10-Q 1 d52830_10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 28, 2002 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 333-58059 Cluett American Corp. (Exact Name of Registrant as Specified in Its Charter) Delaware 22-2397044 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 48 West 38th Street New York, NY 10018 (Address of Principal Executive Offices) (Zip code) Registrant's Telephone Number, Including Area Code 212-984-8900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes |X| No |_| APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes |X| No |_| The aggregate market value of the voting stock held by any non-affiliates of the registrant is zero as of September 28, 2002. All common stock of the registrant is owned by Cluett American Group, Inc., which is a wholly-owned subsidiary of Cluett American Investment Corp. Cluett American Corp. and Subsidiaries TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Report of Independent Accountants 3 Consolidated Balance Sheets as of September 28, 2002 and December 31, 2001 F-1 Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended September 28, 2002 and September 29, 2001 F-2 Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 28, 2002 and September 29, 2001 F-3 Notes to Consolidated Financial Statements F-4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 4 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13 Item 4. Controls and Procedures 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 19 302 CERTIFICATIONS 20 Cluett American Corp. and Subsidiaries REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Cluett American Corp. and Subsidiaries New York, New York We have reviewed the accompanying consolidated balance sheet of Cluett American Corp. and subsidiaries (the "Company"), a wholly owned subsidiary of Cluett American Investment Corp., as of September 28, 2002, and the related consolidated statements of operations and cash flows for the thirteen and thirty-nine week periods ended September 28, 2002 and September 29, 2001. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2001, and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended (not presented herein); and in our report dated April 12, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. The accompanying financial statements for the period ended September 28, 2002 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, certain conditions raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Deloitte & Touche LLP Raleigh, North Carolina November 19, 2002 3 Cluett American Corp. and Subsidiaries Consolidated Balance Sheets (Dollars In Thousands, except share data)

See accompanying notes. F-1 Cluett American Corp. and Subsidiaries Consolidated Statements of Operations (Unaudited) (Dollars In Thousands)

See accompanying notes. F-2 Cluett American Corp. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Dollars In Thousands)

See accompanying notes. F-3 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Cluett American Corp. and its subsidiaries, (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen and thirty-nine week periods ended September 28, 2002, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2002. The Consolidated Balance Sheet at December 31, 2001, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the annual consolidated financial statements and footnotes of the Company, included in the Annual Report on Form 10-K, for the year ended December 31, 2001, filed with the Securities and Exchange Commission on April 16, 2002. The consolidated financial statements include all subsidiary companies of the Company. Significant intercompany transactions have been eliminated in consolidation. The Company uses a 5-4-4 week fiscal quarter whereby the fiscal quarter ends on the Saturday nearest the end of the calendar quarter, which accordingly was September 28, 2002 and September 29, 2001, respectively. Certain amounts in the prior year financial statements and footnotes have been reclassified to conform to the current year presentation. The Company was not in compliance with certain financial covenants of its Senior Credit Facility as of September 28, 2002. On November 13, 2002, the Company obtained waivers of certain financial covenants under the facility for the periods ended September 28, 2002 and December 31, 2002, and the facility was amended to adjust certain financial ratios and tests, interest periods, limitations on asset sales and increase the applicable interest rates on the facility. The amendment also limits outstanding Senior Funded Indebtedness to $48.0 million on March 31, 2003. Senior Funded Indebtedness means, as of any date, all Funded Indebtedness (net of cash and cash equivalents) of the Company on a consolidated basis on such date, excluding (i) Subordinated Indebtedness and (ii) the Tranche C Obligations. Outstanding Senior Funded Indebtedness was $93.1 million as of September 28, 2002. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. In order to remain in compliance with the financial covenants included in the Company's Senior Credit Facility after December 31, 2002 and have adequate liquidity over the next twelve months, the Company intends to seek to reduce its indebtedness under its Senior Credit Facility by March 31, 2003. This includes exploring alternative financing and the sale of certain idle and non-core assets of the Company. There can be no assurances as to the success or timing of such sales or the proceeds that the Company could realize therefrom. F-4 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 1. Basis of Presentation (continued) The Senior Credit Facility includes a cross-default provision which makes it a default under the Senior Credit Facility if, with respect to other indebtedness in excess of $2.0 million of Cluett American Investment Corp. ("Holdings") and the Company, any such party defaults in any payment with respect to such indebtedness or defaults in a manner that permits such indebtedness to be accelerated or such indebtedness is in fact accelerated. The consequences of a default under the Senior Credit Facility are that the lender may terminate the commitments, accelerate the Company's obligations under the Senior Credit Facility, declaring them immediately due and payable, require the credit parties to establish a cash collateral account as security for outstanding letters of credit and enforce any and all other rights and interests existing under the credit documents. If the Company is unable to reduce its outstanding Senior Funded Indebtedness by March 31, 2003 to $48.0 million, then the Company would be in default of its Senior Credit Facility. As a result, outstanding amounts under its Senior Credit Facility and Senior Subordinated Notes have been classified as current liabilities in the Company's consolidated balance sheet as of September 28, 2002. Although the Company expects to be able to meet its working capital requirements with cash flow generated from operations and its ongoing efforts to optimize the Company's asset base, short-term borrowings for seasonal working capital, and permitted borrowings under the senior credit facility, there can be no assurance that the Company will have sufficient source of funds to meet its debt service obligations on March 31, 2003. The accompanying unaudited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 2. Joint Venture On January 7, 2002, the Company entered into a joint venture agreement with Administradora Gaco, S.A. de C.V. and Inversiones Gaco, S.A. de C.V. investing $2.6 million for a 50% share of outstanding capital stock of Inversiones Gaco, S. A. de C. V. The Company's investment in the joint venture is accounted for under the equity method. The joint venture owns a leading manufacturer and distributor of men's, women's and children's socks in Mexico with the largest Mexican brand, CANNON. By moving labor-intensive finishing operations to a lower cost environment, management believes it will recognize significant annual cost savings. In conjunction with the investment, and under the recently adopted Financial Accounting Standards Board ("FASB") Statement No. 141, "Business Combinations", the Company recorded a $1.7 million extraordinary gain related to negative goodwill. The negative goodwill reflects the equity investee's purchase price allocation of the acquisition of a business and was determined based on the fair value of the acquired property, plant and equipment as of the acquisition date. Summary financial information of the joint venture, for which the Company has recorded its 50% share of operating results, is as follows: (Dollars In Thousands) Total assets $12,210 Total liabilities $ 3,083 Total net income $ 4,469 Total net income includes a $3.5 million extraordinary gain related to negative goodwill. F-5 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 3. Recently Issued Accounting Standards Adopted or To Be Adopted In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 eliminates amortization of goodwill and other intangible assets that are determined to have an indefinite useful life and instead requires an impairment only approach. At adoption, any goodwill impairment loss will be recognized as the cumulative effect of a change in accounting principle. Subsequently, any impairment losses will be recognized as a component of income from operations. The Company adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 did not have a material impact on the Company's results of operations and financial condition. In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement Obligation" ("SFAS No. 143") which requires recording the fair value of a liability for an asset retirement obligation in the period in which it is incurred, and a corresponding increase in the carrying value of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, it is either settled for its recorded amount or a gain or loss upon settlement is recorded. SFAS No. 143 is effective for the Company's fiscal year ended December 31, 2003. The Company is currently assessing, but has not yet determined the impact of SFAS No. 143 on its financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment for Disposal of Long-Lived Assets" ("SFAS No. 144") which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in that Opinion). The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's results of operations and financial condition. In November 2001, the Emerging Issues Task Force reached consensus on issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products ("EITF 01-9"). The consensus requires certain payments to customers that may have previously been classified as a selling, general and administrative