbeck ................. 1998 235,000 124,000 0 0
Executive Vice President and Chief 1997 181,000 0 0 0
Operating and Financial Officer .. 1996 146,000 25,000 0 0
of the Shirt Group
William S. Sheely .................. 1998 162,000 156,000 0 0
Executive Vice President ......... 1997 156,000 150,000 0 0
--Operations of the Sock Group ... 1996 150,000 0 0 0
</TABLE>
(1) Compensation paid to A&M. A&M also received, for services other than
those of Mr. Marsal, compensation of $815,000, $738,000, and $257,000 for each
of 1996, 1997, and 1998, respectively.
(2) Accrued vacation pay and deferred compensation paid at time of
termination of employment.
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. Sheely, Ms. Wilson, Mr. Riesbeck and Mr. Kaufman (each an
"Employee") have entered into severance agreements. Each Employee is entitled to
severance pay equal to his or her current base salary for a period of one year
(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
in this paragraph terminates one year from the date of the consummation of the
Plan.
Mr. Molinari's employment with the Company terminated as of December 31,
1998. Mr. Molinari will receive severance payments equal to his base salary for
a period of up to one year. In addition, the Company exercised its call rights
and purchased the shares of Holdings Common Stock owned by Mr. Molinari at the
initial purchase price paid by Mr. Molinari in May 1998.
Bonus Plans
Executive officers along with certain other employees (the "Participants")
of each of 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 and
the Compensation Committee of the Board of Directors. Yearly bonus awards under
the incentive plans are limited to 100% of the respective Participant's annual
salary.
<PAGE>
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 agreed to
grant 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 these or 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 in accordance with the Option Plan.
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.
Compensation of Directors
Directors of the Company who are neither employees of the Company nor
affiliated with Vestar receive annual compensation of $20,000 payable quarterly
for services in such capacity. Other directors do not receive any compensation
for services in such capacity.
Compensation Committee Interlocks and Insider Participation
Directors Alpert and Levy, each of whom is affiliated with Vestar, are the
members of the Compensation Committee which reviews the future compensation and
benefits of the Company's executive officers and key employees.
Since the Recapitalization, each of these individuals has had an interest
in transactions or business relationships involving the Company. See the
information contained in Item 13, "Certain Relationships and Related
Transactions", which is incorporated herein by reference.
Report on Executive Compensation
The compensation of the Company's executive officers for 1998, including
the compensation reported above for the Chief Executive Officer and the four
other most highly compensated executive officers of Holdings, CAG and the
Company, had been established during the bankruptcy proceedings prior to the
Reorganization and prior to the tenure of the current Board of Directors, which
was elected in connection with the Reorganization.
In December 1998, the Board of Directors established a Compensation
Committee to review the future compensation and benefits of the Company's
executive officers and key employees.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
All of the issued and outstanding shares of common stock of the Company are
held by CAG, which is a wholly-owned subsidiary of Holdings. The following table
sets forth, as of February 28, 1999, 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. Except as indicated
below, the address for each of the persons listed below is c/o Cluett American
Corp., 48 W 38th Street, New York, NY 10018.
HOLDINGS COMMON STOCK
-------------------------
SHARES BENEFICIALLY OWNED
-------------------------
NUMBER OF PERCENT OF
SHARES COMMON
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)
599 Lexington Avenue
Suite 2700
New York, New York 10022
Societe Anonyme D'Etudes et de Participation
Industrielles
et Commerciales .......................... 24,699 6.9%(1)
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%
Steven M. Silver(3) ........................ 217,285 60.8%
Robert J. Riesbeck ......................... 2,041 (4)
Kathy D. Wilson ............................ 2,041 (4)
William S. Sheely .......................... 1,633 (4)
Steven J. Kaufman .......................... 816 (4)
Philip L. Molinari ......................... -- --
All executive officers and directors as a
group (11 persons)(2)(3) .................. 278,199 78.0%
(1) For a discussion of certain voting arrangements among these holders see
Item 13. "Certain Relationship and Related Transactions--Stock Ownership and
Stockholder's 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. Silver disclaims the existence of a group and disclaims beneficial
ownership of the Holdings Common Stock not held by him.
(4) Less than 1%.
Item 13. Certain Relationships and Related 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 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 of 1993,
as amended (the "Securities Act"). The balance of the Holdings Common Stock is
held by former stockholders of Holdings.
Stock Ownership And Stockholders' Agreement
In the Recapitalization: (i) Vestar acquired 60.8% of the outstanding
Holdings Common Stock, (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 former
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
certain other Original Equity Holders have (SAEPIC and such other Original
Equity Holders, the "Participating Original Equity Holders"; together with the
Initial Investors, the "Participating Stockholders"), entered 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 Item 10. "Directors
and Executive Officers of the Registrant" for a discussion of the present
officers and directors and their relationship to Vestar and A&M.
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 reserve
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.
<PAGE>
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 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 loaned
$1.35 million to A&M, and $0.9 million 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 5.69%, 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
more favorable to Management Investors than terms obtainable from an unrelated
third-party.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) (1) Financial Statements
Included in Part II, Item 8
Consolidated Balance Sheets as of December 31,
1998 and December 31, 1997
Consolidated Statements of Income for the years ended
December 31, 1998, December 31, 1997 and December 31, 1996
Consolidated Statements of Cash Flow for the years
ended December 31, 1998, December 31, 1997 and December 31, 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying
Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are in applicable and therefore have been
omitted.
(3) List of Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------------------------------------------------------------------------------
2.1 Third Amended plan of Reorganization of Cluett American Corp. and Cluett
American Investment Corp. (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on
June 30, 1998).
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. (incorporated by reference to
Exhibit 2.2 to the Company's Registration Statement on Form S-4
(Reg. No. 333-58059) filed on June 30, 1998).
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
(incorporated by reference to Exhibit 2.3 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998).
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") (incorporated by reference
to Exhibit 2.4 to the Company's Registration Statement on Form S-4 (Reg.
