SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
Date of Report February 17, 1995
PHILLIPS-VAN HEUSEN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-724 13-1166910
(Commission File Number) (IRS Employer Identification Number)
1290 Avenue of the Americas, New York, New York 10104
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 541-5200
Page 1 of 36 pages
<PAGE>
AMENDMENT TO 8-K FILING SUBMITTED MARCH 6, 1995
This amendment to the current report on Form 8-K of Phillips-Van Heusen
Corporation, (the "Company") relating to the Company's acquisition on February
17, 1995 of substantially all of the assets of Crystal Brands, Inc. and
certain of its subsidiaries is being filed to include in said report the
financial statements, pro forma financial information and financial data
schedule required pursuant to Item 7 of this report which were omitted from
the original filing pursuant to Item 7(a)(4) and 7(b)(2) of this report.
ITEM 7. Financial Statements and Exhibits
(a) Financial statements of business acquired.
See page 4 for a listing of the financial statements of the business
acquired submitted as part of this report.
(b) Pro forma financial information.
See page 4 for a listing of the pro forma financial information
submitted as part of this report.
(c) Exhibits:
1. Financial Data Schedule (Incorporated by reference to Exhibit 27 to
the Company's Annual Report on Form 10-K for the fiscal year ended January 29,
1995).
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PHILLIPS-VAN HEUSEN CORPORATION
By Emanuel Chirico
Name: Emanuel Chirico
Title: Vice President
Date: April 28, 1995
3
<PAGE>
INDEX TO FINANCIAL STATEMENTS INCLUDED
AS PART OF ITEM 7
Item 7 - Financial Statements
(a) Financial Statements of Business Acquired
Page
(i) Explanatory Note 5
(ii) Crystal Brands, Inc. (Debtor-In-Possession) Consolidated
Financial Statements 6
(iii) Consent of KPMG Peat Marwick LLP, Independent Auditors 33
(b) Pro forma Financial Statements
(i) Explanatory Note 34
(ii) Phillips-Van Heusen Corporation pro forma Consolidated
Condensed Balance Sheet as of January 29, 1995 35
(iii) Phillips-Van Heusen Corporation pro forma Consolidated
Condensed Statement of Income for the Year Ended
January 29, 1995 36
4
<PAGE>
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED - EXPLANATORY NOTE
The Apparel Group of Crystal Brands, Inc. (the "Acquired Business") was prior
to acquisition an operating division of Crystal Brands, Inc. Accordingly, the
Acquired Business was not a separate reporting entity. Its net assets,
operating results and cash flows are included in the consolidated financial
statements of Crystal Brands, Inc. Due to various other businesses owned,
operated and discontinued by Crystal Brands, Inc. and due to the Crystal
Brands, Inc. January 21, 1994 bankruptcy filing and associated costs and
liabilities related to that filing, the consolidated financial statements of
Crystal Brands, Inc. include various items which are not associated with the
Acquired Business. These unrelated items are segregated in the accompanying
financial statements and are included as discontinued operations,
reorganization items or liabilities subject to compromise. In addition,
allocations of certain costs were made between items associated with the
Acquired Business and items not associated with the Acquired Business.
5
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
ANNUAL FINANCIAL STATEMENTS
For the Fiscal Year Ended December 31, 1994
6
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
Financial Statement Index
December 31, 1994
Independent Auditors' Report
Consolidated Statements of Operations 10
for the years ended December 31, 1994,
January 1, 1994 and January 2, 1993
Consolidated Balance Sheets at 11
December 31, 1994 and January 1, 1994
Consolidated Statements of Cash Flows 12
for the years ended December 31, 1994,
January 1, 1994 and January 2, 1993
Consolidated Statements of Shareholders' Equity (Deficit) 13
for the years ended December 31, 1994,
January 1, 1994 and January 2, 1993
Notes to Consolidated Financial Statements 14
7
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Crystal Brands, Inc.:
We have audited the accompanying consolidated financial statements of Crystal
Brands, Inc. (Debtor-In Possession) and subsidiaries as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Crystal
Brands, Inc. (Debtor-In-Possession) and subsidiaries as of December 31, 1994
and January 1, 1994, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, in January 1994, Crystal Brands, Inc. and
certain subsidiaries filed for reorganization under Chapter 11 of the United
States Bankruptcy Code. Further, as discussed in Note 1 to the consolidated
financial statements, substantially all of the Company's net operating assets
were sold on February 17, 1995 and the Company intends to pursue a Chapter 11
plan of liquidation. The effects of this sale, which management believes will
result in a net gain to the Company, but which is subject to a post-closing
adjustment which is presently undetermined, have not been recognized in the
statements, it is uncertain as to what amount, if any, the Bankruptcy Court
will ultimately recognize for certain unresolved disputed claims of creditors
filed in the Company's Chapter 11 proceedings. Finally, as discussed in Note
19 to the consolidated financial statements, the buyer of the Company's
costume jewelry business, which was sold December 13, 1994, has proposed an
adjustment to reduce the sale price for that business and the ultimate
resolution of this claim is presently uncertain. The consolidated financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
8
<PAGE>
As discussed in Note 4 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for postretirement benefits other
than pensions and the Company has given retroactive effect to the change in
accounting for certain inventories from the last-in, first-out (LIFO) method
to the first-in, first-out (FIFO) method.
KPMG Peat Marwick LLP
March 28, 1995, except as to note 19, which is as of April 11, 1995.
9
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars Except Share Data)
<TABLE>
<CAPTION>
------------- YEAR ENDED--------------
December 31, January 1, January 2,
1994 1994 1993
<S> <C> <C> <C>
Net sales $ 231,010 $ 292,345 $ 307,747
Cost of sales (163,544) (221,655) (227,795)
Gross margin 67,466 70,690 79,952
Selling, general and administrative
expenses (67,008) (84,985) (87,556)
Gain on stock sale and license termination - - 7,774
Operating income (loss) 458 (14,295) 170
Interest expense (2,317) (15,941) (8,893)
Interest income 119 322 627
Loss from continuing operations
before reorganization items, income
taxes and cumulative effect of
change in accounting principle (1,740) (29,914) (8,096)
Reorganization items:
Professional fees and administrative
expenses (8,897) - -
Loss on disposal of facility (2,992) - -
Provision for closing of retail stores (2,426) - -
Provision for rejected executory contracts (582) - -
Write-off of unamortized debt issue costs (3,812) - -
Gain on rejected executory contracts for
which liabilities had been previously
accrued 5,484 - -
Interest earned on accumulated cash
resulting from Chapter 11 proceedings 782 - -
Total reorganization items (12,443) - -
Loss from continuing
operations before income taxes and
cumulative effect of change in
accounting principle (14,183) (29,914) (8,096)
Income tax (provision) benefit (558) (303) 1,971
Loss from continuing operations before
cumulative effect of change in
accounting principle (14,741) (30,217) (6,125)
Discontinued operations, net of income tax:
Operating income (loss) 9,063 (90,456) (24,295)
Gain (loss) on disposition 6,728 (82,000) (45,782)
Income (loss) before cumulative effect
of change in accounting principle 1,050 (202,673) (76,202)
Cumulative effect on prior years of change
in accounting for post-retirement benefits - (13,443) -
Net income (loss) $ 1,050 $(216,116) $ (76,202)
Per share information:
Loss from continuing operations
before cumulative effect of change in
accounting principle $ (1.61) $ (3.32) $ (0.67)
Discontinued operations, net of income tax:
Operating income (loss) 0.99 (9.92) (2.67)
Gain (loss) on disposition 0.74 (8.99) (5.02)
Income (loss) before cumulative effect of