expense to be a reduction of sales. The adoption of EITF 01-9 on January 1, 2002, did not have a material impact on the Company's results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No. 146"). This statement requires companies to recognize costs with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently assessing, but has not yet determined the impact of SFAS No. 146 on its financial position and results of operations. F-6 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 4. Discontinued Operations On June 13, 2000, Phillips-Van Heusen Corporation ("PVH"), and the Company announced an agreement (the "Agreement") for PVH to license the ARROW brand for men's and boys' dress shirts, sports shirts (including knit, woven and all forms of fleece), pants, shorts and sweaters ("Licensed Product") in the United States. In addition, PVH and the Company agreed in principle for PVH to acquire the stock of Cluett Designer Group, Inc. ("CDG"), the licensee for Kenneth Cole dress shirts. In conjunction with the Agreement, the Company approved a plan to discontinue the Company's shirt group segment's manufacturing and distribution operations. On July 24, 2000, the transactions contemplated by the Agreement, including the Purchase and Sale Agreement among Cluett, Peabody & Co., Inc. ("CP"), Cluett, Peabody Canada, Inc. ("CP Canada"), Arrow Factory Stores Inc. ("AFS"), CDG, Consumer Direct Corporation ("CDC"), Cluett, Peabody Holding Corp. ("Holding"), and PVH, (the "Purchase and Sale Agreement") and the Share Purchase Agreement among CP, CDG, Bidermann Tailored Clothing Inc. ("BTC"), and PVH (the "Share Purchase Agreement") were closed. Each of the parties to the Purchase and Sale Agreement and the Share Purchase Agreement other than PVH and CDG is, and prior to the closing CDG was, a wholly owned subsidiary of the Company. Pursuant to the Purchase and Sale Agreement, (i) all of the outstanding shares of capital stock of C.A.T. Industrial S.A. de C.V., ("C.A.T") a corporation organized under the laws of Honduras, were sold to PVH by CP, AFS, CDG, CDC and Holding, (ii) PVH purchased all of CP's and AFS's right, title and interest in and to certain of the other assets (principally inventory) of CP and AFS used primarily by CP and AFS in their ARROW label and private label men's and boys' dress and sport shirt businesses and their Arrow factory outlet operations in the United States and (iii) PVH purchased all of CP Canada's right, title and interest in and to ARROW label dress and sport shirt inventory used in CP Canada's United States "Career Apparel" business. Pursuant to the Share Purchase Agreement, all of the outstanding shares of capital stock of CDG were sold by CP and BTC to PVH. The aggregate purchase price paid by PVH pursuant to the Purchase and Sale Agreement and the Share Purchase Agreement for the stock and assets referred to above was approximately $51.2 million in cash plus the assumption of $2.1 million of debt related to C.A.T., calculated as set forth in, and subject to adjustment pursuant to, Article 3 of each of the Purchase and Sale Agreement and the Share Purchase Agreement. Pursuant to the Purchase and Sale Agreement, the Trademark License Agreement ("PVH Trademark License Agreement"), dated July 24, 2000, by and between Cluett Peabody Resources Corporation ("CPR"), a Delaware corporation and a wholly-owned subsidiary of the Company, CP and PVH was executed and delivered. Pursuant to the PVH Trademark License Agreement, CP granted to PVH an exclusive license to use trademarks related to CP's ARROW clothing line in the United States and its territories and possessions in connection with its manufacture, advertising, marketing, promotion, distribution, offer to sell and the sale of men's and boys' Licensed Product in certain specified channels of trade, including the Internet. CP also granted to PVH the right to operate most of the websites that use URLs that incorporate the ARROW trademarks. The PVH Trademark License Agreement provides for a $5.0 million minimum guaranteed annual royalty fee to be paid to CP, subject to cost of living adjustments. The initial term of the license expires on June 30, 2007; however, PVH has the option to renew the PVH Trademark License Agreement for two additional five-year terms, provided it meets certain conditions. F-7 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 4. Discontinued Operations (continued) The Company used $39.3 million of the net proceeds from the Purchase and Sale Agreement, the Share Purchase Agreement and the PVH Trademark License Agreement (collectively referred to as the "Transactions") to repay outstanding borrowings under its Senior Credit Facility and CP Canada's Credit Facility. On January 29, 2001, and pursuant to an Asset Purchase Agreement, CP Canada sold certain assets (principally inventory, personal property, and manufacturing equipment) used primarily by CP Canada's ARROW labeled apparel bearing the name or logo of other Corporate entities or other organizations ("Career Apparel") businesses in Canada, apparel sold in specialty golf stores and golf pro shops ("Golf Apparel") and FRIDAY'S BY CLUETT businesses in Canada, the United States and Puerto Rico, to The John Forsyth Shirt Company, LTD. ("Forsyth"). Pursuant to a Trademark License Agreement ("Forsyth Trademark License Agreement"), dated as of January 29, 2001, CP and CP Canada granted to Forsyth an exclusive license to use trademarks related to the ARROW business in Canada and the FRIDAY'S BY CLUETT and golf apparel business in Canada, the United States and Puerto Rico. The Forsyth Trademark License Agreement provides for a 1.0 million Canadian dollar minimum guaranteed annual royalty fee to be paid to CP, subject to the Consumer Price Index. The license expires on December 31, 2005; however, Forsyth has the option to renew for two additional five-year terms, provided it meets certain conditions. The aggregate purchase price paid by Forsyth pursuant to the Asset Purchase Agreement was approximately $8.0 million, and subject to adjustment pursuant to Section 4 of the Asset Purchase Agreement. The Company used $5.4 million of the net proceeds from the Asset Purchase Agreement to repay outstanding borrowings under CP Canada's loan facility. The Company has completed the majority of the disposition of the Shirt Group segment's manufacturing and distribution operations. Accordingly, the Company's consolidated financial statements reflect the shirt segment as a discontinued operation. Consequently, the Company's remaining businesses include primarily the Sock and Licensing Groups. The Company has reflected the trade assets, trade liabilities and credit facility paid off, and operations of the shirt segment as discontinued in the accompanying consolidated financial statements. The net assets of the shirt segment are classified as net assets of discontinued operations in the accompanying balance sheet. As of September 28, 2002, the Company's disposition of the shirt segment is complete, except for real estate held for sale and sublease. These remaining net assets consist primarily of distribution facilities located in Austell, Georgia, and Kitchener, Ontario, that are carried at fair value (less costs to sell). F-8 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 5. Comprehensive Loss Total comprehensive loss for the nine months ended September 28, 2002 was $29,000 and is comprised solely of unrealized losses on the translation of foreign currency. 6. Inventories, Net Inventories from continuing operations consist of the following:

7. Long-Term Obligations and Financing Arrangements As of September 28, 2002, the Company had outstanding $235.4 million of debt consisting of $125.0 million in Senior Subordinated Notes (including the Parity Notes), a Senior Credit Facility consisting of a $18.2 million term loan ("Term A"), a $43.1 million term loan ("Term B"), a $17.5 million Tranche C loan, and $31.6 million in revolving credit facility borrowings. During the thirty-nine weeks ended September 28, 2002, the Company had an increase in revolving credit facility borrowings of $4.9 million and repaid $3.5 million in term loans and notes payable. As discussed in Note 1 - Basis of Presentation, of the unaudited consolidated financial statements, the Company was not in compliance with certain financial covenants of its Senior Credit Facility as of September 28, 2002. On November 13, 2002, the Company obtained waivers of certain financial covenants under the facility for the periods ended September 28, 2002 and December 31, 2002, and the facility was amended to adjust certain financial ratios and tests, interest periods, limitations on asset sales and increase the applicable interest rates on the facility. The amendment also limits outstanding Senior Funded Indebtedness to $48.0 million on March 31, 2003. Senior Funded Indebtedness means, as of any date, all Funded Indebtedness (net of cash and cash equivalents) of the Company on a consolidated basis on such date, excluding (i) Subordinated Indebtedness and (ii) the Tranche C Obligations. Outstanding Senior Funded Indebtedness was $93.1 million as of September 28, 2002. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. In order to remain in compliance with the financial covenants included in the Company's Senior Credit Facility after December 31, 2002 and have adequate liquidity over the next twelve months, the Company intends to seek to reduce its indebtedness under its Senior Credit Facility by March 31, 2003. This includes exploring alternative financing and the sale of certain idle and non-core assets of the Company. There can be no assurances as to the success or timing of such sales or the proceeds that the Company could realize therefrom. F-9 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 7. Long-Term Obligations and Financing Arrangements (continued) If the Company is unable to reduce its outstanding Senior Funded Indebtedness by March 31, 2003 to $48.0 million, then the Company would be in default of its Senior Credit Facility. As a result, outstanding amounts under its Senior Credit Facility and the Senior Subordinated Notes have been classified as current liabilities in the Company's consolidated balance sheet as of September 28, 2002. 8. Restructuring and Obligations Related to Discontinued Operations The following table is a summary of the components of the restructuring reserve and obligations related to discontinued operations. The remaining restructuring reserves and obligations related to discontinued operations are related to severance, which is expected to be completed in 2003, and lease obligations which will expire in various years ending in 2006.

