Item 1. Business
Cluett American Corp. and its subsidiaries (the "Company") is a wholly-owned subsidiary of Cluett American Investment Corp. ("Holdings"). The Company was organized in 1982 and 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 on July 17, 1995. The Company's recapitalization and refinancing were consummated on May 18, 1998.
Description of Business
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", COLLARMAN and KHAKI'S by ARROW in the 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 72% 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.
Within certain territories, 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, Nautica, Jockey, Jaclyn Smith 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, 1999, the Company conducted its business through two principal segments: the Sock Group and the Shirt 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 As Defined. EBITDA As Defined is defined as operating income before depreciation and amortization, interest expense, taxes and restructuring and impairment charges. See (5) of Item 6 - Selected Financial Data on pages 13 through 14 for a detailed discussion of EBITDA As Defined. For the year ended December 31, 1999, the Company realized consolidated net sales and EBITDA As Defined of $343.5 million and $22.0 million, respectively.
The Sock Group (47.9% of net sales for the year ended December 31, 1999). 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 62% 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, 1999, the Sock Group realized net sales and EBITDA As Defined of $168.4 million and $36.8 million, respectively. Net sales include intercompany sales of $2.2 million.
The Shirt Group (50.2% of net sales for the year ended December 31, 1999). 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 KHAKI'S 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. Effective January 1, 1999, the Dress Shirt business under the Kenneth Cole trademark, which was launched in the Fall 1998 (previously reported under Designer Group) was consolidated for financial reporting purposes only into the Shirt Group. The Company has restated the 1998 Shirt Group's financial results for the addition of the Kenneth Cole brand to conform with 1999 financial reporting. For the fiscal year ended December 31, 1999, the Shirt Group realized net sales (including licensing fee revenue of $6.4 million) and EBITDA As Defined (including net licensing income of $4.8 million) of $176.5 million and ($11.8) million, respectively. Net sales include intercompany sales of $6.0 million.
For additional information about the Company's product categories and reportable segments, see "Note 17 Segment Data" of the Notes to the Consolidated Financial Statements on pages through of the Consolidated Financial Statements.
Marketing, Sales & Distribution
The Sock Group
The Sock Group is a significant supplier to many leading department store and national chain retailers. In addition, the Sock Group is a supplier to specialty stores, mass merchants and discount retailers. The Sock Group segment uses brand names by distribution channel to solidify the perceived value of such brands and to maintain their integrity. Consistent with industry practice, the Sock Group does not operate under long-term written supply agreements with its customers. The Sock Group's top ten customers accounted for 78% of its total net sales in the fiscal year ended December 31, 1999.
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 use 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, 1999, no GOLD TOE outlet stores were closed and no 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, based on established goals and objectives.
The Shirt Group
The Shirt Group is a significant supplier to many leading department store and national chain retailers. Additionally, the Shirt Group is a supplier to specialty stores, mass merchants and discount 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 51% of total net sales for the fiscal year ended December 31, 1999.
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 uses 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 who 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 discretionary bonus, based on established goals and objectives.
As a supplement to its primary distribution channels, the Shirt Group operates 23 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, 1999, no new retail outlet stores were opened and 1 was closed. The average size of each store is approximately 3,000 square feet.
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 85% of all production is done at Sock Group-owned facilities, 9% is contracted in the United States with other suppliers and 6% 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 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 manufacturing facilities in North and Central America and subcontracting. Approximately 40% of all dress shirt production is done at North American, Shirt Group-owned or leased facilities, and 60% is sourced outside of North America. All sport shirts are sourced outside of North America. The Shirt Group owns or leases, and operates four facilities located in Albertville, Alabama; Austell, Georgia; Kitchener, Ontario and San Pedro Sula, Honduras.
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, Canada, 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.
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 and SILVER TOE. 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.
The Sock Group holds, with the exception of Kenneth Cole, the exclusive sock licenses for the following trademarks (the Kenneth Cole sock license, as with the Kenneth Cole shirt license, is held by the Cluett Designer Group; product sales under the Kenneth Cole licenses are consolidated into the Sock Group and the Shirt Group financial results, respectively, for financial reporting purposes only):
TRADEMARK TERRITORY EXPIRATION - --------------------------- -------------------------------- ----------
ARROW U.S., parts of Central & South 12/31/2000(1) America
The North Face U.S., Canada, Europe and Asia 12/31/2004(1)
Kenneth Cole U.S. 12/31/2003(1)(3)
Nautica U.S. and Canada 12/31/2001
Jockey/Jockey For Her U.S. and Mexico 12/31/1999 (2)
Jaclyn Smith U.S. No termination date
(1) Option to renew. (2) Renewal in negotiation. (3) United States license held by Cluett Designer Group, Inc.
The Sock Group is only partially dependent on these licensed product lines (for the year ended December 31, 1999, 20% of the Sock Group's net sales were 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 within and 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, 1999, the Shirt Group had licensing fee revenue of $6.4 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.
Cluett Designer Group, Inc. holds the exclusive United States license for men's dress shirts under the Kenneth Cole trademark. The Kenneth Cole license for men's dress shirts expires December 31, 2005.
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 Company's business is generally divided among four retail selling seasons: Spring, Father's Day, Fall, and Holiday. Seasonal factors can cause some variance in production and sales levels among fiscal quarters in any fiscal year, but the Company does not regard its overall business as highly seasonal.
Working Capital
Working capital needs are affected primarily by inventory levels, outstanding receivables and trade payables. The Company had available for its use, revolving credit facilities with its primary lender aggregating $53.0 million at December 31, 1999. The commitment on these revolving credit facilities was increased to $62.0 million, on March 29, 2000. These revolving credit facilities are used by the Company to cover fluctuations in working capital needs. The Company had $32.5 million outstanding under these revolving credit facilities at December 31, 1999. Also, the Company had $10.1 million open trade letters of credit reserved against these facilities at December 31, 1999. In addition to the above, the Company has availability under 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 Financial Corp. ("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. At December 31, 1999, the Company had $11.3 million Canadian dollars and $1.5 million Canadian dollars of letters of credit outstanding against the revolving loan facility. The Company had cash of $7.2 million at December 31, 1999. Inventory levels are affected by anticipated sales. It is the general practice of the Company to offer payment terms of net 30 days to the majority of its customers from the date of shipment.
Reliance On Certain Customers
The Sock Group's ten largest customers accounted for approximately 78% of its net sales in 1999 and the Shirt Group's ten largest customers accounted for approximately 51% of its net sales for the fiscal year ended December 31, 1999. 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, 1999, the Company employed approximately 2,772 persons on a full-time basis and approximately 205 persons on a part-time basis, including 1,411 persons in the Sock Group and 1,555 persons in the Shirt Group. Of the total employees, 2,155 were engaged in manufacturing and distribution operations, and the remainder were employed in executive, marketing and sales, purchasing activities and in the operation of the Company's retail outlet stores. Approximately 28% of the Company's 2,977 employees are represented by collective bargaining agreements with one union, which expire between March 31, 2001 and December 31, 2002. The Company believes that its relations with its employees are satisfactory.
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 Kenneth Cole, 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 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 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 (`DKNY,' `Van Heusen,' `Geoffrey Beene' and `John Henry' brands); Salant (`Perry Ellis' brand); Smart Shirt (private label shirt division of Kellwood Company); Capital Mercury (private label shirts); and Oxford Industries Inc. (`Tommy Hilfiger' and `Polo' brands and private label shirts). The Shirt Group's primary sports shirt competitors are: Warnaco (`Chaps' brand); Phillips-Van Heusen Corporation (`Van Heusen' brand); and Perry Ellis International, Inc. (formerly Supreme) (`Natural Issue' and `Munsingwear' brands).
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.
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.
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 (1) 50,000 Owned San Pedro Sula, Honduras. Manufacturing 55,000 Leased Kitchener, Ontario....... Manufacturing 145,000 Owned Kitchener, Ontario....... Distribution 125,000 Leased Albertville, AL.......... Manufacturing 57,000 Leased Austell, GA.............. Manufacturing/ 593,000 Owned Distribution Toronto, Ontario......... Showroom 8,100 Leased New York NY.............. Showroom/ 30,000 Leased Administrative Smyrna, GA............... Administrative 28,486 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
(1) Property held for sale as of December 31, 1999.
In addition, the Company operates 28 outlet stores on leased premises. The Company believes that its existing facilities are adequately insured, well maintained and in good operating condition and are otherwise adequate for its current and foreseeable level of operations for the next few years.
Item 3.
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.