change in accounting principle 0.12 (22.23) (8.36)
Cumulative effect on prior years of change in
accounting for post-retirement benefits - (1.47) -
Net income (loss) $ 0.12 $ (23.70) $ (8.36)
Average shares outstanding 9,117,664 9,117,440 9,116,818
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
10
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
December 31, January 1,
1994 1994
ASSETS
Cash and cash equivalents $ 109,998 $ 13,519
Receivables, net 21,187 38,298
Inventories 32,054 91,383
Other current assets 3,429 12,045
Total current assets 166,668 155,245
Property, plant and equipment, net 11,545 36,122
Goodwill, net 28,119 28,948
Trademarks, tradenames and patents, net 21,036 21,660
Other non-current assets 9,475 6,462
Total assets $ 236,843 $ 248,437
LIABILITIES
Liabilities not subject to compromise:
Short-term debt and current portion
of long-term debt $ - $ 266,461
Accounts payable and accrued liabilities 21,930 46,931
Total current liabilities 21,930 313,392
Non-current liabilities 17,345 27,164
Liabilities subject to compromise (a) 290,382 -
Total liabilities 329,657 340,556
SHAREHOLDERS' DEFICIT
Capital stock:
Cumulative preference stock, no par
value, 1,000,000 shares authorized - -
Common stock, no par value,
18,000,000 shares authorized 9,126 9,126
Paid-in surplus 179,802 179,802
Retained deficit (281,867) (282,917)
Cumulative translation adjustments 125 1,870
Total shareholders' deficit (92,814) (92,119)
COMMITMENTS AND CONTINGENCIES - -
Total liabilities and shareholders'
deficit $ 236,843 $ 248,437
(a) Liabilities subject to compromise
consist of the following:
Insurance company term loan, 12.76% $ 54,197
Insurance company term loan, 13.90% 17,343
Insurance company revolving credit
facility, 13.0% 31,363
Bank term loan, 10.5% 117,662
Bank revolving credit facility, 10.5% 48,000
Trade and other miscellaneous claims 21,817
$ 290,382
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
------------- YEAR ENDED--------------
December 31, January 1, January 2,
1994 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,050 $(216,116) $(76,202)
Adjustments to reconcile net income
(loss) to net cash used for operating
activities:
Depreciation and amortization 6,572 13,166 19,406
Reorganization items 12,443 - -
Non-current liabilities (1,090) 3,617 (31,606)
Loss (gain) on disposition (6,728) 82,000 66,136
Write-off of goodwill, trademarks,
tradenames and patents - 51,108 -
Cumulative effect on prior years of
change in accounting principle - 13,443 -
Gain on stock sale and license
termination - - (7,774)
Changes in current assets and liabilities,
net of effects from dispositions of
businesses and reorganization activities:
Decrease (increase) in receivables, net (2,116) 24,660 18,800
Decrease in inventories 26,170 53,462 23,836
Decrease (increase) in other assets 5,388 10,886 (118)
Increase (decrease) in accounts payable
and accrued liabilities 9,271 (42,482) (47,350)
Other (4,542) 4,134 (1,659)
Cash provided by (used for) operating
activities before reorganization items 46,418 (2,122) (36,531)
NET CASH USED FOR REORGANIZATION ACTIVITIES (5,265) - -
INVESTING ACTIVITIES:
Capital expenditures (3,561) (1,503) (3,642)
Proceeds from:
Sale of Costume Jewelry Business 62,340 - -
Sale of Evan-Picone trademark - 30,500 -
Sale of property, plant and equipment - 7,336 -
Redemption of life insurance policies - 3,064 -
Sale of Men's Tailored Clothing Business - - 36,104
Stock sale and license termination - - 30,000
Decrease in 50% owned affiliate - - 541
Cash provided by investing activities 58,779 39,397 63,003
FINANCING ACTIVITIES:
Decreases (increases) in:
Debtor-in-possession credit facility:
Proceeds 8,554 - -
Repayments (8,554) - -
Pre-petition debt prior to reorganization
proceedings:
Proceeds - 7,000 45,206
Repayments (1,708) (38,246) (73,170)
Issuance of capital stock - 2 -
Dividends paid - - (820)
Cash used for financing activities (1,708) (31,244) (28,784)
Foreign currency adjustments (1,745) (186) (1,134)
Net increase (decrease) in cash and
cash equivalents 96,479 5,845 (3,446)
Cash and cash equivalents:
At beginning of period 13,519 7,674 11,120
At end of period $ 109,998 $ 13,519 $ 7,674
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
12
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(In Thousands of Dollars Except Share Data)
<TABLE>
<CAPTION>
COMMON STOCK Retained Cumulative Treasury Stock
Shares Paid-In Earnings Translation (At Cost)
Issued Amount Surplus (Deficit) Adjustments Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
December 28, 1991 9,116,551 $ 9,123 $ 180,166 $ 9,401 $ 3,190 (287) $ (7)
Net loss - - - (76,202) - - -
Dividends - - (364) - - - -
Issuance of
restricted stock 800 8 - - - - -
Foreign currency
adjustments - - - - (1,134) - -
January 2, 1993 9,117,351 9,131 179,802 (66,801) 2,056 (287) (7)
Net loss - - - (216,116) - - -
Issuance of
restricted stock 600 2 - - - - -
Foreign currency
adjustments - - - - (186) - -
January 1, 1994 9,117,951 9,133 179,802 (282,917) 1,870 (287) (7)
Net income - - - 1,050 - - -
Foreign currency
adjustments - - - - (1,745) - -
December 31, 1994 9,117,951 $ 9,133 $ 179,802 $ (281,867) $ 125 (287) $ (7)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 1: SUBSEQUENT EVENT
On February 17, 1995, Crystal Brands, Inc. (the "Company") sold substantially
all of its net operating assets (excluding cash and cash equivalents) to
Phillips-Van Heusen Corporation ("Phillips") for a cash purchase price of
$114,711, subject to certain post-closing adjustments, which are presently
undetermined. The assets sold comprise the Company's apparel and retail
businesses and include its Gant, Izod and Salty Dog trademarks. The sale is
expected to result in a gain for the Company.
As the Company does not have an active trade or business, it will propose a
Chapter 11 plan pursuant to which it will liquidate its remaining assets and
distribute cash to its creditors.
NOTE 2: PROCEEDINGS UNDER CHAPTER 11 AND GOING CONCERN PRESENTATION
On January 21, 1994 (the "Petition Date"), the Company and each of its
domestic, wholly-owned operating subsidiaries, (collectively the "Debtors")
filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court for the Southern District of New
York. Each of the Company and such subsidiaries is in possession of its
properties and is maintaining and operating its business as a
debtor-in-possession.
During 1992 and 1993, the Company experienced significant cash flow
difficulties as well as significant losses from operations. At December 28,
1991, the Company was not in compliance with the terms of it loan agreements.
In order to rectify such noncompliance, the Company entered into an Amended
and Restated Credit Agreement dated as of February 3, 1992 (the "February
1992 Credit Agreement") with a consortium of banks which amended and restated
the prior credit agreement covering the Company's revolving credit facility,
its bank term loan and consolidated certain banker's acceptance commitments.
The Company also amended its senior notes to make the financial covenants
consistent with those of the February 1992 Credit Agreement.
Subsequent to entering into the February 1992 Credit Agreement, the Company
encountered further difficulties in meeting its working capital requirements
through cash flow from operations and its available borrowing capabilities.
In November, 1992, as more fully described in Note 14, the Company entered
into a new credit agreement (the "November 1992 Credit Agreement"), with a
consortium of banks and insurance company lenders which amended and restated
the February 1992 Credit Agreement and consolidated its obligations; including
the Company's senior notes to its insurance company lenders. Borrowings under
the November 1992 Credit Agreement are guaranteed by all of the Company's
domestic subsidiaries and secured by substantially all of the Company's
and such subsidiaries assets, except inventories. On March 23, 1993, the
Company and its lenders amended the November 1992 Credit Agreement to relax,
at the Company's option, under certain circumstances, the Company's minimum
consolidated net worth and earnings before interest, taxes, depreciation and
amortization ("EBITDA") covenants. On July 1, 1993, the Company exercised
such option.
