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Gerber Childrenswear Inc – IPO: ‘S-1’ on 3/4/98

As of:  Wednesday, 3/4/98   ·   Accession #:  950123-98-2286   ·   File #:  333-47327

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/04/98  Gerber Childrenswear Inc          S-1                   26:1.9M                                   RR Donnelley/FA

Initial Public Offering (IPO):  Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1         Gerber Childrenswear, Inc.                           131    744K 
 2: EX-4.2      Credit Agreement                                     108    427K 
 3: EX-10.1     Stock Purchase Agreement                              51    215K 
11: EX-10.10    Subordination and Interceditor Agreement              17     68K 
12: EX-10.11    Junior Subordinated Note                              25    100K 
13: EX-10.13    License Agreement                                     28     91K 
14: EX-10.14    License Agreement                                     31     73K 
15: EX-10.15    Trademark License Agreement                           33    127K 
16: EX-10.16    Lease Agreement                                        7     31K 
17: EX-10.17    Lease Agreement                                        6     28K 
18: EX-10.18    Lease Agreement                                        6     28K 
19: EX-10.19    Lease Agreement                                       11     37K 
 4: EX-10.2     Form of Executive Stock Purchase Agreement            21     90K 
20: EX-10.20    Lease Agreement                                       40    120K 
21: EX-10.21    Severance Agreement                                    2     14K 
 5: EX-10.3     Form of Manager Securities Purchase Agreement         17     69K 
 6: EX-10.4     Securities Purchase Agreement                         13     60K 
 7: EX-10.5     Form of Director Stock Purchase Agreement             12     44K 
 8: EX-10.7     Stock Purchase Agreement                              54    224K 
 9: EX-10.8     Share Purchase Agreement                              52    242K 
10: EX-10.9     Amended and Restated Credit Agreement                 54    238K 
22: EX-21.1     Subsidiaries of the Registrant                         1      8K 
23: EX-23.1     Consent of Ernst & Young LLP                           1     10K 
24: EX-23.2     Consent of Jc Holland & Co Psc                         1      8K 
25: EX-23.3     Consent Price Waterhouse                               1      8K 
26: EX-27.1     Financial Data Schedule                                1     10K 


S-1   —   Gerber Childrenswear, Inc.
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Common Stock
4Prospectus Summary
"The Company
8Reorganization
9The Offering
"Risk Factors
12Dependence on Gerber License and Other Intellectual Property
13Competition
15Costs of Raw Materials and Supplier Relationships
16Risk of Fluctuation in Foreign Currency Exchange Rates
"Cost of Environmental Compliance
18Dilution
19Use of Proceeds
"Dividend Policy
20Capitalization
22Selected Consolidated Financial Data
24Unaudited Pro Forma Condensed Consolidated Statement of Operations
27Management's Discussion and Analysis of Financial Condition and Results of Operations
29Net sales
"Gross margin
"Stock compensation
"Other
"Income before interest and income taxes
"Interest expense, net
"Provision for income taxes
"Extraordinary item
"Net income
30Liquidity and Capital Resources
32Fluctuation of Foreign Currency Exchange Rates
34Business
37Gerber
39Playwear
40Manufacturing and Sourcing
"Product Sourcing
"Quality Control
41Distribution and Inventory Management
"Auburn
43Management Information Systems
"Customers
44Backlog and Seasonality
"Licensing and Trademarks
48Environmental and Other Regulatory Matters
50Management
"Executive Officers and Directors
53Long-Term Incentive Plan
57Certain Relationships and Related Transactions
"The Reorganization
"Merger and Conversion of GCIH Stock
58Transactions with Management and Directors
59Transactions with CVC and its Affiliates
"Transactions with Citicorp Mezzanine Partners, L.P
60Principal Stockholders
61Description of Certain Indebtedness
"Credit Agreement
63Description of Capital Stock
"Class B Common Stock
"Amended and Restated Registration Rights Agreement
64Certain Provisions of the Company's Amended and Restated Certificate of Incorporation
65Certain United States Federal Income Tax Consequences to Non-United States Holders of Common Stock
66Shares Eligible for Future Sale
69Underwriting
71Legal Matters
"Experts
"Additional Information
73Index to Consolidated Financial Statements
74Report of Independent Auditors
79Notes to Consolidated Financial Statements
103Earnings Per Share
120Item 13. Other Expenses of Issuance and Distribution
"Item 14. Indemnification of Directors and Officers
121Item 15. Recent Sales of Unregistered Securities
124Item 16. Exhibits and Financial Statement Schedules
125Item 17. Undertakings
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 GERBER CHILDRENSWEAR, INC.* (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) [Download Table] DELAWARE 38-2664081 2300 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER (PRIMARY STANDARD INDUSTRIAL INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) CLASSIFICATION CODE NUMBER) 7005 PELHAM ROAD SUITE D GREENVILLE, SC 29615 TELEPHONE: (864) 987-5200 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ MR. EDWARD KITTREDGE CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT GERBER CHILDRENSWEAR, INC. 7005 PELHAM ROAD SUITE D GREENVILLE, SC 29615 TELEPHONE: (864) 987-5200 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Copies to: [Download Table] LANCE C. BALK, ESQ. VALERIE FORD JACOB, ESQ. KIRKLAND & ELLIS FRIED, FRANK, HARRIS, SHRIVER & JACOBSON 153 EAST 53RD STREET ONE NEW YORK PLAZA NEW YORK, NEW YORK 10022 NEW YORK, NY 10004 TELEPHONE:(212) 446-4800 TELEPHONE: (212) 859-8000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the "Securities Act"), check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] [Enlarge/Download Table] ======================================================================================================= TITLE OF EACH CLASS PROPOSED MAXIMUM OF SECURITIES AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED PRICE(1) REGISTRATION FEE ------------------------------------------------------------------------------------------------------- Common Stock, par value $0.01 per share.......................... $57,500,000 $16,962.50 ======================================================================================================= (1) Estimated solely for the purpose of calculating the registration fee pursuant to paragraph (o) of Rule 457 of the Securities Act. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. *Registrant's name is GCIH, Inc. and will be changed to Gerber Childrenswear, Inc. in connection with the consummation of the Offering contemplated hereby. ================================================================================
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MARCH 4, 1998 [LOGO] SHARES GERBER CHILDRENSWEAR, INC. COMMON STOCK ------------------------ All of the shares of Common Stock, par value $.01 per share (the "Common Stock"), offered hereby are being sold by Gerber Childrenswear, Inc. (the "Company"). The Company also has authorized and outstanding shares of Class B Common Stock. The two classes of common stock are substantially identical, except that shares of Class B Common Stock are non-voting and are convertible at any time at the holder's option into shares of Common Stock on a one-for-one basis. See "Description of Capital Stock." Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $ and $ per share. For a discussion relating to the factors considered in determining the initial public offering price, see "Underwriting." Application has been made for listing of the Common Stock on the New York Stock Exchange under the symbol "GCW," subject to official notice of issuance. SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [Enlarge/Download Table] =========================================================================================================================== PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) --------------------------------------------------------------------------------------------------------------------------- Per Share........................ $ $ $ --------------------------------------------------------------------------------------------------------------------------- Total(3)......................... $ $ $ =========================================================================================================================== (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted the Underwriters an option to purchase up to an additional shares of Common Stock, exercisable within 30 days after the date hereof, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about , 1998. ------------------------ MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. LEHMAN BROTHERS FURMAN SELZ WASSERSTEIN PERELLA SECURITIES, INC. ------------------------ The date of this Prospectus is , 1998.
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[LOGOS AND PICTURES OF PRODUCTS TO COME. THESE WILL INCLUDE THE FOLLOWING LOGOS AND PRODUCTS BEARING SUCH LOGOS: GERBER, ALWAYS BABY BY GERBER, CURITY, BABY LOONEY TUNES, WILSON, CONVERSE, COCA-COLA AND DUNLOP. ALL OF SUCH PRODUCTS ARE PRODUCED AND DISTRIBUTED BY THE COMPANY.] Certain persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Such transactions may include stabilizing, the purchase of Common Stock to cover syndicate short positions and the imposition of penalty bids. For a description of these activities, see "Underwriting." 2
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PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the financial statements (including the Notes thereto) appearing elsewhere in this Prospectus. Unless the context otherwise requires, the information set forth in this Prospectus gives effect to the transactions described herein under "Certain Relationships and Related Transactions -- The Reorganization." References in this Prospectus to the "Company" shall, as the context requires, refer to Gerber Childrenswear, Inc. (and its predecessor), together with its wholly-owned direct and indirect subsidiaries. References in this Prospectus to "Gerber" refer to Gerber Childrenswear, Inc. References in this Prospectus to "Auburn" shall, as the context requires, collectively refer to Auburn Holdings, Inc., Auburn Hosiery Mills, Inc., GCI Spainco., S.L. (in process of formation), Sport Socks Co. (UK) Limited and Sport Socks Co. (Ireland) Limited, each a wholly-owned direct or indirect subsidiary of Gerber Childrenswear, Inc. Data included in this Prospectus regarding the size, growth and factors affecting the markets for infant and toddler apparel and for hosiery, the Company's market position, demographic trends, market share and other similar matters are approximations based on the Company's estimates and other industry data which are generally recognized within the industry. Although the Company believes that such data are generally reflective of the matters reflected therein, investors are cautioned not to place undue reliance on such data. Unless otherwise indicated, the information set forth in this Prospectus does not give effect to the exercise of the Underwriters' overallotment option. THE COMPANY Gerber Childrenswear, Inc. is a leading marketer of infant and toddler apparel and related products, offering products under its flagship brand, Gerber, as well as the Baby Looney Tunes and Curity brand names and the Onesies trademark. The Gerber name and baby head logo are among the best recognized in the infant and toddler industry. The Company believes that Gerber is the leading provider of infant and toddler apparel and related products to volume retailers, which constitute the fastest growing segment of the retail industry. The Company also distributes products to mid-tier department stores and specialty retailers. Gerber holds a leading market share in its distribution channels in the underwear, blanket sleeper and cloth diaper categories. The Company believes that these leading positions in addition to strong consumer recognition of its brands provide opportunities for Gerber to leverage its brands into other product categories including sleep 'n play, bed & bath, playwear, bibs, hosiery and gift sets where Gerber has a growing presence. In addition, in order to build upon the Company's expertise as a low-cost supplier of branded merchandise to volume retailers, the Company acquired all of the capital stock of Auburn in December 1997 (the "Acquisition") for approximately $40.0 million. Auburn manufactures, markets and sells branded sport socks for men, women and children under established brand names such as Wilson, Coca-Cola and Converse in the U.S., Europe and other international territories and under the Dunlop brand name in Europe. Auburn markets to a diversified customer base in the U.S. and Europe, including volume retailers, department stores, wholesale clubs and major sporting good chains. As a result of the Acquisition, the Company markets products in over 25 countries. The Company believes that Auburn's expertise in hosiery will position it to capitalize on growth opportunities and the Acquisition will provide opportunities to achieve certain economies of scale and efficiencies in the areas of purchasing, data processing, and selling, general and administrative expenses. In 1997, pro forma for the Acquisition, the Company's net sales and income from continuing operations were $270.1 million and $6.6 million, respectively. In January 1996, Gerber Childrenswear, Inc. was acquired from Gerber Products Company ("GPC") by a group of investors led by Edward Kittredge, the Company's Chairman, President and Chief Executive Officer, who assembled Gerber's current management team. The new management team, under the direction of Mr. Kittredge, developed a series of initiatives to strengthen Gerber's financial results and improve its operations. To achieve cost efficiencies, Gerber consolidated manufacturing facilities, established a flexible production strategy including domestic and offshore manufacturing and sourcing components, centralized finished product purchasing across all product categories and enhanced its compensation system. As a result, Gerber's operating margin, excluding royalties accrued to GPC, stock compensation and certain non-recurring charges, increased to 15.6% in 1997 from 13.3% in 1996 and 8.3% in 1995. 3
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The U.S. retail market for infant and toddler apparel and related products, as a whole, is estimated at $7.0 billion in 1997, and has grown at a compound annual rate of 8.0% since 1991. The Company believes that this market is well-insulated from major changes in fashion trends and is less sensitive to general economic cycles due to the consistent level of infant births in the U.S., at slightly less than 4 million annually, and the high consumption rate for apparel products as infants experience frequent size changes. Annual apparel spending per infant increased to $329 in 1996 from $250 in 1993 according to U.S. Census data, representing compound annual growth of 9.6%. The Company believes the market offers continued growth prospects due to demographic factors including (i) more women having children at an older age and returning to work thereafter, resulting in greater disposable income for expenditures on children; and (ii) an increasing number of grandparents, who represent a key consumer segment for infant and toddler products. Within the infant and toddler industry, greater emphasis on value has shifted consumer purchases away from traditional department stores and toward more value-conscious retail channels, including volume retailers and mid-tier department stores. Additionally, the industry is highly fragmented and services volume retailers who are interested in limiting their purchases to a smaller number of well-capitalized vendors with a broad base of branded products. The Company believes that its strong brand names, leading market positions, broad product offerings and strong customer relationships with volume retailers and mid-tier department stores position it to benefit from industry trends. COMPETITIVE STRENGTHS The Company's business philosophy is to pursue growth and profitability by maintaining and enhancing its strong brand name recognition and reputation for quality while continuing to strengthen its customer relationships. The following factors serve as the Company's competitive strengths and distinguishing characteristics: STRONG BRAND NAME RECOGNITION. The Company believes that Gerber is one of the most recognized brands in the infant and toddler apparel industry with a reputation for consistently delivering high quality products with innovative design features at competitive prices. The Gerber brand name was first introduced for baby food in 1928 by GPC, which holds an approximately 65% market share in the baby food industry. The Company markets and sells infant and toddler's apparel and related products using the well established Gerber brand name and baby head logo. In addition, the Company believes that its popular Baby Looney Tunes brand name (used on products at slightly higher price points) is recognized for its use of characters, bright colors and higher fashion content. The Company also benefits from the strong recognition of its Onesies trademark (developed for its line of infant underwear) and the Curity brand name (used on products which are targeted towards more value-conscious consumers). Additionally, as a result of the Acquisition, the Company offers sport socks under the Wilson, Converse, Coca-Cola and Dunlop brand names licensed by Auburn. LEADING MARKET POSITIONS IN CORE PRODUCT CATEGORIES. The Company is the leading provider of infant and toddler apparel and related products to volume retailers, which constitute the fastest growing segment of the retail industry. The Company also distributes products to mid-tier department stores and specialty retailers. Gerber holds a leading market share in its distribution channels in the underwear, blanket sleeper and cloth diaper categories. The Company believes that its leading market shares provide significant competitive advantages in serving its customers, through production and purchasing efficiencies and greater product development and marketing resources. Management's strategy is to leverage these competitive advantages to further penetrate other product categories, whether acquired or internally developed. HIGH QUALITY, INNOVATIVE PRODUCTS. The Company believes that it has developed a reputation for high quality and innovative products and that this has played a critical role in its long-standing strong market positions. In 1982, Gerber designed and developed Onesies, an innovative one-piece underwear garment, which resulted in a new category of infant apparel which Gerber believes consumers identify with the Onesies trademark. Most recently, Gerber introduced the Swim-per, a swim diaper, and Nap 'N Go, a portable daycare mat. LOW-COST SUPPLIER. The Company believes that its reputation for providing high quality products at attractive prices has established it as one of the top infant and toddler apparel suppliers among value-conscious 4
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volume retailers. The Company actively manages the manufacturing and sourcing of its products to optimize efficiencies. Of the products manufactured and sourced offshore, the majority were through manufacturing operations that are owned or dedicated exclusively to the Company's products. The Company believes that such diversification has enabled it to enhance operating efficiencies through production flexibility and expanded capacity without significant capital investment, while at the same time enabling it to control more efficiently the delivery and quality of its products. All of these factors have helped the Company to become a low-cost supplier. See "Business -- Gerber -- Manufacturing and Sourcing -- Product Sourcing." In addition, the Company believes that its centralized planning, purchasing and distribution systems have enhanced its cost competitiveness through reduced distribution costs, minimization of product delays and economies of scale. LONG-TERM CUSTOMER RELATIONSHIPS AND EMPHASIS ON CUSTOMER SERVICE. Gerber enjoys well-established, long-term relationships with its customers, many of which have been maintained at multiple levels from sales to senior management. In certain cases, members of Gerber's senior management and sales force have maintained relationships with Gerber's customers for over 30 years. Moreover, the Company believes its broad product offerings, emphasis on customer service and proven reliability provide a competitive advantage as retailers consolidate and seek a smaller number of well-capitalized vendors with a broad base of branded products. Gerber works closely with its principal customers to assist in the management of their inventories and has invested in warehousing and distribution facilities and information systems development, including an electronic data interchange ("EDI") system and a vendor managed inventory ("VMI") program. In addition, Gerber's information systems enable it to provide customized merchandising and space allocation recommendations and other category management services to its retail customers. Gerber currently provides such customized services for Wal-Mart Stores, Inc. ("Wal-Mart") in certain product categories. Gerber has been recognized for its accomplishments by many retailers and in 1997 received the "Supplier Performance Award by Retail Category" from Discount Store News on behalf of discounters, the highest award a company can receive from such retailers. In addition, the Company has received a number of awards from its customers, including Wal-Mart, Sears Roebuck & Co. ("Sears"), J.C. Penney Co., Inc. ("J.C. Penney") and Toys "R" Us, Inc. ("Toys "R" Us"). DEVELOPMENT OF MANAGEMENT AND OPERATING INFORMATION SYSTEMS. Gerber has made significant investments in the development of management information systems ("MIS") and plans to make additional capital expenditures to further refine such systems. Gerber believes that it will continue to benefit from these systems through its ability to effectively manage inventory, improve sales and reduce operating costs. Gerber currently serves all major volume retailers through its EDI system, which allows customers to send orders to Gerber more quickly and efficiently. EXPERIENCED MANAGEMENT TEAM WITH A SIGNIFICANT STAKE IN THE COMPANY. The Company's Chairman, President and Chief Executive Officer, Edward Kittredge, has had over 35 years of diverse experience in the textile and apparel industry and the Company's top five senior managers average more than 25 years of experience in the apparel industry. The sales and merchandising team has been strengthened with the recent additions of Robert P. Robertson as Senior Vice President of Sales and Marketing and Mary-beth Boughton as Vice President of Merchandising (focused on mid-tier department stores). After giving effect to the Reorganization and the Offering, management will own approximately % of the Common Stock of the Company on a diluted basis. BUSINESS STRATEGY The key elements of the Company's business strategy to remain a low-cost supplier of high quality, branded products to volume retailers include: ENHANCE OFFERING OF HIGH QUALITY, INNOVATIVE PRODUCTS. The Company intends to continue to enhance its product offerings through new product initiatives and product extensions. The Company's strategy is to leverage the Gerber, Baby Looney Tunes and Curity brands into additional products, including product segments in which the Company is under-represented. For example, the Company is under-represented in the approximately $1.8 billion playwear market at retail and in the approximately $600 million fleece/outerwear 5
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market at retail. In order to grow its market share in these product lines, Gerber recently enhanced its line of Baby Looney Tunes playwear and introduced a new line of Gerber fleecewear. The Company believes that these categories present significant growth opportunities. EXPAND INTO NEW AND STRENGTHEN EXISTING DISTRIBUTION CHANNELS. The Company's plan is to continue to leverage its strong brand names to expand into new distribution channels in the U.S. and abroad. Gerber recently targeted the mid-tier department store channel with product lines such as Always Baby by Gerber, which are specially designed, packaged and priced for mid-tier department store customers. Gerber's strategy is to emphasize marketing efforts to increase product breadth in existing distribution channels in which it believes some of its product lines are under-represented. In addition, management believes that the Gerber, Baby-Looney Tunes and Curity lines of products have growth opportunities in the food and drug, variety, off-price apparel, catalog, dollar store, wholesale club and mid-tier department store distribution channels. FURTHER PENETRATE INTERNATIONAL MARKETS. Gerber currently has an exclusive license to use the Gerber brand name on certain infant and toddler apparel and textile products in the U.S., Canada and the Caribbean and a right of first refusal to use the Gerber name in Central and South America. Gerber branded products are currently being shipped in the U.S. and to Canada and the Caribbean. The Company believes that its offshore manufacturing and sourcing capabilities give it a competitive advantage to further increase its presence in the international markets. Gerber plans to increase the distribution of its Gerber line of products in Canada by offering a broader product mix in such market. The Company's plan is to leverage the Gerber brand name to expand its presence in international markets in which the Gerber brand name is established for baby food, and believes that such markets represent expansion opportunities. MAXIMIZE OPERATING EFFICIENCIES. The Company's strategy is to continue to improve operating efficiencies and productivity in order to offer its customers high quality products at competitive prices. The Company's plan is to continue to optimize product sourcing to achieve economies of scale and to eliminate certain duplicative operations in connection with the acquisition of Auburn. LEVERAGE EXPERTISE THROUGH SELECTIVE ACQUISITIONS. The Company actively evaluates acquisition candidates and is in discussions from time to time regarding future acquisitions. Future strategic acquisitions may be undertaken to broaden the Company's product lines, increase sourcing diversity and strengthen its presence within various channels of distribution. The Company believes that numerous acquisition candidates exist within the infant and toddler apparel industry. In addition, the Company believes that other acquisition opportunities exist in similar high volume, basic branded apparel businesses where the Company can leverage its core competencies. The Company currently has no agreements or understandings with respect to any acquisitions. RECENT ACQUISITION The Company acquired all of the capital stock of Auburn in December 1997 for approximately $40.0 million. Auburn manufactures, markets and sells branded sport socks for men, women and children under established brand names such as Wilson, Coca-Cola and Converse in the U.S. and internationally and under the Dunlop brand name in Europe. Auburn has operations in the United States and Ireland. Auburn markets to a diversified customer base in the U.S. and Europe, including volume retailers, department stores, wholesale clubs and major sporting good chains. These strong brand names and Auburn's long-term reputation for quality facilitate a multi-channel distribution strategy. Auburn competes effectively in these distribution channels by offering its branded products at competitive prices, acting as a low-cost producer with the ability to service customers with quick turnaround, and maintaining strong customer relations. In addition, with its acquisition by Gerber, Auburn has added to these core competencies the ability to access capital for future growth and investment in operations. For the year ended December 31, 1997, Auburn had net sales of approximately $69.6 million. Auburn competes in the highly fragmented hosiery industry, which has significant branded and private label components. Competition within the industry is generally based on price, quality, service, brand recognition and style. The Company believes that advances in technology in hosiery manufacturing will result 6
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in a smaller number of well-capitalized hosiery manufacturers. The Company believes that Auburn is well positioned to benefit from such consolidation due to its strong brands, established channels of distribution, strong customer service, low-cost manufacturing capabilities and access to capital. The Company also believes that significant growth opportunities exist through taking market share from private label producers, which comprise a significant portion of the hosiery industry. In addition, the Company believes that Auburn's European manufacturing facility allows it to be more responsive to the European market, where the Company believes significant opportunity for expansion exists. See "Business -- Auburn -- Distribution and Inventory Management." The Company believes that the Acquisition will provide certain economies of scale and efficiencies in the areas of purchasing, data processing and selling, general and administrative expenses. In addition, the Company believes that the acquisition of Auburn will provide Gerber with opportunities to further expand its business in international markets through Auburn's solid customer relationships and reputation in Europe. REORGANIZATION Gerber Childrenswear, Inc. was acquired by GCIH, Inc. ("GCIH") in January 1996 from GPC for approximately $61.5 million in cash (subject to purchase price adjustments) and a $12.5 million promissory note (the "Original Acquisition"). In connection with such acquisition and related financing, Citicorp Venture Capital, Ltd. ("CVC"), management, directors and others purchased the equity of GCIH. Immediately prior to or in connection with the consummation of the Offering, the Company will consummate a series of transactions pursuant to which the Company will be recapitalized and reorganized (the "Reorganization"). The principal transactions comprising the Reorganization that will occur prior to or in connection with the consummation of the Offering are: (i) the conversion of all of the outstanding shares of preferred stock of GCIH into either common stock of GCIH or the right to receive cash, (ii) the merger of GCIH into and with Gerber, with Gerber being the surviving entity of such merger, and (iii) in connection with such merger, the exchange of all of the outstanding shares of all classes of common stock and warrants to purchase common stock of GCIH for shares of Common Stock, Class B Common Stock or warrants to purchase Class B Common Stock of the Company. In addition, all indebtedness of GCIH will be assumed by Gerber. See "Certain Relationships and Related Transactions--The Reorganization." Consummation of the Offering is contingent on the completion of the above-described transactions. The Company is a Delaware corporation. The Company's principal offices are located at 7005 Pelham Road, Suite D, Greenville, SC 29615, and its telephone number is (864) 987-5200. 7
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THE OFFERING [Enlarge/Download Table] Common Stock Offered by the Company.................. shares Common Stock to be outstanding after the Offering: Common Stock....................................... shares(a) Class B Common Stock............................... shares(b) Total........................................... shares Voting Rights........................................ Each share of Common Stock is entitled to one vote per share. Shares of Class B Common Stock are not entitled to any votes. Use of Proceeds...................................... The net proceeds to be received by the Company from the Offering will be used to repay certain indebtedness of the Company and to redeem certain shares of GCIH's preferred stock in connection with the Reorganization. See "Use of Proceeds." Proposed New York Stock Exchange Symbol.............. "GCW" --------------- (a) Based on the number of shares outstanding as of . Includes restricted shares of Common Stock issued to the Company's management, including vested shares and unvested shares. Excludes shares reserved for issuance under the Company's stock option plan of which options to purchase shares have been or will be granted in connection with the Offering. Assumes the Underwriters' over-allotment option is not exercised. (b) Excludes shares of Class B Common Stock which may be issued upon the exercise of a warrant which was issued in connection with the Original Acquisition. Shares of Class B Common Stock are convertible at any time at the holder's option into shares of Common Stock on a one-for-one basis. Shares of Class B Common Stock may not be transferred to anyone other than an affiliate of the holder, unless such Class B Common Stock is first converted by such holder into Common Stock. See "Description of Capital Stock." RISK FACTORS Purchasers of the Common Stock in the Offering should carefully consider the risk factors set forth under the caption "Risk Factors" and the other information included in this Prospectus prior to making an investment decision. See "Risk Factors." 8
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table presents (i) summary historical consolidated financial information of the Company's Predecessor (the "Predecessor Company") for the year ended December 31, 1995, (ii) summary historical consolidated financial information of the Company for the period from January 22, 1996 to December 31, 1996 and for the year ended December 31, 1997 and (iii) summary pro forma as adjusted information of the Company for the year ended December 31, 1997, after giving effect to the Acquisition, the Reorganization and the Offering and the application of the estimated net proceeds therefrom. The historical consolidated financial information of the Predecessor Company and the Company have been derived from the financial statements of the Predecessor Company and the Company, respectively, which have been audited by Ernst & Young LLP. The summary pro forma as adjusted information does not purport to represent what the Company's results would have been if such events had occurred at the date indicated, nor does such information purport to project the results of the Company for any future period. The summary financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto and the Unaudited Pro Forma Condensed Consolidated Statement of Operations and notes thereto included elsewhere in this Prospectus. [Enlarge/Download Table] PREDECESSOR COMPANY (a) COMPANY ------------ ---------------------------- PERIOD FROM JANUARY 22, YEAR ENDED 1996 TO YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 (b) 1997 (c) ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Net sales................................................. $197,401 $185,223 $202,037 Cost of sales............................................. 156,434 138,608 146,294 -------- -------- -------- Gross margin.............................................. 40,967 46,615 55,743 Selling, general and administrative expenses.............. 24,633 23,894 27,766 Stock compensation(d)..................................... -- -- 9,465 Other..................................................... -- 689 231 -------- -------- -------- Total operating expenses.................................. 24,633 24,583 37,462 -------- -------- -------- Income before interest and income taxes................... 16,334 22,032 18,281 Interest expense, net..................................... -- 6,308 5,798 -------- -------- -------- Income before income taxes and extraordinary item, net.... 16,334 15,724 12,483 Provision for income taxes................................ 6,270 6,244 4,764 -------- -------- -------- Income before extraordinary item, net..................... 10,064 9,480 7,719 Extraordinary item, net(e)................................ -- -- (708) Less preferred stock dividends............................ -- (1,328) (1,637) -------- -------- -------- Net income available to common shareholders............... $ 10,064 $ 8,152 $ 5,374 ======== ======== ======== [Download Table] YEAR ENDED DECEMBER 31, 1997 ------------ PRO FORMA STATEMENT OF OPERATIONS, AS ADJUSTED(f): Net sales................................................. $270,100 Income before interest and income taxes................... 19,960 Interest expense, net..................................... 3,921 Income from continuing operations......................... 9,936 Income from continuing operations per basic share......... (g) Income from continuing operations per diluted share....... (g) PRO FORMA STATEMENT OF OPERATIONS, AS FURTHER ADJUSTED(h): Income before interest and income taxes................... $ 29,425 Income from continuing operations......................... 15,785 Income from continuing operations per basic share......... (g) Income from continuing operations per diluted share....... (g) [Enlarge/Download Table] AT DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED(I) -------- -------------- BALANCE SHEET DATA: Working capital........................................... $ 65,877 $ 65,877 Total assets.............................................. 163,891 163,891 Total debt................................................ 77,010 31,365 Preferred stock including accrued dividends............... 14,610 -- Shareholders' equity...................................... 19,419 (footnotes on following page) 9
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--------------- (a) The Predecessor Company operated as a wholly-owned subsidiary of GPC until being divested by GPC on January 22, 1996. The financial data for the Predecessor Company is not entirely comparable to that of the Company due to certain factors including the following: (i) The Predecessor Company did not incur any royalty expense for the use of the Gerber name and baby head logo. During the period from January 22, 1996 to December 31, 1996, and for fiscal year ended December 31, 1997, the royalty expense to GPC was $1.9 million and $3.5 million, respectively. (ii) The Predecessor Company's net sales in 1995 included approximately $8.3 million of net sales at cost to GPC that generated no gross margin. Net sales to GPC in 1996 and 1997 of approximately $6.2 million and approximately $4.3 million, respectively, generated gross margins in 1996 and 1997 of approximately $950,000 and $598,000, respectively. (iii) The Predecessor Company was included in various self-insurance programs provided by GPC, including medical, dental, workers' compensation, comprehensive general and excess liability and property damage and business interruption. GPC also provided management information services to the Predecessor Company and allocated a portion of the expenses incurred to the Predecessor Company. In addition, the Predecessor Company was allocated a portion of legal and professional costs for services directly attributable to the Predecessor Company. Certain services were provided by GPC's corporate staff, for which no charge was made to the Predecessor Company. Management believes the aggregate cost of these unallocated services was insignificant. The Predecessor Company was charged for all outside legal and professional expenses directly attributable to it. (iv) In 1995, the Predecessor Company had no long term debt and was not charged any interest expense as a subsidiary of GPC. (v) The provision for income taxes of the Predecessor Company essentially results from applying the Federal and state statutory rates to the operations of a stand-alone company. (b) Excludes the Predecessor Company's unaudited operations for the period January 1, 1996 through January 21, 1996. See Note (b) to Selected Consolidated Financial Data. (c) Includes operating results for Auburn Hosiery Mills, Inc. and Sport Socks Company (Ireland) Limited ("Sport Socks Ireland") for the period December 17, 1997 through December 31, 1997. See Note (c) to Selected Consolidated Financial Data. (d) Represents expense related to stock compensation incurred in connection with the sale of capital stock to executives and management of the Company below fair market value. See "Certain Relationships and Related Transactions -- Transactions with Management and Directors." (e) Represents unamortized loan costs and prepayment penalty totaling $708 (net of an income tax benefit of $452) expensed in connection with the replacement of the Company's then existing credit facility with the Credit Agreement (as defined herein). (f) As adjusted for the Acquisition, the Reorganization, the Offering and the application of the estimated net proceeds therefrom, assuming completion of such events as of January 1, 1997. (g) Weighted average shares outstanding used (i) for the computation of income from continuing operations per basic share was shares and (ii) for the computation of income from continuing operations per diluted share was shares. (h) As further adjusted to exclude $9.5 million of stock compensation ($5.8 million after-tax). See Note (d) above. (i) As adjusted for the Reorganization and the Offering and the application of the estimated net proceeds therefrom, assuming completion of both as of January 1, 1997. 10
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RISK FACTORS The following risk factors should be considered carefully in addition to the other information contained in this Prospectus before purchasing the Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed elsewhere in this Prospectus. DEPENDENCE ON GERBER LICENSE AND OTHER INTELLECTUAL PROPERTY The Company is largely dependent on the use of the Gerber name. The Gerber name and trademark are exclusively licensed to the Company from GPC for use on certain clothing and textile products in the infant and toddler apparel market sold in the United States, Canada and the Caribbean. The terms and conditions for use of the Gerber name for other product categories and geographic areas must be negotiated by the Company on an individual basis. The Gerber license extends through 2006, after which there are two five-year renewal periods. See "Business -- Licensing and Trademarks." The loss or limitation of the right to use the Gerber name would have a material adverse effect on the Company's results of operations. GPC retains the rights under the license to produce, distribute, advertise and sell, and to authorize others to produce, distribute, advertise and sell, products under the Gerber name other than clothing and textile products. Negative publicity related to the Gerber name caused by actions not related to the Company or the Company's products could have a material adverse effect on the Company's results of operations. The Company is not required to pay royalty fees to GPC until 2002 (although the Company is recording royalty expense to reflect such fees). The initiation of such royalty payments may adversely affect the Company's cash flow. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company also licenses the Baby Looney Tunes brand name from the Warner Brothers division of Time-Warner, Inc. ("Warner Brothers") and the Curity brand name from The Kendall Company. The Company is licensed to use the Baby Looney Tunes brand name in the U.S. and the Curity brand name in the U.S. and internationally. The Baby Looney Tunes and Curity licenses are limited to certain product categories. The Curity license automatically renews for periods of ten years. The Baby Looney Tunes license expired on September 30, 1997 and was verbally extended until December 31, 1997. Based on discussions with Warner Brothers, the Company continues to operate under the Baby Looney Tunes license consistent with past practice. The Company qualifies for a three-year renewal option under the license. The royalty terms for the renewal have been set and the Company is currently negotiating a renewal that will extend until December 31, 2000. The Company owns the Onesies trademark. The loss or limitation of the right to use these names could have a material adverse effect on the Company's results of operations. Auburn also licenses properties from different companies for its products. The license from Wilson Sporting Goods Co. ("Wilson") expires in 2002 with a five year renewal period if certain sales targets are exceeded. Auburn has held this license since 1982. The license from Wilson can be terminated by Wilson if the employment of either Kevin K. Angliss or Donald J. Murphy with Auburn terminates. The license from Converse Inc. ("Converse") expires on December 31, 2001 with an obligation to enter into good faith discussions in 2001 with respect to a new three year contract. This license can be terminated by Converse if Kevin K. Angliss and Timothy Graham are no longer the principal managers of Auburn's Converse-brand product line. Messrs. Angliss, Murphy and Graham have not entered into employment agreements with Auburn. The Coca-Cola Company ("Coca-Cola") license expires on December 31, 1998 (with a three-year renewal period). The license from Dunlop Slazenger International Ltd. ("Dunlop") expires in 2001 (with a five year renewal period if certain sales targets are exceeded). All of these licenses have particular geographic and other limitations, and the Company negotiates the terms and conditions for the use of such trademarks outside such limitations on an individual basis. The loss or limitation of the right to use the Wilson name would have a material adverse effect on Auburn's results of operations. The loss or limitation of the right to use the Coca-Cola, Converse or Dunlop names would have an adverse effect on Auburn's results of operations. 11
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There are risks associated with the financial condition of the Company's licensors which are beyond the control of the Company. In the event that a case under the Federal bankruptcy laws is commenced by or against any licensor in the future, the trustee in the bankruptcy case or the licensor, as debtor-in-possession, may have the right to reject such licensor's license agreement. While the Company is not aware of any facts which would make such termination or rejection reasonably likely to occur, in the event of any such termination or rejection, the Company would lose its right to use the licensed intellectual property. The Company believes that its trademarks and other proprietary rights are material to its success and its competitive position. Accordingly, the Company and its licensors devote substantial resources to the establishment and protection of their trademarks on a worldwide basis. There can be no assurance that the actions taken by the Company and its licensors to establish and protect their trademarks and other proprietary rights will be adequate to protect the Company's intellectual property or to prevent imitation of its products by others. Moreover, no assurance can be given that others will not assert rights in, or ownership of, trademarks and other proprietary rights of the Company or that the Company will be able to successfully resolve such conflicts. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. See "Business -- Licensing and Trademarks." DEPENDENCE ON SALES TO A LIMITED NUMBER OF LARGE CUSTOMERS Certain of the Company's volume retailer and mid-tier department store customers account for significant portions of the Company's net sales. Gerber directly services approximately 1,100 retail accounts, with the Company's top 10 customers representing approximately 85% of total 1997 sales. Sales to Wal-Mart, which accounted for a significant percentage of the net sales of infant and toddler apparel in the U.S. in 1997, constituted approximately 44% of Gerber's sales during 1997. Sales to Wal-Mart constituted approximately 48% of Auburn's sales during 1997. No other customer accounted for more than 10% of the Company's 1997 sales on a pro forma basis. The Company generally does not enter into long-term agreements with any of its customers. A decision by any significant customer or group of stores, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from the Company, or to change its manner of doing business, could have a material adverse effect on the Company's financial condition and results of operations. See "Business -- Customers." In recent years, the retail industry has experienced consolidation and other ownership changes. In addition, some of the Company's customers have operated and currently operate under the protection of the federal bankruptcy laws. In the future, retailers in the U.S. and in foreign markets may consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry the Company's products or increase the ownership concentration within the retail industry. While such changes in the retail industry to date have not had a material adverse effect on the Company's business or financial condition, there can be no assurance as to the future effect of such changes. COMPETITION The infant and toddler apparel market is highly competitive. Both branded and private label manufacturers compete in the infant and toddler apparel markets. Competition generally is based upon product quality, brand name recognition, price, selection, service and convenience. Gerber's primary competitors include Fruit of the Loom, Inc. ("Fruit of the Loom"), the Hanes subsidiary of the Sara Lee Corporation ("Hanes"), The William Carter Company ("Carter's"), licensed products and firms using character licenses from Walt Disney Company, Inc. ("Disney") and others. Gerber also competes with certain retailers, including several which are customers of the Company, which have significant private label products offerings. Certain of Gerber's competitors have greater financial resources than the Company. Gerber's ability to compete depends, in substantial part, on the continued high regard for the Gerber brand name and the ability of Gerber to continue to offer high-quality garments at competitive prices. The hosiery industry is highly fragmented and has significant branded and private label components. Competition is generally in terms of price, quality, service, brand recognition and style. Auburn's primary competitors include Hanes, which has the largest share of the market, Renfro Corporation ("Renfro"), 12