No. 333-58059) filed on June 30, 1998).
3.1 Restated Certificate of Incorporation of Cluett American Corp.
(incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (Reg. No.
333-58059) filed on June 30, 1998).
3.2 Bylaws of Cluett American Corp. (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-4
(Reg. No. 333-58059) filed on June 30, 1998).
4.1 Indenture between Cluett American Corp. and The Bank of New York, as
Trustee (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (Reg. No.
333-58059) filed on June 30, 1998).
4.2 Exchange Debenture Indenture between Cluett American Corp.
and The Bank of New York, as Trustee (incorporated by reference
to Exhibit 4.2 to the Company's Registration Statement on Form
S-4 (Reg. No. 333-58059) filed on June 30, 1998).
4.3 Certificate of Designations of the 12 1/2% Senior Exchangeable Preferred
Stock Due 2010 (incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-4 (Reg.
No. 333-58059) filed on June 30, 1998).
4.4 Form of 10 1/8% Senior Subordinated Notes Due 2008 (incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement on Form
S-4 (Reg. No. 333-58059) filed on June 30, 1998).
4.5 Form of 10 1/8% Series B Senior Subordinated Notes Due 2008 (incorporated
by reference to Exhibit 4.5 to the Company's Registration Statement on Form
S-4 (Reg. No. 333-58059) filed on June 30, 1998).
4.6 Form of 12 1/2% Senior Exchangeable Preferred Stock Due 2010
(incorporated by reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998).
4.7 Form of 12 1/2% Series B Senior Exchangeable Preferred Stock Due 2010
(incorporated by reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-4 (Reg. No.
333-58059) filed on June 30, 1998).
4.8 Note Registration Rights Agreement dated May 18, 1998 among Cluett
American Corp., NationsBanc Montgomery Securities LLC and NatWest Capital
Markets Limited (incorporated by reference to Exhibit 4.8 to the Company's
Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30,
1998).
4.9 Preferred Stock Registration Rights Agreement dated May 18, 1998 among
Cluett American Corp., NationsBanc Montgomery Securities LLC and NatWest
Capital Markets Limited (incorporated by reference to Exhibit 4.9 to the
Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on
June 30, 1998).
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 (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-4 (Reg. No.
333-58059) filed on June 30, 1998).
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 (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on
June 30, 1998).
*10.2.1 Second Amendment to the Credit Agreement and Assignment dated as
December 18, 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 (filed herewith as Exhibit
10.2.1).
*10.2.2 Third Amendment to the Credit Agreement and Assignment dated as of
March 19, 1999 by an among Cluett American Corp., Cluett American
Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the
Existing Lenders, New Lenders, and agents (filed herewith as Exhibit
10.2.2).
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 (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-4 (Reg. No.
333-58059) filed on June 30, 1998).
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 (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-4 (Reg. No.
333-58059) filed on June 30, 1998).
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 (incorporated
by reference to Exhibit 10.5 to the Company's Registration Statement on
Form S-4/A (Reg. No.
333-58059) filed on September 3, 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 (incorporated by reference to Exhibit 10.6
to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059)
filed on June 30, 1998).
+10.7 Employment Agreement dated March 7, 1997 by and between
Great American Knitting Mills, Inc. and James A. Williams
(incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-4/A (Reg. No. 333-58059) filed
on September 3, 1998).
+10.8 Severance Agreement dated as of August 8, 1997 by and
between Cluett, Peabody & Co., Inc. and Phil Molinari
(incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-4/A (Reg. No. 333-58059) filed
on September 3, 1998).
+10.9 Severance Agreement dated as of May 5, 1997 by and between
Great American Knitting Mills, Inc. and William Sheely
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-4/A (Reg. No. 333-58059) filed
on September 3, 1998).
+10.10 Severance Agreement dated as of May 5, 1997 by and between
Great American Knitting Mills, Inc. and Kathy Wilson
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-4/A (Reg. No. 333-58059) filed
on September 3, 1998).
+10.11 Advisory Agreement dated May 18, 1998 among Cluett
American Investment Corp., Cluett American Corp. and Vestar
Capital Partners (incorporated by reference to Exhibit 10.11 to
the Company's Registration Statement on Form S-4/A (Reg. No.
333-58059) filed on September 3, 1998).
10.12 Secured Promissory Note dated May 18, 1998 made by A&M Investment
Associates #7, LLC in favor of Cluett American Investment Corp.
(incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-4/A (Reg. No.
333-58059) filed on September 3, 1998).
10.13 Form of Secured Promissory Note made by the Management
Investors in favor of Cluett American Investment Corp.
(incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-4/A (Reg. No. 333-58059) filed
on September 3, 1998).
+10.14 Severance Agreement dated as of August 8, 1997 by and
between Cluett, Peabody & Co., Inc. and Robert Riesbeck
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-4/A (Reg. No. 333-58059) filed
on October 15, 1998).
+10.15 Severance Agreement dated as of January 16, 1996 by and
between Bidermann Industries Corp. and Steven J. Kaufman
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-4/A (Reg. No. 333-58059) filed
on October 15, 1998).
21List of Subsidiaries (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-4 (Reg.
No. 333-58059) filed on June 30, 1998).
24Powers of Attorney (included on pages II-5--II-11) (incorporated by
reference to Exhibit 24 to the Company's Registration Statement on Form S-4
(Reg. No. 333-58059) filed on June 30, 1998).
*27 Financial Data Schedule (filed herewith as Exhibit 27)
99.1 Form of Note Letter of Transmittal (incorporated by
reference to Exhibit 99.1 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-58059) filed on June 30,
1998).
99.2 Form of Preferred Stock Letter of Transmittal (incorporated by reference
to Exhibit 99.2 to the Company's Registration Statement on Form S-4 (Reg.
No. 333-58059) filed on June 30, 1998).