On October 12, 1993, the Company and its lenders amended the November 1992
Credit Agreement to lower the minimum consolidated net worth covenant for the
months of October and November 1993. In addition, the lenders waived the
Company's failure to comply with the EBITDA covenant for the fiscal quarter
ended October 2, 1993. On November 8, 1993, the November 1992 Credit
Agreement was further amended to relax the compliance standards of the
EBITDA and consolidated net worth and "clean down" covenants through the year
ended January 1, 1994. The "clean down" covenant required the Company to
reduce its borrowing under the revolving credit facility for a period of
thirty consecutive days during the 1993 fiscal year.
On February 17, 1994, the U.S. Bankruptcy Court for the Southern District of
New York approved a debtor-in-possession credit facility (refer to Note 14).
On February 17, 1995, the debtor-in-possession credit facility was terminated.
14
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 2: PROCEEDINGS UNDER CHAPTER 11 AND GOING CONCERN PRESENTATION
(Continued)
In general, as of the Petition Date, litigation against the debtors has been
stayed and prepetition indebtedness and other contractual obligations may not
be enforced against the debtors without permission of the Bankruptcy Court.
In addition, the debtors may reject prepetition executory contracts and lease
obligations, and parties affected by these rejections may file claims with the
bankruptcy court. Substantially all liabilities as of the Petition Date are
stayed pending the outcome of the bankruptcy proceedings.
Under Chapter 11, the filed companies cannot pay claims which arose prior to
the filing of the petitions for relief under the federal bankruptcy laws
outside of the plan of reorganization or without specific Bankruptcy Court
authorization. These claims, which are expected to be settled as part of a
plan of reorganization, are reflected in the December 31, 1994 consolidated
balance sheet as liabilities subject to compromise. Certain claims have been
accrued subsequent to the petition date resulting primarily from the rejection
of leases.
Additional claims may arise as a result of the additional rejections of
executory contracts, including leases, or from the determination by the
Bankruptcy Court (or agreement by the Company as approved by the Bankruptcy
Court) of allowed claims for contingencies and other disputed amounts that are
not included in the debtors' books and records. The filed companies have
received approval from the Bankruptcy Court to pay certain of their
pre-petition obligations.
As part of the Chapter 11 reorganization process, the filed companies believe
they have notified all known or potential claimants for the purpose of
identifying all pre-petition claims. Most claimants had until September 9,
1994 (the "Bar Date") to file claims or be barred from asserting them. The
filed companies and claimants may agree, negotiate or litigate the value of
claims. This claims process, which is underway and which has resulted in the
Bankruptcy Court expunging a number of claims, and the Company's agreement as
to the validity of a number of open claims, may result in adjustments to the
liabilities of the Company as reported in these consolidated financial
statements.
The Bar Date for filing claims in the debtor's Chapter 11 proceedings was
September 9, 1994. Claims filed by creditors and scheduled by the filed
companies, excluding intercompany claims of $1,367,033, claims related to the
Company's term-loan and revolving credit facility and claims for which amounts
were not specified, were $270,000. Through December 31, 1994, claims of
approximately $62,000 have been objected to and these claims were expunged by
the Bankruptcy Court on January 13, 1995. Subsequent to year-end, claims of
approximately $1,000 were withdrawn and a second omnibus objection to claims
totaling $5,000 has been filed with the Bankruptcy Court. The remaining
claims of $202,000 include multiple claims of $12,700, as amended by the
Trustees of the International Ladies' Garment Workers Union ("ILGWU")
Retirement Fund related to the Company's potential withdrawal liability, which
have been submitted against all Debtors, for a total ILGWU Pension Plan claim
of $152,500 (see Note 13). The remaining claims of approximately $49,000,
include unresolved disputed claims of $28,000, which relate primarily to
matters presently involved in litigation. The Company is continuing the
process of reviewing the validity, completeness, accuracy and amounts of the
claims. Management believes that the amounts recorded in the accompanying
consolidated financial statements are reasonable estimates of the Company's
liabilities. However, given the nature of reorganization proceedings, it is
uncertain as to what amount, if any, the Bankruptcy Court will ultimately
recognize for the presently unresolved claims.
The Company has accounted for and reported all transactions related to the
reorganization proceedings in accordance with the AICPA's Statement of
Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code.
15
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 2: PROCEEDINGS UNDER CHAPTER 11 AND GOING CONCERN PRESENTATION
(Continued)
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 proceedings, and the sale of certain
asset to Phillips, such realization of assets and liquidation of liabilities
are subject to uncertainty. Further, confirmation of a plan of reorganization
could materially change the amounts and classifications reported in the
consolidated historical financial statements, which do not give effect to any
adjustments to the carrying value of assets or amounts of liabilities that
might be necessary as a consequence of the confirmation of a plan of
reorganization. The appropriateness of using the going concern basis is
dependent upon, among other things, confirmation of a plan of reorganization.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
The Business of the Company consists of the production and sale of apparel.
The Company operates in one industry segment.
Most of the Company's customers are department and specialty stores located in
the United States. In the normal course of business, the Company extends
credit on open account to its customers after a credit analysis based on
certain financial criteria.
A. Principles of Consolidation
The consolidated financial statements include the accounts of the parent
Company and subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
B. Cash and Cash Equivalents
Cash equivalents are recorded at cost, which approximates market, and consist
primarily of U.S. government securities, commercial paper and certificates of
deposit with original maturities of three months or less. At December 31,
1994, $68,561 was restricted in connection with the sale of assets.
C. Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out ("FIFO") method or the retail inventory method. See Note 4 for
change in accounting for inventories.
D. Property, Plant, Equipment and Depreciation
Plant and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets. Leasehold improvements are amortized on
a straight-line basis over the shorter of the lease term or the useful lives.
Accelerated depreciation methods are used for tax purposes.
16
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
(Continued)
E. Amortization of Intangibles
Goodwill and trademarks, trade names and patents are as follows:
December 31, 1994 January 1, 1994
Trademarks, Trademarks,
trade names trade names
Goodwill & patents Goodwill & patent s
Subject to 40 year straight
line amortization $ 33,094 $ 24,757 $ 33,094 $ 24,757
Less:
accumulated amortization (4,975) (3,721) (4,146) (3,097)
$ 28,119 $ 21,036 $ 28,948 $ 21,660
Amortization expense $ 829 $ 624 $ 1,998 $ 1,859
It is the Company's policy to account for goodwill and other intangible assets
at the lower of amortized cost or fair value. Management reviews the
valuation and amortization of intangibles on an ongoing basis taking into
consideration events and circumstances which may have diminished their value.
In 1993, the Company made the decision to write off all intangibles related to
the costume jewelry business. The write off of goodwill and trademarks, trade
names and patents amounted to $47,084 and $4,024 (net of accumulated
amortization of $3,168 and $8,224), respectively.
Also in 1993, the sale of the Evan-Picone trademark and discontinuation of the
related women's career apparel business resulted in the write off of goodwill
and trademarks, trade names, and patents of $42,777 and $31,973 (net of
accumulated amortization of $5,421 and $4,055) respectively.
In 1992, discontinued operations and the sale of assets resulted in the write
off of goodwill and trademarks, trade names and patents of $15,332 and $10,365
(net of accumulated amortization of $1,489 and $1,104), respectively.
F. Revenue Recognition
Sales are recognized at the time an order is shipped. The Company provides
for estimated returns at the time of sale. Income from licensing agreements
is recognized when earned.
G. Income Taxes
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities.
H. Income (Loss) Per Share
Income (loss) per share of common stock is computed based on the
weighted-average number of common shares outstanding during the period
reported. No effect has been given to outstanding stock options as they are
anti-dilutive.
17
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
(Continued)
I. Foreign Currency Translation
For foreign operations, local currencies are considered the functional
currency. Assets and liabilities are translated using the exchange rates in
effect at the balance sheet date. Results of operations are translated using
the average exchange rates prevailing throughout the period. Translation
effects are accumulated as part of cumulative translation adjustments in
shareholders' deficit. Gains and losses from foreign currency transactions
are included in operating results.
J. Statements of Cash Flows
Supplemental disclosures of cash flow information for 1994, 1993 and 1992,
respectively, are as follows: $190, $778 and $1,815, for income taxes paid;
and $3,052, $32,495 and $44,629, for interest paid.
K. Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31. The
1994 and 1993 fiscal years reflect 52 week periods. The 1992 fiscal year
reflects a 53 week period.
L. Fair Value of Financial Instruments
The carrying amounts of cash, receivables, net and accounts payable
approximate fair value because of the short maturity of these items.
Because of the bankruptcy filing, the Company is unable to determine the fair
value of its debt obligations.
NOTE 4: ACCOUNTING CHANGES
A. Inventories
Effective January 3, 1993, the Company adopted the first-in, first-out
("FIFO") method of valuing inventories previously valued using the last-in,
first-out ("LIFO") method. The LIFO method was used to value approximately
52% of total inventories at January 2, 1993. The LIFO method had been adopted
during a period of rising costs, particularly with respect to certain raw
materials. Presently, the Company is experiencing nominal inflation and, as
such, believes that the FIFO method will more closely match revenues and
expenses. The use of the LIFO method has resulted in reporting inventories at
amounts less that their current replacement cost. Accordingly, the Company
believes that valuation of its inventories using the FIFO method more
appropriately reflects its financial condition. The FIFO method, which is
predominant in the apparel industry, is now used for all of the Company's
inventories.
In accordance with generally accepted accounting principles, this change has
been applied retroactively, and amounts for prior periods have been restated.
As a result of this change, the net loss for 1992 was increased by $946, or
$0.10 per share.
18
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 4: ACCOUNTING CHANGES
(Continued)
B. Postretirement Benefits Other Than Pensions
The Company provides health care and life insurance benefits for certain
retired employees. Employees may become eligible for these benefits if they
meet minimum age and service requirements and are eligible for retirement
benefits. Retirees who elect to receive this coverage provide contributions
to defray a portion of its cost. Effective January 3, 1993, the Company
adopted an amendment to the plan which eliminates medical coverage for
Medicare eligible employees who retire after January 1, 1995. For retirees
after that date who are not yet eligible for Medicare, it limits the Company's
cost to a flat monthly amount based on years of service. The Company has the
right to further modify or to terminate these benefits.
Effective January 3, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106"). SFAS 106 requires that the
expected cost of postretirement health care and life insurance benefits be
recognized during the years that covered participants are employed. Prior to
adoption of this standard, such costs were charged to expense on a
"pay-as-you-go" basis. The Company has elected to adopt this standard on the
immediate recognition basis. As a result, a one-time, non-cash charge of
$13,443, or $1.47 per share, was recorded in 1993.
NOTE 5: DISCONTINUED OPERATIONS
A. Sale of Costume Jewelry Business
On December 13, 1994, the Company consummated the sale of substantially all of
the assets of its costume jewelry business to The Monet Group, Inc. (the
"Purchaser"), a corporation formed by Chemical Venture Partners, Rainwater,
Inc. and an affiliate of Raymond Chambers, for $62,340 in cash, subject to a
post-closing adjustment (refer to Note 19). The purchase price was determined
based upon arm's-length negotiations between the Company and the Purchaser.
The assets sold included the trademarks "Monet," "Trifari" and "Marvella," and
two manufacturing facilities located in Pawtucket and East Providence, Rhode
Island. A third manufacturing facility, located in Warwick, Rhode Island,
will be leased to the Purchaser for nine months, with an option to renew for
an additional fifteen months, for a nominal amount of rent, and all costs
relating to such facility during the term of the lease will be borne by the
Purchaser.
In connection with the transaction, the Company recorded a gain of $6,728 or
$0.74 per share. No income taxes resulted from the gain. Results of the
costume jewelry business have been classified as discontinued operations and
prior periods have, accordingly, been restated.
Net sales of the costume jewelry business were $134,924, $151,957 and $179,146
in 1994, 1993 and 1992 respectively.
Operating income of the costume jewelry business for 1994 was $9,063 (net of
income tax provision of $9). Operating loss was $88,123 and $10,841 (net of
no tax benefit in 1993 and income tax benefit of $4,116 in 1992).
The 1993 loss includes a write off of $51,108 for goodwill and trademarks,
trade name and patents and a charge of $10,000 principally for severance and
consolidation and reorganization of the sales and manufacturing function. The
aforementioned operating income and loss amounts are net of allocation of
general corporate interest expense of $1,692, $15,177 and $16,086 for 1994,
1993 and 1992, respectively. Interest was allocated based on net assets of
the costume jewelry business.
19
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 5: DISCONTINUED OPERATIONS
(Continued)
B. Sale of Evan-Picone Trademark
On November 3, 1993, the Company consummated the sale of its Evan-Picone
trademark and related trademark licenses to a subsidiary of Jones Apparel
Group, Inc., for $30,500 in cash and future contingent payments equal to 2% of
net annual sales of Evan-Picone womenswear in excess of $20,000 during the
ten-year period ending December 31, 2003. No income was recorded in
1994. The business of design, sourcing and sale of women's career apparel
previously sold under this trademark has been discontinued allowing the
Company to realize additional cash from its investment in the related working
capital.
In connection with the transaction, the Company recorded a provision of
$82,000 or $8.99 per share to recognize the loss resulting from the write off
of goodwill and trademarks associated with the business as well as to provide
for the cost of exiting the Evan-Picone women's career apparel business
("Evan-Picone Womenswear Business"). The Evan-Picone Womenswear Business has
been classified as a discontinued operation.
Net sales of the Evan-Picone Womenswear Business were $59,072 and $102,129, in
1993 and 1992, respectively.
Operating loss of the Evan-Picone Womenswear Business was $2,333 and $13,473
(net of income tax provision of $59 in 1993 and income tax benefit of $4,916
for 1992). The aforementioned operating loss amounts are net of allocations
of general corporate interest expense of $3,104 and $4,767 for 1993 and 1992,
respectively. Interest was allocated based on net assets of the Evan-Picone
Womenswear Business.
C. Sale of Men's Tailored Clothing Business
On October 20, 1992, the Company consummated the sale of its men's and boy's
tailored clothing business (Men's Tailored Clothing Business") to Plaid
Holdings Corp. ("Plaid"). The transaction consisted of the sale of
substantially all of the assets of the Men's Tailored Clothing Business,
excluding accounts receivable, and the assumption by Plaid of certain
liabilities relating to such assets.
The aggregate consideration for the disposition was (i) $47,902 (inclusive of
$26,596 of retained accounts receivable) and (ii) future royalty income
payable by Plaid under licenses granted to use certain trademarks in
connection with the sale and distribution of men's and boys' tailored clothing
and related accessories. Of the $47,902 purchase price, $14,181 was paid to
the Company in cash at closing and $6,125 was deposited into escrow (of which
$5,875 has been released to the Company) pending the determination of certain
environmental matters and to fund the payment of certain retained liabilities.
As part of the transaction, Plaid agreed to pay royalties pursuant to
perpetual, exclusive licenses to use the Evan-Picone and Gant trademarks on
various items of men's and boys' tailored clothing. The terms of the
Evan-Picone license provide for the payment (for a minimum period of fifteen
years) of annual royalties of $1,200 plus 0.75% of net sales of licensed men's
and boys' tailored clothing. This license was transferred to a subsidiary of
Jones Apparel Group, Inc. in connection with the sale of the Evan-Picone
trademark. The terms of the Gant license provide for the payment to the
company (for a minimum period of fifteen years) of annual royalties equal to
1% of net sales of licensed boys' tailored clothing and 2% of sales of
licensed men's tailored clothing.
20
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 5: DISCONTINUED OPERATIONS
(Continued)
In connection with the transaction, the Company recorded a provision for
disposition of $66,136, primarily to write down intangible assets and certain
property, plant and equipment. Net of income taxes, such provision was
$45,782, or $5.02 per share. Results of the Men's Tailored Clothing Business
have been classified as discontinued operations.
Net sales of the Men's Tailored Clothing Business were $146,487 during 1992.
Operating income of the Men's Tailored Clothing Business was $19 (net of
income tax provision of $251) for 1992. The aforementioned operating income
is net of allocations of general corporate interest expense of $5,911.
Interest was allocated based on net assets of the Men's Tailored Clothing
Business.