F-10 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 9. Segment Data The Company identifies its reportable segments based on the segments' product offerings. As a result of the Company's June 13, 2000, decision to discontinue the shirt group operations and license the ARROW tradename, the composition of the Company's reportable segments changed. Subsequent to June 13, 2000, the Company conducted its business through two principal segments: the Sock Group and the Licensing Group. The financial results associated with Latin America, Apparel On-Line LLC, Cluett American Receivables LLC and the U.S. Retail division are referred to collectively as "All Other". Segment data disclosures for the thirteen and thirty-nine weeks ended September 28, 2002 and September 29, 2001, are as follows.

F-11 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 9. Segment Data (Continued) Reconciliation of Reportable Segments Net sales, Operating income, Depreciation and amortization, and Identifiable assets

F-12 Cluett American Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 10. Guarantor Subsidiaries The Company's payment obligations under the Senior Credit Facility and the Senior Subordinated Notes (the "Notes") are fully and unconditionally guaranteed on a joint and several basis by its current domestic subsidiaries, principally: Cluett Peabody & Co., Inc., Gold Toe Brands, Inc., Apparel On-Line LLC, Great American Knitting Mills, Inc., Consumer Direct Corporation and U.S. Retail division (collectively the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is a direct or indirect wholly-owned subsidiary of the Company. The Company's payment obligations under the Notes are not guaranteed by the remaining subsidiaries: Bidermann Womenswear Corp. (formerly Ralph Lauren Womenswear Inc.), Cluett Peabody Canada, Inc., Arrow de Mexico S.A. de C.V., Arrow Inter-America & Co., Ltd. and Cluett American Receivables, LLC (collectively the "Non-Guarantor Subsidiaries"). The obligations of each Guarantor Subsidiary under its guarantee of the Notes are subordinated to such subsidiary's obligations under its guarantee of the Senior Credit Facility. The Company has no independent assets or operations, the guarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors are minor. F-13 Cluett American Corp. and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company was organized in 1982 and primarily designs, manufactures and markets socks in the United States, as well as licenses its proprietary trademarks and trade names domestically and internationally. Based on net sales, the Company believes it is one of the leading designers, manufacturers and marketers of men's socks in the United States and has a significant market presence in women's and children's socks. While the Company serves many channels of distribution, its primary focus, historically, has been in department and national chain store retailers. Today, the Company continues to build new distribution, with particular focus on mass merchandisers that account for more than half of all consumer sock purchases. The Company believes its core product offering, GOLD TOE socks, provides classic and contemporary styles at price points that represent exceptional value and appeal to a broad consumer base. This broad appeal has successfully been captured in brand extensions, AURO, a GOLD TOE brand; ALL PRO, a GOLD TOE brand; and GOLD TOE GEAR to reach an even larger percentage of sock consumers. The Company owns numerous trademarks, including GOLD TOE, SILVER TOE, ARROW and its related trade names such as DOVER, TOURNAMENT, LADY ARROW, FAIRFIELD BY ARROW and FRIDAY'S BY CLUETT, which it regards as valuable assets. Because of the high brand recognition, the Company is able to license the various trademarks to apparel manufacturers and distributors worldwide. The Company has 38 licensees in various countries, which market, manufacture and sell apparel and non-apparel products bearing the ARROW trademark in various channels of distribution. Critical Accounting Policies Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management evaluates its estimates and judgments on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions. The Company's critical accounting policies have not changed from those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2001 Annual Report on Form 10-K. Discontinued Operations On June 13, 2000, Phillips-Van Heusen Corporation, ("PVH"), and the Company announced an agreement (the "Agreement") for PVH to license the ARROW brand for men's and boys' dress shirts, sports shirts (including knit, woven and all forms of fleece), pants, shorts and sweaters ("Licensed Product") in the United States. In addition, PVH and the Company agreed in principle for PVH to acquire the stock of Cluett Designer Group, Inc. ("CDG"), the licensee for Kenneth Cole dress shirts. In conjunction with the Agreement, the Company approved a plan to discontinue the Company's shirt group segment's manufacturing and distribution operations. On July 24, 2000, the transactions contemplated by the Agreement, including the Purchase and Sale Agreement among Cluett, Peabody & Co., Inc. ("CP"), Cluett, Peabody Canada, Inc. ("CP Canada"), Arrow Factory Stores Inc. ("AFS"), CDG, Consumer Direct Corporation ("CDC"), Cluett, Peabody Holding Corp. ("Holding"), and PVH, (the "Purchase and Sale Agreement") and the Share Purchase Agreement among CP, CDG, Bidermann Tailored Clothing Inc. ("BTC"), and PVH (the "Share Purchase Agreement") were closed. Each of the parties to the Purchase and Sale Agreement and the Share Purchase Agreement other than PVH and CDG is, and prior to the closing CDG was, a wholly owned subsidiary of the Company. 4 Cluett American Corp. and Subsidiaries Pursuant to the Purchase and Sale Agreement, (i) all of the outstanding shares of capital stock of C.A.T. Industrial S.A. de C.V., ("C.A.T") a corporation organized under the laws of Honduras, were sold to PVH by CP, AFS, CDG, CDC and Holding, (ii) PVH purchased all of CP's and AFS's right, title and interest in and to certain of the other assets (principally inventory) of CP and AFS used primarily by CP and AFS in their ARROW label and private label men's and boys' dress and sport shirt businesses and their Arrow factory outlet operations in the United States and (iii) PVH purchased all of CP Canada's right, title and interest in and to ARROW label dress and sport shirt inventory used in CP Canada's United States "Career Apparel" business. Pursuant to the Share Purchase Agreement, all of the outstanding shares of capital stock of CDG were sold by CP and BTC to PVH. The aggregate purchase price paid by PVH pursuant to the Purchase and Sale Agreement and the Share Purchase Agreement for the stock and assets referred to above was approximately $51.2 million in cash plus the assumption of $2.1 million of debt related to C.A.T., calculated as set forth in, and subject to adjustment pursuant to, Article 3 of each of the Purchase and Sale Agreement and the Share Purchase Agreement. Pursuant to the Purchase and Sale Agreement, the Trademark License Agreement ("PVH Trademark License Agreement"), dated July 24, 2000, by and between Cluett Peabody Resources Corporation ("CPR"), a Delaware corporation and a wholly-owned subsidiary of the Company, CP and PVH was executed and delivered. Pursuant to the PVH Trademark License Agreement, CP granted to PVH an exclusive license to use trademarks related to CP's ARROW clothing line in the United States and its territories and possessions in connection with its manufacture, advertising, marketing, promotion, distribution, offer to sell and the sale of men's and boys' Licensed Product in certain specified channels of trade, including the Internet. CP also granted to PVH the right to operate most of the websites that use URLs that incorporate the ARROW trademarks. The PVH Trademark License Agreement provides for a $5.0 million minimum guaranteed annual royalty fee to be paid to CP, subject to cost of living adjustments. The initial term of the license expires on June 30, 2007; however, PVH has the option to renew the PVH Trademark License Agreement for two additional five-year terms, provided it meets certain conditions. The Company used $39.3 million of the net proceeds from the Purchase and Sale Agreement, the Share Purchase Agreement and the PVH Trademark License Agreement (collectively referred to as the "Transactions") to repay outstanding borrowings under its Senior Credit Facility and CP Canada's Credit Facility. On January 29, 2001, and pursuant to an Asset Purchase Agreement, CP Canada sold certain assets (principally inventory, personal property, and manufacturing equipment) used primarily by CP Canada's ARROW labeled apparel bearing the name or logo of other Corporate entities or other organizations ("Career Apparel") businesses in Canada, apparel sold in specialty golf stores and golf pro shops ("Golf Apparel") and FRIDAY'S BY CLUETT businesses in Canada, the United States and Puerto Rico, to The John Forsyth Shirt Company, LTD. ("Forsyth"). Pursuant to a Trademark License Agreement ("Forsyth Trademark License Agreement"), dated as of January 29, 2001, CP and CP Canada granted to Forsyth an exclusive license to use trademarks related to the ARROW business in Canada and the FRIDAY'S BY CLUETT and golf apparel business in Canada, the United States and Puerto Rico. The Forsyth Trademark License Agreement provides for a 1.0 million Canadian dollar minimum guaranteed annual royalty fee to be paid to CP, subject to the Consumer Price Index. The license expires on December 31, 2005; however, Forsyth has the option to renew for two additional five-year terms, provided it meets certain conditions. The aggregate purchase price paid by Forsyth pursuant to the Asset Purchase Agreement was approximately $8.0 million, and subject to adjustment pursuant to Section 4 of the Asset Purchase Agreement. The Company used $5.4 million of the net proceeds from the Asset Purchase Agreement to repay outstanding borrowings under CP Canada's loan facility. The Company has completed the majority of the disposition of the Shirt Group segment's manufacturing and distribution operations. Accordingly, the Company's consolidated financial statements reflect the shirt segment as a discontinued operation. Consequently, the Company's remaining businesses include primarily the Sock and Licensing Groups. 