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Neuville Industries, Inc. ("Neuville") and the Russell Corporation ("Russell"). Auburn also competes with certain retailers, including several which are customers of the Company, which have significant private label product offerings. In addition, Auburn competes with private label manufacturers, including small, local manufacturers and large, public companies that have greater financial resources than the Company and larger customer bases. See "Business -- Competition." RECENT ACQUISITION The Company acquired the capital stock of Auburn in December 1997. The ability of the Company to achieve its objectives in connection with the Acquisition are, as with any acquisition, subject to certain risks including, among others, the possible inability to retain certain Auburn personnel, potential negative effects of diverting management resources and the possible failure to retain Auburn's customers. None of Auburn's executive officers have entered or are expected to enter into employment agreements with the Company. In connection with the Offering, however, these executives shall receive stock options which shall be subject to vesting and forfeiture provisions. Moreover, under the terms of Auburn's license with Wilson, Auburn and Gerber are not permitted to consolidate their top management team, sales force, distributors, customer service and manufacturing functions and are not permitted to commingle product lines. As a result, there can be no assurance that the expected benefits from the Auburn acquisition, including certain economies of scale and efficiencies, will be achieved on a timely basis or at all. DEPENDENCE ON KEY PERSONNEL The Company is dependent to a large extent on its ability to attract, motivate and retain an adequate labor force, including management, sales, design, art, manufacturing, merchandising and other personnel. The Company is also dependent to a significant extent upon the continued efforts of its senior management team, including its Chairman, President and Chief Executive Officer, Edward Kittredge, its Senior Vice President, Richard L. Solar and its Vice President of Finance, Secretary and Treasurer, David E. Uren. The Company has entered into employment agreements with the above-named executive officers which expire in 2001. If, for any reason, such executives do not continue to be active in management, the Company's operations could be materially adversely affected. The Company does not maintain key-man life insurance policies on any of its executive officers or key employees. After the consummation of the Offering, the Company's executive officers and key employees will own shares of Common Stock, representing on a diluted basis an approximately % aggregate ownership interest. See "Management" and "Principal Stockholders." RISKS OF THIRD PARTY MANUFACTURING AND SOURCING The Company manufactures its products both in the U.S. and abroad and also purchases certain products manufactured by independent manufacturers. During 1997, pro forma for the Acquisition, approximately 30% of the Company's products (based on cost) were manufactured by third party independent manufacturers (including some manufacturers located outside of the United States). The inability of an independent manufacturer to ship orders of the Company's products in a timely manner or to meet the Company's quality standards could cause the Company to miss the delivery date requirements of its customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on the Company's financial condition and results of operations. The Company generally has no long-term contracts with its independent manufacturing sources and competes with other companies for production facilities and import quota capacity. No single independent manufacturer engaged by the Company accounted for more than 5% of the Company's pro forma total production in 1997. Although the Company believes that it has established close relationships with its principal manufacturing sources, the Company's future success will depend in some measure on its ability to maintain such relationships. The Company requires its independent manufacturers to operate in compliance with applicable laws and regulations, including laws and regulations governing the fire retardancy of certain of the Company's products. The Company monitors the independent manufacturers' compliance with the Company's quality assurance 13
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guidelines and other applicable regulations through both internal and external quality assurance inspectors. Additionally, all of the Company's licensors have the right to, and may from time to time, perform independent inspections of facilities utilized by the Company. While the Company's purchasing guidelines promote ethical business practices, the Company does not control such manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer of the Company, or the divergence of an independent manufacturer's labor practices from those generally accepted as ethical in the United States, could have a material adverse effect on the Company. See "Business -- Gerber -- Manufacturing and Sourcing -- Quality Control." COSTS OF RAW MATERIALS AND SUPPLIER RELATIONSHIPS The Company depends on certain raw materials such as yarn for the manufacturing of its products. In order to hedge against price increases of yarn, the Company actively manages its cost through contracts with its yarn suppliers with terms of up to one year. This practice generally has enabled the Company to successfully manage the effect of price fluctuations; however, no assurance can be given that the Company will continue to be successful in managing such price fluctuations or that future price fluctuations in yarn and other raw materials will not have a material adverse effect on the Company. To date, the Company has not experienced any difficulty in obtaining yarn and other raw materials. However, there can be no assurance that any of such supplier relationships will not be terminated in the future. Any sustained interruption in the Company's receipt of adequate supplies could have a material adverse effect on the Company. RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND IMPORT RESTRICTIONS A significant percentage of the Company's products are manufactured outside of the United States, both by the Company in the Dominican Republic and Ireland and by independent manufacturers in a number of other foreign countries, including China, Guatemala, Indonesia, Mexico, the Philippines, Taiwan and Thailand. The Company is therefore subject to the risks generally associated with manufacturing or purchasing products in foreign countries, such as foreign governmental regulations, changes in existing tax laws, social, political or economic instability, currency and exchange risks, disruptions or delays in shipments, restrictions on the transfer of funds and changes in economic conditions in countries in which the Company's manufacturing sources are located, including any risks associated with the loss of China's most favored nation status. In addition, the Company depends on exporters to obtain certain raw materials and products. Many of these exporters finance their working capital by obtaining "packing" loans which are backed by letters of credit. As a result of the recent financial and economic instability in Southeast Asia, some exporters have experienced difficulty obtaining such loans and, consequently, have been forced to discontinue operations. None of the Company's exporters have ceased operations at this time; however, the Company's operations could be disrupted if one or more of the Company's larger exporters are forced to terminate their exporting activities. The Company is subject to United States regulations, and the risk of the imposition of additional regulations, relating to apparel imports, including quotas on the amounts and types of merchandise which may be imported into the United States from other countries, duties or taxes and other charges on imports. The Company is currently in compliance with these regulations in all material respects; however, failure to comply in the future with these regulations could result in a delay in clearing shipments through customs, which could have an adverse effect on the Company's operations. The Company has adopted procedures designed to ensure compliance with customs regulations and has retained an outside consultant to regularly review such procedures and the Company's customs filings for accuracy and completeness. See "Business -- Gerber -- Manufacturing and Sourcing -- Quality Control." The Company's import operations are subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign countries. These agreements, which have been negotiated bilaterally either under the framework established by the Arrangement Regarding International Trade in Textiles, known as the Multifiber Agreement, or other applicable statutes, impose quotas on the amounts and 14
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types of merchandise which may be imported into the United States from these countries. These agreements also allow the signatories to adjust the quantity of imports for categories of merchandise that, under the terms of the agreements, are not currently subject to specific limits. The Company's imported products are also subject to United States customs duties which comprise a meaningful portion of the cost of the merchandise. RISK OF FLUCTUATION IN FOREIGN CURRENCY EXCHANGE RATES Gerber generally conducts transactions in U.S. dollars. However, a portion of Auburn's sales and costs are transacted in foreign currencies. As such, the sales and costs of these products may be affected by changes in the value of the relevant foreign currencies. During 1997, on a pro forma basis, approximately 7% of the Company's revenues and 8% of the Company's expenses were denominated in currencies other than U.S. dollars. The Company's exposure to changes in foreign currency exchange rates results from the operations of and investment in Auburn's Irish subsidiary. With respect to such subsidiary, changes in currency exchange rates may also affect the relative prices at which the Irish subsidiary and foreign competitors sell their products in the same market. Following the Acquisition, the Company adopted a foreign exchange policy which will be implemented in Auburn's Irish subsidiary for the purpose of managing its day- to-day exposure. The policy mandates a short-term hedging program for its existing and potential exposures to changes in foreign currency exchange rates. There are currently foreign exchange contracts in place covering amounts in excess of the Company's policy, which the Company expects will be reduced to current policy levels by the end of the second quarter of 1998. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on Auburn's financial condition and results of operations, which, in turn, could have a material adverse effect on the Company. The Company views its investment in the Irish subsidiary as long term and, therefore, has not hedged against either its investment or future earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Fluctuation of Foreign Currency Exchange Rates." COST OF ENVIRONMENTAL COMPLIANCE The Company's manufacturing facilities and operations are subject to certain federal, state, local and foreign laws and regulations relating to environmental protection and occupational health and safety, including those governing wastewater discharges, air emissions, the management and disposal of solid and hazardous wastes, and the remediation of contamination associated with the release of hazardous substances. The Company believes that it is in substantial compliance with such requirements, and does not currently anticipate any material capital expenditures for environmental control facilities for the current or succeeding fiscal year. Nonetheless, there can be no assurance that such requirements will not become more stringent or be interpreted and applied more stringently. Such future changes or interpretations or the identification of adverse environmental conditions previously unknown to the Company could result in additional compliance costs or in remediation costs to the Company. The Company's older facilities contain asbestos materials and lead-based paint. It is the Company's policy to manage these materials on an as-needed basis. If, however, the Company decides to renovate these facilities, special removal or encapsulation efforts will be required to prevent worker exposure to these materials. The cost of such efforts could be material. See "Business -- Environmental and Other Regulatory Matters." CONTROL BY EXECUTIVE OFFICERS AND CURRENT STOCKHOLDERS Following consummation of the Offering and the Reorganization, management will hold approximately % and CVC and its affiliates will hold approximately 19% of the outstanding shares of Common Stock. CVC and its affiliates will also hold shares of Class B Common Stock, convertible at the holder's option into shares of Common Stock representing % of the outstanding Common Stock. As a result, if CVC and its affiliates convert their shares of Class B Common Stock into shares of Common Stock, CVC and its affiliates will have sufficient voting power to elect the Company's board of directors and determine the results of other matters submitted to a vote of stockholders. In addition, Mr. Kittredge's employment agreement provides that he will be the Chairman of the Board and Chief Executive Officer of the Company. The concentration of ownership may have the effect of delaying or preventing a change of control of the Company. 15
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In addition, there can be no assurance that in any transfer of a controlling interest in the Company any other holders of Common Stock will be allowed to participate in any such transaction or will realize any premium with respect to their shares. See "Principal Stockholders." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Sales of a substantial number of shares of Common Stock in the public market or the perception that such sales could occur could adversely affect prevailing market prices for the Common Stock. Upon completion of the Offering, the Company will have shares of Common Stock outstanding and shares of Class B Common Stock outstanding. Of such shares, the shares of Common Stock being sold in the Offering (together with any shares sold upon exercise of the Underwriters' over-allotment option) will be immediately eligible for sale in the public market without restriction, except for shares purchased by or issued to any affiliate of the Company. CVC and its affiliates have certain demand registration rights with respect to the Common Stock and Class B Common Stock of the Company held by them. All stockholders of the Company immediately prior to the Offering have piggyback rights with respect to sales of stock by the Company, and in the case of holders other than CVC and its affiliates, piggyback rights with respect to sales by CVC or its affiliates. In connection with the Offering, the Company's officers and directors and all existing stockholders have agreed not to dispose of any shares of Common Stock for a period of 180 days from the date of this Prospectus, or to make any demand for or exercise any right with respect to the registration of the shares for such 180 day period, and the Company has agreed not to dispose of any shares (other than issuances by the Company of certain employee stock options and shares covered thereby) for a period of 180 days from the date of this Prospectus, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf of the Underwriters. All existing stockholders have also waived all rights to register securities owned by them in connection with the Offering. Upon expiration of the 180-day lockup period, shares of Common Stock will be eligible for sale subject to certain volume and other limitations imposed by Rule 144 under the Securities Act. In addition, shares of Class B Common Stock will be outstanding and convertible at the holder's option into shares of Common Stock. The sale of a substantial number of shares held by the existing stockholders, whether pursuant to a subsequent public offering or otherwise, or the perception that such sales could occur, could adversely affect the market price of the Common Stock and could materially impair the Company's future ability to raise capital through an offering of equity securities. See "Shares Eligible for Future Sale," "Description of Capital Stock" and "Underwriting." ABSENCE OF DIVIDENDS; RESTRICTION ON PAYMENT OF DIVIDENDS The Company does not expect to pay dividends for the foreseeable future. The Company's Credit Agreement restricts the ability of the Company to pay dividends on the Common Stock. See "Dividend Policy" and "Description of Certain Indebtedness." CERTAIN ANTI-TAKEOVER PROVISIONS The Company's certificate of incorporation and bylaws contain certain provisions that could make more difficult the acquisition of the Company by means of tender offer, a proxy contest or otherwise. The Company's charter establishes an advance notice procedure for stockholder nominations of persons for election to the board of directors in advance of an annual meeting of stockholders of the Company. Stockholders at an annual meeting may only consider nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors, or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting, and who has given to the Company's Secretary timely written notice, in proper form, of the stockholder's intention to make such nomination before the annual meeting. An amendment to this provision would require approval by an affirmative vote of holders of 66 2/3% of the shares of voting stock of the Company. The Company's charter 16
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provides for cumulative voting in the election of directors. See "Description of Capital Stock -- Certain Provisions of the Company's Amended and Restated Certificate of Incorporation." DILUTION The initial public offering price will be substantially higher than the net tangible book value per share of Common Stock. Investors purchasing shares of Common Stock will therefore incur immediate and substantial dilution. See "Dilution." NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock. Although application has been made for listing the Common Stock on the New York Stock Exchange, there can be no assurance that an active trading market for the Common Stock will develop or be sustained following the Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock offered hereby will be determined by negotiations between the Company and the Underwriters and may not be indicative of future market prices. The price at which the Common Stock will trade will depend upon a number of factors, including, but not limited to, the Company's historical and anticipated quarterly and annual operating results, variations between such results and analyst and investor expectations, investor perceptions of the Company and comparable public companies, changes in the industries in which the Company operates or in the industries of the Company's significant customers, and general market and economic conditions, some of which factors are beyond the Company's control. The stock market has from time to time experienced extreme price and volume fluctuations. See "Underwriting." 17
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USE OF PROCEEDS The net proceeds to the Company from the Offering are estimated to be $46.0 million, assuming an initial public offering price of $ per share (based on the midpoint of the price range as set forth on the cover of the Prospectus), after deducting the estimated underwriting discount and offering expenses payable by the Company ($53.0 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use such net proceeds: (i) to repay a senior subordinated note in the aggregate principal amount of $22.5 million held by Citicorp Mezzanine Partners, L.P. ("CMP") (the "CMP Senior Note"), (ii) to repay a junior subordinated note (the "GPC Junior Note") in the aggregate principal amount of $11.0 million held by GPC (the "GPC Junior Note"), (iii) to repay certain other indebtedness of the Company in the aggregate principal amount of $12.1 million and (iv) to redeem certain shares of GCIH's preferred stock in connection with the Reorganization in the aggregate amount of $355,000. See "Description of Certain Indebtedness" and "Certain Relationships and Related Transactions -- Merger and Conversion of GCIH Stock." The Company will use any net proceeds received upon the exercise of the Underwriters' over-allotment option for general corporate purposes, which may include the repayment of additional indebtedness. The CMP Senior Note bears interest at a rate of 12.00% payable semi-annually on January 15 and July 15, matures in equal installments on January 22, 2003 and January 22, 2004 and was originally issued in connection with the Original Acquisition. The GPC Note bears interest at a rate of 12.00% payable annually in arrears, matures on January 22, 2006 and was originally issued in connection with the Original Acquisition. Dividends on the Preferred Stock accrue at a rate of 12.00% per annum of the "Liquidation Value." For such purposes, "Liquidation Value" is equal to $100 plus any accrued and unpaid dividends thereon. The preferred stock is redeemable by the Company on January 31, 2007 or any time prior thereto, in whole or in part, at a price per share equal to the Liquidation Value plus accrued and unpaid dividends thereon. The term loan portion of the Credit Agreement bears interest at a rate equal to either (a) the Base Rate plus the Applicable Percentage or (b) the Eurodollar Rate plus the Applicable Percentage (each such term as defined in the Credit Agreement). Such rate is determined at the Borrower's option, and was 7.41% as of February 27, 1998. The term loan portion of the Credit Agreement matures on September 30, 2002 and was originally incurred in connection with the Acquisition. DIVIDEND POLICY The Company has not paid any dividends with respect to the Common Stock. The Company presently intends to retain future earnings to finance its growth and development and therefore does not expect to pay any cash dividends in the foreseeable future. In addition, the Credit Agreement restricts the payment of cash dividends by the Company (subject to certain limited exceptions), and the Company may in the future enter into loan or other agreements or issue debt securities or preferred stock that restrict the payment of dividends. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors of the Company (the "Board"). Any future determination to pay dividends will depend on the Company's results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed appropriate by the Board. 18
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CAPITALIZATION The following table sets forth the capitalization of the Company as of December 31, 1997 (i) as adjusted to give effect to the Reorganization and (ii) as further adjusted to reflect the Offering and the application of the estimated net proceeds therefrom, assuming an initial public offering price of $ per share (based on the midpoint of the price range as set forth on the cover of the Prospectus), and as described in "Use of Proceeds." This table should be read in conjunction with the "Selected Financial Information," the Unaudited Pro Forma Condensed Consolidated Statement of Operations and the audited consolidated financial statements and related notes thereto included elsewhere in this Prospectus. [Enlarge/Download Table] AT DECEMBER 31, 1997 ------------------------------------ ADJUSTED FOR PRO FORMA REORGANIZATION(a) ADJUSTED(b) --------------------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Current debt: Revolving credit loans (c)................................ $ 250 $ 250 Current portion of long-term debt......................... 7,286 7,286 -------- -------- Total current debt................................ 7,536 7,536 ======== ======== Long-term debt, net of current portion: Term loan portion of Credit Agreement..................... 32,000 19,855 Senior subordinated note payable.......................... 22,500 -- Junior subordinated note payable.......................... 11,000 -- Other long-term debt...................................... 3,974 3,974 -------- -------- Total long-term debt.............................. 69,474 23,829 Shareholder's equity: Common Stock, par value $.01 per share, shares authorized; shares outstanding, as adjusted for Reorganization; shares outstanding pro forma adjusted............................................... Common Stock, Class B, par value $.01 per share, shares authorized; shares outstanding, as adjusted for Reorganization; shares outstanding pro forma adjusted............................................... Detachable stock warrants................................... 189 189 Additional paid-in-capital.................................. 20,609 Retained earnings........................................... 13,526 13,217 -------- -------- Less unearned compensation under restricted stock plan...... (767) (767) -------- -------- Total shareholders' equity................................ -------- -------- Total capitalization.............................. $ $ ======== ======== --------------- (a) See "Certain Relationships and Related Transactions -- The Reorganization." (b) Additionally, $355 of net proceeds of the Offering will be used to redeem certain shares of GCIH's preferred stock in connection with the Reorganization. See "Certain Relationships and Related Transactions -- Transactions with Management and Directors." (c) The Company had approximately $47,000 of availability under the Credit Agreement at January 24, 1998. 19
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DILUTION As of December 31, 1997, the Company had a net tangible book value of approximately $ , or $ per share of Common Stock. "Net tangible book value" per share of Common Stock represents the difference between the net tangible assets and the liabilities of the Company, on a consolidated basis, divided by the total number of shares of Common Stock outstanding. Without taking into account any changes in the net tangible book value after December 31, 1997, other than to give effect to (i) the Reorganization and (ii) the Offering and the application of the estimated net proceeds therefrom, assuming an initial public offering price of $ (based on the midpoint of the price range as set forth on the cover of the Prospectus), the pro forma net tangible book value of the Company at December 31, 1997 would have been approximately $ , or $ per share. This represents an immediate increase in net tangible book value of $ per share of Common Stock to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: [Download Table] Assumed initial public offering price per share............. $ Actual deficit in net tangible book value per share as of December 31, 1997...................................... $ Increase in net tangible book value per share attributable to the issuance of Class B Common Stock................ Increase in net tangible book value per share attributable to the Offering........................................ ------ Pro forma net tangible book value per share as of ... ------ Immediate dilution per share to new investors in the Offering.................................................. $ (a) ====== --------------- (a) If the Underwriters' over-allotment option is exercised in full, dilution to new investors will be $ per share. The following table summarizes, on a pro forma basis as of December 31, 1997, the number of shares of Common Stock purchased from the Company, the estimated value of the total consideration or value paid or deemed attributable thereto and the average price per share paid by or attributable to existing stockholders and the new investors purchasing shares in the Offering. [Enlarge/Download Table] SHARES OF AVERAGE PRICE COMMON STOCK TOTAL CONSIDERATION PER SHARE OF ------------------ ------------------- COMMON NUMBER PERCENT AMOUNT PERCENT STOCK ------- ------- -------- ------- ------------- Current stockholders............ % $ % $ New investors................... ------- -- -------- -- Total................. ======= == ======== == The foregoing computations assume no exercise of stock options and warrants after December 31, 1997. As of December 31, 1997, there were outstanding stock options and warrants to purchase an aggregate of shares of Common Stock at a weighted average exercise price of approximately $ per share. If all of the foregoing warrants had been exercised at December 31, 1997, the net tangible book value per share of Common Stock at such date would have been $ and the pro forma net tangible book value per share after giving effect to the Reorganization and the Offering would have been $ , representing an immediate dilution to new investors of $ per share and an immediate increase in net tangible book value of $ per share attributable to the Reorganization and the Offering. 20
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SELECTED CONSOLIDATED FINANCIAL DATA The following table presents (i) selected historical consolidated financial data of the Predecessor Company for the year ended and as of December 31, 1995 and (ii) selected historical consolidated financial information of the Company for the period from January 22, 1996 to December 31, 1996, the year ended December 31, 1997 and at December 31, 1996 and 1997. The selected consolidated financial data of the Predecessor and the Company have been derived from the financial statements of the Predecessor and the Company, respectively, which have been audited by Ernst & Young LLP and included elsewhere in this Prospectus. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto included elsewhere in this Prospectus. [Enlarge/Download Table] PREDECESSOR COMPANY (a) COMPANY ------------ ---------------------------- PERIOD FROM JANUARY 22, YEAR ENDED 1996 TO YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 (b) 1997 (c) ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Net sales........................................... $197,401 $185,223 $202,037 Cost of sales....................................... 156,434 138,608 146,294 -------- -------- -------- Gross margin........................................ 40,967 46,615 55,743 Selling, general and administrative expenses........ 24,633 23,894 27,766 Stock compensation(d)............................... -- -- 9,465 Other............................................... -- 689 231 -------- -------- -------- Total operating expenses............................ 24,633 24,583 37,462 -------- -------- -------- Income before interest and income taxes............. 16,334 22,032 18,281 Interest expense, net............................... -- 6,308 5,798 -------- -------- -------- Income before income taxes and extraordinary item, net.............................................. 16,334 15,724 12,483 Provision for income taxes.......................... 6,270 6,244 4,764 -------- -------- -------- Income before extraordinary item, net............... 10,064 9,480 7,719 Extraordinary item, net (e)......................... -- -- (708) Less preferred stock dividends...................... -- (1,328) (1,637) -------- -------- -------- Net income available to common shareholders......... $ 10,064 $ 8,152 $ 5,374 ======== ======== ======== [Enlarge/Download Table] AT DECEMBER 31, ------------------------------ 1995 1996 1997 -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital........................................... $ 69,591 $ 56,205 $ 65,877 Total assets.............................................. 103,196 106,060 163,891 Total debt................................................ -- 43,436 77,010 Preferred stock including accrued dividends............... -- 13,068 14,610 Investment by GPC......................................... 79,129 -- -- Shareholders' equity...................................... -- 9,101 19,419 (footnotes on following page) 21
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--------------- (a) The Predecessor Company operated as a wholly-owned subsidiary of GPC until being divested by GPC on January 22, 1996. The financial data for the Predecessor Company is not entirely comparable to that of the Company due to certain factors including the following: (i) The Predecessor Company did not incur any royalty expense for the use of the Gerber name and baby head logo. During the period from January 22, 1996 to December 31, 1996, and for fiscal year ended December 31, 1997, the royalty expense to GPC was $1.9 million and $3.5 million, respectively. (ii) The Predecessor Company's net sales in 1995 included approximately $8.3 million of net sales at cost to GPC that generated no gross margin. Net sales to GPC in 1996 and 1997 of approximately $6.2 million and approximately $4.3 million, respectively, generated gross margins in 1996 and 1997 of approximately $950,000 and $598,000, respectively. (iii) The Predecessor Company was included in various self-insurance programs provided by GPC, including medical, dental, workers' compensation, comprehensive general and excess liability and property damage and business interruption. GPC also provided management information services to the Predecessor Company and allocated a portion of the expenses incurred to the Predecessor Company. In addition, the Predecessor Company was allocated a portion of legal and professional costs for services directly attributable to the Predecessor Company. Certain services were provided by GPC's corporate staff, for which no charge was made to the Predecessor Company. Management believes the aggregate cost of these unallocated services was insignificant. The Predecessor Company was charged for all outside legal and professional expenses directly attributable to it. (iv) In 1995, the Predecessor Company had no long term debt and was not charged any interest expense as a subsidiary of GPC. (v) The provision for income taxes of the Predecessor Company essentially results from applying the Federal and state statutory rates to the operations of a stand-alone company. At August 25, 1994 in connection with the purchase of GPC by Sandoz, Ltd., the Predecessor Company transitioned its books and records to be in conformity with International Accounting Standards. The Predecessor Company's books and records for 1995 were since reconstructed to be in conformity with U.S. generally accepted accounting principles. (b) Excludes the Predecessor Company's unaudited operations summarized below for the period January 1, 1996 through January 21, 1996. [Download Table] Net sales..................................... $6,657 Gross margin.................................. 1,070 SG&A expenses................................. 1,386 Loss before interest and income taxes......... (316) Net loss...................................... (196) (c) Includes the following operating results for Auburn and Sport Socks Ireland for the period December 17, 1997 through December 31, 1997. [Download Table] Net sales..................................... $1,511 Gross margin.................................. 184 SG&A expenses................................. 225 Loss before interest and income taxes......... (41) Net loss...................................... (28) (d) Represents expense related to stock compensation incurred in connection with the sale of capital stock to executives and management of the Company below fair market value. See "Certain Relationships and Related Transactions -- Transactions with Management and Directors." (e) Represents unamortized loan costs and prepayment penalty totaling $708,000 (net of an income tax benefit of $452,000) expensed in connection with the replacement of the Company's then-existing credit facility with the Credit Agreement. 22
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1997 gives effect to (a) the Acquisition which occurred as of December 17, 1997 and (b) the Reorganization and the Offering, as if such events had occurred on January 1, 1997. The unaudited pro forma consolidated financial information is based upon the historical consolidated financial statements of each of the Company, Auburn Hosiery Mills, Inc. and Sport Socks Ireland and should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Prospectus. The historical financial information of Auburn and Sport Socks Ireland set forth below covers the period from January 1, 1997 through December 16, 1997. The historical financial information of Sport Socks Ireland has been adjusted for inclusion in the Unaudited Pro Forma Condensed Consolidated Financial Information to conform to U.S. generally accepted accounting principles and has been translated into U.S. dollars based upon the average exchange rate of U.S. dollars/Irish pounds for the period January 1, 1997 through December 16, 1997. The Company's historical results of operations for the year ended December 31, 1997 include the results of operations of Auburn Hosiery Mills, Inc. and Sport Socks Ireland since December 17, 1997, the effective date of the Acquisition. The pro forma financial information presented does not purport to be indicative of the financial position or operating results which would have been achieved had the transactions described above taken place at the dates indicated and are not necessarily indicative of the Company's financial position or results of operations for any future date or period. [Enlarge/Download Table] YEAR ENDED DECEMBER 31, 1997 -------------------------------------------------------------------------------------------- HISTORICAL -------------------------------- AUBURN ACQUISI- REORGANIZATION PRO HOSIERY SPORT TION PRO AND FORMA MILLS, SOCKS ADJUST- FORMA OFFERING AS GERBER INC. IRELAND MENTS COMBINED ADJUSTMENTS ADJUSTED -------- ------- ------- -------- -------- -------------- -------- Net sales........................ $202,037 $49,033 $19,030 $270,100 $270,100 Cost of sales.................... 146,294 39,019 13,974 (a) (90) (b) 199,197 199,197 -------- ------- ------- ------- -------- ------- -------- Gross margin..................... 55,743 10,014 5,056 90 70,903 70,903 Operating expenses: Selling, general and administrative expenses...... 27,997 7,393 4,024 (a) 1,022 (c) 40,436 40,436 Foreign exchange loss (d)...... -- -- 1,042 1,042 1,042 Stock compensation (e)......... 9,465 -- -- 9,465 9,465 -------- ------- ------- ------- -------- ------- -------- Total operating expenses..... 37,462 7,393 5,066 1,022 50,943 50,943 -------- ------- ------- ------- -------- ------- -------- Income (loss) before interest and income taxes................... 18,281 2,621 (10) (932) 19,960 19,960 Interest expense................. 5,798 151 71 3,022 (f) 9,219 (5,298)(g) 3,921 177 (h) -- -------- ------- ------- ------- -------- ------- -------- Income (loss) before income taxes.......................... 12,483 2,470 (81) (4,131) 10,741 5,298 16,039 Provision (benefit) for income taxes (i)...................... 4,764 939 (38) (1,549) 4,116 1,987 6,103 -------- ------- ------- ------- -------- ------- -------- Income (loss) from continuing operations (j)................. $ 7,719 $ 1,531 $ (43) $(2,582) $ 6,625 $ 3,311 $ 9,936 ======== ======= ======= ======= ======== ======= ======== Income from continuing operations per basic share................ $ (k) ======== Income from continuing operations per diluted share.............. $ (k) ======== Weighted average shares outstanding - basic............ ======== Weighted average shares outstanding - diluted.......... ======== See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations 23
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NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS) (a) Reflects reclassification of royalty expense from selling, general and administrative expenses to cost of sales in conformity with the Company's reporting practices. (b) Reflects net adjustments to net carrying value of certain fixed assets of the acquired companies to reflect fair market value. (c) Reflects amortization of goodwill and acquisition costs of $20.4 million resulting from the Acquisition based upon a 20 year estimated period of benefit. (d) In connection with the acquisition of Sport Socks Ireland, the Company adopted an accounting policy to mark to market forward foreign exchange contracts which hedge anticipated transactions. This adoption was required to conform Irish generally accepted accounting principles ("GAAP") to U.S. GAAP and resulted in a $46 adjustment to Sport Socks Ireland's statement of operations. In addition, $996 of such loss was the result of unrealized losses in respect of forward foreign currency contracts relating to future transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and the notes thereto. (e) Represents expense related to stock compensation incurred in connection with the sale of capital stock to executives and management of the Company below fair market value. See "Certain Relationships and Related Transactions -- Transactions with Management and Directors." (f) Reflects interest adjustments in connection with the Acquisition detailed as follows: [Download Table] Interest expense related to deferred financing cost amortization associated with the new Credit Agreement $ 208 Interest expense resulting from $40.0 million term loan under the Credit Agreement assuming scheduled quarterly principal amortization of $1.5 million with a rate of 7.5% 2,814 ------ Adjustment $3,022 ====== (g) Reflects adjustments to interest expense as a result of the Offering: [Download Table] Interest on the $22.5 million Senior Subordinated Note Payable, one-half of the principal due January 2003 and balance due January 2004 at an interest rate of 12.00%. $2,738 Interest on the $11.0 million Junior Subordinated Note Payable, due January 2006 at an interest rate of 12.00%. 1,338 Interest on $12.1 million outstanding under the Credit Agreement at an estimated interest rate of 8.75% 1,077 Amortization of deferred financing costs on the retired debt 113 Amortization of discount on the $22.5 million Senior Subordinated Note Payable 32 ------ Adjustment $5,298 ====== (h) Reflects adjustment to decrease interest income by $177, in connection with the settlement of certain intercompany receivables with the previous owner. (i) Reflects adjustment for Federal and state income taxes based on statutory rates adjusted for permanent differences such as non-deductible expenses. (j) Excludes extraordinary item related to unamortized loan costs and prepayment penalty totaling $708 (net of an income tax benefit of $452) expensed in connection with the prepayment of the Company's then-existing credit facility with the Credit Agreement. (k) Calculated using the weighted average number of shares of Common Stock outstanding during the period assuming that (i) a to 1 stock split will occur prior to or contemporaneously with the Offering, (ii) the majority of the preferred stock issued and outstanding will be converted into Class B 24
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NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) (IN THOUSANDS) Common Stock at the per share offering price, minus underwriters' discount and (iii) the Offering will generate estimated net proceeds of approximately $ million as a result of the sale of shares of Common Stock issued upon consummation of the Offering (as if they were outstanding as of the beginning of the period, which proceeds shall be used as described above in "Use of Proceeds"). In connection with the Offering, the deferred financing costs associated with the subordinated debt to be repaid with the Offering proceeds will be written off along with the unamortized discount associated with such debt as an extraordinary item in 1998. This extraordinary item is estimated to be approximately $309 (net of a tax benefit of $185), and is excluded from the pro forma, as adjusted income from continuing operations. 25
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and the Company's consolidated financial statements and notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the section entitled "Risk Factors," as well as those discussed elsewhere in this Prospectus. OVERVIEW In January 1996, Gerber Childrenswear, Inc. was acquired from GPC by a group of investors led by Edward Kittredge, the Company's Chairman, President and Chief Executive Officer, who assembled the Company's current management team. The new management team, under the direction of Mr. Kittredge, developed a series of initiatives to strengthen the Company's financial operations and improve its operations. To achieve cost efficiencies, Gerber consolidated manufacturing facilities, established a flexible production strategy including domestic and offshore manufacturing and sourcing components, and centralized finished product purchasing across all categories. Furthermore, Gerber renewed its emphasis on production quality, reducing the percentage of irregular products produced in certain of the Company's principal factories to approximately 3% from approximately 7%. Gerber also encouraged a more entrepreneurial culture by enhancing its incentive-based compensation program for executive, managerial and professional employees and by installing an equity ownership program for employees. As a result, management believes that the Company is well positioned to implement its strategy to remain a low cost producer of high quality branded products to volume retailers. Gerber's operating margin, excluding royalties accrued to GPC, stock compensation and other non-recurring charges, increased to 15.6% in 1997 from 13.3% in 1996 and 8.3% in 1995. In addition, in order to build upon the Company's expertise as a low-cost supplier of branded merchandise to volume retailers, the Company acquired all of the outstanding capital stock of Auburn in December 1997 for approximately $40.0 million. Auburn manufactures, markets and sells branded sport socks for men, women and children under established brand names such as Wilson, Coca-Cola and Converse in the U.S. and internationally and under the Dunlop brand name in Europe. Auburn markets to a diversified customer base in the U.S. and Europe, including volume retailers, department stores, wholesale clubs and major sporting good chains. As a result of the Acquisition, the Company markets products in over 25 countries. The Company believes that Auburn's expertise in hosiery will position it to capitalize on growth opportunities and the Acquisition will provide opportunities to achieve certain economies of scale and efficiencies in the areas of purchasing, data processing and selling, general and administrative expenses. In 1997, pro forma for the Auburn acquisition, the Company's net sales and income from continuing operations were $270.1 million and $6.6 million, respectively. RESULTS OF OPERATIONS The following discussion and analysis compares the operations of the Predecessor Company for 1995, a shortened period of the Company for 1996 (January 22, 1996 through December 31, 1996), and a full year of the Company for 1997 (including the operations of two acquired companies for the period December 17, 1997 to December 31, 1997). The operations of the Company for 1996 and 1997 reflect the accrual by the Company of a portion of future licensing royalty fees that will become payable to GPC in years 2002 through 2005. The Company is recording charges against earnings for the straight line effect of the anticipated total royalty expense expected to be incurred over the initial ten year term of the licensing agreement with GPC. No licensing fees are required to be paid during the first six years of the agreement. The amount of such licensing royalty fees accrued in 1996 and 1997 were $1.9 million and $3.5 million, respectively. 26