NOTE 6: SALE OF LACOSTE ALLIGATOR S.A.
On July 23, 1992, the Company sold its 50% stock interest in Lacoste Alligator
S.A. ("Lacoste Alligator") to Sporloisirs S.A., the other 50% stockholder, and
terminated the Company's exclusive license in the U.S., Canada and the
Caribbean to produce, market and sell products bearing the Lacoste name and
the "crocodile" emblem effective June 30, 1993. The aggregate consideration
for the stock sale and license termination was $31,500, of which $30,000 was
received at closing. The proceeds were used for working capital purposes.
The Company recognized a gain on the stock sale and license termination
amounting to $7,774, net of reserves, charges and related costs of exiting a
business, including severance, inventory disposition and other disposal costs
as well as provision for a loss on the sale of the Company's knitting and
dyeing facility located in High Point, North Carolina.
Net sales of Lacoste products were $8,188 and $45,411 for 1993 and 1992,
respectively.
Equity income on investment in Lacoste Alligator recognized was $477 in 1992.
Dividends received from Lacoste Alligator were $642 in 1992. Interest paid to
Lacoste Alligator was $20 in 1992.
NOTE 7: RECEIVABLES, NET
Accounts receivable, net are stated net of allowances for discounts, sales,
returns, and doubtful accounts of $7,462 at December 31, 1994 and $18,302 at
January 1, 1994.
NOTE 8: INVENTORIES
Inventories are classified as follows:
December 31, January 1,
1994 1994
At lower of first-in, first-out (FIFO)
cost or market:
Raw materials $ 173 $ 11,321
Work in process - 9,113
Finished goods 31,881 70,949
$ 32,054 $ 91,383
21
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 9: PROPERTY, PLANT, AND EQUIPMENT
The components of property, plant and equipment are as follows:
December 31, January 1,
1994 1994
At cost:
Property $ 18 $ 3,261
Plant 13,545 35,470
Equipment 15,164 46,758
28,727 85,489
Less: accumulated depreciation (17,182) (49,367)
$ 11,545 $ 36,122
Depreciation expense was $5,119, $7,461 and $12,838 for 1994, 1993 and 1992,
respectively.
NOTE 10: SUPPLEMENTARY FINANCIAL STATEMENTS DETAIL
Information regarding other current assets, current liabilities and noncurrent
liabilities is as follows:
December 31, January 1,
1994 1994
Current Assets
Other current assets:
Prepaid expenses $ 1,803 $ 4,110
Net assets held for sale - 700
Retained accounts receivable of
discontinued operations, net - 5,359
Remainder of Men's Tailored Clothing
Business Purchase Price held in escrow - 250
Tax refund claim 1,626 1,626
Total other current assets $ 3,429 $ 12,045
Current Liabilities
Accounts payable and accrued liabilities:
Accounts payable $ 6,401 $ 12,944
Accrued expenses 9,438 23,134
Accrued interest - 105
Accrued payroll 5,102 9,374
Other accrued liabilities 989 1,374
Total accounts payable and
accrued liabilities $ 21,930 $ 46,931
Noncurrent Liabilities:
Postretirement benefits $ 17,236 $ 16,992
Other noncurrent liabilities 109 10,172
Total noncurrent liabilities $ 17,345 $ 27,164
22
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 11: EMPLOYEE BENEFIT PLANS
A. Pension Plan
The Company has a qualified defined benefit pension plan covering
substantially all salaried and non-union hourly paid employees. The employee
benefits under the plan are based primarily on years of service and
remuneration near retirement. Net periodic pension cost includes the
following:
Net Periodic Pension Cost 1994 1993 1992
Service Cost - benefits earned
during the period $ 1,905 $ 2,597 $ 3,154
Interest cost on projected benefit
obligation 4,225 4,227 4,300
Actual return on pension plan assets 1,023 (7,315) (4,866)
Net amortization and deferrals (6,699) 1,766 (997)
Net periodic pension cost $ 454 $ 1,275 $ 1,591
The following assumptions were used to determine pension information:
Pension Assumptions 1994 1993 1992
Discount rate for pension obligation 8.8% 7.5% 8.0%
Salary progression rate for pension
obligation 6.0% 4.8% 5.3%
Salary progression rate for pension
expense 4.8% 5.3% 5.3%
Rate of return on plan assets 8.5% 9.0% 9.0%
The actuarial method used was the projected unit credit method. For funding
purposes, the Company follows the policy of funding the minimum contribution
required by ERISA.
23
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 11: EMPLOYEE BENEFIT PLANS (Continued)
The following table sets forth the plan's funded status and an analysis of the
prepaid pension cost recognized in the Company's balance sheets:
December 31, January 1,
Funded Status and Prepaid Pension Cost 1994 1994
Actuarial present value of benefit
obligations:
Vested benefit obligation $(46,527) $(50,391)
Accumulated benefit obligation $(48,692) $(53,163)
Projected benefit obligation $(50,295) $(57,681)
Plan assets at fair market value* 57,659 61,772
Plan assets in excess of projected
benefit obligation 7,364 4,091
Unrecognized net loss 403 1,198
Prior service cost not yet recognized
in net periodic pension cost 190 (154)
Unrecognized net transition asset (2,494) (3,055)
Prepaid pension cost included in
other non-current assets $ 5,463 $ 2,080
* The plan's assets consist of common stocks, bonds and short-term
investments.
B. Voluntary Investment Plan
The Company's salaried employees may contribute to the Crystal Brand's
Voluntary Investment Plan ("VIP"), a defined contribution benefit plan
qualified under section 401(a) of the Internal Revenue Code. Participant
contributions are made under section 401(k) of the Internal Revenue Code.
Under the VIP, participants may contribute from 1% to 15% of their earnable
compensation. Participant contributions from 1% to 5% may be supplemented by
matching contributions from the Company at a rate determined by the
Compensation Committee of the Board of Directors based on the Company's
financial performance for the year. Total Company matching contributions were
$129 for 1992. During February, 1992, the Company elected to discontinue
Company matching contributions into the VIP.
C. Postretirement Benefits
In addition to providing pension and other supplemental benefits, certain
health care and life insurance benefits are provided for certain retired
employees. Employees may become eligible for these benefits if they meet
minimum age and service requirements and are eligible for retirement benefits.
Retirees who elect to receive this coverage provide contributions to
defray a portion of the cost. Effective January 3, 1993, the Company adopted
an amendment to the plan which eliminates medical coverage for Medicare
eligible employees who retire after January 1, 1995. For retirees after that
date who are not yet eligible for Medicare, it limits the Company's cost to a
flat monthly amount based on years of service. The Company has the right to
further modify or to terminate these benefits.
24
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 11: EMPLOYEE BENEFIT PLANS (Continued)
C. Postretirement Benefits (Continued)
Net periodic postretirement benefit cost, includes the following:
December 31, January 1,
1994 1994
Benefits earned during the period $ 106 $ 100
Interest on accumulated post-
retirement benefit obligation 1,216 1,273
Total cost $ 1,322 $ 1,373
Prior to 1993, such benefits were expensed as paid and totaled approximately
$781 for 1992.
The following table set forth the actuarial and recorded liabilities for
postretirement health care and life insurance benefits for certain retired
employee, none of which have been funded:
Accumulated postretirement benefit obligation:
December 31, January 1,
1994 1994
Retirees $ 12,500 $ 14,411
Fully eligible active plan
participants - 1,750
Other active plan participants 47 524
12,547 16,685
Unrecognized net gain 4,689 307
Accrued postretirement benefits cost $ 17,236 $ 16,992
The accumulated postretirement benefit obligation was calculated assuming a
discount rate of 8.75% at December 31, 1994 and 7.5% at January 1, 1994. The
estimated cost of postretirement benefits is based on the assumption that such
health care costs will increase at an annual rate starting at 12% for pre-65
coverage (9% for post-64 coverage) and then decrease 1% per year until the
annual rate of increase reaches 7.75%. Variations in this health care cost
trend rate can have a significant effect on the amounts reported. An increase
of 1% in this assumed health care cost trend rate would have increased the
accumulated postretirement benefit obligation by approximately $953 and would
increase the annual net periodic postretirement benefit cost by approximately
$114.
