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Filed pursuant to Rule 424(b)(3)
PROSPECTUS Registration No. 333-57203
PHILLIPS-VAN HEUSEN CORPORATION
OFFER TO EXCHANGE UP TO
$150,000,000 OF ITS 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING
$150,000,000 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
SEPTEMBER 24, 1998, UNLESS EXTENDED.
Phillips-Van Heusen Corporation is offering hereby, upon the terms and
subject to the conditions set forth in this Prospectus and accompanying Letter
of Transmittal, which together constitute the Exchange Offer, to exchange an
aggregate of up to $150 million principal amount of its 9 1/2% Senior
Subordinated Notes due 2008 (the 'Exchange Notes') for an identical face amount
of its issued and outstanding 9 1/2% Senior Subordinated Notes Due 2008 (the
'Initial Notes'; the Initial Notes and the Exchange Notes being referred to
collectively as the 'Notes'). See 'The Exchange Offer' for further information
concerning the above and for information with respect to resales of the Exchange
Notes by broker-dealers.
The Exchange Notes are substantially identical to the Initial Notes. See
'Description of Exchange Notes'.
The Exchange Notes are being offered hereby to satisfy certain obligations
of the Company contained in the Registration Rights Agreement. Based on
interpretations by the staff of the Securities and Exchange Commission set forth
in no-action letters issued to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for Initial
Notes may be offered for resale, resold or otherwise transferred by any holder
thereof (other than any holder that is a broker-dealer or an 'affiliate' of the
Company within the meaning of Rule 405 under the Securities Act) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and neither such holder nor any such other person is engaging in
or intends to engage in a distribution of the Exchange Notes. However, the
Company has not sought, and does not intend to seek, its own no-action letter,
and there can be no assurance that the Commission would make a similar
determination with respect to the Exchange Offer. See 'Plan of Distribution'.
The Exchange Notes are designated for trading in the PORTAL Market. There
is no established trading market for the Exchange Notes. The Company does not
currently intend to list the Exchange Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Exchange Notes. The certificates representing the Exchange Notes will be
issued in fully registered form.
SEE 'RISK FACTORS' BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF THE INITIAL NOTES.
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THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August 25, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by Phillips-Van Heusen Corporation (the
'Company') with the Securities and Exchange Commission (the 'Commission') are
hereby incorporated into this Prospectus and shall be deemed to be a part
hereof:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
February 1, 1998, as amended by its amendment on Form 10-K/A No.
1. (File No. 1-724); and
(ii) the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended May 3, 1998 (File No. 1-724).
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 (the 'Exchange Act') subsequent to
the date of this Prospectus and prior to the consummation of the Exchange Offer
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
Copies of all documents incorporated by reference into this Prospectus,
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference therein), will be provided without charge to each
person to whom this Prospectus is delivered, upon oral or written request by
such person to the Secretary of the Company, 1290 Avenue of the Americas, New
York, New York 10104, telephone number (212) 541-5200.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Prospectus, including, without
limitation, statements relating to the plans, strategies, objectives,
expectations and intentions of the Company, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that such forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted with accuracy, and
some of which might not be anticipated, including, without limitation, the
following: (i) the Company's plans, strategies, objectives, expectations and
intentions are subject to change at any time at the discretion of the Company;
(ii) the levels of sales of the Company's apparel and footwear products, both to
its wholesale customers and in its retail stores, and the extent of discounts
and promotional pricing in which the Company is required to engage may vary from
expected levels and amounts; (iii) the Company's plans and results of operations
will be affected by the Company's ability to manage its growth and inventory;
and (iv) other risks and uncertainties indicated from time to time in the
Company's filings with the Commission.
Future events and actual results, financial and otherwise, could differ
materially from those set forth in or contemplated by the forward-looking
statements herein. Important factors that could contribute to such differences,
in addition to those referred to above, are set forth herein under 'Risk
Factors'.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus. Unless the context otherwise requires, as used in this Prospectus,
the term 'Company' means Phillips-Van Heusen Corporation ('PVH') and its
subsidiaries ('Subsidiaries'). The Company's fiscal year is based on the 52-53
week period ending on the Sunday on or closest to January 31 and is designated
by the calendar year in which the fiscal year commences. The Company derives
market share data information used herein from various industry sources.
THE COMPANY
OVERVIEW
The Company is a leading marketer of men's, women's and children's apparel
and footwear, sold under five nationally recognized brand names -- Van Heusen,
Bass, Izod, Gant and Geoffrey Beene -- in the dress shirt, casual footwear, and
sportswear sectors. The Company is brand focused and manages the design,
sourcing and manufacturing of substantially all of its products on a brand by
brand basis. The Company's products include both dress and sport shirts and
casual shoes and, to a lesser extent, sweaters, neckwear, furnishings, bottoms,
outerwear and leather and canvas accessories. Approximately 23% of the Company's
net sales in fiscal 1997 were derived from sales of dress shirts, 33% from sales
of footwear and related products and 44% from sales of other apparel goods,
primarily branded sportswear. The Company markets its products at a wholesale
level through national and regional department store chains and also directly to
consumers through its own retail stores, generally located in factory outlet
retail malls. The Company believes that marketing through the wholesale channel
provides the opportunity to build brand equity and represents its core business,
and views its retail business as a complement to its strong branded positions in
the wholesale market. The Company's strategy is to exploit and expand its
branded position in the United States and, on a longer-term basis, in the
international arena, and the Company believes that its portfolio of well
recognized brands offers the Company the best opportunity for realizing sales
growth and enhancing profit margins.
The Company's net sales and EBITDA (exclusive of the non-recurring charges
to earnings recorded in fiscal 1997) were $1,350.0 million and $70.8 million,
respectively, in fiscal 1997 versus $1,359.6 million and $77.2 million,
respectively, in fiscal 1996. Fiscal 1997 was a year of transition, as the
Company continued to realign and strengthen its business and further reduce
costs. The Company continued its store closing program and closed its sweater
manufacturing operations, which resulted in a planned reduction of revenue, made
a major investment of $18.4 million in incremental advertising expenditures in
the second half of the year, and took non-recurring charges to earnings of
$132.7 million in connection with certain restructuring expenses. The Company
believes that it made significant progress in its apparel segment where sales
and profitability increased, but it was disappointed with the results of its
footwear and related products segment. The Company believes that the increased
advertising expenditures and brand repositionings executed in 1997 position it
well to compete in its markets and expects the actions which gave rise to the
1997 charges to result in aggregate cost savings of over $40 million in the
period 1998 to 2000, and to exceed $20 million annually by 2000.
The Company's Van Heusen, Bass, Izod, Gant and Geoffrey Beene brands
collectively account for approximately 93% of the Company's net sales, with
approximately 73% of net sales being derived from Van Heusen, Bass and Geoffrey
Beene alone. Izod and Gant were acquired by the Company in 1995 and subsequently
repositioned in their markets. The Company believes that Izod and Gant have
substantial brand equity and position the Company well to capitalize on the
increasing popularity of branded sportswear. The Company owns four of the five
brands, with sales of the fifth -- Geoffrey Beene -- being under licensing
agreements with that designer. In addition, the Company recently entered into a
license agreement to market DKNY brand men's dress shirts.
The Company's brands enjoy national recognition in their respective sectors
of the market and share a rich heritage with between 40 and 120 years of
operating history. They represent sales leaders
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in their respective market niches, from a dominant position in dress shirts, to
a leading position in casual footwear, to an increasingly important position in
men's sportswear. In the United States, Van Heusen is the best selling men's
dress shirt and woven sport shirt brand, and Geoffrey Beene is the best selling
men's designer dress shirt brand. The Company believes that its overall share of
the United States men's dress shirt market, including its branded, designer and
private label offerings, is the largest of any company and that it has a growing
market share, currently in excess of 32%, in the key department store channel.
In the United States, Izod products include the best selling men's sweater
brand, one of the best selling basic knit shirts and the number one ranked golf
apparel brand in pro shops and resorts. Gant represents the largest collection
brand in several countries in Europe, and is second only to 'Polo' in most of
the other European countries. Bass is the leading brand of men's, women's and
children's casual shoes at the moderate price range in the United States.
The Company markets its five premier brands to different segments of the
market, appealing to varied demographic sectors and a broad spectrum of
consumers. This diversity of the Company's brands is intended to minimize
competition among the brands. The Van Heusen brand, designed to target the
moderate price range, appeals to the relatively conservative 'middle American'
consumer. The typical Bass consumer is family oriented, views the Bass brand as
'Americana', associated with a casual, outdoor lifestyle, and pays moderate
prices for his or her product. The Company's Izod brand is 'active inspired',
designed to sell on the main floor of department stores largely in knitwear
categories in the moderate to upper moderate price range. The Gant brand is the
Company's entry into collection sportswear and focuses on a traditional consumer
with refined taste who is prepared to purchase apparel in the higher price range
of the market. Geoffrey Beene is targeted toward a more fashion-forward consumer
who is prepared to purchase apparel in the upper moderate price range. The
Company's products are designed to appeal to relatively stable demographic
sectors and generally are not reliant on rapidly changing fashion trends.
The Company believes that because of its strong brands it is
well-positioned to capitalize on several trends that have affected the apparel
and footwear sectors in recent years. These include the stabilization of the
department store sector with a smaller number of stronger players, among which
the Company ranks its most important customers; the continued importance of
branding as a measure of product differentiation; continued growth in the
branded sportswear sector; and the stabilization of the dress shirt sector after
several years of modest decline. In addition, the recent lack of momentum in the
athletic shoe sector provides the Company with the opportunity to capitalize on
its Bass casual footwear products.
Substantially all of the Company's sales are made in the United States.
However, the Company believes that global name awareness is a key to the
creation of lasting brand equity and that it must pursue selective opportunities
to expand the sales of its brands internationally. Currently, Gant is the
Company's brand that is most developed internationally, with its name
recognition and sales substantially stronger in Europe than in the United
States. Gant products are sold in 35 countries, including in over 50 Gant stores
owned or franchised by the Company's licensing partner, Pyramid Sportswear, in
which the Company owns a minority interest with an option to acquire 100%.
Although the Van Heusen, Bass and Izod product lines also are sold outside the
United States, both directly and through licensees, their international sales
are small relative to Gant. Based on its experience with Gant, the Company
believes that opportunities exist to expand the sales of its Van Heusen, Bass
and Izod brands internationally.
Consistent with its strategy of developing its brands, the Company has
focused on the wholesale sector -- primarily department stores -- as the key
source of distribution for its products. The Company believes that the wholesale
channel generally, and department stores specifically, provide the best means of
promoting a fully conceptualized image for each of its brands and of securing
broad awareness of its products and image. The Company's wholesale customers for
branded and designer apparel include May Co., Federated, JC Penney, Proffits and
Dillard's. The Company's customers for footwear include Federated, May Co.,
Dillard's, Belk's and Nordstrom. The Company's ten largest wholesale customers,
accounting for over 60% of the Company's fiscal 1997 sales to wholesale
customers, each have been the Company's customers for more than 25 years. The
Company believes
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that its customers rely on its ability to design, manufacture to exacting
quality standards and deliver on a timely basis commercially successful apparel
and footwear programs.
While focused on the wholesale sector, the Company also sells its products
directly to consumers in approximately 695 Company-owned stores located
primarily in factory outlet retail malls. The stores are operated in five
formats, matching each of the Company's premier brands -- Van Heusen, Bass,
Izod, Gant and Geoffrey Beene. Van Heusen and Bass, which have the broadest
national recognition, followed by Izod, are in the broadest range of malls.
Geoffrey Beene stores are located in malls where that brand has greater name
recognition. Gant stores are included in a limited number of the most successful
of the nation's malls. Historically, the Company participated in the significant
expansion of the factory outlet mall sector, capitalizing on mall expansion to
build a portfolio of approximately 1,000 stores and generate significant sales
and cash flow growth. However, this strategy left the Company reliant on mall
growth rather than on brand and market share development as the primary driver
of expansion, contributed to a deterioration in the quality and stability of
earnings and failed to strengthen the image and brand equity in its major
businesses. Since 1995, the Company has significantly reduced the number of its
retail locations and has closed its least attractive stores to optimize its
portfolio. The Company's retail presence remains an important complement to its
strong branded positions in the wholesale market, facilitating product
experimentation, the gathering of market intelligence, effective inventory
control and management of surplus product.
STRATEGY
The Company's strategy is to exploit and expand its branded position in the
United States and, on a longer-term basis, internationally. Elements of this
strategy include:
o CAPITALIZE ON SPORTSWEAR OPPORTUNITY. With a renewed strong focus by
retailers on the importance of men's sportswear and the customer impact
of brand differentiation within that sector, the Company has actively
sought to build a leading branded presence in this fragmented niche,
acquiring existing sportswear brands (Izod and Gant) and expanding their
presence in the wholesale sector. This renewed focus is in part
attributable to the on-going move of employers towards casual dress
policies, such as 'casual Fridays', and the increasing number of people
who work at home. In addition, outside of the workplace, people's social
activities generally focus on a more casual lifestyle. These trends
present greater opportunities for the Company in sportswear. Sportswear
now represents 66% of the Company's apparel segment sales, and it is
expected that sportswear will continue to increase as a percentage of
sales.
o EXTEND BRAND PRODUCT RANGE. The Company continues to broaden the
product range of its brands, capitalizing on the name recognition,
popular draw and discrete target customer segmentation of each of its
major labels. For example, dress shirts are now marketed under the Bass
name and sportswear under the Van Heusen name, and Izod recently has
expanded its offerings to include products for the fall and holiday
seasons, a step toward building a year-round brand. As part of the
introduction of the European Gant collection in the United States, the
Company expanded its sportswear offerings to include sport coats,
outerwear, rainwear, swimwear and accessories. Brand differentiation is
maintained with design, manufacturing and procurement functions managed
at the brand level.
o PROMOTE GLOBAL BRAND AND IMAGE. The Company believes that over the
long-term the most successful brands will be those with a consistent
imagery, market positioning and name recognition throughout the world's
major consumer markets. The Company's longer-term goal is to develop its
core brands into international consumer franchises. Currently, all four
of the Company's owned brands are distributed internationally, although
only Gant, which in its niche is the leading market player in several
European countries and is second only to 'Polo' in most of the other
European countries, has achieved widespread brand recognition. The Van
Heusen brand is licensed in 21 countries in North, Central and South
America. In 1992, Bass began marketing its footwear internationally and
is now selling limited amounts of footwear to retailers
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in Europe, Canada, South America, the Middle East, Africa and Asia. The
Company plans to build on these bases and to project a consistent global
image for each of its owned brands.
o BUILD UPON ENHANCED ADVERTISING PRESENCE. The Company launched
advertising campaigns for its brands in the second half of fiscal 1997,
which resulted in an increase in advertising expenditures by $18.4
million from fiscal 1996 to $37.8 million. Based upon dialogue with its
wholesale customers, the Company believes that the campaigns were well
received. The Company is committed to a continued advertising program to
support and further develop the national and international recognition
of its brands. The Company believes that ongoing communication with the
consumer is a core ingredient for branded marketing success.
o LEVERAGE CORE COMPETENCIES IN LOGISTICAL AND IT SUPPORT. With primary
focus on the more demanding wholesale customer nationwide and on
securing and maintaining a strong presence on the department store
floor, the Company has made significant investments to ensure the
adequacy of its inventory replenishment programs, its capacity to
monitor sales by SKU and margin and its ability to ensure its customers
of timely product availability in a cost-effective manner.
o INCREASE OPERATING EFFICIENCIES. The Company is committed to a cost
reduction program and constantly explores alternative methods to achieve
that objective. Given its size, purchasing power and ability to optimize
manufacturing and outsourcing alternatives, the Company is in a position
to achieve significant efficiencies in procurement and manufacturing.
This is essential if the Company is to provide high levels of service
and responsiveness to its wholesale customers, while maintaining control
over costs and working capital. The Company has developed significant
manufacturing flexibility by maintaining a range of Company-owned and
third party manufacturing capacity available to it, while optimizing
margins through recourse to low cost non-United States manufacturing.
The Company has announced a number of programs, including the
contraction of its United States manufacturing and logistical
infrastructure, to achieve significant cost savings.
o OPERATE COMPLEMENTARY RETAIL OPERATIONS. The Company's factory outlet
retail stores provide a valuable complement to its wholesale presence,
allowing for product experimentation, the gathering of market
information, increasing the efficiency of inventory and surplus product
management. The Company's stores sell a breadth of product not otherwise
found in the Company's wholesale offerings. With a significant program
of store closures in progress, the Company has been very focused on
improving the profitability of the retail portfolio as a whole and
maintaining its financial viability as a second channel of distribution.
The Company's remaining retail stores are profitable, and the average
sales per square foot and inventory turn at such stores have improved
significantly since 1995, thereby positioning the Company's retail
operations to generate increasing earnings and cash flows.
IMPLEMENTATION OF THE COMPANY'S STRATEGIES
Specific action steps taken beginning in 1995 and continuing into 1998 and
1999 with respect to the implementation of these strategies include: (i) the
acquisition of the Izod and Gant brands; (ii) the reorganization of the
Company's non-dress shirt operations along brand lines versus a wholesale/retail
organizational structure; (iii) the complete repositioning of Gant's domestic
brand image to match its highly successful European brand image; (iv) the
launching of new, focused Van Heusen, Izod and Gant advertising campaigns; (v)
the closure of approximately 400 of the Company's worst performing retail
locations in a program that by the end of fiscal 1998, after approximately 50
new store openings, will have reduced the retail portfolio from approximately
1,000 locations to approximately 650; (vi) the closure of domestic shirt
manufacturing plants and its United States mainland shoe manufacturing plant;
(vii) the consolidation of the Company's domestic warehousing and distribution
facilities; and (viii) the closure of the Company's sweater manufacturing
operations, which were unprofitable, capital intensive and did not match the
Company's branded strategy.
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These steps have had the effect of focusing the Company's attention and
resources on its core brands and have yielded strong and positive results, with
further benefits expected to continue over the next three years. The Company's
apparel operations (excluding sweater operations) saw net sales increase 4.9% in
fiscal 1997 to $882.0 million, representing 65% of total fiscal 1997 net sales,
gross margins improve from 31.3% to 32.9% and operating income increase over 50%
to $45.4 million in fiscal 1997 (after incremental advertising expenses of $15.0
million) as compared to fiscal 1996. The Company's net sales of wholesale
branded apparel products increased 24% in 1997 to $387.2 million. With $6.0
million of annual savings already realized from the closure of dress shirt
manufacturing facilities in 1995 and 1996, the further closures in manufacturing
facilities and consolidation of logistical infrastructure announced by the
Company in 1997 are expected to result in substantial future cash savings.
Within the dress shirt sector, as the benefits of brand development and
manufacturing reorientation have begun to be realized, estimated market share in
the department store channel in which the Company competes has increased to 31%
from 26%, with sales increasing by 20% in fiscal 1997 as compared to fiscal
1996, and operating margins and profitability more than doubling. Approximately
60 underperforming Geoffrey Beene sportswear retail outlets have been closed,
resulting in significant increases in productivity and sales per square foot in
the remaining stores, and eliminating the losses experienced by that business in
1996. Gant's 1997 repositioning in the United States was implemented as the
Company opened a new flagship store on Fifth Avenue in Manhattan and increased
by 34% the number of in-store shops in department stores carrying the Gant
collection, with a further increase of 30% planned by department stores in 1998.
Izod's wholesale sales doubled during 1997, with a 32% increase in the number of
stores carrying the line. While Van Heusen's retail sales experienced a small
decline as poorly performing stores were closed, operating profit increased 23%,
reflecting the benefits of the Company's programs.
The process of implementing the Company's strategic initiatives has not
been without disappointment. In the Bass business, fiscal 1997 net sales
declined 5% to $439.0 million, as a result of the Company's attempt to
reposition its Bass brand to higher price points, which proved overly
aggressive. While the higher price position was endorsed by the Company's
wholesale customers, the initiatives were not well executed and did not meet
with consumer support, resulting in an inventory build up at both the wholesale
level and in the Company's own factory outlet retail stores. To protect its
franchise and preserve its wholesale customer relationships, the Company took
substantial markdowns in its own retail stores and aggressively financed the
markdowns required by its wholesale customers to sell this inventory. Line
management responsible for the Bass business has been changed, a decision was
made to close the United States mainland manufacturing facilities and the brand
was returned to its historic positioning targeted in the moderate price range as
a family oriented, 'Americana'-associated casual lifestyle brand. The result of
these actions was a non-recurring charge to fiscal 1997 earnings of $54.2
million and a decline in footwear and related products operating income (before
such charge) of $17.5 million to $15.4 million. While the Company is
disappointed at the outcome of the Bass repositioning effort, the Company
believes that its current plans for Bass will allow it to return to its
historical levels of sales and profitability.
The implementation of these strategic initiatives has resulted in the
Company taking pre-tax charges of $27.0 million in fiscal 1995 and $132.7
million in fiscal 1997, inclusive of the $54.2 million of Bass related charges.
The Company believes that these initiatives have positioned it to achieve
significant improvements in sales, operating income and cash flow in its apparel
businesses and will position it further to compete cost effectively in the
future across all of its business sectors. Furthermore, the Company believes
that the initiatives favorably position the Company to accelerate its strategy
of building pre-eminent global apparel and footwear brands.
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COMPANY'S STRENGTHS
The key strengths of the Company are as follows:
o MARKET LEADERSHIP POSITION. The Company maintains a dominant position
in men's dress shirts, a leading position in casual footwear and an
increasingly important position in the fragmented men's sportswear
market. The Company's strong market shares provide it with significant
marketing strength relative to its competitors and attractive selling
floor space at its department store customers.
o HIGH BRAND AWARENESS. The Company's five premier brands -- Van Heusen,
Bass, Izod, Gant and Geoffrey Beene -- enjoy national recognition in
their respective sectors of the market. Brand recognition is critical in
the apparel and footwear industries, where strong brand names help
define consumer preferences and drive department store floor space
allocation.
o MARKET SEGMENTATION. The Company markets its five premier brands to
different segments of the market, appealing to varied demographic
sectors and a broad spectrum of consumers. Accordingly, the diversity of
the Company's brands is intended to minimize competition among the
brands.
o STRENGTH AND BREADTH OF CUSTOMERS. The Company markets its products to
a broad spectrum of customers, including department stores, as well as
directly to the consumer in its factory outlet retail stores. The
Company's retail business is intended to serve as a complement to its
strong branded positions in the wholesale market. The Company's ten
largest wholesale customers, accounting for over 60% of the Company's
fiscal 1997 sales to wholesale customers, each have been the Company's
customers for more than 25 years. No single customer accounted for more
than 6% of the Company's total sales in any of the last three years.
o STRONG LOGISTICS. Timely delivery and product quality are among the
most important criteria used by retailers to evaluate suppliers. Because
of the Company's relatively large size and vertical integration, it has
the capacity to contend successfully with the demands of large
retailers. The Company's investment in information technology, use of
the Company's electronic data interchange system ('EDI'), automated
warehousing and distribution operations and global sourcing network
facilitate quick response to sales trends and inventory demands,
maximizing its inventory flexibility and contributing to its strength in
dealing with its large retail customers.
o WORLDWIDE SOURCING ABILITY. The Company has the capability to source
effectively on a world-wide basis as a result of its structure and
history in the apparel and footwear industries. The Company employs
highly seasoned sourcing specialists for each brand. To support these
specialists, the Company maintains a world-wide sourcing network, with
offices in various countries, whose responsibilities include technical
support, quality control and human rights monitoring. These sourcing
specialists provide expertise in sourcing multiple classifications,
which results in highly efficient and cost-effective inventory movement.
As a result of the Company's sourcing network, the Company has developed
strong and stable global relationships over the years.
o STRONG MANAGEMENT. The Company's management is composed of a loyal team
of relatively young and experienced individuals. The average officer of
the Company is under 50 and has spent 25 years in the apparel industry,
13 of those years being with the Company. The Company believes that its
unique team has the experience and expertise to implement the objectives
of the Company.
The Company was incorporated in the State of Delaware in 1976 as the
successor to a business begun in 1881, and, with respect to Bass, a business
begun in 1876. The Company's principal executive offices are located at 1290
Avenue of the Americas, New York, New York 10104; its telephone number is (212)
541-5200.
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THE EXCHANGE OFFER
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THE EXCHANGE OFFER.............................. The Company is offering to exchange, upon the terms and subject
to the conditions of the Exchange Offer, up to $150 million
aggregate principal amount of its 9 1/2% Senior Subordinated
Notes due 2008 for a like aggregate principal amount of its
outstanding 9 1/2% Senior Subordinated Notes due 2008. The
terms of the Exchange Notes are identical in all material
respects (including principal amount, interest rate and
maturity) to the terms of the Initial Notes for which they may
be exchanged pursuant to the Exchange Offer, except that the
Exchange Notes are freely transferable by holders thereof
(other than as provided herein), and are not subject to any
covenant regarding registration under the Securities Act of
1933 (the 'Securities Act').
INTEREST PAYMENTS............................... Interest on the Exchange Notes shall accrue from the last
Interest Payment Date (May 1 or November 1) on which interest
was paid on the Initial Notes so surrendered or, if no interest
has been paid on such Initial Notes, from April 22, 1998.
NO MINIMUM CONDITION............................ The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Initial Notes being tendered for
exchange.
EXPIRATION DATE; WITHDRAWAL OF TENDER........... The Exchange Offer will expire at 5:00 p.m., New York City
time, on September 24, 1998 (the 'Expiration Date'). The
Company currently does not intend to extend the Expiration
Date. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
PROCEDURES FOR TENDERING INITIAL NOTES.......... Each holder of Initial Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of Transmittal,
or a facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise deliver
such Letter of Transmittal, together with the Initial Notes and
any other required documentation, to the Exchange Agent at the
address set forth herein.
USE OF PROCEEDS................................. The Company will not receive any proceeds from the exchange of
Notes pursuant to the Exchange Offer.
SPECIAL PROCEDURES FOR BENEFICIAL OWNERS........ Any beneficial owner whose Initial Notes are registered in the
name of a broker, dealer, commercial bank, trust company or
other nominee who wishes to tender should contact such
registered holder promptly and instruct such registered holder
to tender on such beneficial owner's own behalf. If such
beneficial owner wishes to tender on such beneficial owner's
own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering the Initial
Notes, either make appropriate arrangements to register
ownership of the Initial Notes in such beneficial owner's name
or obtain a properly completed bond power from the
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
registered holder. The transfer of registered ownership may
take considerable time.
GUARANTEED DELIVERY PROCEDURES.................. Holders of Initial Notes who wish to tender their Initial Notes
and whose Initial Notes are not entirely available or who
cannot deliver their Initial Notes, the Letter of Transmittal
or any other documents required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date must tender
their Initial Notes according to the guaranteed delivery
procedures set forth herein.
ACCEPTANCE OF INITIAL NOTES AND DELIVERY OF THE The Company will accept for exchange any and all Initial Notes
EXCHANGE NOTES.................................. which are properly tendered in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date.
EFFECT ON THE HOLDERS OF INITIAL NOTES.......... As a result of the making of, and upon acceptance for exchange
of all validly tendered Initial Notes pursuant to the terms of,
the Exchange Offer, the Company will have fulfilled the
covenant contained in the Exchange and Registration Rights
Agreement (the 'Registration Rights Agreement') dated April 22,
1998 among the Company and Goldman, Sachs & Co., Chase
Securities, Inc. and Citicorp Securities, Inc. (the 'Initial
Purchasers'). Accordingly, there will be no increase in the
interest rate on the Initial Notes pursuant to the terms of the
Registration Rights Agreement, and the holders of the Initial
Notes will have no further registration or other rights under
the Registration Rights Agreement other than those which
survive the Exchange Offer. Holders of the Initial Notes who do
not tender their Initial Notes in the Exchange Offer will
continue to hold such Initial Notes and will be entitled to all
the rights and subject to all the limitations applicable
thereto under the Indenture dated April 22, 1998 between the
Company and Union Bank of California, N.A., as Trustee,
relating to the Initial Notes and the Exchange Notes (the
'Indenture'), except for any such rights under the Registration
Rights Agreement that by their terms terminate or cease to have
further effectiveness as a result of the making of, and the
acceptance for exchange of all validly tendered Initial Notes
pursuant to, the Exchange Offer. All untendered Initial Notes
will continue to be subject to the restrictions on transfer
provided for in the Initial Notes and the Indenture. To the
extent that the Initial Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered Initial Notes
could be adversely affected.
CONSEQUENCE OF FAILURE TO EXCHANGE.............. Initial Notes that are not exchanged for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Initial Notes as set forth
in the legend thereon and in the Indenture.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
The Company currently does not anticipate that it will register
any Initial Notes which are not exchanged pursuant to the
Exchange Offer under the Securities Act after the Expiration
Date.
FEDERAL INCOME TAX CONSEQUENCES................. The exchange pursuant to the Exchange Offer should not result
in gain or loss to the holders or the Company for federal
income tax purposes.
EXCHANGE AGENT.................................. Union Bank of California, N.A. (the 'Exchange Agent') is
serving as exchange agent in connection with the Exchange
Offer. Union Bank of California, N.A. also serves as the
Trustee under the Indenture.
<CAPTION>
TERMS OF THE EXCHANGE NOTES
<S> <C>
SECURITIES OFFERED.............................. $150 million aggregate principal amount of 9 1/2% Senior
Subordinated Notes due 2008.
MATURITY DATE................................... May 1, 2008.
INTEREST PAYMENT DATES.......................... May 1 and November 1, commencing November 1, 1998.
OPTIONAL REDEMPTION............................. The Exchange Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after May 1,
2003, at the redemption prices set forth herein plus accrued
and unpaid interest to the date of redemption. In addition, if
on or before May 1, 2001 one or more Public Equity Offerings
(as defined in the Indenture) are completed, the Company, at
its option, may redeem in the aggregate up to one-third of the
original principal amount of the Exchange Notes at a redemption
price equal to 109.50% of the aggregate principal amount so
redeemed plus accrued and unpaid interest to the redemption
date, with the net proceeds of such Public Equity Offerings,
provided that at least two-thirds of the original principal
amount of the Exchange Notes remains outstanding immediately
after the occurrence of any such redemption.
RANKING......................................... The Exchange Notes will be general unsecured obligations of
PVH, subordinated in right of payment to all existing and
future Senior Debt (as defined in the Indenture). The Notes
will also be effectively subordinated to all existing and
future liabilities of the Company's Subsidiaries. As of May 3,
1998, after giving effect to each of the Initial Notes Offering
and the senior credit facility (the 'Credit Facility') and the
use of proceeds therefrom, the Company has approximately $148
million principal amount of Senior Debt represented by
borrowings under its Credit Facility and the Initial Notes and
approximately $147 million of Senior Debt represented by
letters of credit. In addition, the Company has an additional
approximately $130 million of unused credit capacity available
under its Credit Facility. The indebtedness under the Credit
Facility is Senior Debt.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
The existing Senior Debt is, and any future indebtedness under
the Credit Facility generally will be, secured by substantially
all of the Company's assets.
CHANGE OF CONTROL............................... In the event of a Change of Control (as defined in the
Indenture), the Company will be required to offer to repurchase
the Notes at a purchase price equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest to
the date of purchase.
ASSET SALE PROCEEDS............................. The Company may not make any Asset Disposition (as defined in
the Indenture) in one or more related transactions, unless (i)
the Company receives fair market value, as determined by the
Board of Directors, (ii) 85% of the consideration consists of
cash, readily marketable cash equivalents or the assumption of
debt of the Company, and (iii) all Net Available Proceeds (as
defined in the Indenture), less any amounts invested or
committed to be invested within 365 days of such disposition in
assets related to the business of the Company or applied to
permanently repay Senior Debt, are applied to (a) the repayment
of Senior Debt then outstanding, (b) make an offer to purchase
any outstanding Notes at par, and (c) any other use not
otherwise prohibited by the Indenture.
CERTAIN COVENANTS............................... The Indenture contains covenants for the benefit of the holders
of Exchange Notes that, among other things, restrict the
ability of the Company to: (i) incur additional Debt (as
defined in the Indenture), (ii) pay dividends or make
distributions, (iii) incur liens, (iv) enter into transactions
with affiliates, or (v) merge or consolidate the Company.
</TABLE>
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the Exchange
Notes in exchange for the Initial Notes.
RISK FACTORS
Holders of Initial Notes should consider carefully the matters set forth
under 'Risk Factors', as well as the other information and financial statements
and data included in this Prospectus.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated financial information for each of the
five years ended February 1, 1998 has been derived from the consolidated
financial statements of the Company which have been audited by Ernst & Young
LLP, independent auditors. The consolidated results of operations for 1994, 1995
and 1997 include non-recurring charges related principally to a series of
actions the Company has taken to accelerate the execution of its ongoing
strategy to build its brands. The adjusted statements of operations data and
segment data segregate the non-recurring charges from the Company's ongoing
operations. 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' included elsewhere herein discusses the Company's results
of operations before the non-recurring charges. The following summary
consolidated financial information for each of the thirteen weeks ended May 4,
1997 and May 3, 1998 have been derived from the unaudited condensed consolidated
financial statements of the Company and are subject to year-end adjustments;
however, in the opinion of management, all known adjustments (which consist only
of normal recurring accruals) have been made to present fairly the consolidated
operating results for the unaudited periods. The results of operations for the
interim periods are not necessarily indicative of those for a full fiscal year
due, in part, to seasonal factors.