99.3 Form of Note Notice of Guaranteed Delivery (incorporated by reference to
Exhibit 99.3 to the Company's Registration Statement on Form S-4 (Reg. No.
333-58059) filed on June 30, 1998).
99.4 Form of Preferred Stock Notice of Guaranteed Delivery (incorporated by
reference to Exhibit 99.4 to the Company's Registration Statement on Form
S-4 (Reg. No. 333-58059) filed on June 30, 1998).
+ This is a management contract or compensatory plan or
arrangement
* Filed herewith
(b) No report was filed on Form 8-K during the quarter covered by this report.
(c)Exhibits: See (a)(3) above for a listing of the exhibits included as part of
this report.
(d)Financial Statement Schedules: See (a)(1) and (a)(2) above for a listing of
the financial statements and schedules submitted as part of this report.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CLUETT AMERICAN CORP.
(Registrant)
By: /s/ Bryan P. Marsal
-------------------------------
Name: Bryan P. Marsal
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 29, 1999
-------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Bryan P. Marsal
---------------------------------
Name: Bryan P. Marsal
Title: Director, President and Chief Executive Officer
Date: March 29, 1999
----------------------------------
/s/ W. Todd Walter
-----------------------------------
Name: W. Todd Walter
Title: Vice President and Chief Financial and Accounting
Officer
Date: March 29, 1999
-----------------------------------
/s/ James A. Williams
-----------------------------------
Name: James A. Williams
Title: Director
Date: March 25, 1999
-----------------------------------
/s/ Norman W. Alpert
-----------------------------------
Name: Norman W. Alpert
Title: Director
Date: March 29, 1999
-----------------------------------
/s/ Steven M. Silver
-----------------------------------
Name: Steven M. Silver
Title: Director
Date: March 29, 1999
-----------------------------------
/s/ Sander M. Levy
-----------------------------------
Name: Sander M. Levy
Title: Director
Date: March 29, 1999
-----------------------------------
/s/ Daniel S. O'Connell
-----------------------------------
Name: Daniel S. O'Connell
Title: Director
Date: March 29, 1999
-----------------------------------
-----------------------------------
Name: Neil Defeo
Title: Director
Date:
-----------------------------------
<PAGE>
EXHIBIT INDEX
10.2.1 Second Amendment to the Credit Agreement and Assignment dated as
December 18, 1998
10.2.2 Third Amendment to the Credit Agreement and Assignment dated as
of March 19, 1999
27 Financial Data Schedule
<PAGE>
Item 14 (d). Financial Statement Schedules
SCHEDULE II
CLUETT AMERICAN CORP.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------------------- -------- --------
ADDITIONS
--------------------
CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION BALANCE EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ----------- ------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Deduction from asset account:
Allowance for Doubtful Accounts $ 3,778 $ 591 -- $ 1,077(1) $ 3,292
Customer Allowances 11,858 9,388 -- 9,124(1) 12,122
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
Customer Allowances 12,122 6,877 -- 10,828(1) 8,171
Total 15,414 6,160 -- 11,601(1) 9,973
PERIOD ENDED DECEMBER 31, 1998 :
Deduction from asset account:
Allowance for Doubtful Accounts 1,802 382 -- 616(1) 1,568
Customer Allowances 8,171 12,474 -- 13,751(1) 6,894
Total $ 9,973 $11,493 -- $12,874(1) $ 8,462
<FN>
(1) Charged to costs and expenses
</FN>
</TABLE>
Exhibit 10.2.1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
December 18, 1998, is by and among Cluett American Corp. (the "Borrower"),
Cluett American Investment Corp. (the "Parent"), Cluett American Group, Inc.
("Interco") and the certain subsidiaries of the Parent identified on the
signature pages hereto (together with the Parent and Interco, the "Guarantors"),
the lenders identified on the signature pages hereto (the "Lenders"),
NationsBank, N.A., as agent for the Lenders (in such capacity, the "Agent") and
Gleacher NatWest Inc., as documentation agent (the "Documentation Agent").
Capitalized terms used herein which are not defined herein and which are defined
in the Credit Agreement shall have the same meanings as therein defined.
W I T N E S S E T H
WHEREAS, the Borrower, the Guarantors, the Lenders, the Agent and the
Documentation Agent have entered into that certain Credit Agreement dated as of
May 18, 1998 and as amended as of May 27, 1998, (as so amended the "Existing
Credit Agreement");
WHEREAS, the parties to the Existing Credit Agreement have agreed to amend
the Existing Credit Agreement as provided herein;
NOW, THEREFORE, in consideration of the agreements hereinafter set forth,
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties hereto agree as follows:
PART 1
DEFINITIONS
SUBPART 1.1 Certain Definitions. Unless otherwise defined herein or the
context otherwise requires, the following terms used in this Amendment,
including its preamble and recitals, have the following meanings:
"Amended Credit Agreement" means the Existing Credit
Agreement as amended hereby.
"Amendment No. 2 Effective Date" is defined in Subpart
3.1.
SUBPART 1.2 Other Definitions. Unless otherwise defined herein or the
context otherwise requires, terms used in this Amendment, including its preamble
and recitals, have the meanings provided in the Amended Credit Agreement.
<PAGE>
PART 2
AMENDMENTS TO EXISTING CREDIT AGREEMENT
Effective on (and subject to the occurrence of) the Amendment No. 2
Effective Date, the Existing Credit Agreement is hereby amended in accordance
with this Part 2. Except as so amended, the Existing Credit Agreement and all
other Credit Documents shall
continue in full force and effect.