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The Predecessor Company operated as a wholly-owned subsidiary of GPC until being divested by GPC on January 22, 1996. The financial data for the Predecessor Company is not entirely comparable to that of the Company due to certain factors including the following: (i) The Predecessor Company did not incur any royalty expense for the use of the Gerber name and baby head logo. During the period from January 22, 1996 to December 31, 1996, and for fiscal year ended December 31, 1997, the royalty expense to GPC was $1.9 million and $3.5 million, respectively. (ii) The Predecessor Company's net sales in 1995 included approximately $8.3 million of net sales at cost to GPC that generated no gross margin. Net sales to GPC in 1996 and 1997 of approximately $6.2 million and approximately $4.3 million, respectively, generated gross margins in 1996 and 1997 of approximately $950,000 and $598,000, respectively. (iii) The Predecessor Company was included in various self-insurance programs provided by GPC, including medical, dental, workers' compensation, comprehensive general and excess liability and property damage and business interruption. GPC also provided management information services to the Predecessor Company and allocated a portion of the expenses incurred to the Predecessor Company. In addition, the Predecessor Company was allocated a portion of legal and professional costs for services directly attributable to the Predecessor Company. Certain services were provided by GPC's corporate staff, for which no charge was made to the Predecessor Company. Management believes the aggregate cost of these unallocated services was insignificant. The Predecessor Company was charged for all outside legal and professional expenses directly attributable to it. (iv) In 1995, the Predecessor Company had no long-term debt and was not charged any interest expense as a subsidiary of GPC. (v) The provision for income taxes of the Predecessor Company essentially results from applying the Federal and state statutory rates to the operations of a stand-alone company. At August 25, 1994 in connection with the purchase of GPC by Sandoz, Ltd., the Predecessor Company transitioned its books and records to be in conformity with International Accounting Standards. The Predecessor Company's books and records for 1995 were since reconstructed to be in conformity with U.S. generally accepted accounting principles. The following table sets forth, for the periods indicated, income statement data expressed as a percentage of revenue. Any trends reflected by the following table may not be indicative of future results. [Enlarge/Download Table] PERCENTAGE OF NET SALES ------------------------------------------------------- PREDECESSOR COMPANY COMPANY ------------------- -------------------------------- PERIOD FROM YEAR ENDED JANUARY 22, 1996 YEAR ENDED DECEMBER 31, TO DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------------- ---------------- ------------ Net sales..................................... 100.0% 100.0% 100.0% Cost of sales................................. 79.3 74.8 72.4 ----- ----- ----- Gross margin.................................. 20.7 25.2 27.6 Selling, general & administrative expenses.... 12.4 12.9 13.7 Stock compensation............................ -- -- 4.7 Other......................................... -- 0.4 0.1 ----- ----- ----- Income before interest and income taxes....... 8.3 11.9 9.1 Interest expense, net......................... -- 3.4 2.9 ----- ----- ----- Income before income taxes and extraordinary item, net................................... 8.3 8.5 6.2 Provision for income taxes.................... 3.2 3.4 2.4 ----- ----- ----- Income before extraordinary item, net......... 5.1 5.1 3.8 Extraordinary item, net....................... -- -- (0.3) ----- ----- ----- Net income.................................... 5.1% 5.1% 3.5% ===== ===== ===== 27
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD FROM JANUARY 22, 1996 TO DECEMBER 31, 1996 Net sales. Net sales were $202.0 million in 1997, an increase of $16.8 million, or 9.1%, from net sales of $185.2 million for the period January 22, 1996 to December 31, 1996. The revenue in 1997 included three weeks of additional results compared to 1996 and also included $1.5 million relating to Auburn sales following its acquisition on December 17, 1997. Excluding Auburn results in 1997 and including the Predecessor Company's results for the period January 1, 1996 through January 21, 1996, the increase in net sales was $9.0 million, primarily resulting from increases in unit sales to existing customers in core categories. The growth in unit sales was primarily due to a greater emphasis on developing new product categories and the introduction of new displays offering promotional buying advantages for the consumer. Gross margin. Gross margin as a percentage of net sales increased to 27.6% in 1997 from 25.2% in 1996. Gross margin is determined after accruing royalty expense under the Gerber license agreement of $3.5 million in 1997 versus $1.9 million in 1996. The principal reasons for the improved gross margin as a percentage of net sales were lower manufacturing costs resulting from improved operating efficiency, increased production in owned facilities and a greater percentage of products made offshore. Selling, general & administrative expenses, excluding stock compensation. Selling, general and administrative expenses (excluding stock compensation) as a percentage of net sales were 13.7% in 1997, versus 12.9% in 1996. The increase was principally due to expanding the Company's merchandising and selling efforts to support sales growth, plus the cost in 1997 to relocate central distribution activities into a lower cost facility in another state. Stock compensation. In 1997, stock compensation of $9.5 million was incurred in connection with the sale of stock to certain executives and managers of the Company below its fair market value. Other. Other represents the cost of closing and realignment of certain facilities in the amount of $0.2 million in 1997 and $0.7 million in 1996. Income before interest and income taxes. Income before interest and income taxes was $18.3 million in 1997, compared to $22.0 million in 1996. Excluding stock compensation, 1997 income before interest and income taxes would have been $27.7 million, or 13.7% of net sales compared to 11.9% in 1996. The improvement resulted from the increased sales and improved gross margin percentage. Interest expense, net. Interest expense, net, was $5.8 million for 1997 compared to $6.3 million for 1996. This decrease was primarily due to decreased average debt outstanding and a more favorable rate structure for 1997 as compared to 1996. Provision for income taxes. Provision for income taxes was $4.8 million in 1997, compared to $6.2 million in 1996. The effective tax rate was 38.2% for 1997 as compared to 39.7% for 1996. The higher effective tax rate in 1996 was primarily due to permanent non-deductible items associated with GCIH's acquisition of the Company. Extraordinary item. In connection with the Acquisition, the senior credit facility was replaced. The deferred financing costs associated with this old facility were written off and charged to operations in 1997. This expense, along with the associated prepayment penalties, was approximately $0.7 million (net of a tax benefit of $0.5 million) in 1997. Net income. As a result of the above, net income was $7.0 million for 1997 and $9.5 million for 1996. Excluding the impact of the stock compensation, net income for 1997 would have been $12.9 million, a 36% increase over 1996. PERIOD FROM JANUARY 22, 1996 TO DECEMBER 31, 1996 OF THE COMPANY COMPARED TO YEAR ENDED DECEMBER 31, 1995 OF THE PREDECESSOR COMPANY Net sales. Net sales in 1996 were $185.2 million for the period from January 22, 1996 to December 31, 1996, compared to 1995's net sales of $197.4 million. Including the $6.7 million of net sales of the Predecessor Company for the period January 1, 1996 to January 21, 1996 in the Company's 1996 period, net sales declined 28
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2.8% or $5.5 million compared to 1995. The Company believes the decline was primarily due to the Predecessor Company management's focus in 1995 on the sale of Gerber which resulted in less resources being directed towards developing new products for sale in 1996. Gross margin. Gross margin as a percentage of net sales increased to 25.2% in 1996 from 20.7% in 1995. The increase in gross margin was due to (i) reduced cost of sales due to greater offshore sourcing and offshore manufacturing by the Company, (ii) a more favorable product mix, (iii) margin enhancement in 1996 as compared to 1995 on sales of products to GPC, resulting in an approximately 0.5% margin increase, offset in part by (iv) an accrual of $1.9 million in 1996 for Gerber licensing royalty expense (which charge was not borne by the Predecessor Company). Selling, general & administrative expenses. Selling, general and administrative expenses were $23.9 million, or 12.9% of net sales in 1996, a decrease of $739,000 from $24.6 million, or 12.4% of net sales, in 1995. While the dollar amount of expense declined, the increase in such expense as a percentage of net sales was due to (i) a one-time severance charge incurred in 1996, (ii) enhancement of the management incentive program, (iii) an increase in insurance costs associated with a stand-alone entity, offset in part by (iv) reductions in distribution expense and employee benefit costs. Other. Other represents the cost of closing and realignment of facilities aggregating $0.7 million in 1996. Income before interest and income taxes. As a result of the foregoing, the Company had income before interest and income taxes of $22.0 million in 1996 compared to $16.3 million in 1995. The income before interest and income taxes as a percentage of net sales was 11.9% in 1996 versus 8.3% in 1995. Interest expense, net. Interest expense, net was $6.3 million for 1996, resulting from the debt incurred to acquire the Company and to support working capital needs. In 1995, the Predecessor Company had no long-term debt and was not charged any interest expense as a subsidiary of GPC. Provision for income taxes. Provision for income taxes was $6.2 million for 1996, compared to $6.3 million for 1995. The Company's effective tax rate was 39.7% for 1996, compared to 38.4% for 1995. The higher effective tax rate in 1996 was primarily due to non-recurring non-deductible items associated with GCIH's acquisition of the Company. The provision for income taxes of the Predecessor Company essentially resulted from applying the Federal and state statutory rates to the operations of a stand-alone company. Net income. As a result of the above, net income was $9.5 million for 1996 and $10.1 million for 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash needs are working capital, capital expenditures, and debt service. The Company has financed its working capital, capital expenditures and debt service requirements primarily through internally generated cash flow, in addition to funds borrowed under the Company's Credit Agreement. The Company intends to use the net proceeds from the Offering to repay subordinated notes payable of $33.5 million, to repay certain other indebtedness of the Company and to redeem certain shares of GCIH's Preferred Stock in connection with the Reorganization in the aggregate amount of $355,000. Upon consummation of the Reorganization and the Offering, the Company's cash flow requirements for debt service will be substantially reduced. See "Description of Certain Indebtedness" and "Unaudited Pro Forma Condensed Consolidated Statement of Operations." Net cash used in operating activities for the year ended December 31, 1997 was $(5.0) million compared to net cash provided by operating activities of $32.3 million and $13.4 million for the periods ended December 31, 1996 and December 31, 1995, respectively. The decrease in net cash provided by operating activities from 1996 to 1997 is primarily due to (i) an increase in inventory of $15.0 million, primarily representing higher levels of safety stocks maintained on hand in 1997 to minimize delivery time and properly service customers in the first quarter of 1998 as well as to limit disruptions to customers during the transition to a new warehouse in 1997, (ii) an increase in accounts receivable of $8.5 million, primarily due to the timing of collections (the Company's days sales outstanding were 50 in December 1997 versus 37 in December 1996 29
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as compared to a typical average of 49), and (iii) a decrease in income tax payable of $10.2 million, primarily related to differences in the timing of payments between 1996 and 1997, due in part to the tax impact of stock compensation late in 1997. For Gerber, working capital requirements vary throughout the year. Working capital increases during the first half of the year as inventory, primarily blanket sleepers, builds to support peak shipping periods. The Auburn business is less seasonal, and as such, while working capital tends to increase slightly during the second half of the year, the variation is small. See "Description of Certain Indebtedness." Under the terms of a ten-year license agreement between the Company and GPC, the initial term of which expires in 2006, the Company is not required to pay royalty fees to GPC until the year 2002. Commencing in 2002, the Company is required to pay an escalating royalty fee as a percentage of net sales of Gerber-licensed products throughout the term of the license agreement and in each year of the two consecutive five-year renewal terms if such renewal terms are negotiated. The Company is recording charges against earnings in accordance with generally accepted accounting principles in order to ensure a straight-line effect of the total royalty expense expected to be incurred over the initial ten year license term. The charges recorded prior to 2002 represent non-current liabilities that will begin to be paid to GPC in 2002. The initiation of such royalty payments in year 2002 may adversely affect the Company's cash flow. See "Risk Factors -- Dependence on Gerber License and Other Intellectual Property" and "Business -- Licenses and Trademarks." In connection with the Offering, the deferred financing costs associated with the subordinated debt to be repaid with the Offering proceeds will be written off along with the unamortized discount associated with such debt as an extraordinary item in 1998. This extraordinary item is estimated to be approximately $309 (net of a tax benefit of $185). In connection with the acquisition of Auburn, the Company's then-existing senior credit facility was refinanced. Indebtedness under the Credit Agreement consists of a $40.0 million term loan to finance the Acquisition and a $60.0 million revolving facility to fund current working capital requirements. The term loan portion of the Credit Agreement will mature on September 30, 2002 and requires quarterly principal payments totaling $1.5 million in 1997, $6.5 million in 1998, $8.1 million in 1999, $8.5 million in 2000, $8.6 million in 2001 and $6.8 million in 2002. The revolving credit portion of the Credit Agreement will mature on October 31, 2002 and has no scheduled interim amortization but does require mandatory principal prepayments annually based on excess cash flow commencing December 31, 1998. The Company also incurred debt issuance costs of $1.0 million in 1997. The Company had approximately $47.0 million of availability under its Credit Agreement at January 24, 1998. In connection with the consummation of the Offering, the Company is seeking certain amendments to its Credit Agreement. Consummation of the Offering is dependent on obtaining such amendments. The Credit Agreement subjects the Company to standard covenants and events of default. As of January 24, 1998, the Company was in compliance with all such covenants and was not in default. In connection with the Acquisition, the Company assumed approximately $2.6 million of Auburn's indebtedness. Auburn's Irish subsidiary maintains a IRL 3.0 million loan facility (U.S. $4.1 million as of February 27, 1997) with the National Irish Bank consisting of a combined term loan, overdraft, guarantee and foreign exchange line. This facility is subject to annual review. The overdraft facility and foreign exchange line are available at the Company's discretion with each term loan draw down subject to the National Irish Bank's approval. At present, the Irish subsidiary has drawn down two term loans under the available loan facility and has drawn down on the foreign exchange line. The term loans had an aggregate balance of IRL 517,123 (U.S. $705,000 as of February 27, 1997) outstanding as of December 31, 1997 and are repayable in quarterly installments of interest and principal, the final payment for which is due in September 1999. The Irish subsidiary is not currently using its overdraft facility. In addition, the Irish subsidiary has received grants from the Industrial Development Authority which, if certain events occur, could become repayable to the IDA in the aggregate amount of up to IRL1,815,799. Auburn is a party to two loan agreements with the County of Logan, Kentucky related to the issuance in 1989 of two series of industrial revenue bonds of which 30
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approximately $2.4 million remained outstanding at December 31, 1997. Auburn's two principal Kentucky facilities are mortgaged in connection with such financing. The Company invested $4.2 million, $1.0 million and $1.5 million in capital expenditures during 1997, 1996 and 1995, respectively. These expenditures consisted primarily of normal replacement of manufacturing equipment, purchases of office equipment and upgrades to information systems. In addition, the Company relocated its distribution center in 1997 resulting in a one-time capital expenditure of $2.0 million. The Company is budgeting $5.7 million for capital expenditures in 1998. Gerber's portion of $3.9 million includes approximately $1.7 million for MIS systems upgrades which the Company believes, if fully implemented, could provide efficiencies in the areas of product development, forecasting and planning. Auburn's portion of $1.8 million may be increased to accommodate accelerated development of new technology. The Company believes that cash generated from operations, together with amounts available under the revolving portion of the Credit Agreement and other facilities of Auburn or the Irish subsidiary, will be adequate to meet its working capital, capital expenditures, and debt service requirements for the foreseeable future. SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly statement of operations data for the period from January 22, 1996 to December 31, 1996 and for fiscal year ended December 31, 1997, as well as such data expressed as a percentage of the Company's net sales for the period indicated. This data has been derived from unaudited financial statements that, in the opinion of the Company, include all adjustments necessary for fair presentation of such information when read in conjunction with the Company's financial statements and notes thereto. Income before interest and income taxes in 1997 has been adjusted to exclude the stock compensation charge (dollars in millions). [Enlarge/Download Table] QUARTER ENDED ------------------------------------------------------------------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ---------- ---------- ---------- --------- --------- --------- ---------- --------- 1996 1997 ------------------------------------------------ ---------------------------------------------- Net sales..................... $36.6 $39.0 $58.3 $51.2 $45.3 $40.2 $60.3 $56.2 Gross margin.................. 9.4 10.6 15.5 11.1 12.7 12.1 16.8 14.1 Income before interest and income taxes................ 3.8 3.4 9.0 5.8 5.7 4.9 9.6 7.6 PERCENTAGE OF NET SALES Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross margin.................. 25.7 27.2 26.6 21.6 28.0 30.1 27.9 25.1 Income before interest and income taxes................ 10.4 8.7 15.4 11.3 12.6 12.2 15.8 13.5 In Gerber's segments of the apparel industry, sales are typically higher in the third and fourth quarters due to the seasonal nature of some of its products. With the acquisition of Auburn, the Company will continue to experience seasonality, with the third quarter expected to represent the highest volume shipping quarter for the Company. See "Business -- Backlog and Seasonality." FLUCTUATION OF FOREIGN CURRENCY EXCHANGE RATES Inventory purchases from contract manufacturers in the Far East are primarily denominated in U.S. dollars; however, purchase prices for the Company's products may be affected by fluctuations in the exchange rate between the U.S. dollar and the local currencies of the contract manufacturers, which may have the effect of increasing the Company's cost of goods sold in the future. During the last two fiscal years, exchange rate fluctuations have not had a material effect on the Company's inventory cost. Following the Acquisition, the Company adopted a foreign exchange policy which has been implemented in Auburn's Irish subsidiary for the purpose of managing its day-to-day exposure. There are currently foreign exchange contracts in place covering amounts in excess of the Company's policy, which the Company expects will be reduced to current policy levels by the end of the second quarter of 1998. During 1997, Auburn's Irish 31
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subsidiary recorded a charge of approximately $1.0 million related to its foreign currency exposure prior to its acquisition by the Company. See "Risk Factors -- Risk of Fluctuation in Foreign Currency Exchange Rates." ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. With respect to the Company, this Statement will be effective in fiscal 1998 upon the establishment of the Company's Long-Term Incentive Plan. See "Management -- Long-Term Incentive Plan." The Company will adopt only the disclosure provision of SFAS No. 123 and account for stock based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for financial statements for fiscal years ending after December 31, 1997. This standard establishes standards for the reporting and display of comprehensive income which is defined under SFAS No. 130 as "the change in equity (net assets) during a period from transactions and other events and circumstances from nonowner sources." Under SFAS No. 130, the Company has several choices in the disclosure of the components of other comprehensive income. The Company plans to implement SFAS No. 130 during the first quarter of fiscal year 1998. In June 1997, the FASB released Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. FAS 131 is effective for fiscal years beginning after December 15, 1997. The Company has evaluated the impact of the application of the new rules on the Company's consolidated financial statements and does not expect the new rules to change the way it presently presents its segments. INFLATION Results of operations have not been significantly affected by inflation. The Company, in the normal course of business, has been able to offset the impact of increased costs through operating efficiencies and selected price increases. FORWARD LOOKING STATEMENTS This Prospectus includes forward-looking statements, including statements regarding, among other items, (i) the Company's anticipated growth strategies and intention to consider future acquisitions, (ii) the Company's intention to introduce new products, introduce product line extensions, and enter new distribution channels, (iii) anticipated trends in the Company's businesses, (iv) future expenditures for capital projects (including MIS expenditures) and any benefits expected to be derived therefrom, (v) the Company's ability to reduce its interest expenses and debt service obligations and (vi) the Company's ability to continue to control costs and maintain quality. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of the factors described in "Risk Factors" including, among others, (i) changes in the competitive marketplace, including the introduction of new products, technologies or pricing changes by the Company's competitors, and (ii) changes in the trends in the market for infant and toddler apparel and related products. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Prospectus will in fact transpire. 32
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BUSINESS THE COMPANY Gerber Childrenswear, Inc. is a leading marketer of infant and toddler apparel and related products, offering products under its flagship brand, Gerber, as well as the Baby Looney Tunes and Curity brand names and the Onesies trademark. The Gerber name and baby head logo are among the best recognized in the infant and toddler industry. The Company believes Gerber is the leading provider of infant and toddler apparel and related products to volume retailers, which constitute the fastest growing segment of the retail industry. The Company also distributes products to mid-tier department stores and specialty retailers. Gerber holds a leading market share in its distribution channels in the underwear, blanket sleeper and cloth diaper categories. The Company believes that these leading positions in addition to strong consumer recognition of its brands provide opportunities for Gerber to leverage its brands into other product categories including sleep 'n play, bed & bath, playwear, bibs, hosiery and gift sets where Gerber has a growing presence. In addition, in order to build upon the Company's expertise as a low-cost supplier of branded merchandise to volume retailers, the Company acquired all of the capital stock of Auburn in December 1997 for approximately $40.0 million. Auburn manufactures, markets and sells branded sport socks for men, women and children under established brand names such as Wilson, Coca-Cola and Converse in the U.S., Europe and other international territories and under the Dunlop brand name in Europe. Auburn markets to a diversified customer base in the U.S. and Europe, including volume retailers, department stores, wholesale clubs and major sporting good chains. As a result of the Acquisition, the Company markets products in over 25 countries. The Company believes that Auburn's expertise in hosiery will position it to capitalize on growth opportunities and the Acquisition will provide opportunities to achieve certain economies of scale and efficiencies in the areas of purchasing, data processing and selling, general and administrative expenses. In 1997, pro forma for the Acquisition, the Company's net sales and income from continuing operations were $270.1 million and $6.6 million, respectively. In January 1996, Gerber Childrenswear, Inc. was acquired from GPC by a group of investors led by Edward Kittredge, the Company's Chairman, President and Chief Executive Officer, who assembled Gerber's current management team. The new management team, under the direction of Mr. Kittredge, developed a series of initiatives to strengthen Gerber's financial results and improve its operations. To achieve cost efficiencies, Gerber consolidated manufacturing facilities, established a flexible production strategy including domestic and offshore manufacturing and sourcing components, centralized finished product purchasing across all product categories and enhanced its compensation system. As a result, Gerber's operating margin, excluding royalties accrued to GPC, stock compensation and certain non-recurring charges, increased to 15.6% in 1997 from 13.3% in 1996 and 8.3% in 1995. The U.S. retail market for infant and toddler apparel and related products, as a whole, is estimated at $7.0 billion in 1997, and has grown at a compound annual rate of 8.0% since 1991. The Company believes that this market is well-insulated from major changes in fashion trends and is less sensitive to general economic cycles due to the consistent level of infant births in the U.S., at slightly less than 4 million annually, and the high consumption rate for apparel products as infants experience frequent size changes. Annual apparel spending per infant increased to $329 in 1996 from $250 in 1993 according to U.S. Census data, representing compound annual growth of 9.6%. The Company believes the market offers continued growth prospects due to demographic factors including (i) more women having children at an older age and returning to work thereafter, resulting in greater disposable income for expenditures on children; and (ii) an increasing number of grandparents, who represent a key consumer segment for infant and toddler products. Within the infant and toddler industry, greater emphasis on value has shifted consumer purchases away from traditional department stores and toward more value-conscious retail channels, including volume retailers and mid-tier department stores. Additionally, the industry is highly fragmented and services volume retailers who are interested in limiting their purchases to a smaller number of well-capitalized vendors with a broad base of branded products. The Company believes that its strong brand names, leading market positions, broad product offerings and strong customer relationships with volume retailers and mid-tier department stores position it to benefit from industry trends. 33
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COMPETITIVE STRENGTHS The Company's business philosophy is to pursue growth and profitability by maintaining and enhancing its strong brand name recognition and reputation for quality while continuing to strengthen its customer relationships. The following factors serve as the Company's competitive strengths and distinguishing characteristics: STRONG BRAND NAME RECOGNITION. The Company believes that Gerber is one of the most recognized brands in the infant and toddler apparel industry with a reputation for consistently delivering high quality products with innovative design features at competitive prices. The Gerber brand name was first introduced for baby food in 1927 by GPC, which holds an approximately 65% market share in the baby food industry. The Company markets and sells infant and toddler's apparel and related products using the well established Gerber brand name and baby head logo. In addition, the Company believes that its popular Baby Looney Tunes brand name (used on products at slightly higher price points) is recognized for its use of characters, bright colors and higher fashion content. The Company also benefits from the strong recognition of its Onesies trademark (developed for its line of infant underwear) and the Curity brand name (used on products which are targeted towards more value-conscious consumers). Additionally, as a result of the Acquisition, the Company offers sport socks under the Wilson, Converse, Coca-Cola and Dunlop brand names licensed by Auburn. LEADING MARKET POSITIONS IN CORE PRODUCT CATEGORIES. The Company is the leading provider of infant and toddler apparel and related products to volume retailers, which constitute the fastest growing segment of the retail industry. The Company also distributes products to mid-tier department stores and specialty retailers. Gerber holds a leading market share in its distribution channels in the underwear, blanket sleeper and cloth diaper categories. The Company believes that its leading market shares provide significant competitive advantages in serving its customers, through production and purchasing efficiencies and greater product development and marketing resources. Management's strategy is to leverage these competitive advantages to further penetrate other product categories, whether acquired or internally developed. HIGH QUALITY, INNOVATIVE PRODUCTS. The Company believes that it has developed a reputation for high quality and innovative products and that this has played a critical role in its long-standing strong market positions. In 1982, Gerber designed and developed Onesies, an innovative one-piece underwear garment, which resulted in a new category of infant apparel which Gerber believes consumers identify with the Onesies trademark. Most recently, Gerber introduced the Swim-per, a swim diaper, and Nap 'N Go, a portable daycare mat. LOW-COST SUPPLIER. The Company believes that its reputation for providing high quality products at attractive prices has established it as one of the top infant and toddler's apparel suppliers among value-conscious volume retailers. The Company actively manages the manufacturing and sourcing of its products to optimize efficiencies. Of the products manufactured and sourced offshore, the majority were through manufacturing operations that are owned or dedicated exclusively to the Company's products. The Company believes that such diversification has enabled it to enhance operating efficiencies through production flexibility and expanded capacity without significant capital investment, while at the same time enabling it to control more efficiently the delivery and quality of its products. All of these factors have helped the Company to become a low-cost supplier. See "Business -- Gerber -- Manufacturing and Sourcing -- Product Sourcing." In addition, the Company believes that its centralized purchasing and distribution systems have enhanced its cost competitiveness through reduced distribution costs, minimization of product delays and economies of scale. LONG-TERM CUSTOMER RELATIONSHIPS AND EMPHASIS ON CUSTOMER SERVICE. Gerber enjoys well-established, long-term relationships with its customers, many of which have been maintained at multiple levels from sales to senior management. In certain cases, members of Gerber's senior management and sales force have maintained relationships with Gerber's customers for over 30 years. Moreover, the Company believes its broad product offerings, emphasis on customer service and proven reliability provide a competitive advantage as retailers consolidate and seek a smaller number of well-capitalized vendors with a broad base of branded products. Gerber works closely with its principal customers to assist in the management of their inventories and has invested in warehousing and distribution facilities and information systems development, including an 34
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EDI system and a VMI program. In addition, Gerber's information systems enable it to provide customized merchandising and space allocation recommendations and other category management services to its retail customers. Gerber currently provides such customized services for Wal-Mart in certain product categories. Gerber has been recognized for its accomplishments by many retailers and in 1997 received the "Supplier Performance Award by Retail Category" from Discount Store News on behalf of discounters, the highest award a company can receive from such retailers. In addition, the Company has received a number of awards from its customers, including Wal-Mart, Sears, J.C. Penney and Toys "R" Us. DEVELOPMENT OF MANAGEMENT AND OPERATING INFORMATION SYSTEMS. Gerber has made significant investments in the development of MIS and plans to make additional capital expenditures to further refine such systems. Gerber believes that it will continue to benefit from these systems through its ability to effectively manage inventory, improve sales and reduce operating costs. Gerber currently serves all major volume retailers through its EDI system, which allows customers to send orders to Gerber more quickly and efficiently. EXPERIENCED MANAGEMENT TEAM WITH A SIGNIFICANT STAKE IN THE COMPANY. The Company's Chairman, President and Chief Executive Officer, Edward Kittredge, has had over 35 years of diverse experience in the textile and apparel industry and the Company's top five senior managers average more than 25 years of experience in the apparel industry. The sales and merchandising team has been strengthened with the recent additions of Robert P. Robertson as Senior Vice President of Sales and Marketing and Mary-beth Boughton as Vice President of Merchandising (focused on mid-tier department stores). After giving effect to the Reorganization and the Offering, management will own approximately % of the Common Stock of the Company on a diluted basis. BUSINESS STRATEGY The key elements of the Company's business strategy to remain a low-cost supplier of high quality, branded products to volume retailers include: ENHANCE OFFERING OF HIGH QUALITY, INNOVATIVE PRODUCTS. The Company intends to continue to enhance its product offerings through new product initiatives and product extensions. The Company's strategy is to leverage the Gerber, Baby Looney Tunes and Curity brands into additional products, including product segments in which the Company is under-represented. For example, the Company is under-represented in the approximately $1.8 billion playwear market at retail and in the approximately $600 million fleece/outerwear market at retail. In order to grow its market share in these product lines, Gerber recently enhanced the Baby Looney Tunes playwear offering and introduced a new line of Gerber fleecewear. The Company believes that these categories present significant growth opportunities. EXPAND INTO NEW AND STRENGTHEN EXISTING DISTRIBUTION CHANNELS. The Company's plan is to continue to leverage its strong brand names to expand into new distribution channels in the U.S. and abroad. Gerber recently targeted the midtier department store channel with product lines such as Always Baby by Gerber, which are specially designed, packaged and priced for mid-tier department store customers. Gerber's strategy is to emphasize marketing efforts to increase product breadth in existing distribution channels in which it believes some of its product lines are under-represented. In addition, management believes that the Gerber, Baby-Looney Tunes and Curity lines of products have growth opportunities in the food and drug, variety, off-price apparel, catalog, dollar store, wholesale club and mid-tier department store distribution channels. FURTHER PENETRATE INTERNATIONAL MARKETS. Gerber currently has an exclusive license to use the Gerber brand name on certain infant and toddler apparel and textile products in the U.S., Canada and the Caribbean and a right of first refusal to use the Gerber name in Central and South America. Gerber branded products are currently being shipped in the U.S. and to Canada and the Caribbean. The Company believes that its offshore manufacturing and sourcing capabilities give it a competitive advantage to further increase its presence in the international markets. Gerber plans to increase the distribution of its Gerber line of products in Canada by offering a broader product mix in such market. The Company's plan is to leverage the Gerber brand name to expand its presence in international markets in which the Gerber brand name is established for baby food, and believes that such markets represent expansion opportunities. 35
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MAXIMIZE OPERATING EFFICIENCIES. The Company's strategy is to continue to improve operating efficiencies and productivity in order to offer its customers high quality products at competitive prices. The Company's plan is to continue to optimize product sourcing to achieve economies of scale and to eliminate certain duplicative operations in connection with the acquisition of Auburn. LEVERAGE EXPERTISE THROUGH SELECTIVE ACQUISITIONS. The Company actively evaluates acquisition candidates and is in discussions from time to time regarding future acquisitions. Future strategic acquisitions may be undertaken to broaden the Company's product lines, increase sourcing diversity and strengthen its presence within various channels of distribution. The Company believes that numerous acquisition candidates exist within the infant and toddler apparel industry. In addition, the Company believes that other acquisition opportunities exist in similar high volume, basic branded apparel businesses where the Company can leverage its core competencies. The Company currently has no agreements or understandings with respect to any acquisitions. GERBER BRANDS The Company, through Gerber, offers infant and toddler apparel and related products under the key brands of Gerber, Baby Looney Tunes and Curity and under its Onesies trademark, as well as under private labels. In 1997, approximately 70% of Gerber's products were sold under the Gerber brand name, and approximately 16% of Gerber's products were sold under the Baby Looney Tunes brand name. The Curity brand name and private label sales accounted for approximately 2% and 12% of Gerber's total sales, respectively. Products sold under the Gerber and Curity brand names and private labels are produced in both basic styles and more design oriented styles. Products sold under the Baby Looney Tunes brand name are primarily design oriented. The Onesies trademark was created and developed by Gerber, which resulted in a new category of infant apparel which the Company believes consumers identify with the Onesies trademark. GERBER. The Company's primary brand, Gerber, was first introduced in 1928 by GPC, and has been long associated with infant and toddler care products. The Company believes that many consumers today associate the "Gerber baby" as "every baby." Gerber infant and toddler apparel was first introduced in 1963 with a line of cloth diapers, and the Company currently offers products under the Gerber name in all of its nine principal product categories. Gerber products are distributed primarily through volume retailers and mid-tier department stores. BABY LOONEY TUNES. Gerber markets higher-end, more fashion oriented products such as playwear and bibs under the Baby Looney Tunes brand name. The Baby Looney Tunes characters include Baby Tweety, Baby Bugs Bunny, Baby Tasmanian Devil, Baby Daffy Duck, Baby Wile E. Coyote, Baby Road Runner and Baby Sylvester on infant and toddler bath products, bedding, sleepwear, underwear, footwear, socks, layettes, and infant and toddler playwear. The adult characters of Bugs Bunny, Wile E. Coyote, Marvin the Martian, Foghorn Leghorn, Porky Pig, Elmer Fudd, Tweety and Sylvester Jr. are also applied to infant and toddler bedding. Baby Looney Tunes products are distributed through volume retailers, mid-tier department stores, and food and drug stores. CURITY. The Curity brand was reintroduced by Gerber in 1994 to provide an opening price point to Gerber's portfolio of brands. Products under this brand are targeted towards more value oriented consumers. Curity brand products are currently limited to the categories of underwear, cloth diapers, blanket sleepers and certain other products and are distributed almost exclusively through volume retailers. PRIVATE LABEL. Gerber's private label products are generally for large volume retailers and mid-tier department stores and include products in the underwear, cloth diaper and sleep n' play categories. PRODUCTS Within Gerber's nine product categories, Gerber offers an extensive number of SKUs in order to provide large volume retailers with a full product line. Of its nine product categories, its most well-developed categories are underwear, blanket sleepers and cloth diapers. The Company expects growth in these categories 36
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and the remaining six categories in which it is placing an increasing emphasis. Apparel product sizes range from newborn through size 4T which are generally for children up to three years of age. The majority of Gerber's sales are in the newborn and infant size ranges which are typically for children up to two years of age. The following table summarizes Gerber's nine principal product categories: [Download Table] PRODUCT CATEGORY PRINCIPAL BRANDS RETAIL PRICE RANGE ---------------- ---------------- ------------------- Underwear Gerber, Curity, Baby Looney Tunes, Private $2-11 label Blanket Sleepers Gerber, Curity, Baby Looney Tunes, Private $4-12 label Cloth Diapers Gerber, Curity, Private label $5-10/pack Sleep 'N Play Gerber, Curity, Private label $5-12 Bed & Bath Gerber, Baby Looney Tunes $3-100 (Bed) $1-8 (Bath) Playwear Gerber, Baby Looney Tunes $7-15 Bibs Gerber, Baby Looney Tunes $1-3 Hosiery Gerber, Baby Looney Tunes $1-2 Gift Sets Gerber, Baby Looney Tunes $10-30 UNDERWEAR. Gerber's products in the underwear category are led by the Company-owned trademark Onesies (an underpant and T-shirt combination garment for infants) and also include unionsuits, shirts and training pants. Created, designed and developed by Gerber, the Onesies product line has resulted in a new category of infant apparel with the distinguishing feature of a seamless garment body, which Gerber believes makes the product more comfortable for babies. The Gerber brand is Gerber's main brand in this product category. The Company believes it has achieved a leading market position in the underwear category, estimating that Gerber's products constitute over 50% market share of distribution to volume retailers. Gerber currently is the primary supplier of infant underwear to many of its customers, including Gerber, Baby Looney Tunes and Curity products. Management believes that growth in this product category will occur as a result of further gains in market share, in part due to consolidation of suppliers to volume retailers. BLANKET SLEEPERS. Blanket sleepers are one-piece, footed garments in which infants sleep during the winter months. Gerber's key brand in this product category is Gerber. The Company believes that Gerber is the market leader in blanket sleepers with over 50% market share of distribution to volume retailers. The Company believes that growth in this product category will occur as a result of further gains in market share, in part due to consolidation of suppliers. CLOTH DIAPERS. The cloth diaper category includes both traditional cloth diapers, used as diapers, lap pads and burp cloths, and other products including vinyl pants and the recently introduced Swim-per, a swim diaper. The Gerber brand of cloth diaper is marketed to both volume retailers and mid-tier department stores. Although cloth diaper sales have decreased over the last several years, management believes that cloth diaper sales have stabilized as consumers increasingly have come to rely on them for a wide range of uses. The Company expects growth within the cloth diaper category to come with the development of new, innovative products such as the Swim-per. SLEEP 'N PLAY. Sleep 'N Play products include both pajamas and one piece outfits called "stretchies." The key brands in this product category include the Gerber brand and private label, which are distributed primarily to volume retailers. The Company's strategy is to achieve growth in this product category through (i) increased offerings of new designs, (ii) increased distribution to mid-tier department stores including products under the Always Baby by Gerber brand, (iii) the introduction of 100% cotton sleepwear for infants up to 9 months old, products now permitted under amended Federal regulations, and (iv) the withdrawal of a major competitor. BED & BATH. Bed products include quilted products (such as comforters and bumpers), crib skirts, sheets, and waterproof products such as mattress and changing table protectors. Bath products include washcloths and towels and products such as Lil' Hoodlums, which are hooded towels in the shape of animals. The Gerber and Baby Looney Tunes brands are the key brands within this product category. Gerber distributes 37
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bed and bath products to volume retailers and mid-tier department stores, and believes the mid-tier distribution channel represents a strong area for growth. PLAYWEAR. Gerber is placing a greater emphasis on "Playwear", a category whose products include coordinated sets, jumpers, overalls and fleece products. Gerber offers both fall and spring lines of playwear and provides a variety of styles for each season. The Company believes the playwear category is more design oriented than underwear or sleepwear. In 1997, Gerber offered its entire playwear line exclusively under the Baby Looney Tunes brand. In 1998, Gerber intends to continue its playwear line under the Baby Looney Tunes brand and also introduce a basic line under the Gerber brand. Management believes that the playwear market, estimated at $1.8 billion at retail, represents a significant area of potential growth. BIBS. Gerber sells bibs under the Gerber and Baby Looney Tunes brands through volume retailers and food and drug stores. Historically, GPC's Baby Care Division was responsible for distribution of bibs, among other products, in the food and drug store distribution channel. As of January 1, 1998, Gerber assumed the marketing function for bibs to this channel and believes it to be an area for growth. HOSIERY. Gerber's hosiery products include crew socks, tights, ankle socks, booties, bootie sets and bobby socks. The infant and toddler hosiery market is estimated to be over $500 million at retail and management believes it can grow the category through offering its hosiery in an expanded number of distribution channels. Additionally, Gerber expects to gain further expertise in the hosiery market as a result of its acquisition of Auburn. GIFT SETS. Gerber recently introduced a line of gift sets, which includes selected Company products under the Gerber and Baby Looney Tunes brands, as well as other accessories acquired from other manufacturers (i.e. diaper baskets). Gift sets are generally comprised of items relating to common themes such as new baby, nursery products and infant "sports" themes, and are often packaged in decorative baskets and other unique packaging which can serve additional purposes. Gift sets represent the most recent example of Gerber's ability to leverage its strong brand names to develop a presence in new product categories. SALES Gerber's sales force is comprised of approximately 15 sales representatives and four telemarketers. The Company believes that Gerber's sales force distinguishes itself through its extensive experience in the infant and toddler apparel industry, long tenure and thorough understanding of its retail accounts. Gerber's sales strategy is to have highly qualified personnel handling all product lines for a small number of retail accounts, which it believes efficiently serves existing customers and attracts new ones. Gerber's sales representatives work closely with customers to develop marketing plans, including merchandise space allocation and other merchandising strategies. The four-person telemarketing sales organization is based at Gerber's headquarters in Greenville, South Carolina and handles marketing efforts directed towards smaller stores and in connection with Gerber's sales to diaper services. In addition, the Company believes that Gerber's senior management team has established strong relationships with the senior management of its customers which has resulted in solid customer relationships. In fiscal 1997, $4.3 million of Gerber's products, or 2.1% of Gerber's net sales, were sold through GPC's Baby Care Division to food and drug channels in the U.S. and Canada. Beginning in 1998, Gerber commenced distribution to food and drug channels in the U.S. directly rather than through GPC. Additionally, the Company is working with GPC in Canada to broaden the Company's distribution to Canadian retailers. DESIGN AND MERCHANDISING The Company believes that Gerber has developed a reputation for consistently delivering high-quality, value-priced products, largely due to its strong merchandising team. Gerber's merchandisers are experienced and have a proven ability to interpret fashion direction and convert design ideas into both basic and fashion-oriented products with a value image. Each product category has its own experienced merchandising group. Merchandisers oversee and manage the entire design and merchandising process for each product line from the initial market research to final delivery of the product. The Company believes that this integrated process 38