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JANUARY 30, JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1,
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales............................. $1,152,394 $1,255,466 $1,464,128 $1,359,593 $1,350,007
Cost of goods sold.................... 747,555 845,655 987,921 910,517 937,965
----------- ----------- ----------- ----------- -----------
Gross profit.......................... $ 404,839 $ 409,811 $ 476,207 $ 449,076 $ 412,042
Selling, general and administrative
expenses............................ 324,528 353,109 428,634 401,338 412,495
Facility and store closing,
restructuring and other expenses.... -- 7,000 27,000 -- 86,700
----------- ----------- ----------- ----------- -----------
Income (loss) before Year 2000
computer conversion expenses,
interest and taxes.................. $ 80,311 $ 49,702 $ 20,573 $ 47,738 $ (87,153 )
Year 2000 computer conversion
expenses............................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) before interest and
taxes............................... $ 80,311 $ 49,702 $ 20,573 $ 47,738 $ (87,153 )
Interest expense, net................. 16,679 12,793 23,199 23,164 20,672
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes............ $ 63,632 $ 36,909 $ (2,626 ) $ 24,574 $ (107,825 )
Income tax expense (benefit).......... 20,380 6,894 (2,920 ) 6,044 (41,246 )
Extraordinary loss.................... 11,394 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ 31,858 $ 30,015 $ 294 $ 18,530 $ (66,579 )
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss) per share:
Basic................................ $ 1.22 (1) $ 1.13 $ 0.01 $ 0.69 $ (2.46 )
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted.............................. $ 1.18 (1) $ 1.11 $ 0.01 $ 0.68 $ (2.46 )
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
ADJUSTED STATEMENT OF OPERATIONS DATA
(BEFORE NON-RECURRING CHARGES)
Net sales............................. $1,152,394 $1,255,466 $1,464,128 $1,359,593 $1,350,007
Cost of goods sold.................... 747,555 845,655 987,921 910,517 937,965
Non-recurring charges................. -- -- -- -- (46,000 )
----------- ----------- ----------- ----------- -----------
Gross profit before non-recurring
charges............................. $ 404,839 $ 409,811 $ 476,207 $ 449,076 $ 458,042
SG&A expenses and non-recurring
charges............................. 324,528 360,109 455,634 401,338 499,195
Non-recurring charges................. -- (7,000 ) (27,000 ) -- (86,700 )
----------- ----------- ----------- ----------- -----------
SG&A expenses before non-recurring
charges............................. $ 324,528 $ 353,109 $ 428,634 $ 401,338 $ 412,495
Income (loss) before Year 2000
computer conversion expenses,
interest, taxes and non-recurring
charges............................. 80,311 56,702 47,573 47,738 45,547
Year 2000 computer conversion
expenses............................ -- -- -- -- --
Income (loss) before interest, taxes
and non-recurring charges........... 80,311 56,702 47,573 47,738 45,547
Interest expense, net................. 16,679 12,793 23,199 23,164 20,672
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes,
non-recurring charges and
extraordinary item.................. $ 63,632 $ 43,909 $ 24,374 $ 24,574 $ 24,875
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
MAY 4, MAY 3,
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales............................. $ 285,925 $ 295,765
Cost of goods sold.................... 186,957 193,257
------------ ------------
Gross profit.......................... $ 98,968 $ 102,508
Selling, general and administrative
expenses............................ 100,654 101,954
Facility and store closing,
restructuring and other expenses.... -- --
------------ ------------
Income (loss) before Year 2000
computer conversion expenses,
interest and taxes.................. $ (1,686) 554
Year 2000 computer conversion
expenses............................ -- (2,000)
------------ ------------
Income (loss) before interest and
taxes............................... $ (1,686) $ (1,446)
Interest expense, net................. 4,932 5,466
------------ ------------
Income (loss) before taxes............ $ (6,618) $ (6,912)
Income tax expense (benefit).......... (2,078) (2,427)
Extraordinary loss.................... -- 1,060
------------ ------------
Net income (loss)..................... $ (4,540) $ (5,545)
------------ ------------
------------ ------------
Net income (loss) per share:
Basic................................ $ (0.17) $ (0.20)(2)
------------ ------------
------------ ------------
Diluted.............................. $ (0.17) $ (0.20)(2)
------------ ------------
------------ ------------
ADJUSTED STATEMENT OF OPERATIONS DATA
(BEFORE NON-RECURRING CHARGES)
Net sales............................. $ 285,925 $ 295,765
Cost of goods sold.................... 186,957 193,257
Non-recurring charges................. -- --
------------ ------------
Gross profit before non-recurring
charges............................. $ 98,968 $ 102,508
SG&A expenses and non-recurring
charges............................. 100,654 101,954
Non-recurring charges................. -- --
------------ ------------
SG&A expenses before non-recurring
charges............................. $ 100,654 $ 101,954
Income (loss) before Year 2000
computer conversion expenses,
interest, taxes and non-recurring
charges............................. (1,686) 554
Year 2000 computer conversion
expenses............................ -- (2,000)
Income (loss) before interest, taxes
and non-recurring charges........... (1,686) (1,446)
Interest expense, net................. 4,932 5,466
------------ ------------
Income (loss) before taxes,
non-recurring charges and
extraordinary item.................. $ (6,618) $ (6,912)
------------ ------------
------------ ------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JANUARY 30, JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1,
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SEGMENT DATA (BEFORE NON-RECURRING
CHARGES)
Net sales -- apparel................... $ 757,452 $ 812,993 $1,006,701 $ 897,370 $ 911,047
Net sales -- footwear and related
products............................. 394,942 442,473 457,427 462,223 438,960
----------- ----------- ----------- ----------- -----------
Total net sales........................ $1,152,394 $1,255,466 $1,464,128 $1,359,593 $1,350,007
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Operating income (loss) -- apparel..... $ 53,645 $ 35,994 $ 37,432 $ 30,021 $ 45,416
Operating income -- footwear and
related products..................... 39,638 31,207 23,026 32,888 15,382
----------- ----------- ----------- ----------- -----------
Total operating income................. $ 93,283 $ 67,201 $ 60,458 $ 62,909 $ 60,798
Corporate expenses..................... (12,972 ) (10,499 ) (12,885 ) (15,171 ) (15,251 )
----------- ----------- ----------- ----------- -----------
Income (loss) before Year 2000 computer
conversion expenses, interest, taxes,
non-recurring charges and
extraordinary item................... $ 80,311 $ 56,702 $ 47,573 $ 47,738 $ 45,547
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
OTHER DATA
EBITDA (before non-recurring
charges)(3).......................... $ 99,893 $ 81,467 $ 81,313 $ 77,176 $ 70,847
Capital expenditures................... 47,866 53,140 39,773 22,578 17,923
Depreciation and amortization.......... 19,582 24,765 33,740 29,438 25,300
Cash dividends......................... 3,920 3,984 4,007 4,050 4,065
Ratio of EBITDA to interest
expense(4)........................... 6.0x 5.8x 2.3x 3.3x --
Ratio of adjusted EBITDA (before
non-recurring charges) to interest
expense.............................. 6.0x 6.4x 3.5x 3.3x 3.4x(6)
Ratio of earnings to fixed
charges(5)........................... 2.7x 2.0x -- 1.5x --
Ratio of adjusted earnings (before
non-recurring charges) to fixed
charges.............................. 2.7x 2.2x 1.5x 1.5x 1.5x(6)
Ratio of total debt to adjusted EBITDA
(before non-recurring charges)....... 1.7x 2.1x 3.7x 2.8x 3.5x
Ratio of total debt to capital......... 40.8% 38.2% 52.3% 43.1% 53.0%
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
MAY 4, MAY 3,
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
SEGMENT DATA (BEFORE NON-RECURRING
CHARGES)
Net sales -- apparel................... $ 193,298 $ 205,389
Net sales -- footwear and related
products............................. 92,627 90,376
---------- ----------
Total net sales........................ $ 285,925 $ 295,765
---------- ----------
---------- ----------
Operating income (loss) -- apparel..... $ (544) $ 3,226
Operating income -- footwear and
related products..................... 2,648 581
---------- ----------
Total operating income................. $ 2,104 $ 3,807
Corporate expenses..................... (3,790) (3,253)
---------- ----------
Income (loss) before Year 2000 computer
conversion expenses, interest, taxes,
non-recurring charges and
extraordinary item................... $ (1,686) $ 554
---------- ----------
---------- ----------
OTHER DATA
EBITDA (before non-recurring
charges)(3).......................... $ 5,296 $ 5,339
Capital expenditures................... 3,354 3,553
Depreciation and amortization.......... 6,982 6,785
Cash dividends......................... 2,030 2,038
Ratio of EBITDA to interest
expense(4)........................... 1.1x 1.0x(7)
Ratio of adjusted EBITDA (before
non-recurring charges) to interest
expense.............................. N/A N/A
Ratio of earnings to fixed
charges(5)........................... -- --(7)
Ratio of adjusted earnings (before
non-recurring charges) to fixed
charges.............................. N/A N/A
Ratio of total debt to adjusted EBITDA
(before non-recurring charges)....... 50.7x 55.7x
Ratio of total debt to capital......... 48.6% 58.3%
</TABLE>
- ------------------
(1) Basic and diluted net income per share for the 52 weeks ended January 30,
1994 are net of $0.44 and $0.42, respectively, related to an extraordinary
loss on the early retirement of debt.
(2) Basic and diluted net loss per share for the 13 weeks ended May 3, 1998
include $(0.04) related to an extraordinary loss on the early retirement of
debt.
(3) EBITDA is defined as earnings before extraordinary item, interest expense,
taxes, depreciation and amortization. EBITDA is presented because the
Company believes it is a widely accepted financial indicator of an entity's
ability to incur and service debt. EBITDA should not be considered by an
investor as an alternative to net income or income from operations, as an
indicator of the operating performance of the Company or other consolidated
operations or cash flow data prepared in accordance with generally accepted
accounting principles, or as an alternative to cash flows as a measure of
liquidity.
(4) As a result of the non-recurring charges recorded in the 52 weeks ended
February 1, 1998, EBITDA was a loss and the ratio of EBITDA to interest
expense is not presented.
(5) The ratio of earnings to fixed charges is computed by dividing fixed charges
of the Company into earnings before extraordinary item and taxes, plus fixed
charges. Fixed charges represent interest expense, amortization of discounts
and costs associated with this offering and the portion of rental payments
associated with leases which is deemed to be representative of the interest
factor. As a result of the non-recurring charges recorded in each of the 52
weeks ended January 28, 1996 and February 1, 1998, earnings were inadequate
to cover fixed charges by $2,626 and $107,825, respectively. In each of the
13 weeks ended May 4, 1997 and May 3, 1998, earnings were inadequate to
cover fixed charges by $6,618 and $6,912, respectively.
(6) If the Initial Notes had been issued and the Credit Facility had been in
place as of February 3, 1997, the Company's unaudited pro forma ratio of
adjusted EBITDA (before non-recurring charges) to interest expense for the
52 weeks ended February 1, 1998 would have been 2.7x and the unaudited pro
forma ratio of adjusted earnings (before non-recurring charges) to fixed
charges would have been 1.4x (based on an interest rate of 9.5% on the Notes
and an assumed interest rate of 7.2% on the Credit Facility).
(7) If the Initial Notes had been issued and the Credit Facility had been in
place as of February 2, 1998, the Company's unaudited pro forma ratio of
EBITDA to interest expense for the 13 weeks ended May 3, 1998 would have
been 0.8x and the unaudited pro forma ratio of earnings to fixed charges
would have been 0.4x (based on an interest rate of 9.5% for the Notes and an
assumed interest rate of 6.4% on the Credit Facility).
12
<PAGE>
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1,
1994 1995 1996 1997 1998
------------ ------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital............... $309,546 $315,637 $ 261,538 $ 240,692 $ 251,683
Total assets.................. 554,771 596,284 749,055 657,436 660,459
Current portion of long-term
debt........................ 245 260 10,137 10,157 --
Long-term debt................ 169,934 169,679 229,548 189,398 241,004
Stockholders' equity.......... 246,799 275,460 275,292 290,158 220,305
<CAPTION>
MAY 4, MAY 3,
1997 1998
---------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA
Working capital............... $ 236,951 $ 248,491
Total assets.................. 697,835 690,245
Current portion of long-term
debt........................ 10,157 --
Long-term debt................ 189,399 249,349
Stockholders' equity.......... 283,693 212,797
</TABLE>
NON-RECURRING RESTRUCTURING CHARGES. The Company recorded pre-tax
restructuring charges of $132.7 million ($85.5 million after tax) in 1997
related to a series of actions the Company has taken toward (i) exiting all
United States mainland footwear manufacturing with the closing of its Wilton,
Maine footwear manufacturing facility; (ii) exiting the sweater manufacturing
business with the sale and liquidation of its Puerto Rico sweater operations;
(iii) consolidating and closing manufacturing, warehouse and distribution
facilities, as well as restructuring other logistical and administrative areas,
in order to reduce product costs and operating expenses and improve
efficiencies; (iv) repositioning the Gant brand in the United States to be
consistent with its highly successful positioning in Europe; (v) closing 150
additional underperforming factory outlet retail stores; and (vi) modifying a
repositioning of Bass, including the liquidation of a resulting excess
inventory. Of these charges, approximately $91.9 million include cash outlays,
with the balance, $40.8 million, being non-cash. These restructuring initiatives
will enable the Company significantly to reduce future operating expenses and
product costs. It is expected that the cost savings initiatives will aggregate
in excess of $40 million in the period 1998 to 2000, and exceed $20 million
annually by 2000.
The restructuring initiatives related to the 1995 charge of $27.0 million
($17.0 million after tax) were the closing of three domestic shirt manufacturing
facilities, closing approximately 300 underperforming retail outlet stores and
the reorganization of the Company's management structure to enhance the
Company's focus on its brands.
The restructuring initiatives related to the 1994 charge of $7.0 million
($4.2 million after tax) were the restructuring of wholesale and retail
operations and the closing of the Company's private label retail stores.
13
<PAGE>
RISK FACTORS
In addition to the other information set forth or incorporated by reference
herein, holders of Initial Notes should consider carefully the following
information.
LEVERAGE AND ABILITY TO SERVICE DEBT
As of May 3, 1998 the Company had approximately $297 million of
indebtedness, which represents 58.3% of its total capitalization and had an
additional approximately $130 million of unused credit capacity available under
the Credit Facility. See 'Capitalization'. In addition, the Company's debt
instruments allow the Company to incur additional indebtedness under certain
circumstances. The ability of the Company to make payments with respect to the
Exchange Notes and to satisfy its other debt obligations will depend on the
Company's future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, many of which are
beyond the Company's control.
As a result of the issuance of the Initial Notes, the Company's interest
expense has increased compared to prior years (although after giving effect to
each of the Initial Notes Offering and the Credit Facility and the use of
proceeds therefrom, the Company's total level of debt will be substantially
unchanged). The Company believes, based on current circumstances, that the
Company's cash flow, together with available credit capacity under the Credit
Facility, will be sufficient to permit the Company to meet its operating
expenses and capital expenditures and to service its debt requirements as they
become due for the foreseeable future. If the Company is unable to service its
indebtedness, it will be required to adopt alternative strategies, which may
include actions such as reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms.
The degree to which the Company is leveraged could have important
consequences to holders of the Exchange Notes, including (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions or general corporate purposes may be
impaired; (ii) under this offering and the Credit Facility, a substantial
portion of the Company's cash flows from operations may be dedicated to the
payment of interest on its indebtedness, thereby reducing the funds available to
the Company for its operations; (iii) certain of the Company's indebtedness
contain financial and other restrictive covenants, including those restricting
the incurrence of additional indebtedness, the creation of liens, the payment of
dividends, sales of assets and minimum net worth requirements; (iv) the Credit
Facility will continue to be at variable rates of interest which exposes the
Company to the risk of interest rate volatility; (v) the Company may be more
leveraged than certain of its competitors, which may place the Company at a
relative competitive disadvantage; and (vi) the Company's high degree of
indebtedness could make it more vulnerable in the event of a downturn in its
business. As a result of the Company's level of indebtedness, its financial
capacity to respond to market conditions, extraordinary capital needs and other
factors may be limited.
SUBORDINATION
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Exchange Notes will be subordinated to the
prior payment in full of all existing and future Senior Debt of the Company,
including all amounts owing under the Credit Facility. The Notes will be
effectively subordinated to all existing and future liabilities of the
Subsidiaries. As of May 3, 1998, the aggregate amount of Senior Debt of the
Company was approximately $148 million. The existing Senior Debt is, and any
future indebtedness under the Credit Facility generally will be, secured by the
Company's assets. Consequently, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding with respect to PVH, assets of
PVH will be available to pay obligations under the Exchange Notes only after all
Senior Debt has been paid in full, and there can be no assurance that there will
be sufficient assets to pay amounts due on the Exchange Notes. In addition,
under certain circumstances, PVH may be prohibited by the subordination
provisions of the Indenture from paying amounts due in respect of the Exchange
Notes, or from purchasing, redeeming or otherwise acquiring Exchange Notes,
14
<PAGE>
if a payment or non-payment default exists with respect to Senior Debt. See
'Description of Exchange Notes'.
RESTRICTIONS IMPOSED BY THE CREDIT FACILITY AND THE INDENTURE
The Credit Facility and the Indenture contain a number of significant
covenants that, among other things, limit or restrict the ability of the Company
to dispose of assets, incur additional indebtedness, repay other indebtedness,
pay dividends, enter into certain investments or acquisitions, repurchase or
redeem capital stock, engage in mergers or consolidations, or engage in certain
transactions with subsidiaries and affiliates and otherwise restrict corporate
activities. There can be no assurance that such limitations and restrictions
will not adversely affect the Company's ability to finance its future operations
or capital needs or engage in other business activities that may be in the
interest of the Company. In addition, the Credit Facility also requires the
Company to maintain compliance with certain financial ratios. The ability of the
Company to comply with such ratios may be affected by events beyond the
Company's control. A breach of any of these covenants or the inability of the
Company to comply with the required financial ratios could result in a default
under the Credit Facility. In the event of any such default, the lenders under
the Credit Facility could elect to declare all borrowings outstanding under the
Credit Facility, together with accrued interest and other fees, to be due and
payable, to require the Company to apply all of its available cash to repay such
borrowings or to prevent the Company from making debt service payments on the
Exchange Notes. If the Company were unable to repay any such borrowings when
due, the lenders could proceed against their collateral. If the indebtedness
under the Credit Facility or the Exchange Notes were to be accelerated, there
can be no assurance that the assets of the Company would be sufficient to repay
such indebtedness in full. See 'Description of Exchange Notes' and 'Description
of Senior Debt'.
POTENTIAL INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, PVH will be required to offer
to repurchase the Exchange Notes at 101% of the principal amount of the Notes,
together with accrued or unpaid interest, if any, to the date of purchase. In
such circumstances, the Company will be required to (i) repay all or a portion
of the outstanding principal of, and pay any accrued interest on, its Senior
Debt, including indebtedness under the Credit Facility or (ii) obtain any
requisite consent from its lenders to permit the purchase of the Exchange Notes.
If PVH is unable to repay all of such indebtedness or is unable to obtain the
necessary consents, PVH may be unable to offer to repurchase the Exchange Notes,
which would constitute an Event of Default under the Indenture. There can be no
assurance that PVH will have sufficient funds available at the time of any
Change of Control to make any debt payment (including repurchases of the
Exchange Notes) as described above or that PVH would be able to refinance its
outstanding indebtedness in order to permit it to repurchase the Exchange Notes
or, if such refinancing were to occur, that such financing would be on terms
favorable to the Company. See 'Description of Exchange Notes'.
The events that constitute a Change of Control under the Indenture may also
be events of default under the Credit Facility or other Senior Debt of the
Company. Such events may permit the holders under such debt instruments to
accelerate the debt and, if the debt is not paid, to enforce security interests
on, or commence litigation that could ultimately result in a sale of,
substantially all of the assets of the Company, thereby limiting the Company's
ability to raise cash to repurchase the Exchange Notes.
CONSEQUENCES OF A FAILURE TO EXCHANGE INITIAL NOTES
The Initial Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Initial Notes that
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Initial Notes that remain
outstanding will not be entitled
15
<PAGE>
to any rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer, including an increase in the interest rates on the Initial
Notes. The Company does not currently anticipate that it will register the
Initial Notes under the Securities Act.
The Initial Notes were issued to, and the Company believes are currently
owned by, a small number of beneficial owners. Although the Initial Notes have
been designated for trading in the PORTAL Market, to the extent that Initial
Notes are tendered and accepted in connection with the Exchange Offer, any
trading market for Initial Notes that remain outstanding after the Exchange
Offer could be adversely affected.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Initial Notes
and are designated for trading in the PORTAL market. The Company does not intend
to apply for a listing of the Exchange Notes on a securities exchange. There is
currently no established market for the Exchange Notes and there can be no
assurance as to the liquidity of markets that may develop for the Exchange
Notes, the ability of the holders of the Exchange Notes to sell their Exchange
Notes or the price at which such holders would be able to sell their Exchange
Notes. If such markets were to exist, the Exchange Notes could trade at prices
that may be lower than the initial market values thereof depending on many
factors, including prevailing interest rates and the markets for similar
securities.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
CYCLICAL AND COMPETITIVE NATURE OF APPAREL AND FOOTWEAR INDUSTRIES
Competition is strong in the segments of the apparel and footwear
industries in which the Company operates. The Company competes with numerous
domestic and foreign designers, brands and manufacturers of apparel, accessories
and shoes, some of which may be significantly larger and more diversified and
have greater resources than the Company. The Company's business depends on its
ability to keep up with and respond to changing consumer tastes and demands by
producing attractive quality products, brands and marketing, as well as on its
ability to remain competitive in the area of fashion and price. The failure of
the Company to compete effectively or to keep pace with rapidly changing markets
could have a material adverse effect on the Company's business. See 'Business'.
Despite the use of its EDI, there can be no assurance that the Company will
continue to be successful in this regard. Weak sales and resulting markdown
requests from customers and markdowns at its retail stores could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, if the Company misjudges the market for its products, it
may be faced with significant excess inventories for some products and missed
opportunities with others. For example, the Company's attempt to reposition the
Bass brand to a higher price point during 1997 proved over-aggressive, resulting
in an inventory buildup at both the wholesale and retail levels, requiring
substantial markdowns at its own retail stores and requiring the Company
aggressively to finance the markdowns required by its wholesale customers to
sell this inventory.
YEAR 2000
Until recently, computer programs were written using two digits rather than
four to define the applicable year. Thus, such programs were unable to properly
distinguish between the year 1900 and the year 2000. In October 1996, the
Company initiated a comprehensive Year 2000 Project to address this issue. The
Company determined that it will need to modify or replace significant portions
of its software so that its computer systems will function properly with respect
to dates in the year 2000 and beyond. The Company has also initiated discussions
with its significant suppliers and large customers to determine the status of
their compliance programs. The Company anticipates completing the Year 2000
Project by June 30, 1999. The Company presently believes that the year 2000
issue will not pose significant operational problems for its computer systems.
However, if such modifications and
16
<PAGE>
conversions are not made, or are not completed timely, or the systems of other
companies on which the Company's systems and operations rely are not converted
on a timely basis, the year 2000 issue could have a material adverse impact on
the Company's operations.
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the Exchange
Notes in exchange for the Initial Notes.
17
<PAGE>
CAPITALIZATION
The following table sets forth the long-term debt and the capitalization of
the Company as of
May 3, 1998.
<TABLE>
<CAPTION>
MAY 3, 1998
------------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C>
Short-term debt--notes payable................................................................ $ 48,000
Long-term debt
7.75% Debentures due 2023................................................................... $ 99,450
9 1/2% Senior Subordinated Notes due 2008................................................... 149,229
Other debt.................................................................................. 670
------------------
Total Long-Term Debt..................................................................... $249,349
Stockholders' Equity:
Preferred Stock, par value $100 per share; 150,000 shares authorized; none outstanding...... --
Common Stock, par value $1.00 per share, 100,000,000 shares authorized;
27,188,644 shares issued................................................................. $ 27,189
Additional capital.......................................................................... 117,019
Retained earnings........................................................................... 68,589
------------------
Total Stockholders' Equity............................................................... $212,797
------------------
Total Capitalization and Short-Term Debt.................................................... $510,146
------------------
------------------
</TABLE>
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information for each of the
five years ended February 1, 1998 has been derived from the consolidated
financial statements of the Company which have been audited by Ernst & Young
LLP, independent auditors. The consolidated results of operations for 1994, 1995
and 1997 include non-recurring charges related principally to a series of
actions the Company has taken to accelerate the execution of its ongoing
strategy to build its brands. The adjusted statements of operations data and
segment data segregate the non-recurring charges from the Company's ongoing
operations. 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' included elsewhere herein discusses the Company's results
of operations before the non-recurring charges. The following selected
consolidated financial information for each of the thirteen weeks ended May 4,
1997 and May 3, 1998 have been derived from the unaudited condensed consolidated
financial statements of the Company and are subject to year-end adjustments;
however, in the opinion of management, all known adjustments (which consist only
of normal recurring accruals) have been made to present fairly the consolidated
operating results for the unaudited periods. The results of operations for the
interim periods are not necessarily indicative of those for a full fiscal year
due, in part, to seasonal factors.
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JANUARY 30, JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1,
1994 1995 1996 1997 1998
----------- ----------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales........................ $ 1,152,394 $ 1,255,466 $ 1,464,128 $1,359,593 $1,350,007
Cost of goods sold............... 747,555 845,655 987,921 910,517 937,965
----------- ----------- ----------- ------------ ------------
Gross profit..................... $ 404,839 $ 409,811 $ 476,207 $ 449,076 $ 412,042
Selling, general and
administrative expenses........ 324,528 353,109 428,634 401,338 412,495
Facility and store closing,
restructuring and other
expenses....................... -- 7,000 27,000 -- 86,700
----------- ----------- ----------- ------------ ------------
Income (loss) before Year 2000
computer conversion expenses,
interest and taxes............. $ 80,311 $ 49,702 $ 20,573 $ 47,738 $ (87,153)
Year 2000 computer conversion
expenses....................... -- -- -- -- --
Income (loss) before interest,
taxes and non-recurring
charges........................ $ 80,311 $ 49,702 $ 20,573 $ 47,738 $ (87,153)
Interest expense, net............ 16,679 12,793 23,199 23,164 20,672
----------- ----------- ----------- ------------ ------------
Income (loss) before taxes....... $ 63,632 $ 36,909 $ (2,626) $ 24,574 $ (107,825)
Income tax expense (benefit)..... 20,380 6,894 (2,920) 6,044 (41,246)
Extraordinary loss............... 11,394 -- -- -- --
----------- ----------- ----------- ------------ ------------
Net income (loss)................ $ 31,858 $ 30,015 $ 294 $ 18,530 $ (66,579)
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
Net income (loss) per share:
Basic.......................... $ 1.22(1) $ 1.13 $ 0.01 $ 0.69 $ (2.46)
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
Diluted........................ $ 1.18(1) $ 1.11 $ 0.01 $ 0.68 $ (2.46)
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
ADJUSTED STATEMENT OF OPERATIONS
DATA (BEFORE NON-RECURRING
CHARGES)
Net sales........................ $ 1,152,394 $ 1,255,466 $ 1,464,128 $1,359,593 $1,350,007
Cost of goods sold............... 747,555 845,655 987,921 910,517 937,965
Non-recurring charges............ -- -- -- -- (46,000)
----------- ----------- ----------- ------------ ------------
Gross profit before non-recurring
charges........................ $ 404,839 $ 409,811 $ 476,207 $ 449,076 $ 458,042
SG&A expenses and non-recurring
charges........................ 324,528 360,109 455,634 401,338 499,195
Non-recurring charges............ -- (7,000) (27,000) -- (86,700)
----------- ----------- ----------- ------------ ------------
SG&A expenses before non-
recurring charges.............. $ 324,528 $ 353,109 $ 428,634 $ 401,338 $ 412,495
Income (loss) before Year 2000
computer conversion expenses,
interest, taxes and
non-recurring charges.......... 80,311 56,702 47,573 47,738 45,547
Year 2000 computer conversion
expenses....................... -- -- -- -- --
Income (loss) before interest,
taxes and non-recurring
charges........................ 80,311 56,702 47,573 47,738 45,547
Interest expense, net............ 16,679 12,793 23,199 23,164 20,672
----------- ----------- ----------- ------------ ------------
Income (loss) before taxes, non-
recurring charges and
extraordinary item............. $ 63,632 $ 43,909 $ 24,374 $ 24,574 $ 24,875
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
MAY 4, MAY 3,
1997 1998
-------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales........................ $285,925 $295,765
Cost of goods sold............... 186,957 193,257
-------- --------
Gross profit..................... $ 98,968 $102,508
Selling, general and
administrative expenses........ 100,654 101,954
Facility and store closing,
restructuring and other
expenses....................... -- --
-------- --------
Income (loss) before Year 2000
computer conversion expenses,
interest and taxes............. $ (1,686) $ 554
Year 2000 computer conversion
expenses....................... -- (2,000)
Income (loss) before interest,
taxes and non-recurring
charges........................ $ (1,686) $ (1,446)
Interest expense, net............ 4,932 5,466
-------- --------
Income (loss) before taxes....... $ (6,618) $ (6,912)
Income tax expense (benefit)..... (2,078) (2,427)
Extraordinary loss............... -- 1,060
-------- --------
Net income (loss)................ $ (4,540) $ (5,545)
-------- --------
-------- --------
Net income (loss) per share:
Basic.......................... $ (0.17) $ (0.20)(2)
-------- --------
-------- --------
Diluted........................ $ (0.17) $ (0.20)(2)
-------- --------
-------- --------
ADJUSTED STATEMENT OF OPERATIONS
DATA (BEFORE NON-RECURRING
CHARGES)
Net sales........................ $285,925 $295,765
Cost of goods sold............... 186,957 193,257
Non-recurring charges............ -- --
-------- --------
Gross profit before non-recurring
charges........................ $ 98,968 $102,508
SG&A expenses and non-recurring
charges........................ 100,654 101,954
Non-recurring charges............ -- --
-------- --------
SG&A expenses before non-
recurring charges.............. $100,654 $101,954
Income (loss) before Year 2000
computer conversion expenses,
interest, taxes and
non-recurring charges.......... (1,686) 554
Year 2000 computer conversion
expenses....................... -- (2,000)
Income (loss) before interest,
taxes and non-recurring
charges........................ (1,686) (1,446)
Interest expense, net............ 4,932 5,466
-------- --------
Income (loss) before taxes, non-
recurring charges and
extraordinary item............. $ (6,618) $ (6,912)
-------- --------
-------- --------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JANUARY 30, JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1,
1994 1995 1996 1997 1998
----------- ----------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SEGMENT DATA (BEFORE NON-
RECURRING CHARGES)
Net sales -- apparel....... $ 757,452 $ 812,993 $ 1,006,701 $ 897,370 $ 911,047
Net sales -- footwear and
related products......... 394,942 442,473 457,427 462,223 438,960
----------- ----------- ----------- ------------ ------------
Total net sales............ $ 1,152,394 $ 1,255,466 $ 1,464,128 $1,359,593 $1,350,007
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
Operating income (loss) --
apparel.................. $ 53,645 $ 35,994 $ 37,432 $ 30,021 $ 45,416
Operating
income -- footwear and
related products......... 39,638 31,207 23,026 32,888 15,382
----------- ----------- ----------- ------------ ------------
Total operating income..... $ 93,283 $ 67,201 $ 60,458 $ 62,909 $ 60,798
Corporate expenses......... (12,972) (10,499) (12,885) (15,171) (15,251)
----------- ----------- ----------- ------------ ------------
Income (loss) before Year
2000 computer conversion
expenses, interest,
taxes, non-recurring
charges and extraordinary
item..................... $ 80,311 $ 56,702 $ 47,573 $ 47,738 $ 45,547
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
OTHER DATA
EBITDA (before
non-recurring
charges)(3).............. $ 99,893 $ 81,467 $ 81,313 $ 77,176 $ 70,847
Capital expenditures....... 47,866 53,140 39,773 22,578 17,923
Depreciation and
amortization............. 19,582 24,765 33,740 29,438 25,300
Cash dividends............. 3,920 3,984 4,007 4,050 4,065
Ratio of EBITDA to interest
expense(4)............... 6.0x 5.8x 2.3x 3.3x --
Ratio of adjusted EBITDA
(before non-recurring
charges) to interest
expense.................. 6.0x 6.4x 3.5x 3.3x 3.4x(6)
Ratio of earnings to fixed
charges(5)............... 2.7x 2.0x -- 1.5x --
Ratio of adjusted earnings
(before non-recurring
charges) to fixed
charges.................. 2.7x 2.2x 1.5x 1.5x 1.5x(6)
Ratio of total debt to
adjusted EBITDA (before
non-recurring charges)... 1.7x 2.1x 3.7x 2.8x 3.5x
Ratio of total debt to
capital.................. 40.8% 38.2% 52.3% 43.1% 53.0%
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
MAY 4, MAY 3,
1997 1998
-------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
UNAUDITED
---------
<S> <C> <C>
SEGMENT DATA (BEFORE NON-
RECURRING CHARGES)
Net sales -- apparel....... $193,298 $205,389
Net sales -- footwear and
related products......... 92,627 90,376
-------- --------
Total net sales............ $285,925 $295,765
-------- --------
-------- --------
Operating income (loss) --
apparel.................. $ (544) $ 3,226
Operating
income -- footwear and
related products......... 2,648 581
-------- --------
Total operating income..... $ 2,104 $ 3,807
Corporate expenses......... (3,790) (3,253)
-------- --------
Income (loss) before Year
2000 computer conversion
expenses, interest,
taxes, non-recurring
charges and extraordinary
item..................... $ (1,686) $ 554
-------- --------
-------- --------
OTHER DATA
EBITDA (before
non-recurring
charges)(3).............. $ 5,296 $ 5,339
Capital expenditures....... 3,354 3,553
Depreciation and
amortization............. 6,982 6,785
Cash dividends............. 2,030 2,038
Ratio of EBITDA to interest
expense(4)............... 1.1x 1.0x(7)
Ratio of adjusted EBITDA
(before non-recurring
charges) to interest
expense.................. N/A N/A
Ratio of earnings to fixed
charges(5)............... -- --(7)
Ratio of adjusted earnings
(before non-recurring
charges) to fixed
charges.................. N/A N/A
Ratio of total debt to
adjusted EBITDA (before)
non-recurring charges)... 50.7x 55.7x
Ratio of total debt to
capital.................. 48.6% 58.3%
</TABLE>
- ------------------
(1) Basic and diluted net income per share for the 52 weeks ended January 30,
1994 are net of $0.44 and $0.42, respectively, related to an extraordinary
loss on the early retirement of debt.
(2) Basic and diluted net loss per share for the 13 weeks ended May 3, 1998
include $(0.04) related to an extraordinary loss on the early retirement of
debt.
(3) EBITDA is defined as earnings before extraordinary item, interest expense,
taxes, depreciation and amortization. EBITDA is presented because the
Company believes it is a widely accepted financial indicator of an entity's
ability to incur and service debt. EBITDA should not be considered by an
investor as an alternative to net income or income from operations, as an
indicator of the operating performance of the Company or other consolidated
operations or cash flow data prepared in accordance with generally accepted
accounting principles, or as an alternative to cash flows as a measure of
liquidity.
(4) As a result of the non-recurring charges recorded in the 52 weeks ended
February 1, 1998, EBITDA was a loss and the ratio of EBITDA to interest
expense is not presented.
(5) The ratio of earnings to fixed charges is computed by dividing fixed charges
of the Company into earnings before extraordinary item and taxes, plus fixed
charges. Fixed charges represent interest expense, amortization of discounts
and costs associated with this offering and the portion of rental payments
associated with leases which is deemed to be representative of the interest
factor. As a result of the non-recurring charges recorded in each of the 52
weeks ended January 28, 1996 and February 1, 1998, earnings were inadequate
to cover fixed charges by $2,626 and $107,825, respectively. In each of the
13 weeks ended May 4, 1997 and May 3, 1998, earnings were inadequate to
cover fixed charges by $6,618 and $6,912, respectively.