5 Cluett American Corp. and Subsidiaries The Company has reflected the trade assets, trade liabilities and credit facility paid off, and operations of the shirt segment as discontinued in the accompanying consolidated financial statements. The net assets of the shirt segment are classified as net assets of discontinued operations in the accompanying balance sheet. As of September 28, 2002, the Company's disposition of the shirt segment is complete, except for real estate held for sale and sublease. These remaining net assets consist primarily of distribution facilities located in Austell, Georgia, and Kitchener, Ontario, that are carried at fair value (less costs to sell). Results of Operations: Thirteen weeks ended September 28, 2002 vs. September 29, 2001 The following table sets forth, for the periods indicated, statement of operations data for the Company's continuing operations including the Sock Group, the Licensing Group and all other (Latin America, Apparel On-Line LLC, Cluett American Receivables LLC, U.S. Retail division and corporate overhead charges) and excludes the Company's discontinued Shirt Group operation. Thirteen weeks ended September 28, September 29, 2002 2001 --------------------------- (Dollars In Thousands) Net sales $ 45,757 $ 47,096 Gross profit 13,915 15,326 Operating income from continuing operations 3,924 6,820 Interest expense, net 5,147 5,906 Equity earnings in investments in joint ventures 36 -- Income taxes 129 375 Extraordinary gain, net of taxes (98) -- Income (loss) from continuing operations $ (1,414) $ 539 Net sales: For the thirteen weeks ended September 28, 2002, net sales decreased $1.3 million to $45.8 million compared to $47.1 million for the thirteen weeks ended September 29, 2001. Net sales of the Sock Group declined $1.3 million while the Licensing Group's decreased $300,000 and the U.S. Retail division's increased $282,000. Net sales for the Sock Group decreased $1.3 million to $41.8 million in 2002 from $43.1 million in 2001. The launches of AURO, a GOLD TOE brand; ALL PRO, a GOLD TOE brand; and continued placement of GOLD TOE GEAR and IZOD were offset by declines in Gold Toe sales and planned exits of certain businesses. General retail softness in the department store, national chain and off-price channels resulted in volume declines in the Gold Toe brand business. During the fourth quarter 2001 and first quarter 2002, the Sock Group re-evaluated their private label programs and decided to exit businesses that did not meet minimum criteria or provide a strategic fit to their branded businesses. The Licensing Group's net sales decreased $300,000 to $3.3 million in 2002 from $3.6 million in 2001 primarily due to reduced revenue from the domestic loungewear/underwear licensee. The U.S. Retail division's net sales increased $282,000 due to the opening of five new stores, which began in March 2001. Gross profit: For the thirteen weeks ended September 28, 2002, gross profit decreased $1.4 million to $13.9 million compared to the 2001 quarter. The decline was driven by the Sock Group's decrease of $1.3 million and the Licensing Group's decrease of $300,000 offset by an increase in the U.S. Retail division of $140,000. 6 Cluett American Corp. and Subsidiaries As discussed in net sales above, the Sock Group launched new brands, AURO and ALL PRO, which generated increased gross profit for the third quarter 2002; however, this improvement is offset by the cost associated with the decision to exit certain non-performing businesses. Additionally, in October 2001, the Sock Group announced restructuring plans to optimize plant capacity and maximize supply chain opportunities. The Company is phasing-out production at its Bally, Pennsylvania facility and is relocating its knitting and finishing operations to other company-owned or contract facilities. The Sock Group incurred plant manufacturing inefficiencies in conjunction with this restructuring plan. The decrease in the Licensing Group's revenue of $300,000 had no associated cost of sales. The opening of new stores drove the increase in the U.S. Retail division's gross profit. Operating income from continuing operations: For the thirteen weeks ended September 28, 2002, operating income from continuing operations declined $2.9 million to $3.9 million compared to $6.8 million for the thirteen weeks ended September 29, 2001, due to the factors discussed above and an increase in Selling, General and Administrative Expenses ("SG&A") of $1.5 million. For the Sock Group, SG&A increased $1.5 million over the same period last year, driven by advertising and sales promotion, expenses incurred with the increased capacity at the leased distribution facility, and the write-off of the remaining Kmart pre-petition receivable. The Licensing Group's SG&A expenses remained flat quarter over quarter. The U.S. Retail division's SG&A expenses increased $100,000 due to the opening of new stores and corporate overhead expenses declined $100,000 due to $600,000 lower income from the defined benefit pension plan offset by the $700,000 gain realized on the sale of the discontinued Shirt manufacturing facility in Canada. Interest expense, net: Interest expense decreased $800,000 for the third quarter compared to the same quarter last year, due to lower prevailing interest rates. Equity earnings in investments in joint ventures: For the thirteen weeks ended September 28, 2002, equity earnings in investments in joint ventures increased $36,000 driven by the joint venture agreement as discussed in Note 2 - Joint Venture. Extraordinary gain, net of taxes: Extraordinary gain, net of taxes decreased to $98,000 due to the Sock Group's equity investment in the joint venture and related to an adjustment to negative goodwill recorded in the first quarter of 2002 as discussed in Note 2 - Joint Venture. Income (loss) from continuing operations: Income from continuing operations decreased $1.9 million to a loss of $1.4 million for the thirteen weeks ended September 28, 2002, compared to income of $539,000 in the thirteen weeks ended September 29, 2001, due to the factors discussed above. 7 Cluett American Corp. and Subsidiaries Results of Operations: Thirty-nine weeks ended September 28, 2002 vs. September 29, 2001 The following table sets forth, for the periods indicated, statement of operations data for the Company's continuing operations including the Sock Group, the Licensing Group and all other (Latin America, Apparel On-Line LLC, Cluett American Receivables LLC, U.S. Retail division and corporate overhead charges) and excludes the Company's discontinued Shirt Group operation. Thirty-nine weeks ended September 28, September 29, 2002 2001 --------------------------- (Dollars In Thousands) Net sales $ 131,290 $135,941 Gross profit 43,518 47,998 Operating income from continuing operations 13,230 21,501 Interest expense, net 15,329 17,732 Equity earnings in investments in joint ventures 466 -- Income taxes 629 1,109 Extraordinary gain, net of taxes 1,742 -- Income (loss) from continuing operations $ (520) $ 2,660 Net sales: For the thirty-nine weeks ended September 28, 2002, net sales decreased $4.6 million to $131.3 million compared to $135.9 million for the thirty-nine weeks ended September 29, 2001. Net sales of the Sock Group declined $5.2 million while the Licensing Group's decreased $100,000 and the U.S. Retail division's increased $954,000. Net sales in the Sock Group decreased $5.2 million to $119.4 million in 2002 from $124.6 million in 2001. An increase in Gold Toe Men's volume and the launches of AURO, a GOLD TOE brand; ALL PRO, a GOLD TOE brand; and continued placement of GOLD TOE GEAR and IZOD were offset by declines in Gold Toe Women's and Children's business and