SUBPART 2.1 Definition of Consolidated EBITDA Adjustment. The definition of
"Consolidated EBITDA Adjustment" set forth in Section 1.1 of the Existing Credit
Agreement is hereby amended in its entirety to read as follows:
"Consolidated EBITDA Adjustment" means (i) the sum of (A) for each of
the fiscal quarters ending September 30, 1997, December 31, 1997 and March
28, 1998, the amount indicated for Consolidated EBITDA for such fiscal
quarter on Schedule 1.1A, plus (B) for each of the fiscal quarters ending
December 31, 1997, March 28, 1998, June 27, 1998, September 26, 1998 and
December 31, 1998, the amount indicated for such fiscal quarter on Schedule
1.1A-1 in respect of losses for such period associated with the
discontinuance of the Burberrys and Yves Saint Laurent licensed product
lines, and (ii) for any fiscal quarter after March 28, 1998, the amount, if
any, of reorganization charges taken during such fiscal quarter in respect
of (A) up to $3.3 million of facility closing and re-engineering costs
accrued by the Borrower and its Subsidiaries prior to the Closing Date, (B)
up to $550,000 of losses accrued by the Borrower and its Subsidiaries prior
to the Closing Date associated with (1) the Canadian retail operations of
the Borrower and its Subsidiaries and (2) the Mexican and Guatemalan
operations of the Borrower and its Subsidiaries, (C) up to $4.0 million of
bankruptcy reorganization costs incurred by the Borrower and its
Subsidiaries on or prior to the Closing Date and (D) the costs and expenses
of the Parent, the Borrower and its Subsidiaries incurred in connection
with the Recapitalization, in each case calculated in accordance with GAAP.
SUBPART 2.2 New Schedule 1.1A-1. A new schedule in the form of Schedule
1.1A-1 attached hereto is added to the Existing Credit Agreement immediately
following existing Schedule 1.1A thereof.
PART 3
CONDITIONS TO EFFECTIVENESS
SUBPART 3.1 Amendment No. 2 Effective Date. This Amendment shall be and
become effective as of September 30, 1998 (the "Amendment No. 2 Effective Date")
when all of the conditions set forth in this Part 3 shall have been satisfied,
and thereafter this Amendment shall be known, and may be referred to, as
"Amendment No.
2."
SUBPART 3.1.1 Execution of Counterparts of Amendment. The Agent shall
have received counterparts of this Amendment, which collectively shall have
been duly executed on behalf of each of the Borrower, the Guarantors and
the Required Lenders.
SUBPART 3.1.2 Other Items. The Agent shall have received such other
documents, agreements or information which may be reasonably requested by
the Agent.
PART 4
MISCELLANEOUS
SUBPART 4.1 Representations and Warranties. Borrower hereby represents and
warrants to the Agent and the Lenders that, after giving effect to this
Amendment, (a) no Default or Event of Default exists under the Credit Agreement
or any of the other Credit Documents and (b) the representations and warranties
set forth in Section 6 of the Existing Credit Agreement are, subject to the
limitations set forth therein, true and correct in all material respects as of
the date hereof (except for those which expressly relate to an earlier date).
SUBPART 4.2 Reaffirmation of Credit Party Obligations. Each Credit Party
hereby ratifies the Credit Agreement and acknowledges and reaffirms (a) that it
is bound by all terms of the Credit Agreement applicable to it and (b) that it
is responsible for the observance and full performance of its respective Credit
Party Obligations.
SUBPART 4.3 Cross-References. References in this Amendment to any Part or
Subpart are, unless otherwise specified, to such Part or Subpart of this
Amendment.
SUBPART 4.4 Instrument Pursuant to Existing Credit Agreement. This
Amendment is a Credit Document executed pursuant to the Existing Credit
Agreement and shall (unless otherwise expressly indicated therein) be construed,
administered and applied in accordance with the terms and provisions of the
Existing Credit Agreement.
SUBPART 4.5 References in Other Credit Documents. At such time as this
Amendment No. 2 shall become effective pursuant to the terms of Subpart 3.1, all
references in the Credit Documents to the "Credit Agreement" shall be deemed to
refer to the Credit Agreement as amended by this Amendment No. 2.
SUBPART 4.6 Counterparts/Telecopy. This Amendment may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. Delivery of executed counterparts of this Amendment by telecopy shall
be effective as an original and shall constitute a representation that an
original shall be delivered.
SUBPART 4.7 Governing Law. THIS AMENDMENT SHALL BE DEEMED TO
BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF NEW YORK.
SUBPART 4.8 Successors and Assigns. This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
<PAGE>
IN WITNESS WHEREOF the Borrower, the Guarantors and the Required Lenders
have caused this Amendment to be duly executed on the date first above written.
BORROWER: CLUETT AMERICAN Corp.
By:
Name:
Title:
GUARANTORS: Cluett American Investment Corp.,
a Delaware corporation
By:
Name:
Title:
Cluett American Group, Inc.,
a Delaware corporation
By:
Name:
Title:
CONSUMER DIRECT CORPORATION,
a Delaware corporation
By:
Name:
Title:
ARROW FACTORY STORES, INC.,
a Delaware corporation
By:
Name:
Title:
[Signatures Continued]
<PAGE>
GAKM RESOURCES CORPORATION,
a Delaware corporation
By:
Name:
Title:
CLUETT PEABODY RESOURCES CORPORATION,
a Delaware corporation
By:
Name:
Title:
CLUETT PEABODY HOLDING CORP.,
a Delaware corporation
By:
Name:
Title:
CLUETT, PEABODY & CO., INC.,
a Delaware corporation
By:
Name:
Title:
BIDERTEX SERVICES INC.,
a Delaware corporation
By:
Name:
Title:
[Signatures Continued]
<PAGE>
GREAT AMERICAN KNITTING MILLS, INC.,
a Delaware corporation
By:
Name:
Title:
CLUETT DESIGNER GROUP, INC.,
a Delaware corporation
By:
Name:
Title:
BIDERMANN TAILORED CLOTHING, INC.,
a Delaware corporation
By:
Name:
Title:
LENDERS: NATIONSBANK, N. A.
By:
Name:
Title:
NATIONAL WESTMINSTER BANK PLC
By:
Name:
Title:
FLEET BANK, N.A.
By:
Name:
Title:
BANKBOSTON, N.A.