(6) If the Notes had been issued and the Credit Facility had been in place as of
February 3, 1997, the Company's unaudited pro forma ratio of adjusted EBITDA
(before non-recurring charges) to interest expense for the 52 weeks ended
February 1, 1998 would have been 2.7x and the unaudited pro forma ratio of
adjusted earnings (before non-recurring charges) to fixed charges would have
been 1.4x (based on an interest rate of 9.5% on the Notes and an assumed
interest rate of 7.2% on the Credit Facility).
(7) If the Initial Notes had been issued and the Credit Facility had been in
place as of February 2, 1998, the Company's unaudited pro forma ratio of
EBITDA to interest expense for the 13 weeks ended May 3, 1998 would have
been 0.8x and the unaudited pro forma ratio of earnings to fixed charges
would have been 0.4x (based on an interest rate of 9.5% for the Notes and an
assumed interest rate of 6.4% on the Credit Facility).
20
<PAGE>
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1, MAY 4, MAY 3,
1994 1995 1996 1997 1998 1997 1998
----------- ----------- ----------- ------------ ------------ -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital......... $ 309,546 $ 315,637 $ 261,538 $240,692 $251,683 $236,951 $248,491
Total assets............ 554,771 596,284 749,055 657,436 660,459 697,835 690,245
Current portion of
long-term debt........ 245 260 10,137 10,157 -- 10,157 --
Long-term debt.......... 169,934 169,679 229,548 189,398 241,004 189,399 249,349
Stockholders' equity.... 246,799 275,460 275,292 290,158 220,305 283,693 212,797
</TABLE>
NON-RECURRING RESTRUCTURING CHARGES. The Company recorded pre-tax
restructuring charges of $132.7 million ($85.5 million after tax) in 1997
related to a series of actions the Company has taken toward (i) exiting all
United States mainland footwear manufacturing with the closing of its Wilton,
Maine footwear manufacturing facility; (ii) exiting the sweater manufacturing
business with the sale and liquidation of its Puerto Rico sweater operations;
(iii) consolidating and closing manufacturing, warehouse and distribution
facilities, as well as restructuring other logistical and administrative areas,
in order to reduce product costs and operating expenses and improve
efficiencies; (iv) repositioning the Gant brand in the United States to be
consistent with its highly successful positioning in Europe; (v) closing 150
additional underperforming factory outlet retail stores; and (vi) modifying a
repositioning of Bass, including the liquidation of a resulting excess
inventory. Of these charges, approximately $91.9 million include cash outlays,
with the balance, $40.8 million, being non-cash. These restructuring initiatives
will enable the Company significantly to reduce future operating expenses and
product costs. It is expected that the cost savings initiatives will aggregate
in excess of $40 million in the period 1998 to 2000, and exceed $20 million
annually by 2000.
The restructuring initiatives related to the 1995 charge of $27.0 million
($17.0 million after tax) were the closing of three domestic shirt manufacturing
facilities, closing approximately 300 underperforming retail outlet stores and
the reorganization of the Company's management structure to enhance the
Company's focus on its brands.
The restructuring initiatives related to the 1994 charge of $7.0 million
($4.2 million after tax) were the restructuring of wholesale and retail
operations and the closing of the Company's private label retail stores.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Years Ended January 28, 1996, February 2, 1997 and February 1, 1998:
The Company manages and analyzes its operating results by two vertically
integrated business segments: (i) apparel and (ii) footwear and related
products. As described more fully in the 'Non-Recurring Charges' section of this
review, the results of operations for 1997 and 1995 include pre-tax
non-recurring charges of $132.7 million and $27 million, respectively.
The following adjusted statements of operations and segment data segregate
the non-recurring charges from the Company's ongoing operations, and the review
which follows discusses the Company's results of operations before the
non-recurring charges.
ADJUSTED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 28, FEBRUARY 2, FEBRUARY 1,
1996 1997 1998
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Sales........................................................... $ 1,464,128 $ 1,359,593 $ 1,350,007
Cost of goods sold.................................................. 987,921 910,517 937,965
Non-recurring charges............................................... (46,000)
----------- ----------- -----------
Gross profit before non-recurring charges........................... $ 476,207 $ 449,076 $ 458,042
----------- ----------- -----------
SG&A expenses and non-recurring charges............................. 455,634 401,338 499,195
Non-recurring charges............................................... (27,000) (86,700)
----------- ----------- -----------
SG&A expenses before non-recurring charges.......................... $ 428,634 $ 401,338 $ 412,495
----------- ----------- -----------
Income before interest, taxes and non-recurring charges............. 47,573 47,738 45,547
Interest expense, net............................................... 23,199 23,164 20,672
----------- ----------- -----------
Income before taxes and non-recurring charges....................... $ 24,374 $ 24,574 $ 24,875
Income tax expense.................................................. 7,064 6,044 5,954
----------- ----------- -----------
Income from ongoing operations before non-recurring charges......... $ 17,310 $ 18,530 $ 18,921
Non-recurring charges, net of tax benefit........................... (17,016) (85,500)
----------- ----------- -----------
Net income (loss)................................................... $ 294 $ 18,530 $ (66,579)
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
ADJUSTED SEGMENT DATA
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 28, FEBRUARY 2, FEBRUARY 1,
1996 1997 1998
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales -- Apparel................................................ $ 1,006,701 $ 897,370 $ 911,047
Net sales -- Footwear and Related Products.......................... 457,427 462,223 438,960
----------- ----------- -----------
Total net sales..................................................... $ 1,464,128 $ 1,359,593 $ 1,350,007
----------- ----------- -----------
----------- ----------- -----------
Operating income -- Apparel......................................... $ 37,432 $ 30,021 $ 45,416
Operating income -- Footwear and Related Products................... 23,026 32,888 15,382
----------- ----------- -----------
Total operating income.............................................. 60,458 62,909 60,798
Corporate expenses.................................................. (12,885) (15,171) (15,251)
----------- ----------- -----------
Income before interest, taxes and non-recurring charges............. $ 47,573 $ 47,738 $ 45,547
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
22
<PAGE>
APPAREL
Net sales of the Company's apparel segment were $911.0 million in 1997
compared with $897.4 million in 1996 and $1,006.7 million in 1995. In both 1997
and 1996, sales growth was limited by the planned closing of retail outlet
stores and the contraction of the private label business, including the closing
in 1997 of the Company's sweater manufacturing operations. The Company's sales
of wholesale branded products increased 24% and 3% in 1997 and 1996,
respectively, to $387.2 million in 1997 from $311.9 million in 1996 and $303.2
million in 1995. The major areas of growth in 1997 were Van Heusen and Geoffrey
Beene dress shirts, as well as Izod sportswear.
Gross margin increased to 32.9% in 1997 from 31.3% in 1996 and 31.4% in
1995. All divisions had gross margin improvements with the exception of Izod
Club, which experienced a particularly difficult competitive environment. Strong
inroads by high-visibility men's department store brands into the 'green grass'
channel of distribution serviced by Izod Club caused price pressures which, in
turn, led to price promotions and a reduced gross margin. The Company believes
that the consolidation during 1997 of Izod Club into the various functional
departments of Izod should result in significant cost reductions, as well as
provide major improvements in product and product distribution.
Two factors were key to the improvement in gross margin:
1. The closing of underperforming retail outlet stores and the contraction
of the less profitable private label business.
2. Improvement, across the board, in product and presentation in all of the
Company's brands.
The Company believes these factors should continue in 1998 as the Company's
brands continue to improve their positioning in department store accounts and as
the Company's marketing efforts continue to increase consumer awareness of the
considerable attributes that each of the Company's brands offers.
Selling, general and administrative expenses were 27.9% of net sales in
1997 and 1996 compared with 27.7% in 1995. While overall expense levels have
remained flat, there has been a significant shift in the mix of these
expenditures to marketing and advertising from more general logistical areas.
Included in 1997 were incremental advertising expenses of $15.0 million.
Operating income increased 51.3% in 1997 to $45.4 million compared with
$30.0 million in 1996 and $37.4 million in 1995. The Company believes that its
wholesale sales gains, gross margin improvement, operating efficiency and
marketing investment are all very positive indications of the impact of the
Company's strategic initiatives.
FOOTWEAR AND RELATED PRODUCTS
The process of implementing the Company's strategic initiatives has not
been without disappointment. In the footwear and related products segment,
fiscal 1997 net sales declined 5.0% to $439.0 million compared with $462.2
million in 1996 and $457.4 million in 1995. A closing of retail outlet stores
was a factor in the reduction of overall Bass sales in 1997. However, the larger
negative factor in 1997 was the disappointing results of the Company's attempt
to reposition its Bass brand to higher price points. While the higher price
position was endorsed by the Company's wholesale customers, the initiatives were
not well executed and did not meet with consumer support, resulting in an
inventory build up at both the wholesale level and in the Company's own factory
outlet retail stores. To protect its franchise and preserve its wholesale
customer relationships, the Company took substantial markdowns in its own retail
stores and aggressively financed the markdowns required by its wholesale
customers to sell this inventory. Line management responsible for the Bass
business has been changed, a decision was made to close the United States
mainland footwear manufacturing facilities, and the brand was returned to its
historic positioning targeted in the moderate price range as a family oriented,
'Americana'-associated, casual lifestyle brand. The result of these actions was
a non-recurring charge to fiscal 1997 earnings of $54.2 million and a decline in
footwear and related products operating income (before such charge) of $17.5
million to $15.4 million. Operating income in 1995 was $23.0 million.
23
<PAGE>
Gross margin in 1997 was 36.0% compared with 36.3% in 1996 and 34.9% in
1995. As in all of the Company's branded businesses, the footwear and related
products segment represents a combination of wholesale and retail businesses.
The sales problems described above caused gross margin reductions across the
board as markdown allowances to wholesale customers took place contemporaneously
with markdowns taken at the Company's retail outlet stores. However, the much
sharper declines in the Company's wholesale sector created a greater weighting
to the Company's higher margin retail sector, and this shift offset most of the
overall percentage decline. The Company believes that the repositioning of the
Bass brand should enable both the mix of business and their respective gross
margins to return to more normal levels.
Selling, general and administrative expenses were 32.5% of net sales in
1997 compared with 29.2% in 1996 and 29.9% in 1995. The increase in 1997 was
caused principally by increased national advertising as well as a ramping up of
design and selling costs to support the upgrading of product and product
presentation which was a part of the Bass repositioning.
The Bass misstep is by far the biggest disappointment that the Company has
had in executing its brand strategy. However as much as it negatively impacted
the Company's results of operations in 1997, and is expected to dampen 1998, the
Company believes its impact should be substantially behind the Company by the
fall 1998 season. In the process, the Company has strengthened the Bass
management team and has substantially redirected the sourcing of Bass product.
The Company believes it can lower its costs considerably and build on Bass'
historically strong record of profitability.
NON-RECURRING CHARGES
The Company recorded pre-tax non-recurring charges of $132.7 million ($85.5
million after tax) in 1997 related to a series of actions the Company has taken
towards:
o Exiting all United States mainland footwear manufacturing with the
closing of its Wilton, Maine footwear manufacturing facility;
o Exiting the sweater manufacturing business with the sale and liquidation
of its Puerto Rico sweater operations;
o Consolidating and contracting plant and warehouse and distribution
facilities as well as restructuring other logistical and administrative
areas in order to reduce product costs and operating expenses and improve
efficiencies;
o Repositioning the Gant brand in the United States to be consistent with
its highly successful positioning in Europe;
o Closing an additional 150 underperforming retail outlet stores; and
o Modifying a repositioning of Bass, including the liquidation of a
resulting excess inventory.
The Company believes that these initiatives will enable the Company to
significantly reduce future operating expenses and product costs. It is expected
that the actions which gave rise to the 1997 charge will result in aggregate
cost savings of over $40 million in the period 1998 to 2000, and will exceed $20
million annually by 2000.
The Company had recorded a pre-tax non-recurring charge of $27.0 million
($17.0 million after tax) in 1995 to provide for the closing of some 300 retail
outlet stores, the closing of three domestic shirt manufacturing facilities and
a reorganization of the Company's management structure.
CORPORATE EXPENSES
Corporate expenses were $15.3 million in 1997 compared with $15.2 million
in 1996 and $12.9 million in 1995. The increase in 1996 compared with 1995 was
attributable to an increase in spending relating to information technology.
24
<PAGE>
INTEREST EXPENSE
Interest expense was $20.7 million in 1997 compared with $23.2 million in
both 1996 and 1995. A strong cash flow in 1996 reduced overall debt levels early
in 1997 and was the principal reason for the reduction in interest expense in
1997. The 1997 restructuring activities, described above, will result in a cash
outflow that will likely increase interest expense in 1998. These activities
should become cash positive in 1999 with a resulting interest expense reduction.
INCOME TAXES
Excluding the non-recurring charges, the income tax expense rate was 23.9%
in 1997, 24.6% in 1996 and 29.0% in 1995. The Company's effective tax rate is
lower than statutory rates due to tax exempt income from operations in Puerto
Rico, as well as other permanent differences between book income and taxable
income.
13 Weeks Ended May 4, 1997 and May 3, 1998:
The following statements of operations and segment data show the Company's
results from ongoing operations for the 13 weeks ended May 4, 1997 and May 3,
1998:
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------
MAY 4, MAY 3,
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales.......................................................................... $285,925 $295,765
Cost of goods sold................................................................. 186,957 193,257
-------- --------
Gross profit....................................................................... $ 98,968 $102,508
Selling, general and administrative expenses....................................... 100,654 101,954
-------- --------
Income (loss) before Year 2000 computer conversion expenses, interest and taxes.... $ (1,686) $ 554
Year 2000 computer conversion expenses............................................. (2,000)
-------- --------
Loss before interest and taxes..................................................... $ (1,686) $ (1,446)
Interest expense, net.............................................................. 4,932 5,466
-------- --------
Loss before taxes.................................................................. $ (6,618) $ (6,912)
Income tax benefit................................................................. 2,078 2,427
-------- --------
Loss from ongoing operations....................................................... $ (4,540) $ (4,485)
-------- --------
-------- --------
<CAPTION>
SEGMENT DATA
THIRTEEN WEEKS ENDED
-----------------------
MAY 4, MAY 3,
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales -- Apparel............................................................... $193,298 $205,389
Net sales -- Footwear and Related Products......................................... 92,627 90,376
-------- --------
Total net sales.................................................................... $285,925 $295,765
-------- --------
-------- --------
Operating income (loss) -- Apparel................................................. $ (544) $ 3,226
Operating income -- Footwear and Related Products.................................. 2,648 581
-------- --------
Total operating income............................................................. 2,104 3,807
Corporate expenses................................................................. (3,790) (3,253)
-------- --------
Income (loss) before Year 2000 computer conversion expenses, interest and taxes.... $ (1,686) $ 554
-------- --------
-------- --------
</TABLE>
Excluding Year 2000 computer conversion expenses (net of tax benefit),
basic and diluted net loss per share before extraordinary item for the thirteen
weeks ended May 3, 1998, would have been ($0.12).
25
<PAGE>
APPAREL
Net sales of the Company's apparel segment in the first quarter were $205.4
million in 1998 and $193.3 million last year, an increase of 6.3%. This increase
is due to a 19% increase in branded wholesale apparel sales, offset, in part, by
the impact of the planned reduction in the number of retail outlet stores
operated by the Company and the sale of the Company's private label sweater
manufacturing business in the fourth quarter of 1997.
Gross profit on apparel sales in the first quarter was 33.6% in 1998
compared with 33.0% in the prior year, the fourth consecutive quarter of
increased gross profit in this segment. This improvement is primarily a function
of the changing mix in the Company's apparel business as evidenced by strong
growth in branded wholesale sales and the planned reduction/divestment of
underperforming businesses.
Selling, general and administrative expenses as a percentage of apparel
sales in the first quarter decreased to 32.0% this year from 33.2% last year.
The improved expense level relates principally to the Company's program of
closing underperforming retail outlet stores.
FOOTWEAR AND RELATED PRODUCTS
Net sales of the Company's footwear and related products segment in the
first quarter were $90.4 million in 1998 and $92.6 million last year, a decrease
of 2.4%. This decrease was expected as Bass' sales and gross margins continued
to be impacted by the unsuccessful repositioning in 1997 of the Bass brand to
higher price points.
Gross profit on footwear and related products sales in the first quarter
was 36.8% in 1998 compared with 38.4% in the prior year. As noted above, this
decrease was expected. The Bass inventory position is now substantially
improved, and the Company believes that the impact of the unsuccessful
repositioning in 1997 should be behind it by the third quarter of 1998.
Selling, general and administrative expenses as a percentage of footwear
and related products sales in the first quarter were 36.1% this year compared
with 35.6% last year. While expense levels were essentially flat, the lower
volume of sales caused the percentage relationship to net sales to increase.
INTEREST EXPENSE
Interest expense in the first quarter was $5.5 million in 1998 compared
with $4.9 million last year. This increase resulted from increased debt levels
associated with funding the Company's 1997 restructuring initiatives. On April
22, 1998, the Company issued $150 million of 9.5% senior subordinated notes due
May 1, 2008, and used the net proceeds to retire its intermediate term 7.75%
senior notes and reduce its revolving credit debt. At the same time, the Company
re-syndicated and refinanced its revolving credit facility with a new $325
million senior secured credit facility with a group of 12 banks. While these
refinancings will increase the overall cost of the Company's borrowings, the
Company believes they should provide a secure financial base which will allow
the Company to focus its attention on the execution of its strategic business
plan.
CORPORATE EXPENSES
Corporate expenses in the first quarter were $3.3 million in 1998 compared
with $3.8 million last year.
INCOME TAXES
Income taxes were estimated at a rate of 35.1% for the current year
compared with last year's first quarter rate of 31.4%. The increase relates
principally to the divestment in the fourth quarter of 1997 of the Company's
sweater manufacturing operations in Puerto Rico, which had provided income that
was exempt from Federal income taxes.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Years Ended January 28, 1996, February 2, 1997 and February 1, 1998:
The following table shows key cash flow elements over the last three years:
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 28, FEBRUARY 2, FEBRUARY 1,
1996 1997 1998
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Income from operations before non-recurring charges adjusted
for non-cash items....................................... $ 67,328 $ 55,282 $ 42,021
Change in working capital................................... (35,344) 54,104 (16,275)
----------- ----------- -----------
Cash flow before non-recurring charges...................... $ 31,984 $ 109,386 $ 25,746
Non-recurring charges -- cash impact........................ (6,490) (7,510) (34,100)
Working capital acquired(1)................................. (56,282) -- --
----------- ----------- -----------
$ (30,788) $ 101,876 $ (8,354)
----------- ----------- -----------
Investment activities
Acquisition of Izod and Gant................................ $ (114,503) $ -- $ --
Investment in Pyramid Sportswear............................ (6,950) -- --
Capital spending............................................ (39,773) (22,578) (17,923)
Other, net.................................................. -- 143 360
----------- ----------- -----------
$ (161,226) $ (22,435) $ (17,563)
----------- ----------- -----------
Financing activities
Cash dividends.............................................. $ (4,007) $ (4,050) $ (4,065)
Exercise of stock options................................... 1,745 386 791
----------- ----------- -----------
$ (2,262) $ (3,664) $ (3,274)
----------- ----------- -----------
Increase (decrease) in cash before net change in debt....... $ (194,276) $ 75,777 $ (29,191)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------
(1) Represents working capital related to the acquisition of the Izod and Gant
businesses.
As noted in the table above, the Company's cash flow before non-recurring
charges was positive in each of the three fiscal years ended February 1, 1998.
The cash impact in 1997 of the initiatives covered by the Company's
restructuring charges totaled $34.1 million. The principal areas of outflow
related to the repositioning of Gant and costs associated with the inventory
correction at Bass.
Capital spending in 1997 was $17.9 million compared with $22.6 million in
1996 and $39.8 million in 1995. The reduced level of spending in the latest two
years reflects the completion in 1995 of several large capital spending
projects, including the Company's new distribution center in North Carolina. In
1998, upon the expiration of the lease at the Company's New York headquarters,
the Company anticipates consolidating all of its New York office space into one
location. Capital expenditures related to that move are anticipated to be
approximately $15 million. Capital expenditures, in total, for 1998 are planned
at approximately $40 million. Beyond that, the Company anticipates returning to
the lower level of capital expenditures of the past two years.
Total debt as a percentage of total capital was 53.0% at the end of fiscal
1997 compared with 43.1% at the end of fiscal 1996 and 52.3% at the end of
fiscal 1995.
In fiscal 1998, the Company anticipates additional cash outflows of
approximately $47 million to substantially complete the restructuring programs
provided for in 1997. Most of that amount should be funded by cash flow from
operations as well as certain of the cash flow benefits stemming from these
restructuring moves, particularly the closing of retail stores and the exiting
from the capital-intensive sweater manufacturing business. Beyond that, the
Company anticipates that the cash flow benefits from
27
<PAGE>
the balance of restructuring together with cash flow from operations should
allow it to begin to realize an overall positive cash flow in its individual
business units and in the Company as a whole.
Notwithstanding the Company's positive feelings about future cash flow,
including the cash impact of the non-recurring charges, the Company believed
that it made a great deal of sense to avail itself of the favorable fixed income
market to extend the maturities of its existing debt. Therefore, on April 22,
1998, the Company issued $150 million of Senior Subordinated Notes due 2008 and
used the proceeds to eliminate its intermediate term senior notes and reduce its
revolving credit debt. Accordingly, such debt as of February 1, 1998 has been
classified as long-term debt in the 1997 year end balance sheet.
At the same time, the Company re-syndicated and refinanced its revolving
credit facility, which was scheduled to mature in early 1999, with a new $325
million senior secured credit facility with a group of 12 banks.
The Company believes that these refinancings should provide a secure
financial base and allow the Company to fully focus its attention on the
execution of its strategic business plan.
13 Weeks Ended May 4, 1997 and May 3, 1998:
The seasonal nature of PVH's business typically requires the use of cash to
fund a build-up in the Company's inventory in the first half of each year.
During the third and fourth quarters, the Company's higher level of sales tends
to reduce its inventory and generate cash from operations.
Net cash used by operations in the first quarter totalled $37.9 million in
1998 and $39.1 million last year. The Company's seasonal inventory build-up was
less than in the prior year due principally to a lower Bass inventory build-up
than in the prior year. Partially offsetting the cash flow inventory improvement
was a larger increase in trade receivables, due to an increase in wholesale
sales, and a larger decrease in accrued expenses, due to spending associated
with the Company's 1997 restructuring initiatives.
Capital spending in the first quarter was $3.6 million in 1998 as compared
with $3.4 million last year. The Company anticipates a significant increase in
overall capital spending levels in 1998 due principally to the anticipated
consolidation of its New York City offices into one location.
On April 22, 1998, the Company issued $150 million of 9.5% senior
subordinated notes due May 1, 2008, and used the net proceeds to retire its
intermediate term 7.75% senior notes and reduce its revolving credit debt. At
the same time, the Company re-syndicated and refinanced its revolving credit
facility with a new $325 million senior secured credit facility with a group of
12 banks. While these refinancings will increase the overall cost of the
Company's borrowings, the Company believes they should provide a secure
financial base which will allow the Company to focus its attention on the
execution of its strategic business plan. The new revolving credit facility also
includes a letter of credit facility with a sub-limit of $250 million provided,
however, that the aggregate maximum amount outstanding under both the revolving
credit facility and the letter of credit facility is $325 million. The Company
believes that its borrowing capacity under these facilities is adequate for its
peak seasonal needs in the foreseeable future. In addition, the retirement of
the Company's intermediate term 7.75% senior notes eliminates all long-term debt
repayment requirements for the next 10 years.
YEAR 2000
Until recently, computer programs were written using two digits rather than
four to define the applicable year. Thus, such programs were unable to properly
distinguish between the year 1900 and the year 2000. In October 1996, the
Company initiated a comprehensive Year 2000 Project to address this issue. The
Company determined that it will need to modify or replace significant portions
of its software so that its computer systems will function properly with respect
to dates in the year 2000 and beyond. The Company has also initiated discussions
with its significant suppliers and large customers to determine the status of
their compliance programs.
The Company is utilizing both internal and external resources to remediate,
or replace, and test the software for year 2000 modifications. The Company
anticipates completing the Year 2000 Project by June 30, 1999. The Company
incurred $2.0 million of computer conversion expenses in the first quarter of
1998 in connection with making its computer systems Year 2000 compliant. The
Company expects to
28
<PAGE>
incur additional Year 2000 computer conversion expenses of approximately $6.5
million in the current year and $8.5 million in 1999.
The cost of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of resources, third party modification plans and other
factors. The Company presently believes that the year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, or the
systems of other companies on which the Company's systems and operations rely
are not converted on a timely basis, the year 2000 issue could have a material
adverse impact on the Company's operations.
SEASONALITY
The Company's business is seasonal, with higher sales and income during its
third and fourth quarters, which coincide with the Company's two peak retail
selling seasons: the first running from the start of the back-to-school and fall
selling seasons beginning in August and continuing through September, and the
second being the Christmas selling season beginning with the weekend following
Thanksgiving and continuing through the week after Christmas.
Also contributing to the strength of the third quarter is the high volume
of fall shipments to wholesale customers which are generally more profitable
than spring shipments. The slower spring selling season at wholesale combines
with retail seasonality to make the first quarter particularly weak.
29
<PAGE>
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $150 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Initial Notes properly tendered on or prior to the Expiration Date and
not withdrawn as permitted pursuant to the procedures described below. The
Exchange Offer is being made with respect to all of the Initial Notes.
As of the date of this Prospectus, the aggregate principal amount of the
Initial Notes outstanding is $150 million. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about August 25, 1998 to all
holders of Initial Notes known to the Company.
PURPOSE OF THE EXCHANGE OFFER
The Initial Notes were issued on April 22, 1998 in a transaction exempt
from the registration requirements of the Securities Act. Accordingly, the
Initial Notes may not be reoffered, resold, or otherwise transferred unless
registered under the Securities Act or any applicable securities law or unless
an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Initial Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
file with the Commission a registration statement relating to the Exchange Offer
(the 'Registration Statement') not later than 60 days after the date of original
issuance of the Initial Notes, and to use their best efforts to cause the
Registration Statement to become effective under the Securities Act as soon as
practicable thereafter and to commence the Exchange Offer promptly after such
Registration Statement has become effective, hold the Exchange Offer open for at
least 30 days and exchange the Exchange Notes for all Initial Notes that have
been validly tendered and not withdrawn on or prior to the expiration of the
Exchange Offer. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement.
The term 'holder' with respect to the Exchange Offer, means any person in
whose name Initial Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder, or any person whose Initial Notes are held of record by The Depository
Trust Company ('DTC'). Other than as pursuant to the Registration Rights
Agreement, the Company is not required to file any registration statement to
register any outstanding Initial Notes. Holders of Initial Notes who do not
tender their Initial Notes or whose Initial Notes are tendered but not accepted
would have to rely on exemptions from the registration requirements under the
securities laws, including the Securities Act, if they wish to sell their
Initial Notes.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Initial Notes. The terms of the Exchange Notes are identical in all material
respects to the terms of the Initial Notes for which they may be exchanged
pursuant to this Exchange Offer, except that the Exchange Notes generally will
be freely transferable by holders thereof and will not be subject to any
covenant regarding registration. The Exchange Notes will evidence the same
indebtedness as the Initial Notes and will be entitled to the benefits of the
Indenture. See 'Description of Exchange Notes'.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Initial Notes being tendered for exchange.
The Company is making the Exchange Offer in reliance on the position of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letters, and there can be no assurance that the Commission would
make a similar determination with respect to the Exchange Notes. Based on these
30
<PAGE>
interpretations by the staff of the Commission, the Company believes that
Exchange Notes issued pursuant to the Exchange Offer in exchange for Initial
Notes may be offered for sale, resold and otherwise transferred by any holder of
such Exchange Notes (other than any such holder that is a broker-dealer or an
'affiliate' of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes and neither such holder nor any other such person is
engaging in or intends to engage in a distribution of such Exchange Notes. Since
the Commission has not considered the Exchange Offer in the context of a
no-action letter, there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer. See
'-- Resale of Exchange Notes' and 'Plan of Distribution'.
Interest on the Exchange Notes shall accrue from the last Interest Payment
Date on which interest was paid on the Initial Notes so surrendered or, if no
interest has been paid on such Notes, from April 22, 1998.
Tendering holders of the Initial Notes shall not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Initial Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION
The Exchange Offer will expire at 5:00 p.m., New York City time, on the
Expiration Date. The Company expressly reserves the right, at any time or from
time to time, to extend the period of time during which the Exchange Offer is
open, and thereby delay acceptance for exchange of any Initial Notes, by giving
oral or written notice to the Exchange Agent and by giving written notice of
such extension to the holders thereof or by timely public announcement no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. During any such extension, all Initial
Notes previously tendered will remain subject to the Exchange Offer unless
properly withdrawn. The Company does not anticipate extending the Expiration
Date.
For purposes of the Exchange Offer, a 'business day' means any day
excluding Saturday, Sunday or any other day which is a legal holiday under the
laws of New York, New York or is a day on which banking institutions therein
located are authorized or required by law or other governmental action to close.
PROCEDURES FOR TENDERING INITIAL NOTES
The tender to the Company of Initial Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions of the Exchange Offer. Except as set forth below, a
holder who wishes to tender Initial Notes for exchange pursuant to the Exchange
Offer must transmit either (i) a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent, at the address set forth below under
'-- Exchange Agent' on or prior to the Expiration Date, or (ii) if such Initial
Notes are tendered pursuant to the procedures for book-entry transfer set forth
below under '-- Book-Entry Transfer', a holder tendering Initial Notes may
transmit an Agent's Message (as defined herein) to the Exchange Agent in lieu of
the Letter of Transmittal, in either case on or prior to the Expiration Date. In
addition, either (i) certificates for such Initial Notes must be received by the
Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation
of a book-entry transfer (a 'Book-Entry Confirmation') of such Initial Notes, if
such procedure is available, into the Exchange Agent's account at the DTC (the
'Book-Entry Transfer Facility') pursuant to the procedure for book-entry
transfer described below, along with the Letter of Transmittal or an Agent's
Message, as the case may be, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. The term 'Agent's Message' means a message,
transmitted to the Book-Entry Transfer Facility and received by the Exchange
Agent and forming a part of the Book-Entry Confirmation, which states that the
Book-Entry Transfer Facility has received an express
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acknowledgement from the tendering holder that such holder has received and
agrees to be bound by the Letter of Transmittal and the Company may enforce the
Letter of Transmittal against such holder. THE METHOD OF DELIVERY OF INITIAL
NOTES, LETTERS OF TRANSMITTAL OR AGENT'S MESSAGES AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR INITIAL NOTES SHOULD BE
SENT TO THE COMPANY.
If tendered, Initial Notes are registered in the name of the signer of the
Letter of Transmittal, and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Initial Notes are to be reissued) in the
name of the registered holder (which term, for the purposes described herein,
shall include any participant in the Book-Entry Transfer Facility's system whose
name appears on a security listing as the owner of Initial Notes), the signature
of such signer need not be guaranteed. In any other case, the tendered Initial
Notes must be endorsed or accompanied by written instruments of transfer in form
satisfactory to the Company and duly executed by the registered holder, and the
signature on the endorsement or instrument of transfer must be guaranteed by a
bank, broker, dealer, credit union, savings association, clearing agency or
other institution (each, an 'Eligible Institution') that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act. If the Exchange Notes and/or Initial Notes not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the note register for the Initial Notes, the signature in
the Letter of Transmittal must be guaranteed by an Eligible Institution.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly executed Letter of Transmittal
accompanied by the Initial Notes is received by the Exchange Agent, or (ii) a
Notice of Guaranteed Delivery (as provided below) or letter, telegram or
facsimile transmission to similar effect from an Eligible Institution is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Initial Notes tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided below) by an
Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Initial Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Letters of Transmittal or Initial Notes tendered for
exchange will be determined by the Company in its sole discretion, which
determination shall be final and binding. The Company reserves the absolute
right to reject any and all tenders of any particular Initial Notes not properly
tendered and not to accept any particular Initial Notes for exchange which
acceptance might, in the judgment of the Company or its counsel, be unlawful.
The Company also reserves the absolute right to waive any defects or
irregularities as to any particular Initial Notes or conditions of the Exchange
Offer either before or after the Expiration Date (including the right to waive
the ineligibility of any holder who seeks to tender Initial Notes in the
Exchange Offer). The interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Initial Notes for exchange must be
cured within each reasonable period of time as the Company shall determine. None
of the Company, the Exchange Agent nor any other person shall be under any duty
to give notification of any defect or irregularity with respect to any tender of
Initial Notes for exchange, nor shall any of them incur any liability for
failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Initial Notes, such Initial Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case signed
exactly as the name or names of the registered holder or holders appear on the
Initial Notes.
If the Letter of Transmittal or any Initial Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived
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by the Company, proper evidence satisfactory to the Company of their authority
to so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, (a) Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, (b) neither the holder
nor any such other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and (c) neither the
holder nor any such other person is an 'affiliate' of the Company as defined
under Rule 405 of the Securities Act, or if it is an affiliate, it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable. Any holder of Initial Notes using the Exchange Offer
to participate in a distribution of the Exchange Notes (i) cannot rely on the
position of the staff of the Commission set forth in certain no-action and
interpretive letters and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Initial Notes where such Initial Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Notes. See 'Plan of Distribution'.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Initial Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Initial Notes by causing the
Book-Entry Transfer Facility to transfer such Initial Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Initial Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof,
with any required signature guarantees, or an Agent's Message in lieu of a
Letter of Transmittal, and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at one of the addresses set
forth below under '-- Exchange Agent' on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURE
If a holder desires to accept the Exchange Offer, and time will not permit
a Letter of Transmittal or Initial Notes to reach the Exchange Agent before the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below, on or prior to the Expiration Date, a letter by
hand or mail, or sent by facsimile transmission (receipt confirmed by telephone
and an original delivered by guaranteed overnight courier) from an Eligible
Institution setting forth the name and address of the tendering holder, the
names in which the Initial Notes are registered and, if possible, the
certificate numbers of the Initial Notes to be tendered, and stating that the
tender is being made thereby and guaranteeing that within three business days
after the Expiration Date, the Initial Notes in proper form for transfer or a
Book-Entry Confirmation, will be delivered by such Eligible Institution together
with a properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Initial Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ('Notice of Guaranteed
Delivery') which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
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WITHDRAWAL RIGHTS
Tenders of Initial Notes may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone and an original
delivered by guaranteed overnight courier) or letter must be received by the
Exchange Agent at the address set forth herein prior to the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
tendered the Initial Notes to be withdrawn (the 'Depositor'), (ii) identify the
Initial Notes to be withdrawn (including the certificate number or numbers of
such Initial Notes and the principal amount of each such Initial Note), (iii)
specify the principal amount of Initial Notes to be withdrawn, (iv) include a
statement that such holder is withdrawing his election to have such Initial
Notes exchanged, (v) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Initial Notes were tendered
or as otherwise described above (including any required signature guarantees) or
be accompanied by documents of transfer sufficient to have the Trustee under the
Indenture register the transfer of such Initial Notes into the name of the
person withdrawing the tender, and (vi) specify the name in which any such
Initial Notes are to be registered, if different from that of the Depositor. The
Exchange Agent will return the properly withdrawn Initial Notes promptly
following receipt of notice of withdrawal. If Initial Notes have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Initial Notes or otherwise comply with the
Book-Entry Transfer Facility procedure. All questions as to the validity, form
and eligibility of notices of withdrawals, including time of receipt, will be
determined by the Company, and such determination will be final and binding on
all parties.
