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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to_______
Commission file number 0-23214
SAMSONITE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3511556
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
11200 East 45th Avenue
Denver, Colorado 80239
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 373-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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 the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. _____
As of April 21, 1998, the registrant had outstanding 20,420,902 shares of
Common Stock, par value $.01 per share. The aggregate market value of such
Common Stock held by non-affiliates of the registrant, based upon the closing
sales price of the Common Stock on April 21, 1998, as reported on the Nasdaq
National Market was approximately $382.8 million. Shares of Common Stock held by
each officer and director and by each person who owns 5 percent or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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_____
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INDEX
Page
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PART I
Item 1. Business............................................................. 3
Item 2. Properties........................................................... 11
Item 3. Legal Proceedings.................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data.............................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 29
Item 8. Financial Statements and Supplementary Data.......................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................. 29
PART III
Item 10. Directors and Executive Officers of the Registrant................... 30
Item 11. Executive Compensation............................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 30
Item 13. Certain Relationships and Related Transactions....................... 30
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K...... 31
Signatures......................................................................... 32
Index to Consolidated Financial Statements and Schedule............................ F-1
Exhibit Index...................................................................... E-1
-2-
PART I
ITEM 1. BUSINESS
GENERAL
Samsonite Corporation (the "Company") is one of the world's largest
manufacturers and distributors of luggage. The Company markets its products
primarily under the Samsonite(R), American Tourister(R) and Lark(R) brand names.
The Samsonite brand enjoys worldwide recognition and is the leading brand of
luggage products in the United States and Europe. American Tourister is the
second most recognized brand of luggage in the United States. American Tourister
products are also sold in Europe. The Lark brand is well-recognized in the
United States and competes in the premium segment of the luggage market.
Samsonite and American Tourister luggage products have been manufactured and
sold continuously since the 1930's.
The Company's fiscal year ends on January 31 and references to a fiscal year
denote the calendar year in which the fiscal year ended; for example, "fiscal
1998" refers to the 12 months ended January 31, 1998.
With sales of $736.9 million for fiscal 1998, the Company is a major factor in
the worldwide luggage market. Competition in the luggage market is highly
fragmented with the vast majority of individual competitors having less than 10%
of the Company's annual luggage sales. Samsonite offers the broadest range of
products in the luggage industry, including hardside suitcases, softside
suitcases, garment bags, casual bags, hardside and softside business cases and
other travel bags. Many of today's most successful luggage products and
features-such as suitcases on wheels; suitcases with a built-in luggage cart;
full-featured, structured garment bags; ultra-light, softside suitcases; and
recently, innovative new wheel systems-were introduced or popularized by
Samsonite.
The Company's products are sourced through a global network consisting of 14
Company-operated manufacturing facilities and various third-party suppliers
throughout the world. By operating its own facilities to produce hardside
luggage and more complex softside products, the Company is better able to
control manufacturing quality and achieve shorter product introduction lead
times and lower delivery costs. In addition, the Company takes advantage of its
global sourcing capabilities by buying basic products from various countries
when their product costs or exchange rates are particularly favorable. The
Company produces substantially all of its hardside products in Company-operated
plants in the United States, Belgium and France. Approximately two-thirds of the
Company's softside products are sourced from qualified vendors located
principally in the Far East, Eastern Europe and the Dominican Republic, with the
balance produced by the Company in the United States, Belgium, Italy, Mexico,
Spain, Hungary, and the Slovak Republic.
The Company's marketing and distribution strategy focuses on the broad middle
segment of the luggage market. In the United States, the Samsonite brand has
historically been positioned as high quality, innovative luggage, targeted at
frequent business travelers; the American Tourister brand has been positioned as
quality luggage at an affordable price; and the Lark brand has been positioned
as premium luggage targeted at first and business class travelers. In Europe,
the Samsonite brand enjoys more of a premium image than in the United States,
and is targeted at first class and frequent business travelers. The Company's
marketing theme centers around the Samsonite "Worldproof(TM)" brand image which
represents strength, durability, quality, and style.
The Company's products are sold throughout the world in more than 100
countries through approximately 23,000 retail outlets, including department and
specialty stores, catalog showrooms, mass merchant retailers, warehouse clubs
and Company-owned retail stores located primarily in factory outlet malls. In
addition, Samsonite licenses its trademarks for use on non-luggage products such
as travel accessories, personal leather goods, handbags and furniture. These
products are made and sold primarily by independent licensees which pay
royalties to Samsonite.
-3-
RECENT EVENTS
On January 7, 1998, the Company announced it had engaged Goldman, Sachs & Co.
as financial advisor to assist in the process of exploring various strategic
alternatives designed to enhance shareholder value. On March 20, 1998, the
Board of Directors approved a recapitalization plan (the "Recapitalization"),
pursuant to which the Company planned to pay a special cash dividend to
stockholders of $12.50 per share. Consummation of the Recapitalization and
payment of the $12.50 dividend per share was subject to a number of conditions,
including the closing of a new bank credit facility, the successful retirement
of the Company's outstanding 11 1/8% Series B Subordinated Notes (which were
substantially retired on April 24, 1998 as discussed below), and declaration of
the dividend by the Company's Board of Directors.
The Company also previously announced that it was engaged in discussions with
third parties concerning a possible transaction whereby approximately 50% of the
Company's equity would be acquired by a third party and shareholders would
receive cash payments in the range of $30.00 per share and retain a significant
equity interest in the Company. The Board is continuing to explore alternatives
to the $12.50 per share dividend Recapitalization (including transactions not
involving a controlling equity investment by a third party) which would permit
the Company to make cash payments to shareholders significantly greater than
$12.50, but significantly less than the $30.00 range previously discussed. No
assurances can be given, however, that any such transaction, including the
Recapitalization, will be consummated. The Company currently expects to reach a
decision by the end of May, 1998 as to which transaction, if any, will be
pursued. Any such transaction if pursued will be subject to satisfaction of
various conditions, including receipt of necessary financing.
The Company completed a tender offer on April 23, 1998 for $52.3 million out
of the $52.8 million outstanding principal amount of its 11 1/8% Series B
Subordinated Notes at a price of $115.35 per $100 of principal. The Company's
existing Senior Credit Facility was amended to allow for financing the
retirement of the Series B Notes from borrowings under the Senior Credit
Facility. The Company will incur a pre-tax charge to earnings of approximately
$10 million during the first quarter of fiscal 1999 for the premium paid to
repurchase the Series B Notes and other charges related to the tender offer.
On March 23, 1998, the Company announced a restructuring of its Torhout,
Belgium manufacturing operations. The Company will record a charge of
approximately $2.6 million pre-tax during the first quarter of fiscal 1999 in
connection with the restructuring. The restructuring provision is primarily
related to termination and severance costs for the elimination of approximately
111 positions.
THE LUGGAGE MARKET
The worldwide luggage market covers a wide range of products, values and price
points. At the highest end of the market are luxury products (such as Louis
Vuitton and Gucci) that have prestige identities, high prices, and tightly
confined distribution. Beneath the luxury segment is the broad middle band of
the luggage market in which products are differentiated by features, brand name
and price. Within this band, unit sales volumes are largest at the middle and
lower prices. Product differentiation decreases and breadth of distribution
increases with decreasing price levels.
At the low end of the luggage market, unbranded products with few, if any,
differentiating features are sold in significant volumes and at low margins,
competing primarily on the basis of price.
In the United States, luggage is sold to consumers through (i) traditional
retail distribution channels, including department and specialty luggage stores
and national retail chains; (ii) catalog showrooms; and (iii) discount retail
distribution channels, including mass merchants, warehouse clubs and Company-
owned retail stores.
In Europe, luggage is sold to consumers primarily through traditional
distribution channels, primarily department and specialty luggage stores. In
the European discount channels, the Company is distributing several new product
lines, including its American Tourister brand. Samsonite operates one Company-
owned store in Northern Europe, one in Italy and one in Spain. The Company also
has two factory outlet stores, one in Italy and one in Spain. In addition,
Samsonite products are sold through a group of ten exclusive franchise stores in
Italy.
-4-
PRODUCTS
The Company offers the broadest range of products in the luggage industry,
including hardside suitcases, softside suitcases, garment bags, casual bags,
hardside and softside (including leather) business cases and laptop computer
bags. Hardside suitcases and business cases typically consist of two plastic
shells held together by a hinge and secured closed by locking latches. The
plastic shells are made by injection molding or vacuum forming, some of which
use Samsonite's know-how, proprietary technology and unique designs. Softside
products are normally made of textile and closed by a zipper. They are often
supported by a frame and/or a pull handle and wheel assembly, including
proprietary Samsonite designs. Garment bags are designed to hold garments on
coat hangers, and can be opened while hanging up. Casual bags include duffle
bags and other bags that do not have a frame. Business and attache cases are
constructed of both softside and hardside materials. The following table sets
forth an estimate of the percentage of the Company's fiscal 1998 revenues from
sales of luggage and travel-related products by product type:
Softside suitcases................................. 39%
Hardside suitcases................................. 29
Casual bags (softside)............................. 12
Garment bags (softside)............................ 6
Business cases (hardside and softside)............. 4
Other products (primarily non-luggage)............. 10
---
100%
===
The Company sells a full range of luggage products under each of its
Samsonite, American Tourister and Lark brand names. Although the positioning of
the Company's brands and its target consumers vary somewhat from market to
market, product lines within each brand are designed to appeal to targeted
consumer groups. The following table sets forth, for each of the Company's
principal luggage brands, its market position and targeted consumer.
BRAND NAME MARKET POSITION TARGET CONSUMER
Samsonite(R) Top quality luggage with leading edge features Business/frequent traveler
American Tourister(R) High quality luggage offering value, versatility, Value-conscious traveler
and durability
Lark(R) Premium luggage for upscale consumers with First and business class
luxurious styling traveler
Hardside Luggage. The Company manufactures virtually all of its requirements
for hardside luggage in its own factories. Hardside luggage is sold under the
Samsonite brand globally; in the United States and Europe hardside luggage is
also sold under the American Tourister brand. Hardside products provide greater
protection and security than softside as well as "wrinkle free" packing for
suits and dresses. Both in Europe and in the United States, hardside products
are offered in several lines, each including a variety of sizes and styles to
suit different consumer needs.
In Europe, popular Samsonite-branded hardside lines include the Samsonite
System 4 Deluxe and System 4 Art lines, priced at the higher end of the market
with large cases commanding up to US$550 at retail, the Samsonite Epsilon(R)
lines priced in the upper-middle range, and Samsonite Oyster II and Oyster
products priced at the lower end.