Prepaid pension cost and accrued postretirement benefits cost includes the
following recognized gains:
Postretirement
Pension Benefits
1994 1993 1994
Curtailment gain:
Workforce reduction $ 372 - $ 14
Sale of Costume Jewelry
Business 3,465 - 298
Sale of Men's Tailored
Clothing Business - $1,021 -
Settlement gain:
Sale of Men's Tailored
Clothing Business - 64 -
Total Company costs for health care and life insurance for employees and
retirees were $7,515, $8,485 and $11,441 for 1994, 1993 and 1992,
respectively. The total number of participants covered at the end of fiscal
years 1994, 1993 and 1992 were 2,037; 3,796 and 4,292, respectively, of
which 1,235; 847 and 839 were retirees, respectively.
25
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 12: INCOME TAXES
Income (loss) from continuing operations before income taxes and the
cumulative effect of the change in accounting principle consists of:
1994 1993 1992
Domestic $ (14,058) $(30,368) $ (15,931)
Foreign (125) 454 7,835
$ (14,183) $(29,914) $ (8,096)
The income tax (provision) benefit consists of:
1994 1993 1992
Current income taxes:
Federal taxes $ - $ - $ -
State and local taxes (554) - -
Foreign taxes (4) (303) (1,001)
(558) (303) (1,001)
Deferred income taxes - - 2,972
$ (558) $ (303) $ 1,971
At December 31, 1994 and January 1, 1994, the Company had deferred tax
liabilities of $15,956 and $34,272, respectively, deferred tax assets of
$100,592 and $90,139, respectively, and a valuation allowance of $84,836 and
$55,867, respectively.
In 1994 and 1993, the changes in the deferred income tax assets and
liabilities represent temporary differences and net operating losses. The
types of differences that give rise to significant portions of the deferred
tax assets and liabilities at December 31, 1994 and January 1, 1994 are:
1994 1993
Purchase price allocations $ 8,414 $ 13,611
Property, plant and equipment 1,721 6,210
Reserves for restructure costs (2,775) (3,511)
Inventories (901) (1,981)
Postretirement benefits (6,900) (5,404)
Net operating loss (64,113) (61,506)
Net capital loss (18,834) -
26
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 12: INCOME TAXES (Continued)
A reconciliation setting forth the differences between the effective tax rate
of the Company and the U.S. Federal statutory tax rate is as follows:
1994 1993 1992
Federal statutory rate 34.0% 34.0% 34.0%
State and local income taxes,
net of Federal tax benefits (3.9) - 5.1
Effect of foreign tax rates - (.3) 3.1
Tax benefit of U.S. losses not
recognized (34.0) (34.0) (11.1)
Other items, net, none of which
individually exceeds 5% of
Federal taxes at statutory rates - - (6.8)
Effective income tax rate (3.9)% (.3)% 24.3%
Net loss for 1993 and 1992 includes income of two domestic subsidiaries
located in Puerto Rico under industrial development grants whose partially
tax-exempt status in Puerto Rico will expire in 1996 and 1999. Net income tax
relief resulting from the exemptions for 1993 and 1992 totaled $-0- and
$1,002, respectively. On a per share basis, the relief was $0.11 in
1992.
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $160,000 which expire in the years 2003 through 2009
and a net capital loss carryforward of approximately $47,000 which will expire
in 1999.
27
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 13: COMMITMENTS AND CONTINGENCIES
In July, 1992, four class-action lawsuits were commenced against the Company
and certain of its directors and officers in the United States District Court
for the District of Connecticut. The four lawsuits were consolidated into a
single action. In September, 1992, a fifth purported class-action lawsuit was
commenced in the United States District Court for the Northern District of
Illinois, and this action was consolidated with the prior actions. In
December, 1992, a Consolidated Amended Class Action Complaint (the
"Consolidated Complaint") was served which alleged, among other things,
violations of Sections 10 (b) and 20 (a) of the Securities Exchange Act of
1934, as amended, with respect to the dissemination of allegedly misleading
financial and other information and the alleged failure to disclose certain
material information. The Consolidated Complaint sought damages in an
unspecified amount for members of the alleged class. On August 30, 1993, the
Court granted the defendants' motion to dismiss the Consolidated Complaint,
but granted the plaintiffs leave to file an amended complaint containing
allegations that the defendants acted with fraudulent intent. On October 25,
1993, the plaintiffs filed a second amended consolidated complaint ("Second
Consolidated Complaint"), and on January 6, 1994, defendants moved to dismiss
the Second Consolidated Complaint. The Company's filing for court protection
under Chapter 11 of the U.S. Bankruptcy Code automatically stayed this
litigation against the Company, but the litigation continued against the
individual defendants. On September 7, 1994, the Second Consolidated
Complaint was dismissed with prejudice by the Court, and the plaintiffs have
agreed to dismiss all claims against all individual defendants and the
Company.
The Company is a defendant in various routine litigations incident to the
conduct of its business. Although there can be no assurances, in management's
opinion, there are no such claims or litigations pending which could have a
material adverse effect on the financial position or results of operations of
the Company.
The Company conducts a substantial portion of its operations utilizing leased
facilities and equipment consisting of sales and administrative offices,
retail stores, showrooms, warehouses, manufacturing plants and computer
equipment. Some of the operating leases provide that the Company pay taxes,
maintenance, insurance and other occupancy expenses applicable to leased
premises. Generally, the leases provide for renewal for various periods at
stipulated escalation rates.
Minimum rental commitments under non-cancelable operating leases as of
December 31, 1994, were: $6,312 in 1995, $5,154 in 1996, $3,627 in 1997,
$2,276 in 1998, $979 in 1999 and $2,254 thereafter.
Rental expense amounted to $10,280, $19,136 and $20,291 in 1994, 1993 and
1992, respectively.
Approximately 15% of the Company's employees are members of the ILGWU. The
Company, along with many other employers, make contributions to the ILGWU
National Retirement Fund which is a multi-employer defined benefit pension
plan. The Company does not administer or control the plan. The Employee
Retirement Income Security Act of 1974, as amended by the Multi-Employer
Pension Plan Amendments Act of 1980, imposes certain liabilities upon
employers who are contributors to multi-employer pension plans in the event of
such employers' withdrawal from such a plan or upon termination of such a
plan. The share of the plan's unfunded vested liabilities allocable to the
Company, and for which it may be liable upon withdrawal, was estimated to be
$12,700 as of the date of the latest actuarial valuation which was December
31, 1993. As a result of the February 17, 1995 sale to Phillips, the
contingent withdrawal liability is triggered. At that date, the Company
estimates the liability to be $11,800. Such liability will be recorded in
connection with the sale transaction.
Costs recognized for the ILGWU plan and a similar plan, the Amalgamated
Clothing and Textile Workers of America Nation Retirement Fund, in which
Company employees, due to sales of businesses or assets, ceased to participate
in 1992, were $670, $1,315 and $4,796, in 1994, 1993 and 1992.
28
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 14: DEBT
As described in Note 2, the Company and each of its domestic, wholly-owned
operating subsidiaries filed petitions for relief under Chapter 11 of the U.S.
Bankruptcy Code. During the pendency of the bankruptcy proceedings, interest
on prepetition debt will not be accrued because payment thereof is subject to
an automatic stay under the Bankruptcy Code.
If interest had continued to accrue, interest expense would have been higher
by $28,921 (including $1,848 of amortization of debt issue costs, which was
charged to reorganization items in 1994) for the year ended December 31, 1994.
On February 22, 1994, the Company entered into a $75,000 debtor-in-possession
agreement (the "Post-Petition Credit Agreement") with Citibank, N.A.