Any Initial Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Initial Notes
which have been tendered for exchange but which are not exchanged for any reason
will be returned to the holder thereof without cost to such holder (or, in the
case of Initial Notes tendered by Book-Entry Transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the Book-Entry Transfer
procedures described above, such Initial Notes will be credited to an account
with such Book-Entry Transfer Facility specified by the holder) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Initial Notes may be retendered by following one of
the procedures described under '-- Procedures for Tendering Initial Notes' above
at any time on or prior to the Expiration Date.
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Initial Notes
properly tendered and will issue the Exchange Notes promptly after such
acceptance. For purposes of the Exchange Offer, the Company shall be deemed to
have accepted properly tendered Initial Notes for exchange when, as and if the
Company has given oral or written notice thereof to the Exchange Agent.
For each Initial Note accepted for exchange, the holder of such Initial
Note will receive an Exchange Note having a principal amount equal to the
principal amount (or portion thereof) of the Initial Note surrendered for
tender.
In all cases, issuance of Exchange Notes for Initial Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Initial Notes or a
timely Book-Entry Confirmation of such Initial Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal and all other required documents or, in the case
of a Book-Entry Confirmation, an Agent's Message in lieu thereof. If any
tendered Initial Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer, or if Initial Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Initial Notes will be returned without expense to the tendering
holder thereof (or, in the case of Initial Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described above, such non-exchanged
Initial Notes will be credited
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to an account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration of the Exchange Offer.
EXCHANGE AGENT
Union Bank of California, N.A. has been appointed as the Exchange Agent for
the Exchange Offer. All executed Letters of Transmittal should be directed to
the Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER MAIL: BY FACSIMILE: (213) 972-5695
Union Bank of California, N.A. Attn: Ms. Cheryl Case
120 South San Pedro Street--4th Floor Corporate Trust Operations
Los Angeles, California 90012 By Telephone: (213) 972-5682
Attn: Ms. Cheryl Case
Corporate Trust Operations
</TABLE>
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSIONS OF
INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT
CONSITITUTE A VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others for
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company also will pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the
Initial Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $200,000, which includes fees and expenses of the Exchange Agent,
Trustee, registration fees, accounting, legal printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer, other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the respective dates as of which
information is given herein. The Exchange Offer is not being made to (not will
tenders be accepted from or on behalf of) holders of Initial Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company, at its discretion, may take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to holders of Initial Notes in such jurisdiction. In any jurisdiction in which
the securities laws or blue sky laws of which require the Exchange Offer to be
made by a licensed broker or dealer, the Exchange Offer is being made on behalf
of the Company by one or more registered brokers or dealers which are licensed
under the laws of such jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Initial Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Initial Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Initial Notes tendered,
or if tendered
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<PAGE>
Initial Notes, are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of Initial Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Initial
Notes as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company upon the exchange of Exchange Notes for Initial Notes.
Expenses incurred in connection with the issuance of the Exchange Notes will be
amortized over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Initial Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will continue to be subject to the restrictions on transfer of
such Initial Notes as set forth in the legend thereon and in the Indenture.
Initial Notes not exchanged pursuant to the Exchange Offer will continue to
remain outstanding in accordance with their terms. In general, the Initial Notes
may not be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Initial Notes under the
Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Initial
Notes should consider carefully whether to participate. Holders of the Initial
Notes are urged to consult their financial and tax advisors in making their own
decision on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Initial Notes pursuant to the terms of, this Exchange Offer,
the Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Initial Notes who do not tender their Initial Notes in the
Exchange Offer will continue to hold such Initial Notes and will be entitled to
all the rights and subject to all the limitations applicable thereto under the
Indenture, except for any such rights under the Registration Rights Agreement
that by their terms terminate or cease to have further effectiveness as a result
of the making of this Exchange Offer. All untendered Initial Notes will continue
to be subject to the restrictions on transfer set forth in the Indenture. To the
extent that Initial Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered Initial Notes could be adversely affected.
The Company may seek to acquire in the future, subject to the terms of the
Indenture, untendered Initial Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Initial Notes which are not tendered in the
Exchange Offer.
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter, and there can be no assurance that the Commission would
make a similar determination with respect to the Exchange Offer as it has in
such interpretive letters to third parties. Based on these interpretations by
the staff of the Commission, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Initial Notes may be offered for
resale, resold and otherwise transferred by a holder (other than any Holder that
is a broker-dealer or an 'affiliate' of the Company within the meaning of Rule
405 of the Securities Act) without further compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business,
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any such
other person is engaging in or intends to
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<PAGE>
engage in a distribution of the Exchange Notes. However, any holder who is an
'affiliate' of the Company or who has an arrangement or understanding with
respect to the distribution of the Exchange Notes to be acquired pursuant to the
Exchange Offer, or any broker-dealer who purchased Initial Notes from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act (i) could not rely on the applicable interpretations of the
staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act. A broker-dealer who
holds Initial Notes that were acquired for its own account as a result of
market-making or other trading activities may be deemed to be an 'underwriter'
within the meaning of the Securities Act and must, therefore deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of Exchange Notes. Each such broker-dealer that receives Exchange Notes
for its own account in exchange for Initial Notes, where such Initial Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge in the Letter of Transmittal that it will
deliver a prospectus in connection with any resale of such Exchange Notes. See
'Plan of Distribution'.
In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the Exchange Notes may not be offered or sold unless they have
been registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or blue sky laws of such jurisdictions as any
holder of the Exchange Notes reasonably requests. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
37
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading marketer of men's, women's and children's apparel
and footwear, sold under five nationally recognized brand names -- Van Heusen,
Bass, Izod, Gant and Geoffrey Beene -- in the dress shirt, casual footwear, and
sportswear sectors. The Company is brand focused and manages the design,
sourcing and manufacturing of substantially all of its products on a brand by
brand basis. The Company's products include both dress and sport shirts and
casual shoes and, to a lesser extent, sweaters, neckwear, furnishings, bottoms,
outerwear and leather and canvas accessories. Approximately 23% of the Company's
net sales in fiscal 1997 were derived from sales of dress shirts, 33% from sales
of footwear and related products and 44% from sales of other apparel goods,
primarily branded sportswear. The Company markets its products at a wholesale
level through national and regional department store chains and also directly to
consumers through its own retail stores, generally located in factory outlet
retail malls. The Company believes that marketing through the wholesale channel
provides the opportunity to build brand equity and represents its core business,
and views its retail business as a complement to its strong branded positions in
the wholesale market. The Company's strategy is to exploit and expand its
branded position in the United States and, on a longer-term basis, in the
international arena, and the Company believes that its portfolio of well
recognized brands offers the Company the best opportunity for realizing sales
growth and enhancing profit margins.
The Company's net sales and EBITDA (exclusive of the non-recurring charges
to earnings recorded in fiscal 1997) were $1,350.0 million and $70.8 million,
respectively, in fiscal 1997 versus $1,359.6 million and $77.2 million,
respectively, in fiscal 1996. Fiscal 1997 was a year of transition, as the
Company continued to realign and strengthen its business and further reduce
costs. The Company continued its store closing program and closed its sweater
manufacturing operations, which resulted in a planned reduction of revenue, made
a major investment of $18.4 million in incremental advertising expenditures in
the second half of the year, and took non-recurring charges to earnings of
$132.7 million in connection with certain restructuring expenses. The Company
believes that it made significant progress in its apparel segment where sales
and profitability increased, but it was disappointed with the results of its
footwear and related products segment. The Company believes that the increased
advertising expenditures and brand repositionings executed in 1997 position it
well to compete in its markets and expects the actions which gave rise to the
1997 charges to result in aggregate cost savings of over $40 million in the
period 1998 to 2000, and to exceed $20 million annually by 2000.
The Company's Van Heusen, Bass, Izod, Gant and Geoffrey Beene brands
collectively account for approximately 93% of the Company's net sales, with
approximately 73% of net sales being derived from Van Heusen, Bass and Geoffrey
Beene alone. Izod and Gant were acquired by the Company in 1995 and subsequently
repositioned in their markets. The Company believes that Izod and Gant have
substantial brand equity and position the Company well to capitalize on the
increasing popularity of branded sportswear. The Company owns four of the five
brands, with sales of the fifth -- Geoffrey Beene -- being under licensing
agreements with that designer. In addition, the Company recently entered into a
license agreement to market DKNY brand men's dress shirts.
The Company's brands enjoy national recognition in their respective sectors
of the market and share a rich heritage with between 40 and 120 years of
operating history. They represent sales leaders in their respective market
niches, from a dominant position in dress shirts, to a leading position in
casual footwear, to an increasingly important position in men's sportswear. In
the United States, Van Heusen is the best selling men's dress shirt and woven
sport shirt brand, and Geoffrey Beene is the best selling men's designer dress
shirt brand. The Company believes that its overall share of the United States
men's dress shirt market, including its branded, designer and private label
offerings, is the largest of any company and that it has a growing market share,
currently in excess of 32%, in the key department store channel. In the United
States, Izod products include the best selling men's sweater brand, one of the
best selling basic knit shirts and the number one ranked golf apparel brand in
pro shops and resorts. Gant represents the largest collection brand in several
countries in Europe, and is second only to 'Polo' in most of the other European
countries. Bass is the leading brand of men's, women's and children's casual
shoes at the moderate price range in the United States.
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The Company markets its five premier brands to different segments of the
market, appealing to varied demographic sectors and a broad spectrum of
consumers. This diversity of the Company's brands is intended to minimize
competition among the brands. The Van Heusen brand, designed to target the
moderate price range, appeals to the relatively conservative 'middle American'
consumer. The typical Bass consumer is family oriented, views the Bass brand as
'Americana', associated with a casual, outdoor lifestyle, and pays moderate
prices for his or her product. The Company's Izod brand is 'active inspired',
designed to sell on the main floor of department stores largely in knitwear
categories in the moderate to upper moderate price range. The Gant brand is the
Company's entry into collection sportswear and focuses on a traditional consumer
with refined taste who is prepared to purchase apparel in the higher price range
of the market. Geoffrey Beene is targeted toward a more fashion-forward consumer
who is prepared to purchase apparel in the upper moderate price range. The
Company's products are designed to appeal to relatively stable demographic
sectors and generally are not reliant on rapidly changing fashion trends.
The Company believes that because of its strong brands it is
well-positioned to capitalize on several trends that have affected the apparel
and footwear sectors in recent years. These include the stabilization of the
department store sector with a smaller number of stronger players, among which
the Company ranks its most important customers; the continued importance of
branding as a measure of product differentiation; continued growth in the
branded sportswear sector; and the stabilization of the dress shirt sector after
several years of modest decline. In addition, the recent lack of momentum in the
athletic shoe sector provides the Company with the opportunity to capitalize on
its Bass casual footwear products.
Substantially all of the Company's sales are made in the United States.
However, the Company believes that global name awareness is a key to the
creation of lasting brand equity and that it must pursue selective opportunities
to expand the sales of its brands internationally. Currently, Gant is the
Company's brand that is most developed internationally, with its name
recognition and sales substantially stronger in Europe than in the United
States. Gant products are sold in 35 countries, including in over 50 Gant stores
owned or franchised by the Company's licensing partner, Pyramid Sportswear, in
which the Company owns a minority interest with an option to acquire 100%.
Although the Van Heusen, Bass and Izod product lines also are sold outside the
United States, both directly and through licensees, their international sales
are small relative to Gant. Based on its experience with Gant, the Company
believes that opportunities exist to expand the sales of its Van Heusen, Bass
and Izod brands internationally.
Consistent with its strategy of developing its brands, the Company has
focused on the wholesale sector -- primarily department stores -- as the key
source of distribution for its products. The Company believes that the wholesale
channel generally, and department stores specifically, provide the best means of
promoting a fully conceptualized image for each of its brands and of securing
broad awareness of its products and image. The Company's wholesale customers for
branded and designer apparel include May Co., Federated, JC Penney, Proffits and
Dillard's. The Company's customers for footwear include Federated, May Co.,
Dillard's, Belk's and Nordstrom. The Company's ten largest wholesale customers,
accounting for over 60% of the Company's fiscal 1997 sales to wholesale
customers, each have been the Company's customers for more than 25 years. The
Company believes that its customers rely on its ability to design, manufacture
to exacting quality standards and deliver on a timely basis commercially
successful apparel and footwear programs.
While focused on the wholesale sector, the Company also sells its products
directly to consumers in approximately 695 Company-owned stores located
primarily in factory outlet retail malls. The stores are operated in five
formats, matching each of the Company's premier brands -- Van Heusen, Bass,
Izod, Gant and Geoffrey Beene. Van Heusen and Bass, which have the broadest
national recognition, followed by Izod, are in the broadest range of malls.
Geoffrey Beene stores are located in malls where that brand has greater name
recognition. Gant stores are included in a limited number of the most successful
of the nation's malls. Historically, the Company participated in the significant
expansion of the factory outlet mall sector, capitalizing on mall expansion to
build a portfolio of approximately 1,000 stores and generate significant sales
and cash flow growth. However, this strategy left the Company reliant on mall
growth rather than on brand and market share development as the primary driver
of
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expansion, contributed to a deterioration in the quality and stability of
earnings and failed to strengthen the image and brand equity in its major
businesses. Since 1995, the Company has significantly reduced the number of its
retail locations and has closed its least attractive stores to optimize its
portfolio. The Company's retail presence remains an important complement to its
strong branded positions in the wholesale market, facilitating product
experimentation, the gathering of market intelligence, effective inventory
control and management of surplus product.
STRATEGY
The Company's strategy is to exploit and expand its branded position in the
United States and, on a longer-term basis, internationally. Elements of this
strategy include:
o CAPITALIZE ON SPORTSWEAR OPPORTUNITY. With a renewed strong focus by
retailers on the importance of men's sportswear and the customer impact
of brand differentiation within that sector, the Company actively has
sought to build a leading branded presence in this fragmented niche,
acquiring existing sportswear brands (Izod and Gant) and expanding their
presence in the wholesale sector. This renewed focus is in part
attributable to the on-going move of employers towards casual dress
policies, such as 'casual Fridays', and the increasing number of people
who work at home. In addition, outside of the workplace, people's social
activities generally focus on a more casual lifestyle. These trends
present greater opportunities for the Company in sportswear. Sportswear
now represents 66% of the Company's apparel segment sales, and it is
expected that sportswear will continue to increase as a percentage of
sales.
o EXTEND BRAND PRODUCT RANGE. The Company continues to broaden the
product range of its brands, capitalizing on the name recognition,
popular draw and discrete target customer segmentation of each of its
major labels. For example, dress shirts are now marketed under the Bass
name and sportswear under the Van Heusen name, and Izod recently has
expanded its offerings to include products for the fall and holiday
seasons, a step toward building a year-round brand. As part of the
introduction of the European Gant collection in the United States, the
Company expanded its sportswear offerings to include sport coats,
outerwear, rainwear, swimwear and accessories. Brand differentiation is
maintained with design, manufacturing and procurement functions managed
at the brand level.
o PROMOTE GLOBAL BRAND AND IMAGE. The Company believes that over the
long-term the most successful brands will be those with a consistent
imagery, market positioning and name recognition throughout the world's
major consumer markets. The Company's longer-term goal is to develop its
core brands into international consumer franchises. Currently, all four
of the Company's owned brands are distributed internationally, although
only Gant, which in its niche is the leading market player in several
European countries and is second only to 'Polo' in most of the other
European countries, has achieved widespread brand recognition. The Van
Heusen brand is licensed in 21 countries in North, Central and South
America. In 1992, Bass began marketing its footwear internationally and
is now selling limited amounts of footwear to retailers in Europe,
Canada, South America, the Middle East, Africa and Asia. The Company
plans to build on these bases and to project a consistent global image
for each of its owned brands.
o BUILD UPON ENHANCED ADVERTISING PRESENCE. The Company launched
advertising campaigns for its brands in the second half of fiscal 1997,
which resulted in an increase in advertising expenditures by $18.4
million from fiscal 1996 to $37.8 million. Based upon dialogue with its
wholesale customers, the Company believes that the campaigns were well
received. The Company is committed to a continued advertising program to
support and further develop the national and international recognition
of its brands. The Company believes that ongoing communication with the
consumer is a core ingredient for branded marketing success.
o LEVERAGE CORE COMPETENCIES IN LOGISTICAL AND IT SUPPORT. With primary
focus on the more demanding wholesale customer nationwide and on
securing and maintaining a strong presence on the department store
floor, the Company has made significant investments to ensure the
adequacy of its inventory replenishment programs, its capacity to
monitor sales by
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SKU and margin and its ability to ensure its customers of timely
product availability in a cost-effective manner.
o INCREASE OPERATING EFFICIENCIES. The Company is committed to a cost
reduction program and constantly explores alternative methods to achieve
that objective. Given its size, purchasing power and ability to optimize
manufacturing and outsourcing alternatives, the Company is in a position
to achieve significant efficiencies in procurement and manufacturing.
This is essential if the Company is to provide high levels of service
and responsiveness to its wholesale customers, while maintaining control
over costs and working capital. The Company has developed significant
manufacturing flexibility by maintaining a range of Company-owned and
third party manufacturing capacity available to it, while optimizing
margins through recourse to low cost non-United States manufacturing.
The Company has announced a number of programs, including the
contraction of its United States manufacturing and logistical
infrastructure, to achieve significant cost savings.
o OPERATE COMPLEMENTARY RETAIL OPERATIONS. The Company's factory outlet
retail stores provide a valuable complement to its wholesale presence,
allowing for product experimentation, the gathering of market
information, increasing the efficiency of inventory and surplus product
management. The Company's stores sell a breadth of product not otherwise
found in the Company's wholesale offerings. With a significant program
of store closures in progress, the Company has been very focused on
improving the profitability of the retail portfolio as a whole and
maintaining its financial viability as a second channel of distribution.
The Company's remaining retail stores are profitable, and the average
sales per square foot and inventory turn at such stores have improved
significantly since 1995, thereby positioning the Company's retail
operations to generate increasing earnings and cash flows.
IMPLEMENTATION OF THE COMPANY'S STRATEGIES
Specific action steps taken beginning in 1995 and continuing into 1998 and
1999 with respect to the implementation of these strategies include: (i) the
acquisition of the Izod and Gant brands; (ii) the reorganization of the
Company's non-dress shirt operations along brand lines versus a wholesale/retail
organizational structure; (iii) the complete repositioning of Gant's domestic
brand image to match its highly successful European brand image; (iv) the
launching of new, focused Van Heusen, Izod and Gant advertising campaigns; (v)
the closure of approximately 400 of the Company's worst performing retail
locations in a program that by the end of fiscal 1998, after approximately 50
new store openings, will have reduced the retail portfolio from approximately
1,000 locations to approximately 650; (vi) the closure of domestic shirt
manufacturing plants and its United States mainland shoe manufacturing plant;
(vii) the consolidation of the Company's domestic warehousing and distribution
facilities; and (viii) the closure of the Company's sweater manufacturing
operations, which were unprofitable, capital intensive and did not match the
Company's branded strategy.
These steps have had the effect of focusing the Company's attention and
resources on its core brands and have yielded strong and positive results, with
further benefits expected to continue over the next three years. The Company's
apparel operations (excluding sweater operations) saw net sales increase 4.9% in
fiscal 1997 to $882.0 million, representing 65% of total fiscal 1997 net sales,
gross margins improve from 31.3% to 32.9% and operating income increase over 50%
to $45.4 million in fiscal 1997 (after incremental advertising expenses of $15.0
million) as compared to fiscal 1996. The Company's net sales of wholesale
branded apparel products increased 24% in 1997 to $387.2 million. With $6.0
million of annual savings already realized from the closure of dress shirt
manufacturing facilities in 1995 and 1996, the further closures in manufacturing
facilities and consolidation of logistical infrastructure announced by the
Company in 1997 are expected to result in substantial future cash savings.
Within the dress shirt sector, as the benefits of brand development and
manufacturing reorientation have begun to be realized, estimated market share in
the department store channel in which the Company competes has increased to 31%
from 26%, with sales increasing by 20% in fiscal 1997 as compared to fiscal
1996, and operating margins and profitability more than doubling. Approximately
60 underperforming Geoffrey Beene sportswear retail outlets have been closed,
resulting in significant increases in productivity and sales per square foot in
the remaining stores, and eliminating the losses
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experienced by that business in 1996. Gant's 1997 repositioning in the United
States was implemented as the Company opened a new flagship store on Fifth
Avenue in Manhattan and increased by 34% thenumber of in-store shops in
department stores carrying the Gant collection, with a further increase of 30%
planned by department stores in 1998. Izod's wholesale sales doubled during
1997, with a 32% increase in the number of stores carrying the line. While Van
Heusen's retail sales experienced a small decline as poorly performing stores
were closed, operating profit increased 23%, reflecting the benefits of the
Company's programs.
The process of implementing the Company's strategic initiatives has not
been without disappointment. In the Bass business, fiscal 1997 net sales
declined 5.0% to $439.0 million, as a result of the Company's attempt to
reposition its Bass brand to higher price points, which proved overly
aggressive. While the higher price position was endorsed by the Company's
wholesale customers, the initiatives were not well executed and did not meet
with consumer support, resulting in an inventory build up at both the wholesale
level and in the Company's own factory outlet retail stores. To protect its
franchise and preserve its wholesale customer relationships, the Company took
substantial markdowns in its own retail stores and aggressively financed the
markdowns required by its wholesale customers to sell this inventory. Line
management responsible for the Bass business has been changed, a decision was
made to close the United States mainland manufacturing facilities and the brand
was returned to its historic positioning targeted in the moderate price range as
a family oriented, 'Americana'-associated casual lifestyle brand. The result of
these actions was a non-recurring charge to fiscal 1997 earnings of $54.2
million and a decline in footwear and related products operating income (before
such charge) of $17.5 million to $15.4 million. While the Company is
disappointed at the outcome of the Bass repositioning effort, the Company
believes that its current plans for Bass will allow it to return to its
historical levels of sales and profitability.
The implementation of these strategic initiatives has resulted in the
Company taking pre-tax charges of $27.0 million in fiscal 1995 and $132.7
million in fiscal 1997, inclusive of the $54.2 million of Bass related charges.
The Company believes that these initiatives have positioned it to achieve
significant improvements in sales, operating income and cash flow in its apparel
businesses and will position it further to compete cost effectively in the
future across all of its business sectors. Furthermore, the Company believes
that the initiatives favorably position the Company to accelerate its strategy
of building pre-eminent global apparel and footwear brands.
COMPANY'S STRENGTHS
The key strengths of the Company are as follows:
o MARKET LEADERSHIP POSITION. The Company maintains a dominant position
in men's dress shirts, a leading position in casual footwear and an
increasingly important position in the fragmented men's sportswear
market. The Company's strong market shares provide it with significant
marketing strength relative to its competitors and attractive selling
floor space at its department store customers.
o HIGH BRAND AWARENESS. The Company's five premier brands -- Van Heusen,
Bass, Izod, Gant and Geoffrey Beene -- enjoy national recognition in
their respective sectors of the market. Brand recognition is critical in
the apparel and footwear industries, where strong brand names help
define consumer preferences and drive department store floor space
allocation.
o MARKET SEGMENTATION. The Company markets its five premier brands to
different segments of the market, appealing to varied demographic
sectors and a broad spectrum of consumers. Accordingly, the diversity of
the Company's brands is intended to minimize competition among the
brands.
o STRENGTH AND BREADTH OF CUSTOMERS. The Company markets its products to
a broad spectrum of customers, including department stores, as well as
directly to the consumer in its factory outlet retail stores. The
Company's retail business is intended to serve as a complement to its
strong branded positions in the wholesale market. The Company's ten
largest wholesale customers, accounting for over 60% of the Company's
fiscal 1997 sales to wholesale customers, each have been the Company's
customers for more than 25 years. No single
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customer accounted for more than 6% of the Company's total sales in
any of the last three years.
o STRONG LOGISTICS. Timely delivery and product quality are among the
most important criteria used by retailers to evaluate suppliers. Because
of the Company's relatively large size and vertical integration, it has
the capacity to contend successfully with the demands of large
retailers. The Company's investment in information technology, use of
the Company's EDI system, automated warehousing and distribution
operations and global sourcing network facilitate quick response to
sales trends and inventory demands, maximizing its inventory flexibility
and contributing to its strength in dealing with its large retail
customers.
o WORLDWIDE SOURCING ABILITY. The Company has the capability to source
effectively on a world-wide basis as a result of its structure and
history in the apparel and footwear industries. The Company employs
highly seasoned sourcing specialists for each brand. To support these
specialists, the Company maintains a world-wide sourcing network, with
offices in various countries, whose responsibilities include technical
support, quality control and human rights monitoring. These sourcing
specialists provide expertise in sourcing multiple classifications,
which results in highly efficient and cost-effective inventory movement.
As a result of the Company's sourcing network, the Company has developed
strong and stable global relationships over the years.
o STRONG MANAGEMENT. The Company's management is composed of a loyal team
of relatively young and experienced individuals. The average officer of
the Company is under 50 and has spent 25 years in the apparel industry,
13 of those years being with the Company. The Company believes that its
unique team has the experience and expertise to implement the objectives
of the Company.
BUSINESS
DRESS SHIRTS
The Company's dress shirts currently are marketed principally under the Van
Heusen and Geoffrey Beene brands. These two brands are by far the leaders in
men's dress shirts in their respective markets, finishing calendar 1997 with a
combined market share in the key United States department store sector of 31%,
an increase of five percentage points over the prior year. In addition, the
Company markets its dress shirts under the Bass and Etienne Aigner brands, as
well as providing private label dress shirts. The Company recently entered into
a license agreement pursuant to which it will market men's dress shirts under
the DKNY brand beginning with the holiday season in 1998, thereby permitting the
Company further to leverage its competencies and resources.
While the dress shirt sector in the United States has undergone
considerable change and some contraction over the last several years, the
Company believes that the sector has started to demonstrate stability. Over the
last three years, the Company has increased both the level of its sales in
dollar terms and its overall market share and the Company believes that the core
strength of its brands provides it with a strong foundation for future market
development.
In the past year, the Company made considerable progress not only with
respect to the increase in estimated market share, which generated a substantial
increase in sales, but also with respect to cost and working capital. With the
benefits of the first of the Company's manufacturing and logistics
rationalization strategies beginning to be felt, profitability in this core area
of the Company's business benefited from approximately $6.0 million of achieved
cost savings, and gross margins increased 2.7 percentage points to 24.3% and
operating profit more than doubled to $19.6 million. In addition, the Company
improved its inventory turn significantly in this sector of its business,
reflecting a better logistics function and the strength of its underlying
product and appeal to the end consumer.
Van Heusen dress shirts have provided a strong foundation for the Company
for most of its 117-year history and now constitute the best-selling men's dress
shirt brand in the United States. The Van Heusen dress shirt is marketed at
wholesale in the moderate price range to major department stores and men's
specialty stores nationwide, including May Co., JC Penney, Mervyns and
Federated. Its primary competitors are 'Arrow' and private label shirts.
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The Company markets Geoffrey Beene men's dress shirts under a license
agreement with that designer, which is up for renewal in 2001. Geoffrey Beene
dress shirts are the best-selling men's designer dress shirts in the United
States. In fiscal 1997, Geoffrey Beene garnered the largest market share of all
dress shirt brands in the department store channel of distribution. Geoffrey
Beene dress shirts are sold in the upper moderate price range to major
department stores and men's specialty stores nationwide, including Federated,
May Co., Proffits and Mercantile. Geoffrey Beene dress shirts compete with those
of other designers, including 'Perry Ellis' and 'Ralph Lauren Polo'.
Bass dress shirts are marketed at wholesale to major department stores,
including Federated, Mercantile and Dayton-Hudson, and are sold in the upper
moderate price range. This is a small but successful example of expanding an
existing product line. DKNY dress shirts will be sold in the better price range
and targeted to younger and more contemporary customers.
Private label programs offer the retailer the ability to create its own
line of exclusive merchandise and give the retailer control over distribution of
the product. Private label represents an opportunistic business which leverages
the Company's strong design and sourcing expertise. The Company's customers work
with the Company's designers to develop shirts in the styles, sizes and cuts
which the customers desire to sell in their stores with their particular store
names or private labels. Private label programs offer the consumer quality
product and offer the retailer the opportunity to enjoy higher margins and
product exclusivity. Private label products, however, do not have the same level
of consumer recognition as branded products and private label manufacturers do
not generally provide retailers with the same breadth of services and in-store
sales and promotional support as branded manufacturers. The Company markets at
wholesale men's dress shirts under private labels to major national retail
chains and department stores, including JC Penney, Sears, May Co., Target and
Federated. The Company believes it is one of the largest marketers of private
label dress shirts in the United States.
SPORTSWEAR
Several trends have affected the domestic and global apparel business in
recent years, including the increase in casual dress in and away from the
workplace. The retail dollar volume for men's casual business attire grew 7.3%
annually between 1991 and 1997, and the retail dollar volume of women's casual
business attire increased 4.9% annually in the same period, in comparison to the
retail dollar volume for total tailored apparel, which grew 2.1% annually. In
1997, 65% of the retail dollars spent on casual and tailored apparel was
attributed to casual apparel. The Company has sought to capitalize on this trend
and sportswear sales now account for 66% of the Company's apparel segment sales.
The Company's sportswear products currently are marketed principally under the
Van Heusen, Izod, Izod Club, Gant and Geoffrey Beene brands.
Van Heusen is the best-selling woven sport shirt brand in the United
States. Van Heusen apparel also includes knit sport shirts, sweaters and golf
apparel. Like Van Heusen branded dress shirts, Van Heusen branded sport shirts
and sweaters are marketed at wholesale in the moderate price range to major
department stores and men's specialty stores nationwide, including JC Penney,
Mervyns, May Co. and Proffits. The Company believes that the main floor
classification business in department stores is becoming increasingly important
and that there are few important brands in that category. As a result, the
Company believes that the success of Van Heusen dress shirts in department
stores where it is part of the stores' classification offerings supports its
presence in the department stores' sportswear classification offerings and
presents a significant opportunity for further development.
During 1997, the Company's Van Heusen sport shirt product presentation was
improved through new packaging, and a modest program to reposition the brand was
implemented, all in an effort to improve its share of floor space in better
department stores. The Company ascribes the increased sales at wholesale to a
combination of retailers' increased focus on the classification sportswear
sector and to the success of these programs.
The product mix targeted for Van Heusen outlet stores is intended to
satisfy the key apparel needs of men from dress furnishings to sportswear and of
women for sportswear. Van Heusen stores' merchandising strategy is focused on
achieving a classic and/or updated traditional look in a range of primarily
moderate price points. Target customers represent the broadest spectrum of the
American
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consumer. The Company closed a number of the worst performing Van Heusen retail
outlets during fiscal 1997, resulting in a small reduction in sales, but a
significant increase in profit margin in its retail operations.
Izod occupies a major presence in department stores as a main floor
lifestyle classification sportswear brand. Izod branded apparel products consist
of active inspired men's and women's sportswear, including Izod sweaters (the
best-selling men's sweater brand in the United States), knitwear (one of the
best-selling basic knit shirts in the United States), slacks, fleecewear and
microfiber jackets. These products are marketed in the moderate to upper
moderate price range in major department store locations, including May Co.,
Federated, JC Penney, Mercantile and Belk's.
The Company continues to upgrade its growing product line from the core of
the pique knit shirt and has expanded its wholesale customer base significantly.
During fiscal 1997, Izod doubled its wholesale revenues from the previous fiscal
year. In spring of 1997, the Company sold its Izod products in more than 1,700
department store locations; by spring 1998, the Company expects to have an Izod
presence in approximately 2,300 department store locations. The Company has
expanded the Izod brand to include apparel appropriate for the fall and winter
seasons, including long-sleeve knit shirts, fleecewear and microfiber jackets.
The Company's Izod outlet stores market Izod branded men's and women's
active-inspired sportswear. Target customers are generally brand loyalists who
expect quality and fashion at reasonable prices.
Izod Club branded golf apparel is marketed to approximately 4,000 golf pro
shops and resorts across the United States in the better price range and is
ranked as the number one golf brand in that channel of distribution. Products
marketed in the Izod Club men's and women's collections include knit shirts,
sweaters, bottoms, outerwear, windshirts, headwear and hosiery. Izod Club
women's products have been sold at Nordstrom stores since 1997 and since 1998 at
Dayton Hudson department stores. Izod Club has developed a professional golf
tournament strategy, which was highlighted by its management of the
merchandising efforts at the 1997 U.S. Open, USGA Senior's Open, and USGA
Women's Open. In addition, four of the top 10 women golf professionals on the
LPGA tour wear Izod Club golf apparel, making the Izod Club brand highly visible
on the golf course and on televised LPGA events. In 1997, Izod Club was
reorganized into Izod and all of Izod Club's operational functions, other than
its sales function, were integrated with Izod's operational functions.
The Gant brand is the Company's only lifestyle collection of men's
sportswear that includes woven and knit tops, bottoms and outerwear. For the
past decade, Gant has been successfully marketed internationally as an upscale
brand (competing head-to-head with 'Polo') through a license to the Company's
affiliate, Pyramid Sportswear. Gant's international sales have experienced
significant growth annually for the last decade and the international business
has developed the critical mass to serve as a fully developed stable business.
It is now the largest collection brand in several countries in Europe, and is
second only to 'Polo' in most of the other European countries. Gant products are
sold in 35 countries throughout Europe, Canada, the Middle East and Asia,
including in over 50 Gant retail stores, with 13 additional stores scheduled to
be opened in Europe in 1998. The Company receives a royalty on the sales of Gant
products by Pyramid Sportswear, and also owns 25% of Pyramid Sportswear with an
option to purchase the balance beginning in 2000.