In the United States, Samsonite-branded hardside products include the Road
Warrior(R) 900 Series and the Silhouette(R) 700 Series in the upper range,
Ultralite 3(TM) 550 Series in the upper-middle range, as well as Epsilon(R) 2
400 Series and Oyster(TM) 200 Series products in the middle and lower range
which are comparable to such products in Europe.
-5-
Globally, Samsonite distributes and sells hardside suitcases which include
features to facilitate transport. These include the patented Piggyback(R)
product which incorporates a luggage cart, an extendable handle, and a strap
allowing additional bags to be attached and transported. As a result of
proprietary improvements in molding technology and design, Samsonite is
introducing new lighter weight hardside luggage.
Softside Luggage. The Company sources approximately two-thirds of its
requirements for softside luggage and other bags from numerous independent
suppliers located worldwide, and produces the balance of its requirements in its
own facilities located in several countries. The Company has introduced many
innovative features in its softside products in response to consumer needs for
better interior organization, ease of use, mobility and portability. The
softside products are sold under all of the Company's major brands, Samsonite,
American Tourister, and Lark. Globally, softside products are grouped into
product lines with a variety of matching or complementary suitcases, garment
bags and other bags.
Samsonite has introduced numerous softside products with proprietary features
over the years. Examples include the Ultravalet(R) Garment Bag, with a unique
wrinkle-free folding system, also available on wheels; the EZ Big Wheel(R)
rolling system which allows effortless passage over carpet and rough surfaces;
and the EZ CART(TM) system, whose 4 wheels support all the weight of the case,
combined with a push-handle that provides optimum stability and mobility.
Virtually all wheeled upright cases are provided with hook-on features that
allow transport of accessory pieces such as casual bags, attache cases, or
handbags.
Other Luggage. Samsonite utilizes its global manufacturing and product
sourcing leverage to compete in the high-volume, discount channels of retail
distribution by marketing luggage products under a number of secondary brands
and retailer labels. These hardside and softside luggage products are generally
lower priced than the Company's Samsonite, American Tourister, and Lark
products, and usually provide fewer features. Samsonite's secondary brands
include Magnum(R) and Royal Traveler(R) in Europe, Tauro(R) in Spain, Azzura(R)
and Bogey(R) in Italy, and Legacy(R) in the U.S.
Licensed Products. The Company licenses Samsonite brand names and McGregor(R)
apparel brand names to third parties primarily for the sale of non-luggage
products. Licensees most frequently have outstanding competency in their
product categories, and sell parallel lines of products under their own or other
brands. Currently, licensed products distributed by the Company or by third
party licensees include furniture, travel accessories, photo and audio storage
gear, personal leather goods, ladies handbags, tool organizers, umbrellas,
binoculars, pet carriers, auto accessories, cellular phone cases, back-to-school
bags and other childrens' products. Revenue from royalties for licensing the
use of Company-owned brand names (including apparel brands) totaled
approximately $19.9 million in fiscal 1998.
New Product Design and Development. The Company devotes significant resources
to new product design and development. Most of the Company's products have
either been introduced or substantially redesigned since 1990. The Company uses
market research to identify consumers' luggage needs and develops product
features that address these needs. The Company employs full-time designers and
development engineers, and also has sustained long-term outside design
relations, ensuring a continuous flow of ideas based on material developments
and trends from outside the luggage industry. The Company believes that its
intensive product development and emphasis on innovation are fundamental to its
continued growth and profitability.
DISTRIBUTION
The Company's products are sold in more than 100 countries throughout the
world through approximately 23,000 retail outlets.
North America. The Company sells its Samsonite brand products in North America
primarily through department stores and luggage specialist stores, and through
catalog showrooms and national retailers such as JCPenney and Sears. The
acquisition of American Tourister in 1993 increased the Company's presence in
discount channels such as mass merchants, warehouse clubs and factory outlets,
which are becoming increasingly important in the distribution of luggage. As a
result of the strength of its brand names and its targeted marketing strategy,
the Company is able to distribute one or more full lines of luggage under each
of its principal brand names across different channels of distribution without
selling the same product line
-6-
in more than one channel. In addition, the Company sells luggage products (known
as "exclusive label" products) designed exclusively for each of a number of
department store and specialty retailing customers and bearing special labels
coupled with the Samsonite brand name.
The following table sets forth an estimate of the percentage of the Company's
United States wholesale revenues by distribution channel for fiscal 1998:
Department/specialty stores....................... 55%
Exclusive label................................... 15
Catalog showrooms................................. 11
Mass merchants.................................... 11
Other............................................. 8
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100%
===
The Company has a direct sales force of approximately 75 persons that serves
approximately 10,000 stores in the United States. In coordination with its key
customers, the Company develops exclusive label product lines, coordinates
promotional strategies and establishes merchandise resupply objectives. The
Company employs electronic order gathering and fulfillment systems that enhance
the Company's level of customer service. Combined with automatic electronic
order entry, these systems increase sales by minimizing stockouts at the retail
level, help the retailer reduce inventory holding and purchasing costs, and
increase inventory turnover. Over 60% of Samsonite luggage sales in the United
States are derived from orders received through this electronic system.
As of January 31, 1998, the Company operated 189 retail stores in the United
States. Operating its own retail outlets allows the Company to more efficiently
reduce discontinued and obsolete inventory positions.
Europe. The Company distributes its Samsonite brand products in Europe through
specialty luggage stores and department stores. Samsonite brand products are
generally not distributed through the discount retailers in Europe in order to
preserve the premium image of the Samsonite brand. The Company's American
Tourister brand has been introduced in Europe to help balance the Company's
retail distribution in each of the primary retail channels and is being used to
establish a single pan-European brand name in the discount channel.
The Company services over 11,000 stores in Europe through a direct sales force
and product demonstrators of approximately 120 persons who transmit orders by
computer to a central distribution facility in Belgium. The Company delivers its
products to its European retailing customers through a proprietary distribution
network developed at the Company's European headquarters. Orders received
electronically from the Company's sales force are processed centrally in Belgium
using specialized software created by the Company which deals in the national
currency of each of the Company's customers. The Company's systems are also
capable of handling the anticipated introduction of a common European currency.
Its integration with a centralized shipping facility, electronic order entry,
and preparation of all paperwork necessary for multiple cross-border deliveries
permits delivery of products within five days after an order is placed to
virtually any location in Europe. To complement its business in countries with a
direct sales force, the Company also sells to other European markets through
distributors and agents located in over 20 countries. Such distributors and
agents, as well as those mentioned under "International" below, handle various
non-luggage products in addition to the Company's products. Distribution
agreements generally provide for mutual exclusivity, whereby distributors do not
handle competitors' luggage products, and the Company does not deal with other
distributors or agents in their territory.
International. In markets outside the United States and Western Europe, the
Company primarily sells its products directly, through agents and distributors,
and under license. The Company entered the Japanese market in 1964 through a
licensing arrangement with Ace Luggage Company ("Ace"), Japan's principal
luggage manufacturing company. Samsonite brand products made by Ace are sold
primarily in department stores throughout Japan. Products sold in international
markets are shipped from the United States, Western Europe or Asia depending
upon product type, availability and exchange rate. In some instances, the
Company has entered new markets through third party distributors and has
acquired these third party distributors as markets have matured. The Company
currently has joint ventures in Singapore, South Korea, India, Brazil and China,
and a wholly-
-7-
owned distribution organization in Hong Kong. In India and China, the ventures
operate newly completed manufacturing facilities to support local sales, and
commenced distribution of locally produced Samsonite luggage in mid fiscal 1998.
During fiscal 1998, the Company formed a joint venture with Samsonite's current
distributor in Argentina, to distribute Samsonite products in Brazil and other
major South American markets beginning fiscal 1999.
ADVERTISING
The Company commits substantial resources to aggressive brand advertising
programs that promote the features, durability and quality of the Company's
luggage and travel products under the marketing theme "Samsonite - Worldproof".
The Company is the only luggage maker which regularly advertises on national
television in the United States or in Europe. The Company incurred, under
either direct Company or co-op advertising programs, approximately $52 million
worldwide for television and print advertising and other related expenses in
fiscal 1998 and has incurred in excess of $50 million per year on average during
the last four years. A 1994 market survey conducted by an independent survey
organization engaged by the Company indicated that over 93% and 79% of travelers
surveyed in the United States recognized the Samsonite and American Tourister
brand names, respectively, compared to less than 15% for the next most
recognized luggage brand. This market survey was conducted by asking adults who
made at least one overnight trip during the previous six months to recognize a
brand of luggage when presented with a list of luggage brands. Similar surveys
show that recognition of the Samsonite brand name in most major Western European
countries ranges from 60% to 80%.
Reinforcing the Company's marketing strategy, Samsonite brand advertising
highlights innovative features and benefits of products that meet the needs of
business and frequent travelers. Samsonite advertisements run on television, in
news weeklies and in inflight and business publications during key consumer
purchase periods throughout the year. The Company also helps its retailing
customers coordinate their advertising with the Company's national advertising
campaigns. The Company was the first luggage company both in the U.S. and in
Europe to use television to build brand awareness, and believes its advertising
program is the largest of any luggage maker.
MANUFACTURING AND SOURCING PRODUCTS
The Company's global sourcing network consists of 14 Company-operated
manufacturing facilities and various third-party suppliers located principally
in the Far East, Eastern Europe and the Dominican Republic. By operating its own
facilities to produce hardside luggage and more complex softside products, the
Company is better able to control manufacturing quality and reduce lead times
and delivery costs. The Company's global sourcing network also enables it to
source less complex products from countries with low product costs and favorable
currency exchange rates. Company-operated manufacturing facilities are located
in Belgium, France, Hungary, Italy, the Slovak Republic, Mexico, Spain, India,
China and the United States. In fiscal 1998, approximately 50% of the Company's
sales revenues were from products manufactured at its own facilities.
The Company employs approximately 5,500 people in the manufacture of hardside
and softside luggage.
The Company manufactures virtually all of the hardside luggage products that
it distributes. Major hardside production facilities are located in Denver,
Colorado; Oudenaarde, Belgium; and Nashik, India; with additional hardside
production facilities located in Henin-Beaumont, France; and Ningbo, China.