planned exits of certain businesses. A weak economy and retail price pressure arising from competitors "buy market share" strategy led to year over year declines in the Gold Toe Women's wholesale business. Nevertheless, retail performance was strong with Gold Toe Women's regaining market share during the same period. Declines in Gold Toe Children's were due to discontinuing tights and infants programs at certain retailers. During the fourth quarter 2001 and first quarter 2002, the Sock Group re-evaluated their private label programs and decided to exit businesses that did not meet minimum criteria or provide a strategic fit to their branded businesses. For example, following Kmart's bankruptcy filing and concerns over the need for significant future investment in this relationship, the Sock Group decided to de-emphasize and later discontinue this current business relationship. The Licensing Group's net sales decreased $100,000 to $9.8 million in 2002 from $9.9 million in 2001 primarily due to reduced revenue from the domestic loungewear/underwear licensee. The U.S. Retail division's net sales increased $954,000 due to the opening of five new stores, which began in March 2001. Gross profit: For the thirty-nine weeks ended September 28, 2002, gross profit decreased $4.5 million to $43.5 million compared to $48.0 million in 2001. The decline was driven by the Sock Group's decrease of $4.9 million, the Licensing Group's decrease of $100,000 and an increase in the U.S. Retail division of $400,000. The Sock Group's gross profit decrease of $4.9 million was driven by one-time start-up costs associated with the launches of new businesses, the planned exit of private label programs, higher allowances, and plant inefficiencies associated with the manufacturing restructuring plan. The launches of AURO, a GOLD TOE brand; ALL PRO, a GOLD TOE brand; and continued placement of GOLD TOE GEAR and IZOD generated year over year gross profit; however, not without incurring start-up cost. 8 Cluett American Corp. and Subsidiaries As discussed in net sales above, the Sock Group decided to exit certain non-performing businesses, and during 2002 implemented aggressive inventory liquidation plans based on those decisions. Costs associated with the exit of these businesses, including markdown allowances, repackaging and obsolescence were $5.3 million. Competition within the women's area of the department store channel continued to intensify and competitors became increasingly aggressive on discount pricing and retailer incentives in efforts to acquire market share. In response to increased competition, Gold Toe Women's implemented new marketing programs and since the fourth quarter 2001 has regained market share; however, not without incurring additional costs. Retailer allowances in Gold Toe Women's exceeded those in the prior year and were the primary driver of the Sock Group's increase in allowances in the branded lines of business. In October 2001, the Sock Group announced restructuring plans to optimize plant capacity and maximize supply chain opportunities. The Company is phasing-out production at its Bally, Pennsylvania facility and is relocating its knitting and finishing operations to other company-owned or contract facilities. During 2002, the Sock Group incurred approximately $1.5 million of plant inefficiencies associated with this manufacturing restructuring plan. The decrease in the Licensing Group's revenue of $100,000 had no associated cost of sales. The opening of new stores drove the increase in the U.S. Retail division's gross profit. Operating income from continuing operations: The Company's operating income from continuing operations decreased $8.3 million to $13.2 million in 2002 from $21.5 million in 2001 due to the factors discussed above and an increase in Selling, General and Administrative Expenses ("SG&A") of $3.8 million. SG&A increased $2.5 million in the Sock Group, $450,000 in the Licensing Group, $400,000 in corporate overhead and $480,000 in the U.S. Retail division. For the Sock Group, increases in SG&A were driven by advertising and sales promotion, higher royalties related to the launch of a new line of business and a renewed licensing contract, expenses incurred with the increased capacity at the leased distribution facility, bad debt expense related to Kmart, professional fees associated with the acquisition of the joint venture and consulting fees related to product line and SKU evaluation. The Licensing Group's increase in SG&A was driven by market research and legal fees associated with additional trademark applications. The increase in corporate overhead was driven by $1.5 million lower income from the defined benefit pension plan offset by the $700,000 gain realized on the sale of the discontinued Shirt manufacturing facility in Canada. The U.S. Retail division's increase in SG&A was due to the opening of new stores. Interest expense, net: Interest expense decreased $2.4 million compared to the same period last year, due to lower prevailing interest rates. Equity earnings in investments in joint ventures: For the thirty-nine weeks ended September 28, 2002, equity earnings in investments in joint ventures increased $466,000 driven by the joint venture agreement as discussed in Note 2 - Joint Venture. Extraordinary gain, net of taxes: Extraordinary gain, net of taxes increased to $1.7 million due to the Sock Group's equity investment in the joint venture related to negative goodwill in the first quarter of 2002 as discussed in Note 2 - Joint Venture. Income (loss) from continuing operations: Income from continuing operations decreased $3.2 million, due to the factors discussed above. 9 Cluett American Corp. and Subsidiaries Liquidity and Capital Resources The Company broadly defines liquidity as its ability to generate sufficient cash flow from operating activities to meet its obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and, to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long range business objectives and meeting debt service commitments. The Company's liquidity needs arise primarily from debt service and the funding of working capital and capital expenditures. As of September 28, 2002, the Company had outstanding $235.4 million of debt consisting of $125.0 million in Senior Subordinated Notes (including the Parity Notes), a Senior Credit Facility consisting of a $18.2 million term loan ("Term A"), a $43.1 million term loan ("Term B"), a $17.5 million Tranche C loan, and $31.6 million in revolving credit facility borrowings. During the thirty-nine weeks ended September 28, 2002, the Company had an increase in revolving credit facility borrowings of $4.9 million and repaid $3.5 million in term loans and notes payable. Net availability under the revolver at September 28, 2002, was $17.2 million in addition to cash and cash equivalents of $1.1 million. Refer to Note 1 - Basis of Presentation and Financing Sources and Cash Flows for further information regarding the Company's Liquidity and Capital Resources. Debt Service Principal and interest payments under the Company's debt agreements represent significant liquidity requirements for the Company. Aggregate principal payments on the Company's indebtedness have been classified as current liabilities. The Company's senior subordinated notes mature in 2008 and require semi-annual interest payments at an annual rate of 10 1/8%. The Term A and B loans mature in 2004 and 2005, respectively, and require quarterly principal payments and quarterly interest payments at floating rates based upon the interest rate option elected by the Company. The revolving credit facility expires at May 2004, and requires quarterly or monthly interest payments, based on maturity date, at floating rates based upon the interest rate option elected by the Company. Borrowings under Tranche C loan mature on May 18, 2004, and are guaranteed by Vestar Capital Partners III, L.P. ("Vestar"). Cash paid for interest for the quarter ending September 28, 2002, was $809,000. Interest expense for 2002 is expected to be $19.5 million, including $1.9 million of non-cash amortization of deferred debt issuance costs. Covenant Restrictions The Senior Credit Facility contains a number of covenants that, among other things, restricts the ability of the Company and its subsidiaries, other than pursuant to specified exceptions, to dispose of assets, incur additional indebtedness, incur guarantee obligations, repay other indebtedness, pay dividends, create liens on assets, enter into leases, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, make capital expenditures, enter into sale and leaseback transactions, change the nature of their business or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. In addition, under the Senior Credit Facility the Company is required to comply with specified financial ratios and tests, including minimum fixed charge coverage and interest coverage ratios and maximum leverage ratios, including a senior leverage ratio and a total leverage ratio and a minimum EBITDA test, each of which is tested as of the last day of each fiscal quarter of the Company and its subsidiaries. The amendments in May 1998, December 1998, March 1999, September 1999, March 2000, June 2000, March 2001, April 2002 and November 2002 revised the original covenants. 