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has allowed Gerber to become a leading producer of high quality, basic products while also enabling it to market fashion-enriched products at several price points. The Company has developed an extensive network of information and design idea sources, which it believes maintains a healthy flow of ideas to its merchandising, design and art teams to help keep products fresh. The key merchandising personnel responsible for line direction routinely travel to several international markets for design and product innovations. After analyzing market trends and obtaining input from key buyers in the field regarding design and fashion movements, the merchandising design and artist teams develop a coherent merchandising strategy that will unify that season's individual line components. Samples are then produced for presentations to select major accounts. This interaction with "barometer accounts" provides the Company with additional input as to final line content and an initial indication of demand which is used to adjust earlier production estimates. The Company's licensors also review each new design and product at various stages of production pursuant to their licensing arrangements. The sales force uses sample lines and supporting story boards to make presentations and complete bookings. Throughout the year, the merchandising, design and art teams create fresh product designs for basic and fashion lines. MANUFACTURING AND SOURCING MANUFACTURING OPERATIONS. Gerber actively manages the manufacturing and sourcing of its products to optimize efficiencies, and in 1997, manufactured and sourced approximately 60% of its products offshore (based on cost). Gerber has seven manufacturing operations, including one in each of South Carolina and Texas, two locations in North Carolina and three "9802" facilities in the Dominican Republic. In "9802" facilities, U.S. components are shipped abroad, assembled, packaged and re-imported with duty charges assessed only on the value added abroad. Through its manufacturing operations, Gerber is able to control the knitting, cutting, sewing, embroidering and packaging of its products. Over the last several years, Gerber has focused its operations on its manufacturing strengths such as knitting, cutting and sewing, and has discontinued its inefficient manufacturing operations such as spinning yarn and dyeing fabric. In addition, Gerber has increased its use of offshore manufacturing sources. Approximately 40% of Gerber's products were produced domestically (based on cost), and approximately 60% were produced offshore in 1997. The Company believes that the combination of domestic and Company-controlled foreign production helps Gerber maintain competitive pricing by keeping costs low while fulfilling customer demand for fast turnaround on orders. The Company believes that Gerber's integrated use of domestic and foreign production provides tangible competitive advantages and cost benefits by securing more predictable timing in the production process which facilitates the achievement of the Company's high standards with respect to product quality, timely deliveries and customer service. The ability to accurately forecast the completion of production allows the Company to offer narrow and dependable delivery windows to retailers. As retail buyers continue to consolidate suppliers, the Company believes that they favor those resources which offer quality products along with reliable and timely deliveries. By increasing the service demands on suppliers, retailers can minimize inventory levels, limit markdowns and utilize their open-to-buy dollars most efficiently. PRODUCT SOURCING. Gerber procures both raw and finished products from China, Eastern Europe, Guatemala, Indonesia, Mexico, the Philippines, Taiwan and Thailand. Such purchasing is denominated in U.S. dollars. Gerber's most significant raw material is yarn, which is priced and purchased primarily in U.S. dollars. Gerber buys yarn from proven, reliable sources with which it has good relationships and generally enters into contracts with terms up to one year with its yarn suppliers. To date, Gerber has not experienced any difficulty in obtaining yarn. See "Risk Factors -- Costs of Raw Materials and Supplier Relationships." The Company intends to look for opportunities to consolidate buying between Gerber and Auburn to ensure efficiencies in purchasing (to the extent permitted under current contractual arrangements). QUALITY CONTROL. Gerber maintains quality control processes in a variety of ways. On an internal level, its domestic and offshore production in Gerber-controlled facilities is under the direction of a senior officer and the management of each plant is trained and held responsible for the quality of its own production. Gerber's director of quality control periodically visits each plant to train management personnel and inspect for quality. 39
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Representatives of the Company's merchandising and engineering staffs also visit the facilities from time-to-time to inspect for quality. In addition, in the Far East, employees and agents of the Company visit contractors' facilities to ensure compliance with specifications on-line including qualitative tests and an independent testing service is utilized to ensure compliance of garments with U.S. government regulations. On an external level, all of Gerber's licensors have the right to, and may from time to time, perform inspections of facilities utilized by the company. In addition, Gerber's customers perform third-party quality inspections either through unscheduled visits to Gerber facilities or through their own internal inspection of delivered final merchandise. The Company (and its competitors) are also required to provide the U.S. Consumer Products Safety Commission a continuing guarantee that products conform to U.S. flammability standards. DISTRIBUTION AND INVENTORY MANAGEMENT. Gerber currently distributes the majority of its products through distribution facilities located in Evergreen, Alabama. Gerber's Bed & Bath products are warehoused at its Pelzer, South Carolina facility and its blanket sleeper products are primarily warehoused and shipped from its Ballinger, Texas facility. In December 1997, Gerber relocated its distribution operations to the Alabama facility, which is approximately 255,000 square feet and is adequate for Gerber's current needs with opportunities for expansion in capacity. The Company anticipates that the relocation will create cost savings during the 1998 fiscal year. Under the Company's inventory management program, Gerber offers retailers the ability to reorder certain of its products for immediate shipment. Gerber keeps an inventory of products covered by the program and accepts replenishment orders through its EDI system. See "Business -- Management Information Systems." The Company can typically fill such orders within 72 hours of receipt. While the program requires an increased investment in inventories, the Company believes that its ability to offer this service to its customers is a significant competitive advantage. AUBURN Auburn manufactures, markets and sells branded sport socks for men, women and children under established brand names such as Wilson, Coca-Cola and Converse in the U.S. and internationally and under the Dunlop brand name in Europe. Auburn has operations in the United States and Ireland. Auburn markets to a diversified customer base in the U.S. and Europe, including volume retailers, department stores, wholesale clubs, major sporting good chains and food and drug stores. The strong brand name recognition and a long term reputation for quality facilitate a multi-channel distribution strategy. Auburn competes effectively in these distribution channels by offering its branded products at competitive prices, acting as a low-cost producer with the ability to service customers with quick turnaround, and maintaining strong customer relations. In addition, with its acquisition by Gerber, Auburn has added to these core competencies the ability to access capital for future growth and investment in operations. For the year ended December 31, 1997, Auburn had sales of approximately $69.6 million. Auburn competes in the highly fragmented hosiery industry, which has significant branded, control brand and private label components. Competition within the industry is generally based on price, quality, service, brand recognition and style. The Company believes that advances in technology in hosiery manufacturing will result in a smaller number of well-capitalized hosiery manufacturers. The Company believes that Auburn is well positioned to benefit from such consolidation due to its strong brands, established channels of distribution, strong customer service, low cost manufacturing capabilities and access to capital. The Company believes that significant growth opportunities exist through taking market share from private label producers, which comprise a substantial portion of the hosiery industry. In addition, management believes that Auburn's European manufacturing facility allows it to be more responsive to the European market, where management believes significant opportunity for expansion exists. BRANDS The Company believes, based on discussions with Wilson, that Auburn is the second largest licensee of the Wilson brand name in the U.S. and the third largest in the world. Sales of Wilson-branded products 40
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account for approximately 80% of Auburn's business. The Wilson brand name enjoys strong customer recognition, and a quality reputation with its end consumers. Auburn also produces sports socks under the Coca-Cola and Converse brands domestically and internationally and under the Dunlop brand name in Europe. PRODUCTS Auburn offers a variety of product features and packaging designed to serve its varied distribution channels. Although Auburn's primary products are white sports socks for men, women and children, which represent a substantial portion of Auburn's net sales, Auburn has tailored its product mix to meet consumer tastes and demands, such as the European demand for darker colors. Auburn's products vary based on sole cushion, length of sock, foot size, color, placement of logo and thread content. Auburn also offers a line of high performance sports socks featuring performance fibers such as Duraspun and Coolmax. The Company believes that Auburn, driven by technologically advanced knitting and sewing machinery, has established itself as a market innovator through design innovations such as the welted-top. The European market has shown an interest in sport socks in dark colors, including heather grey, black and navy. The Company believes that the darker colors have increased end usage in Europe, because many customers tend to wear sport socks for dress wear as well as sport uses due to the low price and the high comfort factor of a sport sock. This trend is beginning in the United States and the Company is well positioned to take advantage of it. Auburn has developed a strong reputation for packaging flexibility and can deliver packaged products to suit and meet its customers' individual needs. The Company believes that the ability to service its customers' individual packaging and merchandising needs give Auburn a competitive advantage over many of its competitors. MANUFACTURING AND SOURCING MANUFACTURING OPERATIONS. The hosiery business utilizes a capital intensive manufacturing process through which the sock is knit in the greige, the toe is closed, the sock is bleached or dyed and then packaged for distribution. In the U.S., Auburn conducts knitting and toe closing operations out of its manufacturing facility in Adairville, Kentucky. From time to time, Auburn also employs outside contractors to knit socks. The Adairville facility houses technologically advanced knitting and sewing equipment. The oldest knitting machines are four years old. Auburn is implementing a computerized monitoring system of this machinery which increases efficiency, usage rates and productivity. Auburn's bleaching, dying, packaging and shipping operations are conducted out of its distribution facility in Auburn, Kentucky. Technological advances and other control mechanisms at both the Adairville and Auburn facilities allow Auburn to maximize productivity. The Company intends to invest in further technological advances as they become available. Outside the U.S., Auburn operates a facility in Cahirciveen, County Kerry, Ireland which conducts knitting, sewing, bleaching, packaging and shipping functions using machinery, processes and technology identical to those of the U.S. facilities. The Ireland facility primarily supplies the European market (including Western Europe and Eastern Europe west of Russia) with the same branded American-style sports socks. In addition, the Company has recently installed in the Ireland facility a computerized monitoring system similar to that which Auburn is currently implementing in its Adairville facility. Now fully operational in Ireland, the system has significantly increased efficiency and productivity at that facility. The Company believes that Auburn's ability to offer high quality, branded socks at competitive prices has been recognized by value-conscious Europeans, and that the low levels of similar product offerings at this time offer an opportunity to develop brand recognition in these markets. See "Business -- Auburn -- Distribution and Inventory Management." QUALITY CONTROL. Auburn maintains quality control processes in a variety of ways. Internally, quality control inspectors monitor work in progress at each step of the manufacturing process. A record of each operator's performance is recorded and updated regularly. On an external level, all of Auburn's licensors have the right to, and may from time-to-time, perform inspections of Auburn's facilities. Customers also perform 41
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third-party quality inspections either through unscheduled visits to the Auburn facility, or through their own internal inspection of delivered final merchandise. DISTRIBUTION AND INVENTORY MANAGEMENT. In the U.S., Auburn distributes its products through the volume retailers, mid-tier department stores, wholesale clubs, major sporting good chains and food and drug store distribution channels from its facility in Auburn, Kentucky. In Europe, Auburn distributes its products to volume retailers, mid-tier department stores, supermarkets, wholesale clubs, major sporting goods chains and specialty retailers within the sporting goods category from its facility in Ireland. Both facilities are able to ship orders within 72 hours of their receipt. Management believes that this ability provides a significant competitive advantage over many of Auburn's U.S. competitors who lack fully-integrated European facilities and, therefore, are unable to respond quickly to European customers' individual demands. Management also believes that this ability coupled with Auburn's strong brand names has made Auburn a leading producer. MANAGEMENT INFORMATION SYSTEMS Gerber's MIS system provides, among other things, comprehensive order processing, production, accounting and management information for the marketing, manufacturing, importing and distributing functions of Gerber's business. Gerber has purchased and implemented a software program that enables Gerber to track, among other things, orders, manufacturing schedules, inventory, sales and mark-downs of its products. Gerber's MIS staff, based in Greenville, South Carolina, supports all computer systems and programs used to run Gerber's business. Gerber believes that its programmers play a critical role at Gerber in supporting these systems and in developing programs to maximize product flow through the different manufacturing functions at each facility and correctly staffing each function. Gerber continuously upgrades its MIS system to attempt to optimize inventory management and provide management with more timely information. In addition, Gerber has made expenditures with respect to the millennium problem and expects to be year 2000 compliant by the end of 1998. In addition, to support Gerber's replenishment program, Gerber maintains and fully utilizes its EDI and VMI capabilities. Gerber has made significant investments in the development of such MIS systems and plans to make additional capital expenditures to improve such systems, including the development of a fully integrated production system. Auburn's MIS system provides a full range of functions. Auburn's domestic EDI system is available for all customers and is completely integrated with Auburn's manufacturing, production, order entry, shipping, accounting and packaging functions. The system links all three of Auburn's domestic facilities and can interface with Gerber's financial functions. Management expects that Auburn's domestic EDI system will be year 2000 compliant by the end of 1998. The MIS system in the Ireland facility, which includes EDI capability, is a fully-integrated, real-time system and is able to interface with Auburn's New York sales office. The MIS system in the Ireland facility is currently year 2000 compliant. CUSTOMERS Gerber directly services approximately 1,100 retail accounts, with the Company's top 10 customers representing approximately 85% of total pro forma 1997 net sales. Sales to Wal-Mart, which accounted for a significant percentage of the net sales of infant and toddler apparel in the U.S. in 1997, constituted approximately 44% of Gerber's sales during 1997. Sales to Wal-Mart constituted approximately 48% of Auburn's sales during 1997. No other customer accounted for more than 10% of the Company's 1997 sales on a pro forma basis. Gerber enjoys well-established, long-term relationships with its customers, many of which have been maintained at multiple levels from sales to senior management. In certain cases, members of Gerber's senior management and sales force have maintained relationships with Gerber's customers for over 30 years. Approximately 90% of Gerber's customer orders, including all orders from volume retailers, currently come through the EDI system. This allows Gerber's customers to receive the quick order turnaround of approximately 72 hours. Gerber has also implemented a VMI program. Gerber's information systems enable it to provide customized merchandising and space allocation recommendations and other category management services to its retail customers. Gerber currently provides such customized services for Wal-Mart in certain 42
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product categories. Gerber has been recognized for its accomplishments by many retailers and in 1997 received the "Supplier Performance Award by Retail Category" from Discount Store News on behalf of discounters, the highest award a company can receive from such retailers. In addition, the Company has received a number of awards from its customers, including Wal-Mart, Sears, J.C. Penney and Toys "R" Us. Auburn maintains EDI systems in both its domestic and Ireland facilities. In addition, to prepare for the integration of a single European currency (the "E.M.U.") by European Union member states, Auburn is implementing the systems necessary to offer its products for sale in both national currencies and the E.M.U. BACKLOG AND SEASONALITY The Company delivers products throughout the year and generally experiences busy cycles during the first and third quarters. The EDI system and VMI programs have significantly reduced the average order period, which effectively reduces backlog. At December 31, 1997, the Company's backlog of orders for its products, all of which were expected to be shipped during fiscal 1998, was approximately $20.2 million, as compared to approximately $18.2 million at December 31, 1996 (including Auburn's backlog in 1996). Backlog as of any given date may not be indicative of backlog at a subsequent date. Therefore, a comparison of backlog from period to period is not necessarily an accurate indicator of eventual shipments. In Gerber's segments of the apparel industry, sales are typically higher in the third and fourth quarters. The Company believes that there are three main reasons for this trend in the third quarter: (i) sales of blanket sleepwear occur mostly during this period, (ii) a portion of the Company's underwear business is seasonal in that a product line for the fall season incorporates seasonal designs, prints, colors and fabric weight, and (iii) sales in general rise as retailers prepare for events such as back-to-school season (as consumers visit stores to buy clothing for older children) and retailer-initiated promotions of baby apparel. In the fourth quarter, such trend is primarily due to greater sales of blanket sleepers in the early fourth quarter and increased sales of playwear in the late fourth quarter. Auburn's business is generally non-seasonal but experiences somewhat higher sales in the second and third quarters as a result of the seasonal use of the product and back to school sales. Auburn's business is also influenced by promotions instituted by its customers. COMPETITION The infant and toddler apparel market is highly competitive. Both branded and private label manufacturers compete in the infant and toddler apparel markets. Competition generally is based upon product quality, brand name recognition, price, selection, service and convenience. Gerber's primary competitors include Fruit of the Loom, Hanes, Carter's, licensed products and firms using character licenses from Disney and others. Gerber also competes with certain retailers, including several which are customers of the Company, which have significant private label products offerings. Certain of Gerber's competitors have greater financial resources than the Company. Gerber's ability to compete depends, in substantial part, on the continued high regard for the Gerber brand name and the ability of Gerber to continue to offer high-quality garments at competitive prices. The hosiery industry is highly fragmented and has significant branded, control brand and private label components. Competition is generally in terms of price, quality, service, brand recognition and style. Auburn's primary competitors include Hanes, which has the largest share of the market, Renfro, Neuville and Russell. Auburn also competes with certain retailers, including several which are customers of the Company, which have significant private label products offerings. In addition, Auburn competes with private label manufacturers, including small, local manufacturers and large, public companies that have greater financial resources than the Company and larger customer bases. LICENSING AND TRADEMARKS GERBER LICENSE. GPC has granted Gerber a ten year license that expires in January 2006 (with two five year renewal periods) to use the Gerber brand name in the United States, Canada and the Caribbean. The 43
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five-year renewal periods are each subject to Gerber's meeting certain minimum target sales amounts. Royalties are not payable under the license until 2002. However, the Company accrues for the projected average royalties to be paid pursuant to the license arrangement. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Liquidity and Capital Resources." The license permits use of the Gerber name for infant and toddler shoes, underwear, sleepwear (including blanket sleepers, pajamas and sleep 'n play), playwear, bed and bath products typically used in a nursery to decorate or coordinate the nursery or bedding or to bathe a child, reusable cloth diapers and diapering apparel products, bibs, hosiery, swimwear and gift sets and layettes incorporating the above articles, in each case, targeted to infants and toddlers of certain specific sizes. In the event that the licensor desires to license the Gerber name for the sale of licensed articles in any other country in Central or South America, Gerber has the right of first refusal to obtain such license on the same terms and conditions as the existing license. The licensor has granted a third party the right to use the Gerber name for products which fall into the same general product category as one or more of the licensed articles and which may be similar to but not the same as one or more of the licensed articles in terms of use, function or otherwise. Gerber is allowed to use the Gerber name in its corporate or business name during the term of the license. Under the terms of the license, Gerber is required to maintain certain levels of insurance. Products which utilize the Gerber name may not deviate from the quality, design, material, construction, details, fabric, weight, workmanship and finish of the licensed articles approved by the licensor. Any new or altered products or advertising which use the Gerber name must be submitted to the licensor prior to their use. The licensor can disapprove any proposed product or advertising which, in its sole view, would impair the value or goodwill associated with the Gerber name. The licensor can terminate the license if Gerber materially breaches the license agreement, fails to maintain required levels of insurance or sells products which were not approved by the licensor, or if certain bankruptcy events occur. The Company believes that it is currently in compliance with all provisions of the Gerber license in all material respects and has no reason to believe that any events are likely to occur that would result in the early termination of such license. The Company may not sell, manufacture or distribute any item for use in association with licensed articles that compete in any area with any item, sold or manufactured by the licensor. BABY LOONEY TUNES LICENSE. Gerber currently holds a license to use the Baby Looney Tunes name from Warner Brothers. The license expired on September 30, 1997, and was verbally extended until December 31, 1997. Based on discussions with Warner Brothers, the Company continues to operate under the Baby Looney Tunes license consistent with past practice. The Company qualifies for a three-year renewal option under the license. The royalty terms for the renewal have been set and the Company is currently negotiating a renewal that will extend until December 31, 2000. The following is a description of the terms of the Company's prior license with Warner Brothers. The license permits Gerber to use the characters Baby Tweety, Baby Bugs Bunny, Baby Tasmanian Devil, Baby Daffy Duck, Baby Wile E. Coyote, Baby Road Runner and Baby Sylvester on infant bath products, bedding, sleepwear, underwear, footwear, socks, layettes, and infant and toddler playwear. The license also permits Gerber to use the adult characters Bugs Bunny, Wile E. Coyote, Marvin the Martian, Foghorn Leghorn, Porky Pig, Elmer Fudd, Tweety and Sylvester Jr. for toddler bedding. The license is limited to the U.S. and its territories and possessions. The licensor is permitted to grant rights in the characters to (i) other parties for products other than those covered by the license; (ii) other parties for products covered by the license for sale through catalogues produced by or on behalf of the licensor, for sale or distribution in any movie theaters, retail stores operated by the licensor, or in any theme park operated by the licensor; and (iii) Six Flags Corporation for sale of similar products as Gerber's in its theme parks. Use of the characters is subject to review and approval by the licensor. The license may be terminated by the licensor (i) upon a material default under the license by Gerber; (ii) if Gerber fails to maintain certain insurance; (iii) if any government body finds that Gerber's products are harmful or defective in any way, manner or form, or are being sold or made in violation of the law; (iv) if Gerber fails to make and sell at least 25 different products; (v) if Gerber manufactures, sells or distributes licensed products without approval by the licensor; or (vi) if Gerber sells licensed products outside the U.S. and its possessions. 44
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CURITY LICENSE. The Kendall Company granted Gerber a royalty-free license to use the Curity brand name until July 2006 with automatic renewals for additional ten year terms. The license permits use of the Curity name for cloth diapers and diaper liners, underwear, hosiery, sleepwear (including blanket sleepers and sleep 'n play sets), linens, bedding and certain other products (such as infant car seat covers), in each case to be worn by or used for infants and toddlers. The license permits such products to be sold in the U.S. and in more than 40 countries worldwide (and in more than 70 additional countries if the licensor verifies that the licensed trademarks may be licensable for the licensed products therein). The licensor must approve any product and all advertising which utilizes the Curity name. All products using the Curity name must be made pursuant to quality standards approved by the licensor. The licensor can cancel the license if during any five year period only token sales of products using the Curity name are made. The licensor can terminate the agreement upon an uncured breach of the license or upon the occurrence of certain bankruptcy events involving Gerber. In January 1996, Gerber returned to the licensor the worldwide rights to use the Curity name in outerwear and playwear and agreed that the licensor could retain the rights to the Curity trademark in hosiery, linens, bedding and certain other products if Gerber failed to "use in commerce" the Curity name on any licensed products for a period of six consecutive months. WILSON LICENSE. Since 1982, Auburn has held an exclusive license to use the Wilson brand name for its sport socks in the fifty United States. Since 1988, this license has allowed Auburn to use the Wilson name in Europe, as well. During this long term relationship, the Company believes that Auburn has become the second biggest Wilson licensee in the U.S. and the third biggest worldwide. The current license expires on December 31, 2002 and is renewable for a five year term if Auburn meets certain sales targets for years 1998 through 2001. In 1997, Auburn's sales greatly exceeded the targets set for each of the four years comprising such period. Under the current arrangement, Auburn and Gerber are not permitted to consolidate their top management team, sales force, distributors, customer service and manufacturing and are not permitted to commingle product lines. Auburn is not permitted to sell or distribute products which compete with Wilson's products, and Wilson can terminate its license if Auburn's operation under the Wilson license is not wholly separate and distinct from the operations of any affiliated entity which makes or distributes socks or other sporting goods under a sports brand name, subject to certain exceptions. Wilson's distributors in a particular country in Europe may sell Wilson sport socks manufactured by parties other than Auburn if Auburn has not sold socks in such country in the prior year. Auburn is required to maintain a certain percentage of its sales in the sporting goods store trade channel. Wilson must approve Auburn's use of the Wilson logo on particular products prior to the sale of such products. Royalty payments to Wilson are calculated as a percentage of net sales value and minimum royalties are set for each year. Wilson has the option to terminate the license if: (i) Auburn fails to meet its annual minimum sales goal (calculated both by volume and geographic area) in any given year or three-year period; (ii) a material change occurs in the overall management or ownership of Auburn, or the employment by Auburn of Kevin K. Angliss or Donald J. Murphy terminates; (iii) Auburn defaults on its obligations under the license; or (iv) Auburn is insolvent. Wilson consented to the sale of Auburn to the Company. CONVERSE LICENSE. Converse granted Auburn an exclusive license to use the Converse brand name for its men's, women's and youth's hosiery in the U.S., its possessions or territories, and in Europe until December 31, 2001. Converse and Auburn also agreed to enter into good faith discussions with respect to a new three-year contract beginning in 2002. Converse may remove Europe from the coverage of the license if Auburn does not achieve certain net sales minimum amounts in Europe during any contract year. The licensor must approve Auburn's use of the licensed trademarks on products or advertising material prior to use or sale. Royalty payments to the licensor are calculated as a percentage of net sales and minimum royalties are set for each year. The license may be terminated by Converse in the event that Kevin Angliss and/or Tim Graham are not, at all times, the principal managers of the Converse-brand product line at Auburn. Converse can also terminate the license in the event of one or more of the following: (i) liquidation or discontinuance of the active operation of the enterprise of Auburn; (ii) default by Auburn on payments under the Converse license; (iii) failure by Auburn to make timely periodic or minimum royalty payments; (iv) failure by Auburn to 45
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submit a marketing plan in accordance with the Converse license; and (v) default in the performance of any other obligation continuing for more than 30 days. Converse consented to the sale of Auburn to the Company. COCA-COLA LICENSE. Coca-Cola granted Auburn exclusive licenses to use the Coca-Cola brand name for its sport and casual socks in the U.S. and its possessions and Europe for a three year term until December 31, 1998. Auburn has the option to extend the term of the license for three years commencing January 1, 1999. The licensor may revoke Auburn's right in any country and declare the license to be nonexclusive if Auburn fails to maintain a bona fide commercial sales presence in any country within the territory for the licensed articles. In addition, Coca-Cola is permitted to continue standard soft-drink promotional activities in the territory covered by the license, which may include the sale of goods identical to or similar to licensed articles, and the licensor's retail stores may purchase goods from any source regardless of whether they are identical or similar to Auburn's products. Auburn is not permitted to deal in any merchandise which is identical or similar to any licensed article and which bears the trademarks of any non-alcoholic beverage product produced by any of Coca-Cola's competitors. Royalty payments to Coca-Cola are calculated as a percentage of net sales and minimum royalties are set for each year. Coca-Cola may terminate the license at any time: (i) if Auburn fails for a consecutive period in excess of six months to continue the bona fide distribution and sale of the licensed articles; (ii) Auburn fails to adequately advertise, promote or merchandise the licensed articles at a level consistent with accepted standards in Auburn's industry; (iii) if Auburn fails to make any payments due under the license agreement for more than 30 days; (iv) if Auburn is unable to pay its obligations when due or is adjudicated bankrupt or insolvent; (v) if Auburn intentionally understates any royalty report; or (vi) if the quality of the licensed articles becomes materially lower on a consistent basis than those submitted for approval. Coca-Cola consented to the sale of Auburn to the Company. DUNLOP LICENSE. Dunlop granted Auburn a license to use the Dunlop brand name for its sport and casual socks in Europe (including Eastern Europe west of Russia) for a five year term until December 31, 2001. If the royalty amount in the year 2000 is in excess of the minimum guaranteed royalty for the year 2000, the license automatically will be renewed for five years commencing January 1, 2002 and ending December 31, 2006. The licensor must approve Auburn's use of the licensed trademarks on products or advertising material prior to use or sale. Royalty payments to the licensor are calculated as a percentage of net sales and minimum royalties are set for each year. Dunlop or Auburn may terminate this license if either commits a breach of this license or if either is unable to pay its debts or enters into voluntary or compulsory liquidation. Dunlop may terminate this license: (i) if any moneys payable by Auburn remain unpaid for more than 45 days; (ii) if the ultimate equity share voting control in Auburn changes; or (iii) if Auburn exercises its rights to seek a declaration or other order from a court that, by reason of acts or omissions, the registration of Dunlop registered trademarks is invalid. Dunlop consented to the sale of Auburn to the Company. OTHER. Gerber is the owner of the Onesies trademark in the United States. Gerber also licenses certain patent rights related to its cloth diaper products from a third party. The Company regards the licenses of trademarks and its other proprietary rights in and to the trademarks as valuable assets in the marketing of its products and, on a worldwide basis, seeks to protect them against infringement. EMPLOYEES As of December 31, 1997, the Company had approximately 3,300 employees, including approximately 2,000 in the United States and approximately 1,300 in foreign countries. None of the Company's employees are members of unions or are otherwise party to a collective bargaining agreement. Certain of the Company's employees in Ireland are subject to the national wage agreement in Ireland. The Company considers its relations with its employees to be good. 46
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PROPERTIES The following table sets forth the principal real property owned or leased by the Company and used as production, distribution, warehouse, manufacturing or other facilities as of December 31, 1997: [Download Table] OWNED OR APPROXIMATE FLOOR USE LEASED SPACE (SQ. FT.) LOCATION --- ------ ----------------- Ballinger, TX............. Manufacturing Owned 85,000 Ballinger, TX............. Warehouse, Distribution Leased 70,000 Evergreen, AL............. Warehouse, Distribution Leased 255,000 Dominican Republic (3 facilities)............ Production Leased 90,000 Lumberton, NC (2 facilities)............ Manufacturing Owned 183,000 Pelzer, SC (2 facilities)............ Manufacturing, Distribution Owned 804,000 Adairville, KY............ Manufacturing Owned 72,000 Auburn, KY................ Manufacturing, Distribution Owned 160,000 and Administration Cahirciveen, Ireland...... Manufacturing, Distribution Leased 62,000 In addition to the facilities described above, the Company leases 48,000 square feet for its headquarters in Greenville, South Carolina and approximately 16,000 square feet for its executive offices and showroom in New York, New York. From time-to-time, the Company also uses storage space in a warehouse in Franklin, Kentucky. The Company holds a purchase option for the Evergreen, Alabama warehouse which is exercisable at any time during its 15 year term at a price of two dollars. ENVIRONMENTAL AND OTHER REGULATORY MATTERS The Company's manufacturing facilities and operations are subject to certain federal, state, local and foreign laws and regulations relating to environmental protection and occupational health and safety, including those governing wastewater discharges, air emissions, the management and disposal of solid and hazardous wastes, and the remediation of contamination associated with the release of hazardous substances. The Company believes that it is in substantial compliance with such laws and regulations. The Company has incurred, and will continue to incur, capital expenditures and operating expenses to comply with such requirements. However, the Company does not currently anticipate any material capital expenditures for environmental control facilities for the current or succeeding fiscal year. Nonetheless, there can be no assurance that such laws will not become more stringent or be interpreted and applied more stringently. Such future changes or interpretations or the identification of adverse environmental conditions previously unknown to the Company could result in additional compliance costs or in remediation costs to the Company. The Company's older facilities contain asbestos materials and lead-based paint. It is the Company's policy to manage these materials on an as-needed basis. If, however, the Company decides to renovate these facilities, special removal or encapsulation efforts will be required to prevent worker exposure to these materials. The cost of such efforts could be material. In connection with both the Original Acquisition and the Acquisition, the Company obtained from the former owners of the businesses, indemnification for certain potential environmental liabilities. Most of the indemnities are subject to limitations, including as to time and dollar amounts. To date, the Company has not made any claim under these indemnities, and there is no assurance that the former owners will have the ability to fulfill their indemnification obligations if called upon to do so by the Company. See "Risk Factors -- Cost of Environmental Compliance." 47
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LEGAL PROCEEDINGS The Company is involved from time to time in various routine legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of its business. The Company has been active in pursuing actions against counterfeiters and diverters of its products. In the opinion of the Company's management, the resolution of such matters will not have a material adverse effect on the Company's business, financial condition or results of operations. 48
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MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES Executive officers, directors and key employees of the Company and their ages as of February 24, 1998 are as follows: [Enlarge/Download Table] NAME AGE POSITION ---- --- -------- Edward Kittredge.................... 59 Chairman of the Board, President, Chief Executive Officer Richard L. Solar.................... 58 Senior Vice President and Director David E. Uren....................... 54 Vice President of Finance, Secretary and Treasurer Lee M. Schaeffer.................... 51 Senior Vice President of Operations of Gerber Robert P. Robertson................. 51 Senior Vice President of Sales and Marketing of Gerber Raymond R. McManus.................. 54 Vice President of Human Resources of Gerber Kevin K. Angliss.................... 46 President of Auburn Donald J. Murphy.................... 58 Senior Vice President of International Sales and Marketing of Auburn W. Timothy Graham................... 45 Vice President of Sales of Auburn Richard M. Cashin, Jr............... 45 Director Joseph Medalie...................... 75 Director John D. Weber....................... 34 Director Lawrence R. Glenn................... 59 Director EXECUTIVE OFFICERS AND DIRECTORS EDWARD KITTREDGE led a group of investors in the purchase of Gerber Childrenswear, Inc. from GPC in January 1996 and has served as Chairman of the Board, President and Chief Executive Officer of the Company since that time. Before joining the Company Mr. Kittredge served as Chairman and Chief Executive Officer of Denton Mills, manufacturer of Dr. Denton children's pajamas from 1984. From 1980 to 1984, he was President of Royal Manufacturing Company, a privately owned men's underwear and active sportswear company. Prior to that, he served in a variety of senior sales and marketing management positions at Union Underwear Company (Fruit of the Loom), including national director of all Branded and Private Label Sales and as head of its BVD Division. RICHARD L. SOLAR has been Senior Vice President of the Company and a director since January 1996. Prior to joining the Company, Mr. Solar held various positions at Bankers Trust Company, including managing director positions. From 1971 to 1975, Mr. Solar also served as Treasurer of Val D'Or Industries Inc., a publicly held apparel company, and Diamondhead Corporation, a publicly held real estate development company. He is also a director of Concord Fabrics, Inc. DAVID E. UREN has been Vice President of Finance of the Company or its predecessor since 1987. He has been Secretary and Treasurer of the same since 1990. Prior to joining the Company, he was Chief Financial Officer of Borg Textile Corporation and held various senior financial positions at Buster Brown Apparel, Inc. between 1972 and 1987. Mr. Uren also served at Ernst & Young from 1967 to 1971, including as a certified public accountant from 1969 to 1971. LEE M. SCHAEFFER has been Senior Vice President of Operations of Gerber or its predecessor since September 1997 and was Vice President of Operations from 1993 to 1997. He joined the Company in 1990 as Vice President of Marketing Services. Prior to joining the Company, he held various management positions with Milliken and Co., and Williamson-Dickie Manufacturing Co. ROBERT P. ROBERTSON has been Senior Vice President of Sales and Marketing of Gerber since August 1997. Prior to joining the Company, he held various senior management positions with Sara Lee Knit Products (Hanes and Hanes Her Way), Stedman Corporation and Pannill Knitting Company, Inc. 49
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RAYMOND R. MCMANUS has been Vice President of Human Resources of Gerber or its predecessor since April 1995. Prior to joining the Company in 1986, Mr. McManus held various management positions at Boston Whalers, Inc., Acushnet Company, and Converse. RICHARD M. CASHIN, JR. has been a director since January 1996. Mr. Cashin has been president of CVC since 1994. Prior to being appointed president, Mr. Cashin served as a Managing Director of CVC for more than four years. Mr. Cashin is also a director of Levitz Furniture Inc., Delco Remy International, Inc., LifeStyle Furnishings International Ltd., Fairchild Semiconductor Corporation, FFC Holdings, Inc., Cable Systems International, Euramax International, Plc., Titan Wheel International, Inc., Hoover Group Inc., Thermal Engineering, JAC Holding Corporation, GVC Holdings, Ballantrae Corporation and Delta Commodities, Inc. JOSEPH MEDALIE has been a director since February 1997. Mr. Medalie is a director of the Convention Center Corporation, a retired director and vice chairman of Fruit of the Loom and a retired director of Transfinancial Bank and Commonwealth Health Corporation. JOHN D. WEBER has been a director since January 1996. Mr. Weber has been a Vice President at CVC since 1994. Previously, Mr. Weber worked at Putnam Investments from 1992 through 1994. Mr. Weber is a director of Advanced Cast Products, Inc., Anvil Knitwear, Inc., Electrocal Designs, Inc., FFC Holding, Inc., Graphic Design Technologies, Marine Optical, Inc., Neenah Foundry Company, Plainwell Paper Company, Sleepmaster, LLC, and Smith Alarm. LAWRENCE R. GLENN has been a director since January 1996. Mr. Glenn was a Senior Corporate Officer of Citicorp from 1963 until 1995. Currently Mr. Glenn is the Chairman of J.W. Goddard & Co., a private investment bank. KEY EMPLOYEES KEVIN K. ANGLISS has been President of Auburn since 1997 and the officer responsible for the day-to-day operations of Auburn (while employed by J.P. Manning, Inc., an affiliate of Auburn) since 1986. Prior to joining Auburn in 1983, he held a senior sales management position at Champion Products and was employed in various positions by J.C. Penney in the buying/merchandising departments. DONALD J. MURPHY has been Senior Vice President of International Sales and Marketing at Auburn since 1997. From 1995 to 1997, Mr. Murphy held such position at J.P. Manning, Inc., an affiliate of Auburn. Prior to joining Auburn in 1990, he held several merchandising positions with J.C. Penney and a senior sales position at Pannill Knitting Company. W. TIMOTHY GRAHAM has been Vice President of Sales of Auburn since 1997. From 1986 to 1997, Mr. Graham held such position at J.P. Manning, Inc., an affiliate of Auburn. Prior to joining Auburn in 1983, he held a senior sales position at The Bibb Company and Judy Bond, Inc. BOARD COMMITTEES AUDIT COMMITTEE. In 1996, the Board established an audit committee, whose members are directors who may also be employees of the Company. The audit committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of the Company's internal accounting controls. Messrs. Weber, Glenn and Solar currently serve on the audit committee. COMPENSATION COMMITTEE. In 1996, the Board established a compensation committee, whose members are directors who may also be employees of the Company. The compensation committee approves the salaries and other benefits of the executive officers of the Company and administers certain compensation plans of the Company. In addition, the compensation committee consults with the Company's management regarding pension and other benefit plans and compensation policies and practices of the Company. Messrs. Kittredge, Cashin and Medalie currently serve on the compensation committee. 50