In fiscal 1998, approximately one-third of the Company's revenues from
softside luggage products were from products manufactured at the Company's own
facilities. The Company sources the remainder of its softside luggage products
primarily from third party vendors in the Far East, Eastern Europe and the
Dominican Republic. The Company believes that the significant volume of its
softside luggage purchases has enabled it to obtain a reliable supply of high
quality, low cost products and prompt order fulfillment. The Company is able to
select different third-party suppliers to take advantage of changes in
manufacturing, payment terms and shipping costs. The Company does not rely on
any single third-party supplier, the loss of which would be material to the
Company.
-8-
In September 1996, Samsonite implemented centralized direction and
coordination of all sourcing of finished products components. The Company's
strategy is to achieve maximum advantage from its purchasing leverage by
aggregating orders from the Company's different locations and by better planning
and timing its requirements and purchases. Manufacturing processes and materials
and component supply arrangements are factored into new product design or
existing product improvements. As a result, products are designed to be
manufactured more efficiently.
The Company maintains a rigorous quality control program for goods
manufactured at its own plants and at third party vendor facilities. Products
are designed to assure durability and strength, and a prototype of each new
product is put through a series of simulation and stress tests. In the Company's
manufacturing facilities and its Asian sourcing office, it uses quality control
inspectors, engineers and lab technicians to perform inspection and laboratory
testing on raw materials, parts and finished goods.
COMPETITION
Competition in the luggage market is highly fragmented with the vast majority
of individual competitors having less than 10% of the Company's annual luggage
sales. In the United States, the Company competes based on brand name, consumer
advertising, product innovation, quality, differentiation, customer service, and
price. Price is more important at the lower end of the luggage market where
fewer differentiating features are offered. Management of the Company believes
that no luggage manufacturer, other than Samsonite, has more than 10% of the
United States luggage market. In Europe, the Company competes based on its
premium image, brand name, product quality, access to established distribution
channels and new product offerings. The Company's principal competition in
softside luggage in both Europe and the United States markets is private label
luggage manufactured in low labor cost countries, primarily in Asia. The
manufacture of softside luggage is labor intensive but not capital intensive, so
that the barriers to entry by additional competitors are relatively low. At the
very low end of the market is luggage characterized by non-differentiation of
features and low margins.
CUSTOMERS
Customers include most major department stores in the United States and Europe
which carry luggage, most specialty stores featuring luggage products, and many
other retailers (mass merchants, discounters and other retailers). Samsonite
also sells directly to consumers through its retail stores in the United States
and Europe. The Company is not dependent on any single customer, and no single
customer accounts for more than 5% of the Company's revenues.
TRADEMARKS AND PATENTS
Trademarks and patents are important to the Company. The Company is the
registered owner of its Samsonite, American Tourister, Lark and other trademarks
and has approximately 2,140 trademark registrations in the United States and
abroad, as of January 31, 1998. The Company also owns approximately 193 United
States patents and approximately 538 patents (patents of inventions, industrial
design registrations, and utility models) in selected foreign countries. In
addition, the Company has approximately 298 patent applications pending
worldwide. The Company pursues a policy of seeking patent protection where
appropriate for inventions embodied in its products. The Company's patents
include EZ CART(TM), Smart Sleeve(TM), Easy Turn(R), Piggyback(R), Ultravalet(R)
and Oyster(TM) luggage. The Company has also patented its CPX technology for
making luggage shells. Although some companies have sought to imitate some of
the Company's patented products, Samsonite has generally been successful in
enforcing its worldwide intellectual property rights.
-9-
EMPLOYEES AND LABOR RELATIONS
At January 31, 1998, the Company had approximately 7,800 employees worldwide,
with approximately 2,400 employees in the United States and approximately 5,400
employees in other countries. In the United States, approximately 770 employees
are unionized under a contract which is renewed every three years and which is
due for renewal on April 9, 1999. The Company employs approximately 2,100
workers in its 5 European manufacturing plants located in Belgium, France,
Spain, Italy and Hungary. Union membership varies from country to country and
is not officially known to the Company; however, it is probable that most of the
workers are affiliated with a union. Most European union contracts have a one-
year duration. The Company believes its employee relations are good.
FORWARD-LOOKING STATEMENTS
Certain statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere herein constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions including foreign currency
fluctuations; industry capacity; changes in customer preferences; demographic
changes; competition; changes in methods of distribution and technology; changes
in political, social and economic conditions and local regulations, particularly
in Europe and Asia; general levels of economic growth in emerging market
countries such as India, China, Brazil, Argentina, and other Asian and South
American countries; the loss of any significant customers; completion of new
product developments within anticipated time frames; changes in interest rates;
and various other factors beyond the Company's control.
-10-
ITEM 2. PROPERTIES
The following table sets forth certain information relating to the Company's
principal properties and facilities. All of the Company's manufacturing plants,
in the opinion of the Company's management, have been adequately maintained and
are in good operating condition. The Company believes that its existing
facilities have sufficient capacity, together with sourcing capacity from third
parties, to handle sales volumes for the foreseeable future. The Company's
headquarters in Denver shares the same location as a manufacturing facility.
Approximate
Owned or Facility Size
Location Leased (thousands of sq. ft.)
-------- -------- ----------------------
Denver, CO................ Owned/Leased 1,290
Tucson, AZ................ Owned/Leased 63
Jacksonville, FL.......... Leased 510
Warren, RI................ Leased 94
Stratford, Canada......... Owned 212
Nogales, Mexico........... Leased 313
Mexico City, Mexico....... Owned 164
Oudenaarde, Belgium....... Owned 649
Ningbo, China............. Owned 100
Nashik, India............. Owned 150
Torhout, Belgium.......... Owned 79
Henin-Beaumont, France.... Owned 98
Szekszard, Hungary........ Owned 81
Tres Cantos, Spain........ Owned 37
Saltrio, Italy............ Leased 74
Singapore................. Leased 14
Hong Kong................. Leased 27
Seoul, South Korea........ Leased 24
Sao Paulo, Brazil......... Leased 15
Samorin, Slovak Republic.. Owned 43
The Company also maintains numerous sales offices, retail outlets and
distribution centers in the United States and abroad.
ITEM 3. LEGAL PROCEEDINGS
The information regarding legal proceedings contained in note 14 to the
Company's consolidated financial statements included elsewhere herein is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-11-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share (the "Common Stock"), is
presently traded on the Nasdaq National Market under the symbol "SAMC". Prior to
the July 14, 1995 merger of Samsonite and Astrum, the Company's common stock was
traded on the Nasdaq National Market under the symbol "ASTI". The table below
sets forth the high and low sale prices for the Common Stock for fiscal years
1997 and 1998 and through April 21, 1998 (as reported on the Nasdaq National
Market). The closing price of the Common Stock on the Nasdaq National Market on
April 21, 1998 was $29.25.
Fiscal 1997 High Low
- ----------- ---- ---
Fiscal quarter ended:
April 30, 1996 19 1/4 9 5/8
July 31, 1996 24 1/2 17 3/8
October 31, 1996 40 3/4 18
January 31, 1997 45 3/4 33 1/2
Fiscal 1998
- -----------
Fiscal quarter ended:
April 30, 1997 50 7/8 37 1/4
July 31, 1997 51 1/4 40 3/4
October 31, 1997 53 1/8 35 7/8
January 31, 1998 46 3/4 25
Fiscal 1999
- -----------
February 1, 1998 through April 21, 1998 37 7/8 27 7/8
As of April 21, 1998, the number of holders of record of the Common Stock was
71.
All holders of shares of Common Stock shall share ratably in any dividends
declared by the Board of Directors of the Company. Any payment of future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's earnings, financial condition,
capital requirements, extent of indebtedness and contractual restrictions with
respect to the payment of dividends. The terms of the Company's indebtedness
currently restrict the ability of the Company to pay dividends on the Common
Stock.
-12-
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial information for the Company presented below
is derived from the Company's audited consolidated financial statements. As
discussed in note 1(b) to the Company's consolidated financial statements
included elsewhere herein and note (a) to the selected historical financial
information presented below, the consolidated financial statements for periods
subsequent to June 30, 1993 are not comparable to prior periods.
The selected historical financial information presented below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and related notes thereto included elsewhere herein.
Predecessor Reorganized
Company (a) Company (a)
----------- --------------------------------------------------------------------------
Combined
Five Seven Twelve
Months Months Months
Ended Ended Ended Year Ended January 31,
June 30, January 31, January 31, ----------------------------------------------
Statement of Operations Data 1993 1994 1994(a) 1995 1996 1997 1998
- ---------------------------- ----------- ------------ ----------- ---------- -------- -------- ---------
(In thousands, except per share amounts)
Net Sales (b) $192,519 331,100 523,619 635,452 675,209 741,138 736,875
Cost of Goods Sold 113,032 196,777 309,809 373,967 414,691 449,333 424,349
-------- ------- ------- ------- ------- ------- -------
Gross Profit 79,487 134,323 213,810 261,485 260,518 291,805 312,526
Selling, General and
Administrative Expenses 66,094 97,480 163,574 197,716 203,701 233,761 (c) 234,257
Amortization of Intangible
Assets (g) 206 39,924 40,130 67,189 63,824 31,837 7,101
Provision for Restructuring
Operations - - - - 2,369 10,670 1,866
-------- ------- ------- -------- ------- ------- -------
Operating Income (Loss) 13,187 (3,081) 10,106 (3,420) (9,376) 15,537 69,302
Interest Income - 4,342 4,342 2,909 4,709 1,419 2,574
Interest Expense and
Amortization of Debt Issue
Costs and Premium 4,404 (d) 24,839 29,243 37,875 39,974 35,670 19,918
Other Income - Net 360 5,504 5,864 2,729 3,967 18,821 28,294
Reorganization Items 462,447 - 462,447 - - - -
Income Tax Expense 2,313 6,797 9,110 10,619 9,095 10,389 23,088
Minority Interest in
Earnings of Subsidiaries (901) (1,148) (2,049) (931) (1,385) (1,041) (287)
-------- ------- ------- -------- ------- ------- -------
Income (Loss) from Continuing
Operations 468,376 (26,019) 442,357 (47,207) (51,154) (11,323) 56,877
Income (Loss) from Operations
Discontinued and Sold,
Cumulative Effect of Change
in Accounting Principles and
Extraordinary Items 456,448 (25,502) 430,946 (64,372) (10,293) -- (16,178)
-------- ------- ------- -------- ------- ------- -------
Net Income (Loss) $924,824 (51,521) 873,303 (111,579) (61,447) (11,323) 40,699
======== ======= ======= ======== ======= ======= =======
Income (Loss) per Share - Basic:
Continuing Operations N/A (1.68) N/A (3.05) (3.24) (.71) 2.81
Net Income (Loss) N/A (3.33) N/A (7.22) (3.89) (.71) 2.01
Income (Loss) per Share - Assuming Dilution:
Continuing Operations N/A (1.68) N/A (3.05) (3.24) (.71) 2.70
Net Income (Loss) N/A (3.33) N/A (7.22) (3.89) (.71) 1.93
Balance Sheet Data (as of end of period)
- -----------------------------------------
Property, Plant and Equipment, Net $ 131,984 (e) 137,686 140,912 143,959 142,351
Total Assets $1,111,735 (e) 866,000 607,443 592,658 610,049
Long-Term obligations (including current
installments) $ 573,197 (f) 417,175 310,959 290,617 179,223
Stockholders' Equity $ 253,693 (f) 148,472 25,116 24,998 208,886
See footnotes on page 15
-13-
IMPACT OF FAIR VALUE ADJUSTMENTS ATTRIBUTABLE TO THE REORGANIZATION OF ASTRUM,
RESTRUCTURINGS AND CERTAIN OTHER EXPENSES:
Included in the Company's statements of operations are amortization and
depreciation related to adjustments of assets and liabilities to fair value in
connection with the adoption of the American Institute of Certified Public
Accountants Statement of Position 90-7 entitled "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code" ("SOP 90-7") in June 1993. The
most significant adjustment related to reorganization value in excess of
identifiable assets which was amortized over the three-year period ended June
1996. The Company also recorded fresh start adjustments to reflect tradenames,
licenses, patents, and other intangibles at their fair values, which are being
amortized over periods ranging from one to forty years. Property and equipment
adjusted to fair values in connection with the adoption of SOP 90-7 are being
depreciated over their respective useful lives, primarily ranging from two to
six years. In addition, the Company's statements of operations include
provisions for restructuring operations in fiscal 1996, 1997 and 1998 as well as
certain other expenses associated with the fiscal 1997 restructuring and
management team changes. Such other expenses in fiscal 1997 include those
incurred for consulting services in connection with establishing the fiscal 1997
restructuring plan, the cessation of the former chief executive officer's
employment, the hiring of new and additional members of the executive management
team, and for expenses incurred in excess of the original fiscal 1996 provision
for the consolidation of American Tourister manufacturing facilities.