By:
Name:
Title:
SANWA BUSINESS CREDIT CORPORATION
By:
Name:
Title:
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By:
Name:
Title:
By:
Name:
Title:
<PAGE>
FIRST SOURCE FINANCIAL LLP,
By: First Source Financial Inc., its manager
By:
Name:
Title:
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
Name:
Title:
SUMMIT BANK
By:
Name:
Title:
MARINE MIDLAND BANK
By:
Name:
Title:
AG CAPITAL FUNDING PARTNERS, L.P.
By: Angelo Gordon & Co., L.P. as Investment
Advisor
By:
Name:
Title:
NEW YORK LIFE INSURANCE COMPANY
By:
Name:
Title:
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By:
Name:
Title:
ML CLO XX PILGRIM AMERICA (CAYMAN) LTD.
By:
Name:
Title:
STRATA FUNDING LTD.
By:
Name:
Title:
SANKATY HIGH YIELD ASSET PARTNERS, L.P.
By:
Name:
Title:
MORGAN STANLEY SENIOR FUNDING, INC.
By:
Name:
Title:
MERRILL LYNCH SENIOR FLOATING
RATE FUND, INC.
By:
Name:
Title:
<PAGE>
SCHEDULE 1.1A-1
ADDITIONAL FINANCIAL INFORMATION
- -------------- ----------- ------------ ------------- -------------
For the For the For the For the For the
Fiscal Fiscal Fiscal Fiscal Fiscal
Quarter Ended Quarter Quarter Quarter Quarter
December 31, Ended Ended Ended Ended
1997 March 28, June 27, September December
1998 1998 26, 1998 31, 1998
- -------------- ----------- ------------ ------------- -------------
The lesser of $2.3
$0.7 million $0.5 $1.1 $3.2 million million and actual
million million lossesof Cluett
Designer Group, Inc.
associated with the
discontinuance of the
Burberrys and Yves
Saint Laurent
licensed product
lines for such fiscal
quarter
- -------------- ----------- ------------ ------------- -------------
Exhibit 10.2.2
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
March 19, 1999, is by and among Cluett American Corp. (the "Borrower"), Cluett
American Investment Corp. (the "Parent"), Cluett American Group, Inc.
("Interco") and the certain subsidiaries of the Parent identified on the
signature pages hereto (together with the Parent and Interco, the "Guarantors"),
the lenders identified on the signature pages hereto (the "Lenders"),
NationsBank, N.A., as agent for the Lenders (in such capacity, the "Agent") and
Gleacher NatWest Inc., as documentation agent (the "Documentation Agent").
W I T N E S S E T H
WHEREAS, the Borrower, the Guarantors, the Lenders, the Agent and the
Documentation Agent have entered into that certain Credit Agreement dated as of
May 18, 1998 and as amended as of May 27, 1998 and December 18, 1998 (as so
amended the "Existing Credit Agreement");
WHEREAS, the parties to the Existing Credit Agreement have agreed to amend
the Existing Credit Agreement as provided herein;
NOW, THEREFORE, in consideration of the agreements hereinafter set forth, and
for other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
PART 1
DEFINITIONS
SUBPART 1.1 Certain Definitions. Unless otherwise defined herein or the
context otherwise requires, the following terms used in this Amendment,
including its preamble and recitals, have the following meanings:
"Amended Credit Agreement" means the Existing Credit
Agreement as amended hereby.
"Amendment No. 3 Effective Date" is defined in Subpart 3.1.
SUBPART 1.2 Other Definitions. Unless otherwise defined herein or the context
otherwise requires, terms used in this Amendment, including its preamble and
recitals, have the meanings provided in the Amended Credit Agreement.
<PAGE>
PART 2
AMENDMENTS TO EXISTING CREDIT AGREEMENT
Effective on (and subject to the occurrence of) the Amendment No. 3 Effective
Date, the Existing Credit Agreement is hereby amended in accordance with this
Part 2. Except as so amended, the Existing Credit Agreement and all other Credit
Documents shall continue in full force and effect.
SUBPART 2.1 Amendments to Section 1.1.
(a) The pricing grid contained in the definition of "Applicable Percentage"
appearing in Section 1.1 of the Existing Credit Agreement is hereby amended and
replaced with the pricing grid set forth below:
<TABLE>
- -----------------------------------------------------------------------------------------
<CAPTION>
Applicable
Percentage For Applicable
Revolving Percentage
Loans and For Tranche B
Tranche A Term Loan
Term Loan
-------------------------------
Applicable Applicable Applicable
Senior Percentage Percentage Percentage
Pricing Leverage For Eurodollar Base Eurodollar Base For for
Level Ratio Unused Loans Rate Loans Rate Standby Trade
Fee Loans Loans Letter of Letter
Credit Fee of Credit Fee
<S> <C> <C> <C> <C> <C> <C> <C> <C>
I >2.50 1/2% 2-1/2% 1-1/2% 3% 2% 2-1/4% 1-1/8%
to
1.00
- ------------------------------------------------------------------------------------------
II <2.50 1/2% 2-1/4% 1-1/4% 2-3/4% 1-3/4% 2% 1%
-
to
1.00
but >
-
2.00
to
1.00
- -----------------------------------------------------------------------------------------
III <2.00 3/8% 2% 1% 2-1/2% 1-1/2% 1-3/4% 7/8%
to
1.00
but >
-
1.75
to
1.00
- ----------------------------------------------------------------------------------------
IV < 3/8% 1-3/4% 3/4% 2-1/2% 1-1/2% 1-1/2% 3/4%
1.75
to
1.00
========================================================================================
</TABLE>
(b) The definition of "Consolidated EBITDA" appearing in Section 1.1 of the
Credit Agreement is hereby amended and restated in its entirety to read as
follows:
"Consolidated EBITDA" means, for any period, the sum of (i) Consolidated
Net Income for such period, plus (ii) an amount which, in the determination
of Consolidated Net Income for such period, has been deducted for (A)
Consolidated Interest Expense, (B) total federal, state, local and foreign
income, value added and similar taxes, (C) depreciation and amortization
expense, (D) letter of credit fees, (E) non-cash expenses resulting from
the grant of, or the obligation to grant, stock and stock options to
employees of the Parent, the Borrower or any of their respective
Subsidiaries pursuant to a written plan or agreement and (F) step-ups in
inventory valuation as a result of purchase accounting for Permitted
Acquisitions, all as determined in accordance with GAAP; provided, however,
that Consolidated EBITDA for the fiscal quarters ending June 30, 1998,
September 30, 1998 and December 31, 1998 shall be equal to the sum of (i)
the amount determined pursuant to the first clause of this definition for
the one-quarter period, two-quarter period or three-quarter period,
respectively, then ended plus (ii) the aggregate Consolidated EBITDA
Adjustment for each fiscal quarter occurring during such period.