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BOARD OF DIRECTORS There are currently six members of the Board. Directors are elected at the annual meeting of stockholders. The Company's Amended and Restated Certificate of Incorporation provides for cumulative voting in the election of directors. See "Description of Capital Stock -- Certain Provisions of the Company's Amended and Restated Certificate of Incorporation." DIRECTOR COMPENSATION Messrs. Medalie and Glenn are the only members of the Board who receive compensation for their services as directors. Both Messrs. Medalie and Glenn are entitled to receive $2,500 for each Board meeting attended and reimbursement for their reasonable out-of-pocket expenses incurred in connection with Board meetings. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following summarizes the principal components of compensation of the Company's Chairman and Chief Executive Officer and the four most highly compensated executive officers of the Company other than the Chief Executive Officer as of December 31, 1997 for services rendered in all capacities to the Company during fiscal 1997. [Enlarge/Download Table] ANNUAL COMPENSATION LONG-TERM COMPENSATION ----------------------------------------- ------------------------------- ALL OTHER OTHER ANNUAL RESTRICTED STOCK COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) ($)(A) --------------------------- ---- ---------- --------- ---------------- ---------------- ------------ Edward Kittredge, Chairman, President and CEO........ 1997 225,000 776,100 14,405(b) 0 6,379,468 Richard L. Solar, Senior Vice President........... 1997 150,000 455,286 4,750(c) 0 2,392,301 David E. Uren, Vice President of Finance, Secretary and Treasurer................ 1997 150,450 158,614 10,750(c) 0 0 Lee M. Schaeffer, Senior Vice President, Operations............... 1997 136,335 75,000 2,850(c) 0 73,048 Robert P. Robertson, Senior Vice President, Sales and Marketing................ 1997 65,048 25,000 0 0 292,191 --------------- (a) Reflects stock compensation. See "Certain Relationships and Related Transactions -- Transactions with Management and Directors." (b) Company-paid 401(k) matching contributions ($4,750) and Company-paid premiums on a private life insurance contract ($9,655). (c) Other annual compensation reflects Company-paid 401(k) matching contributions and, in the case of Mr. Uren a car allowance. EMPLOYMENT AGREEMENTS In connection with the Original Acquisition, the Company, GCIH and CVC entered into employment agreements with each of Edward Kittredge, Richard Solar and David E. Uren (collectively, the "Executive Agreements") pursuant to which the Company employs Messrs. Kittredge, Solar and Uren as Chairman/ President/Chief Executive Officer, Senior Vice President, and Vice President of Finance, respectively, through January 22, 2001. See "Management -- Executive Officers and Directors" and "Certain Relationships and Related Transactions -- Transactions with Management and Directors." Mr. Uren is also party to a severance agreement dated as of March 18, 1995 between Mr. Uren, GPC and the Company (the "Uren Severance Agreement"). The Executive Agreements currently provide Messrs. Kittredge, Solar and Uren with annual base salaries of $225,000, $150,000, and $150,450, respectively, plus annual incentive bonuses based upon the achievement 51
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of pre-determined objectives tied to the performance of the Company, including criteria related to growth and profitability. In the event that the Company terminates the employment of either of Messrs. Kittredge or Solar for cause, such executive shall not be entitled to any further compensation. In the event of either of Messrs. Kittredge or Solar's death, disability, or termination without cause, he shall be entitled to receive his base salary for eighteen months thereafter (the "Severance Payments"), and a pro rata portion of his bonus for the number of days employed during the termination year, and shall be restricted from competing with the Company or soliciting any of its employees for the eighteen-month period during which the Severance Payments are received. In the event that the Company terminates the employment of Mr. Uren without cause on or prior to January 22, 1999, the Uren Severance Agreement provides that Mr. Uren shall receive his base salary and benefits for eighteen months, and professional out placement assistance, in addition to a pro rata portion of his bonus for the number of days employed during the termination year to which Mr. Uren shall be entitled regardless of the reason for his termination. In the event that the Company terminates the employment of Mr. Uren after January 22, 1999, Mr. Uren's Executive Agreement contains the same terms and conditions as those of Messrs. Kittredge and Solar. Upon termination of any of the executives, the Executive Agreements also provide that the capital stock of GCIH is subject to repurchase by the Company and CVC. See also "Certain Relationships and Related Transactions -- Transactions with Management and Directors." LONG-TERM INCENTIVE PLAN In connection with the Offering, the Company has adopted the Long-Term Equity Incentive Plan (the "Incentive Plan"), designed to provide incentives to present and future executive, managerial, marketing, technical and other key employees, and consultants and advisors of the Company and its subsidiaries ("Participants") as may be selected in the sole discretion of the Company's Board of Directors. The Incentive Plan provides for the granting to Participants of the following types of incentive awards: stock options, stock appreciation rights ("SARs"), restricted stock, performance units, performance grants and other types of awards that the Compensation Committee of the Board (the "Committee") deems to be consistent with the purposes of the Incentive Plan. An aggregate of shares of Common Stock have been reserved for issuance under the Incentive Plan. The Incentive Plan affords the Company latitude in tailoring incentive compensation for the retention of key personnel, to support corporate and business objectives, and to anticipate and respond to a changing business environment and competitive compensation practices. The Committee will have exclusive discretion to select the Participants and to determine the type, size and terms of each award, to modify the terms of awards, to determine when awards will be granted and paid, and to make all other determinations which it deems necessary or desirable in the interpretation and administration of the Incentive Plan. The Incentive Plan is scheduled to terminate ten years from the date that the Incentive Plan was initially approved and adopted by the stockholders of the Company, unless extended for up to an additional five years by action of the Board of Directors. With limited exceptions, including termination of employment as a result of death, disability or retirement, or except as otherwise determined by the Committee, rights to these forms of contingent compensation are forfeited if a recipient's employment or performance of services terminates within a specified period following the award. Generally, a Participant's rights and interest under the Incentive Plan will not be transferable except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order. Options, which include nonqualified stock options and incentive stock options, are rights to purchase a specified number of shares of Common Stock at a price fixed by the Committee. The option price may be less than, equal to or greater than the fair market value of the underlying shares of Common Stock, but in no event shall the exercise price of an incentive stock option be less than the fair market value on the date of grant. Options generally will expire not later than ten years after the date on which they are granted. Options will become exercisable at such times and in such installments as the Committee shall determine. Payment of the option price must be made in full at the time of exercise in such form (including, but not limited to, cash or Common Stock of the Company) as the Committee may determine. 52
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An SAR may be granted alone, or in connection with the grant of an option, either at the time of grant of the related option or by amendment thereafter to an outstanding option. SARs granted in connection with options shall be exercisable only when, to the extent and on the condition that any related option is exercisable. The exercise of an option shall result in an immediate forfeiture of any related SAR to the extent the option is exercised, and the exercise of an SAR shall cause an immediate forfeiture of any related option to the extent the SAR is exercised. Upon the exercise of an SAR, the Participant shall be entitled to a distribution in an amount equal to the difference between the fair market value of a share of Common Stock on the date of exercise and the exercise price of the SAR or, in the case of SARs granted in tandem with options, any option to which the SAR is related, multiplied by the number of shares of Common Stock as to which the SAR is exercised. The Committee shall decide whether such distribution shall be in cash, in shares of Common Stock having a fair market value equal to such amount, in other securities having a fair market value equal to such amount or in a combination thereof. A restricted stock award is an award of a given number of shares of Common Stock which are subject to a restriction against transfer and to a risk of forfeiture during a period set by the Committee. During the restriction period, the Participant generally has the right to vote and receive dividends on the shares. Dividends received while under restriction are treated as compensation. Performance awards are those whose final value, if any, is determined by the degree to which specified performance objectives have been achieved during an award period set by the Committee, subject to such adjustments as the Committee may approve based on relevant factors. Performance objectives are based on measures of Company, unit or Participant performance, or any combination of these and other factors, as the Committee may determine. The Committee may make such adjustments in the computation of any performance measure as it deems appropriate. The Committee shall determine the portion of each performance award that is earned by a participant on the basis of the Company's performance over the performance cycle in relation to the performance goals for such cycle. The earned portion of a performance award may be paid out in shares of Common Stock, cash, other securities of the Company, or any combination thereof, as the Committee may determine. Upon the liquidation or dissolution of the Company, all outstanding awards under the Incentive Plan shall terminate immediately prior to the consummation of such liquidation or dissolution, unless otherwise provided by the Committee. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Company, the Committee shall make such adjustment as it deems appropriate in the number and kind of shares or other property reserved for issuance under the Incentive Plan, in the number and kind of shares or other property covered by grants previously made under the Incentive Plan, and in the exercise price of outstanding options and SARs. In the event of any merger, consolidation or other reorganization in which the Company is not the surviving or continuing entity or in which a change in control is to occur, all of the Company's obligations regarding options, SARs performance awards, and restricted stock that were granted hereunder and that are outstanding on the date of such event shall, on such terms as may be approved by the Committee prior to such event, be assumed by the surviving or continuing entity or canceled in exchange for property (including cash). 53
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PENSION PLAN The following table represents monthly amounts estimated to be paid to employees eligible for the Company's pension plan based upon years of service as set forth below. PENSION PLAN TABLE [Enlarge/Download Table] REMUNERATION YEARS OF SERVICE ------------ --------------------------------------------------------- 15 20 25 30 35 --------- --------- --------- --------- --------- $125,000.................................. $2,096.70 $2,795.60 $3,494.50 $4,193.40 $4,892.30 150,000.................................. 2,565.45 3,420.60 4,275.75 5,130.90 5,986.05 175,000.................................. 3,034.20 4,045.60 5,057.00 6,068.40 7,079.80 200,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55 225,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55 250,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55 300,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55 400,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55 450,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55 500,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55 ESTIMATED CREDITED YEARS OF SERVICE FOR NAMED EXECUTIVE OFFICERS [Enlarge/Download Table] YEARS OF CREDITED SERVICE NAME (YEARS OF PARTICIPATION) ---- ------------------------- Edward Kittredge............................................ 2 years (0 years) Richard L. Solar............................................ 2 years (0 years) David E. Uren............................................... 11 years (0 years) Lee M. Schaeffer............................................ 7 years (0 years) Robert P. Robertson......................................... 0 years (1 year) The Retirement Plan for Salaried Employees of Gerber Childrenswear, Inc. (the "Retirement Plan") is a defined benefit pension plan qualified pursuant to Section 401(a) of the Internal Revenue Code. The Retirement Plan is administered by the Company Benefits Plans Committee (the "Committee"), the members of which are appointed by the Board of Directors of the Company. All determinations of the Committee are made in accordance with the provisions of the Retirement Plan in a uniform and nondiscriminatory manner. The Retirement Plan covers substantially all salaried employees of the Company. Benefits under the Retirement Plan are administered through a trust arrangement providing benefits in the form of monthly payments. Generally, a participant in the Retirement Plan is eligible to receive benefits upon such participant's Normal Retirement Age, which is the later of the Social Security retirement age or the fifth anniversary of the date the participant commenced participation in the Retirement Plan. A participant may elect an early retirement benefit when such participant reaches Early Retirement Age, which is the later of ten years prior to such participant's Social Security retirement age and the fifth anniversary of the date the participant commenced participation in the Retirement Plan. Early retirement benefits are reduced for those participants who retire more than three years prior to their Normal Retirement Age according to a formula established in the Retirement Plan based upon each full month that the participant's age is less than the Normal Retirement Age. If a participant who is vested terminates employment, such participant is entitled to a deferred, unreduced benefit payable within three years of such participant's Normal Retirement Age, or a reduced benefit, if requested earlier. The amount of a participant's Retirement Plan benefit is based upon such participant's Final Average Pay (as defined below) and on his/her Years of Participation (as defined below). The annual amount of the participant's normal retirement benefit is derived, subject to certain limitations, by multiplying (i) and (ii), where (i) = 0.9% of Final Average Pay plus 0.6% of Final Average Pay in excess of Covered Compensation (as defined below); and (ii) = Years of Participation up to a maximum of 35 years. A participant's benefits 54
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may be offset by the amount of any workers' compensation or similar benefits payable because of an employment-related injury or illness. The normal retirement benefit formula produces an annual benefit which is paid to the participant in equal monthly installments. The standard form of payment for a single participant is a monthly benefit payable for the participant's life only. The standard form of payment for a married participant is a 50% joint and survivor benefit, which provides a reduced monthly benefit to the participant during his/her lifetime, and 50% of that benefit to the participant's spouse for his/her lifetime in the event of the participant's death. Other optional forms of payment are also provided, including a 100% survivorship annuity, a 50% survivorship annuity and a life and period certain annuity option, but they require participant election. In addition, the Committee may elect to pay the benefit equivalent of a benefit payable at Normal Retirement Age in the form of a lump sum payment, if the lump sum payment does not exceed $3,500. "Final Average Pay" is defined as the average of a participant's annual compensation during the highest-paid five complete consecutive plan years within the last ten years before such participant's retirement. For purposes of the Retirement Plan, compensation includes total earnings received for personal services to the Company. For the 1995 and 1996 calendar years, the total compensation that can be considered for any purpose under the Retirement Plan is limited to $150,000, and for 1997, the limit is $160,000, pursuant to requirements imposed by the Internal Revenue Code. The Internal Revenue Code also places certain other limitations on the annual benefits that may be paid under the Plan. "Covered Compensation" is an average of the Social Security Taxable wage bases for the 35 calendar years ending with the year a participant reaches the Social Security retirement age. Any participant who is credited with 1,000 or more hours of service in a calendar year receives a "Year of Service", while any participant who is credited with 1,950 or more hours of service in a calendar year receives a "Year of Participation". Years of Service determine a participant's eligibility for benefits under the Retirement Plan, and the percentage vested in those benefits. Participants in any superseded plan earn Years of Service and Years of Participation pursuant to slightly different criteria for plan years beginning prior to January 1, 1989. The Retirement Plan is funded entirely by Company contributions that are held by a trustee for the exclusive benefit of the participants. The Company voluntarily agreed to contribute the amounts necessary to provide the assets required to meet the future benefits payable to Retirement Plan participants. Under the Retirement Plan, contributions are not specifically allocated to individual participants. Although the Company intends to continue the Retirement Plan indefinitely, it can terminate the plan at any time, upon which event all participants will become 100% vested in any benefit accrued to the extent funds are available in trust. In this circumstance, assets will be allocated to benefit categories in the order specified in the Retirement Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In 1997, Edward Kittredge, Richard M. Cashin, Jr. and Joseph Medalie served as members of the Board's compensation committee. During the same period, Mr. Kittredge also served as the Company's Chairman, President and Chief Executive Officer. In addition, pursuant to an Executive Stock Purchase Agreement, dated January 22, 1996, by and among GCIH, the Company, CVC and Edward Kittredge, Mr. Kittredge purchased 26,161.9 shares of GCIH Class B Common at a price of $1.00 per share, 50,000 shares of GCIH Class B Common for $.02 per share and 1,188.4 shares of Series A Preferred Stock of GCIH at a price of $100.00 per share. Of such shares, 20,000 shares of GCIH Class B Common (the "Kittredge Vesting Stock") are subject to vesting at 20% per year over a five-year period. The Kittredge Vesting Stock is subject to repurchase by the Company and, if not repurchased by the Company, CVC, should Mr. Kittredge's employment with the Company terminate for any reason. The purchase price for unvested shares is $1.00 per share; the purchase price for vested shares (the "Kittredge Vested Shares") is book value, unless the executive is terminated for cause in which case the purchase price for the Kittredge Vested Shares is $1.00 per share. Further, on November 24, 1997, Mr. Kittredge purchased an additional 20,000 shares of GCIH Class B Common at a price of $1.00 per share, which were fully vested upon purchase, but which are subject to repurchase on the terms described above for the Kittredge Vested Shares, should Mr. Kittredge's employment with the Company terminate for any reason. Pursuant to a Director Stock Purchase Agreement by and between Joseph Medalie and GCIH, dated as of February 11, 1997, Mr. Medalie purchased from the Company 2,500 shares of GCIH Class B Common at a 55
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purchase price of $1.00 per share. Such stock is subject to repurchase by the Company at any time at its book value. See "Certain Relationships and Related Transactions -- Transactions with Management and Directors." CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE REORGANIZATION Immediately prior to or in connection with the consummation of the Offering, the Company will consummate a series of transactions pursuant to which the Company will be reorganized and recapitalized. The principal transactions comprising the Reorganization are the following: AMENDMENT AND RESTATEMENT OF CERTIFICATE OF INCORPORATION. Under the Company's certificate of incorporation there are ten (10) shares of common stock, par value $100.00 per share (the "Old GCI Stock") authorized, all of which shares (before giving effect to the Reorganization) are issued and outstanding and owned beneficially and of record by GCIH. Prior to the consummation of the Offering, the Company's certificate of incorporation will be amended and restated to provide for, among other things, the increase of its authorized share capital and the division of its authorized common stock into two classes of common stock with different voting rights, with each share of Common Stock having one vote per share, each share of Class B Common Stock having no voting rights (the "Recapitalization"). The certificate will further provide that (a) each share of Class B Common Stock will be convertible at the option of the holder at any time into one share of Common Stock and (b) each share of Common Stock held by a holder of Class B Common Stock will be convertible at the option of the holder at any time into one share of Class B Common. CVC and its affiliates will be the only holders of the Class B Common Stock which will be convertible into Common Stock representing approximately % of the combined voting power of the Company's outstanding Common Stock. Pursuant to the Reorganization, the ten shares of Old GCI Stock owned by GCIH will be automatically converted into one share of Common Stock (the "Original GCI Share"). See "Principal Stockholders" and "Description of Capital Stock." MERGER AND CONVERSION OF GCIH STOCK. Prior to the consummation of the Offering and immediately after giving effect to the Recapitalization, GCIH will be merged, pursuant to a tax-free reorganization, into the Company, with the Company as the surviving entity (the "Merger"). Upon consummation of the Merger and in the following sequence, (i) 113,623.6 shares of Series A Preferred Stock, par value $0.01 per share, of GCIH ("GCIH Series A Preferred") (held by CVC and its affiliates) will be converted into shares of Class A Common Stock of GCIH, and 2,828.4 shares of GCIH Series A Preferred (held by members of management) will be converted into the right to receive cash equal to a liquidation value per share at the time of the Merger (including accrued and unpaid dividends) of $125.46 per share, or $355,000, in the aggregate (with $149,101.68 payable to Mr. Kittredge, $149,101.68 payable to Mr. Solar, and $56,645.19 payable to Mr. Uren) (ii) all of the outstanding shares of GCIH Class A Common and Class C Common Stock of GCIH ("GCIH Class C Common"), par value $0.01 per share (which stock is held by CVC, its affiliates, and a director of GCIH) will be exchanged for shares of Class B Common Stock of the Company pursuant to a to 1 stock split, (iii) all of the outstanding shares of Class B Common Stock of GCIH ("GCIH Class B Common"), having a par value of $0.01 per share (which stock is held by members of the Company's management) will be exchanged for shares of Common Stock of the Company at such specified ratio and (iv) all of the outstanding warrants to purchase shares of Class D Common Stock of GCIH ("GCIH Class D Common") (which warrants are held by Citicorp Mezzanine Partners, L.P.) will be exchanged into warrants to purchase shares of the Class B Common Stock of the Company. In addition, upon consummation of the Merger, (i) a 12.00% junior subordinated note of GCIH held by GPC will be assumed by the Company, and (ii) the Original GCI Share will be canceled. After giving effect to the foregoing transactions, as part of the Reorganization in connection with the consummation of the Offering, CVC will convert shares of Class B Common Stock into shares of Common Stock, representing 19% of the combined voting power of the Company's outstanding capital stock. After giving effect to the Reorganization and the Offering (i) CVC and its affiliates will own shares of Common 56
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Stock representing 19% of the outstanding Common Stock and shares of Class B Common Stock convertible into shares of Common Stock representing % of the outstanding Common Stock, (ii) Messrs. Kittredge, Solar and Uren will own shares of Common Stock representing %, % and % of the outstanding Common Stock, (iii) Messrs. Glenn, Medalie and other members of the Company's management, as a whole, will own shares of Common Stock representing %, % and % of the outstanding Common Stock, and (iv) Citicorp Mezzanine Partners, L.P. will own a warrant exercisable for shares of Class B Common Stock, convertible into shares of Common Stock, representing % of the outstanding Common Stock, in each of cases (i)-(iv) assuming that all Class B Common Stock is converted into Common Stock pursuant to the terms thereof. See "-- Transactions with Management and Directors," "-- Transactions with CVC and its Affiliates" and "-- Transactions with Citicorp Mezzanine Partners, L.P." TRANSACTIONS WITH MANAGEMENT AND DIRECTORS Pursuant to an Executive Stock Purchase Agreement, dated January 22, 1996, by and among GCIH, the Company, CVC and Edward Kittredge, Mr. Kittredge purchased 26,161.9 shares of GCIH Class B Common at a price of $1.00 per share, 50,000 shares of GCIH Class B Common for $.02 per share and 1,188.4 shares of Series A Preferred Stock of GCIH at a price of $100.00 per share. Of such shares, 20,000 shares of GCIH Class B Common (the "Kittredge Vesting Stock") are subject to vesting at 20% per year over a five-year period. The Kittredge Vesting Stock is subject to repurchase by the Company and, if not repurchased by the Company, CVC, should Mr. Kittredge's employment with the Company terminate for any reason. The purchase price for unvested shares is $1.00 per share; the purchase price for vested shares (the "Kittredge Vested Shares") is book value, unless the executive is terminated for cause in which case the purchase price for the Kittredge Vested Shares is $1.00 per share. In addition, on November 24, 1997, Mr. Kittredge purchased an additional 20,000 shares of GCIH Class B Common at a price of $1.00 per share, which were fully vested upon purchase but which are subject to repurchase on the terms described above for the Kittredge Vested Shares, should Mr. Kittredge's employment with the Company terminate for any reason. Pursuant to an Executive Stock Purchase Agreement, dated January 22, 1996 by and among GCIH, the Company, CVC and Richard Solar, Mr. Solar purchased 23,661.9 shares of GCIH Class B Common at a price of $1.00 per share and 1,188.4 shares of Series A Preferred Stock of GCIH at a price of $100.00 per share. Of such shares, 17,500 shares of GCIH Class B Common (the "Solar Vesting Stock") are subject to vesting at 20% per year over a five-year period. The Solar Vesting Stock is subject to repurchase by the Company and, if not repurchased by the Company, CVC, should Mr. Solar's employment with the Company terminate for any reason. The purchase price for unvested shares is $1.00 per share; the purchase price for the vested shares (the "Solar Vested Shares") is book value, unless the executive is terminated for cause in which case the purchase price for the Solar Vested Shares is $1.00 per share. In addition, on September 30, 1997, Mr. Solar purchased an additional 7,500 shares of GCIH Class B Common at a price of $1.00 per share, which were fully vested upon purchase, but which are subject to repurchase on the terms described above for the Solar Vested Shares, should Mr. Solar's employment with the Company terminate for any reason. Pursuant to an Executive Stock Purchase Agreement, dated January 22, 1996 by and among GCIH, the Company, CVC and David Uren, Mr. Uren purchased 14,841.5 shares of GCIH Class B Common at a price of $1.00 per share and 451.6 shares of Series A Preferred of GCIH at a price of $100.00 per share. Of such shares, 12,500 shares of Class B Common (the "Uren Vesting Stock") are subject to vesting at 20% per year over a five-year period. The Uren Vesting Stock is subject to repurchase by the Company and, if not repurchased by the Company, CVC, should Mr. Uren's employment with the Company terminate for any reason. The purchase price for unvested shares is $1.00 per share; the purchase price for vested shares is book value, unless the executive is terminated for cause in which case the purchase price for vested shares is $1.00 per share. Pursuant to an Investor Stock Purchase Agreement, dated as of January 22, 1996 by and between GCIH and Lawrence R. Glenn, Mr. Glenn purchased 2,500 shares of GCIH Class C Common for a purchase price of $1.00 per share. Such stock is subject to repurchase by the Company at any time at its book value. 57
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Pursuant to a Director Stock Purchase Agreement by and between Joseph Medalie and GCIH, dated as of February 11, 1997, Mr. Medalie purchased from the Company 2,500 shares of GCIH Class B Common at a purchase price of $1.00 per share. Such stock is subject to repurchase by the Company at any time at its book value. Pursuant to certain Manager Securities Purchase Agreements, by and among GCIH, CVC and certain members of management of the Company (other than Messrs. Solar, Kittredge, and Uren, described above), dated as of February 28, 1997, July 25, 1997 and November 25, 1997, certain members of management of the Company purchased, in the aggregate, 23,250 shares of GCIH Class B Common for a purchase price of $1.00 per share. Among such members of management are Mr. Lee M. Schaeffer who purchased 1,500 shares on February 28, 1997, Mr. Raymond R. McManus, who purchased 750 shares on February 28, 1997, and 250 shares on July 25, 1997 and Mr. Robert P. Robertson, who purchased 1,000 shares on November 26, 1997. In all cases, such stock is subject to vesting at 20% per year over a five-year period. Such stock is subject to repurchase by the Company (and, if the Company elects not to purchase, CVC) should any of such employees' employment with the Company terminate for any reason. The purchase price for unvested shares is $1.00 per share; the purchase price for vested shares is book value, unless the executive is terminated for cause in which case the purchase price for vested shares is $1.00 per share. During 1997, certain executives and managers of the Company acquired stock in the Company below its fair market value. The difference between the fair market value and the purchase consideration for the stock is reported as noncash compensation to the affected executives and managers. The Company has "grossed-up" this noncash compensation to provide for the payment by the Company of a significant portion of the related income and other payroll taxes associated with the transactions. These taxes ($4,446,000) are included in the amount identified as stock compensation of $9,465,000 in 1997. TRANSACTIONS WITH CVC AND ITS AFFILIATES Pursuant to a CVC Securities Purchase Agreement dated as of January 22, 1996 by and between GCIH and CVC, CVC purchased (a) 86,974.5 shares of Series A Preferred Stock of GCIH at a purchase price of $100.00 per share, and (b) 523,476.0 shares of GCIH Class A Common at a purchase price of $0.01 per share. On February 28, 1997 and September 30, 1997, the Company repurchased, in the aggregate, 74,326.8 shares of GCIH Class A Common at a purchase price of $1.00 for issuance (in the form of GCIH Class B Common) to members of management. Pursuant to a Securities Purchase Agreement by and between GCIH and the affiliates of CVC listed as purchasers on the signature pages thereto, dated as of January 22, 1996, such purchasers acquired, in the aggregate, 26,649.1 shares of GCIH Series A Preferred for $100 per share and 138,179.1 shares of GCIH Class A Common for $1.00 per share. TRANSACTIONS WITH CITICORP MEZZANINE PARTNERS, L.P. In order to finance the Original Acquisition, the Company obtained $22.5 million in senior subordinated financing from Citicorp Mezzanine Partners, L.P., whose general partner is an affiliate of CVC. The agreement governing this indebtedness was amended and restated in December 1997. A portion of the proceeds of the Offering will be used to repay such indebtedness to CMP. In connection therewith, the Company sold a warrant to purchase 191,250 shares of GCIH Class D Common to CMP for $189,338. CMP may, at its option, exercise such warrant at any time on or before January 22, 2006 for a nominal exercise price. Upon consummation of the Reorganization, such warrant will be exercisable for shares of Class B Common Stock. 58
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PRINCIPAL STOCKHOLDERS The table below sets forth certain information regarding ownership of Common Stock and Class B Common Stock as of , and as adjusted to reflect the Reorganization, assuming exercise of options or warrants exercisable within sixty days of such date by (i) each person or entity who owns of record or beneficially 5% or more of any class of the Company's voting securities, (ii) each director and named executive officer and (iii) all executive officers and directors as a group. Except as indicated, each of such stockholders is assumed to have sole voting and dispositive power as to the shares shown. [Enlarge/Download Table] PERCENTAGE OF COMMON STOCK AND CLASS B CLASS B COMMON COMMON STOCK COMMON STOCK STOCK OUTSTANDING(a) ------------ -------------- -------------------- BENEFICIALLY BENEFICIALLY BEFORE AFTER NAME OWNED(a) OWNED(a) OFFERING OFFERING ---- ------------ -------------- -------- -------- Citicorp Venture Capital, Ltd............. 399 Park Avenue New York, NY 10022 CCT III, L.P.............................. 399 Park Avenue New York, NY 10022 Citicorp Mezzanine Partners, L.P.......... 399 Park Avenue New York, NY 10022 Edward Kittredge.......................... c/o 7005 Pelham Rd. Suite D Greenville, SC 29615 Richard L. Solar.......................... David E. Uren............................. Lawrence R. Glenn......................... 7005 Pelham Rd. Suite D Greenville, SC 29615 Joseph Medalie............................ Richard Cashin............................ John Weber................................ Lee M. Schaeffer.......................... Robert P. Robertson....................... Executive officers and directors as a group (10 persons)...................... --------------- * Represents less than 1%. (a) Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission (the "SEC"). In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. 59
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DESCRIPTION OF CERTAIN INDEBTEDNESS CREDIT AGREEMENT In connection with the Acquisition, Gerber and Auburn entered into the Credit Agreement by and among Gerber, Auburn, their domestic subsidiaries, Nationsbank, N.A., and certain other lenders, dated as of December 17, 1997 (the "Credit Agreement") to finance the Acquisition, refinance the existing senior indebtedness incurred by the Company in connection with the Original Acquisition and finance capital expenditures and working capital needs of the Borrowers. The amount available to the Borrowers under the Credit Agreement is $100,000,000, consisting of (a) the $40,000,000 Term Loan and (b) the $60,000,000 Revolving Credit Facility. The Term Loan and Revolving Credit Facility mature and terminate, respectively, on September 30, 2002 and October 31, 2002. The Term Loan is subject to repayment, payable in quarterly installments, beginning on December 31, 1997, with aggregate principal amounts of $6.5 million, $8.1 million, $8.5 million, $8.6 million, and $6.8 million due during years 1998 through 2002, respectively. The amounts available under the Revolving Credit Facility are available in multiple drawings from time to time, and amounts borrowed and repaid may be reborrowed until October 31, 2002. The amount available under the Revolving Credit Facility is subject to (a) a $5.0 million sub-limit for a swing-line facility and (b) a $20.0 million sub-limit for the issuance of letters of credit. Up to $10.0 million is available under the Revolving Credit Facility to finance acquisitions of businesses similar to or which are a logical extension of the business of the Company. A portion of the Revolving Credit Facility must be prepaid if the amount of revolving loans outstanding together with swing line loans and letter of credit obligations exceeds the lesser of $60 million and the borrowing base (which consists or certain accounts receivable, inventory and documentary letters of credit). Loans under the Credit Agreement must be prepaid with the net cash proceeds of certain asset dispositions, debt issuances and equity issuances and with a portion of Excess Cash Flow (as defined in the Credit Agreement) earned in the preceding fiscal year. The proceeds of equity issuances of at least $50 million may be used to prepay existing preferred stock rather than to prepay loans under the Credit Agreement. As of January 24, 1998, on a pro forma basis giving effect to the Reorganization and the Offering, the Company had $47.0 million of availability under the Revolving Credit Facility. Each of the Term Loan and Revolving Credit Facility may be maintained from time to time, at the Borrower's option, as (a) Base Rate Loans (as defined in the Credit Agreement) which bear interest at the Base Rate plus the Applicable Percentage (each as defined in the Credit Agreement) or (b) Eurodollar Loans (as defined in the Credit Agreement) bearing interest at the Eurodollar Rate (adjusted for reserves) as determined by the administrative agent for the applicable interest period, plus the Applicable Percentage (as defined in the Credit Agreement). The initial Applicable Percentage for Eurodollar loans is a per annum rate equal to 1.5%, and the initial Applicable Percentage for Base Rate Loans is a per annum rate equal to .25%. The Applicable Percentage will be determined from time to time based on the Leverage Ratio (as defined in the Credit Agreement) at the end of each fiscal quarter. The Credit Agreement contains certain affirmative and negative covenants, including without limitation, covenants that restrict, subject to specified exceptions: (i) the incurrence of additional indebtedness and other obligations and the granting of additional liens; (ii) mergers, acquisitions, investments and acquisitions and dispositions of assets; (iii) the incurrence of capitalized lease obligations; (iv) the declaration of dividends or purchase or redemption of capital stock; (v) prepayments or repurchase of other indebtedness and amendments to certain agreements governing indebtedness, including indebtedness under the CMP Senior Notes and the GPC Junior Notes (each as defined below); (vi) engaging in transactions with affiliates and formation of subsidiaries; (vii) the creation or existence of consensual restrictions on the ability of subsidiaries to pay dividends, make loans or transfer property to other credit parties under the Credit Agreement; (viii) the use of proceeds of asset sales; and (ix) changes of lines of business. The Credit Agreement also requires that the Borrowers maintain compliance with certain specified financial covenants, including covenants relating to minimum fixed charge coverage, maximum leverage ratio, maximum capitalization ratio, minimum current ratio, and minimum tangible net worth. The Company may not amend its license agreements with Gerber, Warner Brothers, Wilson, Converse and Coca-Cola in any manner that would materially affect the rights of the lenders under the Credit Agreement or amend its charter or bylaws in any manner that would reasonably be likely to adversely affect the rights of the lenders under the Credit Agreement. The Company's foreign 60
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subsidiaries may not own assets which constitute greater than 15% of the total assets of the Company at any one time. The Credit Agreement contains standard events of default, including a Change of Control (as defined in the Credit Agreement) of the Company. The Credit Agreement is secured by (a) a pledge of all of the capital stock of the Borrowers and each of the domestic subsidiaries (direct and indirect) of the Borrowers (the "Guarantors"), and 65% of the capital stock of each direct foreign subsidiary of the Borrowers and the Guarantors, and (b) all other assets and properties of the Borrowers and their domestic subsidiaries. OTHER In connection with the Acquisition, the Company assumed approximately $2.6 million of Auburn's indebtedness. Auburn's Irish subsidiary maintains a IRL3.0 million loan facility (U.S. $4.1 million as of February 27, 1997) with the National Irish Bank consisting of a combined term loan, overdraft, guarantee and foreign exchange line. This facility is subject to annual review. The overdraft facility and foreign exchange line are available at the Company's discretion with each term loan draw down subject to the National Irish Bank's approval. At present, the Irish subsidiary has drawn down two term loans under the available loan facility and had drawn down on the foreign exchange line. The term loans had an aggregate balance of IRL517,123 (U.S. $705,000 as of February 27, 1997) outstanding as of December 31, 1997 and are repayable in quarterly installments of interest and principal, the final payment for which is due in September 1999. The Irish subsidiary is not currently using its overdraft facility. In addition, the Irish subsidiary has received grants from the Industrial Development Authority which, if certain events occur, could become repayable to the IDA in the aggregate amount of up to IRL1,815,799. Auburn is a party to two loan agreements with the County of Logan, Kentucky related to the issuance in 1989 of two series of industrial revenue bonds of which approximately $2.4 million remained outstanding at December 31, 1997. Auburn's two principal Kentucky facilities are mortgaged in connection with such financing. 61
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DESCRIPTION OF CAPITAL STOCK GENERAL Prior to the consummation of the Offering, the Company will amend its Certificate of Incorporation to change its authorized capital stock to shares, including shares of Common Stock, par value $0.01 per share, and shares of Class B Common Stock, par value $0.01 per share. Upon completion of the Offering, the Company will have outstanding shares of Common Stock ( if the Underwriters' over-allotment option is exercised in full) and shares of Class B Common Stock. As of April , 1998, there would be approximately holders of Common Stock, and CVC and its affiliates will own of record all of the outstanding shares of Class B Common Stock. See "Principal Stockholders." COMMON STOCK The holders of Common Stock are generally entitled to one vote for each share held on all matters voted upon by stockholders, including without limitation, the election of directors and any proposed amendment to the Amended and Restated Certificate of Incorporation. The holders of the Common Stock are entitled to such dividends as may be declared at the discretion of the Board of Directors out of funds legally available therefor. The holders of Common Stock are entitled to share ratably in the net assets of the Company upon liquidation after payment or provision for all liabilities. The holders of Common Stock have no preemptive rights to purchase securities of the Company. Shares of Common Stock are not subject to any redemption provisions. Each share of Common Stock held by a holder of Class B Common Stock is convertible into a share of Class B Common Stock. All outstanding shares of Common Stock are, and the shares of Common Stock to be issued pursuant to the Offering will be upon payment therefor, fully paid and non-assessable. Application has been made for the listing of the Common Stock on the New York Stock Exchange, subject to official notice of issuance. CLASS B COMMON STOCK The rights of the holders of Class B Common Stock are identical and entitle the holders thereof to the same rights, privileges, benefits and notices as the holders of Common Stock, except that (a) the holders of such shares are not entitled to vote on any matter voted upon by the stockholders, including, without limitation, in the election of directors of the Company and (b) a share of Class B Common Stock is convertible into a share of Common Stock at any time at the sole option of the holder. All outstanding shares of Class B Common Stock are fully paid and non-assessable. Due to certain regulatory limitations affecting CVC, CVC may not own 20% or more of the voting securities of the Company without meeting certain regulatory requirements. Accordingly, CVC believes that it will maintain part of its equity interest in the Company in Class B Common Stock. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT The Company and its stockholders were parties to a registration rights agreement, dated as of January 22, 1996, which was amended and restated in its entirety on , 1998 in connection with the Reorganization (the "Amended and Restated Registration Rights Agreement"). Capitalized terms used but not defined herein have the meanings ascribed to such terms in the Amended and Restated Registration Rights Agreement. The following summary description of the Amended and Restated Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the text of the Amended and Restated Registration Rights Agreement, which is filed as an exhibit to the registration statement of which this Prospectus is a part. Certain parties to the Amended and Restated Registration Rights Agreement will have demand registration rights on the following terms: (a) CVC may at any time after the earlier of (i) January 22, 2001 or (ii) the six month anniversary of the consummation of a Qualified Public Offering (as defined in the agreement) make a demand for up to five long-form registrations, unlimited short-form registrations, and one registration under Section 415 of the Securities Act, in each case, of CVC Registrable Securities, and 62
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(b) CMP may at any time after the earlier of (i) January 22, 2001 or (ii) six months following the consummation of a Qualified Public Offering, make a demand for one long-form and unlimited short-form registrations of CMP Registrable Securities (such registrations referred to in clauses (a) and (b) above, collectively, "Demand Registrations.") Such Demand Registrations are subject to certain limitations, including: (x) no two demands may be made within any six-month period and (y) the amount which can be sold pursuant to any demand may be limited by the managing underwriter selected by the makers of such demand, and approved by the Company. In the event that the Company proposes to register its stock under the Securities Act other than pursuant to a Demand Registration, all holders of Registrable Securities, subject to CVC's approval in the initial primary public offering, will have the right to include such securities in such registration ("Piggyback Registration"). The amount of shares which can be sold pursuant to a Piggyback Registration are subject to limitation by the managing underwriter. The Amended and Restated Registration Rights Agreement also provides that certain holders of Registrable Securities and the Company may not effect a sale or distribution of equity securities of the Company for a 180-day period beginning on the effective date of any Demand Registration (other than pursuant to Section 415) or Piggyback Registration. The Company pays all expenses of Demand Registrations and Piggyback Registrations. CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION The Company's charter establishes an advance notice procedure for stockholder nominations of persons for election to the board of directors in advance of an annual meeting of stockholders of the Company. Stockholders at an annual meeting may only consider nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors, or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting, and who has given to the Company's Secretary timely written notice, in proper form, of the stockholder's intention to make such nomination before the annual meeting. An amendment to this provision would require approval by an affirmative vote of holders of 66 2/3% of the shares of voting stock of the Company. In addition, the Company's charter provides for cumulative voting in the election of directors. The above two provisions may have the effect of discouraging or deferring a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the Company. LIMITATION ON OFFICER AND DIRECTOR LIABILITY The Amended and Restated Certificate of Incorporation limits the liability of directors to the fullest extent permitted by the Delaware General Corporation Law. In addition, the Amended and Restated Certificate of Incorporation provides that the Company shall indemnify directors and officers of the Company to the fullest extent permitted by such law. The Company agreed with GPC that until 2003 it would not amend its charter or bylaws in any manner regarding exculpation or indemnification of former officers and directors. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is the American Stock Transfer & Trust Company. 63