Due to the significance of these items, management believes that it is useful
to isolate their impact on net income (loss) and operating income (loss) as
shown below. This information does not represent and should not be considered
an alternative to net income, any other measure of performance as determined by
generally accepted accounting principles or as an indicator of operating
performance. The information presented may not be comparable to similar
presentations reported by other companies.
YEAR ENDED JANUARY 31,
----------------------------
Impact on Net Income or Loss 1996 1997 1998
- ---------------------------- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Fresh Start Amortization and Depreciation (g) $66,433 34,484 8,738
Provision for Restructuring Operations 2,369 10,670 1,866
Certain Other Expenses Associated with the Restructuring and
Management Changes(c) -- 5,400 --
Tax Benefit (5,629) (11,319) (4,030)
------- ------- ------
After-Tax Impact on Net Income or Loss $63,173 39,235 6,574
======= ======= ======
Impact on Net Income or Loss Per Share - Assuming Dilution $ 4.00 2.38 0.31
======= ======= ======
Impact on Operating Income (Loss)
- --------------------------------
Operating Income (Loss) $(9,376) 15,537 69,302
Fresh Start Amortization and Depreciation (g) 66,433 34,484 8,738
Provision for Restructuring Operations 2,369 10,670 1,866
Certain Other Expenses Associated with the
Restructuring and Management Changes (c) -- 5,400 --
------- ------- ------
Operating Income Before Fresh Start Amortization and
Depreciation, Provision for Restructuring Operations
and Certain Other Expenses Associated with the
Restructuring and Management Changes $59,426 66,091 79,906
======= ======= ======
See footnotes on Page 15
(a) Prior to July 14, 1995, the Company was a subsidiary of Astrum International
Corp. ("Astrum"). On July 14, 1995, Astrum merged with Samsonite
Corporation and changed its name to Samsonite Corporation.
In June 1993, Astrum completed a financial restructuring pursuant to a plan
of reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Plan"). Effective June 30, 1993 and pursuant to the American Institute of
Certified Public Accountants Statement of Position 90-7 entitled "Reporting
by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), the
Company was required to adjust its assets and liabilities to their fair
("fresh start") values and create a new entity for financial reporting
purposes. The information for the "Predecessor Company" reflects activity
occurring through June 30, 1993, prior to the effectiveness of the Plan, and
the information for the "Reorganized Company" reflects activity occurring
after such date. As a result of the effects of SOP 90-7 on amortization of
intangibles, depreciation, interest expense, and reorganization items, the
periods before and after June 30, 1993 are not comparable.
(b) The Company acquired American Tourister in August 1993. Net sales for the
combined periods comprising the year ended January 31, 1994 include net
sales of $47.7 million of American Tourister for five months. Net sales for
the fiscal years ended January 31, 1995, 1996 and 1997 include net sales
for American Tourister of $117.8 million, $115.0 million and $147.3 million,
respectively. Because of the consolidation of American Tourister wholesale
operations with the Company's, comparable American Tourister sales amounts
are not available for fiscal 1998.
(c) Selling, general and administrative expenses include $5.4 million of
expenses during the year ended January 31, 1997 for consulting fees to
establish the restructuring plan ($0.8 million), for the cessation of the
former chief executive officer's employment and the change in management
($4.1 million), and for expenses in excess of the original provision in
fiscal 1996 for the consolidation of American Tourister manufacturing
facilities ($0.5 million).
(d) In accordance with SOP 90-7, no interest expense on the pre-petition
securities (certain debt existing at the date of the Plan) was accrued from
June 25, 1992 through June 30, 1993.
(e) Includes the effects of SOP 90-7 "fresh start" adjustments recorded at June
30, 1993, net of depreciation and amortization. Pursuant to SOP 90-7, the
net book value of property and equipment was increased by $34 million and
intangible and other assets were increased by $530 million.
(f) Pursuant to SOP 90-7, under the Plan effected in June 1993, $1.5 billion in
long-term debt subject to compromise, including accrued interest, was
forgiven in exchange for $500 million principal amount of senior secured
notes, approximately $342 million in cash and 15 million shares of common
stock. In July 1995, the senior secured notes were redeemed with the
proceeds from the sale of the 11 1/8% Series A Senior Subordinated Notes and
borrowings under the Company's U.S. banking lines.
(g) As discussed in note (a) above, the Company adjusted its assets and
liabilities to their fresh start values effective June 30, 1993. Since June
30, 1993, the Company's statements of operations include amortization and
depreciation related to these fresh start adjustments. The most significant
fresh start adjustment relates to recording Reorganization Value in Excess
of Identifiable Assets, which was amortized over a three-year period which
ended in June 1996. In addition, fresh start amortization includes
amortization of fresh start adjustments to reflect the fair value of
trademarks, licenses, patents and other intangibles, which are being
amortized over periods from one to forty years. Fresh start amortization
and depreciation also includes depreciation of fresh start adjustments to
reflect the fair value of property and equipment, depreciated over their
estimated useful lives ranging primarily from two to six years.
Fresh Start Amortization and Depreciation consists of the following:
YEAR ENDED JANUARY 31,
----------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
FRESH START AMORTIZATION:
Amortization of Reorganization Value in Excess of Identifiable Assets..... $55,072 22,947 --
Amortization of Licenses, Patents and Other............................... 5,263 4,897 3,158
Amortization of Trademarks................................................ 2,560 3,079 3,026
------- ------ -----
Total Fresh Start Amortization Included in Amortization of Intangibles....
62,895 30,923 6,184
------- ------ -----
FRESH START DEPRECIATION - PROPERTY AND EQUIPMENT:
Included in Cost of Goods Sold............................................ 2,895 2,914 2,093
Included in Selling, General and Administrative Expenses.................. 643 647 461
------- ------ -----
Total Fresh Start Depreciation............................................ 3,538 3,561 2,554
------- ------ -----
Total Fresh Start Amortization and Depreciation........................... $66,433 34,484 8,738
======= ====== =====
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
selected financial data and the consolidated financial statements of the Company
and notes thereto commencing on page F-1. The Company's fiscal year ends on
January 31. References to a fiscal year denote the calendar year in which the
fiscal year ended; for example, "fiscal 1998" refers to the 12 months ended
January 31, 1998. The Company's continuing operations consist of a single
business segment, the manufacture and sale of luggage and luggage related
products. The Company's sales are directed to three principal markets: the
United States, Europe and International (representing the balance of the world).
RESULTS OF OPERATIONS
- ---------------------
The Company analyzes its net sales and operations by the following categories:
(1) "European operations" which consist of its European manufacturing and
distribution operations whose reporting currency is the Belgian franc, (2) "the
Americas operations" which include sales, manufacturing, and distribution
operations in the United States, Mexico, Canada, South America, and Latin
America and (3) "International operations" which include the sales,
manufacturing and distribution operations in Singapore, India, Hong Kong, and
South Korea, exports to the Far East and Middle East, and global licensing
operations. Beginning in mid-fiscal year 1998, Middle East sales are reported
with European operations.
FISCAL 1998 COMPARED TO FISCAL 1997
General. Results of European operations were translated from Belgian francs
to U.S. dollars in fiscal 1998 and fiscal 1997 at average rates of approximately
35.67 and 30.93 francs to the U.S. dollar, respectively. This decrease in the
value of the Belgian franc of 13% resulted in decreases in European reported
sales, cost of sales and other expenses in fiscal 1998 compared to fiscal 1997.
The most significant effects from the difference in exchange rates from last
year to the current year are noted in the following analysis and referred to as
an "exchange rate difference". The Company enters into forward foreign exchange
contracts and option contracts to reduce its economic exposure to fluctuations
in currency exchange rates for the Belgian franc and other foreign currencies.
Such instruments are marked to market at the end of each accounting period;
realized and unrealized gains and losses are recorded in Other Income - Net.
During fiscal 1998, the Company had net gains from such instruments of $6.5
million; during fiscal 1997, the Company had net gains on such instruments of
$2.8 million. The Company estimates the reduction in operating income from the
year-to-year strengthening of the U.S. dollar versus the Belgian franc to be
approximately $5.6 million and $2.9 million in fiscal 1998 and 1997,
respectively.