Commencing in 1997, as a part of the Company's ongoing strategy to build
its brands, the Company undertook a series of measures to reposition the Gant
brand in the United States as a pre-eminent global sportswear collection. The
repositioning of the Gant brand in the United States has encompassed new,
expanded and upgraded products and the consolidation of the worldwide design and
sourcing functions -- all focused on promoting consistency of product and
quality throughout the world. It is a major step forward in creating one image
for this global brand. Enhancing this image is the Gant flagship store on Fifth
Avenue in New York City which opened on November 20, 1997. Serving as a showcase
of Gant products for retail customers and building brand recognition among
consumers, the store carries a wide range of Gant brand products at higher
quality and better price points. Part of this repositioning has been an
increased effort to encourage wholesale customers to present the Gant collection
in separate in-store shops. The number of Gant in-store shops more than doubled
from 156 in
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1995 to 441 in 1997. In 1998, Gant will be offered as a collection in selected
Federated stores, including Macy's West.
The Company's limited number of Gant outlet stores offer fine quality knit
and woven shirts, sweaters, pants, shorts, outerwear and accessories for men.
The Gant line incorporates several
sportswear 'lifestyles'. Included are spectator-active and sportswear products,
all of which maintain detailed construction and high quality fabrics.
The Company's Geoffrey Beene stores offer dress and sport shirts, neckwear,
furnishings, outerwear, bottoms and sportswear. Through their product mix, the
Geoffrey Beene stores seek to meet the full needs of men's wardrobes (excluding
suits) from dress furnishings to sportswear. The merchandising strategy is
focused on an upscale, fashion forward consumer who is prepared to purchase
apparel in the upper moderate price range. Most Geoffrey Beene stores also offer
a full line of women's casual apparel bearing the Geoffrey Beene name, which
accounts for more than one-third of the Company's Geoffrey Beene outlet
business. The Company offers Geoffrey Beene products in its stores under license
agreements which expire in 1999. The Company is negotiating for a renewal of
these agreements.
Geoffrey Beene products are styled to be more fashion-forward than the
Company's Van Heusen brand, and the Geoffrey Beene brand name recognition is
more geographically focused, versus the broader based familiarity with the Van
Heusen, Bass or Izod labels. In recognition of this, the Company has closed a
significant number of its Geoffrey Beene retail outlets in parts of the country
where brand recognition was not strong, which has resulted in a substantial
improvement in store productivity and inventory turn and a significant increase
in profitability.
The Company's extensive resources in both product development and sourcing
have permitted it to market successfully private label sport shirts to major
retailers, including K-Mart, Wal-Mart, Target, Sears, JC Penney and Lord &
Taylor. Private label golf apparel is marketed to traditional department and
specialty stores, national retail chains and catalog merchants. The Company also
markets private label shirts to companies in service industries, including major
airlines and food chains. The Company believes it is one of the largest
marketers of private label sport shirts in the United States.
FOOTWEAR AND RELATED PRODUCTS
The Company manufactures, procures for sale and markets a broad line of
traditional men's, women's and children's casual shoes and related products
under the Bass brand in the moderate price range. The Bass brand has a very
strong heritage since its formation in 1876 and has been an icon to a wide
spectrum of consumers. A number of Bass' trademarks are highly recognized, the
most important ones being Weejun and Sunjun. Bass is the leading brand of men's,
women's and children's casual shoes at the moderate price range in the United
States. Based on the number of pairs sold, Bass branded footwear has a 3.4%
share of the upper moderate casual shoe market.
The Company launched an aggressive repositioning program at Bass during
fiscal 1997 intended to capitalize on its broad name recognition and reputation.
Based on extensive market research and encouragement from its wholesale
customers, the Company implemented significant price increases without, however,
the depth of prior marketing and brand image support that such a program
requires. The repositioning was not well-executed and did not meet with consumer
support. This misstep in execution resulted in a significant build up in
inventory at both the wholesale customer and Company-owned retail store levels,
as the end-consumer resisted the price changes. The Company elected to correct
this inventory build up as expeditiously as possible through inventory markdowns
and allowances to wholesale customers, and to restore Bass to its historical
price point and image. While the Company continues to believe that the Bass
brand is capable of sustaining higher end product pricing and a more upmarket
image, the experience in fiscal 1997 has resulted in the determination to
undertake any such repositioning in a very gradual and incremental fashion. The
Company does not believe that the underlying brand equity built up over 120
years has been weakened.
Bass' traditional wholesale customers are major department stores and
specialty shoe stores throughout the United States, including Federated, May
Co., Dillard's, Belk's and Nordstrom. In 1992, Bass began marketing its footwear
internationally and is now selling limited amounts of footwear to retailers in
Europe, Canada, South America, the Middle East, Africa and Asia.
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Bass' merchandising strategy is focused on achieving an American classic
look that emphasizes the Bass style -- the classic and traditional designs Bass
has marketed for more than a century -- representing the 'Bass Lifestyle'. All
footwear is designed in-house, regardless of source, to maintain tight control
of the styling and quality offered by the brand.
The Company's Bass factory outlet retail stores typically carry an
assortment of Bass shoes and accessories for men, women and children, in the
moderate price range, as well as complementary products not sold to wholesale
customers. Bass sportswear apparel for men, women and children is marketed in
approximately 70% of the Company's Bass stores.
COMPETITION
The apparel industry is highly competitive due to its fashion orientation,
its mix of large and small producers, the flow of domestic and imported
merchandise and the wide diversity of retailing methods. The Company's apparel
wholesale divisions experience competition in branded, designer and private
label products. Some of the larger dress shirt competitors include: Bidermann
Industries ('Arrow' brand); Salant Corporation ('Perry Ellis' and 'John Henry'
brands); Smart Shirt (private label shirt division of Kellwood); Capital Mercury
(private label shirts); and Oxford Industries (private label shirts). The
dominance of the Company's dress shirts has increased, in part attributable to
the decrease in sales of the 'Arrow' brand of Bidermann Industries. The Geoffrey
Beene brand has increased its lead in sales over other dress shirt brands,
augmenting its dominance in department stores. Some of the larger sportswear
competitors include: Warnaco ('Chaps' brand); Nautica Enterprises ('Nautica'
brand); Polo/Ralph Lauren L.P. ('Polo' brand); Ashworth and Tommy Hilfiger.
The shoe industry is characterized by fragmented competition. Consequently,
retailers and consumers have a wide variety of choices regarding brands, style
and price. However, over the years, Bass has maintained its important position
in the traditional casual footwear market, and few of its competitors have the
significant brand recognition of Bass. The Company's primary competitors include
Dexter, Rockport, Eastland, Sperry and Sebago. The Company believes, however,
that it manufactures a more extensive line of footwear for both genders and
children and in a broader price range than any of its competitors.
Based on the variety of the apparel and footwear marketed by the Company,
the various channels of distribution it has developed, its logistics and
sourcing expertise, and the strength of the Company's brands, the Company
believes it is particularly well-positioned to compete in the apparel and
footwear industries.
MERCHANDISE DESIGN AND PRODUCT PROCUREMENT
Each brand employs its own designers, product line builders and separate
merchandise product development groups, creating a structure that focuses on the
brand's special qualities and identity. These designers, product line builders
and merchants consider consumer taste, fashion trends and the economic
environment when creating a product plan for a particular season for their
brand. Each brand also employs sourcing specialists who focus on the
manufacturing and sourcing needs of the particular brand. In addition, the
Company operates a world-wide network providing technical support and quality
control to those sourcing specialists. The apparel and footwear merchandise
manufactured by the Company, as well as the vast majority of its sourced
products, are planned, designed and sourced through the efforts of its various
merchandise/product development and sourcing groups.
The process from initial design to finished product varies greatly, but
generally spans nine to 12 months prior to each selling season. Apparel and
footwear product lines are developed primarily for two major selling seasons,
spring and fall. However, certain of the Company's product lines require more
frequent introductions of new merchandise. Raw materials and production
commitments are generally made four to 12 months prior to production and
quantities are finalized at that time. In addition, sales are monitored
regularly at both the retail and wholesale levels and modifications in
production can be made both to increase or reduce availability. The Company's
substantial efforts in the area of quick response to sales trends (through the
expanded use of EDI) enhance its inventory flexibility and reduce production
overruns. EDI provides a computer link between the Company and its wholesale
customers that enables both the customer and the Company to track sales,
inventory and
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<PAGE>
shipments; currently, 65% of the Company's total invoices are handled using EDI.
Use of the system also reduces the amount of time it takes a customer to
determine its inventory needs and order replenishment merchandise and for the
Company to respond to the customer's order.
Dress shirts are manufactured in the Company's domestic apparel
manufacturing facilities in Alabama and Arkansas as well as in Costa Rica,
Guatemala and Honduras. However, most of the Company's dress shirts and
substantially all of its sportswear are sourced and manufactured to the
Company's specifications by independent manufacturers in the Far East, Middle
East and Caribbean areas who meet its quality and cost requirements. Footwear is
manufactured in the Company's factories located in Puerto Rico and the Dominican
Republic. However, approximately 80% of the Company's footwear is sourced to
independent manufacturers which meet its quality and cost requirements,
principally located in Brazil and the Far East.
The Company's foreign offices, located principally in Hong Kong, Taiwan,
the Philippines, Singapore and throughout Central America, enable the Company to
monitor the quality of the goods manufactured by, and the delivery performance
of, its suppliers. The Company continually seeks additional suppliers throughout
the world for its sourcing needs and places its orders in a manner designed to
limit the risk that a disruption of production at any one facility could cause a
serious inventory problem. The Company has not experienced significant
production delays or difficulties in importing goods. However, from time to time
the Company has incurred added costs by shipping goods by air freight in order
to meet certain delivery commitments to its customers. The Company's purchases
from its suppliers are effected through individual purchase orders specifying
the price and quantity of the items to be produced. Generally, the Company does
not have any long-term, formal arrangements with any of the suppliers which
manufacture its products. The Company believes that it is the largest customer
of many of its manufacturing suppliers and that its long-standing relationships
with its suppliers provide the Company with a competitive advantage over its
competitors. No single supplier is critical to the Company's production needs,
and the Company believes that an ample number of alternative suppliers exist
should the Company need to secure additional or replacement production capacity.
The Company purchases raw materials, including shirting fabric, buttons,
thread, labels, yarn, piece goods and leather, from domestic and foreign sources
based on quality, pricing and availability (including quotas and duties). The
Company believes it is one of the largest procurers of shirting fabric worldwide
and purchases the majority of its shirting fabric from overseas manufacturers,
due, principally, to decreased domestic production. The Company monitors factors
affecting textile production and imports and remains flexible in order to
exploit advantages in obtaining materials from different suppliers and different
geographic regions. Rawhide leather for Bass footwear is procured mainly from
domestic suppliers. Bass monitors the leather market and makes purchases on the
spot market or through blanket contracts with suppliers as price trends dictate.
No single supplier of raw materials is critical to the Company's production
needs and the Company believes that an ample number of alternative suppliers
exist should the Company need to secure additional or replacement raw materials.
ADVERTISING AND PROMOTION
The Company has used national advertising to communicate the Company's
marketing message since the 1920s. In recent years, the Company focused on
cooperative advertising, through which the Company and individual retailers
combine their efforts and share the cost of store radio, television and
newspaper advertisements and in-store advertising and promotional events
featuring the Company's branded products. While the Company believes that this
effort has helped create strong brand awareness and a high recognition factor
among American consumers, as well as contributed to the overall success of the
Company, in fiscal 1997 the Company increased its media marketing activities in
an aggressive fashion by also communicating its brand position directly to the
American consumer. The Company's advertising expenses increased by $18.4 million
to $37.8 million.
The Company advertises primarily in national print media, including
fashion, entertainment/human interest, business, men's, women's and sports
magazines. The Company continues its efforts in
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<PAGE>
cooperative advertising, as it believes that brand awareness and in-store
positioning is further supplemented by the Company's continuation of such a
program.
In the Company's retail sector, the Company relies upon local outlet mall
developers to promote traffic for their centers. Outlet center developers employ
multiple formats, including signage (highway
billboards, off-highway directional signs, on-site signage and on-site
information centers), print advertising (brochures, newspapers and travel
magazines), direct marketing (to tour bus companies and travel agents), radio
and television, and special promotions.
TRADEMARKS
The Company has the exclusive right to use the Izod and Gant names in most
countries, the Van Heusen name in North, Central and South America as well as
the Philippines, and the exclusive worldwide right to use the Bass name for
footwear. The Company has registered or applied for registration of numerous
other trademarks for use on a variety of items of apparel and footwear and
related products and owns many foreign trademark registrations. It presently has
pending a number of applications for additional trademark registrations. The
Company regards its trademarks and other proprietary rights as valuable assets
and believes that they have significant value in the marketing of its products.
LICENSING
The Company has various agreements under which it licenses the use of its
brand names. The Company is licensing the Van Heusen name for apparel products
in Canada and in most of the South and Central American countries. In the United
States, the Company currently licenses the use of the Van Heusen name for
various products that it does not manufacture or source, including boy's
apparel, sleepwear, eyeglasses, neckwear and other accessories and is exploring
the possibility of licensing the name for use on other products. The Company
licenses the use of the Gant name for a complete range of sportswear and
footwear in Europe, Australia, New Zealand and the Far East. (During 1995, the
Company acquired 25% of the Gant licensee, Pyramid Sportswear, and has an option
to purchase the remaining 75% beginning in the year 2000.) The Company also
licenses the use of the Gant name for dress furnishings in the United States.
The Company licenses the use of the Izod name for infants, toddlers and
children's clothing, as well as 'big and tall' apparel, in the United States,
and for men's and women's sportswear in Canada.
The Company plans to continue expanding its worldwide marketing efforts,
utilizing licenses and other techniques for all its brands, especially under the
Izod and Gant trademarks. A substantial portion of sales by its domestic
licensing partners are made to the Company's largest customers. While the
Company has significant control over its licensing partners' products and
advertising, it relies on its licensing partners for, among other things,
operational and financial control over their businesses. In addition, failure by
the Company to maintain its existing licensing alliances could adversely affect
the Company's financial condition and results of operations. Although the
Company believes in most circumstances it could replace existing licensing
partners if necessary, its inability to do so for any period of time could
adversely affect the Company's revenues both directly from reduced licensing
revenue received and indirectly from reduced sales of the Company's other
products. To the extent the equity and awareness of each of the Company's brands
grows, the Company expects to gain even greater opportunities to build on its
licensing efforts.
TARIFFS AND IMPORT RESTRICTIONS
A substantial portion of the Company's products is manufactured by
contractors located outside the United States. These products are imported and
are subject to United States Customs laws, which impose tariffs as well as
import quota restrictions established by the United States government. However,
a significant portion of the Company's apparel products is imported from its
Caribbean Basin manufacturing facilities and is therefore eligible for certain
duty-advantaged programs commonly known as '807 Programs'. While importation of
goods from certain countries from which the Company obtains goods may be subject
to embargo by United States Customs authorities if shipments exceed quota
limits, the Company closely monitors import quotas and can, in most cases, shift
production to
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contractors located in countries with available quotas. The existence of import
quotas has, therefore, not had a material adverse effect on the Company's
business.
EMPLOYEES
As of February 1, 1998, the Company employed approximately 8,450 persons on
a full-time basis and approximately 3,400 persons on a part-time basis.
Approximately 5% of the Company's 11,850 employees are represented for the
purpose of collective bargaining by three different unions. Additional persons,
some represented by these three unions, are employed from time to time based
upon the Company's manufacturing schedules and retailing seasonal needs. The
Company believes that its relations with its employees are satisfactory. As a
result of the restructuring and reorganization of the Company's operations over
the past three years, the number of the Company's employees will have been
reduced by approximately 3,400 persons.
PROPERTIES
The Company maintains its principal executive offices at 1290 Avenue of the
Americas, New York, New York, occupying approximately 80,000 square feet under a
sub-lease which expires on December 30, 1998. The Company also maintains
administrative offices at 404 Fifth Avenue, New York, New York, where the
Company occupies approximately 38,000 square feet under a lease which expires on
December 31, 1998; in Bridgewater, New Jersey, where the Company occupies a
building of approximately 153,000 square feet under a lease which expires on
July 30, 2007; and in Portland, Maine, where the Company occupies a building of
approximately 95,000 square feet under a lease which expires on October 1, 2008.
The Company expects to move at the end of 1998 or early in 1999 in order to
consolidate its offices now located at 1290 Avenue of the Americas and 404 Fifth
Avenue, New York, New York and has entered into a lease for approximately
132,400 square feet at 200 Madison Avenue, New York, New York. That lease will
expire on May 31, 2014, subject to certain renewal options. The following tables
summarize the other manufacturing facilities, warehouses and distribution
centers, administrative offices and retail stores of the Company as of February
1, 1998:
Apparel
<TABLE>
<CAPTION>
SQUARE FEET OF
FLOOR SPACE (000'S)
------------------------
OWNED LEASED TOTAL
----- ------ -----
<S> <C> <C> <C>
Manufacturing Facilities.............................................................. 239 127 366
Warehouses and Distribution Centers................................................... 1,770 146 1,916
Administrative........................................................................ 16 311 327
Retail Stores......................................................................... 6 1,759 1,765
----- ------ -----
2,031 2,343 4,374
----- ------ -----
----- ------ -----
<CAPTION>
Footwear and Related Products
OWNED LEASED TOTAL
----- ------ -----
<S> <C> <C> <C>
Manufacturing Facilities.............................................................. 274 151 425
Warehouses and Distribution Centers................................................... 209 57 266
Administrative........................................................................ 20 115 135
Retail Stores......................................................................... 8 1,381 1,389
----- ------ -----
511 1,704 2,215
----- ------ -----
----- ------ -----
</TABLE>
For information with respect to minimum annual rental commitments under
leases in which the Company is a lessee, see the note entitled 'Leases' in the
Notes to Consolidated Financial Statements.
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<PAGE>
MANAGEMENT
The following table sets forth information with respect to the officers of
the Company:
<TABLE>
<CAPTION>
NAME POSITION AGE
- --------------------------------------------- -------------------------------------------------- ----
<S> <C> <C>
Bruce J. Klatsky............................. Chairman and Chief Executive Officer; Director 50
Mark Weber................................... President and Chief Operating Officer; Director 49
Irwin W. Winter.............................. Executive Vice President and Chief Financial 64
Officer; Director
Allen E. Sirkin.............................. Vice Chairman 56
Michael J. Blitzer........................... Vice Chairman 49
Mitchell Kates............................... Senior Vice President -- Marketing and Strategic 43
Development
Emanuel Chirico.............................. Vice President and Controller 41
Pamela N. Hootkin............................ Vice President, Treasurer and Secretary 50
Eugene O. Kessler............................ Vice President -- Human Resources 55
</TABLE>
Mr. Bruce J. Klatsky has been employed by the Company in various capacities
over the last 26 years, and was President of the Company from 1987 to March
1998. Mr. Klatsky was named Chief Executive Officer in June of 1993 and Chairman
of the Board of Directors in June of 1994.
Mr. Mark Weber has been employed by the Company in various capacities over
the last 26 years, had been a Vice President of the Company since 1988, was Vice
Chairman of the Company since 1995 and was named President and Chief Operating
Officer in 1998.
Mr. Irwin W. Winter joined the Company in 1987 as Vice President, Finance
and Chief Financial Officer and has over 30 years of experience in the apparel
industry.
Mr. Allen E. Sirkin has been employed by the Company since 1985. He served
as Chairman of the Company's Apparel Group since 1990 and was named Vice
Chairman of the Company in 1995.
Mr. Michael J. Blitzer has been employed by the Company since 1980. In
1998, Mr. Blitzer was named Vice Chairman and Chairman of G.H. Bass & Co. Prior
to that, Mr. Blitzer served as Senior Vice President of the Company since 1995
and President of the Company's Van Heusen retail operations since 1990.
Mr. Mitchell Kates joined the Company in 1998 as Senior Vice
President -- Marketing and Strategic Development. Prior to that, Mr. Kates
served as a consultant with Monitor Company, a management consulting firm.
Mr. Emanuel Chirico has been employed by the Company as Vice President and
Controller since 1993. Prior to that, Mr. Chirico was a partner with the
accounting firm of Ernst and Young LLP.
Ms. Pamela N. Hootkin has been employed by the Company as Vice President,
Treasurer and Secretary since 1988. Prior to that, Ms. Hootkin was the Chief
Financial Officer of Yves Saint Laurent Parfums, Inc.
Mr. Eugene O. Kessler has been employed by the Company in various
capacities since 1981. In 1988, Mr. Kessler was named Vice President -- Human
Resources.
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<PAGE>
The following table lists the non-employee directors of the Company:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AGE
- --------------------------------------------- -------------------------------------------------- ----
<S> <C> <C>
Edward H. Cohen.............................. Senior Partner of Rosenman & Colin LLP, a law firm 59
Joseph B. Fuller............................. Director of Monitor Company, a management 41
consulting firm
Joel H. Goldberg............................. President of Career Consultants, Inc., a 55
management consulting firm
Marc Grosman................................. Founder and Chief Executive Officer of Marc 43
Laurent SA, the owner of a chain of European
apparel stores which trade under the name CELIO
Dennis F. Hightower.......................... Professor of Management, Harvard University, 56
Graduate School of Business Administration
Maria Elena Lagomasino....................... Senior Vice President of The Chase Manhattan Bank 49
Harry N.S. Lee............................... Director of TAL Apparel Limited, an apparel 55
manufacturer and exporter based in Hong Kong
Bruce Maggin................................. Principal of The H.A.M. Media Group, LLC, a media 55
investment company
Sylvia M. Rhone.............................. Chairman and Chief Executive Officer of the 46
Elektra Entertainment Group of Time-Warner Inc.
Peter J. Solomon............................. Chairman of Peter J. Solomon Company, Ltd., an 59
investment banking firm
</TABLE>
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of May 3, 1998
(unless otherwise noted) with respect to each person who is known to the Company
to be the beneficial owner of more than five percent of the outstanding shares
of the Company's common stock, par value $1.00 per share (the 'Common Stock').
<TABLE>
<CAPTION>
AMOUNT
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED CLASS
- --------------------------------------------------------------------------------------- ------------ ----------
<S> <C> <C>
The Crabbe Huson Group, Inc.(1) ....................................................... 4,844,300 17.9%
121 SW Morrison
Suite 1400
Portland, Oregon 97204
Vaneton International, Inc.(2) ........................................................ 2,860,001 10.5
P.O. Box 3340
Road Town
Tortola, British Virgin Islands
Mellon Bank Corporation(3) ............................................................ 1,796,453 6.6
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Phillips-Van Heusen Corporation Investment Committee .................................. 1,398,044 5.1
1290 Avenue of the Americas
New York, New York 10104
</TABLE>
- ------------------
(1) The Crabbe Huson Group, Inc. ('CHG') is a registered investment advisor
which, as of February 2, 1998, shares voting and dispositive power with
approximately 60 investors for whom it serves as investment advisor with
respect to the 4,844,300 shares of Common Stock owned by such investors. CHG
disclaims beneficial ownership of all shares owned by such investors.
Information as to the shares of Common Stock owned by CHG is as set forth in
a Schedule 13G filed with the Commission.
(2) Dr. Richard Lee, 6/F TAL Building, 49 Austin Road, Kowloon, Hong Kong, may
be deemed to beneficially own the 2,860,001 shares of Common Stock owned of
record by Vaneton International, Inc. Dr. Richard Lee and Vaneton
International, Inc. have shared voting and dispositive power over such
shares. Information as to the shares of Common Stock beneficially owned by
Vaneton International, Inc. and Dr. Richard Lee is as of March 5, 1998 and
as set forth in information filed with the Company.
(3) Mellon Bank Corporation ('MBC') is the parent company of Boston Group
Holdings, Inc. ('BGH') which is the parent company of The Boston Company,
Inc. ('TBC'). Each of BGH and TBC may be deemed to be the beneficial owner
of 1,427,155 shares of Common Stock (5.3% of the class). Each of MBC, BGH
and TBC has disclaimed beneficial ownership of such shares. Information as
to the shares of Common Stock beneficially owned by MBC, BGH and TBC is as
of January 23, 1998 and as set forth in a Schedule 13G filed with the
Commission.
(4) Includes all shares held by Wachovia Bank, N.A. as trustee under the Master
Trust Agreement relating to the Company's Associates Investment Plan and its
Associates Investment Plan for Associates in Puerto Rico. Wachovia Bank,
N.A. does not have dispositive power as to the shares of Common Stock
beneficially owned by it.
53
<PAGE>
DESCRIPTION OF SENIOR DEBT
CREDIT FACILITY. The Company and The Chase Manhattan Bank ('Chase') and
Citicorp USA, Inc. ('Citicorp') and a syndicate of lenders have entered into a
senior secured revolving credit facility agreement, which provides for loans in
the aggregate principal amount of $325.0 million (the 'Credit Facility'). In
connection with such financing, Chase acts as administrative agent and
collateral agent and Citicorp acts as documentation agent.
Borrowings under the Credit Facility bear interest, at the Company's
option, (a) at a rate equal to Adjusted LIBOR plus 1.25% per annum or (b) the
Alternate Base Rate (as defined therein) plus 0.25% per annum. The spread over
Adjusted LIBOR or the Alternate Base Rate is subject to change depending on
certain performance measures.
The Credit Facility has a term of five years and is fully revolving until
final maturity. The Credit Facility is secured by all of the stock of certain of
the Company's present and future subsidiaries (which pledge, in the case of
foreign subsidiaries, is limited to 65% of the voting stock of each directly
owned foreign subsidiary to the extent the pledge of any greater percentage
would result in adverse tax consequences to the Company) and by substantially
all of the other present and future domestic property and assets of the Company
and its domestic subsidiaries.
The Credit Facility contains certain financial covenants, including, but
not limited to, covenants related to interest coverage, a leverage test and a
limitation on capital expenditures. In addition, the Credit Facility contains
other affirmative and negative covenants relating to (among other things) liens,
limitations on other debt, transactions with affiliates, mergers and
acquisitions, sales of assets, leases, restricted junior payments, capital
expenditures, guarantees and investments. The Credit Facility contains customary
events of default, including certain changes in control of the Company.
2023 DEBENTURES. The 2023 Debentures rank pari passu in right of payment
with the Credit Facility and rank senior in right of payment to the Notes. The
2023 Debentures will be secured pari passu with the Credit Facility by all of
the stock of certain of the Company's present and future subsidiaries (which
pledge, in the case of foreign subsidiaries, shall be limited to 65% of the
voting stock of each directly owned foreign subsidiary to the extent the pledge
of any greater percentage would result in adverse tax consequences to the
Company) and by substantially all of the other present and future domestic
property and assets of the Company and its domestic subsidiaries.
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<PAGE>
DESCRIPTION OF EXCHANGE NOTES
The Initial Notes have been, and the Exchange Notes are to be, issued under
the Indenture, dated as of April 22, 1998, between the Company and Union Bank of
California, N.A., as trustee (the 'Trustee'). The statements under this caption
relating to the Notes and the Indenture are summaries and do not purport to be
complete, and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Indenture, including the definitions of certain
terms therein. The Indenture is by its terms subject to and governed by the
Trust Indenture Act of 1939. Unless otherwise indicated, references under this
caption to sections, 'Section' or articles are references to the Indenture.
Where reference is made to particular provisions of the Indenture or to defined
terms not otherwise defined herein, such provisions or defined terms are
incorporated herein by reference. Copies of the Indenture and of the
Registration Rights Agreement referred to below (see '-- Registration
Covenant -- Exchange Offer' below) will be available at the corporate trust
office of the Trustee.
GENERAL
The Exchange Notes will be unsecured obligations of the Company, will be
limited to $150 million aggregate principal amount and will mature on May 1,
2008. The Exchange Notes will bear interest at the rate per annum shown on the
front cover of this Prospectus from April 22, 1998 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually on May 1 and November 1 of each year, commencing November 1, 1998,
to the Person in whose name the Exchange Note (or any predecessor Note) is
registered at the close of business on the preceding April 15 or October 15, as
the case may be. Settlement for the Exchange Notes will be made in immediately
available funds and payments by the Company in respect of the Exchange Notes
(including principal, premium, if any, and interest) will be made in immediately
available funds. Interest on the Exchange Notes will be computed on the basis of
a 360-day year comprised of twelve 30-day months. (SectionSection 301, 308 and
311)
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be exchanged or transferred, at the office
or agency of the Company in Los Angeles, California (which initially shall be
the corporate trust office of the Trustee, at Union Bank of California, N.A.,
120 South San Pedro Street - 4th Floor, Los Angeles California 90012; telephone
(213) 972-5682, except that, at the option of the Company, payment of interest
may be made by check mailed to the address of the holders as such address
appears in the Exchange Note register).
The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge shall be made for any registration of transfer or exchange of
Exchange Notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.
FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
The Exchange Notes will be issued only in fully registered form, without
interest coupons, in denominations of $1,000 and integral multiples thereof. The
Exchange Notes will not be issued in bearer form.
Global Exchange Notes. The Exchange Notes initially will be represented by
one or more Notes in registered global form without interest coupons
(collectively, the 'Global Exchange Note'). A Global Exchange Note will be
deposited upon issuance with the Trustee as custodian for The Depository Trust
Company ('DTC'), in New York, New York and registered in the name of DTC or its
nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Transfers of beneficial interests in a Global Exchange Note will be subject
to the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and CEDEL), which may
change from time to time.
Except as set forth below, a Global Exchange Note may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in a
55
<PAGE>
Exchange Note may not be exchanged for Exchange Notes in certificated form
except in the limited circumstances described below under '-- Exchanges of
Book-Entry Notes for Certificated Notes'.
Holders whose Initial Notes were issued in registered certificated form
without interest coupons (the 'Certificated Initial Notes') are entitled to
receive Exchange Notes in registered certificated form without interest coupons
(the 'Certificated Exchange Notes') instead of a beneficial interest in a Global
Exchange Note. Holders tendering Certificated Initial Notes who wish to receive
an interest in the Global Exchange Note may elect to do so by so indicating in
the Letter of Transmittal.
EXCHANGES OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES. A beneficial
interest in a Global Exchange Note may not be exchanged for an Exchange Note in
certificated form unless (i) DTC (x) notifies the Company that it is unwilling
or unable to continue as Depositary for the Global Exchange Note or (y) has
ceased to be a clearing agency registered under the Exchange Act, and in either
case the Company thereupon fails to appoint a successor Depositary within 90
days, (ii) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of the Exchange Notes in certificated form or (iii)
there shall have occurred and be continuing an Event of Default or any Event
which after notice or lapse of time or both would be an Event of Default with
respect to the Exchange Notes. In all cases, certificated Exchange Notes
delivered in exchange for any Global Exchange Note or beneficial interests
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the Depositary (in accordance with
its customary procedures). Any such exchange will be effected through the DWAC
system, and an appropriate adjustment will be made in the records of the
Security Registrar to reflect a decrease in the principal amount of the relevant
Global Exchange Note.
CERTAIN BOOK-ENTRY PROCEDURES. The descriptions of the operations and
procedures of DTC, Euroclear and CEDEL that follow are provided solely as a
matter of convenience. These operations and procedures are solely within the
control of the respective settlement systems and are subject to changes by them
from time to time. The Company takes no responsibility for these operations and
procedures and urges investors to contact the system or their participants
directly to discuss these matters.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a 'clearing corporation' within the meaning of the
Uniform Commercial Code and a 'Clearing Agency' registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants ('participants') and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system is available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ('indirect
participants').
DTC has advised the Company that its current practice, upon the issuance of
a Global Exchange Note, is to credit, on its internal system, the respective
principal amount of the individual beneficial interests represented by such
Global Exchange Note to the accounts with DTC of the participants through which
such interests are to be held. Ownership of beneficial interests in a Global
Exchange Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominees (with respect
to interests of participants) and the records of participants and indirect
participants (with respect to interests of persons other than participants).
AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL
EXCHANGE NOTE, DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE
SOLE OWNER AND HOLDER OF THE EXCHANGE NOTES REPRESENTED BY SUCH GLOBAL EXCHANGE
NOTE FOR ALL PURPOSES UNDER THE INDENTURE AND THE EXCHANGE NOTES. Except in the
limited circumstances described above under '-- Exchanges of Book-Entry Exchange
Notes for Certificated Notes', owners of beneficial interests in a Global
Exchange Note will not be entitled to have any portions of such Global Exchange
Note
56
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registered in their names, will not receive or be entitled to receive physical
delivery of Exchange Notes in definitive form and will not be considered the
owners or Holders of the Global Exchange Note (or any Exchange Note represented
thereby) under the Indenture or the Exchange Notes.
Investors may hold their interests in a Global Exchange Note directly
through DTC, if they are participants in such system, or indirectly through
organizations (including Euroclear and CEDEL) which are participants in such
system. Investors also may hold their interests in a Global Exchange Note
through organizations other than CEDEL and Euroclear that are participants in
the DTC system. CEDEL and Euroclear will hold interests in any Global Exchange
Note on behalf of their participants through customers' securities accounts in
their respective names on the books of their respective depositories. The
depositories, in turn, will hold such interests in such Global Exchange Notes in
customers' securities accounts in the depositories' names on the books of DTC.
All interest in a Global Exchange Note, including those held through Euroclear
or CEDEL, will be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or CEDEL will also be subject to the procedures
and requirements of such system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Exchange Note to such persons may be
limited to that extent. Because DTC can act only on behalf of its participants,
which in turn act on behalf of indirect participants and certain banks, the
ability of a person having beneficial interests in a Global Exchange Note to
pledge such interest to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests.
Payments of the principal of, premium, if any, and interest on, Global
Exchange Notes will be made to DTC or its nominee as the registered owner
thereof. Neither the Company, the Trustee nor any of their respective agents
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Exchange Notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Exchange Note representing any
Exchange Notes held by it or its nominee, will immediately credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Exchange Note for such Exchange
Notes as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in such Global
Exchange Note held through such participants will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers registered in 'street name'. Such payment will be the
responsibility of such participants.
Except for trades involving only Euroclear and CEDEL participants,
interests in the Global Exchange Note will trade in DTC's settlement system and
secondary market trading activity in such interests will therefore settle in
immediately available funds, subject in all cases to the rules and procedures of
DTC and its participants. Transfers between participants in DTC will be effected
in accordance with DTC's procedures, and will be settled in same-day funds.
Transfers between participants in Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer and exchange applicable to the
Exchange Notes described elsewhere herein, cross-market transfers between DTC
participants, on the one hand, and Euroclear or CEDEL participants, on the other
hand, will be effected by DTC in accordance with DTC's rules on behalf of
Euroclear or CEDEL, as the case may be, by its respective depositary; however,
such cross-market transactions will require delivery of instructions to
Euroclear or CEDEL, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or CEDEL, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depository to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global
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Exchange Note in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. Euroclear
participants and CEDEL participants may not deliver instructions directly to the
depositories for Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Exchange Note from a DTC
participant will be credited, and any such crediting will be reported to the
relevant Euroclear or CEDEL participant, during the securities settlement
processing day (which must be a business day for Euroclear and CEDEL)
immediately following the DTC settlement date. Cash received in Euroclear or
CEDEL as a result of sales of interests in a Global Exchange Note by or through
a Euroclear or CEDEL participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant Euroclear
or CEDEL cash account only as of the business day for Euroclear or CEDEL
following the DTC settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below and the conversion of Exchange Notes) only
at the direction of one or more participants to whose account the DTC interests
in the Global Exchange Notes are credited and only in respect of such portion of
the aggregate principal amount of the Exchange Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default (as defined below) under the Exchange Notes, the Global
Notes will be exchanged for Exchange Notes in certificated form, and distributed
to DTC's participants.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
in order to facilitate transfers of beneficial ownership interests in the Global
Exchange Notes among participants of DTC, Euroclear and CEDEL, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Trustee nor
any of their respective agents will have any responsibility for the performance
by DTC, Euroclear and CEDEL, their participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records relating
to, or payments made on account of, beneficial ownership interests in Global
Exchange Notes.