In March 2000, the Company and a former employee reached an agreement in principle to settle all matters relating to an action brought by the employee for the sum of $1.75 million of which $1.6 million and $1.75 million was reserved at December 31, 1998 and December 31, 1999, respectively.
In connection with the bankruptcy proceedings, the Company incurred bankruptcy reorganization costs in 1997 and 1998 of $6.1 million and $2.5 million respectively, for professional fees. In 1999, the Company recognized bankruptcy credits of $573,000. The Company does not anticipate any future adjustments with respect to disputed claims or other events related to the bankruptcy.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1999, 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.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
All of the Company's outstanding common stock is held by Cluett American Group ("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 of 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.
Item 6.
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, 1999. The following summary financial data with respect to the three years ended December 31, 1999, are derived from the Consolidated Financial Statements included elsewhere in this document which have been audited by Ernst & Young LLP (1997 and 1998) and Deloitte & Touche LLP (1999), independent auditors, as indicated in their reports 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.
1995 1996 1997 1998 1999 ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA: Net sales $ 486.7 $ 369.0 $ 363.5 $ 373.1 $ 343.5 Cost of goods sold(1) 369.8 273.8 253.7 264.3 249.1 ------------------------------------------ Gross profit 116.9 95.2 109.8 108.8 94.4
Selling, general and administrative expense 137.9 86.3 76.3 82.4 81.8 Restructuring and impairment charges(2) 22.5 11.6 2.5 2.4 2.2 ------------------------------------------ Operating income (loss) (43.5) (2.7) 31.0 24.0 10.4 Interest expense, net 22.7 16.9 15.2 20.4 26.5 Other expense (income), net(3) 0.5 3.2 1.2 2.1 0.5
Bankruptcy reorganization costs (credits)(4) 20.9 6.1 (3.9) 37.5 (0.6) Income (loss) before provision for income taxes (87.6) (28.9) 18.5 (36.0) (16.0) Provision for income taxes 1.5 1.3 1.3 0.8 1.1 ------------------------------------------ Net income (loss) $ (89.1) $(30.2) $ 17.2 $ 36.8) $ (17.1) ==========================================
OTHER FINANCIAL DATA: Capital expenditures $ 6.1 $ 9.8 $ 10.8 $ 11.8 $ 10.7 Depreciation 13.3 10.9 8.1 8.7 9.4 Cash flows provided by (used in): Operating activities 0.4 16.7 13.0 (30.9) (7.9) Investing activities 25.3 (8.3) (7.5) (11.7) (11.7) Financing activities (26.1) 13.3 (1.3) 35.5 23.9 EBITDA As Defined(5) (7.8) 17.4 39.6 40.9 22.0 Net Sales 486.7 369.0 363.5 373.1 343.5 EBITDA As Defined margin -- 4.7% 10.9% 11.0% 6.4% Ratio of earnings to fixed charges(6) -- -- 2.1x -- -- Working capital(7) $ 116.9 $ 82.1 $ 82.3 $ 81.4 $ 80.2 Total assets 252.9 211.1 220.0 220.8 231.5 Total long-term debt, net of current portion(8) 3.6 8.6 2.0 235.7 258.9 Debt subject to compromise 161.1 146.0 145.6 -- -- Preferred stock 17.4 18.7 20.0 51.3 58.3 Total stockholder's deficit (44.3) (74.2) (56.8) (149.0) (147.2)
(1) In 1995, the Company recorded a charge of approximately $14.0 million for the write-down of inventory, which is included in cost of goods sold.
(2) Over the five-year period 1995-1999, restructuring and impairments charges, which totaled $42.0 million, included $20.1 million for facility closings and related termination benefits, $10.5 million for store closings, $2.4 million for Other Segment (as defined herein) and $8.9 million for software, systems development and implementation and other consulting costs.
(3) 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 1998, other expenses is comprised primarily of failed deal costs and litigation reserves.
(4) Bankruptcy reorganization costs (credits) consist of the following:
YEAR ENDED DECEMBER 31,
------------------------------------------ 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------ (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) -- (0.6) Write off of deferred financing costs 3.5 -- -- -- -- Fees related to obtaining the Debtor- In-Possession Facility 1.3 -- -- -- -- Claims and related litigation 3.5 -- -- -- -- -------- ------- ------- ------- ------- $ 20.9 $ 6.1 $ (3.9) $ 37.5 $ (0.6) ======== ======= ======= ======= =======
(5) For 1999, EBITDA As Defined is defined as operating income before depreciation and amortization, interest expense, taxes and restructuring and impairment charges. EBITDA As Defined for years 1995 through 1997 and 1998 is based on a similiar definition as disclosed in the Company's S-4 and 1998 Form 10-K, respectively,(incorporated herein by reference).EBITDA As Defined should not be considered in isolation or as a substitute for net income, certain cash flows from operating activities and other income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity. EBITDA As Defined is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.
(6) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before income taxes, plus fixed charges. Fixed charges include interest expense on all indebtedness, amortization of deferred financing charges, and one-third of rental expense, representing that portion of rental expense deemed to be attributable to interest. Earnings were insufficient to cover fixed charges by $87.6 million in 1995, $28.9 million in 1996, $14.2 million in 1998, and $11.9 million in 1999.
(7) Working capital is defined as current assets (less cash and cash equivalents) minus current liabilities (less current maturities of long-term debt).
(8) On July 17, 1995, $161.1 million of long-term debt was reclassified to liabilities subject to compromise.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Consolidated Statement of Operations present Cluett American Corp.'s operating performance over the last three years.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following table sets forth, for the periods indicated, statement of operations data in dollars and as a percentage of net sales.
Net Sales. Net sales in 1999 decreased $29.6 million to $343.5 million compared to $373.1 million in 1998. Net sales in the Sock Group increased $3.6 million to $168.4 million in 1999 from $164.8 million in 1998. This increase resulted primarily from the Company's expanded branded product offerings. Net sales in the Shirt Group decreased $8.9 million to $176.5 million in 1999 from $185.4 in 1998. This decrease resulted primarily from an $18.0 million decrease in Wholesale business due to a decline in staple dress shirt demand, offset by a $10.2 million increase in Kenneth Cole product offerings. The Shirt Group net sales also includes license fee income of $6.4 million in 1999 compared to $6.3 million in 1998. Net sales of all other products decreased $24.1 million to $6.8 million in 1999 compared to $30.9 million in 1998. This decrease resulted primarily from the Company's exit from the YSL, Burberry's and Canadian retail store businesses.
Gross Profit. Gross profit in 1999 decreased $14.4 million to $94.4 million compared to $108.8 million in 1998. The Company's gross profit margin decreased to 27.5% in 1999 compared to 29.2% in 1998. The Sock Group's gross profit increased $6.2 million to $58.7 million in 1999 compared to $52.5 million in 1998. This increase is due to increased sales and improved efficiencies. Sock Group gross margin increased to 34.9% in 1999 from 31.9% in 1998, primarily due to productivity and overhead absorption improvements as well as material cost reductions. The Shirt Group's gross profit decreased $17.2 million to $35.3 million in 1999 from $52.5 million in 1998, primarily due to decreased sales and higher costs. Shirt Group gross margin decreased to 20.0% in 1999 compared to 28.3% in 1998, primarily due to margin deterioration at the US Wholesale division where gross margin fell to 13.8% in 1999 from 25.1% in 1998. This margin decrease was primarily due to a decline in staple dress shirt demand (traditionally the Company's most profitable product), dress shirt cost increases due to quality improvements without offsetting price increases, general plant inefficiencies, transition costs for the new Khaki's sportswear line, and new product launch costs. Gross profit of all other products decreased $3.4 million to $382,000 in 1999 compared to $3.8 million in 1998, primarily due to the Company's exit from the YSL, Burberry's and Canadian retail store businesses.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for 1999 decreased $600,000 to $81.8 million in 1999 compared with $82.4 million in 1998. The decreased S,G&A expenses relate primarily to cost savings from the Company's exit of the YSL, Burberry's and Canadian retail store businesses.
Restructuring and Impairment charges. Restructuring and impairment charges decreased $200,000 to $2.2 million in 1999 compared to $2.4 million in 1998. During 1999, the Company recorded net restructuring and impairment charges of $2.2 million to reduce operating expenses and improve overall productivity. The Company closed its owned manufacturing facility located in Enterprise, Alabama and consolidated certain administrative functions within the Shirt Group. The closure and administrative consolidation costs included severance costs of $1.6 million and an impairment charge of $383,000 to record the Enterprise facility at its net realizable value. Both the facility closure and the administrative consolidation are expected to yield annual pre-tax cost savings of approximately $3.2 million beginning in 2000. In 1999, the Company's Sock Group approved a restructuring plan to cease distribution operations at an owned facility located in Bally, Pennsylvania and to close a leased dye-house facility in Pottstown, Pennsylvania in 2000 and recorded termination benefits of $269,000 and other facility closure costs of $97,000. The restructuring is expected to yield annual pre-tax savings of approximately $1.4 million beginning in 2001.