Net Sales. Consolidated net sales decreased from $741.1 million in fiscal
1997 to $736.9 million in fiscal 1998, a decrease of $4.2 million. Fiscal 1998
sales were adversely affected by the large decrease in the value of the Belgian
franc compared to the U.S. dollar in fiscal 1998. Without the effect of the
exchange rate difference, fiscal 1998 sales would have increased by $38.3
million or approximately 5%.
On a U.S. dollar basis, sales from European operations decreased from $280.8
million in fiscal 1997 to $277.2 million in fiscal 1998, a decrease of $3.6
million. Expressed in the local European reporting currency (Belgian francs),
fiscal 1998 sales increased by 13.8%, or the U.S. constant dollar equivalent of
$38.9 million, from fiscal 1997; however, the increase was more than offset by a
$42.5 million exchange rate difference. Despite the effect of the strong U.S.
dollar on reported sales, Europe's local results were much improved over the
prior year. Sales of hardside products were 7% above the prior year due
primarily to the success of the new Oyster II product. Sales of softside
products were 22% above the prior year because of strong traditional softside
luggage sales, the new Trunk & Co product line, and strong computer and other
softside business case lines. Sales in most European countries increased over
the prior year, with the exceptions of Germany and Belgium, where sales were
down approximately 1% from fiscal 1997.
Sales from the Americas operations increased from $417.6 million in fiscal
1997 to $423.5 million in fiscal 1998, an increase of $5.9 million or 1.4%. The
increase was largely due to an increase in U.S. retail sales of $30.4 million or
39% from the prior year. Comparable store sales increased by 15.6% from fiscal
1997 and the number of stores open increased from 149 at January 31, 1997 to 189
at January 31, 1998. The Company has rapidly expanded the number of retail
locations during the
-16-
past two fiscal years which, along with the increase in comparable store sales
growth, contributed to the 39% growth in fiscal 1998 sales over fiscal 1997
sales. The Company does not expect to continue the rate of growth in retail
store openings in fiscal 1999 and therefore will not sustain the level of retail
sales growth achieved in fiscal 1998. U.S. wholesale revenues of $274.0 million
were less than the prior year by $21.8 million, or 7.4%. U.S. wholesale sales
decreased due to market disruptions caused by the adverse impact of higher
pricing strategies, various forms of cross distribution-channel selling, dealer
bankruptcies, and product availability problems associated with forecasting and
production issues. The Company has addressed these issues by focusing on
traditional disciplined channel management and strategic pricing which targets
critical retailer price points, and is working on a long-term resolution of
forecasting and production issues. Although the Company is taking these
corrective actions, it expects sales in the U.S. wholesale division to continue
to be negatively impacted by the aforementioned factors through at least the
first two quarters of fiscal 1999. Sales from other Americas operations,
including Mexico, Canada and Latin America, were less than the prior year by an
aggregate of $2.7 million. The decrease in the other Americas countries was
caused primarily by a decline in Canadian sales caused by issues related to
product standardization requirements which have been modified subsequent to
January 31, 1998.
Sales from International operations decreased from $42.7 million in fiscal
1997 to $36.2 million in fiscal 1998, a decrease of $6.5 million. Product sales
from export and emerging markets decreased by $4.7 million from fiscal 1997.
During fiscal 1998 the Company moved export responsibility for the Middle East
from the Americas to Europe resulting in a decrease in sales classified as
International operations. Export sales from the U.S. to Asia have been moved to
the Company's subsidiaries in Singapore, Hong Kong, and South Korea entities
which were formerly the Company's regional distributors. Transition issues
resulting from the formation of the joint ventures and the economic problems in
Asia resulted in decreased sales in this region. Sales in India were $2.7
million for fiscal 1998. Samsonite products were introduced to the Indian market
through the new Indian manufacturing and distribution joint venture which
completed construction and began operations in April 1997. Royalties from global
licensing operations decreased by $2.2 million from the prior year; $1.7 million
of the difference occurred largely because $3.9 million of revenues were
realized in fiscal 1997 from a single license sale transaction while fiscal 1998
included approximately $2.2 million from two separate license sales.
Gross profit. Consolidated gross profit for fiscal 1998 increased from fiscal
1997 by $20.7 million. Gross margin increased by 3.0 percentage points, from
39.4% in fiscal 1997 to 42.4% in fiscal 1998.
Gross margins from European operations increased by 0.7 percentage points,
from 39.2% in fiscal 1997 to 39.9% in fiscal 1998. The improvement is due to
price increases in selected product lines and lower costs from standardized
global production sources.
Gross margins for the Americas operations increased 5.1 percentage points from
38.2% in fiscal 1997 to 43.3% in fiscal 1998. U.S. wholesale margins increased
from 35.8% to 43.9%, primarily as a result of price increases on product sales
to both trade customers and the Company's retail division and product cost
improvements from global sourcing and product design improvements. The increase
in gross margins was achieved despite negative production variances incurred
during the last half of fiscal 1998 of approximately $4.1 million. Margins in
the Americas also benefited from a higher mix of retail versus wholesale sales
compared to the prior year. The Company intends to pursue a different marketing
and pricing strategy in fiscal 1999 and expects to roll back certain prices
approximately 4% to 6% to conform to previously successful pricing strategies
and make corresponding reductions in the various co-op advertising and sales
promotions costs. Thus, while gross profit margins may decline somewhat from
fiscal 1998 levels, the Company believes this strategy will stimulate sales over
the long-term and achieve an increased level of operating profit margin
percentages from U.S. wholesale sales.
Selling, General and Administrative Expenses ("SG&A"). Consolidated SG&A
increased by $0.5 million from fiscal 1997 to fiscal 1998. As a percent of
sales, SG&A was 31.8% in fiscal 1998 and 31.5% in fiscal 1997.
SG&A for European operations decreased by $5.6 million from fiscal 1997 to
fiscal 1998. The exchange rate difference caused SG&A to decrease by $10.7
million. The remaining increase of $5.1 million was due primarily to higher
variable selling expenses of $2.5 million related to the higher sales levels,
higher advertising expenses of $2.4 million and various other net increases of
$0.2 million.
-17-
SG&A for the Americas operations, including worldwide corporate headquarters,
increased by $5.5 million in fiscal 1998 compared to fiscal 1997. SG&A related
to U.S. wholesale operations was approximately equal to fiscal 1997. In fiscal
1998, U.S. wholesale price increases and the relatively high rate of new product
introductions were supported by increased co-op advertising allowances and other
sales promotion credits given to customers, particularly during the second half
of fiscal 1998. The Company is modifying this strategy in fiscal 1999 by
reducing prices from 4% to 6% on certain products to better target critical
retailer and competitive price points. The Company will make corresponding
reductions in co-op advertising allowances and sales promotion costs. The
Company believes this strategy will better stimulate sales over the long-term
and result in an increased level of operating profit margin, albeit with lower
gross profit margins and lower selling, general and administrative expenses.
SG&A related to U.S. retail operations increased by $10.4 million because of an
increase in the number of stores open and increased sales volume. As a percent
of sales, retail SG&A decreased from 45.9% of sales in fiscal 1997 to 42.6% of
sales in fiscal 1998. SG&A for other Americas operations increased by $1.5
million primarily because of a new Brazilian joint venture. Corporate SG&A
decreased by $6.4 million from the prior year due primarily to expenses incurred
in the prior year related to expenses associated with a restructuring and
changing organization structure in fiscal 1997.
SG&A for International operations increased by $0.6 million from fiscal 1997
due to the addition of new joint venture subsidiaries in the Far East and
startup of operations in India, net of various cost savings from the
reorganization of export operations from the U.S. to Europe and the Far East.
Amortization of intangible assets. The Company recorded significant
intangible assets as a result of its reorganization in 1993. See Notes 1(b),
1(i) and 7 to the Company's consolidated financial statements included elsewhere
herein for a discussion of the recording and amortization of intangible assets.
Reorganization value in excess of identifiable assets became fully amortized
in fiscal 1997, which generally accounts for the decrease in amortization of
intangible assets of $24.8 million in fiscal 1998.
Provision for restructuring operations. Over the past three fiscal years the
Company has recorded a series of restructuring provisions to accrue the costs of
consolidating and reorganizing various operations and realigning its management
and workforce structure. Net restructuring provisions decreased from $10.7
million in fiscal 1997 to $1.9 million in fiscal 1998. In fiscal 1998, the
Company recorded a $3.6 million restructuring provision and reduced the
restructuring provision by $1.7 million for excess accruals related to the
fiscal 1997 restructuring. The fiscal 1998 restructuring includes the
elimination of approximately 180 positions in the Mexico City manufacturing
plant and 20 management positions in the U.S. and is expected to be completed by
July 31, 1998. The provision consists primarily of costs associated with
involuntary employee terminations and is comprised of estimated cash
expenditures of $3.3 million and estimated non-cash charges of $0.3 million.
See the discussion of the fiscal 1997 restructuring provision under Results of
Operations - Fiscal 1997 Compared to Fiscal 1996 and Note 4 to the consolidated
financial statements for further information relative to the restructuring
provisions.
As discussed elsewhere herein, the Company expects U.S. wholesale sales to be
depressed through at least the first half of fiscal 1999 because of various
market factors which affected U.S. wholesale sales in fiscal 1998, including the
adverse impact of price increases and pricing strategies, market disruptions and
retailer discounting issues associated with various forms of cross distribution
channel sales, and forecasting and production scheduling errors. The Company is
currently evaluating its U.S. wholesale hardside production operations in light
of various marketing issues the Company is encountering with its hardside
suitcase products in the United States which have resulted in excess inventory,
declining sales, and reduced production requirements. This evaluation may
result in additional restructuring charges related to U.S. wholesale operations
in fiscal 1999.
The Company is also evaluating its investment in Chia Tai Samsonite (H.K.)
Ltd., a 50% owned joint venture formed to manufacture and distribute luggage in
China which is encountering difficulties in achieving an adequate level of sales
and distribution to support operational expenses and finding qualified personnel
to manage the joint venture. As a result of this evaluation, the Company may
dispose of or liquidate this investment. At January 31, 1998, the Company had a
net investment of approximately $2.4 million in this joint venture.
-18-
Operating income (loss). Operating income increased from $15.5 million in
fiscal 1997 to $69.3 million in fiscal 1998. This is a result of increased gross
profit of $20.7 million, the decrease in amortization of intangibles of $24.8
million, the decrease in restructuring provisions of $8.8 million, net of the
increase in SG&A of $0.5 million.
Interest income. Interest income increased from the prior year by $1.2
million, primarily as a result of nonrecurring interest income received in
fiscal 1998 upon recovery of a loan to the settlement trust created as a result
of the reorganization in 1993. See Note 14 to the consolidated financial
statements included elsewhere herein and the discussion of the collection of the
receivable from the trust under Other income, net included elsewhere herein.