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF COMMON STOCK The following is a general discussion of certain U.S. federal income and estate tax consequences of the ownership and disposition of Common Stock by a beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a person or entity other than (i) a citizen or resident of the U.S., (ii) a corporation or partnership created or organized in the U.S. or under the laws of the U.S. or of any other state (other than any partnership treated as foreign under U.S. Treasury Regulations), or (iii) an estate or trust whose income is includable in gross income for U.S. federal income tax purposes regardless of source. This discussion is based on the Code and administrative interpretations as of the date hereof, all of which are subject to change, including changes with retroactive effect. This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to Non-U.S. Holders in light of their particular circumstances and does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction. Prospective holders should consult their tax advisors with respect to the particular tax consequences to them of owning and disposing of Common Stock, including the consequences under the laws of any state, local or foreign jurisdiction. DIVIDENDS Subject to the discussion below, dividends, if any, paid to a Non-U.S. Holder of Common Stock generally will be subject to withholding tax at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. For purposes of determining whether tax is to be withheld at a 30% rate or at a reduced rate as specified by an income tax treaty, in accordance with currently applicable U.S. Treasury regulations, the Company ordinarily will presume that dividends paid to an address in a foreign country are paid to a resident of such country absent actual knowledge to the contrary. Under recently finalized U.S. Treasury regulations generally effective for payments made after December 31, 1998 (the "Final Regulations"), however, a Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable treaty rate generally will be required to satisfy applicable certification and other requirements. In addition, under the Final Regulations, in the case of Common Stock held by a foreign partnership, (x) the certification requirement will generally be applied to the partners of the partnership and (y) the partnership will be required to provide certain information, including a U.S. taxpayer identification number. The Final Regulations also provide look-through rules for tiered partnerships. Generally, there will be no withholding tax on dividends paid to a Non-U.S. Holder if such dividends are effectively connected with the Non-U.S. Holder's conduct of a trade or business within the U.S. or, if an income tax treaty applies, attributable to a permanent establishment in the U.S. ("U.S. trade or business income"), if the Non-U.S. Holder files the appropriate U.S. Internal Revenue Service ("IRS") form with the payor (which form, under the Final Regulations, will require the Non-U.S. Holder to provide a U.S. taxpayer identification number). Instead, the effectively connected dividends will be subject to regular U.S. net income tax at graduated rates, in the same manner as if the Non-U.S. Holder were a U.S. resident. In addition to the graduated tax described above, a non-U.S. corporation receiving effectively connected dividends may be subject to a "branch profits tax" which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable treaty) of the non-U.S. corporation's effectively connected earnings and profits, subject to certain adjustments. A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amount withheld by filing an appropriate claim for a refund with the IRS. GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to U.S. federal income tax (and no tax will generally be withheld) with respect to gain realized on a sale or other disposition of Common Stock unless (i) the gain is U.S. trade or business income (in which case, the branch profits tax described above may also apply to a corporate Non-U.S. Holder), (ii) in the case of certain Non-U.S. Holders who are non-resident alien 64
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individuals and hold the Common Stock as a capital asset, such individuals are present in the U.S. for 183 or more days in the taxable year of the disposition and certain other conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of the Code regarding the taxation of U.S. expatriates, or (iv) the Company is or has been a "U.S. real property holding corporation" for federal income tax purposes and the Non-U.S. Holder owned directly or indirectly more than 5% of the Company's Common Stock (assuming the Common Stock is regularly traded on an established securities market) at any time within the shorter of the five-year period preceding such disposition or such holder's holding period. Generally, a corporation is a "U.S. real property holding corporation" if the fair market value of its "U.S. real property interest" equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. The Company is not, and does not anticipate becoming, a "U.S. real property holding corporation" for U.S. federal income tax purposes. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF COMMON STOCK Generally, the Company must report to the U.S. Internal Revenue Service the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or certain other agreements, the U.S. Internal Revenue Service may make its reports available to tax authorities in the recipient's country of residence. Under currently effective U.S. Treasury regulations, dividends paid to a Non-U.S. Holder at an address within the U.S. may be subject to backup withholding imposed at a rate of 31% if the Non-U.S. Holder fails to establish that it is entitled to an exemption or to provide a correct taxpayer identification number and certain other information to the Company or its paying agent. Under the Final Regulations, a Non-U.S. Holder of Common Stock that fails to certify its Non-U.S. Holder status in accordance with the requirements of the Final Regulations may be subject to U.S. backup withholding at a rate of 31% on payment of dividends. Under current U.S. Federal income tax law, information reporting and backup withholding imposed at a rate of 31% will apply to the proceeds of a disposition of Common Stock paid to or through a U.S. office of a broker unless the disposing holder certifies as to its non-U.S. status or otherwise establishes an exemption. Generally, U.S. information reporting and backup withholding will not apply to a payment of disposition proceeds if the payment is made outside the U.S. through a non-U.S. office of a non-U.S. broker. However, U.S. information reporting requirements (but not backup withholding) will apply to a payment of disposition proceeds outside the U.S. if the payment is made through an office outside the U.S. of a broker that is (i) a U.S. Person, (ii) a foreign person which derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the U.S. or (iii) a "controlled foreign corporation" for U.S. federal income tax purposes, unless the broker maintains documentary evidence that the holder is a Non-U.S. Holder and that certain conditions are met, or that the holder otherwise is entitled to an exemption. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the IRS. FEDERAL ESTATE TAX An individual Non-U.S. Holder who is treated as the owner of, or has made certain lifetime transfers of, an interest in the Common Stock at the time of death will be required to include the value thereof in his gross estate for U.S. Federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Such individual's estate may be subject to U.S. Federal estate tax on the property includable in the gross estate for U.S. Federal estate tax purposes. Estates of non-resident aliens are generally allowed a statutory credit which has the effect of offsetting the U.S. Federal estate tax imposed on the first $60,000 of the taxable estate. SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing 65
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from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after the Offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of the Offering and the Reorganization, there will be shares of Common Stock outstanding ( shares assuming the conversion of all outstanding shares of Class B Common Stock), assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options and based upon the number of shares outstanding as of . Of these shares, all of the shares sold in the Offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Affiliates"). The remaining shares of Common Stock (including any Common Stock issued upon conversion of Class B Common Stock) will be deemed "restricted securities" as that term is defined in Rule 144 under the Securities Act (the "Restricted Shares") and will be eligible for resale upon expiration of the lock-up described below. Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 promulgated under the Securities Act, which rules are summarized below. Except for the issuance by the Company of Common Stock to effectuate the Reorganization, the Company, its executive officers, directors and stockholders have agreed not to directly or indirectly (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or thereafter acquired by the person executing the agreement or with respect to which the person executing the agreement thereafter acquires the power of disposition, or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of the Common Stock whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise, without the prior written consent of Merrill Lynch on behalf of the Underwriters for a period of 180 days after the date of this Prospectus. The shares of the Company's Class B Common Stock are convertible into shares of Common Stock and, in the event of conversion of such shares and expiration of the 180 day lock-up period described above, of the aggregate shares of Common Stock issuable upon conversion of the Class B Common Stock would be immediately eligible for sale pursuant to shares of Common Stock held by existing stockholders will be eligible for sale without restriction pursuant to Rule 144. No assurance can be given that holders of the Class B Common Stock will not decide, based upon then prevailing market and other conditions, to convert their Class B Common Stock to Common Stock and to dispose of all or a portion of such stock pursuant to the provisions of Rule 144 under the Securities Act or pursuant to the demand registration rights contained in the Registration Rights Agreement. See "Description of Capital Stock -- Amended and Restated Registration Rights Agreement." In addition, as of , shares of Common Stock were subject to outstanding options and warrants, including shares of Common Stock issuable upon the conversion of the Class B Common Stock. All of those shares are subject to these lock-up agreements. Upon expiration of these lock-up agreements, shares subject to such options and warrants will be vested, and could be exercised and sold. In general, under Rule 144, an Affiliate of the Company, or any person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) one percent of the then outstanding shares of the Company's Common Stock or (ii) the average weekly trading volume of the Company's Common Stock in the New York Stock Exchange during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the SEC. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or person whose shares are aggregated) who is not deemed to have been an Affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned 66
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Restricted Shares for at least 2 years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. The Commission is currently considering amendments to Rule 144 which could modify among other things the volume and manner of sale requirements described above. Any employee, officer or director of or consultant to the Company who purchased or was awarded shares or options to purchase shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 under the Securities Act, which permits Affiliates and non-Affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares without complying with the public information, volume and notice provisions of Rule 144. The Company intends to file a registration statement under the Securities Act covering shares of Common Stock reserved for issuance under the Option Plan. Based on the number of options outstanding and shares reserved for issuance under the Option Plan at , such registration statement would cover approximately shares. Such registration statement is expected to be filed and to become effective as soon as practicable after the date of this Prospectus. Shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to Affiliates, be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described above. See "Management." The holders of all shares outstanding prior to the Offering are entitled to certain registration rights with respect to their shares. See "Description of Capital Stock -- Amended and Restated Registration Rights Agreement." 67
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UNDERWRITING Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Bear, Stearns & Co. Inc., Lehman Brothers Inc., Furman Selz LLC and Wasserstein Perella Securities, Inc. are acting as representatives (the "Representatives") of each of the Underwriters named below (the "Underwriters"). Subject to the terms and conditions set forth in a purchase agreement (the "Purchase Agreement") among the Company and the Underwriters, the Company has agreed to sell to the Underwriters, and each of the Underwriters severally and not jointly has agreed to purchase from the Company, the number of shares of Common Stock set forth opposite its name below. [Download Table] NUMBER OF UNDERWRITER SHARES ----------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... Bear, Stearns & Co. Inc..................................... Lehman Brothers Inc......................................... Furman Selz LLC............................................. Wasserstein Perella Securities, Inc......................... -------- Total.......................................... ======== In the Purchase Agreement the several Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to such agreement if any of the shares of Common Stock being sold pursuant to such agreement are purchased. Under certain circumstances, under the Purchase Agreement, the commitments of non-defaulting Underwriters may be increased. The Representatives have advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share of Common Stock. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of Common Stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Company has granted options to the Underwriters, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of additional shares of Common Stock at the initial public offering price set forth on the cover page of this Prospectus, less the underwriting discount. The Underwriters may exercise these options solely to cover over-allotments, if any, made on the sale of the Common Stock offered hereby. To the extent that the Underwriters exercise these options, each Underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares of Common Stock proportionate to such Underwriter's initial amount reflected in the foregoing table. At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, up to of the shares offered to be sold to certain employees of the Company and other persons. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase 68
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within one day of the pricing of the Offering will be offered by the Underwriters to the general public on the same terms as the other shares offered hereby. The Company, the Company's executive officers and directors and all existing stockholders have agreed, subject to certain exceptions, not to directly or indirectly (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or thereafter acquired by the person executing the agreement or with respect to which the person executing the agreement thereafter acquires the power of disposition, or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of the Common Stock whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise, without the prior written consent of Merrill Lynch on behalf of the Underwriters for a period of 180 days after the date of this Prospectus. See "Shares Eligible for Future Sale." Prior to the Offering, there has been no public market for the Common Stock of the Company. The initial public offering price will be determined through negotiations between the Company and the Representatives. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are price-earnings ratios of publicly traded companies that the Representatives believe to be comparable to the Company, certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, and an assessment of the Company's management, its past and present operations, the prospects for, and timing of, future revenues of the Company, the present state of the Company's development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to the Company. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offering at or above the initial public offering price. The Common Stock has been approved for listing on the New York Stock Exchange, subject to notice of issuance, under the symbol "GCW". In order to meet the requirements for listing of the Common Stock on that exchange, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. The Underwriters do not expect sales of the Common Stock to any accounts over which they exercise discretionary authority to exceed 5% of the number of shares being offered hereby. The Company has agreed to indemnify the Underwriters against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offering. 69
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In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of the Common Stock to the extent that it discourages resales of the Common Stock. Neither the Company nor any of the Underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Certain of the Representatives have provided investment banking and related services for the Company and CVC from time to time for which they have received customary fees. LEGAL MATTERS Certain legal matters with respect to the validity of the Common Stock being offered hereby will be passed upon for the Company by Kirkland & Ellis (a partnership which includes professional corporations), New York, New York. Certain legal matters relating to the Offering will be passed upon for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson (a partnership which includes professional corporations), New York, New York. EXPERTS The consolidated financial statements and schedule of GCIH, Inc. at December 31, 1997 and 1996, and for the year ended December 31, 1997, and for the period from January 22, 1996 to December 31, 1996, and the consolidated statements of operations and cash flows and schedule for the year ended December 31, 1995 of Gerber Childrenswear, Inc. ("Predecessor Company") appearing in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The consolidated statements of income and cash flows for the period January 1, 1997 through December 16, 1997 of Auburn Hosiery Mills, Inc. appearing in this Prospectus and Registration Statement, have been audited by J.C. Holland & Co., PSC, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance on such report given upon the authority of such firm as experts in accounting and auditing. The profit and loss account and cash flow statement of Sport Socks Co. (Ireland) Limited for the fifty weeks ended December 16, 1997 appearing in this Prospectus and Registration Statement, have been audited by Price Waterhouse, independent accountants, as set forth in their report thereon appearing elsewhere herein, and are included in reliance on such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which are omitted as permitted by the rules and regulations of the Commission. For further information pertaining to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto and the financial statements, notes and schedules filed as a part thereof. Statements contained in this Prospectus regarding the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an 70
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exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. Upon completion of the Offering, the Company will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information, as well as the Registration Statement and the exhibits and schedules thereto, may be inspected, without charge, at the public reference facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Seven World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such materials can also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005 or on the Commission's site on the Internet at http://www.sec.gov. 71
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS GCIH, INC. AND SUBSIDIARIES [Download Table] PAGE NUMBER ------ Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets at December 31, 1997 and 1996... F-3 Consolidated Statements of Income, Changes in Shareholders' Equity and Cash Flows for the year ended December 31, 1997 and the period from January 22, 1996 to December 31, 1996...................................................... F-4 Notes to Consolidated Financial Statements.................. F-7 GERBER CHILDRENSWEAR, INC. ("PREDECESSOR COMPANY") Report of Independent Auditors.............................. F-20 Consolidated Statements of Income and Cash Flows for the year ended December 31, 1995.............................. F-21 Notes to Consolidated Financial Statements.................. F-23 AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY Independent Auditors' Report................................ F-27 Consolidated Statements of Income and Cash Flows for the Period January 1, 1997 through December 16, 1997.......... F-28 Notes to Consolidated Financial Statements.................. F-30 SPORT SOCKS CO. (IRELAND) LIMITED Independent Accountant's Report............................. F-34 Profit and Loss Account and Cash Flow Statement for the fifty weeks ended December 16, 1997....................... F-35 Notes to Consolidated Financial Statements.................. F-37 F-1
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REPORT OF INDEPENDENT AUDITORS Board of Directors GCIH, Inc. We have audited the accompanying consolidated balance sheets of GCIH, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1997 and the period from January 22, 1996 to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GCIH, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for the year ended December 31, 1997 and the period from January 22, 1996 to December 31, 1996 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP January 30, 1998 F-2
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GCIH, INC. CONSOLIDATED BALANCE SHEETS [Download Table] DECEMBER 31 -------------------- 1997 1996 -------- -------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 536 $ 17,592 Accounts receivable, net of allowances for doubtful accounts of $2,510,000 (1997) and $1,798,000 (1996) (Note 8)................................................ 34,506 17,979 Income taxes receivable................................... 4,635 -- Inventories (Notes 3 and 8)............................... 71,041 47,504 Deferred income taxes (Note 5)............................ 399 4,353 Other..................................................... 1,273 3,083 -------- -------- Total current assets.................................... 112,390 90,511 Property, plant and equipment, net (Notes 4 and 8).......... 24,648 9,938 Deferred income taxes (Note 5).............................. 2,281 2,075 Excess of cost over fair value of net assets acquired, net....................................................... 22,257 1,606 Debt issuance costs, net.................................... 1,381 1,775 Other....................................................... 934 155 -------- -------- $163,891 $106,060 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 14,759 $ 10,078 Accrued expenses (Note 6)................................. 24,099 16,503 Income taxes payable...................................... -- 6,000 Current portion of obligations under capital leases (Note 9)...................................................... 119 -- Revolver (Note 8)......................................... 250 -- Current portion of long-term debt (Note 8)................ 7,286 1,725 -------- -------- Total current liabilities............................... 46,513 34,306 Accrued pension and postretirement benefit cost (Note 10)... 5,058 4,021 Other accrued liabilities (Note 7).......................... 8,713 3,853 Obligations under capital leases, less current portion (Note 9)........................................................ 104 -- Long-term debt, less current portion (Note 8)............... 69,474 41,711 Redeemable preferred stock, 12% non-voting, cumulative, par value $.01 per share, 117,402.7 shares authorized, 116,452 outstanding (1997); 117,402.7 shares outstanding (1996) (liquidation and redemption value of $100 per share) including accrued dividends of $2,965,000 (1997) and $1,328,000 (1996) (Note 11)............................... 14,610 13,068 Shareholders' equity (Note 12): Common Stock, Class A, par value $.01 per share, 750,000.0 shares authorized, 587,328.3 shares outstanding (1997); 661,655.1 shares outstanding (1996)..................... 7 7 Common Stock, Class B, par value $.01 per share, 250,000 shares authorized, 166,915.3 shares outstanding (1997); 144,594.9 shares outstanding (1996)..................... 2 1 Common Stock, Class C with 225 votes per share, par value $.01 per share, 2,500 shares authorized and outstanding............................................. -- -- Common Stock, non-voting Class D, par value $.01 per share, 191,250 shares authorized, none issued........... -- -- Treasury stock.............................................. (75) -- Detachable stock warrants................................... 189 189 Additional paid-in capital.................................. 6,537 752 Retained earnings........................................... 13,526 8,152 -------- -------- 20,186 9,101 Less unearned compensation under restricted stock plan.... 767 -- -------- -------- Total shareholders' equity.............................. 19,419 9,101 -------- -------- $163,891 $106,060 ======== ======== See accompanying notes. F-3
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GCIH, INC. CONSOLIDATED STATEMENTS OF INCOME [Enlarge/Download Table] PERIOD FROM JANUARY 22, YEAR ENDED 1996 TO DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................................................... $202,037 $185,223 Cost of sales............................................... 146,294 138,608 -------- -------- Gross margin................................................ 55,743 46,615 Expenses: Selling, general and administrative expenses, including $9,465,000 of compensation in 1997 for restricted stock.................................................. 37,231 23,894 Other..................................................... 231 689 -------- -------- 37,462 24,583 -------- -------- Income before interest and income taxes..................... 18,281 22,032 Interest expense, net of interest income.................... 5,798 6,308 -------- -------- Income before income taxes.................................. 12,483 15,724 Federal and state income taxes (Note 5): Current................................................... 1,303 11,635 Deferred.................................................. 3,461 (5,391) -------- -------- 4,764 6,244 -------- -------- Income before extraordinary item............................ 7,719 9,480 Extraordinary item -- loss on early extinguishment of debt (net of income tax benefit of $452,000)................... (708) -- -------- -------- Net income.................................................. 7,011 9,480 Less preferred stock dividends.............................. (1,637) (1,328) -------- -------- Net income available to common shareholders................. $ 5,374 $ 8,152 ======== ======== Per share amounts: Earnings per common share: Income before extraordinary item....................... $ 8.47 $ 11.11 Extraordinary item..................................... (.99) -- -------- -------- Net income................................................ $ 7.48 $ 11.11 ======== ======== Earnings per common share -- assuming dilution: Income before extraordinary item....................... $ 6.39 $ 8.15 Extraordinary item..................................... (.74) -- -------- -------- Net income................................................ $ 5.65 $ 8.15 ======== ======== See accompanying notes. F-4
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GCIH, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM JANUARY 22, 1996 TO DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT SHARE DATA) [Enlarge/Download Table] CLASS A CLASS A CLASS B CLASS B CLASS C CLASS C CLASS D CLASS D COMMON COMMON COMMON COMMON COMMON COMMON COMMON COMMON TREASURY SHARES STOCK SHARES STOCK SHARES STOCK SHARES STOCK SHARES --------- ------- --------- ------- ------- ------- ------- ------- --------- Balance at January 22, 1996... 661,655.1 $ 7 144,594.9 $ 1 2,500 $-- -- $-- -- Net income................... -- -- -- -- -- -- -- -- -- Dividend on redeemable preferred stock............ -- -- -- -- -- -- -- -- -- --------- --- --------- --- ----- --- -- --- --------- Balance at December 31, 1996......................... 661,655.1 7 144,594.9 1 2,500 -- -- -- -- Repurchase of shares for treasury................... (74,326.8) -- (30,929.6) -- -- -- -- -- 105,256.4 Pursuant to restricted stock plan: Shares issued.............. -- -- 53,250.0 1 -- -- -- -- (53,250.0) Amortization............... -- -- -- -- -- -- -- -- -- Forfeitures................ -- -- -- -- -- -- -- -- -- Net income................... -- -- -- -- -- -- -- -- -- Dividend on redeemable preferred stock............ -- -- -- -- -- -- -- -- -- --------- --- --------- --- ----- --- -- --- --------- Balance at December 31, 1997......................... 587,328.3 $ 7 166,915.3 $ 2 2,500 $-- -- $-- 52,006.4 ========= === ========= === ===== === == === ========= DETACHABLE ADDITIONAL TREASURY STOCK PAID-IN RETAINED UNEARNED STOCK WARRANTS CAPITAL EARNINGS COMPENSATION TOTAL -------- ---------- ---------- -------- ------------ ------- Balance at January 22, 1996... $ -- $189 $ 752 $ -- $ -- $ 949 Net income................... -- -- -- 9,480 -- 9,480 Dividend on redeemable preferred stock............ -- -- -- (1,328) -- (1,328) ----- ---- ------ ------- ------- ------- Balance at December 31, 1996......................... -- 189 752 8,152 -- 9,101 Repurchase of shares for treasury................... (128) -- -- -- -- (128) Pursuant to restricted stock plan: Shares issued.............. 53 -- 5,857 -- (1,000) 4,911 Amortization............... -- -- -- -- 161 161 Forfeitures................ -- -- (72) -- 72 -- Net income................... -- -- -- 7,011 -- 7,011 Dividend on redeemable preferred stock............ -- -- -- (1,637) -- (1,637) ----- ---- ------ ------- ------- ------- Balance at December 31, 1997......................... $ (75) $189 $6,537 $13,526 $ (767) $19,419 ===== ==== ====== ======= ======= ======= See accompanying notes. F-5
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GCIH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [Enlarge/Download Table] PERIOD FROM JANUARY 22, YEAR ENDED 1996 TO DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ (IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $ 7,011 $ 9,480 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation.............................................. 1,976 1,339 Amortization of goodwill.................................. 84 83 Amortization of debt issuance costs....................... 478 412 Provision for allowance for doubtful accounts............. 712 1,798 Provision for deferred income taxes....................... 3,461 (5,391) Compensation expense pursuant to restricted stock plan (noncash)............................................... 4,858 -- Amortization pursuant to restricted stock plan............ 161 -- (Gain) on disposal of assets.............................. (2) -- Extraordinary item........................................ 708 -- Changes in operating assets and liabilities: Inventories............................................. (15,048) 10,487 Accounts receivable..................................... (8,511) (3,296) Other assets............................................ 538 (500) Accounts payable........................................ 253 3,668 Accrued expenses........................................ 3,824 6,627 Income taxes payable.................................... (10,204) 6,000 Other accrued liabilities............................... 3,628 510 Accrued pension and postretirement benefit cost......... 1,037 1,034 -------- --------- Net cash (used in) provided by operating activities......... (5,036) 32,251 INVESTING ACTIVITIES Collections on notes receivable............................. 207 3,226 Purchases of property, plant and equipment.................. (4,180) (1,047) Proceeds from sale of property, plant and equipment......... 445 -- Purchase of Auburn Holdings, Inc., net of cash acquired and seller receivables........................................ (38,840) -- -------- --------- Net cash (used in) provided by investing activities......... (42,368) 2,179 FINANCING ACTIVITIES Borrowings under revolving credit agreement................. $ 88,824 $ 162,903 Repayments under revolving credit agreement................. (88,574) (177,755) Proceeds from long-term borrowings.......................... 41,600 -- Principal payments on long-term borrowings.................. (10,205) (2,875) Principal payments on capital leases........................ (88) -- Repurchase of common stock.................................. (128) -- Repurchase of preferred stock............................... (95) -- Proceeds from sale of restricted stock...................... 53 -- Debt issuance costs......................................... (1,039) -- -------- --------- Net cash provided by (used in) financing activities......... 30,348 (17,727) -------- --------- Net (decrease) increase in cash and cash equivalents........ (17,056) 16,703 Cash and cash equivalents at beginning of period............ 17,592 889 -------- --------- Cash and cash equivalents at end of period.................. $ 536 $ 17,592 ======== ========= Supplemental Disclosure of Cash Flow Information: Noncash items: Reduction of notes payable, offset by reduction of notes receivable............................................ $ 1,500 -- See accompanying notes. F-6
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization GCIH, Inc. ("the Company") was formed to acquire 100% of the outstanding stock of Gerber Childrenswear, Inc. from Gerber Products Company. The acquisition was effective as of the start of business on January 22, 1996 and was accounted for as a purchase. The purchase price was allocated to the net assets acquired based on their respective fair values and the balance was treated as excess of cost over fair value of net assets acquired. The total cost of the acquisition was approximately $74 million. The excess of the cost over fair value of net assets acquired is being amortized over twenty years on a straight-line basis. The acquisition was funded in part by long-term borrowings and a note payable to the seller. The stock purchase agreement provided for the adjustment of the $74 million purchase price based on net working capital, as defined, at January 22, 1996. Calculated net working capital as defined resulted in a reduction of the purchase price by $4.7 million. This was collected through cash receipt of $3.2 million in 1996 and a $1.5 million reduction in the junior subordinated note payable to Gerber Products Company in 1997. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which are Gerber Childrenswear, Inc. and Auburn Holdings, Inc. All material intercompany balances and transactions have been eliminated in consolidation. Earnings Per Common Share Earnings per common share are calculated by dividing net income by the weighted average shares outstanding in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Revenue Recognition Substantially all revenue is recognized when products are shipped to customers. Concentration of Credit Risk The Company manufactures infant apparel and products that are primarily sold to retail entities throughout the United States. The Company's primary customers are mass merchants and discount stores. Sales to three customers represented approximately 65% of 1997 net sales and 60% of 1996 net sales with sales to one customer representing approximately 44% of 1997 and 1996 sales, respectively. The Company performs periodic credit evaluations of their customers and generally does not require collateral for credit sales. Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Undesignated cash is invested each night through participation in a bank investment plan and bears interest at a variable rate. Under this agreement, the bank sells securities that are direct obligations of or are fully guaranteed by the United States government to the Company each night and repurchases the investments the next business day. F-7
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Debt Issuance Costs Debt issuance costs are being amortized over the lives of the related debt. Accumulated amortization amounted to $224,000 and $412,000 at December 31, 1997 and 1996, respectively. Amortization expense is included in interest expense in the accompanying statements of income. Advertising Advertising costs of approximately $5,071,000 and $3,250,000 for fiscal years 1997 and 1996, respectively, were expensed as incurred. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is computed by the straight-line method over the estimated useful lives of the assets for financial reporting purposes and computed based upon "Modified Accelerated Cost Recovery System" guidelines for income tax reporting purposes. Income Taxes The Company accounts for its income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The carrying amounts reported in the balance sheet for cash and long-term debt approximate their fair value. The carrying amounts of variable-rate debt approximate fair value due to interest rates adjusting to market rates. New Accounting Standards The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for financial statements for fiscal years ending after December 31, 1997. This standard establishes standards for the reporting and display of comprehensive income which is defined under SFAS No. 130 as "the change in equity (net assets) during a period from transactions and other events and circumstances from nonowner sources." Under SFAS No. 130, the Company has several choices in the disclosure of the components of other comprehensive income. The Company plans to implement SFAS No. 130 during the first quarter of fiscal year 1998. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information" which is effective for years beginning after December 15, 1997. SFAS 131 establishes standards for the way that business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial F-8
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt the new requirements retroactively in 1998. Management has not completed its review of SFAS 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's reported segments. Excess of Cost Over Net Assets of Businesses Acquired The excess of investments in consolidated subsidiaries over the net asset value at acquisition ("goodwill") is being amortized on a straight-line basis over periods not exceeding twenty years. On an annual basis the Company reviews the recoverability of goodwill based primarily upon an analysis of undiscounted cash flows from the acquired businesses. Accumulated amortization amounted to $167,000 and $83,000 at December 31, 1997 and 1996, respectively. Forward Exchange Contracts The Company uses forward foreign currency exchange contracts to minimize currency exchange risk. Unrealized gains or losses resulting from changes in currency exchange rates are recognized currently. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. ACQUISITIONS On December 17, 1997, the Company acquired Auburn Hosiery Mills, Inc. ("Auburn") and Sport Socks Co. (Ireland) Limited ("Sport Socks") for $28 million and $12 million in cash, respectively. Both companies are engaged in the production and sale of various styles of socks to retail chain stores. The acquisitions were financed through a term loan of $40 million. The acquisitions have been recorded using the purchase method of accounting. Accordingly, the purchase price has been allocated to assets and liabilities of the acquired companies based on their estimated fair values as of the effective date of acquisition. The purchase price exceeded the fair value of net assets acquired by approximately $20 million, which is being amortized on a straight-line basis over twenty years. The results of operations of Auburn and Sport Socks are included in the accompanying consolidated financial statements from the date of acquisition. The following summarized unaudited pro forma financial information assumes the acquisitions had occurred on January 1 of each year: [Download Table] 1997 1996 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.............................................. $270,100 $246,921 Income before extraordinary item....................... 6,625 10,856 Net earnings........................................... 5,917 10,856 Basic earnings per share............................... 5.96 12.99 Diluted earnings per share............................. 4.50 9.53 The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies which might be achieved from combined operations. The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. F-9
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INVENTORIES Inventories consist of the following (in thousands): [Download Table] DECEMBER 31 ------------------- 1997 1996 ------- ------- Raw materials............................................ $18,482 $14,481 Work in process.......................................... 15,857 10,073 Finished goods........................................... 48,732 35,799 ------- ------- 83,071 60,353 Less reserves............................................ 12,030 12,849 ------- ------- $71,041 $47,504 ======= ======= 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (in thousands): [Download Table] DECEMBER 31 ------------------- 1997 1996 ------- ------- Land..................................................... $ 742 $ 538 Buildings and leasehold improvements..................... 9,060 4,451 Machinery and equipment.................................. 14,997 5,164 Furniture and other equipment............................ 1,750 733 Vehicles................................................. 291 176 Construction in progress................................. 1,027 215 ------- ------- 27,867 11,277 Less accumulated depreciation............................ 3,219 1,339 ------- ------- $24,648 $ 9,938 ======= ======= 5. INCOME TAXES The components of the Company's net deferred tax assets are as follows (in thousands): [Download Table] DECEMBER 31 ----------------- 1997 1996 ------ ------ Deferred tax assets: Inventory reserves....................................... $ 647 $1,019 Postretirement benefits.................................. 1,729 1,509 Accrued royalty.......................................... 2,025 716 Restructuring reserves................................... 463 802 Other.................................................... 3,452 3,577 ------ ------ Total deferred tax assets.................................. 8,316 7,623 Deferred tax liabilities: Depreciation............................................. 2,404 828 Inventory methods........................................ 1,926 -- Other.................................................... 1,306 367 ------ ------ Total deferred tax liabilities............................. 5,636 1,195 ------ ------ Net deferred tax assets.................................... $2,680 $6,428 ====== ====== F-10
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense is different from the amount that would result from applying the Federal statutory rate to income before income taxes as follows (in thousands): [Download Table] DECEMBER 31 ----------------- 1997 1996 ------ ------ Federal tax at statutory rate.............................. $4,244 $5,346 State income tax, net of Federal tax benefit............... 412 519 Other...................................................... 108 379 ------ ------ Income tax expense......................................... $4,764 $6,244 ====== ====== Current and deferred income tax expense are as follows (in thousands): [Download Table] DECEMBER 31 ------------------ 1997 1996 ------ ------- Current: Federal................................................. $1,168 $10,379 State................................................... 135 1,256 ------ ------- Total current............................................. 1,303 11,635 Deferred: Inventory reserves...................................... 372 (1,019) Postretirement benefits................................. (220) (232) Accrued royalty......................................... (1,309) (716) Inventory methods....................................... 2,676 (750) Restructuring reserves.................................. 339 198 Other................................................... 1,603 (2,872) ------ ------- Total deferred............................................ 3,461 (5,391) ------ ------- Income tax expense........................................ $4,764 $ 6,244 ====== ======= Income taxes paid were approximately $11,734,000 and $5,638,000 in 1997 and 1996, respectively. 6. ACCRUED EXPENSES Accrued expenses consist of the following (in thousands): [Download Table] DECEMBER 31 ------------------- 1997 1996 ------- ------- Interest................................................. $ 2,914 $ 2,869 Salaries, wages and payroll taxes........................ 7,618 1,801 Incentives............................................... 3,610 1,980 Advertising.............................................. 1,684 1,217 Self-insurance reserves.................................. 1,828 1,505 Royalties................................................ 1,194 358 Restructuring............................................ 335 1,541 Other.................................................... 4,916 5,232 ------- ------- $24,099 $16,503 ======= ======= F-11
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following (in thousands): [Download Table] DECEMBER 31 ----------------- 1997 1996 ------ ------ Royalties.................................................. $5,400 $1,909 Incentives................................................. -- 520 Other...................................................... 3,313 1,424 ------ ------ $8,713 $3,853 ====== ====== 8. LONG-TERM DEBT Long-term debt consists of (in thousands): [Enlarge/Download Table] DECEMBER 31 ------------------- 1997 1996 ------- ------- NationsBank term loan with interest accruing at the rate equal to the greater of 1) the Federal Funds Rate plus 1/2 of 1%, or 2) the prime rate; plus an applicable percentage based on the current Leverage Ratio (7.4% at December 31, 1997); principal due on a quarterly payment schedule through September 30, 2002........................................................... $38,500 $ -- Senior subordinated note payable with interest accruing at 12%; one-half of the principal is due in January 2003 and the remaining balance in January 2004.............................. 22,500 22,500 Junior subordinated note payable to Gerber Products Company with interest accruing at 12%; principal is due January 2006........ 11,000 12,500 Note payable to a bank with interest accruing at 8.75%; principal and interest payable in monthly installments of $15,992........ 1,583 -- Industrial Revenue Bond, payable in annual principal installments of $100,000 through March 1, 1999, then annual principal installments of $200,000 through March 1, 2004, plus interest at a floating rate not to exceed 14% (3.3% -- 4.9% in 1997).... 1,200 -- Industrial Revenue Bond, payable in annual principal installments of $100,000 through October 1, 1999, then annual principal installments of $200,000 through October 1, 2004, plus interest at a floating interest rate not to exceed 14% (3.3% -- 4.9% in 1997).......................................................... 1,200 -- Other............................................................ 921 -- Term note payable with interest accruing at 1) the prime rate or the Federal Funds effective rate, whichever is higher; plus 1.25%, or 2) the LIBOR rate plus 3............................. -- 8,625 ------- ------- 76,904 43,625 Less current portion............................................. 7,286 1,725 Less unamortized discount........................................ 144 189 ------- ------- $69,474 $41,711 ======= ======= Substantially all of the Company's property, plant and equipment, accounts receivable, and inventory have been pledged as collateral for the above debt. The loan agreements require the Company to maintain certain financial ratios and restricts the payment of dividends F-12