(c) The definition of "Consolidated EBITDA Adjustment" appearing in Section
1.1 of the Credit Agreement is hereby amended and restated in its entirety to
read as follows:
"Consolidated EBITDA Adjustment" means (i) the sum of (A) for each of the
fiscal quarters ending September 30, 1997, December 31, 1997 and March 28,
1998, the amount indicated for Consolidated EBITDA for such fiscal quarter
on Schedule 1.1A, plus (B) for each of the fiscal quarters ending December
31, 1997, March 28, 1998, June 27, 1998, September 26, 1998 and December
31, 1998, the amount indicated for such fiscal quarter on Schedule 1.1A-1
in respect of losses for such period associated with the discontinuance of
the Burberrys and Yves Saint Laurent licensed product lines, and (ii) for
any fiscal quarter after March 28, 1998, the sum of (A) the amount, if any,
of reorganization charges taken during such fiscal quarter in respect of
(1) up to $3.3 million of facility closing and re-engineering costs accrued
by the Borrower and its Subsidiaries prior to the Closing Date, (2) up to
$550,000 of losses accrued by the Borrower and its Subsidiaries on or prior
to December 31, 1998 associated with (x) the Canadian retail operations of
the Borrower and its Subsidiaries and (y) the Mexican and Guatemalan
operations of the Borrower and its Subsidiaries, (3) up to $4.0 million of
bankruptcy reorganization costs incurred by the Borrower and its
Subsidiaries on or prior to the Closing Date, (4) the costs and expenses of
the Parent, the Borrower and its Subsidiaries incurred in connection with
the Recapitalization and (5) up to $700,000 for non-cash facility closing
and re-engineering costs accrued by the Borrower and its Subsidiaries on or
prior to December 31, 1998, plus (B) the amount, if any, of charges taken
during such fiscal quarter in respect of (1) the establishment on or prior
to December 31, 1998 of a litigation reserve of up to $1.6 million and (2)
failed deal costs of up to $500,000 incurred by the Borrower and its
Subsidiaries on or prior to December 31, 1998, in each case calculated in
accordance with GAAP.
(d) The definition of "Excess Cash Flow" appearing in Section 1.1 of the
Credit Agreement is hereby amended and restated in its entirety to read as
follows:
"Excess Cash Flow" means, with respect to any fiscal year period of the
Consolidated Parties on a consolidated basis, an amount equal to (a)
Consolidated EBITDA for such period minus (b) Consolidated Capital
Expenditures for such period minus (c) Consolidated Interest Expense for
such period minus (d) Federal, state and other income taxes payable by the
Consolidated Parties on a consolidated basis in respect of such period
minus (e) Consolidated Scheduled Funded Debt Payments made during such
period minus (f) prepayments applied to the permanent reduction of Funded
Debt of any Consolidated Party; provided that in the case of any revolving
Funded Debt, such prepayment shall correspondingly permanently reduce
commitments with respect thereto, plus/minus (g) changes in non-cash
working capital for such period minus (h) without duplication of any item
included under clause (c) above, Restricted Payments made by the Parent and
the Consolidated Parties during such period to the extent permitted by the
terms of Section 8.7 minus (i) for each of the fiscal quarters ending
December 31, 1997, March 28, 1998, June 27, 1998, September 26, 1998 and
December 31, 1998, the Consolidated EBITDA adjustment referred to in clause
(i)(B) in the definition of "Consolidated EBITDA Adjustment".
SUBPART 2.2 Amendments to Section 7.11. Section 7.11 of the Existing Credit
Agreement is hereby amended and restated in its entirety to read as follows:
7.11 Financial Covenants.
The Credit Parties shall cause:
(a) Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio, as of the
last day of each fiscal quarter of the Consolidated Parties, to be at
least:
(i) for the period from the Closing Date to and
including December 31, 1998, 1.00 to 1.00;
(ii) for the period from January 1, 1999 to and including December
30, 1999, 0.75 to 1.00; and
(iii) for the period from December 31, 1999 and at all times
thereafter, 1.00 to 1.00.
(b) Interest Coverage Ratio. The Interest Coverage Ratio, as of the last
day of each fiscal quarter of the Consolidated Parties, to be greater than
or equal to:
(i) for the period from the Closing Date to and
including December 31, 1998, 1.65 to 1.00;
(ii) for the period from January 1, 1999 to and including December
30, 1999, 1.45 to 1.00;
(iii) for the period from December 31, 1999 to and including March
30, 2000, 1.65 to 1.00;
(iv) for the period from March 31, 2000 to and including December
30, 2000, 1.85 to 1.00;
(v) for the period from December 31, 2000 to and
including December 30, 2001, 2.00 to 1.00;
(vi) for the period from December 31, 2001 to and including
December 30, 2002, 2.25 to 1.00; and
(vii) for the period from December 31, 2002 and at all
times thereafter, 2.50 to 1.00.