Other income (expenses) - net. Following is an analysis of other income
(expense) - net for fiscal 1998 compared to fiscal 1997:
Year ended January 31,
----------------------
1998 1997
---- ----
(In thousands)
Net gains from foreign currency forward delivery contracts (a) $ 6,463 2,829
Rental income (b) 1,633 1,987
Equity in loss of unconsolidated affiliate (c) (547) (33)
Pension expense related to merged plans (d) (706) --
Foreign currency transaction losses, net (e) (1,834) (211)
Loss on disposition of fixed assets, net (f) (377) (62)
Other, net (g) (1,247) (1,120)
Favorable settlement of claims (h) 2,060 3,802
Adjustment of allowances relating to previous operations (i) 5,299 529
Adjustment of contingent tax accruals (j) 12,700 --
Collection of loans to settlement trust (k) 4,850 --
Adjustment of liability for PBGC claims (l) -- 11,100
------- ------
$28,294 18,821
======= ======
(a) The Company has entered into certain forward exchange contracts to reduce
its exposures to changes in exchange rates. Other income for fiscal 1998
includes gains from such transactions of $6.5 million. In fiscal 1997,
such transactions resulted in gains of $2.8 million. The income recorded
for fiscal 1998 results primarily from forward exchange contracts selling
forward the Belgian franc which has devalued significantly against the
U.S. dollar since the contracts were executed. The Company estimates that
the reduction in net sales and operating income from the year-to-year
strengthening of the U.S. dollar versus the Belgian franc to be
approximately $42.5 million and $14.8 million and $5.6 million and $2.9
million during fiscal 1998 and 1997, respectively.
(b) Rental income represents income from rents received from properties
retained by the Company which were used in previous operations and which
are held for sale as of January 31, 1998. The Company expects that all of
these properties will be sold during fiscal 1999 and that rental income
will decline accordingly.
(c) Equity in loss of unconsolidated affiliate represents the Company's 50%
equity interest in the losses of its affiliate, Chia Tai Samsonite (H.K.)
Ltd., a 50% owned joint venture formed to manufacture and distribute
luggage in China. This start-up operation completed construction of a
manufacturing plant in Ningbo, China and began operations in fiscal 1998.
-19-
(d) Pension expense related to merged plans represents the net periodic
pension expense for plans merged with a Company pension plan as discussed
in Note 14 to the consolidated financial statements included elsewhere
herein under Contingent Pension Liabilities.
(e) Foreign currency transaction losses represent net realized losses on
payments for goods and services denominated in currencies other than those
used for financial reporting. Foreign currency transaction losses
increased from $0.2 million in fiscal 1997 to $1.8 million in fiscal 1998
due to the strengthening of the U.S. dollar versus the Mexican Peso, the
Canadian dollar, and certain Asian currencies.
(f) Loss on disposition of fixed assets, net represents losses incurred from
the disposition of fixed assets retired or sold in the ordinary course of
business.
(g) Other, net represents miscellaneous expenses and increased from $1.1
million in fiscal 1997 to $1.2 million in fiscal 1998.
(h) Other income for fiscal 1998 includes $2.1 million from the favorable
settlement of claims for interest on overdue installments of interest
accruing prior to the commencement of the bankruptcy of the Company's
predecessor in 1993. Additionally, the Company has entered into a non-
binding agreement-in-principle to settle the remainder of these claims for
approximately $9.4 million. The Company has $10.3 million accrued for the
payment of such claims at January 31, 1998. Because these claims are in
the judicial process, final settlement is not expected to occur for
several months.
(i) Other income from the adjustment of allowances for contingencies from
previous operations of $5.3 million in fiscal 1998 includes (i) $3.8
million from the adjustment of an accrual for potential environmental
liability related to real estate used in previous operations, for which no
claims were filed and liability terminated by agreement with the
purchasers of the real estate during fiscal 1998, and (ii) $1.5 million
for the adjustment of allowances for factored receivables from previous
operations which were no longer necessary upon collection of the
receivables. Fiscal 1997 included $0.5 million of income from the reversal
of excess reserves relating to previous operations that were determined to
be unnecessary.
(j) Other income for fiscal 1998 includes adjustments totaling $12.7 million
to reduce accruals for certain tax contingencies established in
conjunction with the Restructuring referred to in Note 1(b) to the
consolidated financial statements included elsewhere herein. The
adjustment was made upon the resolution of these contingencies which did
not result in any cash payment or future liability for taxes.
(k) As described in Note 14 to the consolidated financial statements included
elsewhere herein, under Obligations to Settlement Trust, the Company had
made loans of $4.8 million to a trust (the "Trust") established for the
benefit of the holders of certain classes of pre-bankruptcy claims against
the Company. The Company provided allowances for the full amount of these
loans at the time they were funded and accrued no interest on them. The
Trust repaid the Company's loan during fiscal 1998 with interest of $1.4
million. As a result, the Company recognized $4.8 million of other income
in fiscal 1998 from the collection of the loan, which had no carrying
value, and recorded interest income of $1.4 million. The Company believes
it is very unlikely it will be required to make any additional loans to
the Trust which, under the terms of the Trust Agreement, must settle with
its beneficiaries and dissolve by June 8, 1998.
(l) Other income in fiscal 1997 includes $11.1 million from the adjustment of
a liability accrued from contingent pension liabilities established during
the reorganization in 1993. See Note 14 to the consolidated financial
statements included elsewhere herein under Contingent Pension Liabilities
for a discussion of this matter.
Interest expense and amortization of debt issue costs and premium. Interest
expense and amortization of debt issue costs decreased from $35.7 million in
fiscal 1997 to $19.9 million in fiscal 1998. The decrease was caused primarily
by retirement of indebtedness out of the proceeds of a public stock offering
completed in February 1997, a lower interest rate on borrowings under the senior
credit facility which was refinanced in June 1997, and interest savings from
the retirement of high interest
-20-
rate subordinated debt financed by lower rate bank borrowings. See Notes 9 and
18 to the consolidated financial statements included elsewhere herein.
Income taxes. Income tax expense increased from $10.4 million in fiscal 1997
to $23.1 million in fiscal 1998. The increase in tax expense is due primarily
to higher consolidated pretax earnings in fiscal 1998. The difference between
expected income tax expense, computed by applying the U.S. statutory rate to
income from continuing operations, and income tax expense recognized, results
primarily because of (i) the nondeductibility for tax purposes of amortization
of reorganization value in excess of identifiable assets, (ii) foreign income
tax expense provided on foreign earnings, (iii) certain nontaxable liability
adjustments, (iv) foreign tax credits and (v) state and local income taxes. See
Note 11 to the consolidated financial statements included elsewhere herein for
further analysis of income tax expenses.
Extraordinary loss. The extraordinary loss of $16.2 million for fiscal 1998
resulted from (i) the payment of $17.3 million of redemption and market premiums
and the write-off of deferred financing costs of $4.6 million related to the
early retirement of $137.2 million principal amount of the Company's 11 1/8%
Series B Senior Subordinated Notes, (ii) the payment of $0.3 million of early
retirement fees and the write-off of $3.9 million of deferred financing costs
related to refinancing of the previous senior credit facility, and (iii) the tax
benefit from the aforementioned transactions of $9.9 million. See Note 9 to the
consolidated financial statements included elsewhere herein.
Net income (loss). The Company had a net loss in fiscal 1997 of $11.3 million
and net income in fiscal 1998 of $40.7 million. The increase in the net income
from the prior year of $52.0 million is caused by the effect of the increases in
operating income and other income and the decrease in interest expense, offset
by the increase in income tax expense and the extraordinary loss.
FISCAL 1997 COMPARED TO FISCAL 1996
General. Results of European operations were translated from Belgian francs
to U.S. dollars in fiscal 1997 and fiscal 1996 at average rates of approximately
30.93 and 29.38 francs to the U.S. dollar, respectively. This represented a
decrease in the value of the Belgian franc of 5.0%, which resulted in decreases
in reported sales, cost of sales and other expenses in fiscal 1997 compared to
fiscal 1996. The most significant effects from the difference in exchange rates
from fiscal 1997 to fiscal 1996 are noted in the following analysis and referred
to as an "exchange rate difference". The Company enters into forward foreign
exchange contracts and option contracts to reduce its economic exposure to
fluctuations in currency exchange rates for the Belgian franc and other foreign
currencies. Such instruments are marked to market at the end of each accounting
period; realized and unrealized gains and losses are recorded in Other Income.
During fiscal 1997, the Company had net gains from such instruments of $2.8
million.
Net Sales. Consolidated net sales increased to $741.1 million in fiscal 1997
from $675.2 million in fiscal 1996, an increase of $65.9 million or 9.8%.
Adjusted for the European exchange rate difference, sales increased from fiscal
1996 by 12.0%.
Sales from European operations increased from $271.6 million in fiscal 1996 to
$280.8 million in fiscal 1997, an increase of $9.2 million. The exchange rate
difference resulted in a $14.8 million decrease in reported sales versus fiscal
1996. The remainder, an increase of $24.0 million, represents an increase in
sales expressed in Belgian francs of 8.8% from fiscal 1996. Despite a generally
weak European economy, sales increased due to increased market share, increased
sales of diversified products (which includes footwear, handbags, and other
travel accessories), and consumer acceptance of new product lines. In fiscal
1997, European sales enjoyed strong third and fourth quarters, with strong
summer and Christmas sales reversing trends earlier in fiscal 1997.
Sales from the Americas operations increased from $366.4 million in fiscal
1996 to $417.6 million in fiscal 1997, an increase of $51.2 million or 14.0%.
The increase was due to continued broad consumer preference and demand for
Samsonite brand products, particularly lines of upright, lightweight softside
luggage which were redesigned in fiscal 1996. Additionally, the Company began
sales in the third quarter of fiscal 1997 of its new EZ CART(TM) product. Sales
of softside products in the U.S. continued to increase while sales of hardside
products decreased from fiscal 1996 to fiscal 1997. U.S. wholesale sales
increased from $266.9 million in fiscal 1996 to $295.8 million in fiscal 1997,
an increase of $28.9 million or 10.8%. Sales from
-21-
operations in the other Americas increased from $36.9 million to $43.4 million,
an increase of $6.5 million, due to an increase in Mexican sales of $4.5
million, Canadian sales of $1.0 million, and Latin American exports of $1.0
million. Sales from the Company's retail stores increased by $15.8 million or
25.2%, from $62.7 million in fiscal 1996 to $78.5 million in fiscal 1997. Same
store sales increased by 10.3% from fiscal 1996. The Company had 149 retail
outlets open at January 31, 1997 compared to 126 at January 31, 1996.