OPTIONAL REDEMPTION
The Exchange Notes will be subject to redemption, at the option of the
Company, in whole or in part, at any time on or after May 1, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' notice mailed to each
holder of Exchange Notes to be redeemed at such holder's address appearing in
the Note Register, in amounts of $1,000 or an integral multiple of $1,000, at
the following Redemption Prices (expressed as percentages of the principal
amount) plus accrued interest to but excluding the Redemption Date (subject to
the right of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date), if redeemed during the 12-month period beginning May 1 of the years
indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ------------------------------------------------------------ ----------
<S> <C>
2003........................................................ 104.750%
2004........................................................ 103.167%
2005........................................................ 101.583%
2006 and thereafter......................................... 100.000%
</TABLE>
(SectionSection 203, 1101, 1105 and 1107)
In addition, if on or before May 1, 2001 the Company receives net proceeds
from the sale of its Common Stock in one or more Public Equity Offerings, the
Company may, at its option, use an amount equal to all or a portion of any such
net proceeds to redeem Exchange Notes in an aggregate principal amount of up to
one-third of the original principal amount of the Exchange Notes, provided,
however, that Exchange Notes having a principal amount equal to at least
two-thirds of the original principal amount of the Exchange Notes remain
outstanding after such redemption. Such redemption must occur
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on a Redemption Date within 90 days of such sale and upon not less than 30 nor
more than 60 days' notice mailed to each holder of Exchange Notes to be redeemed
at such holder's address appearing in the Note Register, in amounts of $1,000 or
an integral multiple of $1,000, at a redemption price of 109.50% of the
principal amount of the Exchange Notes plus accrued interest to but excluding
the Redemption Date (subject to the right of holders of record on the relevant
Regular Record Date to receive interest due on an Interest Payment Date that is
on or prior to the Redemption Date).
If less than all the Exchange Notes are to be redeemed, the Trustee shall
select, in such manner as it shall deem fair and appropriate, the particular
Exchange Notes to be redeemed or any portion thereof that is an integral
multiple of $1,000. (Section 1101)
The Exchange Notes will not have the benefit of any sinking fund.
SUBORDINATION
The indebtedness evidenced by the Exchange Notes will, to the extent set
forth in the Indenture, be subordinate in right of payment to the prior payment
in full in cash of all Senior Debt. Upon any payment or distribution of assets
to creditors upon any liquidation, dissolution, winding-up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company,
whether voluntary or involuntary, or any bankruptcy, insolvency, receivership or
similar proceedings of the Company, the holders of all Senior Debt will first be
entitled to receive payment in full in cash of such Senior Debt, or provision
made for such payment, before the holders of the Exchange Notes will be entitled
to receive any payment in respect of the principal of or premium, if any, or
interest on, or any obligation to repurchase, the Exchange Notes. In the event
that notwithstanding the foregoing, the Trustee or the holder of any Exchange
Note receives any payment or distribution of assets of the Company of any kind
or character (including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of the Company
being subordinated to the payment of the Exchange Notes), before all the Senior
Debt is so paid in full, then such payment or distribution will be required to
be paid over or delivered forthwith to the trustee in bankruptcy or other person
making payment or distribution of assets of the Company for application to the
payment of all Senior Debt remaining unpaid, to the extent necessary to pay the
Senior Debt in full.
No payments on account of principal of, premium, if any, or interest on, or
in respect of the purchase, redemption or other acquisition of, the Exchange
Notes, and no defeasance of the Exchange Notes, may be made if there shall have
occurred and be continuing a Senior Payment Default. 'Senior Payment Default'
means any default in the payment of any principal of or premium, if any, or
interest on Designated Senior Debt when due, whether at the stated maturity of
any such payment or by declaration of acceleration, call for redemption or
otherwise.
Upon the occurrence of a Senior Nonmonetary Default and receipt of written
notice by the Company and the Trustee of the occurrence of such Senior
Nonmonetary Default from any holder of Designated Senior Debt (or any trustee,
agent or other representative for such holder) which is the subject of such
Senior Nonmonetary Default, no payments on account of principal of, premium, if
any, or interest on, or in respect of the purchase, redemption or other
acquisition of, the Exchange Notes, and no defeasance of the Exchange Notes, may
be made for a period (the 'Payment Blockage Period') commencing on the date of
the receipt of such notice and ending the earlier of (i) the date on which such
Senior Nonmonetary Default shall have been cured or waived or ceased to exist or
all Designated Senior Debt the subject of such Senior Nonmonetary Default shall
have been discharged and (ii) the 179th day after the date of the receipt of
such notice. In any event, no more than one Payment Blockage Period may be
commenced during any 360-day period, and there shall be a period of at least 181
days during each 360-day period when no Payment Blockage Period is in effect. In
addition, no Senior Nonmonetary Default that existed or was continuing on the
date of the commencement of a Payment Blockage Period may be made the basis of
the commencement of a subsequent Payment Blockage Period whether or not within a
period of 360 consecutive days, unless such Senior Nonmonetary Default shall
have been cured for a period of not less than 90 consecutive days. 'Senior
Nonmonetary Default' means the occurrence or existence and continuance of an
event of default with respect to Senior Debt, other than a Senior Payment
Default, permitting the holders of the Designated Senior Debt (or a trustee
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or other agent on behalf of the holders thereof) then to declare such Designated
Senior Debt due and payable prior to the date on which it would otherwise become
due and payable.
The failure to make any payment on the Exchange Notes by reason of the
provisions of the Indenture described under this caption 'Subordination' will
not be construed as preventing the occurrence of an Event of Default with
respect to the Exchange Notes arising from any such failure to make payment.
Upon termination of any period of payment blockage the Company shall resume
making any and all required payments in respect of the Exchange Notes, including
any missed payments.
'Senior Debt' means (i) the principal of (and premium, if any) and interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding) on, and
penalties and any obligation of the Company for reimbursement, indemnities, fees
and expenses relating to, the Credit Facility, (ii) every reimbursement
obligation of the Company with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of the Company, (iii)
the principal of (and premium, if any) and interest on Debt of the Company for
money borrowed, whether Incurred on or prior to the date of original issuance of
the Initial Notes or thereafter, and any amendments, renewals, extensions,
modifications, refinancings and refundings of any such Debt and (iv) Permitted
Interest Rate, Currency or Commodity Price Agreements entered into with respect
to Debt described in clauses (i), (ii) and (iii) above; provided, however, that
the following shall not constitute Senior Debt: (1) any Debt as to which the
terms of the instrument creating or evidencing the same provide that such Debt
is not superior in right of payment to the Exchange Notes, (2) any Debt which is
subordinated in right of payment in any respect to any other Debt of the
Company, (3) Debt evidenced by the Exchange Notes, (4) any Debt owed to a Person
when such Person is a Subsidiary of the Company, (5) any obligation of the
Company arising from Redeemable Stock of the Company, (6) that portion of any
Debt which is Incurred in violation of the Indenture and (7) Debt which, when
Incurred and without respect to any election under Section 1111(b) of Title 11,
United States Code, is without recourse to the Company. If any Senior Debt is
disallowed, avoided or subordinated pursuant to the provisions of Section 548 of
Title 11, United States Code, or any applicable state fraudulent conveyance law,
such Senior Debt nevertheless will constitute Senior Debt.
By reason of such subordination, in the event of insolvency, creditors of
the Company who are not holders of Senior Debt or of the Exchange Notes may
recover less, ratably, than holders of Senior Debt and more, ratably, than
holders of the Exchange Notes.
The subordination provisions described above will not be applicable to
payments in respect of the Exchange Notes from a defeasance trust established in
connection with any defeasance or covenant defeasance of the Exchange Notes as
described under '-- Defeasance'. (Article Thirteen)
COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON CONSOLIDATED DEBT
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, Incur any Debt unless immediately after giving pro forma effect to
the Incurrence of such Debt and the receipt and application of the proceeds
thereof, the Consolidated Cash Flow Coverage Ratio of the Company would be
greater than 2.0 to 1, for any Incurrence of Debt prior to May 1, 2001, and 2.5
to 1 for any Incurrence of Debt thereafter.
Notwithstanding the foregoing limitation, the Company may, and may permit
any Restricted Subsidiary to, Incur the following Debt:
(i) Debt under the Credit Facility in an aggregate principal amount at
any one time not to exceed $325.0 million, less any amounts by which any
revolving credit facility commitments under the Credit Facility are
permanently reduced pursuant to the 'Limitation on Asset Dispositions'
covenant below (so long as and to the extent that any required payments in
connection therewith are actually made);
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(ii) the original issuance by the Company of the Debt evidenced by the
Notes (including any Exchange Notes);
(iii) Debt (other than Debt described in another clause of this
paragraph) outstanding or committed on the date of original issuance of the
Notes after giving effect to the application of the proceeds of the
Exchange Notes, as described in a schedule to the Indenture;
(iv) Debt owed by the Company to any Wholly Owned Restricted
Subsidiary of the Company or Debt owed by a Restricted Subsidiary of the
Company to the Company or a Wholly Owned Restricted Subsidiary of the
Company; provided, however, that upon either (A) the transfer or other
disposition by such Wholly Owned Restricted Subsidiary or the Company of
any Debt so permitted to a Person other than the Company or another Wholly
Owned Restricted Subsidiary of the Company or (B) the issuance (other than
directors' qualifying shares), sale, lease, transfer or other disposition
of shares of Capital Stock (including by consolidation or merger) of such
Wholly Owned Restricted Subsidiary to a Person other than the Company or
another such Wholly Owned Restricted Subsidiary, the provisions of this
clause (iv) shall no longer be applicable to such Debt and such Debt shall
be deemed to have been Incurred at the time of such transfer or other
disposition;
(v) Debt consisting of Permitted Interest Rate, Currency or Commodity
Price Agreements;
(vi) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of, outstanding Debt
Incurred pursuant to the first paragraph under this caption or clauses (ii)
or (iii) of this paragraph (each of the foregoing, a 'refinancing') in an
aggregate principal amount not to exceed the principal amount of the Debt
so refinanced plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the Debt so
refinanced or the amount of any premium reasonably determined by the
Company as necessary to accomplish such refinancing by means of a tender
offer or privately negotiated repurchase, plus the expenses of the Company
or the Restricted Subsidiary, as the case may be, incurred in connection
with such refinancing; provided, however, that (A) Debt the proceeds of
which are used to refinance the Exchange Notes or Debt which is pari passu
with or subordinate in right of payment to the Exchange Notes shall only be
permitted if (x) in the case of any refinancing of the Exchange Notes or
Debt which is pari passu to the Exchange Notes, the refinancing Debt is
made pari passu to the Exchange Notes or subordinated to the Exchange
Notes, and (y) in the case of any refinancing of Debt which is subordinated
to the Exchange Notes, the refinancing Debt constitutes Subordinated Debt;
(B) the refinancing Debt by its terms, or by the terms of any agreement or
instrument pursuant to which such Debt is issued, (1) does not provide for
payments of principal of such Debt at the stated maturity thereof or by way
of a sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof (including any redemption,
defeasance, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon any event of default thereunder), in each
case prior to the stated maturity of the Debt being refinanced and (2) does
not permit redemption or other retirement (including pursuant to an offer
to purchase) of such debt at the option of the holder thereof prior to the
final stated maturity of the Debt being refinanced), other than a
redemption or other retirement at the option of the holder of such Debt
(including pursuant to an offer to purchase) which is conditioned upon
provisions substantially similar to those described under '-- Change of
Control' and '-- Limitation on Asset Dispositions'; and (C) in the case of
any refinancing of Debt Incurred by the Company, the refinancing Debt may
be Incurred only by the Company, and in the case of any refinancing of Debt
Incurred by a Restricted Subsidiary, the refinancing Debt may be Incurred
only by such Restricted Subsidiary; provided, further, that Debt Incurred
pursuant to this clause (vi) may not be Incurred more than 45 days prior to
the application of the proceeds to repay the Debt to be refinanced; and
(vii) Debt not otherwise permitted to be Incurred pursuant to clauses
(i) through (vi) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (vii), has an aggregate principal amount
not in excess of $50 million at any time outstanding. (Section 1008)
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LIMITATION ON SENIOR SUBORDINATED DEBT
The Company may not Incur any Debt which by its terms is both (i)
subordinated in right of payment to any Senior Debt and (ii) senior in right of
payment to the Exchange Notes. (Section 1009)
LIMITATION ON ISSUANCE OF GUARANTEES OF SUBORDINATED DEBT
The Company may not permit any Restricted Subsidiary, directly or
indirectly, to assume, guarantee or in any other manner become liable with
respect to any Debt of the Company that by its terms is pari passu or junior in
right of payment to the Exchange Notes. (Section 1010)
LIMITATION ON LIENS
The Company may not, and may not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on or with respect to any
property or assets of the Company or any such Restricted Subsidiary now owned or
hereafter acquired to secure Debt which is pari passu with or subordinated in
right of payment to the Exchange Notes without making, or causing such
Restricted Subsidiary to make, effective provision for securing the Exchange
Notes (and, if the Company shall so determine, any other Debt of the Company
which is not subordinate to the Exchange Notes or of such Restricted Subsidiary)
(x) equally and ratably with such Debt as to such property or assets for so long
as such Debt shall be so secured or (y) in the event such Debt is Debt of the
Company which is subordinate in right of payment to the Exchange Notes, prior to
such Debt as to such property for so long as such Debt will be so secured. The
foregoing restrictions shall not apply to Liens in respect of Debt existing at
the date of the Indenture or to: (i) Liens securing only the Exchange Notes;
(ii) Liens in favor of the Company or a Wholly Owned Restricted Subsidiary; or
(iii) Liens to secure Debt incurred to extend, renew, refinance or refund (or
successive extensions, renewals, refinancings or refundings), in whole or in
part, any Debt secured by Liens referred to in the foregoing clause (i) so long
as such Lien does not extend to any other property and the principal amount of
Debt so secured is not increased except as otherwise permitted under Clause (vi)
of the 'Limitation on Consolidated Debt'. (Section 1011)
LIMITATION ON RESTRICTED PAYMENTS
The Company (i) may not, directly or indirectly, declare or pay any
dividend or make any distribution (including any payment in connection with any
merger or consolidation derived from assets of the Company or any Restricted
Subsidiary) in respect of its Capital Stock or to the holders thereof, excluding
any dividends or distributions by the Company payable solely in shares of its
Capital Stock (other than Redeemable Stock) or in options, warrants or other
rights to acquire its Capital Stock (other than Redeemable Stock), (ii) may not,
and may not permit any Restricted Subsidiary to, purchase, redeem, or otherwise
acquire or retire for value (a) any Capital Stock of the Company or any Related
Person of the Company or (b) any options, warrants or other rights to acquire
shares of Capital Stock of the Company or any Related Person of the Company or
any securities convertible or exchangeable into shares of Capital Stock of the
Company or any Related Person of the Company, (iii) may not make, or permit any
Restricted Subsidiary to make, any Investment other than a Permitted Investment,
and (iv) may not, and may not permit any Restricted Subsidiary to, redeem,
repurchase, defease or otherwise acquire or retire for value prior to any
scheduled maturity, repayment or sinking fund payment Debt of the Company which
is subordinate in right of payment to the Exchange Notes (each of clauses (i)
through (iv) being a 'Restricted Payment') unless, at the time of, and after
giving effect to such Restricted Payment, (1) no Event of Default, or event that
with the passing of time or the giving of notice, or both, would constitute an
Event of Default, shall have occurred and is continuing or would result from
such Restricted Payment, and (2) after giving pro forma effect to such
Restricted Payment as if such Restricted Payment had been made at the beginning
of the applicable four-fiscal-quarter period, the Company could Incur at least
$1.00 of additional Debt pursuant to the terms of the Indenture described in the
first paragraph of 'Limitation on Consolidated Debt' above; provided that in
connection with regular quarterly dividends on the Company's Common Stock (not
to exceed $7.5 million in the aggregate) declared or payable prior to January
31, 1999, the Company's pro forma capacity to Incur additional Debt shall be
computed on a basis that excludes the non-recurring charges recorded during
the 1997 fiscal year; and (3) upon giving effect to such Restricted Payment, the
aggregate of all
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Restricted Payments from the date of issuance of the Exchange Notes does not
exceed the sum of: (a) 50% of cumulative Consolidated Net Income (or, in the
case Consolidated Net Income shall be negative, less 100% of such deficit) of
the Company since the date of issuance of the Exchange Notes through the last
day of the last full fiscal quarter ending immediately preceding the date of
such Restricted Payment for which quarterly or annual financial statements are
available (taken as a single accounting period); plus (b) 100% of the aggregate
net proceeds received by the Company after the date of original issuance of the
Initial Notes, including the fair market value of property other than cash
(determined in good faith by the Board of Directors as evidenced by a resolution
of the Board of Directors filed with the Trustee), from the issuance and sale
(other than to a Restricted Subsidiary) of Capital Stock (other than Redeemable
Stock) of the Company, options, warrants or other rights to acquire Capital
Stock (other than Redeemable Stock) of the Company and Debt of the Company that
has been converted into or exchanged for Capital Stock (other than Redeemable
Stock and other than by or from a Restricted Subsidiary) of the Company after
the date of original issuance of the Initial Notes, provided that any such net
proceeds received by the Company from an employee stock ownership plan financed
by loans from the Company or a Restricted Subsidiary of the Company shall be
included only to the extent such loans have been repaid with cash on or prior to
the date of determination; plus (c) $40 million. Prior to the making of any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate setting forth the computations by which the determinations required
by clauses (2) and (3) above were made and stating that no Event of Default, or
event that with the passing of time or the giving of notice, or both, would
constitute an Event of Default, has occurred and is continuing or will result
from such Restricted Payment.
Notwithstanding the foregoing, so long as no Event of Default, or event
that with the passing of time or the giving of notice, or both, would constitute
an Event of Default, shall have occurred and is continuing or would result
therefrom, (i) the Company may pay any dividend on Capital Stock of any class
within 60 days after the declaration thereof if, on the date when the dividend
was declared, the Company could have paid such dividend in accordance with the
foregoing provisions; (ii) the Company may refinance any Debt otherwise
permitted by clause (vi) of the second paragraph under 'Limitation on
Consolidated Debt' above or solely in exchange for or out of the net proceeds of
the substantially concurrent sale (other than from or to a Restricted Subsidiary
or from or to an employee stock ownership plan financed by loans from the
Company or a Restricted Subsidiary of the Company) of shares of Capital Stock
(other than Redeemable Stock) of the Company, provided that the amount of net
proceeds from such exchange or sale shall be excluded from the calculation of
the amount available for Restricted Payments pursuant to the preceding
paragraph; (iii) the Company may purchase, redeem, acquire or retire any shares
of Capital Stock of the Company solely in exchange for or out of the net
proceeds of the substantially concurrent sale (other than from or to a
Restricted Subsidiary or from or to an employee stock ownership plan financed by
loans from the Company or a Restricted Subsidiary of the Company) of shares of
Capital Stock (other than Redeemable Stock) of the Company; and (iv) the Company
or a Restricted Subsidiary may purchase or redeem any Debt from Net Available
Proceeds to the extent permitted under 'Limitation on Asset Dispositions'.
Any payment made pursuant to clause (i) or (iii) of this paragraph shall be
a Restricted Payment for purposes of calculating aggregate Restricted Payments
pursuant to the preceding paragraph. (Section 1012)
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary of the Company (i) to pay dividends (in cash or otherwise) or make
any other distributions in respect of its Capital Stock or pay any Debt or other
obligation owed to the Company or any other Restricted Subsidiary; (ii) to make
loans or advances to the Company or any other Restricted Subsidiary; or (iii) to
transfer any of its property or assets to the Company or any other Restricted
Subsidiary. Notwithstanding the foregoing, the Company may, and may permit any
Restricted Subsidiary to, suffer to exist any such encumbrance or restriction
(a) pursuant to any agreement in effect on the date of original issuance of the
Initial Notes as described in a schedule to the Indenture; (b) pursuant to an
agreement relating to any Debt Incurred by a Person (other than a
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Restricted Subsidiary of the Company existing on the date of original issuance
of the Initial Notes or any Restricted Subsidiary carrying on any of the
businesses of any such Restricted Subsidiary) prior to the date on which such
Person became a Restricted Subsidiary of the Company and outstanding on such
date and not Incurred in anticipation of becoming a Restricted Subsidiary, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person so acquired; (c) pursuant to an
agreement effecting a renewal, refunding or extension of Debt Incurred pursuant
to an agreement referred to in clause (a) or (b) above, provided, however, that
the provisions contained in such renewal, refunding or extension agreement
relating to such encumbrance or restriction are no more restrictive in any
material respect than the provisions contained in the agreement the subject
thereof, as determined in good faith by the Board of Directors and evidenced by
a resolution of the Board of Directors filed with the Trustee; (d) pursuant to
an agreement relating to Debt of a Restricted Subsidiary that is not materially
more restrictive than customary provisions in comparable financing arrangements
and which the Board of Directors determines (as evidenced by a resolution of the
Board of Directors filed with the Trustee) will not materially impair the
Company's ability to make payments under the Exchange Notes; (e) in the case of
clause (iii) above, restrictions contained in any security agreement (including
a capital lease) securing Debt of a Restricted Subsidiary otherwise permitted
under the Indenture, but only to the extent such restrictions restrict the
transfer of the property subject to such security agreement; (f) in the case of
clause (iii) above, customary nonassignment provisions entered into in the
ordinary course of business consistent with past practices in leases and other
contracts to the extent such provisions restrict the transfer or subletting of
any such lease or the assignment of rights under any such contract; (g) any
restriction with respect to a Restricted Subsidiary of the Company imposed
pursuant to an agreement which has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of such Restricted
Subsidiary, provided that consummation of such transaction would not result in
an Event of Default or an event that, with the passing of time or the giving of
notice or both, would constitute an Event of Default, that such restriction
terminates if such transaction is closed or abandoned and that the closing or
abandonment of such transaction occurs within one year of the date such
agreement was entered into; or (h) such encumbrance or restriction is the result
of applicable corporate law or regulation relating to the payment of dividends
or distributions. (Section 1013)
LIMITATION ON ASSET DISPOSITIONS
The Company may not, and may not permit any Restricted Subsidiary to, make
any Asset Disposition in one or more related transactions unless: (i) the
Company or the Restricted Subsidiary, as the case may be, receives consideration
for such disposition at least equal to the fair market value for the assets sold
or disposed of as determined by the Board of Directors in good faith and
evidenced by a resolution of the Board of Directors filed with the Trustee; (ii)
at least 85% of the consideration for such disposition consists of cash or
readily marketable cash equivalents or the assumption of Debt (other than Debt
that is subordinated to the Exchange Notes) relating to such assets and release
from all liability on the Debt assumed; and (iii) all Net Available Proceeds,
less any amounts invested or committed to be invested within 365 days of such
disposition in assets related to the business of the Company or applied to
permanently repay Senior Debt, are applied within 365 days of such disposition
(1) first, to the permanent repayment or reduction of Senior Debt then
outstanding under any agreements or instruments which would require such
application or prohibit payments pursuant to clause (2) following, (2) second,
to the extent of remaining Net Available Proceeds, to make an Offer to Purchase
outstanding Exchange Notes at 100% of their principal amount plus accrued
interest to the date of purchase and, to the extent required by the terms
thereof, any other Debt of the Company that is pari passu with the Exchange
Notes at a price no greater than 100% of the principal amount thereof plus
accrued interest to the date of purchase and (3) third, to the extent of any
remaining Net Available Proceeds, to any other use as determined by the Company
which is not otherwise prohibited by the Indenture. (Section 1014)
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TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, enter into any transaction (or series of related transactions) with
an Affiliate or Related Person of the Company (other than the Company or a
Wholly-Owned Restricted Subsidiary of the Company), including any Investment,
either directly or indirectly, unless such transaction is on terms no less
favorable to the Company or such Restricted Subsidiary than those that could be
obtained in a comparable arm's-length transaction with an entity that is not an
Affiliate or Related Person. For any transaction that involves in excess of
$5,000,000, a majority of the disinterested members of the Board of Directors
shall determine that the transaction satisfies the above criteria and shall
evidence such a determination by a Board Resolution filed with the Trustee. For
any transaction that involves in excess of $10,000,000, the Company shall also
obtain an opinion from a nationally recognized expert with experience in
appraising the terms and conditions of the type of transaction (or series of
related transactions) for which the opinion is required stating that such
transaction (or series of related transactions) is on terms no less favorable to
the Company or such Restricted Subsidiary than those that could be obtained in a
comparable arm's-length transaction with an entity that is not an Affiliate or
Related Person of the Company, which opinion shall be filed with the Trustee.
(Section 1015)
Notwithstanding anything to the contrary contained in the Indenture, the
foregoing provisions shall not apply to (i) transactions with any employee,
officer or director of the Company or any of its Restricted Subsidiaries
pursuant to employee benefit plans or compensation arrangements or agreements
entered into in the ordinary course of business, (ii) purchases or sales of
goods or services in the ordinary course of business, or (iii) transactions with
any Affiliate or Related Person of the Company in which such Affiliate or
Related Person acquires or purchases the capital stock of the Company or any
Restricted Subsidiary at fair market value.
CHANGE OF CONTROL
Within 60 days of the occurrence of a Change of Control, the Company will
be required to make an Offer to Purchase all Outstanding Exchange Notes at a
purchase price equal to 101% of their principal amount plus accrued interest to
but excluding the date of purchase. A 'Change of Control' will be deemed to have
occurred at such time as either (a) any Person or any Persons acting together
that would constitute a 'group' (a 'Group') for purposes of Section 13(d) of the
Exchange Act, or any successor provision thereto, together with any Affiliates
or Related Persons thereof, shall beneficially own (within the meaning of Rule
13d-3 under the Exchange Act, or any successor provision thereto), directly or
indirectly, at least 50% of the aggregate voting power of all classes of Voting
Stock of the Company (for the purposes of this clause (a) a person shall be
deemed to beneficially own the Voting Stock of a corporation that is
beneficially owned (as defined above) by another corporation (a 'parent
corporation'), if such person beneficially owns (as defined above) at least 50%
of the aggregate voting power of all classes of Voting Stock of such parent
corporation); or (b) any Person or Group, together with any Affiliates or
Related Persons thereof, shall succeed in having a sufficient number of its
nominees elected to the Board of Directors of the Company such that such
nominees, when added to any existing director remaining on the Board of
Directors of the Company after such election who was a nominee of or is an
Affiliate or Related Person of such Person or Group, will constitute a majority
of the Board of Directors of the Company; or (c) the Company shall, directly or
indirectly, transfer, sell, lease or otherwise dispose of all or substantially
all of its assets; or (d) there shall be adopted a plan of liquidation or
dissolution of the Company; provided, however, that a transaction effected to
create a holding company of the Company, (i) pursuant to which the Company
becomes a wholly-owned Subsidiary of such holding company, and (ii) as a result
of which the holders of Capital Stock of such holding company are substantially
the same as the holders of Capital Stock of the Company immediately prior to
such transaction, shall not be deemed to involve a 'Change of Control'.
(Section1016)
In the event that the Company makes an Offer to Purchase the Exchange
Notes, the Company intends to comply with any applicable securities laws and
regulations, including any applicable requirements of Section 14(e) of, and Rule
14e-1 under, the Exchange Act.
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PROVISION OF FINANCIAL INFORMATION
For so long as any of the Exchange Notes are outstanding, the Company shall
file with the Commission the annual reports, quarterly reports and other
documents which the Company is required to file with the Commission pursuant to
Section 13(a) or 15(d) of the Exchange Act or any successor provisions thereto.
(Section 1017)
UNRESTRICTED SUBSIDIARIES
The Company may designate any Subsidiary of the Company to be an
'Unrestricted Subsidiary' as provided below in which event such Subsidiary and
each other Person that is then or thereafter becomes a Subsidiary of such
Subsidiary will be deemed to be an Unrestricted Subsidiary. 'Unrestricted
Subsidiary' means (1) any Subsidiary designated as such by the Board of
Directors as set forth below where (a) neither the Company nor any of its other
Subsidiaries (other than another Unrestricted Subsidiary) (i) provides credit
support for, or any Guarantee of, any Debt of such Subsidiary or any Subsidiary
of such Subsidiary (including any undertaking, agreement or instrument
evidencing such Debt) or (ii) is directly or indirectly liable for any Debt of
such Subsidiary or any Subsidiary of such Subsidiary, and (b) no default with
respect to any Debt of such Subsidiary or any Subsidiary of such Subsidiary
(including any right which the holders thereof may have to take enforcement
action against such Subsidiary) would permit (upon notice, lapse of time or
both) any holder of any other Debt of the Company and its Subsidiaries (other
than another Unrestricted Subsidiary) to declare a default on such other Debt or
cause the payment thereof to be accelerated or payable prior to its final
scheduled maturity and (2) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, any other Subsidiary of the Company which is not a Subsidiary
of the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary,
provided that either (x) the Subsidiary to be so designated has total assets of
$1,000 or less or (y) immediately after giving effect to such designation, the
Company could Incur at least $1.00 of additional Debt pursuant to the first
paragraph under '-- Limitation on Consolidated Debt' and provided, further, that
the Company could make a Restricted Payment in an amount equal to the greater of
the fair market value and book value of such Subsidiary pursuant to 'Limitation
on Restricted Payments' and such amount is thereafter treated as a Restricted
Payment for the purpose of calculating the aggregate amount available for
Restricted Payments thereunder. (Section 1018)
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company may not, in a single transaction or a series of related
transactions, (i) consolidate with or merge into any other Person or permit any
other Person to consolidate with or merge into the Company or (ii) directly or
indirectly, transfer, sell, lease or otherwise dispose of all or substantially
all of its assets unless: (1) in a transaction in which the Company does not
survive or in which the Company transfers, sells, leases or otherwise disposes
of all or substantially all of its assets, the successor entity to the Company
is organized under the laws of the United States of America or any State thereof
or the District of Columbia and shall expressly assume, by a supplemental
indenture executed and delivered to the Trustee in form satisfactory to the
Trustee, all of the Company's obligations under the Indenture; (2) immediately
before and after giving effect to such transaction and treating any Debt which
becomes an obligation of the Company or a Restricted Subsidiary as a result of
such transaction as having been Incurred by the Company or such Restricted
Subsidiary at the time of the transaction, no Event of Default or event that
with the passing of time or the giving of notice, or both, would constitute an
Event of Default shall have occurred and be continuing; (3) immediately after
giving effect to such transaction, the Consolidated Net Worth of the Company (or
other successor entity to the Company) is equal to or greater than that of the
Company immediately prior to the transaction; (4) immediately after giving
effect to such transaction and treating any Debt which becomes an obligation of
the Company or a Restricted Subsidiary as a result of such transaction as having
been Incurred by the Company or such Restricted Subsidiary at the time of the
transaction, the Company (including any successor entity to the Company) could
Incur at least $1.00 of additional Debt pursuant to the provisions of the
Indenture described in the
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first paragraph under 'Limitation on Consolidated Debt' above; and (5) certain
other conditions are met. (Section 801)
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (Section 101)
'Affiliate' of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, 'control' when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms 'controlling' and
'controlled' have meanings correlative to the foregoing.
'Asset Disposition' by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Restricted Subsidiaries
(including any issuance or sale by a Restricted Subsidiary of Capital Stock of
such Restricted Subsidiary, and including a consolidation or merger or other
sale of any such Restricted Subsidiary with, into or to another Person in a
transaction in which such Restricted Subsidiary ceases to be a Restricted
Subsidiary, but excluding a disposition by a Restricted Subsidiary of such
Person to such Person or a Wholly-Owned Restricted Subsidiary of such Person or
by such Person to a Wholly-Owned Restricted Subsidiary of such Person) of (i)
shares of Capital Stock (other than directors' qualifying shares) or other
ownership interests of a Restricted Subsidiary of such Person, (ii)
substantially all of the assets of such Person or any of its Restricted
Subsidiaries representing a division or line of business or (iii) other assets
or rights of such Person or any of its Restricted Subsidiaries outside of the
ordinary course of business, provided in each case that the aggregate
consideration to the Company or Restricted Subsidiary in any single transaction
or series of related transactions for such transfer, conveyance, sale, lease or
other disposition is equal to $20 million or more.
'Capital Lease Obligation' of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty. The principal amount of such obligation shall be the capitalized amount
thereof that would appear on the face of a balance sheet of such Person in
accordance with generally accepted accounting principles.
'Capital Stock' of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
'Cash Equivalents' means (i) direct obligations of the United States of
America or any agency thereof having maturities of not more than one year from
the date of acquisition, (ii) time deposits and certificates of deposit of any
domestic commercial bank or recognized standing having capital and surplus in
excess of $500 million, with maturities of not more than one year from the date
of acquisition, (iii) repurchase obligations issued by any bank described in
clause (ii) above with a term not to exceed 30 days; (iv) commercial paper rated
at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent
thereof by Moody's, in each case maturing within one year after the date of
acquisition and (v) shares of any money market mutual fund, or similar fund, in
each case having assets in excess of $500 million, which invests predominantly
in investments of the types describes in clauses (i) through (iv) above.
'Common Stock' of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
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'Consolidated Cash Flow Available for Fixed Charges' for any period means
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated
Income Tax Expense of the Company and its Restricted Subsidiaries for such
period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of the Company and its Restricted Subsidiaries
for such period, plus (iv) all other non-cash items reducing Consolidated Net
Income of the Company and its Restricted Subsidiaries, less all non-cash items
increasing Consolidated Net Income of the Company and its Restricted
Subsidiaries; provided, however, that there shall be excluded therefrom the
Consolidated Cash Flow Available for Fixed Charges (if positive) of any
Restricted Subsidiary of the Company (calculated separately for such Restricted
Subsidiary in the same manner as provided above for the Company) that is subject
to a restriction which prevents the payment of dividends or the making of
distributions to the Company or another Restricted Subsidiary of the Company to
the extent of such restriction.