Operating Income. Operating income decreased $13.6 million to $10.4 million in 1999 from $24.0 million in 1998, due to the factors discussed above.
Interest Expense. Interest expense increased $6.1 million to $26.5 million in 1999, versus $20.4 million in 1998, due primarily to higher debt levels existing in 1999.
Other Expense, net. Other expense, net decreased $1.6 million to $500,000 in 1999 compared to $2.1 million in 1998, due primarily to the Connolly Litigation. In March 2000, the Company and a former employee reached an agreement in principle to settle all matters relating to an action brought by the employee for the sum of $1.75 million of which $1.6 million and $1.75 million was reserved at December 31, 1998 and December 31, 1999, respectively.
Bankruptcy Reorganization Costs. Bankruptcy reorganization costs decreased $38.1 million to ($0.6) million in 1999 compared to $37.5 million in 1998. During 1998, the Company incurred bankruptcy reorganization costs resulting from the payment of post-petition interest, default interest, and fees to creditors in accordance with the terms of the Plan, with no corresponding costs incurred in 1999.
Provision for Income Taxes. Provision for income taxes increased $300,000 to $1.1 million in 1999 compared to $800,000 in 1998.
Net Loss. Net loss decreased $19.7 million to $17.1 million in 1999 compared to a net loss of $36.8 million in 1998. Due to the factors discussed above.
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 in dollars and as a percentage of net sales.
Net Sales. Net sales in 1998 increased $9.6 million to $373.1 million compared to $363.5 million in 1997. Net sales in the Sock Group increased $13.0 million to $164.8 million in 1998 from $151.8 million in 1997. This increase resulted primarily from the Company's expanded GOLD TOE, Nautica and Jockey product offerings. Net sales in the Shirt Group increased $8.6 million to $185.4 million in 1998 from $176.8 million in 1997. This increase resulted primarily from an $8.6 million increase in the wholesale business. The Shirt Group net sales also include license fee income of $6.3 million for 1998 compared to $6.7 million for 1997. The decrease in license fee income is a result of erosion in royalties from ARROW's Asian licensees offset by a 15% improvement in ARROW royalties in Europe, Africa, South America and the United States. Net sales of all other products decreased $12.7 million to $30.9 million in 1998 compared to $43.6 million in 1997, due to the Company's exit from the YSL and Burberry's businesses.
Gross Profit. Gross profit in 1998 decreased $1.0 million to $108.8 million compared to $109.8 million in 1997. The Company's gross profit margin decreased slightly to 29.2% in 1998 compared to 30.2% in 1997. The Sock Group's gross profit increased $3.4 million to $52.5 million in 1998 compared to $49.1 million in 1997, primarily due to increased sales. Sock Group gross margin decreased to 31.7% in 1998 from 32.2% in 1997, primarily due to unfavorable mix changes and a general 3% wage increase. The Shirt Group's gross profit increased $3.3 million to $52.5 million in 1998 from $49.2 million in 1997, primarily due to increased sales. Shirt Group gross margin increased to 28.3% in 1998 compared to 27.8% in 1997, primarily due to reduced off-price selling, lower excess inventories and better execution of deliveries. Gross profit of all other products decreased $7.7 million to $3.8 million in 1998 compared to $11.5 million in 1997. Gross profit margin of all other products decreased to 12.4% in 1998 from 26.4% in 1997. These other product decreases are primarily due to the Company's decision to exit the YSL and Burberry's businesses in 1998.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for 1998 increased $6.1 million to $82.4 million compared with $76.3 million in 1997. This increase related to increased advertising at Arrow, higher distribution expense from volume increases, excessive overtime and Sock Group distribution center consolidation charges and increased selling expense associated with new product-line and distribution-channel initiatives.
Restructuring and Impairment Charges. Restructuring and impairment charges decreased $100,000 to $2.4 million in 1998 compared to $2.5 million in 1997. During 1998 and 1997, the Company closed 3 retail outlet stores each year and in 1998 consolidated certain distribution facilities and closed a sock knitting facility at the Sock Group. The Company recorded restructuring costs of $2.2 million in 1997 and $2.3 million in 1998, respectively, related to the closures and facility consolidation. Severance costs of $318,000 in 1998 and $338,000 in 1997 were recorded which related to the termination of 100 employees in 1998 and 25 employees in 1997. Additional closure costs primarily related to lease terminations. In addition, the Company recorded impairment charges of $150,000 in 1998 and 1997 related to the write-off of retail outlet store property and underperforming assets. The Company incurred other operating expenses during 1997 and 1998 to restructure and operate the Company during bankruptcy. In 1998, the Company also consolidated certain distribution centers, closed a sock knitting facility and disposed of certain under- performing assets. The restructuring is expected to yield annual pre-tax savings of approximately $847,000 beginning in 1999.
Operating Income (Loss). Operating income decreased $7.0 million to $24.0 million in 1998 from $31.0 million in 1997 due to the factors noted above.
Interest Expense. Interest expense increased $5.2 million in 1998 compared to $15.2 million in 1997, due primarily to higher debt levels existing after the bankruptcy reorganization completed on May 18, 1998.
Other Expense, net. Other expense, net increased $900,000 to $2.1 million in 1998 compared to $1.2 million in 1997, due primarily to the Connally Litigation previously discussed.
Bankruptcy Reorganization. Bankruptcy reorganization costs increased $41.4 million to $37.5 million in 1998 compared to bankruptcy reorganization credits of $3.9 million in 1997, due primarily to post-petition interest, default interest, and fees to creditors in accordance with the terms of the bankruptcy reorganization plan.
Provision for Income Taxes. Provision for income taxes decreased $500,000 to $800,000 in 1998 compared to $1.3 million in 1997.
Net Income (Loss). Net loss increased $54.0 million to ($36.8) million in 1998 compared to net income of $17.2 million in 1997, due primarily to the factors noted above.
Liquidity and Capital Resources
The Company broadly defines liquidity as its ability to generate sufficient cash flow from operating activities to meet its obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long range business objectives and meeting debt service commitments.
Cash Flows
Cash and cash equivalents increased $4.3 million to $7.2 million in 1999 from $2.9 million in 1998 primarily as a result of $7.9 million and $11.7 million in net cash used in operating and investing activities, respectively, offset by $23.9 million in net cash provided by financing activities. Net cash used in operating activities resulted primarily from the Company's $17.1 million net loss offset by $10.9 million in non-cash depreciation and amortization charges. Net cash used in investing activities resulted primarily from $10.7 million in capital expenditures. Net cash provided by financing activities resulted primarily from $24.1 million in net borrowings under the Company's revolving credit facilities.
Liquidity and Capital Resources
The Company's liquidity needs arise primarily from debt service on the indebtedness incurred in connection with the Company's 1998 bankruptcy reorganization and the funding of working capital and capital expenditures. As of December 31, 1999, the Company had outstanding $273.1 million of debt consisting of $125.0 million in senior subordinated notes (including the Parity Notes), a Senior Credit Facility consisting of a $46.0 million term A loan, a $59.1 million term B loan and $32.5 million in revolving credit facilities borrowings, $7.8 million in Canadian revolving credit facility borrowings and a $2.5 million CAT acquisition note payable. During 1999 the Company had a net increase in revolving credit facilities borrowings of $27.9 million, and repaid $4.0 million in term loans and notes payable.
In 1999, the Company obtained a $3.0 million revolving credit facility ("Additional Revolver") which is guaranteed by Vestar and bears interest, at the Company's option, at either the Eurodollar rate plus 1.5% or the Prime rate plus 0.5%. This facility expires on December 31, 2000. At December 31, 1999, there were no amounts outstanding under the Additional Revolver. On February 17, 2000, the Additional Revolver was increased to $7.5 million.
On March 29, 2000, the Additional Revolver was increased to $12.0 million and incorporated into the Senior Credit Facility as Tranche C. Borrowings under Tranche C are due and payable on June 30, 2000 (unless certain events occur, in which case the maturity can be extended to December 31, 2001) and are guaranteed by Vestar.