Sales from International operations increased from $37.2 million in fiscal
1996 to $42.7 million in fiscal 1997, an increase of $5.5 million or 14.8%. Of
the change in revenues from fiscal 1996, $4.0 million was due to revenue from
the sale of McGregor apparel tradenames in certain Pacific Rim countries. The
remainder was due primarily to the Singapore distribution company which began
operations on January 1, 1996.
Gross profit. Consolidated gross profit for fiscal 1997 increased from fiscal
1996 by $31.3 million. Gross margin increased by 0.8 percentage point, from
38.6% in fiscal 1996 to 39.4% in fiscal 1997. Without the effect of a sale of
tradenames for $4.0 million, gross margin increased 0.4 percentage point to
39.0% in fiscal 1997.
Gross margins from European operations increased by 1.5 percentage points,
from 37.7% in fiscal 1996 to 39.2% in fiscal 1997. The improvement was due to
price increases in selected product lines, declining materials costs, and
improving productivity variances compared to fiscal 1996.
Gross profit margins from the Americas operations were 38.2% in fiscal 1997
and fiscal 1996. Certain margin improvements occurred in fiscal 1997 including
lower raw materials costs, product cost improvements on certain products, the
introduction of innovative products at higher margins, price increases on
selected product lines in the fourth quarter of fiscal 1997, higher retail sales
(which produce a higher margin than wholesale sales), and decreased sales of
obsolete products in fiscal 1997. These improvements were offset by promotional
sales discounts, increased sales of certain lower margin products relative to
the previous fiscal year, negative productivity variances from the startup of
production of new hardside products and the restructuring of operations, and
higher than anticipated costs on certain new product lines. The net result of
these factors was consistent year-to-year margin percentages.
Excluding the effect of the tradename sales in fiscal 1997, gross profit
margins from International operations decreased by 2.7 percentage points. The
decrease was attributable to the lack of price increases and a greater
proportion of sales of lower margin products in fiscal 1997.
In fiscal 1997, the Company began a global standardization project to
standardize its product lineup and product components, and finished goods
purchasing in order to continue to increase gross profit margins. To further
enhance gross profit margins, the Company announced price increases in the
United States on many of its product lines effective March 1, 1997.
Selling, General and Administrative Expenses ("SG&A"). Consolidated SG&A
increased by $30.1 million from fiscal 1996 to fiscal 1997. As a percent of
sales, SG&A was 31.5% in fiscal 1997 and 30.2% in fiscal 1996. Expenses
totaling approximately $5.4 million were incurred during fiscal 1997 for
consulting fees to establish the restructuring plan, the cessation of the former
CEO's employment, the hiring of new and additional members of the executive
management team, and for expenses in excess of the original provision in fiscal
1996 for the consolidation of American Tourister manufacturing facilities.
Without such expenses, SG&A would have been 30.8% of sales during fiscal 1997.
-22-
SG&A for European operations increased by $5.5 million from fiscal 1996 to
fiscal 1997. The exchange rate difference caused SG&A to decrease by $4.0
million. The remainder, an increase of $9.5 million, resulted from an increase
in SG&A expressed in Belgian francs of 13.3%. The increase was due to higher
variable selling and distribution costs related to the higher sales levels ($2.0
million); higher salaries and employee benefits from the hiring of additional
sales and general management personnel to support higher sales levels and growth
oriented projects ($2.7 million); higher bad debt expense because of the
financial difficulties of a few specific customers ($1.1 million); higher
advertising expenses to support new products, entry into the eastern European
markets, and brand image in light of a generally weak European economy ($2.3
million); and various other expense categories ($1.4 million).
SG&A for the Americas operations, including worldwide corporate headquarters,
increased by $22.3 million in fiscal 1997 compared to fiscal 1996. The increase
was due to higher selling and administrative costs related to the increase in
retail sales ($7.9 million); higher national and co-op advertising expenses
($6.8 million); expenses relating to the cessation of the former CEO's
employment, expenses of hiring new and additional management team members,
consulting fees and the other expenses incurred related to the restructuring
($5.4 million); compensation expense related to restricted stock awards ($0.9
million): and other net increases ($1.3 million).
SG&A for the International operations increased by $2.3 million primarily due
to the expenses incurred in the foreign joint venture operations in Singapore,
which began in fiscal 1997.
Amortization of intangible assets. The Company recorded significant
intangible assets as a result of its reorganization in 1993. See Notes 1(b),
1(i) and 7 to the Company's consolidated financial statements included elsewhere
herein for a discussion of the recording and amortization of intangible assets.
Reorganization value in excess of identifiable assets became fully amortized
as of June 30, 1996, which generally accounts for the decrease in amortization
of intangible assets from $63.8 million in fiscal 1996 to $31.8 million in
fiscal 1997.
Provision for restructuring operations. The fiscal 1996 provision resulted
from a restructuring of certain manufacturing and administrative functions of
the American Tourister division. The fiscal 1997 provision of $10.7 million
resulted from a program to further consolidate functions and operations in North
America, Europe and the Far East, and to reduce or eliminate certain other
operations. The fiscal 1997 restructuring plan includes further consolidation
of hardside luggage production to Samsonite's largest U.S. facility located in
Denver, CO from other locations in the Americas, as well as eventual
consolidation of many administrative and control functions, primarily to Denver.
The Plan included the elimination of as many as 450 positions worldwide,
including approximately 150 manufacturing positions and approximately 300
managerial, office and clerical positions. The restructuring provision
consisted primarily of costs associated with involuntary employee terminations
and was comprised of estimated cash expenditures of $9.7 million and estimated
non-cash charges of $1.0 million, both on a pretax basis.
Operating income (loss). Operating results improved from a loss in fiscal 1996
of $9.4 million to income in fiscal 1997 of $15.5 million, an increase of $24.9
million. This increase was a result of higher revenues and improved margins
which increased gross profit by $31.3 million from fiscal 1996 and the decrease
in amortization of intangibles of $32.0 million, both of which were partially
offset by increases in SG&A of $30.1 million and the higher provision for
restructuring of $8.3 million.
Interest income. Interest income decreased from $4.7 million in fiscal 1996
to $1.4 million in fiscal 1997. Fiscal 1996 interest income included $2.9
million realized from a note receivable collected in connection with the sale of
an investment in a television station. Recurring interest income results from
temporary investments of cash on hand and is $0.4 million less than in fiscal
1996.
-23-
Other income (expense) - net. Following is an analysis of other income
(expense) - net for fiscal 1997 compared to fiscal 1996:
Year ended January 31,
----------------------
1997 1996
---------- ---------
(In thousands)
Net gains from foreign currency forward delivery contracts (a) $ 2,829 (494)
Rental income (b) 1,987 1,735
Equity in loss of unconsolidated affiliate (c) (33) --
Foreign currency transaction losses, net (d) (211) (1,660)
Loss on disposition of fixed assets, net (e) (62) (245)
Other, net (f) (1,120) (737)
Favorable settlement of claims (g) 3,802 --
Adjustment of allowances relating to previous operations (h) 529 --
Adjustment of liability for PBGC claims (i) 11,100 --
Gain on sale of television station (j) -- 5,368
------- ------
$18,821 3,967
======= ======
(a) Beginning in fiscal 1997, the Company entered into certain forward
exchange contracts to reduce its exposure to changes in exchange rates.
Other income for fiscal 1997 includes gains of $2.8 million from such
transactions. The income for fiscal 1997 resulted primarily from forward
exchange contracts selling forward the Belgian franc. The Company
estimates that the reduction in operating income from the year-to-year
strengthening of the U.S. dollar versus the Belgian franc was $2.9 million
in fiscal 1997.
(b) Rental income in fiscal 1997 and 1996 represents rents received from
properties retained by the Company which were used in previous operations.
As discussed elsewhere herein, such properties are expected to be disposed
of in fiscal 1999 and rental income will decline accordingly.
(c) Equity in loss of unconsolidated affiliate represents the Company's 50%
equity interest in the loss of its affiliate, Chia Tai Samsonite (H.K.)
Ltd., a 50% owned joint venture formed to manufacture and distribute
luggage in China which was formed in fiscal 1997.
(d) Foreign currency transaction losses represent net realized losses on
transactions denominated in currencies other than those used for financial
reporting. Foreign currency transaction losses decreased from $1.7 million
in fiscal 1996 to $0.2 million in fiscal 1997.
(e) Loss on disposition of fixed assets, net represents losses incurred from
the disposition of fixed assets retired or sold in the ordinary course of
business.
(f) Other, net represents miscellaneous expenses and decreased from $0.7
million in fiscal 1996 to $0.6 million in fiscal 1997.
(g) Other Income in fiscal 1997 included $3.8 million from the favorable
settlement for $0.2 million of a claim against the Company by a related
party. The Company had previously accrued $4.0 million for such claim.
This claim is part of the Contingent Liability with Respect to the Old
Notes described in Note 14 to the consolidated financial statements
included elsewhere herein and relates to the claim for interest on overdue
installments of interest accruing prior to the commencement of the
bankruptcy of the Company's predecessor in 1993. The contingent liability
was recorded as part of the reorganization. The holders of this claim were
Apollo Investment Fund, L.P. ("Apollo") and an affiliate of Apollo. Apollo
and its affiliates owned 36.08% of the outstanding shares of the Company's
common stock as of March 31, 1997.
-24-
(h) Fiscal 1997 included $0.5 million of income from the reversal of excess
reserves relating to previous operations that were determined to be
unnecessary.
(i) Other income in fiscal 1997 included $11.1 million from the adjustment of
a previously recorded liability for contingent pension liabilities. See
Note 14 to the consolidated financial statements included elsewhere herein
for a discussion of this item.
(j) Other income in fiscal 1996 included a $5.4 million gain from the sale of
a television station investment related to previous operations.
Interest expense and amortization of debt issue costs and premium. Interest
expense and amortization of debt issue costs and premium decreased from $40.0
million in fiscal 1996 to $35.7 million in fiscal 1997 due to lower levels of
outstanding indebtedness in fiscal 1997 and lower average interest rates. The
U.S. senior credit facility allowed for lower rates in fiscal 1997 based on
improved performance and lower debt levels.