("Citibank"), which provides the Company with revolving credit and letter of
credit facilities. Funds under such facilities are used by the Company to
conduct its business in the ordinary course, to reimburse all drawings under
prepetition documentary letters of credit and to make other expenditures and
to pay such administrative and other fees and expenses as are approved by the
U.S. Bankruptcy Court for the Southern District of New York. Such borrowings
and the reimbursement obligations relating to such letters of credit are
secured by a first priority lien on all of the Company's and its domestic
operating subsidiaries' assets and such credit facility is entitled to
super-priority administrative claim status. Interest on borrowings accrues at
a rate equal to Citibank's base rate plus 1.5% per annum. The agreement
terminated on February 17, 1995.
Under the Post-Petition Credit Agreement, the lenders thereunder are entitled
to a fee of 1/2 of 1% per annum on the average daily unused portion of the
aggregate loan commitments, payable monthly in arrears. In addition, under
the Post-Petition Credit Agreement, Citibank, for its own account, is entitled
to an agency fee of $50 per annum, and a collateral monitoring fee of $125 per
annum, payable annually in advance. Pursuant to the Post-Petition Credit
Agreement, the lenders are entitled to fees equal to 2% per annum of the
amount available to be drawn under letters of credit issued for the Company's
account, payable monthly in arrears. The Company paid Citibank a $750
commitment fee in connection with the Debtor-In-Possession Commitment, and
the Company paid an additional commitment fee of $938 to Citibank following
approval by the bankruptcy court of the Post-Petition Credit Agreement.
The Company had previously entered into the November 1992 Credit Agreement
with a consortium of banks and its existing insurance company lenders which
amended and restated a prior credit agreement and consolidated obligations
including the Company's senior notes to its insurance company lenders.
The November 1992 Credit Agreement provided for aggregate borrowings of up to
$419,126 of which $100,000 was available under a revolving credit facility,
$40,000 under a letter of credit facility and $279,126 as a term loan.
Borrowings under the revolving credit facility were limited further whenever
the value of the "borrowing base," based on a valuation of certain of the
Company's assets, was less than the full revolving credit commitment. Under
the terms of that agreement, the Company was required to reduce its term loans
and/or effect a permanent reduction in its revolving credit facility and/or
its letter of credit facilities by an aggregate amount of $93,750 no later
than January 3, 1995, as well as "clean down" requirements which stipulate
that the Company must, during 1993, reduce aggregate revolving credit
borrowings to $85,000, or the borrowing base, whichever is less, for a period
of thirty consecutive days. The sale of knitting and dyeing facilities
located in High Point, North Carolina and the Evan-Picone trademark and
related reductions in long-term indebtedness reduced the amount to be
repaid by January 3, 1995 to $56,333.
The November 1992 Credit Agreement contains covenants which, among other
things, limit the company's ability to purchase its own stock, make capital
expenditures, dispose of properties, pay dividends or merge with another
corporation, and contains various events of default, including a change in
control of the Company. The company is also required to maintain certain
minimum financial ratios as defined in the agreement. Borrowings outstanding
under the November 1992 Credit Agreement are secured by substantially all the
assets of the Company and its domestic subsidiaries, except for inventory, and
are guaranteed by all of the Company's domestic subsidiaries. However, these
borrowings are subordinated to the security interests of the lenders under the
Post-Petition Credit Agreement.
29
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 14: DEBT (Continued)
Bank borrowings under the November 1992 Credit Agreement bear interest at a
rate approximating the prime rate plus 2%. The terms of the November 1992
Credit Agreement require a commitment fee, payable monthly, of 0.5% per annum
on the average unused portion of the revolving credit facility. In addition,
a facility fee is payable monthly at the rate of 0.5% per annum on the full
amount of the revolving credit commitment. At the time the November 1992
Credit Agreement was entered into, the Company paid a one-time restructuring
fee of $4,191.
The November 1992 Credit Agreement will expire by its terms on December 31,
1995; however, the Company is in default of its obligations to maintain a
specified level of consolidated net worth for the fiscal quarter ending April
2, 1994 and, since January 10, 1994, the Company has been in default of its
obligation to repay its prepetition lenders amounts necessary to reduce the
Company's aggregate outstanding loans to the maximum level permitted to be
outstanding based on a borrowing-base formula specified in the November 1992
Credit Agreement. The amount due as of January 21, 1994 was approximately
$292,000 (including $23,000 of outstanding trade letters of credit). In
addition, the bankruptcy proceedings by the Company and its subsidiaries
constitute an automatic default.
Debt consists of the following:
December 31, January 1,
1994 1994
Insurance company term loan,
due 1995 (12.76%) $ 54,197 $ 55,103
Insurance company term loan,
due 1995 (13.9%) 17,343 17,633
Insurance company revolving credit
facility (13.04%) 31,363 30,824
Bank term loan, due 1995 (10.5%) 117,662 119,537
Bank revolving credit facility,
due 1995 (10.5%) 48,000 47,176
Unamortized discount - (3,812)
$ 268,565 $ 266,461
Debt is classified as follows:
December 31, January 1,
1994 1994
Short-Term $ - $ 266,461
Liabilities subject to compromise 268,565 -
$ 268,565 $ 266,461
The Company has been advised that the Unofficial Committee of Institutional
Lenders and the Official Committee of Unsecured Creditors have reached
agreement in principle that $139,000 of the $268,565 of debt described above
is to be treated as fully secured and the balance of $129,565 is to be treated
as a general unsecured claim in the Company's chapter 11 plan. However, until
the agreement in principle has been approved by the Bankruptcy Court, all of
such debt will be reported as a liability subject to compromise in the
accompanying financial statements.
At December 31, 1994, the Company had an aggregate of $40,000 in trade letter
of credit facilities, of which approximately $13,994 were available.
Unamortized discount represents the balance of unamortized debt issue costs
which were being amortized over the life of the related debt. Amortization of
such amounts charged to interest expense was $-0-, $1,848 and $254 in 1994,
1993 and 1992, respectively. The unamortized balance of $3,812 was charged to
reorganization items in 1994.
30
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 15: SHAREHOLDERS' EQUITY
On February 19, 1992 and May 20, 1992, the Company declared cash dividends of
$0.02 per share paid on April 1, 1992. On August 14, 1992, the Company
announced that the Board of Directors suspended the Company's regular
quarterly cash dividend. The Company, under the terms of its credit
agreements, is restricted from paying further cash dividends.
NOTE 16: EMPLOYEE STOCK PLANS
The Company's Stock Option Plans of 1989 and 1985 (the "Option Plans") provide
for the grant of options for up to 700,000 and 600,000 shares, respectively,
of common stock. Alternatively, under the 1989 Option Plan, the Compensation
Committee of the Board of Directors (the "Committee") may grant shares of
restricted stock. The number of shares of restricted stock granted under the
1989 Option Plan will reduce, share for share, the number of shares for which
options may be granted under that plan. The options may be either
non-qualified or incentive stock options. Options granted under the Option
Plans may be exercised at no less than 100% of the fair market value of the
related common stock on the grant date. Options become exercisable over a
period of time as determined by the Committee, but under the 1985 Option Plan
options may not be exercised until at least six months of continuous
employment following the date of grant. All options granted under the 1985
Option Plan expire ten years from grant. Other options will expire at such
time as shall be determined by the Committee. In the event of a change in
control of the Company, all outstanding options granted under the 1985 Option
Plan will become exercisable immediately, but, under the 1989 Option Plan, the
Committee may, in its discretion, accelerate the exercisability of outstanding
options for an amount equal to the difference between the fair market value of
the shares covered by the option and the aggregate exercise price, adjust the
outstanding grants in a manner as will appropriately reflect the change in
control or cause the options to be assumed by the acquiring or surviving
corporation.
A summary of shares subject to options follows:
Option Price
Shares Range
Outstanding at January 2, 1993 393,216 $13.31 - 28.88
Granted 476,000 $ 2.38 - 2.44
Canceled (299,300) $ 2.44 - 28.88
Outstanding at January 1, 1994 569,916 $ 2.38 - 28.88
Canceled (159,066) $ 2.44 - 28.88
Outstanding at December 31, 1994 410,850
Exercisable at December 31, 1994 385,350 $ 2.38 - 28.88
As of November 1, 1985, the Company established the Restricted Stock Plan of
1985 ("Restricted Plan") to attract and retain key executives. The aggregate
number of shares of common stock which may be granted under the Restricted
Plan may not exceed 125,000. The Restricted Plan is administered by the
Committee which, in its discretion, determines the vesting period of all
grants. As of December 31, 1994, 122,000 shares of restricted stock had been
granted.