Debt Service
Principal and interest payments under the Company's debt agreements represent significant liquidity requirements for the Company. Aggregate principal payments on the Company's indebtedness are $14.2 million, $9.5 million, $12.9 million, $14.6 million, $40.6 million, for each of the years 2000 through 2004, respectively, with $181.3 million thereafter through 2008.
The Company's senior subordinated notes mature in 2008 and require semi-annual interest payments at 10 1/8%. The term A and B loans mature in 2004 and 2005, respectively, and require quarterly principal payments and quarterly interest payments at floating rates based upon the interest rate option elected by the Company. The revolving credit facilities expire at various dates through 2004, and require quarterly interest payments at floating rates based upon the interest rate option elected by the Company. The Canadian revolving credit facility expires in 2000, but can continue year to year thereafter, and requires monthly interest payments at floating rates based upon the interest rate option elected by the Company. The CAT note payable requires monthly payments through 2002 with interest imputed at 10%. Cash paid for interest in 1999 was $23.3 million. Interest expense for 2000 is expected to be $29.9 million, including $1.7 million of non-cash amortization of deferred debt issuance costs.
Covenant Restrictions
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, and a minimum Sock Group EBITDA test each of which is tested as of the last day of each fiscal quarter of the Company and its subsidiaries. The amendments in December 1998, March 1999, September 1999 and March 2000 revised the original covenants. Additionally, the September 1999 amendment requires Vestar to infuse up to $30 million of new capital if certain leverage ratios are not met.
At December 31, 1999, the Company was not in compliance with its financial ratio covenants and received a waiver dated March 29, 2000. The March 2000 waiver and amendment, also revised on-going covenants and the Company expects to meet these covenants in 2000.
On March 29, 2000, the Senior Credit Facility and the Investment and Deposit agreement were amended. The March 2000 amendment requires (i) Vestar to infuse up to $30 million of new capital into the Company and (ii) the Company to make $20 million in additional principal payments on the Senior Credit Facilities between June 30, 2000 (or in certain circumstances August 31, 2000) and December 31, 2000 if certain financial ratios are not met by June 30, 2000.
Capital Expenditures
Capital spending during 1999 was $10.7 million and related primarily to general improvements to the Company's manufacturing facilities. Total capital spending for 2000 is expected to be $7.0 million and also relates primarily to general improvements to the Company's manufacturing facilities.
Financing Sources and Cash Flows
At December 31, 1999 the Company had $7.2 million in cash and additional availability of $5.7 million under the revolving credit facilities included in the Senior Credit facility, after consideration of $10.1 million in open trade letters of credit and $1.7 million of stand-by letters of credit. These credit facilities were increased by $4.5 million on each of February 17, 2000, and March 29, 2000. At December 31, 1999 the Company also had additional availability of $2.2 million Canadian dollars under the Canadian revolving credit facility, after consideration of $1.5 million Canadian dollars in open trade letters of credit.
The Company has a substantial amount of indebtedness. The Company relies on internally generated funds and, to the extent necessary, on borrowings under the revolving credit facilities to meet its liquidity needs. The Company's ability to incur additional indebtedness is limited under its existing borrowing arrangements.
Based upon the current level of operations, management believes that cash flow from operations and available cash, together with available borrowings under the revolving credit facilities, are adequate to meet the Company's future liquidity needs until at least the end of 2000. 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. In addition, there can be no assurances 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 or (ii) fund its other liquidity needs.
Income Taxes
See Note 10 "Income Taxes" of the Notes to the Consolidated Financial Statements included on pages through of the Consolidated Financial Statements.
New Accounting Pronouncements
See Note 3 "New Accounting Pronouncements" of the Notes to the Consolidated Financial Statements included on pages through of the Consolidated Financial Statements.
Year 2000 Risk
The Year 2000 ("Y2K") 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, 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. In addition, certain computer programs that are date sensitive may not process the Y2K as a leap year. As of March 6, 2000, the Company has not experienced any significant business interruption related to the Y2K issue or leap year issues, nor is it aware of any business interruptions at any of its primary suppliers or customers. There can be no assurance, however, that the Company will not be affected in the future by any existing non-disclosed Y2K or leap year non-compliance of material third parties. As a result, the Company will continue to monitor its Y2K and leap year compliance and the related compliance of its suppliers and customers. Total Y2K costs were not material to the Company's results of operations and financial condition.
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.
Item 7A.
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 currently engage in any 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 $ 1.4 million.
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, 1999 would result in a decrease in fair value of total long-term debt and preferred stock, by approximately $ 4.7 million.
Currency
The Company's Canadian operations represented approximately 4% of consolidated fixed assets and 9% of consolidated net sales for 1999. Because of the Company's international operations, the Company is 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 the Company's consolidated statements of income was materially affected by exchange rate fluctuations in 1997, 1998, or 1999.
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, 1999, a hypothetical 10% adverse movement in foreign exchange rates applied to the underlying exposures described above would not have a material effect on the Company's results of operations.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
- --------- Report of Independent Auditors' as of and for the year ended December 31, 1999
Report of Independent Auditors' as of December 31, 1998 and for the years ended December 31, 1997 and 1998
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1999
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Stockholder's Deficit for the years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 1999 II-6
All other schedules are omitted because they are not applicable or the required information is provided in the Consolidated Financial Statements or related notes thereto.
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS'
Board of Directors Cluett American Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Cluett American Corp. and subsidiaries, a wholly-owned subsidiary of Cluett American Investment Corp., as of December 31, 1999, and the related consolidated statements of operations, stockholder's deficit and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 14(a) for the year ended December 31, 1999. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cluett American Corp. and subsidiaries at December 31, 1999 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Atlanta, Georgia March 29, 2000
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS'
Board of Directors Cluett American Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cluett American Corp. and subsidiaries, a wholly owned subsidiary of Cluett American Investment Corp. ("Holdings"), as of December 31, 1998, and the related consolidated statements of operations, stockholder's deficit and cash flows for the two years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a) for the two years in the period ended December 31, 1998. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 1998 and the consolidated results of their operations and their cash flows for the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. 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 all material respects the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia March 19, 1999
CLUETT AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(DOLLARS IN THOUSANDS)
See accompanying notes.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------- --------- --------- 1997 1998 1999 (DOLLARS IN THOUSANDS) -------- --------- --------- OPERATING ACTIVITIES Net income (loss) $ 17,196 $ (36,834) $ (17,113) Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by (used in) operating activities: Impairment of property, plant and equipment -- 1,094 360 Write-off of deferred acquisition cost -- 489 -- Depreciation 8,075 8,660 9,378 Deferred finance amortization -- 952 1,592 Goodwill and license fee amortization 30 40 228 Gain on sale of property, plant and equip (348) -- (57) Adjustments in 1997 and payments in 1998 of liabilities subject to compromise- reorganization (10,000) (22,442) -- Accrual of professional fees, potential claims and related litigation matters- reorgainzation 6,117 -- --
Changes in operating assets and liabilities, excluding the effect of acquisition: Accounts receivable 3,917 1,070 1,631 Inventories (6,980) 2,629 (2,718) Prepaid expenses and other current assets 178 197 898 Pension and other non-current assets (1,808) (13,772) (1,683) Accounts payable and accrued expenses (4,430) (3,871) 2,016 Income taxes payable 521 (678) 495 Other liabilities (448) 435 (234) Due to parent -- 27,974 -- Effect of changes in foreign currency 930 3,190 (2,683) --- ----- ------ Net cash and cash equivalents provided by (used in) operating activities 12,950 (30,867) (7,890) ------ ------- ------
INVESTING ACTIVITIES Purchase of property, plant and equipment (10,778) (11,841) (10,670) Proceeds on disposal of property, plant and equipment 3,327 152 1,275 Purchase of CAT, net of cash acquired -- -- (2,289) ------ ------ ------ Net cash and cash equivalents used in investing activities (7,451) (11,689) (11,684) ------ ------- -------
FINANCING ACTIVITIES Issuance of preferred stock -- 48,125 -- Distribution to Parent -- (87,522) -- Net borrowings under line-of-credit agreement -- 3,126 27,928 Proceeds from Debtor-in-Possession credit facility 16,398 -- -- Principal payments on Debtor-in-Possession (16,795) -- -- Proceeds from issuance of long term debt 2,246 222,000 -- Principal payments on long term debt (3,113) (1,300) (3,600) Principle Payment on long-term note CAT -- -- (374) Payments on pre-petition liabilities -- (146,490) -- Principal payments on capital leases -- (2,406) (15) ----- ------ --- Net cash and cash equivalents (used in) provided by financing activities (1,264) 35,533 23,939 Effect of exchange rate changes on cash -- (128) 6 ------- ------- ------- Net change in cash and cash equivalents 4,235 (7,151) 4,371 Cash and cash equivalents at beginning of year 5,784 10,019 2,868 --------- --------- --------- Cash and cash equivalents at end of year $ 10,019 $ 2,868 $ 7,239 ========= ========= =========
SUPPLEMENTAL DISCLOSURES Cash paid during the year: Interest $ 7,649 $ 17,073 $ 23,341 Income taxes $ 1,163 $ 1,236 $ 648
SUMMARY OF CAT ACQUISITION: Fair value of assets acquired $ 5,288 Long term notes issued (2,881) Liabilities assumed (118) ---- Net cash paid for acquisitions $ 2,289 =========
See accompanying notes.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
Cluett American Corp. and its subsidiaries (the "Company") are a wholly owned subsidiary of Cluett American Investment Corp ("Holdings"). The Company was organized in 1982 and primarily designs, manufactures and markets socks and men's dress shirts in the United States and Canada. The Company also has a growing presence in men's and women's sportswear. The Company also manufactures dress shirts in Honduras.