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has available a revolving credit facility which had $250,000 outstanding at December 31, 1997. The revolving credit loan permits the Company to borrow up to a maximum of $60,000,000 subject to specified levels of eligible inventory, eligible inventory on order under letters of credit, and accounts receivable with the total amount reduced by outstanding letters of credit. At December 31, 1997, the Company had available borrowings up to approximately $50,000,000. The Company also had outstanding letters of credit in conjunction with purchases from foreign vendors of approximately $5,747,000 and $5,753,000 at December 31, 1997 and 1996, respectively. Beginning in 1999, the revolving credit facility and term loan agreement require mandatory principal prepayments annually based on excess cash flow, as defined. The Company has available a foreign credit facility which had $735,000 outstanding at December 31, 1997. This credit facility permits the Company to borrow up to a maximum of $3,400,000 on a long-term basis and $850,000 as a bank overdraft. All amounts outstanding at December 31, 1997 relate to the long-term portion. Total interest paid was approximately $6,000,000 and $3,142,000 in fiscal years 1997 and 1996, respectively. The aggregate annual maturities of long-term debt at December 31, 1997 are as follows (in thousands): [Download Table] 1998........................................... $ 7,286 1999........................................... 8,782 2000........................................... 8,966 2001........................................... 9,097 2002........................................... 7,229 Thereafter..................................... 35,544 ------- $76,904 ======= 9. LEASES The Company leases buildings and machinery under both capital and operating leases with various renewal terms and expiring in various years through 2012. Two of these leases contain renewal options totaling 10 years. Future minimum lease payments as of December 31, 1997 under leases classified as capital leases and operating leases, are as follows (in thousands): [Download Table] CAPITAL OPERATING FISCAL YEAR ENDING IN LEASES LEASES ---------------------------------------------------------- ------- --------- 1998................................................. $ 127 $ 1,469 1999................................................. 109 1,018 2000................................................. 6 646 2001................................................. -- 579 2002................................................. -- 567 Thereafter.............................................. -- 708 ---- ------ Total minimum lease payments.............................. 242 $ 4,987 ====== Less amounts representing interest........................ 19 ---- Present value of net minimum lease payments............... 223 Less current portion...................................... 119 ---- $ 104 ==== F-13
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rent expense totaled approximately $2,292,000 for the year ended December 31, 1997 and $2,318,000 for the period from January 22, 1996 to December 31, 1996. Assets recorded under capital leases, net of accumulated amortization, were approximately $1,700,000 at December 31, 1997. The assets recorded under capital leases are pledged as collateral for the capital lease obligations. Amortization of assets recorded under capital lease obligations is included with depreciation expense. 10. EMPLOYEE BENEFIT PLANS Previously, Gerber Childrenswear, Inc. had two non-contributory defined benefit pension plans that covered substantially all full-time domestic employees. These two plans were merged together effective May 31, 1996. Benefits are based on the employee's years of service and, for salaried employees, each employee's compensation during the last five years of employment. The Company's funding policy is to make the minimum annual contributions required by applicable regulations. Accumulated plan benefits and projected benefit obligations, as estimated by consulting actuaries, and plan net assets and funded status as of December 31, 1997 and 1996 are as follows (in thousands): [Download Table] 1997 1996 -------- -------- Actuarial present value of benefit obligations: Vested benefit obligations........................... $(22,280) $(21,792) Non-vested benefit obligations....................... (422) (525) -------- -------- Accumulated benefit obligation......................... $(22,702) $(22,317) ======== ======== Projected benefit obligation........................... $(25,418) $(25,169) Plan assets at fair value.............................. 25,155 24,630 -------- -------- Funded status -- projected benefit obligation greater than plan assets..................................... (263) (539) Unrecognized net (gain) loss........................... (183) 542 -------- -------- (Accrued) prepaid pension cost......................... $ (446) $ 3 ======== ======== Net pension cost included the following components at December 31, 1997 and 1996 (in thousands): [Download Table] 1997 1996 -------- -------- Service cost -- benefits earned during the period...... $ 850 $ 845 Interest cost on projected benefit obligation.......... 1,709 1,541 Actual return on plan assets........................... (2,115) (1,917) -------- -------- Net periodic pension cost.............................. $ 444 $ 469 ======== ======== The weighted-average discount rate used in determining the actuarial present value of projected benefit obligations was 7.25% at December 31, 1997 and 1996. The weighted-average rate of increase in future compensation levels used was 5.5% for December 31, 1997 and 1996. The expected long-term rate of return on plan assets was 9% at December 31, 1997 and 1996. The plan assets are invested primarily in mutual funds via the Gerber Childrenswear, Inc. Retirement Plans Master Trust and in a group annuity contract with an insurance company. Gerber Childrenswear, Inc. also has an investment retirement plan for salaried employees which provides for salaried employees and Company contributions. The Company will match 50% of the employee's contributions up to a maximum company match of 3% of the employee's compensation. In addition, the Company has a defined contribution plan for the benefit of its full-time hourly employees. The Company contributes one and one-half percent of each participant's annual compensation to the plan. Employees are not allowed to contribute to this plan. Effective January 1, 1997, these two plans were merged together. Total expense under these plans was approximately $439,000 and $230,000 for 1997 and 1996, respectively. F-14
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sport Socks has a defined contribution pension plan. The assets of the plan are held in an independently administered fund. No contributions were made between December 17, 1997 and December 31, 1997. Auburn has a defined contribution plan covering all employees who have 2 years of service of at least 1,000 hours each year. The contribution is determined by its Board of Directors annually. No contributions were made between December 17, 1997 and December 31, 1997. Gerber Childrenswear, Inc. also sponsors two defined benefit postretirement health care plans covering all full-time domestic employees. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. The accounting for the plans anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to increase the retiree contribution rate annually for the expected general inflation rate for that year. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. In conjunction with the acquisition (Note 1), Gerber Products Company assumed the accumulated benefit obligation for retirees. The following table presents the plans' funded status at December 31, 1997 (in thousands): [Enlarge/Download Table] SALARIED NON-SALARIED TOTAL -------- ------------ ------- Accumulated postretirement benefit obligation: Retirees.......................................... $ (21) $ (17) $ (38) Fully eligible active plan participants........... (490) (230) (720) Other active plan participants.................... (1,468) (1,464) (2,932) ------- ------- ------- Funded status....................................... (1,979) (1,711) (3,690) Unrecognized net (gain)............................. (185) (737) (922) ------- ------- ------- Accrued postretirement benefit cost................. $ (2,164) $ (2,448) $(4,612) ======= ======= ======= Net periodic postretirement benefit cost includes the following components: Service cost...................................... $ 218 $ 205 $ 423 Interest cost..................................... 104 89 193 ------- ------- ------- Net periodic postretirement benefit cost............ $ 322 $ 294 $ 616 ======= ======= ======= The following table presents the plans' funded status at December 31, 1996 (in thousands): [Enlarge/Download Table] SALARIED NON-SALARIED TOTAL -------- ------------ ------- Accumulated postretirement benefit obligation: Retirees.......................................... $ -- $ -- $ -- Fully eligible active plan participants........... (452) (276) (728) Other active plan participants.................... (1,495) (1,584) (3,079) ------- ------- ------- Funded status....................................... (1,947) (1,860) (3,807) Unrecognized net loss (gain)........................ 86 (303) (217) ------- ------- ------- Accrued postretirement benefit cost................. $ (1,861) $ (2,163) $(4,024) ======= ======= ======= Net periodic postretirement benefit cost includes the following components: Service cost...................................... $ 217 $ 201 $ 418 Interest cost..................................... 108 104 212 ------- ------- ------- Net periodic postretirement benefit cost............ $ 325 $ 305 $ 630 ======= ======= ======= F-15
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted-average discount rate used in determining the actuarial present value of projected benefit obligations was 7.25% at December 31, 1997 and 1996. The weighted-average rate of increase in future compensation levels used was 5.5% for December 31, 1997 and 1996. The weighted-average annual assumed rate of increase in the per capita cost of covered medical benefits is 8.25 percent to 10 percent and is assumed to decrease gradually to 5.5 percent by 2003 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by approximately $689,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by approximately $131,000. 11. REDEEMABLE PREFERRED STOCK The outstanding redeemable preferred stock has a scheduled redemption date of January 31, 2007 at $100 per share plus all accrued and unpaid dividends thereon. The Company may, at any time prior to this date, redeem all or a portion of the preferred stock at the same price. 12. SHAREHOLDERS' EQUITY During 1997, the Company sold shares of its Class B common stock to certain employees for $1 per share. Some of these shares were immediately vested while others vest over a five-year period. At the time of issuance of the unvested shares, the difference between the amount paid by the employees and the fair market value was credited to additional paid-in capital with a corresponding charge to unearned compensation. The unearned compensation is amortized to earnings over five years on a straight-line basis. 1997 amortization expense was $161,000. Previously amortized amounts for shares forfeited is credited to compensation expense in the year of forfeiture. At the time of issuance of the shares which were vested, the difference between the amount paid by the employees and the fair market value was credited to additional paid-in capital with a corresponding charge to expense for $4,858,000. Certain shareholders have demand registration rights with respect to shares of common stock owned by them. In connection with obtaining the $22,500,000 note payable for the acquisition of Gerber Childrenswear, Inc., the Company issued a warrant to the lender to purchase 191,250 shares of non-voting Class D common stock at a nominal price. The warrant, in whole or in part, may be exercised at anytime through January 22, 2006. The recorded value of the warrant at the date of issuance was $189,338 and reduced the face amount of the note payable. 13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate fair value due to the short-maturity of these instruments. Receivables: The carrying amounts reported in the balance sheet for receivables approximate their fair value. Long and short-term liabilities: The carrying amounts of the Company's short-term borrowings approximate their fair value. Forward exchange contracts: The fair value of the Company's forward foreign currency exchange contracts is estimated by reference to quoted prices. The estimated fair value of outstanding contracts at F-16
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1997 was approximately $9,600,000 which results in a loss of approximately $1,042,000 which was recorded at fair value in connection with the Company's acquisitions on December 17, 1997. 14. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: [Enlarge/Download Table] 1997 1996 ----------- ----------- Numerator: Income before extraordinary item................................ $ 7,719,000 $ 9,480,000 Preferred stock dividends....................................... (1,637,000) (1,328,000) ----------- ----------- Income available to common stockholders......................... 6,082,000 8,152,000 Extraordinary item.............................................. (708,000) -- ----------- ----------- Numerator for basic and diluted earnings per share -- net income available to common stockholders................................ $ 5,374,000 $ 8,152,000 =========== =========== Denominator: Denominator for basic earnings per share -- weighted-average shares....................................................... 717,925 733,750 Effect of dilutive securities: Warrants..................................................... 191,239 191,186 Nonvested stock.............................................. 42,303 75,000 ----------- ----------- Denominator for diluted earnings per share -- adjusted weighted-average shares......................................... 951,467 999,936 =========== =========== Basic earnings per share.......................................... $ 7.48 $ 11.11 =========== =========== Diluted earnings per share........................................ $ 5.65 $ 8.15 =========== =========== 15. EXTRAORDINARY ITEM In December 1997, the Company repaid its term note payable in the principal amount of $6,500,000. The Company was required to pay a prepayment penalty of $160,000 in connection with this transaction. The write-off of unamortized loan costs and prepayment penalty totaling $708,000 (net of the income tax benefit of $452,000) is included as an extraordinary item in the accompanying statement of income for the year ended December 31, 1997. 16. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS The Company operates in two business segments: apparel and hosiery. The apparel segment consists of the production and sale of infant and toddler's sleepwear, playwear, underwear, bedding and cloth diapers to mass merchandise outlets in the United States under the Gerber trademark and private labels. The hosiery segment which was acquired on December 17, 1997 consists of the production and sale of sport socks under the Wilson, Coca Cola, and Dunlop names to major retailers in the United States and Europe. Sales, earnings before interest and income taxes, depreciation and amortization, and capital expenditures are reported based on the operations of each business segment or geographic region. Identifiable assets are those used exclusively in the operations of each business segment or geographic region, or which are allocated when used jointly. F-17
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables present sales and other financial information by business segment and geographic region for the years 1997 and 1996: [Download Table] DECEMBER 31 --------------------- 1997 1996 -------- -------- (IN THOUSANDS) BUSINESS SEGMENTS Net trade sales: Apparel.............................................. $200,526 $185,223 Hosiery.............................................. 1,511 -- -------- -------- Total net sales........................................ $202,037 $185,223 ======== ======== Earnings (loss) before interest and taxes: Apparel.............................................. $ 18,322 $ 22,032 Hosiery.............................................. (41) -- -------- -------- Total operating income................................. $ 18,281 $ 22,032 ======== ======== Depreciation and amortization: Apparel.............................................. $ 2,472 $ 1,834 Hosiery.............................................. 66 -- -------- -------- Total depreciation and amortization.................... $ 2,538 $ 1,834 ======== ======== Capital additions: Apparel.............................................. $ 4,180 $ 1,047 Hosiery.............................................. -- -- -------- -------- Total capital additions................................ $ 4,180 $ 1,047 ======== ======== Identifiable assets: Apparel.............................................. $113,200 $106,060 Hosiery.............................................. 50,691 -- -------- -------- Total assets........................................... $163,891 $106,060 ======== ======== GEOGRAPHIC AREAS Net trade sales: United States........................................ $202,037 $185,223 Europe............................................... -- -- -------- -------- Total net sales........................................ $202,037 $185,223 ======== ======== Earnings (loss) before interest and taxes: United States........................................ $ 18,281 $ 22,032 Europe............................................... -- -- -------- -------- Total operating income................................. $ 18,281 $ 22,032 ======== ======== Identifiable assets: United States........................................ $153,944 $106,060 Europe............................................... 9,947 -- -------- -------- Total assets........................................... $163,891 $106,060 ======== ======== F-18
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GCIH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited financial data regarding the Company's quarterly results of operations. [Enlarge/Download Table] 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 Net sales............................... $45,350 $40,162 $60,323 $56,202 $202,037 Gross margin............................ 12,696 12,122 16,837 14,088 55,743 Income(loss) before extraordinary item.................................. 2,524 2,104 4,834 (1,743) 7,719 Extraordinary item -- loss on early extinguishment of debt................ -- -- -- (708) (708) Net income(loss)........................ 2,524 2,104 4,834 (2,451) 7,011 Basic earnings per share: Income(loss) before extraordinary item............................... 2.93 2.39 6.21 (3.06) 8.47 Extraordinary item.................... -- -- -- (0.99) (0.99) Net income(loss)........................ 2.93 2.39 6.21 (4.05) 7.48 Diluted earnings per share: Income(loss) before extraordinary item............................... 2.20 1.81 4.71 (3.06)* 6.39 Extraordinary item.................... -- -- -- (.99)* (0.74) Net income (loss)....................... 2.20 1.81 4.71 (4.05)* 5.65 * Same as basic -- no incremental shares are included due to loss in the quarter. 1996 Net sales............................... $36,606 $39,042 $58,336 $51,239 $185,223 Gross margin............................ 9,429 10,556 15,522 11,108 46,615 Net income.............................. 1,486 1,064 4,419 2,511 9,480 Basic earnings per share................ 1.57 1.00 5.57 2.97 11.11 Diluted earnings per share.............. 1.15 0.73 4.09 2.18 8.15 18. OTHER MATTERS The Company has employment contracts in the normal course of business with three of its officers with remaining terms of approximately three years. F-19
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REPORT OF INDEPENDENT AUDITORS Board of Directors Gerber Childrenswear, Inc. We have audited the accompanying consolidated statements of income and cash flows of Gerber Childrenswear, Inc. ("Predecessor Company") for the year ended December 31, 1995. These financial statements are the responsibility of the Predecessor Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of the Predecessor Company for the year ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP September 12, 1997 F-20
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GERBER CHILDRENSWEAR, INC. ("PREDECESSOR COMPANY") CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS) [Enlarge/Download Table] Net sales................................................................ $197,401 Cost of sales............................................................ 156,434 -------- Gross margin............................................................. 40,967 Selling, general and administrative expenses............................. 24,633 -------- Income before income taxes............................................... 16,334 Federal and state income taxes (Note 2): Current................................................................ $6,716 Deferred............................................................... (446) 6,270 ------ -------- Net income............................................................... $ 10,064 ======== See accompanying notes. F-21
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GERBER CHILDRENSWEAR, INC. ("PREDECESSOR COMPANY") CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS) [Enlarge/Download Table] OPERATING ACTIVITIES Net income........................................................................ $ 10,064 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.................................................................... 1,959 Provision for allowance for doubtful accounts................................... (1,155) Provision for deferred income taxes............................................. (446) Loss on disposal of fixed assets................................................ (10) Changes in operating assets and liabilities: Inventories.................................................................. 4,931 Accounts receivable.......................................................... (1,213) Prepaid expenses............................................................. (47) Accounts payable............................................................. (3,371) Accrued expenses............................................................. 1,362 Income taxes payable......................................................... 2,107 Other accrued liabilities.................................................... (1,564) Accrued pension and postretirement benefit cost.............................. 755 ------- Net cash provided by operating activities......................................... 13,372 INVESTING ACTIVITIES Purchases of property, plant and equipment........................................ (1,483) FINANCING ACTIVITIES Advances to parent................................................................ (11,728) ------- Net increase in cash and cash equivalents......................................... 161 Cash and cash equivalents at December 31, 1994.................................... 319 ------- Cash and cash equivalents at December 31, 1995.................................... $ 480 ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Non-cash investing and financing activities: Fixed assets transferred to parent as a dividend................................ $ 1,248 See accompanying notes. F-22
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GERBER CHILDRENSWEAR, INC. ("PREDECESSOR COMPANY") NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Gerber Childrenswear, Inc. ("the Company") is a wholly-owned subsidiary of Gerber Products Company. In August 1994, Sandoz, Ltd. ("Sandoz"), a company headquartered in Switzerland, acquired Gerber Products Company. The financial statements of the Company as of December 31, 1995 are based on historical costs incurred and recorded by the Company which in the opinion of management include all material expenses on a stand-alone basis. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All material intercompany transactions have been eliminated in consolidation. Revenue Recognition Substantially all revenue is recognized when products are shipped to customers. Concentration of Credit Risk The Company manufactures infant apparel and products that are primarily sold to retail entities throughout the United States. The Company's primary customers are mass merchants and discount stores. Sales to three customers represented approximately 58% of net sales for 1995. The Company performs periodic credit evaluations of their customers and generally does not require collateral for credit sales. Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Advertising Advertising costs of approximately $3,108,000 were expensed as incurred. Property, Plant and Equipment Depreciation of property, plant and equipment is computed by the straight-line method over the estimated useful lives of the assets. Depreciation for income tax reporting is computed based upon "Modified Accelerated Cost Recovery System" guidelines. Income Taxes The Company accounts for its income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. F-23
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GERBER CHILDRENSWEAR, INC. ("PREDECESSOR COMPANY") NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company was included in a consolidated Federal income tax return filed by its parent company, Gerber Products Company. The Company provides for income taxes on a stand-alone separate taxpayer basis, and reflects current income taxes as a part of its accounts with its parent company. In conjunction with the sale of the Company in January 1996 to a third party, Gerber Products Company assumed all current income tax liabilities at December 31, 1995 and up to the date of the sale. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. INCOME TAXES Income tax expense is different from the amount that would result from applying the Federal statutory rate to income before income taxes as follows (in thousands): [Download Table] Federal tax at statutory rate....................................... $5,717 State income tax, net of Federal tax benefit........................ 531 Other............................................................... 22 ------ Income tax expense.................................................. $6,270 ====== Current and deferred income tax expense are as follows: [Download Table] Current: Federal........................................................... $5,917 State............................................................. 799 ------ Total current....................................................... 6,716 Deferred: Inventory reserves................................................ (704) Postretirement benefits........................................... (452) Restructuring reserves............................................ 436 Depreciation...................................................... (308) Other............................................................. 582 ------ Total deferred...................................................... (446) ------ Income tax expense.................................................. $6,270 ====== Income taxes paid were approximately $400,000 in 1995. 3. EMPLOYEE BENEFIT PLANS The Company has two non-contributory defined benefit pension plans that cover substantially all full-time domestic employees. Benefits are based on the employee's years of service and, for salaried employees, each employee's compensation during the last five years of employment. The company's funding policy is to make the minimum annual contributions required by applicable regulations. F-24
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GERBER CHILDRENSWEAR, INC. ("PREDECESSOR COMPANY") NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension cost included the following components at December 31, 1995 (in thousands): [Download Table] SALARIED NON-SALARIED TOTAL -------- ------------- ------- Service cost............................... $ 640 $ 174 $ 814 Interest cost.............................. 1,016 575 1,591 Expected return of assets.................. (1,316) (556) (1,872) ------- ----- ------- Net periodic pension cost.................. $ 340 $ 193 $ 533 ======= ===== ======= A weighted-average discount rate of 8.0% and a rate of increase in future compensation levels of 5.5% were used in determining the actuarial present value of projected benefit obligations. The expected long-term rate of return on plans' assets was 9.0%. The plans' assets are invested primarily in mutual funds via the Gerber Childrenswear, Inc. Retirement Plans Master Trust and in a group annuity contract with an insurance company. The Company also has an investment retirement plan for salaried employees which provides for salaried employees and Company contributions. The Company will match 50% of the employee's contributions up to a maximum of 3% of the employee's compensation. In addition, the Company has a defined contribution plan for the benefit of its full-time hourly employees. The Company contributes one and one-half percent of each participant's annual compensation to the plan. Employees are not allowed to contribute to this plan. Total expense under these salaried and hourly employees defined contribution plans was approximately $536,000 for 1995. The Company also sponsors two defined benefit postretirement health care plans covering all full-time domestic employees. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. The accounting for the plans anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to increase the retiree contribution rate annually for the expected general inflation rate for that year. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. Net periodic post retirement benefit cost for 1995 included the following components (in thousands): [Download Table] SALARIED NON-SALARIED TOTAL -------- ------------ ----- Service cost................................... $235 $260 $ 495 Interest cost.................................. 137 171 308 ---- ---- ---- Net periodic postretirement benefit cost....... $372 $431 $ 803 ==== ==== ==== The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent. The weighted-average annual assumed rate of increase in the per capita cost of covered medical benefits is 9 percent to 11 percent and is assumed to decrease gradually to 5.5 percent by 2003 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rate by one percentage point in each year would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by approximately $170,000. 4. LEASES The Company leases buildings and machinery under operating leases with various renewal terms and expiring in various years through 2000. Rent expense for 1995 was approximately $2,840,000. Future F-25
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GERBER CHILDRENSWEAR, INC. ("PREDECESSOR COMPANY") NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) minimum lease payments under noncancelable operating leases at December 31, 1995 are as follows (in thousands): [Download Table] 1996................................................ $1,549 1997................................................ 984 1998................................................ 503 1999................................................ 496 2000................................................ 20 ------ $3,552 ====== 5. LETTERS OF CREDIT The Company has letters of credit outstanding totaling approximately $4,600,000. These are used in conjunction with purchases from foreign vendors. 6. BUSINESS SEGMENTS The Company operates in the apparel line of business, which encompasses the manufacture, distribution, and sale of infant and toddler's sleepwear, playwear, underwear, bedding and cloth diapers to mass merchandise outlets under Gerber trademark and private labels. The Company's principal operations and markets are located in the United States. Net sales, earnings before interest and income taxes, depreciation and amortization, capital expenditures and identifiable assets of businesses outside of the United States were not significant. Historically, transfers of product between geographic areas have not been significant. F-26
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INDEPENDENT AUDITORS' REPORT Board of Directors Auburn Hosiery Mills, Inc. and Subsidiary Auburn, Kentucky We have audited the accompanying consolidated statements of income and cash flow of Auburn Hosiery Mills, Inc. and Subsidiary for the period January 1, 1997 through December 16, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated statements of income and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit of the statements of income and cash flows provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the operations of Auburn Hosiery Mills, Inc. and Subsidiary and cash flows for the period January 1, 1997 through December 16, 1997, in conformity with generally accepted accounting principles. J. C. HOLLAND & CO., PSC Bowling Green, Kentucky January 16, 1998 F-27
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AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 16, 1997 [Download Table] DOLLARS IN THOUSANDS (EXCEPT EARNINGS PER SHARE) ---------------- Net sales................................................... $49,033 Cost of goods sold.......................................... 39,019 ------- Gross profit................................................ 10,014 ------- Operating expenses Sales and distribution expenses -- Note 4................. 5,941 General and administrative expenses....................... 2,269 ------- 8,210 ------- Income from operations...................................... 1,804 Other income (expense) Commission income -- Note 4............................... 443 Interest expense.......................................... (333) Loss on disposal of equipment............................. (6) Interest income........................................... 182 Other..................................................... 380 ------- 666 ------- Income before income taxes.................................. 2,470 Income taxes -- Note 2...................................... 939 ------- Net income.................................................. $ 1,531 ======= Basic and diluted earnings per share........................ $ 1,143 ======= The accompanying notes are an integral part of the consolidated financial statements. F-28
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AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 16, 1997 [Enlarge/Download Table] DOLLARS IN THOUSANDS --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................................................... $ 1,531 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................................. 1,413 Amortization................................................................. 13 Loss on sale of assets....................................................... 6 Change in assets and liabilities: Increase in accounts receivable............................................ (1,658) Decrease in inventories.................................................... 407 Decrease in other receivables.............................................. 7 Increase in refundable income taxes........................................ (432) Increase in other current assets........................................... (116) Increase in accounts payable............................................... 276 Increase in accrued royalties and commissions.............................. 54 Increase in accrued labor.................................................. 66 Increase in accrued vacation............................................... 91 Increase in bank overdraft................................................. 427 Increase in other accrued expenses and payables............................ 304 Decrease in deferred income taxes.......................................... (2) ------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................... 2,387 ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................................................ (1,136) Net decrease in restricted cash................................................. 8 Appreciation in cash surrender value of life insurance.......................... (97) Payments received on receivables from affiliates................................ 71 Loans to stockholder............................................................ (1,512) ------- NET CASH USED IN INVESTING ACTIVITIES................................... (2,666) ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving loan agreement................................... 1,271 Principal payments on long-term debt............................................ (1,038) ------- NET CASH PROVIDED BY FINANCING ACTIVITIES............................... 233 ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH........................................... 1 ------- NET DECREASE IN CASH AND CASH EQUIVALENTS......................................... (45) CASH AND CASH EQUIVALENTS AT JANUARY 1, 1997...................................... 98 ------- CASH AND CASH EQUIVALENTS AT DECEMBER 16, 1997.......................... $ 53 ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 16, 1997 FOR: Interest........................................................................ $ 338 Income taxes.................................................................... 1,584 The accompanying notes are an integral part of the consolidated financial statements. F-29
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AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 16, 1997 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Auburn Hosiery Mills, Inc. and Subsidiary (the "Company") is engaged in the production and sale of various styles of socks to retail chain stores primarily in the United States of America. Basis of Consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned foreign subsidiary after elimination of significant intercompany balances and transactions. Foreign Currency Translation Assets and liabilities of the Company's wholly-owned subsidiary are translated into U.S. dollars at the current rate of exchange, while revenues and expenses are translated at the average exchange rate during the year. Translation adjustments are excluded from the results of operations and are reported as a separate component of stockholders' equity. Cash and Cash Equivalents Cash and cash equivalents include demand deposits, certificates of deposit and highly liquid investments with original maturities of three months or less. Inventories Inventories are stated at the lower of cost or market. Cost is computed using currently adjusted standards that approximate actual cost on first-in, first-out basis. Market is based on estimated net realizable value. Property, Plant and Equipment Property, plant and equipment are stated at cost. Improvements and replacements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. The cost is depreciated over the estimated useful lives of the related assets. Leased equipment is amortized over the term of the related lease. Depreciation and amortization are computed on the straight-line method for financial reporting purposes and on an accelerated method for income tax purposes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Intangibles Loan closing costs and other deferred charges are amortized over the life of the related charges on the straight-line method. F-30
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AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) S Corporation -- Income Tax Status During 1987, the Company elected to be taxed under the provisions of subchapter S of the Internal Revenue Code effective July 1, 1987. Under those provisions, the Company did not pay federal or state corporate income taxes on its taxable income. Instead, the stockholders were liable for individual federal and state income taxes on their respective shares of the Company's taxable income. Effective November 1, 1989, the Company terminated its S corporation status when it purchased the wholly-owned subsidiary. A provision for federal and state income taxes has been included in these financial statements for the period January 1, 1997 through December 16, 1997. Deferred Income Taxes The Company accounts for its income taxes using Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Differences are primarily inventory cost, vacation payable and depreciation. Earnings Per Share Earnings per share amounts are based on the number of shares outstanding during the period January 1, 1997 through December 16, 1997, which remained unchanged. New Accounting Standards The Financial Accounting Standards Board has issued SFAS No. 130, Reporting Comprehensive Income, which is effective for financial statements for fiscal years ending after December 31, 1997. This standard establishes standards for the reporting and display of comprehensive income which is defined under SFAS No. 130 as "the change in equity (net assets) during a period from transactions and other events and circumstances from nonowner sources." Under SFAS No. 130, the Company has several choices in the disclosure of the components of other comprehensive income. The Company plans to implement SFAS No. 130 during the first quarter of fiscal year 1998, and management anticipates that such adoption will have no material effect on the Company's financial condition or results of operations. NOTE 2: INCOME TAXES Income tax expense is different from the amount that would result from applying the federal statutory rate of 34% to income before income taxes as follows: [Download Table] DOLLARS IN THOUSANDS --------- Federal tax at statutory rate............................. $ 777 State income tax, net of federal tax benefit.............. 193 Other..................................................... (31) ---- Income Tax Expense.............................. $ 939 ==== F-31
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AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Current and deferred income tax expense for the period January 1, 1997 through December 16, 1997 are as follows: [Download Table] DOLLARS IN THOUSANDS --------- Current: Federal.............................................. $ 755 State................................................ 185 ---- Total Current................................... 940 ---- Deferred: Inventory............................................ 39 Accrued vacations.................................... (39) Reserve for bad debts................................ (96) Depreciation......................................... 95 ---- Total Deferred.................................. (1) ---- Income Tax Expense.............................. $ 939 ==== Income taxes paid were approximately $1,401,000 for the period January 1, 1997 through December 16, 1997. NOTE 3: OPERATING LEASES -- LESSEE The Company leases various equipment under non-cancellable operating leases. Rent expense was approximately $101,000, net of subleases of approximately $91,000, for the period January 1, 1997 through December 16, 1997. NOTE 4: RELATED PARTY TRANSACTIONS One of the Company's stockholders owns certain companies that AUBURN HOSIERY MILLS, INC. uses as its sales representatives and pays those companies sales commissions. Also, the Company remits royalties through its affiliates to pay license grantors. The following is a summary of transactions with affiliates for December 16, 1997 and the period January 1, 1997 through December 16, 1997. [Download Table] DOLLARS IN THOUSANDS --------- Sales commissions paid to affiliates (included in sales and distribution expense in the accompanying consolidated statements of income)...................................................... $ 2,732 ====== Royalties paid through affiliates (included in sales and distribution expense in the accompanying consolidated statements of income)...................................................... $ 2,157 ====== The Company sold greige goods inventory at market price to a foreign affiliate, which amounted to approximately $149,000 for the period January 1, 1997 through December 16, 1997. The Company's subsidiary received approximately $443,000 in commission income from a foreign affiliate for the period January 1, 1997 through December 16, 1997. F-32
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AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5: CONCENTRATIONS The Company sells a substantial portion of its product to certain customers. Customers with ten percent or more of the Company's sales during the period January 1, 1997 through December 16, 1997 aggregated to approximately $32,239,000. The Company manufactures and sells a substantial portion of its product under a single licensing agreement. This agreement was renewed January 1, 1998 and expires December 31, 2002 and is renewable for an additional 5 years at that time. NOTE 6: PROFIT SHARING PLAN The Company has a defined contribution plan covering all employees of the Company who have two years of service of at least 1,000 hours each year. The Company's contribution is determined by its Board of Directors annually. The contributions charged to operations for the period January 1, 1997 through December 16, 1997 was $100,000. NOTE 7: CONTINGENCIES The Company is self-insured for their group medical plan. Any person who is actively working for the employer on a full-time basis (at least 30 hours per week) and has been with the Company at least 90 days is eligible to participate in the plan. Dependent coverage is also offered to qualified dependents of an eligible employee. The Company has contracted with an administrator to process claims and has purchased stop-loss insurance to limit its losses on individual and aggregate claims. The Company's loss limit per person is $40,000 and the individual lifetime maximum stop loss coverage is $1,000,000; the Company's annual aggregate loss limit is based on a monthly limit per the average number of employees in the plan. The Company's minimum annual aggregate loss is equal to the greater of the average number of employees in the plan times a $330 allowance times 90% or $1,842,588. Stop-loss insurance will pay any claims in excess of these calculated annual limits. The Company elected to become self-insured for their worker's compensation insurance. The Company has contracted with an administrator to process claims and provide stop-loss insurance to limit its losses on individual and aggregate claims. The Company's loss limit per event has a range from $150,000 to $300,000; the Company's aggregate loss limit is $1,000,000. Stop-loss insurance will pay any claims in excess of these limits. The Company has obtained a letter of credit from Nations Bank for $150,000 for the purpose of supporting the worker's compensation self-insurance. NOTE 8: SUBSEQUENT EVENT The stockholders of Auburn Hosiery Mills, Inc. and Subsidiary sold 100% of their stock to GCIH, Inc., a Delaware corporation, effective as of the close of business December 16, 1997. NOTE 9: SEGMENT INFORMATION The Company operates in a single hosiery line of business, encompassing the manufacture, distribution and sale of sport socks under the Wilson, Converse and Coca-Cola names to major retailers. The Company's principal operations and markets are located in the United States. Net sales, earnings before interest and income taxes, depreciation and amortization, capital expenditures and identifiable assets of businesses outside of the United States were not significant. Historically, transfers of product between geographic areas have not been significant. During the period January 1, 1997 through December 16, 1997, sales to a single customer amounted to approximately 66% of total net sales. F-33
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SPORT SOCKS CO. (IRELAND) LIMITED Report of Independent Accountants To the Board of Directors of Sport Socks Co. (Ireland) Limited We have audited the accompanying statements of profit and loss account and of cash flows of Sport Socks Co. (Ireland) Limited ("the company") for the fifty weeks ended 16 December 1997 (the "financial statements") all expressed in Irish pounds as set out on pages F-35 to F-45 inclusive. These financial statements are the responsibility of the company's directors and management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements audited by us present fairly, in all material respects the results of its operations and its cash flows for the fifty weeks ended 16 December 1997 in conformity with accounting principles generally accepted in Ireland. Accounting principles generally accepted in Ireland vary in certain significant respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of net loss expressed in Irish pounds for the fifty weeks ended 16 December 1997 to the extent summarised in Note 16 to the financial statements. PRICE WATERHOUSE CORK, IRELAND Date: 23 February 1998 F-34
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SPORT SOCKS CO. (IRELAND) LIMITED PROFIT AND LOSS ACCOUNT FIFTY WEEKS ENDED 16 DECEMBER 1997 [Download Table] IRL ---------- TURNOVER.................................................... 12,519,930 Cost of sales............................................... (8,514,277) ---------- GROSS PROFIT................................................ 4,005,653 Selling and distribution costs.............................. (2,434,199) Administrative expenses..................................... (919,353) Exceptional item -- loss on foreign exchange commitments (note 10)................................................. (716,000) ---------- OPERATING LOSS.............................................. (63,899) Interest receivable......................................... 9,913 Interest payable (note 3)................................... (56,835) ---------- LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (note 4)........ (110,821) Taxation credit (note 5).................................... 25,275 ---------- LOSS FOR THE FINANCIAL PERIOD............................... (85,546) Transfer to other reserves (note 6)......................... (109,703) Allotment of equity share capital (note 6).................. (100,000) ---------- Decrease in balance during the period....................... (295,249) Balance at beginning of period.............................. 1,886,096 ---------- BALANCE AT END OF PERIOD (note 7)........................... 1,590,847 ========== Turnover and operating loss arose solely from continuing operations. There were no recognised gains and losses other than those dealt with in the profit and loss account. The accompanying footnotes on pages F-37 to F-45 are an integral part of these financial statements. ON BEHALF OF THE BOARD R L Solar K K Angliss F-35