31
<PAGE>
CRYSTAL BRANDS, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except Share Data)
NOTE 17: DIRECTORS' STOCK PLAN
As of April 16, 1991, the Company established the Stock Plan for Non-Employee
Directors ("Directors' Stock Plan") to increase the proprietary interest of
non-employee directors in the Company by granting them non-qualified options
to purchase common stock and restricted common stock of the Company. The
aggregate number of shares of options and restricted common stock which may be
granted under the Directors' Stock Plan may not exceed 50,000. The Directors'
Stock Plan is administered by the Company's Benefits Committee. As of
December 31, 1994, 25,000 options had been issued with a per share exercise
price of $19.19 and are exercisable. During 1993, 600 shares of restricted
stock were granted at an average market price of $2.44 per share and $2 was
charged to compensation expense. During 1992, 800 shares of restricted stock
were granted at an average market price of $10.63 per share and $8 was charged
to compensation expense.
NOTE 18: RIGHTS TO PURCHASE PREFERRED STOCK
Each share of common stock includes the right to purchase one preferred stock
purchase right. The rights are not presently exercisable and will not become
exercisable unless (i) a person or group of affiliated persons ("Acquiring
Person") acquires 20% or more of the Company's common stock, or (ii) a tender
or exchange offer is announce with respect to 30% or more of the Company's
common stock. Each right, when exercised, will be exchanged for a fractional
share of preferred stock having voting rights equivalent to one share of
common stock and preferred rights as to dividends.
If thereafter, the Company is directly or indirectly acquired, or if the
Acquiring Person should engage in certain self-dealing transactions or become
the beneficial owner of 40% of the Company's common stock, each right will
entitle the holder (other than the Acquiring Person) to acquire either shares
of the Company's common stock, or shares of the acquiring company's common
stock, equal in market value to twice the exercise price of the right.
The rights are redeemable at five cents per right, at the discretion of the
Board of Directors, under certain circumstances. Unless earlier redeemed, the
rights will expire on May 31, 1996.
NOTE 19: SUBSEQUENT EVENT SALE OF COSTUME JEWELRY BUSINESS
On March 28, 1995, the Company was notified by the buyer of its costume
jewelry business, that the buyer is proposing a post-closing adjustment of
$8,800, reducing the sale price, which is presently being disputed by the
Company. Management believes that the Company's reserves for this matter are
adequate, but the ultimate resolution of this claim is uncertain.
32
<PAGE>
Consent of Independent Certified Public Accountants
Board of Directors
Crystal Brands, Inc.:
We consent to the inclusion of our report dated March 28, 1995, except as to
note 19, which is as of April 11, 1995, with respect to the consolidated
balance sheets of Crystal Brands, Inc. (Debtor-In-Possession) and subsidiaries
as of December 31, 1994 and January 1, 1994 and the related statements of
operations, cash flows and shareholders' equity (deficit) for each of the
years in the three-year-period ended December 31, 1994, which report appears
in Form 8-K of Phillips-Van Heusen Corporation which will be filed on or about
April 25, 1995.
Our report contains an explanatory paragraph that states that in January 1994
Crystal Brands, Inc. and certain subsidiaries filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. Further, substantially all
of the Company's net operating assets were sold on February 17, 1995 and the
Company intends to pursue a Chapter 11 plan of liquidation. The effects of
this sale, which management believes will result in a net gain to the Company,
but which is subject to a post-closing adjustment which is presently
undetermined, have not been recognized in the December 31, 1994 financial
statements. Also, it is uncertain as to what amount, if any, the Bankruptcy
Court will ultimately recognize for certain unresolved disputed claims of
creditors filed in the Company's Chapter 11 proceedings. Finally, the buyer
of the Company's costume jewelry business, which was sold December 13, 1994,
has proposed an adjustment to reduce the sale price for that business and the
ultimate resolution of this claim is presently uncertain. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Our report also refers to changes in 1993 in the method of accounting for
postretirement benefits other than pensions and in the method of accounting
for certain inventories which were changed from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method.
KPMG Peat Marwick LLP
Allentown, Pennsylvania
April 25, 1995
33
<PAGE>
PRO FORMA FINANCIAL STATEMENTS - EXPLANATORY NOTE
On February 17, 1995, the Company completed the acquisition of the Apparel
Group of Crystal Brands, Inc. (the "Acquired Business") for $114.7 million in
cash, subject to certain adjustments. The accompanying pro forma financial
statements reflect the Company's estimate of how its consolidated balance
sheet as of January 29, 1995 (the date of the Company's most recently
completed fiscal year) and its consolidated statement of income for the fiscal
year then ended, would have been affected if the acquisition had occurred on
January 31, 1994, the first day of the Company's fiscal year ended January 29,
1995.
34
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
Actual Pro forma
January 29, Pro forma January 29,
1995 Adjustments 1995
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 80,473 $(75,473) $ 5,000
Trade receivables.............................. 77,527 16,912 94,439
Inventories.................................... 255,244 36,344 291,588
Other.......................................... 16,426 12,903 29,329
Total Current Assets....................... 429,670 (9,314) 420,356
Property, Plant and Equipment................... 136,297 5,341 141,638
Goodwill........................................ 17,733 88,200 105,933
Other Assets.................................... 12,584 6,180 18,764
Total Assets............................... $596,284 $90,407 $686,691
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................... $ 38,759 $ 6,715 $ 45,474
Accrued expenses............................... 70,039 7,680 77,719
Accrued income taxes........................... 4,975 0 4,975
Notes payable.................................. 0 5,672 5,672
Current portion of long-term debt.............. 260 0 260
Total Current Liabilities.................. 114,033 20,067 134,100
Long-Term Debt, less current portion............ 169,679 56,000 225,679
Other Liabilities............................... 37,112 13,344 50,456
Stockholders' Equity............................ 275,460 996 276,456
Total Liabilities & Stockholders' Equity... $596,284 $90,407 $686,691
</TABLE>
The pro forma adjustments were developed based on the tangible net assets
acquired from Crystal Brands, Inc., the price paid for those assets, and the
inclusion of certain costs incurred and reserves established by the Company in
connection with the acquisition. In addition, the pro forma adjustments
include the effect of the 1994 pro forma net income associated with the
acquisition and adjustments for non-cash amortization of goodwill.
35
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Actual Pro forma
Year Ended Year Ended
January 29, Pro forma January 29,
1995 Adjustments 1995
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . $1,255,466 $231,010 $1,486,476
Cost of goods sold . . . . . . . . . . . . . . . 845,655 163,344 1,008,999
Gross profit . . . . . . . . . . . . . . . . . . 409,811 67,666 477,477
Selling, general and administrative expenses . . 353,109 57,476 410,585
Restructuring expenses . . . . . . . . . . . . . 7,000 - 7,000
Interest expense, net. . . . . . . . . . . . . . 12,793 8,557 21,350
Income before taxes. . . . . . . . . . . . . . . 36,909 1,633 38,542
Income taxes . . . . . . . . . . . . . . . . . . 6,894 637 7,531
Net income . . . . . . . . . . . . . . . . . . .$ 30,015 $ 996 $ 31,011
Average shares outstanding . . . . . . . . . . . 27,154 27,154
Net income per share.. . . . . . . . . . . . . .$ 1.11 $ 1.14
</TABLE>
The pro forma adjustments were developed using the actual Crystal Brands, Inc.
1994 results from continuing operations, as adjusted to eliminate certain
corporate overhead and amortization expenses, and as further adjusted for
amortization of goodwill resulting from the acquisition. The pro forma
adjustment for interest expense was developed by applying the Company's
effective average borrowing rate during 1994 to the adjusted acquisition
price plus estimated additional 1994 average working capital. The pro
forma effective tax rate was estimated at 39%.
36