The Company filed voluntary petitions for relief under the provisions of Chapter 11 of the Federal Bankruptcy Code on July 17, 1995. The Company emerged from bankruptcy on May 18, 1998. As part of the approved reorganization plan, Vestar Capital Partners III, L.P. ("Vestar") and co-investors made a $61.3 million equity investment and Alvarez & Marsal, Inc. ("A&M") and certain members of management made a $6.7 million equity investment in Holdings.
The Company and Holdings used the equity investments 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 Holdings shareholders that were shareholders prior to the bankruptcy as part of the Recapitalization. These notes are identical in, and rank in parity with, the $112.0 million Senior Subordinated Notes Due 2008. During 1999, approximately $2.0 million of Parity Notes were converted to Senior Subordinated Notes.
2. Acquisition
On July 13, 1999, the Company acquired 100% of the outstanding common stock of Central American Tailoring ("CAT"), incorporated under the laws of Honduras. CAT had been a captive contractor providing sewing services to the Company. The total purchase price was $5.2 million and was comprised of $1.6 million in cash, the issuance of $2.9 million in long-term notes and other related acquisition costs of $0.7 million. The cash payment was financed primarily through the Company's revolving credit facility. The acquisition was accounted for using the purchase method of accounting. Accordingly, the assets and liabilities of the acquired business are included in the consolidated balance sheet as of December 31, 1999. The operating results of CAT have been included in the consolidated statements of operations from the date of acquisition. The excess purchase price over the fair market value of the underlying assets of $4.9 million was allocated to goodwill and is being amortized on a straight-line basis over 10 years.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include all subsidiary companies of the Company. All significant intercompany balances and transactions have been eliminated in 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 primarily located in the United States and Canada. Royalty and licensing income is earned from a worldwide base of licensees engaged in the sale and manufacture of textiles and apparel. The Company generally does not require collateral on accounts receivable.
Inventory Valuation
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories are stated net of an allowance for obsolete and slow moving inventory.
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
Impairment
The Company reviews long-lived assets and certain intangibles for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Any impairment losses are reported in the period in which the recognition criteria are first applied based on the fair value of the assets. Assets held for sale are carried at the lower of carrying amount or fair value, less estimated costs to sell such assets. The Company discontinues depreciating or amortizing assets held for sale at the time the decision to sell the assets is made.
Goodwill
Goodwill represents the excess of costs of acquired businesses over the fair value of the net identifiable assets acquired and is amortized on a straight-line basis over 10 years, the estimated future economic benefit.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Significant Accounting Policies (Continued)
Deferred Financing Fees
In connection with the Recapitalization transactions discussed in Note 1, the Company deferred financing fees of $13.4 million. These costs are being amortized to interest expense over the lives of the related debt agreements.
Income Taxes
Deferred income taxes are provided at the enacted marginal rates on the differences between the financial statement and income tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company files a consolidated federal income tax return with Holdings 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
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could be different from those estimates.
Revenue Recognition
The Company recognizes revenue when the apparel is shipped. At this point, persuasive evidence of a sale arrangement exists, delivery has occurred, the Company's price to the buyer is fixed and collectibility of the associated receivable is reasonably assured. Customer returns and allowances have been provided based on estimated returns. 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 $6.9 million, $6.3 million and $6.4 million in 1997, 1998 and 1999, respectively, which are included in net sales in the accompanying statements of operations.
Interest Expense, net
The Company includes interest income from overnight investment in net interest expense. The Company recorded interest income of $0, $178,000, $246,000 in 1997, 1998 and 1999 respectively.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Significant Accounting Policies (Continued)
New Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board issued Statement No. 133, "Accounting For Derivative Instruments And Hedging Activities" ("SFAS No. 133"). This statement (as amended by SFAS No. 137) is effective January 2001. This statement establishes accounting and reporting 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, 2001. Management has not determined how SFAS No. 133 will impact the Company's results of operations or financial position.
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 foreign currency transactions of approximately $816,000, $41,000 and $16,000 in 1997, 1998 and 1999, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. The Company charged a total of $9.5 million, $9.3 million and $11.6 million to advertising expense in 1997, 1998 and 1999, 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 more than 10% of the Company's sales in 1997, 1998, and 1999. Additionally, there was no single customer who accounted for more than 10% of consolidated accounts receivable balances at December 31, 1998 or 1999. Management believes the risk associated with trade accounts receivable is adequately provided for in the allowance for doubtful accounts.
Reclassifications
Certain amounts in the 1997 and 1998 financial statements and footnotes have been reclassified to conform to the 1999 presentation.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Redeemable Preferred Stock
In connection with the Recapitalization, 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, cumulative preferential dividends from the date of issuance of the Preferred Stock accruing at the rate per share of 12 1/2 % per annum. Dividends are 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 at December 31, 1998 and 1999, reflects accretion of $90,000 and $244,000, respectively, in transaction fees. Through December 31, 1999, the Company declared and paid stock dividends aggregating 99,145 shares on its Preferred Stock. As of December 31, 1999, the Company had issued and outstanding 599,145 cumulative shares.
5. Restructuring and Impairment Charges
In 1995, the Company developed and implemented a program designed to reduce operating expenses and improve overall productivity. During 1997, 1998 and 1999, the Company incurred expenses of $2.5 million, $2.4 million and $2.2 million, respectively, in implementing this plan.
During 1999, the Company closed its owned manufacturing facility located in Enterprise, Alabama and consolidated certain administrative functions within its Shirt Group. The closure and administrative consolidation costs included severance costs of $1.6 million for 308 employees at Enterprise and in administrative functions. In addition, special termination benefits of $1.7 million related to 280 employees of the Enterprise facility which were provided through the Company's employee benefit plan. (See Note 11). All terminations were completed by December 31, 1999. The Company also recorded an impairment charge of $383,000 to record the Enterprise facility at its net realizable value. This facility is held for sale at December 31, 1999 and the facility's new basis of $257,000 is included in other assets on the Company's consolidated balance sheet.
Also in 1999, the Company's Sock Group approved a restructuring plan to cease distribution operations at an owned facility located in Bally, Pennsylvania and to close a lease dye-house facility in Pottstown, Pennsylvania in 2000. In 1999, the Company recorded termination benefits of $269,000 for 94 employees at the Bally, Pennsylvania facility and other facility closure costs of $97,000. The terminations are expected to occur in the third quarter of 2000.