'Consolidated Cash Flow Coverage Ratio' as of any date of determination
means the ratio of (i) Consolidated Cash Flow Available for Fixed Charges of the
Company and its Restricted Subsidiaries for the period of the most recently
completed four consecutive fiscal quarters for which quarterly or annual
financial statements are available to (ii) Consolidated Fixed Charges of the
Company and its Restricted Subsidiaries for such period; provided, however, that
Consolidated Fixed Charges shall be adjusted to give effect on a pro forma basis
to any Debt (other than short-term Debt Incurred for working capital purposes)
that has been Incurred by the Company or any Restricted Subsidiary since the
beginning of such period that remains outstanding and to any Debt (other than
short-term Debt Incurred for working capital purposes) that is proposed to be
Incurred by the Company or any Restricted Subsidiary as if in each case such
Debt had been Incurred on the first day of such period and as if any Debt (other
than short-term Debt Incurred for working capital purposes) that (i) is or will
no longer be outstanding as the result of the Incurrence of any such Debt or
(ii) had been repaid or retired during such period had not been outstanding as
of the first day of such period; provided further that in making such
computation, the Consolidated Interest Expense of the Company and its Restricted
Subsidiaries attributable to interest on any proposed Debt bearing a floating
interest rate shall be computed on a pro forma basis as if the rate in effect on
the date of computation had been the applicable rate for the entire period; and
provided further that, in the event the Company or any of its Restricted
Subsidiaries has made Asset Dispositions or acquisitions of assets not in the
ordinary course of business (including acquisitions of other Persons by merger,
consolidation or purchase of Capital Stock) during or after such period, such
computation shall be made on a pro forma basis as if the Asset Dispositions or
acquisitions had taken place on the first day of such period.
'Consolidated Fixed Charges' for any period means the sum of (i)
Consolidated Interest Expense and (ii) the consolidated amount of interest
capitalized by the Company and its Restricted Subsidiaries during such period
calculated in accordance with generally accepted accounting principles.
'Consolidated Income Tax Expense' for any period means the consolidated
provision for income taxes of the Company and its Restricted Subsidiaries for
such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
'Consolidated Interest Expense' means for any period the consolidated
interest expense included in a consolidated income statement (without deduction
of interest income) of the Company and its Restricted Subsidiaries for such
period calculated on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities; (iii) fees with respect to Interest Rate,
Currency or Commodity Price Agreements; (iv) Preferred Stock dividends of
Restricted Subsidiaries of the Company (other than with respect to Redeemable
Stock) declared and paid or payable to persons other than the Company or any
Restricted Subsidiary; (v) accrued Redeemable Stock dividends of the Company and
its Restricted Subsidiaries payable to persons other than the Company or any
Restricted Subsidiary, whether or not declared or paid; (vi) interest on Debt
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guaranteed by the Company and its Restricted Subsidiaries; and (vii) the portion
of any rental obligation with respect to capitalized leases allocable to
interest expense.
'Consolidated Net Income' for any period means the consolidated net income
(or loss) of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom (a) the
net income (or loss) of any Person acquired by of the Company or a Restricted
Subsidiary of the Company in a pooling-of-interests transaction for any period
prior to the date of such transaction, (b) the net income (or loss) of any
Person that is not a Subsidiary of the Company except to the extent of the
amount of dividends or other distributions actually paid to the Company or a
Subsidiary of the Company by such Person during such period, (c) gains or losses
on Asset Dispositions by the Company or its Restricted Subsidiaries, (d) all
extraordinary gains and extraordinary losses, (e) the cumulative effect of
changes in accounting principles and (f) the tax effect, if any, of any of the
items described in clauses (a) through (e) above; provided, further, that for
purposes of any determination pursuant to the provisions described under
'Limitation on Restricted Payments', there shall further be excluded therefrom
the net income (but not net loss) of any Restricted Subsidiary of the Company
that is subject to a restriction which prevents the payment of dividends or the
making of distributions to the Company or another Restricted Subsidiary of the
Company to the extent of such restriction.
'Consolidated Net Worth' of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles, less amounts attributable to
Redeemable Stock of such Person; provided that, with respect to the Company,
adjustments following the date of the Indenture to the accounting books and
records of the Company in accordance with Accounting Principles Board Opinions
Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the
acquisition of control of the Company by another Person shall not be given
effect to.
'Consolidated Tangible Assets' of any Person means, as of any date, the
amount which, in accordance with GAAP, would be set forth under the caption
'Total Assets' (or any like caption) on a consolidated balance sheet of such
Person and its Restricted Subsidiaries, less all intangible assets, including,
without limitation, goodwill, organization costs, patents, trademarks,
copyrights, franchises, and research and development costs.
'Debt' means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(including securities repurchase agreements but excluding trade accounts payable
or accrued liabilities arising in the ordinary course of business which are not
overdue or which are being contested in good faith), (v) every Capital Lease
Obligation of such Person, (vi) all Receivables Sales of such Person, together
with any obligation of such Person to pay any discount, interest, fees,
indemnities, penalties, recourse, expenses or other amounts in connection
therewith, (vii) all Redeemable Stock issued by such Person, (viii) Preferred
Stock of Restricted Subsidiaries of such Person held by Persons other than such
Person or one of its Wholly-Owned Restricted Subsidiaries, (ix) every obligation
under Interest Rate, Currency or Commodity Price Agreements of such Person and
(x) every obligation of the type referred to in clauses (i) through (ix) of
another Person and all dividends of another Person the payment of which, in
either case, such Person has Guaranteed or is responsible or liable for,
directly or indirectly, as obligor, Guarantor or otherwise. The 'amount' or
'principal amount' of Debt at any time of determination as used herein
represented by (a) any Receivables Sale, shall be the amount of the unrecovered
capital or principal investment of the purchaser (other than the Company or a
Wholly-Owned Restricted Subsidiary of the Company) thereof, excluding amounts
representative of yield or interest earned on such investment and (b) any
Redeemable Stock, shall be the maximum fixed redemption or repurchase price in
respect thereof.
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'Designated Senior Debt' shall mean (i) so long as the Credit Facility is
in effect, the obligations of the Company under the Credit Facility and (ii) at
any time thereafter, the 2023 Debentures and any other Senior Debt of the
Company permitted under the Indenture, the principal amount of which at original
issuance is $25.0 million or more and that has been designated by the Company as
Designated Senior Debt.
'Guarantee' by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the 'primary obligor') in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or to purchase (or to advance or supply funds for the purchase of)
any security for the payment of such Debt, (ii) to purchase property, securities
or services for the purpose of assuring the holder of such Debt of the payment
of such Debt, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Debt (and 'Guaranteed', 'Guaranteeing'
and 'Guarantor' shall have meanings correlative to the foregoing); provided,
however, that the Guaranty by any Person shall not include endorsements by such
Person for collection or deposit, in either case, in the ordinary course of
business.
'Incur' means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
or the recording, as required pursuant to generally accepted accounting
principles or otherwise, of any such Debt or other obligation on the balance
sheet of such Person (and 'Incurrence', 'Incurred', 'Incurrable' and 'Incurring'
shall have meanings correlative to the foregoing); provided, however, that a
change in generally accepted accounting principles that results in an obligation
of such Person that exists at such time becoming Debt shall not be deemed an
Incurrence of such Debt.
'Interest Rate, Currency or Commodity Price Agreement' of any Person means
any forward contract, futures contract, swap, option or other financial
agreement or arrangement (including, without limitation, caps, floors, collars
and similar agreements) relating to, or the value of which is dependent upon,
interest rates, currency exchange rates or commodity prices or indices
(excluding contracts for the purchase or sale of goods in the ordinary course of
business).
'Investment' by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise) to, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt issued by, any
other Person, including any payment on a Guarantee of any obligation of such
other Person.
'Lien' means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
'Moody's' means Moody's Investors Services, Inc.
'Net Available Proceeds' from any Asset Disposition by any Person means
cash or readily marketable cash equivalents received (including by way of sale
or discounting of a note, instalment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiree of Debt or other obligations relating to such properties or assets)
therefrom by such Person, net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses Incurred and all federal,
state, provincial, foreign and local taxes required to be accrued as a liability
as a consequence of such Asset Disposition, (ii) all payments made by such
Person or its Restricted Subsidiaries on any Debt which is secured by such
assets in accordance with the terms of any Lien upon or with respect to such
assets or which must by the terms of such Lien, or in order to obtain a
necessary consent to such Asset Disposition or by applicable law, be repaid out
of the proceeds from
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such Asset Disposition, (iii) all distributions and other payments made to
minority interest holders in Restricted Subsidiaries of such Person or joint
ventures as a result of such Asset Disposition and (iv) appropriate amounts to
be provided by such Person or any Restricted Subsidiary thereof, as the case may
be, as a reserve in accordance with generally accepted accounting principles
against any liabilities associated with such assets and retained by such Person
or any Restricted Subsidiary thereof, as the case may be, after such Asset
Disposition, including, without limitation, liabilities under any
indemnification obligations and severance and other employee termination costs
associated with such Asset Disposition, in each case as determined by the Board
of Directors, in its reasonable good faith judgment evidenced by a resolution of
the Board of Directors filed with the Trustee; provided, however, that any
reduction in such reserve following the consummation of such Asset Disposition
will be treated for all purposes of the Indenture and the Exchange Notes as a
new Asset Disposition at the time of such reduction with Net Available Proceeds
equal to the amount of such reduction.
'Credit Facility' means the senior secured revolving credit facility in the
aggregate principal amount of $325.0 million between the Company, The Chase
Manhattan Bank, as administrative and collateral agent, Citibank USA, Inc., as
documentation agent, and certain other lenders, as it may be amended or restated
from time to time, and any renewal, extension, refinancing, refunding or
replacement thereof, in whole or in part.
'Offer to Purchase' means a written offer (the 'Offer') sent by the Company
by first class mail, postage prepaid, to each holder at his address appearing in
the Note Register on the date of the Offer offering to purchase up to the
principal amount of Exchange Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the 'Expiration Date') of the Offer to Purchase which shall be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such Offer and a settlement date (the 'Purchase Date')
for purchase of Notes within five Business Days after the Expiration Date. The
Company shall notify the Trustee at least 15 Business Days (or such shorter
period as is acceptable to the Trustee) prior to the mailing of the Offer of the
Company's obligation to make an Offer to Purchase, and the Offer shall be mailed
by the Company or, at the Company's request, by the Trustee in the name and at
the expense of the Company. The Offer shall contain information concerning the
business of the Company and its Restricted Subsidiaries which the Company in
good faith believes will enable such holders to make an informed decision with
respect to the Offer to Purchase (which at a minimum will include (i) the most
recent annual and quarterly financial statements and 'Management's Discussion
and Analysis of Financial Condition and Results of Operations' contained in the
documents required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to in
clause (i) (including a description of the events requiring the Company to make
the Offer to Purchase), (iii) if applicable, appropriate pro forma financial
information concerning the Offer to Purchase and the events requiring the
Company to make the Offer to Purchase and (iv) any other information required by
applicable law to be included therein. The Offer shall contain all instructions
and materials necessary to enable such holders to tender Exchange Notes pursuant
to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding Exchange Notes
offered to be purchased by the Company pursuant to the Offer to Purchase
(including, if less than 100%, the manner by which such amount has been
determined pursuant to the Indenture provision requiring the Offer to
Purchase) (the 'Purchase Amount');
(4) the purchase price to be paid by the Company for each $1,000
aggregate principal amount of Exchange Notes accepted for payment (as
specified pursuant to the Indenture) (the 'Purchase Price');
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(5) that the holder may tender all or any portion of the Exchange
Notes registered in the name of such holder and that any portion of an
Exchange Note tendered must be tendered in an integral multiple of $1,000
principal amount;
(6) the place or places where Exchange Notes are to be surrendered for
tender pursuant to the Offer to Purchase;
(7) that interest on any Exchange Note not tendered or tendered but
not purchased by the Company pursuant to the Offer to Purchase will
continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Exchange Note being accepted for payment pursuant to the
Offer to Purchase and that interest thereon shall cease to accrue on and
after the Purchase Date;
(9) that each holder electing to tender an Exchange Note pursuant to
the Offer to Purchase will be required to surrender such Exchange Note at
the place or places specified in the Offer prior to the close of business
on the Expiration Date (such Exchange Note being, if the Company or the
Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Trustee
duly executed by, the holder thereof or his attorney duly authorized in
writing);
(10) that holders will be entitled to withdraw all or any portion of
Exchange Notes tendered if the Company (or their Paying Agent) receives,
not later than the close of business on the Expiration Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Exchange Note the holder tendered, the
certificate number of the Exchange Note the holder tendered and a statement
that such holder is withdrawing all or a portion of his tender;
(11) that (a) if Exchange Notes in an aggregate principal amount less
than or equal to the Purchase Amount are duly tendered and not withdrawn
pursuant to the Offer to Purchase, the Company shall purchase all such
Exchange Notes and (b) if Exchange Notes in an aggregate principal amount
in excess of the Purchase Amount are tendered and not withdrawn pursuant to
the Offer to Purchase, the Company shall purchase Exchange Notes having an
aggregate principal amount equal to the Purchase Amount on a pro rata basis
(with such adjustments as may be deemed appropriate so that only Exchange
Notes in denominations of $1,000 or integral multiples thereof shall be
purchased); and
(12) that in the case of any holder whose Exchange Note is purchased
only in part, the Company shall execute, and the Trustee shall authenticate
and deliver to the holder of such Exchange Note without service charge, a
new Exchange Note or Exchange Notes, of any authorized denomination as
requested by such holder, in an aggregate principal amount equal to and in
exchange for the unpurchased portion of the Exchange Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with the
Offer for such Offer to Purchase.
'Permitted Interest Rate, Currency or Commodity Price Agreement' of any
Person means any Interest Rate, Currency or Commodity Price Agreement entered
into with one or more financial institutions in the ordinary course of business
that is designed to protect such Person against fluctuations in interest rates
or currency exchange rates with respect to Debt Incurred and which shall have a
notional amount no greater than the payments due with respect to the Debt being
hedged thereby, or in the case of currency or commodity protection agreements,
against currency exchange rate or commodity price fluctuations in the ordinary
course of business relating to then existing financial obligations or then
existing or forecast production or for the purchase of product for resale and
not for purposes of speculation.
'Permitted Investments' means (i) an Investment in the Company or a
Wholly-Owned Restricted Subsidiary of the Company; (ii) an Investment in Pyramid
Sportswear; provided, however, that as a result thereof the Company owns not
less than a majority interest in Pyramid Sportswear; (iii) an Investment in a
Person, if such Person or a Subsidiary of such Person will, as a result of the
making of such Investment and all other contemporaneous related transactions,
become a Wholly-Owned
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Restricted Subsidiary of the Company or be merged or consolidated with or into
or transfer or convey all or substantially all its assets to the Company or a
Wholly-Owned Restricted Subsidiary of the Company; (iv) a Temporary Cash
Investment; (v) stock, obligations or securities received in settlement of debts
owing to the Company or a Restricted Subsidiary of the Company as a result of
bankruptcy or insolvency proceedings or upon the foreclosure, perfection,
enforcement or agreement in lieu of foreclosure of any Lien in favor of the
Company or a Restricted Subsidiary of the Company; (vi) Investments in the
Exchange Notes; (vii) Investments in Permitted Interest Rate, Currency or
Commodity Price Agreements; (viii) advances to employees of the Company made in
the ordinary course of business and (ix) entry into and Investments in joint
ventures, partnerships and other Persons engaged or proposing to engage in
businesses related to those conducted by the Company or any Restricted
Subsidiary of the Company, in an amount not to exceed $15 million.
'Preferred Stock' of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
'Public Equity Offering' means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
'Receivables' means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
'Receivables Sale' of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purpose of collection and not as a
financing arrangement.
'Redeemable Stock' of any Person means any Capital Stock of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including upon the occurrence of
an event) matures or is required to be redeemed (pursuant to any sinking fund
obligation or otherwise) or is convertible into or exchangeable for Debt or is
redeemable at the option of the holder thereof, in whole or in part, at any time
prior to the final Stated Maturity of the Exchange Notes; provided that
'Redeemable Stock' shall not include any Capital Stock that is payable at
maturity, or upon required redemption or redemption at the option of the holder
thereof, or that is automatically convertible or exchangeable, solely in or into
Common Stock of such Person.
'Related Person' of any Person means any other Person directly or
indirectly owning (a) 5% or more of the Outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the equity
interest in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
'Restricted Subsidiary' means any Subsidiary, whether existing on or after
the date of the Indenture, unless such Subsidiary is an Unrestricted Subsidiary.
'S&P' means Standard & Poor's Ratings Group, a division of MacGraw-Hill,
Inc.
'Subordinated Debt' means Debt of the Company as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be subordinate to the prior payment in full of the
Exchange Notes to at least the following extent: (i) no payments of principal of
(or premium, if any) or interest on or otherwise due in respect of such Debt may
be permitted for so long as any default in the payment of principal (or premium,
if any) or interest on the Exchange Notes exists; (ii) in the event that any
other default that with the passing of time or the giving of notice, or both,
would constitute an event of default exists with respect to the Exchange Notes,
upon notice by 25% or more in principal amount of the Exchange Notes to the
Trustee, the Trustee shall have the right to give notice to the Company and the
holders of such Debt (or trustees or agents therefor) of a payment blockage, and
thereafter no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Debt may be made for a period of 179 days from
the date of such notice; and (iii) such Debt may not (x) provide for payments of
principal of such Debt at the stated maturity thereof or by way of a sinking
fund applicable thereto or by way of any mandatory redemption,
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defeasance, retirement or repurchase thereof by the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of acceleration
of such Debt upon an event of default thereunder), in each case prior to the
final Stated Maturity of the Exchange Notes or (y) permit redemption or other
retirement (including pursuant to an offer to purchase made by the Company) of
such other Debt at the option of the holder thereof prior to the final Stated
Maturity of the Exchange Notes, other than a redemption or other retirement at
the option of the holder of such Debt (including pursuant to an offer to
purchase made by the Company) which is conditioned upon a change of control of
the Company pursuant to provisions substantially similar to those described
under 'Change of Control' (and which shall provide that such Debt will not be
repurchased pursuant to such provisions prior to the Company's repurchase of the
Exchange Notes required to be repurchased by the Company pursuant to the
provisions described under 'Change of Control').
'Subsidiary' of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof or (ii) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof.
'Temporary Cash Investments' means any Investment in the following kinds of
instruments: (A) readily marketable obligations issued or unconditionally
guaranteed as to principal and interest by the United States of America or by
any agency or authority controlled or supervised by and acting as an
instrumentality of the United States of America if, on the date of purchase or
other acquisition of any such instrument by the Company or any Restricted
Subsidiary of the Company, the remaining term to maturity or interest rate
adjustment is not more than two years; (B) obligations (including, but not
limited to, demand or time deposits, bankers' acceptances and certificates of
deposit) issued or guaranteed by a depository institution or trust company
incorporated under the laws of the United States of America, any state thereof
or the District of Columbia, provided that (1) such instrument has a final
maturity nor more than one year from the date of purchase thereof by the Company
or any Restricted Subsidiary of the Company and (2) such depository institution
or trust company has at the time of the Company's or such Restricted
Subsidiary's Investment therein or contractual commitment providing for such
Investment, (x) capital, surplus and undivided profits (as of the date such
institution's most recently published financial statements) in excess of $100
million and (y) the long-term unsecured debt obligations (other than such
obligations rated on the basis of the credit of a Person other than such
institution) of such institution, at the time of the Company's or such
Restricted Subsidiary's Investment therein or contractual commitment providing
for such Investment, are rated in the highest rating category of both S&P and
Moody's; (C) commercial paper issued by any corporation, if such commercial
paper has, at the time of the Company's or any Restricted Subsidiary's
Investment therein or contractual commitment providing for such Investment
credit ratings of at least A-1 by S&P and P-1 by Moody's; (D) money market
mutual or similar funds having assets in excess of $100 million; (E) readily
marketable debt obligations issued by any corporation, if at the time of the
Company's or any Restricted Subsidiary's Investment therein or contractual
commitment providing for such Investment (1) the remaining term to maturity is
not more than two years and (2) such debt obligations are rated in one of the
two highest rating categories of both S&P and Moody's; (F) demand or time
deposit accounts used in the ordinary course of business with commercial banks
the balances in which are at all times fully insured as to principal and
interest by the Federal Deposit Insurance Corporation or any successor thereto;
and (G) to the extent not otherwise included herein, Cash Equivalents. In the
event that either S&P or Moody's ceases to publish ratings of the type provided
herein, a replacement rating agency shall be selected by the Company with the
consent of the Trustee, and in each case the rating of such replacement rating
agency most nearly equivalent to the corresponding S&P or Moody's rating, as the
case may be, shall be used for purposes hereof.
'Voting Stock' of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at
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all times or only so long as no senior class of securities has such voting power
by reason of any contingency.
'Wholly Owned Restricted Subsidiary' of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Exchange Note when due; (b)
failure to pay any interest on any Exchange Note when due, continued for 30
days; (c) default in the payment of principal and interest on Exchange Notes
required to be purchased pursuant to an Offer to Purchase as described under
'Change of Control' and 'Limitation on Certain Asset Dispositions' when due and
payable; (d) failure to perform or comply with the provisions described under
'Merger, Consolidation and Certain Sales of Assets'; (e) failure to perform any
other covenant or agreement of the Company under the Indenture or the Exchange
Notes continued for 60 days after written notice to the Company by the Trustee
or holders of at least 25% in aggregate principal amount of Outstanding Exchange
Notes; (f) default under the terms of any instrument evidencing or securing Debt
for money borrowed by the Company or any Restricted Subsidiary having an
outstanding principal amount of $5 million individually or in the aggregate
which default results in the acceleration of the payment of such indebtedness or
constitutes the failure to pay such indebtedness when due; (g) the rendering of
a final judgment or judgments (not subject to appeal) against the Company or any
Restricted Subsidiary in an amount in excess of $5 million which remains
undischarged or unstayed for a period of 60 days after the date on which the
right to appeal has expired; and (h) certain events of bankruptcy, insolvency or
reorganization affecting the Company or any Restricted Subsidiary. (Section 501)
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default (as defined) shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders, unless
such holders shall have offered to the Trustee reasonable indemnity. (Section
603) Subject to such provisions for the indemnification of the Trustee, the
holders of a majority in aggregate principal amount of the Outstanding Exchange
Notes will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. (Section 512)
If an Event of Default (other than an Event of Default described in Clause
(h) above) shall occur and be continuing, either the Trustee or the holders of
at least 25% in aggregate principal amount of the Outstanding Exchange Notes may
accelerate the maturity of all Exchange Notes; provided, however, that after
such acceleration, but before a judgment or decree based on acceleration, the
holders of a majority in aggregate principal amount of Outstanding Exchange
Notes may, under certain circumstances, rescind and annul such acceleration if
all Events of Default, other than the non-payment of accelerated principal, have
been cured or waived as provided in the Indenture. If an Event of Default
specified in Clause (h) above occurs, the Outstanding Exchange Notes will ipso
facto become immediately due and payable without any declaration or other act on
the part of the Trustee or any holder. (Section 502) For information as to
waiver of defaults, see 'Modification and Waiver'.
No holder of any Exchange Note will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such holder shall have previously given to the Trustee written notice of a
continuing Event of Default (as defined) and unless also the holders of at least
25% in aggregate principal amount of the Outstanding Exchange Notes shall have
made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as trustee, and the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the Outstanding
Exchange Notes a direction inconsistent with such request and shall have failed
to institute such proceeding within 60 days. (Section 507) However, such
limitations do not apply to a suit instituted by a holder of an Exchange Note
for enforcement of payment of the principal of or premium, if any, or interest
on such Exchange Note on or after the respective due dates expressed in such
Exchange Note. (Section 508)
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The Company will be required to furnish to the Trustee quarterly a
statement as to the performance by the Company of certain of its obligations
under the Indenture and as to any default in such performance. (Section 1019)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all outstanding
Exchange Notes (except as to (i) rights of registration of transfer and exchange
and the Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Exchange Notes, (iii) rights of
holders to receive payment of principal and interest on the Exchange Notes, (iv)
rights, obligations and immunities of the Trustee under the Indenture and (v)
rights of the holders of the Exchange Notes as beneficiaries of the Indenture
with respect to any property deposited with the Trustee payable to all or any of
them), if (x) the Company will have paid or caused to be paid the principal of
and interest on the Notes as and when the same will have become due and payable
or (y) all Outstanding Exchange Notes (except lost, stolen or destroyed Exchange
Notes which have been replaced or paid) have been delivered to the Trustee for
cancellation.
DEFEASANCE
The Indenture will provide that, at the option of the Company, (A) if
applicable, the Company will be discharged from any and all obligations in
respect of the Outstanding Exchange Notes or (B) if applicable, the Company may
omit to comply with certain restrictive covenants, and that such omission shall
not be deemed to be an Event of Default under the Indenture and the Exchange
Notes, in either case (A) or (B) upon irrevocable deposit with the Trustee, in
trust, of money and/or U.S. government obligations which will provide money in
an amount sufficient in the opinion of a nationally recognized firm of
independent certified public accountants to pay the principal of and premium, if
any, and each installment of interest, if any, on the Outstanding Exchange
Notes. With respect to clause (B), the obligations under the Indenture other
than with respect to such covenants and the Events of Default other than the
Events of Default relating to such covenants above shall remain in full force
and effect. Such trust may only be established if, among other things (i) with
respect to clause (A), the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or there has been a change
in law, which in the Opinion of Counsel provides that holders of the Exchange
Notes will not recognize gain or loss for Federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to Federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such deposit, defeasance and discharge had not
occurred; or, with respect to clause (B), the Company has delivered to the
Trustee an Opinion of Counsel to the effect that the holders of the Exchange
Notes will not recognize gain or loss for Federal income tax purposes as a
result of such deposit and defeasance and will be subject to Federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such deposit and defeasance had not occurred; (ii) no Event of
Default or event that with the passing of time or the giving of notice, or both,
shall constitute an Event of Default shall have occurred or be continuing; (iii)
the Company has delivered to the Trustee an Opinion of Counsel to the effect
that such deposit shall not cause the Trustee or the trust so created to be
subject to the Investment Company Act of 1940; and (iv) certain other customary
conditions precedent are satisfied. (Article Thirteen)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of a majority in aggregate
principal amount of the Outstanding Exchange Notes; provided, however, that no
such modification or amendment may, without the consent of the Holder of each
Outstanding Exchange Note affected thereby, (a) change the Stated Maturity of
the principal of, or any installment of interest on, any Exchange Note, (b)
reduce the principal amount of (or the premium) or interest on any Exchange
Note, (c) change the place or currency of payment of principal of (or premium)
or interest on any Exchange Note, (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any Exchange Note, (e) reduce
the above-stated percentage of Outstanding Exchange Notes necessary to modify or
amend the Indenture, (f) reduce the percentage of aggregate principal amount of
Outstanding Exchange Notes necessary for waiver of
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compliance with certain provisions of the Indenture or for waiver of certain
defaults, (g) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults or
covenants, except as otherwise specified, or (h) following the mailing of any
Offer to Purchase, modify any Offer to Purchase for the Exchange Notes required
under the 'Limitation on Asset Dispositions' and the 'Change of Control'
covenants contained in the Indenture in a manner materially adverse to the
holders thereof. (Section 902)
The holders of a majority in aggregate principal amount of the Outstanding
Exchange Notes, on behalf of all holders of Exchange Notes, may waive compliance
by the Company with certain restrictive provisions of the Indenture. (Section
1020) Subject to certain rights of the Trustee, as provided in the Indenture,
the holders of a majority in aggregate principal amount of the Outstanding
Exchange Notes, on behalf of all holders of Exchange Notes, may waive any past
default under the Indenture, except a default in the payment of principal,
premium or interest or a default arising from failure to purchase any Exchange
Note tendered pursuant to an Offer to Purchase. (Section 513)
GOVERNING LAW
The Indenture and the Exchange Notes will be governed by the laws of the
State of New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs.
(SectionSection 601-603)
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with the Company or any Affiliate, provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign. (Section 608)
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DESCRIPTION OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE EXCHANGE NOTES
The following is a summary of certain United States federal income tax
consequences associated with the acquisition, ownership, and disposition of the
Exchange Notes. The following summary does not discuss all of the aspects of
federal income taxation that may be relevant to investors in light of his or her
particular circumstances, or to certain types of holders which are subject to
special treatment under the federal income tax laws (including dealers in
securities, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, S corporations, persons who hold the Exchange
Notes as part of a hedge, straddle, 'synthetic security' or other integrated
investment, and, except as discussed below, foreign corporations and persons who
are not citizens or residents of the United States). Such holders generally are
taxed in a similar manner to U.S. Holders (as defined below); however, certain
special rules apply. In addition, this discussion is limited to holders who hold
the Exchange Notes as capital assets within the meaning of Section 1221 of the
United States Internal Revenue Code of 1986 (the 'Code'). This summary also does
not describe any tax consequences under state, local, or foreign tax laws.
The discussion is based upon the Code, Treasury Regulations, Internal
Revenue Service ('IRS') rulings and pronouncements and judicial decisions all in
effect as of the date hereof, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of the Exchange
Notes. The Company has not sought and will not seek any rulings or opinions from
the IRS or counsel with respect to the matters discussed below. There can be no
assurance that the IRS will not take positions concerning the tax consequences
of the purchase, ownership or disposition of the Exchange Notes which are
different from those discussed herein.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES THAT MAY APPLY TO THEM, AS
WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of Initial Notes for Exchange Notes pursuant to the Exchange
Offer will not be considered a taxable exchange for United States federal income
tax purposes because the Exchange Notes will not differ materially in kind or
extent from the Initial Notes and because the exchange will occur by operation
of the terms of the Notes. Accordingly, such exchange will have no United States
federal income tax consequences to holders of Initial Notes. A holder's adjusted
tax basis and holding period in an Exchange Note will be the same as such
holder's adjusted tax basis and holding period, respectively, in the Initial
Note exchanged therefor. All references to Notes under this heading 'Description
of Certain Federal Income Tax Consequences of an Investment in the Notes', apply
equally to Exchange Notes.
Holders considering the exchange of Initial Notes for Exchange Notes should
consult their own tax advisors concerning the United States federal income tax
consequences in light of their particular situations as well as any consequences
arising under state, local or foreign income tax or other tax law.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
A U.S. Holder is any holder who or which is (i) a citizen or resident of
the United States; (ii) a corporation or partnership created or organized in or
under the laws of the United States or of any political subsidiaries thereof;
(iii) an estate other than a 'foreign estate' as defined in Section 7701 (a)
(31) of the Code; or (iv) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust, and one or
more United States persons have the authority to control all substantial
decisions of the trust.
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TAXATION OF STATED INTEREST. In general, U.S. Holders of the Exchange Notes
will be required to include interest received thereon in taxable income as
ordinary income at the time it accrues or is received, in accordance with the
holder's regular method of accounting for federal income tax purposes.
REGISTRATION DEFAULT. Because the Exchange Notes provide for an increase in
the interest rate during the time that a Registration Default is in effect, the
Exchange Notes are subject to Treasury regulations applicable to debt
instruments that provide for one or more contingent payments. Under such
Treasury regulations, if the possibility of an increased interest payments is,
as of the Issue Date, either a 'remote' or 'incidental' contingency, the payment
of such additional interest would not be considered a contingent interest
payment and the U.S. federal income tax treatment of such additional interest
generally would be the same as that described under 'Taxation of Stated
Interest' above. The Company intends to take the position that, solely for these
purposes, the payment of additional interest upon a Registration Default is a
remote or incidental contingency; such determination is binding on a U.S. Holder
unless such holder discloses to the Internal Revenue Service (the 'IRS') that it
is taking a contrary position.
If the Company becomes obligated to pay interest at an increased rate upon
a Registration Default, a U.S. Holder generally would be required to include the
initial payment of interest at such rate in income as ordinary income when
received or accrued, in accordance with such holder's method of accounting for
U.S. federal income tax purposes. In addition, the Exchange Notes would be
treated as having been reissued at such time for their 'adjusted issue price'
(i.e., generally, the stated principal amount of the Exchange Notes). If, at the
time of such deemed reissuance, the possibility that the Company would be
required to make additional payments of interest at such increased interest rate
were not a remote or incidental contingency, a U.S. Holder could be required to
accrue the projected payments of interest at such increased rate into income on
a constant yield basis, which could result in a holder recognizing income prior
to the receipt of the related cash payment. Prospective investors should consult
their tax advisors regarding the U.S. federal income tax consequences should the
interest rate be increased as a result of a Registration Default.
EFFECT OF OPTIONAL REDEMPTION AND REPURCHASE. Under certain circumstances
the Company may be entitled to redeem a portion of the Exchange Notes. In
addition, under certain circumstances, the Company will be required to offer to
repurchase all or any part of a holder's Exchange Notes. Treasury Regulations
contain special rules for determining the yield to maturity and maturity on a
debt instrument in the event the debt instrument provides for a contingency that
could result in the acceleration or deferral of one or more payments. The
Company does not believe that these rules should apply to either the Company's
right to redeem Exchange Notes or to the holders' rights to require the Company
to repurchase Exchange Notes. Therefore, the Company has no present intention of
treating such redemption and repurchase provisions of the Exchange Notes as
affecting the computation of the yield to maturity or maturity date of the
Exchange Notes.
SALE OR OTHER TAXABLE DISPOSITION OF THE NOTES. The sale, exchange,
redemption, retirement or other taxable disposition of an Exchange Note will
result in the recognition of gain or loss to a U.S. Holder in an amount equal to
the difference between (a) the amount of cash and fair market value of property
received in exchange therefor (except to the extent attributable to the payment
of accrued but unpaid stated interest) and (b) the holder's adjusted tax basis
in such an Exchange Note. A holder's initial tax basis in an Exchange Note
purchased by such holder will be equal to the price paid for the Exchange Note.
Any gain or loss on the sale or other taxable disposition of an Exchange Note
generally will be capital gain or loss, and generally will be long-term capital
gain or loss if the holding period for the Exchange Note exceeds one year at the
time of the disposition. Non-corporate taxpayers may be taxed at reduced rates
of federal income tax in respect of long-term capital gains realized on a
disposition of Exchange Notes in certain instances (e.g., generally, long-term
capital gain recognized by an individual U.S. Holder would be subject to a
maximum tax rate of 20% in respect of Exchange Notes held for more than one
year). Prospective investors should consult their tax advisors regarding the tax
consequences of realizing long-term capital gains. Payments on such disposition
for accrued interest not previously included in income will be treated as
ordinary interest income.
79
<PAGE>
The exchange of (i) beneficial interests in a Global Exchange Note for a
Certificated Exchange Note or (ii) the exchange of an Initial Note for an
Exchange Note, will not constitute a 'significant modification' of the Note for
U.S. federal income tax purposes and, accordingly, the beneficial interests,
Certificated Exchange Note or Exchange Note received in exchange for the
original beneficial interest or Note, as the case may be, would be treated as a
continuation of the original Note in the hands of such U.S. Holder. As a result,
there would be no U.S. federal income tax consequences to a U.S. Holder upon
such exchanges.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS
For purposes hereof, a 'Non-U.S. Holder' is any person that is not a U.S.