(c) Senior Leverage Ratio. The Senior Leverage Ratio, as of the last day of
each fiscal quarter of the Consolidated Parties, to be less than or equal
to:
(i) for the period from the Closing Date to and
including December 31, 1998, 3.25 to 1.00;
(ii) for the period from January 1, 1999 to and including December
30, 1999, 3.75 to 1.00;
(iii) for the period from December 31, 1999 to and including
December 30, 2001, 3.50 to 1.00;
(iv) for the period from December 31, 2001 to and including
December 30, 2002, 3.00 to 1.00;
(v) for the period from December 31, 2002 to and
including December 30, 2003, 2.75 to 1.00; and
(vi) for the period from December 31, 2003 and at all times
thereafter, 2.50 to 1.00.
(d) Total Leverage Ratio. The Total Leverage Ratio, as of the last day of
each fiscal quarter of the Consolidated Parties, to be less than or equal
to:
(i) for the period from the Closing Date to and
including December 31, 1998, 6.50 to 1.00;
(ii) for the period from January 1, 1999 to and including December
30, 1999, 7.00 to 1.00;
(iii) for the period from December 31, 1999 to and including March
30, 2000, 6.25 to 1.00;
(iv) for the period from March 31, 2000 to and including December
30, 2000, 5.50 to 1.00;
(iv) for the period from December 31, 2000 to and including
December 30, 2001, 4.75 to 1.00; and
(v) for the period from December 31, 2001 and at all times
thereafter, 4.00 to 1.00.
SUBPART 2.3 Amendments to Section 7.14. Section 7.14 of the Existing Credit
Agreement is hereby amended and restated in its entirety to read as follows:
7.14Furtherance Assurances.
The Borrower shall use its reasonable best efforts to deliver to the Agent
on or before April 30, 1999 with respect to the leasehold or other
ownership interest of the Borrower in the Austell Property at such time,
such real property documents, instruments and other items of the types
required to be delivered pursuant to Section 5.1(e), in each case in form
and substance reasonably acceptable to the Agent.
SUBPART 2.4 Amendments to Section 8.7. Section 8.7 of the Existing Credit
Agreement is hereby amended and restated in its entirety to read as follows:
8.7 Restricted Payments.
The Credit Parties will not permit the Parent or any Consolidated Party to,
directly or indirectly, declare, order, make or set apart any sum for or
pay any Restricted Payment, except (i) payments and distributions to
consummate the Recapitalization pursuant to the Recapitalization Documents
(a) on the Closing Date or (b) to the extent consisting of the distribution
of the Parity Notes (and interest thereon) and cash in lieu of fractional
amounts thereof, (ii) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests in the Parent held by any
member of the executive management of the Parent and its Subsidiaries,
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Capital Stock shall not exceed $1,000,000 in any fiscal
year, (iii) any payment by the Parent in connection with the repurchase of
outstanding shares of Employee Preferred Stock (or any class of Equity
Interests into which such shares of Employee Preferred Stock are converted)
following the death, termination, disability, retirement or termination or
other separation of employment of any employee that is the beneficial
holder thereof, (iv) payments by any Consolidated Parties to the Parent
pursuant to a tax sharing agreement under which each such Consolidated
Party is allocated its proportionate share of the tax liability of the
affiliated group of corporations that file consolidated federal income tax
returns (or that file state or local income tax returns on a consolidated
basis), (v) the repurchase of Equity Interests of the Parent with the
proceeds of any issuance by the Parent to the Sponsor or its Affiliates or
designated co-investors or any of the officers, directors or employees of
the Parent or a Consolidated Party of any Equity Interests of the Parent,
(vi) to the extent not permitted pursuant to the immediately preceding
clause (v), payments made to or for the benefit of beneficiaries of the
Consolidated Parties' employee bonus plan in lieu of the issuance to or for
the benefit of such beneficiaries of Employee Preferred Stock, provided
that such payments are made with the proceeds of any issuance by the Parent
to the Sponsor or its Affiliates or designated co-investors or any of the
officers, directors or employees of the Parent or a Consolidated Party of
any Equity Interests of the Parent, and (vii) provided that no Default or
Event of Default exists either before or after giving effect thereto, (A)
loans, advances, dividends or distributions by any Consolidated Party to
the Parent not to exceed an amount necessary to permit the Parent to pay
its costs (including all professional fees and expenses) incurred to comply
with its reporting obligations under federal or state laws or in connection
with reporting or other obligations under this Credit Agreement and the
Credit Documents, (B) loans or advances by any Consolidated Party to the
Parent not to exceed an amount necessary to permit the Parent to pay its
interim expenses incurred in connection with any public offering of equity
securities the net proceeds of which are specifically intended to be
received by or contributed or loaned to the Borrower, which, unless such
offering shall have been terminated by the board of directors of the
Parent, shall be repaid to the Borrower promptly out of the proceeds of
such offering and (C) loans, advances, dividends or distributions by any
Consolidated Party to the Parent to pay for corporate, administrative and
operating expenses in the ordinary course of business.
PART 3
CONDITIONS TO EFFECTIVENESS
SUBPART 3.1 Amendment No. 3 Effective Date. This Amendment shall
be and become effective December 30, 1998 (the "Amendment No. 3
Effective Date") when all of the conditions set forth in this Part 3
shall have been satisfied, and thereafter this Amendment shall be
known, and may be referred to, as "Amendment No. 3."
SUBPART 3.1.1 Execution of Counterparts of Amendment. The Agent shall
have received counterparts of this Amendment, which collectively shall have
been duly executed on behalf of each of the Borrower, the Guarantors and
the Required Lenders.
SUBPART 3.1.2 Other Items. The Agent shall have received such other
documents, agreements or information which may be reasonably requested by
the Agent.
PART 4
MISCELLANEOUS
SUBPART 4.1 Representations and Warranties. Borrower hereby represents and
warrants to the Agent and the Lenders that, after giving effect to this
Amendment, (a) no Default or Event of Default exists under the Credit Agreement
or any of the other Credit Documents and (b) the representations and warranties
set forth in Section 6 of the Existing Credit Agreement are, subject to the
limitations set forth therein, true and correct in all material respects as of
the date hereof (except for those which expressly relate to an earlier date).