During 1998 and 1997, the Company closed 3 retail outlet stores each year and in 1998 consolidated certain distribution facilities and closed a sock knitting facility at the Sock Group. The Company recorded restructuring costs of $2.2 million in 1998 and $2.3 million in 1997, related to the closures and facility consolidation. Severance costs of $318,000 in 1998 and $338,000 in 1997 were recorded which related to the termination of 100 employees in 1998 and 25 employees in 1997. In 1998, additional closure costs primarily related to lease termination costs. In addition, the Company recorded impairment charges of $150,000 in 1998 and 1997 related to the write-off of outlet store property and underperforming assets. The Company also incurred other operating expenses during 1997 and 1998 to restructure and operate the Company during bankruptcy.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Restructuring and Impairment Charges (Continued)
The provision and related ending accruals for these costs are summarized as follows (in thousands):
6. Accounts Receivable
Allowances provided for accounts receivable are as follows:
DECEMBER 31, 1998 1999 (DOLLARS IN THOUSANDS)
Doubtful accounts $ 1,610 $ 1,620 Customer allowances 6,852 8,554
------- -------
$ 8,462 $10,174
======= =======
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Inventories
Inventories consist of the following:
December 31, 1998 1999 (DOLLARS IN THOUSANDS)
Finished goods $ 65,283 $ 60,854 Work in process 4,189 8,260 Raw material and supplies 10,276 11,613 -------- -------- 79,748 80,727 Less: Allowance for obsolete and slow moving inventory (5,149) (2,622) -------- -------- $ 74,599 $ 78,105 ======== ========
8. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31, 1998 1999 (DOLLARS IN THOUSANDS)
Land $ 2,091 $ 2,049 Buildings and site improvements 24,267 32,224 Machinery, equipment and other 81,200 82,403 Vehicles -- 37 Construction in progress 4,875 485 --------- --------- 112,433 117,198 Less accumulated depreciation (64,309) (69,404) --------- --------- $ 48,124 $ 47,794 ========= =========
Included in the amounts above is property held under capital leases (principally a distribution facility) of $0.8 million and $0.4 million, at December 31, 1998 and 1999, respectively.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-Term Obligations and Financing Arrangements
The classification of the Company's long-term obligations and financing arrangements, including accrued interest, is as follows:
Senior Credit Facility
On May 18, 1998, the Company entered into a $160.0 million Senior Credit Facility (the "Senior Credit Facility"). The Senior Credit Facility, which was amended on December 18, 1998, March 19, 1999, September 30, 1999 and March 29, 2000, 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, 1999, approximately $32.5 million was outstanding on the Revolver and the Company had approximately $10.1 million of open trade letters of credit outstanding for the purchase of finished goods inventory from foreign vendors. In addition, approximately $1.7 million of stand-by letters of credit were outstanding. Net availability under the Revolver was $5.7 million at December 31, 1999 in addition to cash and cash equivalents of $7.2 million.
In 1999, the Company obtained a $3.0 million revolving credit facility ("Additional Revolver") which is guaranteed by Vestar and bears interest, at the Company's option, at either the Eurodollar rate plus 1.5% or the Prime rate plus 0.5%. This facility expires on December 31, 2000. At December 31, 1999, there were no amounts outstanding under the Additional Revolver. On February 17, 2000, the Additional Revolver was increased to $7.5 million.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-Term Obligations and Financing Agreements (Continued)
On March 29, 2000, the Additional Revolver was increased to $12.0 million and incorporated into the Senior Credit Facility as Tranche C. Borrowings under Tranche C are due and payable on June 30, 2000 (unless certain events occur, in which case the maturity can be extended to December 31, 2001) and are guaranteed by Vestar.
The Revolver and the Term A loan mature in 2004 and the Term B loan matures in 2005. Term Loan A requires quarterly principal payments of $500,000 through June 1999, which increase annually by $500,000 through June 2002, then increase by $750,000 through June 2003 and decrease by $250,000 through maturity. Term Loan B requires quarterly principal payments of $150,000 through June 2004 and four quarterly payments of $14,100,000 beginning in September 30, 2004.
Interest for borrowings under the Revolver and Term A loan is based on either, at the Company's option, LIBOR plus 2.5% at December 31, 1998 and 3.0% at December 31, 1999 or the Alternative Base Rate plus 1.5% at December 31, 1998 and 2.0% at December 31, 1999. The Alternative Base Rate is the greater of the Bank of America prime rate or the Fed Funds rate plus 0.5%. Interest rates on the Revolver and Term Loan A ranged between 7.56% to 9.13%, and 9.19% to 10.25% at December 31, 1998 and 1999, respectively. Term Loan B interest rate is based on either LIBOR plus 3.0% at December 31, 1998 and 3.5% at December 31, 1999 or, at the Company's option, the Alternative Base Rate plus 2.0% at December 31, 1998 and 2.5% at December 31, 1999. Interest rates on Term Loan B were 7.79% and 9.69% at December 31, 1998 and 1999, respectively. At December 31, 1998 and 1999, the weighted average interest rate on short term borrowings was 9.0% and 9.41%, respectively.
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) are 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 debt issuance.
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 and a minimum Sock Group EBITDA test, each of which is tested as of the last day of each fiscal quarter of the Company and its subsidiaries. The amendments in December 1998, March 1999, September 1999 and March 2000 revised the original covenants.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-Term Obligations and Financing Agreements (Continued)
At December 31, 1999, the Company was not in compliance with its financial ratio covenants and received a waiver dated March 29, 2000. The March 2000 amendment also revised on-going covenants and the Company expects to meet these covenants throughout 2000.
In connection with the September 30, 1999 amendment of the Senior Credit Facility, Vestar and Bank of America, N.A. entered into an Investment and Deposit agreement for Vestar to infuse up to $30 million of new capital into the Company if certain leverage ratios are not met.
On March 29, 2000, the Senior Credit Facility and the Investment and Deposit agreement were amended. The March 2000 amendment requires (i) Vestar to infuse up to $30 million of new capital and (ii) the Company to make $20 million in additional principal payments on the Senior Credit Facilities between June 30, 2000 (or in certain circumstances August 31, 2000) and December 31, 2000 if certain financial ratios are not met by June 30, 2000. The Company expects to meet these covenants in 2000.
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 lender may terminate the commitments, accelerate the Company's obligations under the Senior Credit Facility, declaring them immediately due and payable, require the credit parties to establish a cash collateral account as security for outstanding letters of credit and enforce any and all other rights and interests existing under the credit documents.
Senior Subordinated Notes
In connection with the Recapitalization, 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"). The Parity Notes, which are convertible to senior subordinated notes have the same terms as the Senior Subordinated Notes with the exception that accumulated interest is paid to each Parity Note holder upon the conversion to Senior Subordinated Notes. As of December 31, 1999, $2.0 million of the initial $13.0 million Parity Notes have been converted to Senior Subordinated Notes. No mandatory redeemable dates exist for the parties' notes to be converted to Senior Subordination Note. Commencing November 15, 1998, interest is paid semiannually on May 15 and November 15 of each year. 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, are senior in right of payment to the Preferred Stock and are guaranteed by the Company's domestic subsidiaries.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-Term Obligations and Financing Agreements (Continued
Canadian 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"). 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. Congress under the Canadian Facility has a first priority lien on substantially all of the assets of Cluett Canada. Interest rates on the Canadian Facility ranged between 8.0% to 9.0%, and 7.75% to 9.75% at December 31, 1998 and 1999, respectively.
As of December 31, 1999, $11.3 million Canadian dollars were outstanding under the Canadian Facility plus $1.5 million Canadian dollars in open trade letters of credit.
CAT Notes Payable
In connection with the CAT acquisition, the Company entered into long term note agreements with an imputed value of $2.9 million which mature on November 1, 2002 and require monthly payments of $85,000 beginning August 1, 1999. The Company imputed interest on the notes at 10.0%.
The aggregate maturities of long-term debt and capital lease obligations as of December 31, 1999 are as follows:
2000 $14,209 2001 9,507 2002 12,930 2003 14,613 2004 40,563 Thereafter 181,270 -------- $273,092 ========
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Income Taxes
The provision for income taxes is summarized as follows:
(1) Includes approximately $0.5 million, $0.4 million and $0.5 million relating to foreign withholding taxes for 1997, 1998 and 1999, respectively.
A reconciliation of the statutory federal income tax provision (benefit) to the Company's provision for income taxes is as follows:
Deferred income taxes represent the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Income Taxes (Continued)
The significant components of the Company's domestic deferred tax assets and liabilities are as follows:
As of December 31, 1999, the Company had federal net operating loss ("NOL") carryforwards of approximately $246 million. These NOL carryforwards are scheduled to expire from the year 2005 through 2019. 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, approximately $206 million of the Company's NOL carryforwards are subject to an annual usage limitation of approximately $6.0 million plus an additional amounts related to any realized built in gains.
Based on the Company's history of earnings and the limitation on the use of its NOL carryforwards, the Company's entire balance of net domestic deferred tax assets have been reduced by a valuation allowance of $80.4 million and $83.3 million at December 31, 1998 and 1999, respectively as it was not assured that such assets would be realized in the future. The Company increased its valuation allowance by $25.1 million to $80.4 million in 1998 and $3.0 million to $83.3 million in 1999.