10 Cluett American Corp. and Subsidiaries As discussed in Note 1 - Basis of Presentation, of the unaudited consolidated financial statements, the Company was not in compliance with certain financial covenants of its Senior Credit Facility as of September 28, 2002. On November 13, 2002, the Company obtained waivers of certain financial covenants under the facility for the periods ended September 28, 2002 and December 31, 2002, and the facility was amended to adjust certain financial ratios and tests, interest periods, limitations on asset sales and increase the applicable interest rates on the facility. The amendment also limits outstanding Senior Funded Indebtedness to $48.0 million on March 31, 2003. Senior Funded Indebtedness means, as of any date, all Funded Indebtedness (net of cash and cash equivalents) of the Company on a consolidated basis on such date, excluding (i) Subordinated Indebtedness and (ii) the Tranche C Obligations. Outstanding Senior Funded Indebtedness was $93.1 million as of September 28, 2002. These conditions have required the Company to include a "going concern" qualification in the consolidated financial statements and footnotes of the Company, for the thirty-nine week period ended September 28, 2002. In order to remain in compliance with the financial covenants included in the Company's Senior Credit Facility after December 31, 2002 and have adequate liquidity over the next twelve months, the Company intends to seek to reduce its indebtedness under its Senior Credit Facility by March 31, 2003. This includes exploring alternative financing and the sale of certain idle and non-core assets of the Company. There can be no assurances as to the success or timing of such sales or the proceeds that the Company could realize therefrom. Cash Flows Cash and cash equivalents decreased $200,000 to $1.1 million at September 28, 2002, from $1.3 million at December 31, 2001, primarily as a result of $3.6 million, $1.2 million and $616,000 provided by operating activities, discontinued operations and financing activities, respectively, offset by $5.6 million use in investing activities. Net cash provided by operating activities resulted from the Company's $520,000 loss offset by $3.8 million in non-cash depreciation, amortization, equity earnings and extraordinary gain of equity investee plus a $713,000 gain on the sale of property and an increase in operating assets and liabilities of $943,000. The $1.2 million provided by discontinued operations was the result of selling the discontinued Shirt manufacturing facility in Canada. Net cash provided by financing activities resulted from net borrowings under the Company's line of credit agreement of $4.9 million offset by payments on long-term debt of $3.5 million and deferred financing fees for the nine month period of $804,000. Net cash used in investing activites is a result of $3.0 million capital expenditures and $2.6 million investment in the joint venture discussed in Note 2 - Joint Venture. The Company had EBITDA As Defined from continuing operations of $18.4 million, of which $1.4 million was non-cash pension income, earnings of equity investees and gain on disposal of assets; $9.3 million was paid for cash interest expense (net of interest income from overnight investments); $2.6 million was used to fund the joint venture; $3.0 million was invested in capital expenditures; $2.2 million was used by working capital, including accounts receivable, prepaid expenses, inventory and accounts payable; $200,000 was used to pay discontinued operations and restructuring expenditures; $500,000 was paid for taxes and net financing activities provided $600,000. EBITDA, as defined ("EBITDA As Defined") is defined as operating income before depreciation and amortization, interest expense, taxes and restructuring and impairment charges plus equity earnings in investments in joint ventures. EBITDA As Defined should not be considered in isolation or as a substitute for net income, certain cash flows from operating activities and other income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States of America or as a measure of profitability or liquidity. EBITDA As Defined is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Capital Expenditures Capital spending for the thirty-nine week period ended September 28, 2002, was $3.0 million and related primarily to general improvements to the Sock Group's leased distribution center and upgrades to the Sock Group's AS400 operating systems in order to provide additional data processing capacity. Total capital spending for 2002 is expected to be in the $4.0 million range and relates primarily to the items described above. 11 Cluett American Corp. and Subsidiaries Financing Sources and Cash Flows At September 28, 2002, the Company had $1.1 million in cash and additional availability of $17.2 million under the revolving credit facilities included in the Senior Credit facility, after consideration of $1.0 million of stand-by letters of credit and $164,000 of trade letters of credit. Historically, the Company's cash on hand, together with cash flow generated from operations and its ongoing efforts to optimize the Company's asset base, short-term borrowings for seasonal working capital, and permitted borrowings under the senior credit facility have been sufficient to enable the Company to satisfy cash requirements for operating, investing and financing activities, including debt service. As discussed in Note 1 - Basis of Presentation, of the unaudited consolidated financial statements, the Company was not in compliance with certain financial covenants of its Senior Credit Facility as of September 28, 2002. On November 13, 2002, the Company obtained waivers of certain financial covenants under the facility for the periods ended September 28, 2002 and December 31, 2002, and the facility was amended to adjust certain financial ratios and tests, interest periods, limitations on asset sales and increase the applicable interest rates on the facility. The amendment also limits outstanding Senior Funded Indebtedness to $48.0 million on March 31, 2003. Senior Funded Indebtedness means, as of any date, all Funded Indebtedness (net of cash and cash equivalents) of the Company on a consolidated basis on such date, excluding (i) Subordinated Indebtedness and (ii) the Tranche C Obligations. Outstanding Senior Funded Indebtedness was $93.1 million as of September 28, 2002. These conditions have required the Company to include a "going concern" qualification in the consolidated financial statements and footnotes of the Company, for the thirty-nine week period ended September 28, 2002. In order to remain in compliance with the financial covenants included in the Company's Senior Credit Facility after December 31, 2002 and have adequate liquidity over the next twelve months, the Company intends to seek to reduce its indebtedness under its Senior Credit Facility by March 31, 2003. This includes exploring alternative financing and the sale of certain idle and non-core assets of the Company. There can be no assurances as to the success or timing of such sales or the proceeds that the Company could realize therefrom. On January 7, 2002, the Company entered into a joint venture agreement with Administradora Gaco, S.A. de C.V. and Inversiones Gaco, S.A. de C.V. investing $2.6 million for a 50% share of outstanding capital stock of Inversiones Gaco, S. A. de C. V. The joint venture owns a leading manufacturer and distributor of men's, women's and children's socks in Mexico with the largest Mexican brand, CANNON. By moving labor-intensive finishing operations to a lower cost environment, management believes it will recognize significant annual cost savings. Seasonality The industries in which the Company operates are cyclical. Purchases of apparel tend to decline during recessionary periods and also may decline at other times. A recession in the general economy or uncertainties regarding future economic prospects could affect consumer-spending habits and could have an adverse effect on the Company's results of operations. Weak sales and resulting markdown requests from customers could also have a material adverse effect on the Company's business, results of operations and financial condition. The Company's business is seasonal, with higher sales and income during its third and fourth quarters. The third and fourth quarters coincide with the Company's two peak retail selling seasons: (i) the first season runs from the start of the back-to-school and fall selling seasons, beginning in August and continuing through September; and (ii) the second season runs from the start of the Christmas selling season beginning with the weekend following Thanksgiving and continuing through the week after Christmas. 