SUBPART 4.2 Reaffirmation of Credit Party Obligations. Each Credit Party
hereby ratifies the Credit Agreement and acknowledges and reaffirms (a) that it
is bound by all terms of the Credit Agreement applicable to it and (b) that it
is responsible for the observance and full performance of its respective Credit
Party Obligations.
SUBPART 4.3 Amendment Fee. By its execution of this Amendment, the Borrower
agrees to pay an amendment fee (the "Amendment Fee") equal to 0.15% of the
Commitment of each Lender which executes this Amendment on or prior to March 19,
1999. The Amendment Fee shall be due and payable on or before March 30, 1999.
SUBPART 4.4 Cross-References. References in this Amendment to any Part or
Subpart are, unless otherwise specified, to such Part or Subpart of this
Amendment.
SUBPART 4.5 Instrument Pursuant to Existing Credit Agreement. This Amendment
is a Credit Document executed pursuant to the Existing Credit Agreement and
shall (unless otherwise expressly indicated therein) be construed, administered
and applied in accordance with the terms and provisions of the Existing Credit
Agreement.
SUBPART 4.6 References in Other Credit Documents. At such time as this
Amendment No. 3 shall become effective pursuant to the terms of Subpart 3.1, all
references in the Credit Documents to the "Credit Agreement" shall be deemed to
refer to the Credit Agreement as amended by this Amendment No. 3.
SUBPART 4.7 Counterparts/Telecopy. This Amendment may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. Delivery of executed counterparts of this Amendment by telecopy shall
be effective as an original and shall constitute a representation that an
original shall be delivered.
SUBPART 4.8 Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE
A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE
OF NEW YORK.
SUBPART 4.9 Successors and Assigns. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
10
IN WITNESS WHEREOF the Borrower, the Guarantors and the Required Lenders have
caused this Amendment to be duly executed on the date first above written.
BORROWER: CLUETT AMERICAN Corp.
By:
Name:
Title:
GUARANTORS: Cluett American Investment Corp.,
a Delaware corporation
By:
Name:
Title:
Cluett American Group, Inc.,
a Delaware corporation
By:
Name:
Title:
CONSUMER DIRECT CORPORATION,
a Delaware corporation
By:
Name:
Title:
ARROW FACTORY STORES, INC.,
a Delaware corporation
By:
Name:
Title:
GAKM RESOURCES CORPORATION,
a Delaware corporation
By:
Name:
Title:
CLUETT PEABODY RESOURCES CORPORATION,
a Delaware corporation
By:
Name:
Title:
CLUETT PEABODY HOLDING CORP.,
a Delaware corporation
By:
Name:
Title:
CLUETT, PEABODY & CO., INC.,
a Delaware corporation
By:
Name:
Title:
BIDERTEX SERVICES INC.,
a Delaware corporation
By:
Name:
Title:
GREAT AMERICAN KNITTING MILLS, INC.,
a Delaware corporation
By:
Name:
Title:
CLUETT DESIGNER GROUP, INC.,
a Delaware corporation
By:
Name:
Title:
BIDERMANN TAILORED CLOTHING, INC.,
a Delaware corporation
By:
Name:
Title:
LENDERS: NATIONSBANK, N. A.
By:
Name:
Title:
NATIONAL WESTMINSTER BANK PLC
By:
Name:
Title:
FLEET BANK, N.A.
By:
Name:
Title:
BANKBOSTON, N.A.
By:
Name:
Title:
FLEET BUSINESS CREDIT CORPORATION
(successor in interest to Sanwa Business Credit
Corporation)
By:
Name:
Title:
[Signatures Continued]
<PAGE>
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By:
Name:
Title:
By:
Name:
Title:
FIRST SOURCE FINANCIAL LLP,
By: First Source Financial Inc., its manager
By:
Name:
Title:
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
Name:
Title:
SUMMIT BANK
By:
Name:
Title:
MARINE MIDLAND BANK
By:
Name:
Title:
AG CAPITAL FUNDING PARTNERS, L.P.
By: Angelo Gordon & Co., L.P. as Investment
Advisor
By:
Name:
Title:
NEW YORK LIFE INSURANCE COMPANY
By:
Name:
Title:
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By:
Name:
Title:
ML CLO XX PILGRIM AMERICA (CAYMAN) LTD.
By:
Name:
Title:
STRATA FUNDING LTD.
By:
Name:
Title:
SANKATY HIGH YIELD ASSET PARTNERS, L.P.
By:
Name:
Title:
MERRILL LYNCH SENIOR FLOATING
RATE FUND, INC.
By:
Name:
Title:
EATON VANCE SENIOR INCOME TRUST
By:
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
FINANCIAL DATA SCHEDULE
CLUETT AMERICAN CORP.
(DOLLARS IN THOUSANDS)
</LEGEND>
<CIK> 0001064435
<NAME> Cluett American Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,868
<SECURITIES> 0
<RECEIVABLES> 55,248
<ALLOWANCES> (8,462)
<INVENTORY> 74,599
<CURRENT-ASSETS> 128,225
<PP&E> 112,433
<DEPRECIATION> (64,309)
<TOTAL-ASSETS> 220,775
<CURRENT-LIABILITIES> 54,162
<BONDS> 0
0
51,288
<COMMON> 1
<OTHER-SE> (149,046)
<TOTAL-LIABILITY-AND-EQUITY> 220,775
<SALES> 373,123
<TOTAL-REVENUES> 373,123
<CGS> 264,325
<TOTAL-COSTS> 82,442
<OTHER-EXPENSES> 2,131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,355
<INCOME-PRETAX> (36,024)
<INCOME-TAX> 810
<INCOME-CONTINUING> (36,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,834)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