Undistributed earnings of foreign subsidiaries deemed permanently invested for which no deferred income taxes have been provided were approximately $5.1 million at December 31, 1997, and $0 at December 31, 1998 and $0 at December 31, 1999.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Employee Benefit Plans
The Company has a qualified defined benefit pension plan covering essentially all employees of the Company in the United States. 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, 1998 and 1999, the funded status of the Company's qualified defined benefit pension plan was as follows:
DECEMBER 31, 1998 1999 (DOLLARS IN THOUSANDS) Benefit Obligation Information Benefit obligation at beginning of year $ 74,073 $ 77,582 Service cost 1,724 2,086 Interest cost 5,346 5,034 Actuarial loss/(gain) 3,794 (10,093) Benefits paid (8,232) (11,703) Amendments - 1,186 Special termination benefits 877 3,178 --------- --------- Benefit obligation at end of year $ 77,582 $ 67,270 ========= =========
Fair Value of Plan Assets
Fair value of plan assets at beginning of year $109,129 $ 113,244 Actual return on plan assets 12,347 11,370 Benefits paid (8,232) (11,703) --------- --------- Fair value of plan assets at end of year $ 113,244 $ 112,911 ========= =========
Reconciliation of Funded Status, Amounts Not recognized, and Amounts Recognized Funded status $ 35,662 $ 45,641 Unrecognized prior service cost 3,222 4,037 Unrecognized loss/(gain) 765 (10,455) Unrecognized reversion value discount (8,266) (7,036) --------- --------- Prepaid benefit costs $ 31,383 $ 32,187 ========= =========
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Employee Benefit Plans (Continued)
Net pension benefit of the Company's qualified defined benefit plan for the years ended December 31, 1997, 1998 and 1999 include the following components:
The assumptions used in determining the funded status of the Company's defined benefit pension plans for the years ended December 31, 1997, 1998 and 1999 were discount rates of 7.5%, 7.0% and 8.25% 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. The change in assumptions between periods is reflected as an actuarial loss/(gain) and is reflected as a component of benefit obligation.
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 1997, 1998 and 1999, and is included in pension benefit for each respective year. The Company periodically performs an actuarial valuation of these pension assets and adjusts the amount of the pension assets and the annual amortization based on the results of the valuation.
During 1995, the Company's qualified defined benefit plan was amended to provide an Enhanced Retirement Program ("ERP"). The total charge in 1997 related to this program was $642,000.
During 1998, the Company's qualified defined benefit plan was amended to provide an Early Retirement Program ("CERP"). The total charge in 1998 and 1999 related to the program was $877,000 and $1,443,000.
During 1999, the Company's qualified defined benefit plan was amended to provide special termination benefits to those employees severed as a result of the Enterprise facility closing. The total charge in 1999 related to this program was $1,735,000.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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 2000, the Company and a former employee reached an agreement in principle to settle all matters relating to an action brought by the employee for the sum of $1.75 million of which $1.6 million and $1.75 million was reserved at December 31, 1998 and December 31, 1999, respectively. 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 results of operations or financial position.
The Company leases certain land, buildings and equipment under both capital and noncancelable operating leases that expire in various years through 2013. Certain of the operating leases contain rent escalation clauses and require the Company to pay maintenance costs, property taxes and insurance obligations on the leased property. 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, 1999 are as follows:
CAPITAL OPERATING LEASES LEASES (DOLLARS IN THOUSANDS) Year payable: 2000 $ 41 $ 3,826 2001 38 2,708 2002 37 2,420 2003 31 1,940 2004 30 1,466 Thereafter 240 2,072 ------- ------- Total minimum lease payments 417 $14,432 ======= ======= Amount representing interest (170) ------- Present value of net minimum lease payments 247 Current portion 16 ------- Long-term portion $ 231 =======
Rent expense totaled approximately $3.9 million in 1997, $4.3 million in 1998 and $3.4 million in 1999.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999 are as follows (in thousands):
Year payable: 2000 $ 566 2001 695 2002 955 2003 763
14. Related Party Transactions
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 in 1998. This amount was contributed by Holdings to the Company in 1999 and is reflected as a component of Stockholder's Deficit. In addition, a $1.5 million and $2.1 million liability related to an employee stock plan was assumed by the Company and the pension plan, respectively. The liability assumed by the pension plan is reflected as a component of the benefit obligation (see Note 11).
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. The Company expensed $250,000 in 1998 and $500,000 in 1999 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 Recapitalization, Vestar received a one-time transaction fee of $3.25 million in 1998.
During 1995 Mr. Marsal (founding Managing Director of A&M) was appointed Chief Executive Officer of the Company. In connection with this appointment, the Company paid A&M $1.4 million, $957,000, and $963,000 for 1997, 1998, and 1999, respectively for compensations and other related expenses.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Included in the Company's consolidated balance sheet at December 31, 1999 are the net assets of the Company's manufacturing facility located in Kitchener, Ontario and San Pedro Sula, Honduras, which total $ 1.1 million. The Honduras facility does not sell products to external customers. As of December 31, 1999, 28% of the Company's labor force is covered under collective bargaining agreements with one union, which expire between March 31, 2001 and December 31, 2002.
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 at December 31, 1998 and $225.1 million (book value of $257.0 million) at December 31, 1999 based on interest rates that are believed to be available to the Company for debt with similar provisions provided for in the existing debt agreements. The fair value of the senior exchangeable Preferred Stock was approximately $45.7 million at December 31, 1998 and $20.0 million (book value of $58.3 million) at December 31, 1999 based on a market value analysis.
17. Segment Data
The Company is organized by product line in three business segments. Foreign sales, primarily Canadian, were approximately 9.4%, 9.1% and 8.9%, in 1997, 1998 and 1999, respectively. There were no customers for which sales exceeded 10% during the three-year period presented.
The Company incurred a number of one-time costs associated with the restructuring of its operations and bankruptcy reorganization costs. The financial results associated with the Burberrys, YSL, Latin America, Canadian retail operations, Apparel On-line and unallocated corporate overhead charges, are referred to collectively as "All other".
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Segment Data (Continued)
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Segment Data (Continued)
Interest expense, interest income and income taxes are excluded from reportable segment data as such amounts are not included in segment information reviewed by the chief operating decision maker.
Reconciliation of Reportable Segments Net sales, Operating Income and Identifiable Assets
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Segment Data (Continued)
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 of the Notes are subordinated to such subsidiary's obligations under its guarantee of the Senior Credit Facility. Presented below is condensed consolidating financial information for Cluett American Corp. ("Parent Company"), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. In the Company's opinion, separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries would not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are consolidated in the presentation below. Investments in subsidiaries are accounted for by Cluett American Corp. using 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, 1998 and 1999, the Company allocated external interest expense to its subsidiaries, based on a percentage of net sales.
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Guarantor Subsidiaries (Continued)
CLUETT AMERICAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands)
Quarterly financial information for 1998 and 1999 is summarized as follows:
Year Ended Quarter December 31, First Second Third Fourth
Net Sales $ 92,355 $ 76,279 $ 93,264 $ 111,225 Gross Profit 28,449 23,747 27,007 29,595 Net Income (Loss) 2,341 (11,025) (715) (27,435)(1)
Net Sales 81,099 79,219 87,438 95,764 Gross Profit 23,712 22,509 22,492 25,681 Net Loss $ (2,165) $ (4,524) $ (4,939) $ (5,485)
Notes: (1) Includes $24.3 million in post-petition interest expense allocated to the Company by Holdings
Item 9.
Item 9. Changes in and disagreements with with Accountants on Accounting and Financial Disclosures
None other than previously reported on Cluett American Corp.'s Form 8-K dated January 3, 2000 and filed January 10, 2000.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Set forth below are the names and positions of the directors and executive officers of the Parent and the Company. All directors hold office until the next annual meeting of stockholders of the Parent and the Company, and until their successors are duly elected and qualified. All officers serve at the pleasure of the Board of Directors.
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.
JOSEPH. A. ROSATO is the President and Chief Operating Officer of Cluett Peabody & Co. Mr. Rosato joined the Company in September 1999. Mr. Rosato has 16 years of experience in the apparel industry. He has worked for Phillips-Van Heusen Corporation, Tommy Hilfiger, Inc., and most recently Warnaco Group, Inc., and has held various positions in sourcing and production related areas. Mr. Rosato earned a B.A. from New York University and an M.B.A. from Pace University.
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.
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.
W. TODD WALTER is a Director of A&M and became the Chief Financial Officer of the Parent 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.
SCOTT R. COLEMAN is Acting General Counsel and Secretary of the Parent and the Company effective August 1999. Mr. Coleman joined the Company in July 1998 as Assistant General Counsel. Prior to joining the Company, Mr. Coleman worked for four years as corporate associate at Paul, Weiss, Rifkind, Wharton & Garrison, and five years as an attorney for the City of New York. Mr. Coleman earned a J.D. from New York University School of Law and a B.A. from Columbia College.