Income taxes. Income taxes increased from $9.1 million in fiscal 1996 to
$10.4 million in fiscal 1997. The increase in tax expense is due to higher
consolidated pretax earnings in fiscal 1997, partially offset by amortization of
reorganization value in excess of identifiable assets, which is not deductible
for tax purposes, in fiscal 1997 as compared to fiscal 1996. The relationship
between the expected income tax expense or benefit, computed by applying the
U.S. statutory rate to income or loss from continuing operations and income tax
expense recognized, resulted primarily because of (i) the nondeductibility for
tax purposes of amortization of reorganization value in excess of identifiable
assets, (ii) foreign income tax expense provided on foreign earnings, and (iii)
state and local income taxes. See Note 11 to the consolidated financial
statements included elsewhere herein for further analysis of income tax expense.
Operations discontinued and sold. The loss from discontinued operations in
fiscal 1996 includes an adjustment to reduce previously accrued losses on
disposal of $2.6 million, net of income taxes of $1.1 million, and a provision
for federal income taxes on the distribution of Culligan stock to certain
foreign stockholders of $3.8 million.
Extraordinary item. The extraordinary loss in fiscal 1996 resulted from the
payment of an $18.0 million redemption premium upon the early retirement of
senior secured notes. The extraordinary loss is presented in the consolidated
financial statements net of the unamortized premium on such notes of $4.4
million and the associated income tax benefit of $5.6 million.
Net loss. The net loss decreased from $61.5 million in fiscal 1996 to $11.3
million in fiscal 1997, a decrease of $50.2 million. The decrease in the net
loss was caused by the effect of the increases in operating and other income and
the decreases in interest expense, extraordinary loss, and loss on discontinued
operations, offset by the decrease in interest income and the increase in income
tax expense.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As reflected in the consolidated statements of cash flows included elsewhere
herein, cash flows provided by continuing operating activities decreased by $7.1
million in fiscal 1998 from fiscal 1997. Cash flows from net income, adjusted
for nonoperating and noncash charges, increased by $22.4 million, primarily as a
result of the increases in operating income described above, while cash flow
used for increases in working capital and other operating assets increased by
$29.5 million. At January 31, 1998, the Company had working capital of $187.2
million compared to $105.4 million at January 31, 1997, an increase of $81.8
million. Current assets increased by $39.3 million primarily due to an increase
in receivables of $9.3 million and an increase in inventories of $37.6 million,
both of which were partially offset by net decreases in cash and other current
assets of $7.6 million. Receivables increased due to a high volume of sales in
the second half of the fiscal year and extended terms on certain sales. The
increase in inventories of $37.6 million occurred primarily in domestic U.S.
operations and resulted from (i) an increase in retail stores' inventories of
approximately $15.1 million due to an increase in the number of stores and sales
volume and (ii) an increase in wholesale inventories of $15.0 million due to an
oversupply of certain new product introductions which were not accepted in the
marketplace, an increase in discontinued and obsolete products due to the volume
of new product introductions in fiscal 1998, and overproduction in the last half
of the fiscal year due to over optimistic sales
-25-
forecasts. The Company is addressing these problems and intends to reduce
inventories through better forecasting and selling discontinued products through
its retail store outlets located primarily in factory outlet malls. Subsequent
to January 31, 1998, the Company sold two of the four assets held for sale
realizing approximately $3.0 million in proceeds, and has a contract to sell
another asset for approximately $12.2 million.
Cash flows used in investing activities increased from $17.0 million in fiscal
1997 to $37.9 million in fiscal 1998, an increase of $20.9 million. Capital
expenditures were $36.3 million in fiscal 1998 compared to $31.1 million in
fiscal 1997. Capital expenditures in fiscal 1998 consist primarily of tooling
for new products, warehouse expansion in Europe, and capital expenditures in
India for factory construction. Capital expenditures of $6.1 million in fiscal
1998 were incurred in the less than 100% owned subsidiaries, and were therefore
financed in part by the other shareholders in the ventures. In fiscal 1997, cash
was provided by liquidating assets used in previous operations of $10.4 million
while in fiscal 1998 cash of $4.0 million was used to fund obligations related
to these previous operations. The Company expects it will continue to use cash
to fund these obligations totaling approximately $6.3 million through calendar
2000. During fiscal 1998, the Company formed subsidiaries in Korea and Hong
Kong to acquire the distributorships from the former distributors in those
countries and made initial investments of approximately $2.5 million for
inventory, fixed assets, other assets and goodwill.
Cash flows provided by (used in) financing activities increased from cash used
in financing activities in fiscal 1997 of $11.7 million to cash provided by
financing activities in fiscal 1998 of $21.1 million, an increase in cash of
$32.8 million. The Company completed a public stock offering in February 1997,
receiving net cash proceeds from the offering of $130.2 million and $6.6 million
from the exercise of stock options by a former chief executive officer in
connection with the offering. The Company also received $0.4 million from the
exercise of other employee stock options throughout the fiscal year. The Company
used the net proceeds of the stock offering approximately as follows: (i) $89.5
million to redeem and purchase in the market $80.8 million principal amount of
11 1/8% Series B Subordinated Notes (the "Series B Notes"), including $8.7
million for early redemption and market premiums, (ii) $45.0 million to pay down
a term loan outstanding on the previous senior credit facility, and (iii) the
remainder for accrued interest and revolving credit loans under the senior
credit facility. The Company also amended and refinanced the previous senior
credit facility, which permitted it to purchase a limited principal amount of
the Series B Notes by open market purchases. As a result of the public stock
offering and the amended and refinanced Senior Credit Facility, a total of
$137.2 million principal amount of the Series B Notes were retired from the
previously outstanding amount of $190.0 million and a total of $17.6 million of
redemption and market premiums were paid.
At January 31, 1998, long-term obligations (including current installments)
were $179.2 million compared to $290.6 million at January 31, 1997, a decrease
of $111.4 million. At January 31, 1998, the Company had $133.0 million available
under its Senior Credit Facility. In addition, the Company's foreign
subsidiaries have approximately $56 million available borrowings under other
short-term lines of credit.
The Company's cash flow from operations together with amounts available under
its credit facilities were sufficient to fund fiscal 1998 operations, scheduled
payments of principal and interest on indebtedness, and capital expenditures.
Management of the Company believes that cash flow from operations and amounts
available under its credit facilities and new credit facilities in emerging
markets will be adequate to fund operating requirements and expansion plans
during the next 12 months. In addition, management currently believes the
Company will be able to meet long-term cash flow obligations from cash provided
by operations and other existing resources. As further discussed in Note 14 to
the consolidated financial statements under Contingent Pension Liabilities and
Contingent Liability with Respect to the Old Notes (included elsewhere herein),
the Company has merged two pension plans into one of its pension plans and has
reached an agreement-in-principle to settle certain claims arising from the
reorganization in 1993 for $9.4 million. The Company does not expect the merger
of the pension plans to have a material effect on funding requirements for the
merged plans and plans to fund the proposed $9.4 million settlement of the other
claims out of available capital resources from operations and/or credit
facilities.
-26-
The Company's principal foreign operations are located in Western Europe, the
economies of which are not considered to be highly inflationary. The economy in
Mexico is considered highly inflationary beginning February 1, 1997. The
Company enters into foreign exchange contracts in order to reduce its exposure
on certain foreign operations through the use of forward delivery commitments.
During the past several years, the Company's most effective hedge against
foreign currency changes has been the foreign currency denominated debt balances
maintained in respect to its foreign operations. Geographic concentrations of
credit risk with respect to trade receivables are not significant as a result of
the diverse geographic areas covered by the Company's operations.
The Company's foreign operations in Asia consist primarily of distributorships
organized as joint venture subsidiaries. Economies and local currencies
throughout much of Asia have entered a tumultuous period beginning in fiscal
1998 as a result of political turmoil and general economic problems with
principal industries. During fiscal 1998, the Company had approximately $25
million of revenues from Asian sales and royalties and, as of January 31, 1998,
approximately $17.2 million in investments and receivables from Asian
subsidiaries, not including investments in the India joint venture subsidiary.
Part of the Company's hedging strategy is to protect against further currency
devaluation by hedging its expected operating earnings and investments related
to these countries through forward exchange contracts and local borrowings.
There can be no assurance given that such strategies will be effective.
Additionally, such hedging strategies do not mitigate the effect on sales and
operating earnings of the slumping local economies in these countries.
Because of the relatively small part of the Company's revenues and assets
related to Asia, the Company does not believe the Asian economic problems will
have a material impact on the overall Company operations. However, if such
conditions continue, the Company's expected growth in this area of the world
could be adversely affected.
The Company believes that disclosure of its Earnings Before Interest, Taxes,
Depreciation, and Amortization (EBITDA) provides useful information regarding
the Company's ability to incur and service debt, but that it should not be
considered a substitute for operating income or cash flow from operations
determined in accordance with generally accepted accounting principles. Other
companies may calculate EBITDA in a different manner than the Company. EBITDA
does not take into consideration substantial costs and cash flows of doing
business, such as interest expense, income taxes, depreciation, and
amortization, and should not be considered in isolation to or as a substitute
for other measures of performance. EBITDA does not represent funds available
for discretionary use by the Company because those funds are required for debt
service, capital expenditures to replace fixed assets, working capital, and
other commitments and contingencies. EBITDA, as calculated by the Company, also
excludes extraordinary items, discontinued operations, and minority interest in
earnings of subsidiaries. The Company's EBITDA for the years ended January 31,
1998, 1997, and 1996 was $126.2 million, $88.2 million, and $78.7 million,
respectively. However, these amounts include (i) restructuring provisions; (ii)
other income primarily related to various items from previous operations; and
(iii) foreign currency transaction losses, net; loss on disposition of fixed
assets, net; and other, net (see Note 15 to the consolidated financial
statements included elsewhere herein) of $17.9 million, $3.4 million, and $0.4
million for the years ended January 31, 1998, 1997, and 1996, respectively,
which management believes should be deducted from the calculation of EBITDA.
EBITDA for fiscal 1998 as set forth above reflects the impact of $4.1 million of
negative production variances incurred during the last half of fiscal 1998.
RECENT EVENTS AND PROPOSED RECAPITALIZATION
On January 7, 1998, the Company announced it had engaged Goldman, Sachs & Co.
as financial advisor to assist in the process of exploring various strategic
alternatives designed to enhance shareholder value. On March 20, 1998, the
Board of Directors approved a Recapitalization plan, pursuant to which the
Company planned to pay a special cash dividend to stockholders of $12.50 per
share. Consummation of the Recapitalization and payment of the $12.50 dividen