12 Cluett American Corp. and Subsidiaries Cautionary Statement Regarding Forward-Looking Statements The Quarterly Report on Form 10-Q contains certain statements which describe the Company's beliefs concerning future business conditions and the outlook for the Company based on currently available information. The preceding Management's Discussion and Analysis contains forward-looking statements regarding the Company's performance, liquidity and the adequacy of its capital resources. These forward-looking statements are subject to risks, uncertainties and other factors, which could cause the Company's actual results, performance or achievement to differ materially from those expressed in, or implied by these statements. These risks, uncertainties and other factors include, but are not limited to, the following: (i) the financial strength of the retail industry and the level of consumer spending for apparel, (ii) the Company's ability to develop, market and sell its products, (iii) increased competition from other manufacturers of socks, (iv) general economic conditions, (v) hiring and retaining effective team members, and (vi) sourcing merchandise from domestic and international vendors. Therefore, while management believes that there is a reasonable basis for the forward-looking statements, undue reliance should not be placed on those statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has market risk exposure from changes in interest rates and foreign currency exchange rates. The Company operates under a senior credit facility at variable interest rates, primarily LIBOR and base rates. Interest expense is primarily affected by the general level of U.S. interest rates, LIBOR and base rates. Currently, the Company does not engage in any derivative type instruments in order to hedge against interest rates and foreign currency exchange rate fluctuations. However, the Company feels it is limited in its exposure of foreign currency exchange rate changes as inventory purchase contracts are denominated in U.S. Dollars. The Company evaluated its market risks (floating interest rate, fixed interest rate and currency risks) at the fiscal year ended December 31, 2001, which is disclosed in the Company's annual report filed on Form 10-K. There has not been any material change (adverse or favorable) in the risk factors identified since the evaluation performed by the Company at December 31, 2001. Item 4. Controls and Procedures Based on their evaluation, as of a date within 90 days of the filing of this Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded the Company's disclosure controls and procedures (as defined in the rules of the Securities Exchange Act of 1934) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 13 Cluett American Corp. and Subsidiaries Part II - OTHER INFORMATION Item 1. Legal Proceedings From time to time, the Company is involved in various legal proceedings arising from the ordinary course of its business operations, such as personal injury claims, employment matters and contractual disputes. The Company believes that its potential liability with respect to proceedings currently pending is not material in the aggregate to the Company's consolidated financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the quarter ended September 28, 2002. Item 6. Exhibits and Reports on Form 8-K (a) (1) Financial Statements Included in Part I, Item 1 (2) List of Exhibits (b) No report was filed on Form 8-K during the period ended September 28, 2002. (c) Exhibits: See (a)(3) above for a listing of the exhibits included as part of this report. (d) Financial Statement Schedules: See (a)(1) and (a)(2) above for a listing of the financial statements and schedules submitted as part of this report. EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 2.1 Third Amended plan of Reorganization of Cluett American Corp. and Cluett American Investment Corp. (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 2.2 Subscription Agreement dated as of March 30, 1998 among Bidermann Industries U.S.A., Inc., Vestar Capital Partners III, L.P. and Alvarez & Marsal, Inc. (incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 2.3 Stockholders' Agreement dated as of May 18, 1998 among Cluett American Investment Corp., Vestar Capital Partners III, L.P., A&M Investment Associates #7, LLC, the Co-Investors named therein, the Original Equity Holders named therein and the Management Investors named therein (incorporated by reference to Exhibit 2.3 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 2.4 Joinder Agreement dated as of June 30, 1998 among Cluett American Investment Corp., Vestar Capital Partners III, L.P. and each other signatory thereto (an "Additional Stockholder") (incorporated by reference to Exhibit 2.4 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 3.1 Restated Certificate of Incorporation of Cluett American Corp. (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 14 Cluett American Corp. and Subsidiaries 3.2 Bylaws of Cluett American Corp. (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 4.1 Indenture between Cluett American Corp. and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 4.2 Exchange Debenture Indenture between Cluett American Corp. and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 4.3 Certificate of Designations of the 121/2% Senior Exchangeable Preferred Stock Due 2010 (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 4.4 Form of 10 1/8% Senior Subordinated Notes Due 2008 (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 4.5 Form of 10 1/8% Series B Senior Subordinated Notes Due 2008 (incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 4.6 Form of 12 1/2% Senior Exchangeable Preferred Stock Due 2010 (incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 4.7 Form of 12 1/2% Series B Senior Exchangeable Preferred Stock Due 2010 (incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 4.8 Note Registration Rights Agreement dated May 18, 1998 among Cluett American Corp., NationsBanc Montgomery Securities LLC and NatWest Capital Markets Limited (incorporated by reference to Exhibit 4.8 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 4.9 Preferred Stock Registration Rights Agreement dated May 18, 1998 among Cluett American Corp., NationsBanc Montgomery Securities LLC and NatWest Capital Markets Limited (incorporated by reference to Exhibit 4.9 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 10.1 $160,000,000 Credit Agreement dated as of May 18, 1998 among Cluett American Corp., as the Borrower, NationsBank, N.A., as Administrative Agent and Collateral Agent, NationsBanc Montgomery Securities LLC, as Arranger and Syndication Agent, and lenders (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 10.2 First Amendment to the Credit Agreement and Assignment dated May 27, 1998 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lenders, New Lenders, and agents (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 10.2.1 Second Amendment to the Credit Agreement and Assignment dated as December 18, 1998 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lenders, New Lenders, and agents (incorporated by reference to Exhibit 10.2.1 to the Company's Annual Report on Form 10-K (Reg. No. 333-58059) filed on March 29, 1999). 15 Cluett American Corp. and Subsidiaries 10.2.2 Third Amendment to the Credit Agreement and Assignment dated as of March 19, 1999 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lenders, New Lenders, and agents (incorporated by reference to Exhibit 10.2.2 to the Company's Annual Report on Form 10-K (Reg. No. 333-58059) filed on March 29, 1999). 10.2.3 Waiver to the Credit Agreement and Assignment dated July 28, 1999 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lenders, New Lenders, and agents (incorporated by reference to Exhibit 10.2.3 to the Company's Annual Report on Form 10-K (Reg No. 333-58059) filed on March 29, 1999). 10.2.4 Fourth Amendment to the Credit Agreement and Assignment dated September 30, 1999 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lender, New Lender, and agents (incorporated by reference to Exhibit 10.2.4 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on November 16, 1999). 10.2.5 Investment and Deposit Agreement between Vestar Capital Partners and Bank of America dated September 30, 1999 (incorporated by reference to Exhibit 10.2.5 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on November 16, 1999). 10.2.6 $3.0 million Credit Agreement dated as of November 9, 1999 among Cluett American Corp, as the borrower, Bank of America, N.A. and Vestar Capital Partners III, L.P., as guarantor (incorporated by reference to Exhibit 10.2.6 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on November 16, 1999). 10.2.7 $7.5 million Amended and Restated Credit Agreement dated as of February 17, 2000, among Cluett American Corp, as the borrower, Bank of America, N.A. and Vestar Capital Partners III, L.P., as guarantor (incorporated by reference to Exhibit 10.2.7 to the Company's Annual Report on Form 10-K (Reg No. 333-58059) filed on March 30, 2000). 