NORMAN W. ALPERT is a Managing Director of Vestar Capital Partners and was a founding partner of Vestar at its inception in 1988. Mr. Alpert is Chairman of the Board of Directors of Aearo Corporation and Advanced Organics, Inc., and a director of Russell-Stanley Holdings, Inc., Siegelgale 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 is a director of Gleason Corporation and St. John Knits, Inc., companies in which Vestar or its affiliates have a significant equity interest. 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 founder and Chief Executive Officer of Vestar Capital Partners. Mr. O'Connell is a director of Aearo Corporation, Insight Communications Company, L.P., Remington Products Company, L.L.C., Russell- Stanley Holdings, Inc., Sheridan Healthcare, Inc., Siegelgale Holdings, Inc. and St. John Knits, Inc., 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 Capital Partners. 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 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 new 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 August 11, 1999 and November 20, 1999, the effective date the individuals became a reporting person. Through an oversight such forms were not filed until early in 2000. None of such directors or officers reported beneficial ownership of any equity securities of the Company.
Item 11.
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 the Parent and the Company.
SUMMARY COMPENSATION TABLE
(1) A&M also received, for services other than those of Mr. Marsal, compensation of $738,000, $257,000, and $263,000 for each of 1997, 1998, and 1999, respectively.
(2) Severance paid as part of termination of employment that was effective December 31, 1998.
(3) Accrued vacation pay and deferred compensation paid at time of termination of employment.
(4) Effective October 31, 1999, Robert Riesbeck no longer acted in the capacity of executive officer.
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 and Mr. Coleman (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) with the exception of Mr. Coleman, upon the occurrence of the termination of his or her employment without cause. Mr. Coleman's entitlement covers a period of six months. 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.
Mr. Kaufman's employment with the Company terminated as of September 30, 1999. The Company exercised its call rights and purchased the shares of Holdings Common Stock owned by Mr. Kaufman at the initial purchase price paid by Mr. Kaufman in May 1998.
Mr. Riesbeck stopped serving as executive officer effective October 31, 1999, but continued to receive salary continuation through on March 31, 2000. The Company exercised its call rights and purchased the shares of Holdings Common Stock owned by Mr. Riesbeck at the initial purchase price paid by Mr. Riesbeck 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 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.
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. No options have been granted under the Option Plan through December 31, 1999.
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
This report sets forth the compensation policies that guide decisions of the Compensation committee with respect to the compensation of the Company's executive officers. This report also reviews the rationale for pay decisions that affected Mr. Marsal during the 1999 fiscal year, and, in that regard, offers additional insight into the figures that appear in the compensation tables which are an integral part of the overall disclosures of executive compensation. Any consideration to pay-related actions that may become effective in future fiscal years are not reported in this statement.
The central responsibility of the Compensation Committee is to oversee compensation practices of the Company's executive offices. In this capacity, it reviews salaries, benefits, and other compensation paid to the Company's executive officers and recommends actions to the full Board of Directors with respect to those matters.
The Compensation Committee is dedicated to ensuring that the Company's financial resources are used effectively to support the achievement of its short-term and long-term business objectives. In general, it is the policy of the Company that executive compensation reflect relevant market standards for individuals with superior capabilities and be driven substantially by the Company's performance as measured by the achievement of internally generated earnings targets. The members of the Compensation committee believes that the Company's executive compensation program is well structured to achieve its objectives.
Item 12.
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 Cluett American Group ("CAG"), which is a wholly-owned subsidiary of Cluett American Investment Corp. ("Holdings"). The following table sets forth, as of February 29, 2000, 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% Kathy D. Wilson ............................ 2,041 (4) William S. Sheely .......................... 1,633 (4) All executive officers and directors as a group (11 persons)(2)(3) .................. 275,342 77.1%
(1) For a discussion of certain voting arrangements among these holders see Item 13.
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 Junior 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 and certain other Original Equity Holders (SAEPIC and such other Original Equity Holders, the "Participating Original Equity Holders"; together with the Initial Investors, the "Participating Stockholders"), have 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.
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.
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 recourse 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.
Item 14.
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, 1999
Consolidated Statements of Operations for the years ended December 31, 1997, December 31, 1998 and December 31, 1999
Consolidated Statements of Stockholder's Deficit for the years ended December 31, 1997, December 31, 1998 and December 31, 1999
Consolidated Statements of Cash Flows for the years ended December 31, 1997, December 31, 1998 and December 31, 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
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 inapplicable 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).
2.3Stockholders' 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 121/2% 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 (incorporated by reference to Exhibit 10.2.1 to the Company's Annual Report on Form 10-K (Reg. No. 333-58059) filed on March 29, 1999).
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 (incorporated by reference to Exhibit 10.2.2 to the Company's Annual Report on Form 10-K (Reg. No. 333-58059) filed on March 29, 1999).
10.2.3 Waiver to the Credit Agreement and Assignment dated July 28, 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 (incorporated by reference to Exhibit 10.2.3 to the Company's Annual Report on Form 10-K (Reg No. 333-58059) filed on March 29, 1999).
10.2.4 Fourth Amendment to the Credit Agreement and Assignment dated September 30, 1999 by an among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lender, New Lender, and agents (incorporated by reference to Exhibit 10.2.4 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on November 16, 1999).
10.2.5 Investment and Deposit Agreement between Vestar Capital Partners and Bank of America dated September 30, 1999 (incorporated by reference to Exhibit 10.2.5 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on November 16, 1999).
10.2.6 $3.0 million Credit Agreement dated as of November 9, 1999 among Cluett American Corp, as the borrower Bank of America, N.A. and Vestar Capital Partners III, L.P. as guarantor (incorporated by reference to Exhibit 10.2.6 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on November 16, 1999).
*10.2.7 $7.5 million Amended and Restated Credit Agreement dated as of February 17, 2000, among Cluett American Corp, as the borrower, Bank of America, N.A. and Vestar Capital Partners III, L.P., as guarantor (filed herewith as Exhibit 10.2.7).
*10.2.8 Fifth Amendment to Credit Agreement and Waiver dated March 29, 2000 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lender, New Lender, and agents (filed herewith as Exhibit 10.2.8).
*10.2.9 Amended and Restated Investment and Deposit Agreement between Vestar Capital Partners III, L.P. and Bank of America dated March 29, 2000 (filed herewith as Exhibit 10.2.9).
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).
+10.7Employment 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).
+10.8Severance 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).
+10.9Severance 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).
10.12Secured 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).
10.13Form 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).
16.1 Letter from Ernst & Young LLP, former Certifying Accountants (incorporated by reference to Exhibit 16.1 to the Company's Current Report filed on Form 8-K (Reg. No. 333-58059) filed on January 10,2000).
21 List 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).
*23.1Consent of Ernst & Young LLP, independent certified public accountants (filed herewith as Exhibit 23.1)
24 Powers 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 three months ended December 31, 1999 . (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.
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, 2000 --------------------------------------------------------------
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 and Chief Executive Officer
Date: March 29, 2000 --------------------------------------------------------------
/s/ W. Todd Walter
-------------------------------------------------------------- Name: W. Todd Walter Title: Vice President and Chief Financial Officer
Date: March 29, 2000 --------------------------------------------------------------
/s/ James A. Williams
-------------------------------------------------------------- Name: James A. Williams Title: Director
Date: March 29, 2000 --------------------------------------------------------------
/s/ Norman W. Alpert
-------------------------------------------------------------- Name: Norman W. Alpert Title: Director
Date: March 29, 2000 --------------------------------------------------------------
/s/ Steven M. Silver
-------------------------------------------------------------- Name: Steven M. Silver Title: Director
Date: March 29, 2000 --------------------------------------------------------------
/s/ Sander M. Levy
-------------------------------------------------------------- Name: Sander M. Levy Title: Director
Date: March 29, 2000 --------------------------------------------------------------
/s/ Daniel S. O' Connell
-------------------------------------------------------------- Name: Daniel S. O'Connell Title: Director
Date: March 29, 2000 --------------------------------------------------------------
EXHIBIT INDEX
10.2.7 $7.5 million Amended and Restated Credit Agreement dated February 17, 2000.
10.2.8 Fifth Amendment to Credit Agreement and Waiver dated March 29, 2000.
10.2.9 Amended and Restated Investment and Deposit Agreement dated March 29,
23.1 Consent of Ernst & Young, LLP Certified Public Accountant dated March 29,
27 Financial Data Schedule
Item 14 (d). Financial Statement Schedules
SCHEDULE II
CLUETT AMERICAN CORP.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)