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SPORT SOCKS CO. (IRELAND) LIMITED CASH FLOW STATEMENT FIFTY WEEKS ENDED 16 DECEMBER 1997 [Download Table] IRL ---------- NET CASH INFLOW FROM OPERATING ACTIVITIES (note 8).......... 1,731,068 ---------- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest paid............................................... (58,741) Interest element of finance lease rentals................... (1,281) Interest received........................................... 9,372 ---------- Net cash outflow from returns on investments and servicing of finance................................................ (50,650) ---------- TAXATION Corporation tax paid........................................ (113,882) ---------- CAPITAL EXPENDITURE Purchase of tangible assets................................. (1,341,164) ---------- EQUITY DIVIDENDS PAID....................................... -- ---------- Net cash inflow before management of liquid resources and financing................................................. 225,372 ---------- MANAGEMENT OF LIQUID RESOURCES.............................. -- ---------- FINANCING Bank loan advances (note 8)................................. 298,645 Bank loans repaid (note 8).................................. (393,832) Repayment of loan from director (note 8).................... (100,000) Capital element of finance lease rentals (note 8)........... (36,409) Capital grants received..................................... 132,715 ---------- Net cash outflow from financing............................. (98,881) ---------- INCREASE IN CASH (note 8)................................... 126,491 ========== The accompanying footnotes on pages F-37 to F-45 are an integral part of these financial statements. ON BEHALF OF THE BOARD R L Solar K K Angliss F-36
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS 1 ACCOUNTING POLICIES BASIS OF ACCOUNTING The financial statements are prepared under the historical cost convention, in Irish pounds, and in accordance with accounting standards generally accepted in Ireland. The preparation of financial accounts in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TURNOVER Turnover represents the invoiced value of goods to third parties, exclusive of value added tax. TANGIBLE ASSETS Tangible assets are stated at cost less accumulated depreciation. Depreciation is calculated in order to write off the cost of tangible assets other than land over their estimated useful lives by equal annual instalments. The estimated useful lives of tangible assets by reference to which depreciation has been calculated are as follows: [Download Table] Leasehold buildings....................................... 25 years Plant and machinery....................................... 7 years Office equipment.......................................... 10 years Motor vehicles............................................ 3 years LEASES Where tangible assets are financed by leasing agreements which give rights approximating to ownership ("finance leases") they are treated as if they had been purchased outright at the present values of the minimum lease payments and the corresponding leasing liabilities are shown in the balance sheet as finance leases. Depreciation is calculated in order to write off the amounts capitalised over the estimated useful lives of the assets by equal annual instalments. Interest arising on finance leases is charged to the profit and loss account in proportion to the amounts outstanding under the leases. All operating lease rentals are charged to the profit and loss account on a straight line basis. STOCKS Stocks are stated at the lower of cost and net realisable value. Cost is based on normal levels of cost and activity and comprises cost of purchase and, where applicable, cost of conversion to current condition. Cost of purchase includes charges such as freight or duty where appropriate. Cost of conversion includes direct labour, direct expenses and fixed and variable production overhead expenditure. Net realisable value comprises the actual or estimated selling price (net of trade but before settlement discounts), less all further costs to completion, and less all costs to be incurred in marketing, selling and distribution. F-37
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) DEFERRED TAXATION Deferred taxation is provided on timing differences to the extent that it is expected to become payable in the foreseeable future and any amount not provided is disclosed as a contingent liability. Timing differences are temporary differences between profits as computed for taxation purposes and profits as stated in the financial statements which arise because certain items of income and expenditure in the financial statements are dealt with in different periods for taxation purposes. FOREIGN CURRENCIES Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates ruling at the balance sheet date and revenues, costs and non-monetary assets at the exchange rates ruling at the dates of the transactions. However, where a transaction is covered by way of forward contract, the contracted exchange rate is used to translate the asset, liability, revenue or cost. Profits and losses arising from foreign currency translations and on settlement of amounts receivable and payable in foreign currency are dealt with through the profit and loss account. Monetary assets are money held and amounts to be received in money; all other assets are non-monetary assets. Where the company enters into forward currency contracts to hedge foreign exchange exposures on anticipated foreign currency trading receipts, unrealised gains and losses on all contracts yet to mature are calculated and reflected in the profit and loss account for the period. GRANTS Capital grants are treated as deferred income, which is credited to the profit and loss account on the same basis as the related tangible assets are depreciated. Employment grants receivable on creation of new jobs are treated as deferred income, which is credited to the profit and loss account over the minimum period for which each job must be maintained. The period by reference to which employment grants are amortised is five years being the minimum period for which each job must be maintained. PENSION COSTS Contributions to the defined contribution pension scheme are charged to the profit and loss account as incurred. 2 BACKGROUND OF THE COMPANY AND BASIS OF PREPARATION Sport Socks Co. (Ireland) Limited was incorporated on 19 December 1989 and is registered in the Republic of Ireland. The company manufactures and sells branded sport socks in Europe under established brand names such as Wilson, Coca Cola and Dunlop through volume retailers and major sporting goods chains. The company was wholly owned and controlled in the period by Mr. J. P. Manning, shareholder and director. With effect from 17 December 1997, the company is a wholly owned subsidiary of Gerber Childrenswear Inc. incorporated in the state of Delaware, USA. These financial statements, prepared for the fifty weeks ended 16 December 1997, do not constitute "statutory accounts" within the meaning of the Companies Acts 1963 to 1990 of Ireland for the period presented. Statutory accounts were prepared for the year ended 31 December 1997. F-38
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) These financial statements exclude a balance sheet, related balance sheet notes, comparatives for the prior year, a Directors' Report and certain other information (such as names and addresses of the Company's auditors, bankers and solicitors) which are required of "statutory accounts" by the Companies Acts 1963 to 1990. However, they include all material disclosures required by generally accepted accounting principles in Ireland including those Companies Acts disclosures relating to profit and loss and cash flow statements. 3 INTEREST PAYABLE [Download Table] IRL (Pounds) ------ This interest was in respect of: Borrowings wholly repayable within five years: - bank overdrafts...................................... 1,788 - bank loans........................................... 40,117 - finance leases....................................... 1,281 - creditors............................................ 13,649 ------ 56,835 ====== 4 LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION [Download Table] IRL (Pounds) --------- Loss on ordinary activities before taxation has been arrived at after charging: Staff costs - wages and salaries................................... 3,375,602 - social welfare costs................................. 313,801 - pension costs........................................ 75,217 --------- 3,764,620 Depreciation................................................ 805,181 Royalties................................................... 679,351 Currency translation loss................................... 170,199 Loss on foreign exchange commitments........................ 716,000 Auditors' remuneration...................................... 19,795 Directors' emoluments....................................... -- ========= and after crediting: Amortisation of capital grants.............................. 59,804 Amortisation of employments grants.......................... 172,998 Training grants............................................. 23,508 ========= The estimated useful economic lives and recoverable values of tangible assets are subject to regular review by management. Where management has committed to a plan to dispose of or replace the assets, whether by sale or abandonment, the assets are reduced to their estimated fair values and a charge is reflected in the profit and loss account. As a result of the company's ongoing capital expenditure investment programme in 1997, management abandoned or were committed to a plan to dispose of certain assets resulting in a charge to the profit and loss of IRL192,419 and which is included in the depreciation charge. F-39
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 5 TAXATION CREDIT [Download Table] IR (Pounds) ----------- Based on profit for the period at 10% Corporation tax............................................. -- Deferred tax................................................ 20,000 ------ 20,000 Overprovision in respect of prior years Corporation tax............................................. 5,275 ------ 25,275 ====== There is no corporation tax charge for the period due to losses incurred. 6 CHANGES IN SHAREHOLDERS' EQUITY The changes in shareholders' equity balances are comprised of the following: [Enlarge/Download Table] CALLED UP EQUITY SHARE PROFIT AND LOSS OTHER CAPITAL ACCOUNT RESERVES IR (Pounds) IR (Pounds) IR (Pounds) ------------ --------------- ---------- Balance at 1 January 1997................................ 1,623,800 1,886,096 78,212 Transfers................................................ 100,000 (209,703) 109,703 Loss for the financial period............................ -- (85,546) -- --------- --------- ------- Balance at 16 December 1997.............................. 1,723,800 1,590,847 187,915 ========= ========= ======= Other reserves represent a non distributable reserve maintained in compliance with the company's existing grant agreements. During the period ended 16 December 1997 100,000 ordinary IRL1 shares were allotted in consideration for the reduction by an equivalent amount of the company's revenue reserves. 7 PROFIT AND LOSS ACCOUNT Profit and loss account includes IRL810,037 which is not available for distribution until the contingencies referred to in note 11 have expired. F-40
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 8 NOTES ON THE CASH FLOW STATEMENT [Download Table] IRL (POUNDS) ---------- NET CASH INFLOW FROM OPERATING ACTIVITIES: Operating loss............................................ (63,899) Depreciation.............................................. 805,181 Amortisation of capital grants............................ (59,804) Amortisation of employment grants......................... (172,998) Currency translation loss on director's loan.............. 83,697 Currency translation loss on bank loans................... 9,713 Exceptional item -- loss on foreign exchange commitments............................................ 716,000 Increase in stocks........................................ (205,477) Decrease in debtors....................................... 31,004 Increase in creditors..................................... 587,651 ---------- 1,731,068 ========== IRL (POUNDS) ---------- RECONCILIATION OF NET CASHFLOW TO MOVEMENT IN NET DEBT: Increase in cash in the year.............................. 126,491 Cash outflow from decrease in debt and finance leases..... 131,596 Cash outflow from decrease in loan from director.......... 100,000 ---------- Reduction in net debt resulting from cash flows........... 358,087 Effects of changes in foreign exchange rates.............. (93,410) ---------- Movement in net debt in the period........................ 264,677 Net debt at 1 January 1997................................ (1,021,195) ---------- Net debt at 16 December 1997.............................. (756,518) ========== F-41
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) [Enlarge/Download Table] EFFECTS OF AT FOREIGN AT 1 JANUARY EXCHANGE RATE OTHER 16 DECEMBER 1997 CASH FLOWS CHANGES CHANGES 1997 IRL IRL IRL IRL IRL ANALYSIS OF CHANGES IN NET DEBT (POUND) (POUNDS) (POUNDS) (POUNDS) (POUNDS) ------------------------------- ---------- ---------- ------------- -------- ----------- Cash at bank and in hand............... 455,059 (18,454) -- -- 436,605 Bank overdrafts........................ (144,945) 144,945 -- -- -- ---------- -------- ------- -------- -------- Cash................................... 310,114 126,491 -- -- 436,605 ---------- -------- ------- -------- -------- Bank loans Due within one year.................... (217,593) (298,645) (9,713) 214,951 (311,000) Due after one year..................... (413,424) 393,832 -- (214,951) (234,543) ---------- -------- ------- -------- -------- (631,017) 95,187 (9,713) -- (545,543) ---------- -------- ------- -------- -------- Finance leases Due within one year.................... (28,239) 27,697 -- (19,266) (19,808) Due after one year..................... (34,126) 8,712 -- 19,266 (6,148) ---------- -------- ------- -------- -------- (62,365) 36,409 -- -- (25,956) ---------- -------- ------- -------- -------- Loan from director..................... (637,927) 100,000 (83,697) -- (621,624) ---------- -------- ------- -------- -------- Net debt............................... (1,021,195) 358,087 (93,410) -- (756,518) ========== ======== ======= ======== ======== Tangible assets purchases of IRL300,000 were made on extended credit terms. This liability is repayable on an instalment basis over five years commencing subsequent to 16 December 1997. 9 RELATED PARTY TRANSACTIONS Details of the company's transactions with related parties are as follows: (i) Cost of sales include purchases of stocks of IRL126,070 from Auburn Hosiery Mills Inc, a company owned and controlled by Mr. J.P. Manning during the period. (ii) Selling and distribution costs include sales commission payable of IRL286,573 to Sport Socks Co. (UK) Limited, a company owned and controlled by Mr. J.P. Manning during the period. (iii) Selling and distribution costs include Wilson licence royalties of IRL372,683 and IRL80,016 respectively payable to Sales and Marketing Hosiery Corporation and Auburn Hosiery Mills Inc., companies controlled and owned by Mr. J.P. Manning, company shareholder and director during the period. (iv) Selling and distribution costs include sales and marketing costs amounting to IRL214,376 representing the salary and related expenses of sales and marketing personnel, recharged to the company by JP Manning Inc., a company controlled by Mr. J.P. Manning. (iv) Included in administrative expenses are amounts of IRL5,597, IRL8,500 and IRL7,350 respectively, paid to White and Case, and Anthony Carroll & Co. and T. Collins relating to legal and engineering consultancy services provided by firms in which J. Reiner, B. Carroll and T. Collins, company directors, have respective interests. 10 FOREIGN EXCHANGE COMMITMENTS The company's revenues are primarily received in currency other than Irish pounds and accordingly the company is subject to currency exposure. The company seeks to limit this risk by entering into forward F-42
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) currency contracts at varying maturity dates. Unrealised gains or losses on all of those contracts yet to mature are calculated at the balance sheet date and reflected in the profit and loss account for the period. At the balance sheet date, the company has contracted to sell forward foreign currencies equivalent to IRL8,032,000 at various rates and maturity dates. Unrealised losses of IRL716,000 in respect of all of those contracts relating to future transactions, excluding those contracts in respect of sales which have arisen or were committed prior to the balance sheet date, are reflected in the profit and loss account. This represents a change in accounting policy for the company and is considered by the directors to be more appropriate to the company's circumstances and give a fairer presentation of the results and financial position of the business. The comparatives have not been restated as in the opinion of the directors the financial effects of the change in accounting policy are not material to the company's comparative results and financial position. If the forward currency contracts were considered separately from underlying future revenues the company would be subject to market risk from fluctuations in currency exchange rates. The company only enters these forward contracts to hedge the related currency risks. Therefore there is a market risk only to the extent that the actual foreign currency cashflows differ from anticipated amounts and the only credit risk arises from potential non performance by counter parties which is restricted to the hedging differential and not the principal amount hedged. The company does not anticipate non performance as the counterparties are all licensed banks. 11 CONTINGENT LIABILITIES CAPITAL GRANTS If certain circumstances occur, these grants could be repayable up to a maximum of IRL950,808. Such circumstances would arise if the company ceased to use the assets to which the grants relate. EMPLOYMENT GRANTS If certain circumstances occur, these grants could be repayable up to a maximum of IRL864,991. Such circumstances would arise at any time within five years from the date of receipt of the first moiety of the employment grant in respect of any job if the job should become vacant and remain vacant for a period in excess of six calendar months. 12 EMPLOYEES The average number of persons employed by the company during the period was 270, 266 of whom are based in the Republic of Ireland, and 4 in Belgium. 13 PENSIONS The company operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the company in an independently administered fund. The pension cost charge represents contributions payable by the company to the fund and amounted to IRL75,217. F-43
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 14 DIRECTORS' RESPONSIBILITIES The directors are required to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing those financial statements, the directors are required to: - Select suitable accounting policies and then apply them consistently - Make judgements and estimates that are reasonable and prudent - Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business The directors are responsible for keeping proper books of account which disclose with reasonable accuracy at any time the financial position of the company. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 15 APPROVAL OF THE FINANCIAL STATEMENTS The directors approved the financial statements on 23 February 1998. 16 DIFFERENCES BETWEEN IRISH AND US ACCOUNTING PRINCIPLES The financial statements of the company are prepared in accordance with Irish GAAP, which differ in certain significant respects from US GAAP. The following is a reconciliation to US GAAP pursuant to Item 17 of Form 20-F. [Download Table] IR(POUNDS) ---------- Net loss for the period (Irish GAAP)........................ (85,546) Amortisation of interest capitalised(1)..................... (1,750) Restructuring costs(2)...................................... 36,000 Loss on foreign exchange contracts(3)....................... 30,000 Income taxes(4)............................................. (7,000) ------- NET LOSS FOR THE PERIOD (US GAAP)........................... (28,296) ======= --------------- (1) CAPITALISATION OF INTEREST EXPENSES AND RELATED AMORTISATION. Under Irish GAAP, interest incurred during the period for which assets are under construction is not required to be capitalised. Under US GAAP, such interest incurred during the period is eligible for capitalisation. The amount capitalised is to be an allocation of the interest cost incurred during the period required to complete the asset. The Company had no assets under construction during the period. The adjustment reflected above relates to amortisation of past interest capitalised in accordance with US GAAP. (2) RESTRUCTURING COSTS. Under Irish GAAP, the company has accrued over the past three years, a provision to cover the potential costs associated with possible employee redundancies at its manufacturing facility. The related amount charged to profit and loss in the period ended 16 December 1997 totalled IRL36,000. These provisions, which do not conform with the more prescriptive requirements of US GAAP, have been reversed. (3) LOSS ON FORWARD EXCHANGE CONTRACTS. Under Irish GAAP, the Company adopted during the period an accounting policy to mark to market forward foreign exchange contracts which hedge anticipated transactions (eg. Future sales). Under US GAAP, such a policy is required for both 1996 and for the F-44
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) period, and results in an adjustment of IRL30,000 related to a reduction in mark to market losses during the period which would have been reflected in the prior year. Additionally, the Company classified this loss on foreign exchange commitments as an exceptional item in the Irish GAAP financial statements. Under US GAAP, such an item is not considered to be an extraordinary item as such as classification is limited to those items that are both unusual in nature and infrequent in occurrence. (4) INCOME TAXES. Under Irish GAAP, deferred taxes are provided for temporary differences and tax loss carryforwards using the liability method, when it is probable that an asset or liability will crystallise. Under US GAAP, deferred taxes are provided for temporary differences and for tax loss carryforwards. A valuation allowance is established when it is more likely than not that the deferred tax asset will not be realised. Additionally, for US GAAP purposes, deferred taxes are provided in respect of US GAAP adjustments to the book basis of assets and liabilities. F-45
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SPORT SOCKS CO. (IRELAND) LIMITED NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF CASHFLOWS The company's cashflow statement prepared in accordance with Irish GAAP is different from that which is required under SFAS 95. A statement of cash flows provided under SFAS 95 is as follows: [Download Table] IR(POUNDS) ---------- NET LOSS FOR THE PERIOD (US GAAP)........................... (28,296) ADJUSTMENTS TO RECONCILE NET LOSS TO CASH PROVIDED FROM OPERATING ACTIVITIES Depreciation................................................ 806,931 Amortisation of capital grants.............................. (59,804) Amortisation of employment grants........................... (172,998) Currency translation loss on directors' loan................ 83,697 Currency translation loss on bank loans..................... 9,713 Exceptional item -- loss on foreign exchange commitments.... 686,000 Increase in stocks.......................................... (205,477) Decrease in debtors......................................... 31,004 Increase in creditors and other liabilities................. 415,766 ---------- Net cash provided by operating activities................... 1,566,536 ---------- CASH UTILISED IN INVESTING ACTIVITIES Payments for tangible assets................................ (1,341,164) ---------- CASHFLOWS FROM FINANCING ACTIVITIES Proceeds from bank loan advances............................ 298,645 Payments to settle bank debt................................ (538,777) Repayments of loan from director............................ (100,000) Capital element of finance lease rentals.................... (36,409) Capital grants received..................................... 132,715 ---------- Net cash outflow from financing activities.................. (243,826) ---------- Net decrease in cash and cash equivalents for the year...... (18,454) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 455,059 ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. 436,605 ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest......... IRL60,022 Income tax....... IRL113,882 F-46
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====================================================== NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS [Download Table] PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 11 Use of Proceeds....................... 18 Dividend Policy....................... 18 Capitalization........................ 19 Dilution.............................. 20 Selected Consolidated Financial Data................................ 21 Unaudited Pro Forma Condensed Consolidated Statement of Operations.......................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 26 Business.............................. 33 Management............................ 49 Certain Relationships and Related Transactions........................ 56 Principal Stockholders................ 59 Description of Certain Indebtedness... 60 Description of Capital Stock.......... 62 Certain United States Federal Income Tax Consequences to Non-United States Holders of Common Stock...... 64 Shares Eligible for Future Sale....... 65 Underwriting.......................... 68 Legal Matters......................... 70 Experts............................... 70 Additional Information................ 70 Index to Consolidated Financial Statements.......................... F-1 UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ============================================ ====================================================== SHARES [LOGO] GERBER CHILDRENSWEAR, INC. COMMON STOCK -------------------- PROSPECTUS -------------------- MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. LEHMAN BROTHERS FURMAN SELZ WASSERSTEIN PERELLA SECURITIES, INC. , 1998 ======================================================
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a statement of estimated expenses of the issuance and distribution of the securities being registered other than underwriting compensation: [Download Table] SEC registration fee........................................ $ 16,962.50 NASD filing fee............................................. 6,250.00 New York Stock Exchange original listing fee................ * Blue sky fees and expenses (including attorneys' fees and expenses)................................................. * Printing and engraving expenses............................. * Transfer agent's fees and expenses.......................... * Accounting fees and expenses................................ * Legal fees and expenses..................................... * Miscellaneous expenses...................................... * ----------- Total.................................................. $ * =========== ------------------------ * To be provided by amendment. All amounts are estimated except for the SEC registration fee and the NASD filing fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company is incorporated under the laws of the State of Delaware. Section 145 of the General Corporation Law of the State of Delaware ("Section 145") provides that a Delaware corporation may indemnify any person who is, or is threatened to be made, a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was illegal. A Delaware corporation may indemnify any person who is, or is threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director has actually and reasonably incurred. The Company's Certificate of Incorporation provides for the indemnification of directors and officers of the Company to the fullest extent permitted by Section 145. In that regard, the Certificate of Incorporation provides that the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of such corporation, or is or was II-1
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serving at the request of such corporation as a director, officer or member of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of such corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Indemnification in connection with an action or suit by or in the right of such corporation to procure a judgment in its favor is limited to payment of settlement of such an action or suit except that no such indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the indemnifying corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine that, despite the adjudication of liability but in consideration of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Over the past three years, the Company sold shares of its capital stock as follows in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, or Rule 701 pursuant to Section 3(b) of the Securities Act. SERIES A PREFERRED STOCK, PAR VALUE $0.01 PER SHARE. Shares of Series A Preferred Stock of GCIH were sold to the following persons on the following dates. Such shares were converted immediately prior to the Offering into either (a) shares of Common Stock or (b) the right to receive cash, in each case pursuant to the Merger described herein. See "Certain Relationships and Related Transactions--The Reorganization." [Download Table] NUMBER AGGREGATE DATE NAME OF SHARES PURCHASE PRICE ---- ---- --------- -------------- January 22, 1996 Citicorp Venture Capital, Ltd. 86,974.5 $8,697,446.50 January 22, 1996 CCT III, L.P. 15,348.4 $1,534,843.50 January 22, 1996 Richard M. Cashin 3,327.5 $ 332,746.50 January 22, 1996 Natasha Partnership 2,774.4 $ 277,439.30 January 22, 1996 David Thomas 2,774.4 $ 277,439.30 January 22, 1996 Thomas McWilliams 950.7 $ 95,070.50 January 22, 1996 John Weber 475.4 $ 47,535.30 January 22, 1996 Byron L. Knief 237.7 $ 23,767.60 January 22, 1996 Michael A. Delaney 237.7 $ 23,767.60 January 22, 1996 David Y. Howe 237.7 $ 23,767.60 January 22, 1996 M. Saleem Muqaddam 190.1 $ 19,014.20 January 22, 1996 Charles E. Corpening 95.1 $ 9,507.00 January 22, 1996 Richard Solar 1,188.4 $ 118,838.10 January 22, 1996 Edward Kittredge 1,188.4 $ 118,838.10 January 22, 1996 David Jones 950.7(1) $ 95,070.40 January 22, 1996 David Uren 451.6 $ 45,158.50 --------------- (1) Repurchased by the Company on February 11, 1997. II-2
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CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE. Shares of Class A Common Stock of GCIH were sold to the following persons on the following dates. Such shares were converted into Common Stock immediately prior to the Offering pursuant to the Merger described herein. See "Certain Relationships and Related Transactions--Reorganization." [Download Table] AGGREGATE NUMBER PURCHASE DATE NAME OF SHARES PRICE ---- ---- --------- ----------- January 22, 1996 Citicorp Venture Capital, Ltd. 523,476.0(2) $523,476.00 January 22, 1996 CCT III, L.P. 79,584.0 $ 79,584.00 January 22, 1996 Richard M. Cashin 17,253.5 $ 14,253.50 January 22, 1996 63 BR Partnership 14,385.7 $ 14,385.70 January 22, 1996 David Thomas 14,385.7 $ 14,385.70 January 22, 1996 Alchemy, L.P. 4,929.5 $ 4,929.50 January 22, 1996 John Weber 2,464.7 $ 2,464.70 January 22, 1996 Byron L. Knief 1,232.4 $ 1,232.40 January 22, 1996 Michael A. Delaney 1,232.4 $ 1,232.40 January 22, 1996 David Y. Howe 1,232.4 $ 1,232.40 January 22, 1996 M. Saleem Muqaddam 985.8 $ 985.80 January 22, 1996 Charles E. Corpening 493.0 $ 493.00 --------------- (2) The Company repurchased (a) 23,500 of such shares on February 11, 1997 for $1.00 per share, or an aggregate consideration of $23,500 and (b)50,826.8 of such shares on September 30, 1997 at a price of $1.00 for an aggregate consideration of $50,826.80. Such repurchased shares were canceled but reissued in the form of Class B Common Stock of GCIH. CLASS B COMMON STOCK, PAR VALUE $0.01 PER SHARE. Shares of Class B Common of GCIH were sold to the following persons on the following dates. Such shares were converted into shares of Common Stock immediately prior to the Offering, pursuant to the Merger described herein. See "Certain Relationships and Related Transactions--Reorganization." [Download Table] NUMBER AGGREGATE DATE NAME OF SHARES PURCHASE PRICE ---- ---- --------- -------------- January 22, 1996 Richard Solar 23,661.9 $ 23,661.90 January 22, 1996 Edward Kittredge 76,161.9 $ 76,161.90 January 22, 1996 David Jones 29,929.6(3) $ 29,929.60 January 22, 1996 David Uren 14,841.5 $ 14,841.50 February 11, 1997 Joseph Medalie 2,500 $ 2,500.00 February 28, 1997 Gerardo M. Arce 250 $ 250.00 February 28, 1997 Larry L. Bateman 500 $ 500.00 February 28, 1997 Charles W. Berry 500 $ 500.00 February 28, 1997 Ronald C. Boone 500 $ 500.00 February 28, 1997 Harvey Burak 1,000 $ 1,000.00 February 28, 1997 Ray Jefferson Caplenor 1,500(4) $ 1,500.00 February 28, 1997 LeeAnn Carroll 500 $ 500.00 February 28, 1997 Jay R. Cope 250 $ 250.00 February 28, 1997 Robert L. Gall 1,000 $ 1,000.00 February 28, 1997 George J. Boltz 250 $ 250.00 February 28, 1997 Bobbie C. Greene 250 $ 250.00 February 28, 1997 David R. Hamilton 250 $ 250.00 II-3
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[Download Table] NUMBER AGGREGATE DATE NAME OF SHARES PURCHASE PRICE ---- ---- --------- -------------- February 28, 1997 Kenneth R. Heatter 250 $ 250.00 February 28, 1997 Earle R. Keaton, Jr. 500 $ 500.00 February 28, 1997 Douglas E. Klein 250 $ 250.00 February 28, 1997 Christine R. Lanigan 1,000 $ 1,000.00 February 28, 1997 Angela C. Lombardi 1,000 $ 1,000.00 February 28, 1997 Raymond R. McManus 750 $ 750.00 February 28, 1997 Jacqueline D. McNulty 750 $ 750.00 February 28, 1997 Jeffrey Mintz 500 $ 500.00 February 28, 1997 Deanna L. Parris 250 $ 250.00 February 28, 1997 John Larry Pelt 250 $ 250.00 February 28, 1997 David C. Pittman 250 $ 250.00 February 28, 1997 James B. Robertson 250 $ 250.00 February 28, 1997 Marvin E. Roberts 250 $ 250.00 February 28, 1997 Jeanne E. Scannell 1,000 $ 1,000.00 February 28, 1997 Eugene L. Scarpa 500 $ 500.00 February 28, 1997 Lee M. Schaeffer 1,500 $ 1,500.00 February 28, 1997 Dwight Smith 500 $ 500.00 February 28, 1997 Dale F. Tarlow 1,000 $ 1,000.00 February 28, 1997 John M. Temple 1,000(5) $ 1,000.00 February 28, 1997 Philip V. Todaro 1,000 $ 1,000.00 February 28, 1997 Holly H. Waddell 250 $ 250.00 February 28, 1997 Deidre A. Wahlberg 500 $ 500.00 February 28, 1997 Ralph L. Wheeler 250 $ 250.00 February 28, 1997 Philip R. Whitaker 500 $ 500.00 July 25, 1997 Raymond McManus 250 $ 250.00 July 25, 1997 Robert L. Gall 250 $ 250.00 July 25, 1997 David G. Phillips 250 $ 250.00 September 30, 1997 Susan M. Vander Molen 250 $ 250.00 September 30, 1997 Richard Solar 7,500 $ 7,500.00 November 24, 1997 Edward Kittredge 20,000 $ 20,000.00 November 26, 1997 Robert P. Robertson 1,000 $ 1,000.00 November 26, 1997 David Hamilton 250 $ 250.00 --------------- (3) Such shares were repurchased by the Company on February 11, 1997. (4) Such shares were repurchased by the Company on January 15, 1998. (5) Such shares were repurchased by the Company on September 20, 1997. CLASS C COMMON STOCK, PAR VALUE $0.01 PER SHARE. Shares of Class C Common of GCIH were sold to the following person on the following date. Such shares were converted into shares of Common Stock immediately prior to the Offering, pursuant to the Merger described herein. See "Certain Relationships and Related Transactions -- Reorganization." [Download Table] NUMBER AGGREGATE DATE NAME OF SHARES PURCHASE PRICE ---- ---- --------- -------------- January 22, 1996 Lawrence R. Glenn 2,500 $ 2,500.00 II-4
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CLASS D COMMON STOCK, PAR VALUE $0.01 PER SHARE. No shares of such class have been issued. Warrants to purchase 191,250 shares of Class D Common Stock were issued to CMP on January 22, 1996 in connection with the issuance of senior subordinated indebtedness of the Company to CMP, for an aggregate consideration of $189,337.50. Such warrants were converted into warrants to purchase Class B Common Stock of the Company, immediately prior to the Offering, pursuant to the Merger described herein. See "Certain Relationships and Related Transactions--Reorganization." ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: [Download Table] NUMBER DESCRIPTION ------- ----------- 1.1* Form of Purchase Agreement. 3.1* Form of Amended and Restated Certificate of Incorporation of the registrant. 3.2* Form of Amended and Restated Bylaws of the registrant. 4.1* Form of certificate representing shares of Common Stock, $0.01 par value per share. 4.2 Credit Agreement by and among GCIH, Auburn, GCI, the domestic subsidiaries of same and various lending institutions dated as of December 17, 1997. 5.1* Opinion and consent of Kirkland & Ellis. 10.1 Stock Purchase Agreement by and between GPC and GCIH dated as of December 14, 1995. 10.2 Form of Executive Stock Purchase Agreement between GCIH and certain of its Executives, each dated January 22, 1996. 10.3 Form of Manager Securities Purchase Agreement between GCIH and certain of its Managers. 10.4 Securities Purchase Agreement by and between GCIH and CVC, dated as of January 22, 1996. 10.5 Form of Director Stock Purchase Agreement between GCIH and certain of its directors. 10.6* Amended and Restated Registration Rights Agreement by and between GCIH, Citicorp Venture Capital, Ltd., and other stockholders of GCIH, dated as of , 1998. 10.7 Stock Purchase Agreement by and among GCIH, James P. Manning, Eileen Manning and Certain Charitable Remainder Trusts dated as of November 12, 1997. 10.8 Share Purchase Agreement by and among GCIH, James P. Manning and Eileen Manning dated as of December 16, 1997. 10.9 Amended and Restated Senior Subordinated Credit Agreement dated as of December 17, 1997 by and among GCIH, GCI, CMP and others. 10.10 Subordination and Intercreditor Agreement by and among Nationsbank, CMP, GCI and others dated as of December 17, 1997. 10.11 12% Junior Subordinated Note in the face amount of $11,000,000, issued by GCIH to GPC as of December 29, 1997. 10.12 License Agreement by and between Warner Bros. Division of Time Warner Entertainment Company, L.P. and GCI dated as of January 19, 1996. 10.13** License Agreement by and between GPC and GCI dated as of January 22, 1996. 10.14 License Agreement among The Kendall Company, GPC, and Soft Care Apparel, Inc. (n/k/a GCI), dated as of July 31, 1986, as amended pursuant to that certain Letter Agreement dated January 19, 1996 by and among The Kendall Company, GPC, GCI and GCIH. 10.15 Trademark License Agreement between Auburn and Wilson Sporting Goods Co. dated April 29, 1997; as sublicensed to Sport Socks Ireland as of October 1, 1997, effective as of January 1, 1998; as amended as of December 5, 1997. 10.16 Lease Agreement by and between GCI and Operadora Zona Franca De La Romana, S.A. for property located at Zona Franca Industrial La Romana (Sewing, Packaging). II-5
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[Download Table] NUMBER DESCRIPTION ------- ----------- 10.17 Lease Agreement by and between GCI and Operadora Zona Franca De La Romana, S.A. for property located at Altos Buvillaverde. 10.18 Lease Agreement by and between GCI and Operadora Zona Franca De La Romana, S.A. for property located at Altos Buvillaverde. 10.19 Lease Amendment by and between GCI and the Industrial Development Board of the City of Evergreen, Alabama, dated as of August 28, 1997, and assignment and assumption agreement and resolution of the Industrial Development Board dated as of the same date. 10.20 Lease Agreement between GCI and Highland Properties, LLC dated as of November 25, 1996, and amendments thereto, for the lease of the Greenville facility. 10.21 Severance Agreement by and between GPC, GCI and David E. Uren, dated as of March 18, 1995. 21.1 Subsidiaries of the registrant. 23.1 Consent of Ernst & Young LLP 23.2 Consent of J.C. Holland & Co., PSC 23.3 Consent of Price Waterhouse 23.4* Consent of Kirkland & Ellis (included in Exhibit 5.1). 24.1 Powers of Attorney (included in signature page). 27.1 Financial Data Schedule. --------------- * To be filed by amendment. ** The Company has requested confidential treatment with respect to certain provisions of this Exhibit from the Commission. (b) Financial Statement Schedules: The following financial statement schedule for GCIH, Inc. is included in this Registration Statement: Schedule II -- Supplemental Schedule of Valuation and Qualifying Accounts The following financial statement schedule for Gerber Childrenswear, Inc. is included in this Registration Statement: Schedule II -- Supplemental Schedule of Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions, are inapplicable or not material, or the information called for thereby is otherwise included in the financial statements and therefore have been omitted. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made of the securities registered hereby, a posteffective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or II-6
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in the aggregate, represent a fundamental change in the information set forth in this registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement; provided, however, that the undertakings set forth in paragraph (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide Offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. In addition, the undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide Offering thereof. The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide Offering thereof. II-7
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SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on March 3, 1998. GERBER CHILDRENSWEAR, INC. By: /s/ RICHARD L. SOLAR ------------------------------------ Name: Richard L. Solar Title: Senior Vice President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints any of Edward Kittredge or Richard L. Solar his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (including his capacity as a director and/or officer of Gerber Childrenswear, Inc.), to sign any or all amendments (including post-effective amendments) to this Registration Statement and any subsequent Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement and power of attorney have been signed on March 3, 1998, by, or on behalf of, the following persons in the capacities indicated with respect to Gerber Childrenswear, Inc.: [Enlarge/Download Table] SIGNATURE CAPACITY --------- -------- /s/ EDWARD KITTREDGE Chairman of the Board, President and Chief -------------------------------------------------------- Executive Officer (Principal Executive Edward Kittredge Officer) /s/ RICHARD L. SOLAR Senior Vice President, Assistant Secretary -------------------------------------------------------- and Director (Principal Financial Officer Richard L. Solar and Principal Accounting Officer) /s/ RICHARD CASHIN Director -------------------------------------------------------- Richard Cashin /s/ LAWRENCE R. GLENN Director -------------------------------------------------------- Lawrence R. Glenn /s/ JOSEPH MEDALIE Director -------------------------------------------------------- Joseph Medalie /s/ JOHN D. WEBER Director -------------------------------------------------------- John D. Weber II-8
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SCHEDULE II GCIH, INC. SUPPLEMENTAL SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) [Enlarge/Download Table] BALANCE AT CHARGED TO BALANCE AT BEGINNING COST AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD ----------- ---------- ---------- ---------- ---------- Year ended December 31, 1997: Allowance for doubtful accounts............... $ 1,798 $ 5,113 $4,401(1) $ 2,510 Inventory reserves............................ 12,849 (819) -- 12,030 Period ended December 31, 1996: Allowance for doubtful accounts............... -- 3,683 1,885(1) 1,798 Inventory reserves............................ -- 12,849 -- 12,849 --------------- (1) Allowances, uncollected amounts and credit balances written off against reserve, net of recoveries. II-9
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SCHEDULE II GERBER CHILDRENSWEAR, INC. ("PREDECESSOR COMPANY") SUPPLEMENTAL SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) [Enlarge/Download Table] CHARGED BALANCE AT TO COST BALANCE AT BEGINNING AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD ----------- ----------- -------- ---------- ---------- Year ended December 31, 1995: Allowance for doubtful accounts................ $ 3,755 $ 2,203 $ 3,358(1) $ 2,600 Inventory reserves............................. 6,965 262 -- 7,227 --------------- (1) Allowances, uncollected amounts and credit balances written off against reserve, net of recoveries.
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EXHIBIT INDEX ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: [Download Table] SEQUENTIALLY NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------ 1.1* Form of Purchase Agreement. 3.1* Form of Amended and Restated Certificate of Incorporation of the registrant. 3.2* Form of Amended and Restated Bylaws of the registrant. 4.1* Form of certificate representing shares of Common Stock, $0.01 par value per share. 4.2 Credit Agreement by and among GCIH, Auburn, GCI, the domestic subsidiaries of same and various lending institutions dated as of December 17, 1997. 5.1* Opinion and consent of Kirkland & Ellis. 10.1 Stock Purchase Agreement by and between GPC and GCIH dated as of December 14, 1995. 10.2 Form of Executive Stock Purchase Agreement between GCIH and certain of its Executives, each dated January 22, 1996. 10.3 Form of Manager Securities Purchase Agreement between GCIH and certain of its Managers. 10.4 Securities Purchase Agreement by and between GCIH and CVC, dated as of January 22, 1996. 10.5 Form of Director Stock Purchase Agreement between GCIH and certain of its directors. 10.6* Amended and Restated Registration Rights Agreement by and between GCIH, Citicorp Venture Capital, Ltd., and other stockholders of GCIH, dated as of , 1998. 10.7 Stock Purchase Agreement by and among GCIH, James P. Manning, Eileen Manning and Certain Charitable Remainder Trusts dated as of November 12, 1997. 10.8 Share Purchase Agreement by and among GCIH, James P. Manning and Eileen Manning dated as of December 16, 1997. 10.9 Amended and Restated Senior Subordinated Credit Agreement dated as of December 17, 1997 by and among GCIH, GCI, CMP and others. 10.10 Subordination and Intercreditor Agreement by and among Nationsbank, CMP, GCI and others dated as of December 17, 1997. 10.11 12% Junior Subordinated Note in the face amount of $11,000,000, issued by GCIH to GPC as of December 29, 1997. 10.12* License Agreement by and between Warner Bros. Division of Time Warner Entertainment Company, L.P. and GCI dated as of January 19, 1996. 10.13** License Agreement by and between GPC and GCI dated as of January 22, 1996. 10.14 License Agreement among The Kendall Company, GPC, and Soft Care Apparel, Inc. (n/k/a GCI), dated as of July 31, 1986, as amended pursuant to that certain Letter Agreement dated January 19, 1996 by and among The Kendall Company, GPC, GCI and GCIH.
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[Download Table] SEQUENTIALLY NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------ 10.15 Trademark License Agreement between Auburn and Wilson Sporting Goods Co. dated April 29, 1997; as sublicensed to Sport Socks Ireland as of October 1, 1997, effective as of January 1, 1998; as amended as of December 5, 1997. 10.16 Lease Agreement by and between GCI and Operadora Zona Franca De La Romana, S.A. for property located at Zona Franca Industrial La Romana (Sewing, Packaging). 10.17 Lease Agreement by and between GCI and Operadora Zona Franca De La Romana, S.A. for property located at Altos Buvillaverde. 10.18 Lease Agreement by and between GCI and Operadora Zona Franca De La Romana, S.A. for property located at Altos Buvillaverde. 10.19 Lease Amendment by and between GCI and the Industrial Development Board of the City of Evergreen, Alabama, dated as of August 28, 1997, and assignment and assumption agreement and resolution of the Industrial Development Board dated as of the same date. 10.20 Lease Agreement between GCI and Highland Properties, LLC dated as of November 25, 1996, and amendments thereto, for the lease of the Greenville facility. 10.21 Severance Agreement by and between GPC, GCI and David E. Uren, dated as of March 18, 1995. 21.1 Subsidiaries of the registrant. 23.1 Consent of Ernst & Young LLP 23.2 Consent of J.C. Holland & Co., PSC 23.3 Consent of Price Waterhouse 23.4* Consent of Kirkland & Ellis (included in Exhibit 5.1). 24.1 Powers of Attorney (included in signature page). 27.1 Financial Data Schedule. --------------- * To be filed by amendment. ** The Company has requested confidential treatment with respect to certain provisions of this Exhibit from the Commission.

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