10.2.8 Fifth Amendment to Credit Agreement and Waiver dated March 29, 2000 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lender, New Lender, and agents (incorporated by reference to Exhibit 10.2.8 to the Company's Annual Report on Form 10-K (Reg No. 333-58059) filed on March 30, 2000). 10.2.9 Amended and Restated Investment and Deposit Agreement between Vestar Capital Partners III, L.P. and Bank of America dated March 29, 2000 (incorporated by reference to Exhibit 10.2.8 to the Company's Annual Report on Form 10-K (Reg No. 333-58059) filed on March 30, 2000). 10.2.9.1 Sixth Amendment to Credit Agreement and Waiver dated June 30, 2000 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lender, New Lender, and agent (incorporated by reference to Exhibit 10.2.9.1 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on August 14, 2000). 10.2.9.2 Seventh Amendment to Credit Agreement and Waiver dated March 22, 2001 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lender, Agents and Documentation Agents (incorporated by reference to Exhibit 10.2.9.2 to the Company's Annual Report on Form 10-K (Reg No. 333-58059) filed on March 29, 2001). 10.2.9.3 Eighth Amendment to Credit Agreement and Waiver dated April 12, 2002 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lender, Agents and Documentation Agents (incorporated by reference to Exhibit 10.2.9.3 to the Company's Annual Report on Form 10-K (Reg No. 333-58059) filed on April 16, 2002). 16 Cluett American Corp. and Subsidiaries 10.2.9.4 Ninth Amendment to Credit Agreement and Waiver dated November 13, 2002 by and among Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain subsidiaries, the Existing Lender, Agents and Documentation Agents (incorporated by reference to Exhibit 10.2.9.4 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on November 26, 2002). 10.3 Security Agreement dated as of May 18, 1998 made by Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain Subsidiaries of Cluett American Investment Corp. in favor of NationsBank, N.A. as agent (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 10.4 Pledge Agreement dated as of May 18, 1998 made by Cluett American Corp., Cluett American Investment Corp., Cluett American Group, Inc. and certain Subsidiaries of Cluett American Investment Corp. in favor of NationsBank, N.A., as agent (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 10.5 Joinder Agreement dated as of May 18, 1998 by and between Bidermann Tailored Clothing, Inc., and NationsBank, N.A., in its capacity as Agent under that certain Credit Agreement dated as of May 18, 1998 (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4/A (Reg. No. 333-58059) filed on September 3, 1998). 10.6 CDN $15,000,000 Loan Agreement dated as of August 8, 1997 between Cluett, Peabody Canada Inc., as the Borrower, and Congress Financial Corporation (Canada), as Lender (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). +10.7 Employment Agreement dated March 7, 1997 by and between Great American Knitting Mills, Inc. and James A. Williams (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-4/A (Reg. No. 333-58059) filed on September 3, 1998). +10.8 Severance Agreement dated as of August 8, 1997 by and between Cluett, Peabody & Co., Inc. and Phil Molinari (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-4/A (Reg. No. 333-58059) filed on September 3, 1998). +10.9 Severance Agreement dated as of May 5, 1997 by and between Great American Knitting Mills, Inc. and William Sheely (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-4/A (Reg. No. 333-58059) filed on September 3, 1998). +10.10 Severance Agreement dated as of May 5, 1997 by and between Great American Knitting Mills, Inc. and Kathy Wilson (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-4/A (Reg. No. 333-58059) filed on September 3, 1998). +10.11 Advisory Agreement dated May 18, 1998 among Cluett American Investment Corp., Cluett American Corp. and Vestar Capital Partners (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-4/A (Reg. No. 333-58059) filed on September 3, 1998). 10.12 Secured Promissory Note dated May 18, 1998 made by A&M Investment Associates #7, LLC in favor of Cluett American Investment Corp. (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-4/A (Reg. No. 333-58059) filed on September 3, 1998). 10.13 Form of Secured Promissory Note made by the Management Investors in favor of Cluett American Investment Corp. (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-4/A (Reg. No. 333-58059) filed on September 3, 1998). +10.14 Severance Agreement dated as of August 8, 1997 by and between Cluett, Peabody & Co., Inc. and Robert Riesbeck (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-4/A (Reg. No. 333-58059) filed on October 15, 1998). 17 Cluett American Corp. and Subsidiaries 10.16 Limited Liability Company Agreement of Cluett American Receivables, LLC, entered into by Great American Knitting Mills, Inc. as the sole equity member and Dwight Jenkins and Lori Rezza as the special members (incorporate by reference to Exhibit 10.16 to the Company's Quarterly Report of Form 10-Q (Reg No. 333-58059) filed on May 16, 2000). 10.16.1 Receivable Transfer Agreement dated May 12, 2000 between Great American Knitting Mills, Inc. and Cluett American Receivables, LLC (incorporate by reference to Exhibit 10.16.1 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on May 16, 2000). 10.16.2 Receivable Purchase Agreement entered into between Cluett American Receivable, LLC and Banc of America Commercial Corp. dated May 12, 2000 (incorporate by reference to Exhibit 10.16.2 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on May 16, 2000). 10.16.3 Partial Release Agreement dated May 12, 2000, by and among Bank of America, N.A. f/k/a/ Nationsbank, N.A. as agent for the Lenders under the Credit Agreement, Great American Knitting Mills, Inc. and Cluett American Corp. (incorporate by reference to Exhibit 10.16.3 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on May 16, 2000). 10.16.4 Guarantee Agreement dated May 12, 2000 made by Cluett American Corp. (incorporate by reference to Exhibit 10.16.4 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on May 16, 2000). 10.16.5 Repurchase Agreement dated May 12, 2000 made by Vestar Capital Partners III, L.P. in favor of Banc of America Commercial Corporation (incorporate by reference to Exhibit 10.16.5 to the Company's Quarterly Report on Form 10-Q (Reg No. 333-58059) filed on May 16, 2000). 16.1 Letter from Ernst & Young LLP, former Certifying Accountants (incorporated by reference to Exhibit 16.1 to the Company's Current Report filed on Form 8-K (Reg. No. 333-58059) filed on January 10, 2000). 21 List of Subsidiaries (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 24 Powers of Attorney (included on pages II-5--II-11) (incorporated by reference to Exhibit 24 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 99.1 Form of Note Letter of Transmittal (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 99.2 Form of Preferred Stock Letter of Transmittal (incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 99.3 Form of Note Notice of Guaranteed Delivery (incorporated by reference to Exhibit 99.3 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). 99.4 Form of Preferred Stock Notice of Guaranteed Delivery (incorporated by reference to Exhibit 99.4 to the Company's Registration Statement on Form S-4 (Reg. No. 333-58059) filed on June 30, 1998). + This is a management contract or compensatory plan or arrangement 18 Cluett American Corp. and Subsidiaries SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CLUETT AMERICAN CORP. (Registrant) By: /s/ Bryan P. Marsal Date: November 26, 2002 -------------------------------------------- Name: Bryan P. Marsal Director and Chief Executive Officer By: /s/ Kathy D. Wilson Date: November 26, 2002 -------------------------------------------- Kathy D. Wilson Vice President and Chief Financial and Accounting Officer EXHIBIT INDEX 10.2.9.4 Ninth Amendment to Credit Agreement and Waiver dated November 13, 2002 19 Cluett American Corp. and Subsidiaries CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Bryan P. Marsal, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cluett American Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Bases on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluate the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Bryan Marsal ------------------------------------ Bryan P. Marsal Director and Chief Executive Officer November 26, 2002 20 Cluett American Corp. and Subsidiaries CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kathy D. Wilson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cluett American Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Bases on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluate the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/Kathy D. Wilson --------------------------------------------------------- Kathy D. Wilson Vice President and Chief Financial and Accounting Officer November 26, 2002 21

CLUETT AMERICAN CORP 10-Q