Holder. This summary does not address the tax consequences to stockholders,
partners or beneficiaries in a Non-U.S. Holder.
PAYMENTS OF INTERESTS. Interest that is paid to a Non-U.S. Holder on an
Exchange Note will not be subject to U.S. withholding tax provided that (a) (i)
the Non-U.S. Holder does not own, actually or constructively, 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote; (ii) the Non-U.S. Holder is not a controlled foreign corporation that is
related to the Company actually or constructively through stock ownership for
United States federal income tax purposes; (iii) the Non-U.S. Holder is not a
bank receiving interest on a loan entered into in the ordinary course of
business; and (iv) either (x) the beneficial owner of the Exchange Note provides
the Company or its paying agent with a properly executed certification on IRS
Form W-8 (or a suitable substitute form) signed under penalties of perjury that
the beneficial owner is not a 'U.S. person' for United States federal income tax
purposes and that provides the beneficial owner's name and address, or (y) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its business holds the Exchange
Note and certifies to the Company or its agent under penalties of perjury that
the IRS Form W-8 (or a suitable substitute) has been received by it from the
beneficial owner of the Exchange Note or a qualifying intermediary and furnishes
the payor a copy thereof; (b) the interest received on the Exchange Note is
effectively connected with the conduct by the Non-U.S. Holder of a trade or
business in the United States, and the Non-U.S. Holder complies with certain
reporting requirements; or (c) a U.S. income tax treaty applies to reduce the
rate of withholding to zero and the Non-U.S. Holder provides a properly executed
Form 1001.
Recently issued Treasury regulations (the 'Withholding Regulations') that
will be effective with respect to payments made after December 31, 1999, will
provide alternative methods for satisfying the certification requirements
described in clause (a)(iv) above. The Withholding Regulations will also
require, in the case of Exchange Notes held by a foreign partnership, that (x)
the certification described in clause (a)(iv) above be provided by the partners
and (y) the partnership provide certain information, including its taxpayer
identification number. A look-through rule will apply in the case of tiered
partnerships.
Payments of interest to a Non-U.S. Holder that do not qualify for the
non-imposition of U.S. withholding tax discussed above, will be subject to U.S.
federal withholding tax at a rate of 30% (or such reduced rate of withholding as
provided for in an applicable treaty if such Non-U.S. Holder provides a properly
executed Form 1001).
SALE, EXCHANGE OR RETIREMENT OF EXCHANGE NOTES. Any gain realized by a
Non-U.S. Holder on the sale, exchange or retirement of the Exchange Notes, will
generally not be subject to United States federal income tax or withholding
unless (i) the Non-U.S. Holder is an individual who was present in the United
States for 183 days or more in the taxable year of the disposition and meets
certain other requirements; (ii) the Non-U.S. Holder is subject to tax pursuant
to certain provisions of the Code applicable to certain individuals who renounce
their United States citizenship or terminate long-term United States residency
or (iii) the gain is effectively connected with a U.S. trade or business
conducted by the Non-U.S. Holder. If a Non-U.S. Holder falls under clause (i)
above, the holder generally will be subject to United States federal income tax
at a rate of 30% on the gain derived from the sale (or reduced treaty rate) and
may be subject to withholding in certain circumstances. If a Non-U.S. Holder
falls under clause (ii) above, the holder will be taxed on the net gain derived
from the sale under the graduated United States federal income tax rates that
are applicable to United States citizens and resident aliens, and may be subject
to withholding under certain circumstances.
80
<PAGE>
EFFECTIVELY CONNECTED INCOME. To the extent that interest or other payments
received by a Non-U.S. Holder with respect to the Exchange Notes (or proceeds
from the disposition of the Exchange Notes) are treated as being effectively
connected with the conduct by the Non-U.S. Holder of a trade or business within
the United States (or the Non-U.S. Holder is otherwise subject to U.S. federal
income taxation on a net basis with respect to such Non-U.S. Holder's ownership
of the Notes), such Non-U.S. Holder will generally be subject to rules similar
to that described above under 'U.S. Taxation of U.S. Holders' (subject to any
modification provided under an applicable income tax treaty). Such Non-U.S.
Holder may also be subject to the U.S. 'branch profits tax' if such Non-U.S.
Holder is a corporation.
U.S. FEDERAL ESTATE TAXES. An Exchange Note beneficially owned by an
individual who is a Non-U.S. Holder at the time of his or her death generally
will not be subject to U.S. federal estate tax as a result of such death if (i)
the Non-U.S. Holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote and (ii) interest payments with respect to the Exchange Note would not have
been, if received at the time of such individual's death, effectively connected
with the conduct of a U.S. trade or business.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The backup withholding rules require a payor to deduct and withhold a tax
if (i) the payee fails to furnish a taxpayer identification number ('TIN') in
the prescribed manner, (ii) the IRS notifies the payor that the TIN furnished by
the payee is incorrect, (iii) the payee has failed to report properly the
receipt of 'reportable payments' and the IRS has notified the payor that
withholding is required, or (iv) the payee fails to certify under the penalty of
perjury that such payee is not subject to backup withholding. If any one of the
events discussed above occurs with respect to a holder of Exchange Notes, the
Company, its paying agent or other withholding agent will be required to
withhold a tax equal to 31% of any 'reportable payment' made in connection with
the Exchange Notes of such holder. A 'reportable payment' includes, among other
things, amounts paid in respect of interest on an Exchange Note. Certain holders
(including, among others, corporations and certain tax-exempt organizations) are
not subject to backup withholding.
Back-up withholding generally will not apply to an Exchange Note issued in
registered form that is beneficially owned by a Non-U.S. Holder if the
certification of Non-U.S. Holder status is provided to the Company or its agent
as described above in 'Certain Federal Income Tax Consequences to Non-U.S.
Holders -- Interest', provided that the payor does not have actual knowledge
that the holder is a U.S. person. The Company may be required to report annually
to the IRS and to each Non-U.S. Holder the amount of interest paid to, and the
tax withheld, if any, with respect to each Non-U.S. Holder.
If payments of principal and interest are made to the beneficial owner of
an Exchange Note by or through the foreign office of a custodian, nominee or
other agent of such beneficial owner, or if the proceeds of the sale of Exchange
Notes are paid to the beneficial owner of an Exchange Note through a foreign
office of a 'broker' (as defined in the pertinent Regulations), the proceeds
will not be subject to backup withholding (absent actual knowledge that the
payee is a U.S. person). Information reporting (but not backup withholding) will
apply, however, to a payment by a foreign office of a custodian, nominee, agent
or broker that is (i) a U.S. person, (ii) a controlled foreign corporation for
United States federal income tax purposes, or (iii) a foreign person that
derives 50% or more of its gross income from the conduct of a United States
trade or business for a specified three-year period or, effective after December
31, 1998, by a foreign office of certain other persons; unless the broker has in
its records documentary evidence that the holder is a Non-U.S. Holder and
certain conditions are met (including that the broker has no actual knowledge
that the holder is a U.S. Holder) or the holder otherwise establishes an
exemption. Payment through the United States office of a custodian, nominee,
agent or broker is subject to both backup withholding at a rate of 31% and
information reporting, unless the holder certifies that it is a Non-U.S. Holder
under penalties of perjury or otherwise establishes an exemption.
Any amount withheld under the backup withholding rules will be allowed as a
credit against, or refund of, such holder's United States federal income tax
liability, provided that the required information is provided by the holder to
the IRS.
81
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Initial Notes where such Initial Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that it will make this Prospectus, as amended or supplemented, available to such
broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at prevailing market prices at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the Notes. Any broker-dealer that resells
Exchange Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Notes may be deemed to be an 'underwriter' within the meaning of
the Securities Act and any profit from any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
'underwriter' within the meaning of the Securities Act.
The Company promptly will send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the expenses of one counsel
for the holders of the Initial Notes) other than dealers' and brokers'
discounts, commissions and counsel fees and will indemnify the holders of the
Initial Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
VALIDITY OF THE EXCHANGE NOTES
The validity of the Exchange Notes will be passed upon for the Company by
Rosenman & Colin LLP, 575 Madison Avenue, New York, New York 10022. Edward H.
Cohen, a member of Rosenman & Colin LLP, is a director of the Company and is the
beneficial owner of 14,963 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements (including the schedule incorporated
by reference) of the Company at February 1, 1998 and February 2, 1997, and for
each of the three years in the period ended February 1, 1998, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information for the thirteen weeks ended May 3, 1998 appearing in this
Prospectus and Registration Statement, Ernst & Young LLP has reported that they
have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report appearing elsewhere
herein states that they did not audit and they do not express an opinion on such
interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted considering the limited nature
of the review procedures applied. The independent auditors are not subject to
the liability provisions of Section 11 of the Securities Act for their report on
the unaudited interim financial
82
<PAGE>
information because that report is not a 'report' or a 'part' of the
Registration Statement prepared or certified by the auditors within the meaning
of Sections 7 and 11 of the Securities Act.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission. Such reports and other information filed with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's regional offices at Seven World Trade Center, 13th
Floor, New York, New York 10007 and at Northwestern Atrium Center, 500 West
Madison Street, 14th Floor, Chicago, Illinois 60661-2551. Copies of such
material also can be obtained from the principal office of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Materials filed electronically with the Commission via EDGAR may also be
accessed through the Commission's home page at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement of Form S-4
filed by the Company with the Commission under the Securities Act. As permitted
by the rules and regulations of the Commission, this Prospectus does not contain
all of the information contained in the Registration Statement and the exhibits
and schedules thereto, and reference is hereby made to the Registration
Statement and the exhibits and schedules thereto for further information with
respect to the Company and the Exchange Notes. Statements contained herein
concerning the provisions of any documents filed as an exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance, reference is made to the copy of
such document so filed. Each such statement is qualified in its entirety by such
reference.
83
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................................................ F-2
Consolidated Balance Sheets as of February 2, 1997 and February 1, 1998................................... F-3
Consolidated Statements of Operations for the years ended January 28, 1996, February 2, 1997 and February
1, 1998................................................................................................. F-4
Consolidated Statements of Cash Flows for the years ended January 28, 1996, February 2, 1997 and February
1, 1998................................................................................................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended January 28, 1996, February
2, 1997 and February 1, 1998............................................................................ F-6
Notes to Consolidated Financial Statements................................................................ F-7
Independent Accountants Review Report..................................................................... F-18
Condensed Consolidated Balance Sheet as of May 3, 1998 (unaudited)........................................ F-19
Condensed Consolidated Statements of Operations for the thirteen weeks ended May 4, 1997 and May 3, 1998
(unaudited)............................................................................................. F-20
Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended May 4, 1997 and May 3, 1998
(unaudited)............................................................................................. F-21
Notes to Condensed Consolidated Financial Statements (unaudited).......................................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and the Board of Directors
Phillips-Van Heusen Corporation
We have audited the accompanying consolidated balance sheets of
Phillips-Van Heusen Corporation and subsidiaries as of February 1, 1998 and
February 2, 1997, and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for each of the three years in the
period ended February 1, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Phillips-Van
Heusen Corporation and subsidiaries at February 1, 1998 and February 2, 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended February 1, 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
---------------------
New York, New York
March 10, 1998, except for the
Long-Term Debt note,
which is as of April 22, 1998
F-2
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Feb. 2, 1997 FEB. 1, 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash, including cash equivalents of $1,861 and $1,413............................. $ 11,590 $ 11,748
Trade receivables, less allowances of $3,401 and $2,911........................... 91,806 88,656
Inventories....................................................................... 237,422 249,534
Other, including deferred taxes of $4,300 and $19,031............................. 22,140 35,080
------------- -------------
Total Current Assets........................................................... 362,958 385,018
Property, Plant and Equipment....................................................... 137,060 94,582
Goodwill............................................................................ 120,324 116,467
Other Assets, including deferred taxes of $16,617 and $44,094....................... 37,094 64,392
------------- -------------
$ 657,436 $ 660,459
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable..................................................................... $ 20,000 $ 7,900
Accounts payable.................................................................. 36,355 36,233
Accrued expenses.................................................................. 55,754 89,202
Current portion of long-term debt................................................. 10,157
------------- -------------
Total Current Liabilities...................................................... 122,266 133,335
Long-Term Debt, less current portion................................................ 189,398 241,004
Other Liabilities................................................................... 55,614 65,815
Stockholders' Equity:
Preferred stock, par value $100 per share; 150,000 shares authorized; no shares
outstanding
Common stock, par value $1 per share; 100,000,000 shares authorized; shares issued
27,045,705 and 27,179,244...................................................... 27,046 27,179
Additional capital................................................................ 116,296 116,954
Retained earnings................................................................. 146,816 76,172
------------- -------------
Total Stockholders' Equity..................................................... 290,158 220,305
------------- -------------
$ 657,436 $ 660,459
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales........................................................... $1,464,128 $1,359,593 $1,350,007
Cost of goods sold.................................................. 987,921 910,517 937,965
---------- ---------- ----------
Gross profit........................................................ 476,207 449,076 412,042
Selling, general and administrative expenses........................ 428,634 401,338 412,495
Facility and store closing, restructuring and other expenses........ 27,000 86,700
---------- ---------- ----------
Income (loss) before interest and taxes............................. 20,573 47,738 (87,153)
Interest expense, net............................................... 23,199 23,164 20,672
---------- ---------- ----------
Income (loss) before taxes.......................................... (2,626) 24,574 (107,825)
Income tax expense (benefit)........................................ (2,920) 6,044 (41,246)
---------- ---------- ----------
Net income (loss)................................................... $ 294 $ 18,530 $ (66,579)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per share:
Basic............................................................. $ 0.01 $ 0.69 $ (2.46)
---------- ---------- ----------
---------- ---------- ----------
Diluted........................................................... $ 0.01 $ 0.68 $ (2.46)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
In 1995 and 1997, PVH recorded pre-tax charges of $27,000 and $132,700,
respectively, related principally to a series of actions the Company has taken
to accelerate the execution of PVH's ongoing strategy to build its brands. Such
charges have been recorded in the consolidated statements of operations as
follows:
<TABLE>
<CAPTION>
1995 1997
-------- -------
<S> <C> <C>
Cost of goods sold................................................... $46,000
Facility and store closing, restructuring and other expenses......... $ 27,000 86,700
-------- -------
27,000 132,700
Income tax benefit................................................... (9,984) (47,200)
-------- -------
$ 17,016 $85,500
-------- -------
-------- -------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)...................................................... $ 294 $ 18,530 $(66,579)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization..................................... 33,740 29,438 25,300
Write-off of property, plant and equipment........................ 13,000 40,800
Deferred income taxes............................................. 3,363 8,214 (42,208)
Equity income in Pyramid Sportswear............................... (85) (900) (792)
Changes in operating assets and liabilities:
Receivables......................................................... (13,927) 18,060 3,150
Income tax refund receivable........................................ 16,987
Inventories......................................................... 16,315 39,351 (12,112)
Accounts payable and accrued expenses............................... (83,897) (17,782) 34,038
Deferred landlord contributions..................................... (399) (5,001) (5,949)
Other-net........................................................... 808 (5,021) 15,998
--------- --------- --------
Net cash provided (used) by operating activities.................... (30,788) 101,876 (8,354)
--------- --------- --------
Investing activities:
Acquisition of the Apparel Group of Crystal Brands, Inc................ (114,503)
Property, plant and equipment acquired................................. (39,773) (22,578) (17,923)
Investment in Pyramid Sportswear....................................... (6,950)
Other-net.............................................................. 143 360
--------- --------- --------
Net cash used by investing activities............................... (161,226) (22,435) (17,563)
--------- --------- --------
Financing activities:
Proceeds from revolving line of credit................................. 204,996 52,582 123,000
Payments on revolving line of credit and long-term borrowings.......... (73,660) (134,302) (93,651)
Exercise of stock options.............................................. 1,745 386 791
Cash dividends......................................................... (4,007) (4,050) (4,065)
--------- --------- --------
Net cash provided (used) by financing activities.................... 129,074 (85,384) 26,075
--------- --------- --------
Increase (decrease) in cash.............................................. (62,940) (5,943) 158
Cash at beginning of period.............................................. 80,473 17,533 11,590
--------- --------- --------
Cash at end of period.................................................... $ 17,533 $ 11,590 $ 11,748
--------- --------- --------
--------- --------- --------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
$1 PAR ADDITIONAL RETAINED STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS EQUITY
---------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
January 29, 1995........................... 26,610,310 $26,610 $ 112,801 $136,049 $ 275,460
Stock options exercised.................. 187,908 188 1,557 1,745
Net income............................... 294 294
Cash dividends........................... (4,007) (4,007)
Investment in Pyramid Sportswear......... 181,134 181 1,619 1,800
---------- ------- ---------- -------- -------------
January 28, 1996........................... 26,979,352 26,979 115,977 132,336 275,292
Stock options exercised.................. 66,353 67 319 386
Net income............................... 18,530 18,530
Cash dividends........................... (4,050) (4,050)
---------- ------- ---------- -------- -------------
FEBRUARY 2, 1997........................... 27,045,705 27,046 116,296 146,816 290,158
Stock options exercised.................. 133,539 133 658 791
Net loss................................. (66,579) (66,579)
Cash dividends........................... (4,065) (4,065)
---------- ------- ---------- -------- -------------
FEBRUARY 1, 1998........................... 27,179,244 $27,179 $ 116,954 $ 76,172 $ 220,305
---------- ------- ---------- -------- -------------
---------- ------- ---------- -------- -------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of PVH and its subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from the
estimates.
Fiscal Year -- Fiscal years are designated in the financial statements and
notes by the calendar year in which the fiscal year commences. Accordingly,
results for fiscal years 1995 and 1997 represent the 52 weeks ended January 28,
1996 and February 1, 1998, respectively. Fiscal year 1996 represents the 53
weeks ended February 2, 1997.
Cash and Cash Equivalents -- PVH considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Asset Impairments -- PVH records impairment losses on long-lived assets
(including goodwill) used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by the related assets are less than the carrying amounts of those
assets.
Inventories -- Inventories are stated at the lower of cost or market. Cost
for apparel inventories of $90,151 (1996) and $90,999 (1997) is determined using
the last-in, first-out method (LIFO). Cost for footwear and certain sportswear
inventories is determined using the first-in, first-out method (FIFO).
Property, Plant and Equipment -- Depreciation is computed principally by
the straight line method over the estimated useful lives of the various classes
of property.
Goodwill -- Goodwill, net of accumulated amortization of $8,615 and $11,358
in 1996 and 1997, respectively, is being amortized principally by the straight
line method over 40 years.
Contributions from Landlords -- PVH receives contributions from landlords
for fixturing retail stores which the Company leases. Such amounts are amortized
as a reduction of rent expense over the life of the related lease. Unamortized
contributions are included in accrued expenses and other liabilities and
amounted to $18,747 and $12,798 in 1996 and 1997, respectively.
Fair Value of Financial Instruments -- Using discounted cash flow analyses,
PVH estimates that the fair value of all financial instruments approximates
their carrying value, except as noted in the footnote entitled 'Long-Term Debt'.
Stock-Based Compensation -- PVH accounts for its stock options under the
provisions of APB Opinion No. 25, 'Accounting for Stock Issued to Employees,'
and complies with the disclosure requirements of FASB Statement No. 123,
'Accounting for Stock-Based Compensation'.
Advertising -- Advertising costs are expensed as incurred and totaled
$21,136 (1995), $19,427 (1996) and $37,762 (1997).
EARNINGS PER SHARE
In 1997, PVH adopted FASB Statement No. 128, 'Earnings Per Share'. This
statement replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share.
PVH computed its basic and diluted earnings per share by dividing net
income or loss by:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted Average Common Shares Outstanding for Basic
Earnings Per Share...................................... 26,725,804 27,004,115 27,107,633
Impact of Dilutive Employee Stock Options................. 295,529 209,462
---------- ---------- ----------
Total Shares for Diluted Earnings Per Share............... 27,021,333 27,213,577 27,107,633
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-7
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
INCOME TAXES
Income taxes consist of:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Federal:
Current............................................................ $(8,219) $(4,620) $ 400
Deferred........................................................... 2,995 7,959 (42,985)
State, foreign and local:
Current............................................................ 1,936 2,450 562
Deferred........................................................... 368 255 777
------- ------- --------
$(2,920) $ 6,044 $(41,246)
------- ------- --------
------- ------- --------
</TABLE>
Taxes paid were $3,371 (1995), $1,262 (1996) and $1,155 (1997). In
addition, PVH received an income tax refund of $16,987 in 1996.
The approximate tax effect of items giving rise to the deferred income tax
asset recognized in the Company's balance sheets is as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Depreciation................................................................... $(18,349) $(18,427)
Landlord contributions......................................................... 7,367 5,030
Facility and store closing, restructuring and other expenses................... 415 27,295
Employee compensation and benefits............................................. 9,243 10,302
Tax loss and credit carryforwards.............................................. 17,231 31,179
Other -- net................................................................... 5,010 7,746
-------- --------
$ 20,917 $ 63,125
-------- --------
-------- --------
</TABLE>
A reconciliation of the statutory Federal income tax to the income tax
expense (benefit) is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Statutory 35% federal tax............................................ $ (919) $ 8,601 $(37,739)
State, foreign and local income taxes, net of Federal income tax
benefit............................................................ 1,454 1,463 805
Income of Puerto Rico Subsidiaries(1)................................ (3,298) (3,757) (3,258)
Other -- net......................................................... (157) (263) (1,054)
------- ------- --------
Income tax expense (benefit)......................................... $(2,920) $ 6,044 $(41,246)
------- ------- --------
------- ------- --------
</TABLE>
- ------------------
(1) Exemption from Puerto Rico income tax expires in 1998. PVH anticipates this
exemption will be extended through 2008.
INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Raw materials................................................................. $ 16,670 $ 15,964
Work in process............................................................... 13,208 15,216
Finished goods................................................................ 207,544 218,354
-------- --------
$237,422 $249,534
-------- --------
-------- --------
</TABLE>
Inventories would have been approximately $13,000 and $12,000 higher than
reported at February 2, 1997 and February 1, 1998, respectively, if the FIFO
method of inventory accounting had been used for all apparel.
F-8
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Land......................................................... $ 1,774 $ 1,646
Buildings and building improvements.......................... 15-40 years 37,778 24,932
Machinery and equipment, furniture and fixtures and leasehold
improvements............................................... 5-15 years 233,884 187,671
-------- --------
273,436 214,249
Less: Accumulated depreciation and amortization.............. 136,376 119,667
-------- --------
$137,060 $ 94,582
-------- --------
-------- --------
</TABLE>
LONG-TERM DEBT
Long-term debt, exclusive of current portion, is as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revolving Credit Facility..................................................... $ 40,000 $ 91,600
7.75% Debentures.............................................................. 99,442 99,448
7.75% Senior Notes............................................................ 49,286 49,286
Other debt.................................................................... 670 670
-------- --------
$189,398 $241,004
-------- --------
-------- --------
</TABLE>
PVH issued $100,000 of 7.75% Debentures due 2023 on November 15, 1993 with
a yield to maturity of 7.80%. Interest is payable semi-annually. Based on
current market conditions, PVH estimates that the fair value of these Debentures
on February 1, 1998, using discounted cash flow analyses, was approximately
$93,400.
On April 22, 1998, PVH completed a refinancing of its Revolving Credit
Facility and its 7.75% Senior Notes by entering into a new $325,000 Senior
Secured Credit Facility with a group of banks and by issuing $150,000 of 9.5%
Senior Subordinated Notes due May 1, 2008. The net proceeds from the Senior
Subordinated Notes were used to retire the 7.75% Senior Notes and to repay a
portion of the amount due under PVH's prior Revolving Credit Facility.
Accordingly, such amounts have been classified as long-term debt as of February
1, 1998.
The new $325,000 Credit Facility has a 5 year term and all borrowings
thereunder are due April 22, 2003. The Facility includes a revolving credit
facility which allows PVH, at its option, to borrow and repay amounts up to
$325,000. The Facility also includes a letter of credit facility with a
sub-limit of $250,000 provided, however, that the aggregate maximum amount
outstanding under both the revolving credit facility and the letter of credit
facility is $325,000. Interest is payable quarterly at a spread over LIBOR or
the prime rate, at the borrower's option, with the spread based on PVH's credit
rating and certain financial ratios. The Facility also provides for payment of a
fee on the unutilized portion of the Facility.
The 9.5% Senior Subordinated Notes have a yield to maturity of 9.58% and
interest payable semi-annually.
In connection with the 7.75% Debentures and the $325,000 Credit Facility,
substantially all of PVH's assets have been pledged as collateral.
In connection with the early retirement of the 7.75% Senior Notes, PVH paid
a yield maintenance premium of $1,446, which will be classified as an
extraordinary item in 1998.
The weighted average interest rate on outstanding borrowings under the
revolving credit facility at February 2, 1997 and February 1, 1998 was 6.2% and
6.4%, respectively.
Interest paid was $22,949 (1995), $24,039 (1996) and $20,784 (1997).
There are no scheduled maturities of long-term debt for the next five
years.
F-9
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
INVESTMENT IN PYRAMID SPORTSWEAR
During the fourth quarter of 1995, PVH acquired 25% of Pyramid Sportswear
('Pyramid') for $6,950 in cash and $1,800 in the Company's common stock. PVH
accounts for its investment in Pyramid under the equity method of accounting.
Pyramid, headquarted in Sweden, designs, develops and sources Gant sportswear
under a license from PVH and markets such sportswear in 35 countries around the
world. In connection with this investment, PVH also acquired an option to
purchase the remaining 75% of Pyramid beginning in 2000.
STOCKHOLDERS' EQUITY
Preferred Stock Rights -- On June 10, 1986, the Board of Directors declared
a distribution of one Right (the 'Rights') to purchase Series A Cumulative
Participating Preferred Stock, par value $100 per share, for each outstanding
share of common stock. As a result of subsequent stock splits, each outstanding
share of common stock now carries with it one-fifth of one Right.
Under certain circumstances, each Right will entitle the registered holder
to acquire from the Company one one-hundredth (1/100) of a share of said Series
A Preferred Stock at an exercise price of $100. The Rights will be exercisable,
except in certain circumstances, commencing ten days following a public
announcement that (i) a person or group has acquired or obtained the right to
acquire 20% or more of the common stock, in a transaction not approved by the
Board of Directors or (ii) a person or group has commenced or intends to
commence a tender offer for 30% or more of the common stock (the 'Distribution
Date').
If PVH is the surviving corporation in a merger or other business
combination then, under certain circumstances, each holder of a Right will have
the right to receive upon exercise the number of shares of common stock having a
market value equal to two times the exercise price of the Right.
In the event PVH is not the surviving corporation in a merger or other
business combination, or more than 50% of PVH's assets or earning power is sold
or transferred, each holder of a Right will have the right to receive upon
exercise the number of shares of common stock of the acquiring company having a
market value equal to two times the exercise price of the Right.
At any time prior to the close of business on the Distribution Date, PVH
may redeem the Rights in whole, but not in part, at a price of $.05 per Right.
During 1996, the rights were extended for a period of 10 years from the date of
initial expiration and will expire on June 16, 2006.
Stock Options -- Under PVH's stock option plans, non-qualified and
incentive stock options ('ISOs') may be granted. Options are granted at fair
market value at the date of grant. ISOs and non-qualified options granted have a
ten year duration. Generally, options are cumulatively exercisable in three
installments commencing three years after the date of grant.
Under APB Opinion No. 25, PVH does not recognize compensation expense
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant. Under FASB Statement No.
123, proforma information regarding net income and earnings per share is
required as if the Company had accounted for its employee stock options under
the fair value method of that Statement.
For purposes of proforma disclosures, PVH estimated the fair value of stock
options granted since 1995 at the date of grant using the Black-Scholes option
pricing model. The estimated fair value of the options is amortized to expense
over the options' vesting period.
F-10
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
STOCKHOLDERS' EQUITY--(CONTINUED)
The following summarizes the assumptions used to estimate the fair value of
stock options granted in each year and certain proforma information:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate.......................................... 6.05% 6.61% 6.49%
Expected option life............................................. 7 Years 7 Years 7 YEARS
Expected volatility.............................................. 30.6% 30.6% 26.0%
Expected dividends per share..................................... $ 0.15 $ 0.15 $ 0.15
Weighted average estimated fair value per share of options
granted........................................................ $ 6.11 $ 5.29 $ 5.43
Proforma net income (loss)....................................... $ (127) $ 17,396 $(68,242)
Proforma basic and diluted net income (loss) per share........... $ (0.00) $ 0.65 $ (2.52)
</TABLE>
As any options granted in the future will also be subject to the fair value
proforma calculations, the proforma adjustments for 1995, 1996 and 1997 may not
be indicative of future years.
Other data with respect to stock options follows:
<TABLE>
<CAPTION>
OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE PRICE PER SHARE
--------- --------------------- ----------------
<S> <C> <C> <C>
Outstanding at January 29, 1995.................. 1,554,249 $ 4.75 - $36.25 $16.99
Granted........................................ 568,390 10.75 - 17.50 15.02
Exercised...................................... 187,908 4.75 - 10.69 7.17
Cancelled...................................... 131,383 4.75 - 34.75 20.37
--------- --------------------- --------
Outstanding at January 28, 1996.................. 1,803,348 4.75 - 36.25 17.14
Granted........................................ 948,411 10.75 - 14.38 12.83
Exercised...................................... 66,353 4.75 - 8.75 5.81
Cancelled...................................... 727,866 6.88 - 36.25 26.07
--------- --------------------- --------
Outstanding at February 2, 1997.................. 1,957,540 4.75 - 31.63 12.12
Granted........................................ 817,250 12.81 - 15.68 14.23
Exercised...................................... 133,539 4.75 - 13.13 5.93
Cancelled...................................... 179,587 6.88 - 31.63 14.49
--------- --------------------- --------
Outstanding at February 1, 1998.................. 2,461,664 $ 5.94 - $31.63 $12.98
--------- --------------------- --------
--------- --------------------- --------
</TABLE>
Of the outstanding options at February 1, 1998, 434,466 shares have an
exercise price below $12.25, 2,023,558 shares have an exercise price from $12.25
to $16.50 and 3,640 shares have an exercise price above $16.50. The weighted
average remaining contractual life for all options outstanding at February 1,
1998 is 7.6 years.
Of the outstanding options at February 2, 1997 and February 1, 1998,
options covering 645,091 and 650,479 shares were exercisable at a weighted
average price of $9.35 and $10.56, respectively. Stock options available for
grant at February 2, 1997 and February 1, 1998 amounted to 311,496 and 1,704,250
shares, respectively.
LEASES
PVH leases retail stores, manufacturing facilities, office space and
equipment. The leases generally are renewable and provide for the payment of
real estate taxes and certain other occupancy expenses. Retail store leases
generally provide for the payment of percentage rentals based on store sales and
other costs associated with the leased property.
F-11
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LEASES--(CONTINUED)
At February 1, 1998, minimum annual rental commitments under
non-cancellable operating leases, including leases for new retail stores which
had not begun operating at February 1, 1998, are as follows:
<TABLE>
<S> <C>
1998......................................................... $ 59,232
1999......................................................... 46,049
2000......................................................... 33,183
2001......................................................... 26,036
2002......................................................... 19,653
Thereafter................................................... 48,174
--------
Total minimum lease payments................................. $232,327
--------
--------
</TABLE>
Rent expense, principally for real estate, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Minimum............................................................. $69,988 $67,914 $65,177
Percentage and other................................................ 11,807 11,166 11,139
------- ------- -------
$81,795 $79,080 $76,316
------- ------- -------
------- ------- -------
</TABLE>
RETIREMENT AND BENEFIT PLANS
Defined Benefit Plans -- PVH has noncontributory, defined benefit pension
plans covering substantially all U.S. employees meeting certain age and service
requirements. For those vested (after five years of service), the plans provide
monthly benefits upon retirement based on career compensation and years of
credited service. It is PVH's policy to fund pension cost annually in an amount
consistent with Federal law and regulations. The assets of the plans are
principally invested in a mix of fixed income and equity investments. In
addition, PVH also participates in multi-employer plans, which provide defined
benefits to their union employees.
A summary of the components of net pension cost for the defined benefit
plans and the total contributions charged to pension expense for the
multi-employer plans follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Defined Benefit Plans:
Service cost -- benefits earned during the period............... $ 2,145 $ 2,528 $ 2,004
Interest cost on projected benefit obligation................... 7,107 7,425 7,935
Actual gain on plan assets...................................... (19,533) (13,688) (19,772)
Net amortization and deferral of actuarial gains................ 12,028 5,354 11,259
-------- -------- --------
Net pension cost of defined benefit plans......................... 1,747 1,619 1,426
Multi-employer plans.............................................. 219 253 213
-------- -------- --------
Total pension expense............................................. $ 1,966 $ 1,872 $ 1,639
-------- -------- --------
-------- -------- --------
</TABLE>
Significant rate assumptions used in determining pension obligations at the
end of each year, as well as pension cost in the following year, were as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate used in determining projected benefit obligation................ 7.50% 8.00% 7.25%
Rate of increase in compensation levels....................................... 4.00% 4.50% 4.00%
Long-term rate of return on assets............................................ 8.75% 8.75% 8.75%
</TABLE>
F-12
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
RETIREMENT AND BENEFIT PLANS--(CONTINUED)
The following table sets forth the plans' funded status and amounts
recognized for defined benefit plans in the Company's balance sheets:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................................ $ 91,379 $ 108,656
--------- ---------
--------- ---------
Accumulated benefit obligation........................................... $ 93,373 $ 110,171
--------- ---------
--------- ---------
Plan assets at fair value.................................................. $ 110,830 $ 124,663
Less: projected benefit obligation for services rendered to date........... (101,065) (116,622)
--------- ---------
Plan assets in excess of projected benefit obligation...................... 9,765 8,041
Unrecognized prior service cost............................................ 3,099 2,536
Unrecognized net actuarial gain............................................ (3,665) (2,403)
Unrecognized net asset at adoption date of FASB Statement No. 87........... (305) (238)
--------- ---------
Net pension asset recognized in the balance sheets......................... $ 8,894 $ 7,936
--------- ---------
--------- ---------
</TABLE>
Plan assets in excess of projected benefit obligation at February 2, 1997
and February 1, 1998 are net of $3,729 and $4,264, respectively, for certain
underfunded plans.
PVH has an unfunded supplemental defined benefit plan covering 23 current
and retired executives under which the participants will receive a predetermined
amount during the 10 years following the attainment of age 65, provided that
prior to the termination of employment with PVH, the participant has been in the
plan for at least 10 years and has attained age 55. PVH does not intend to admit
new participants in the future. At February 2, 1997 and February 1, 1998, $7,450
and $8,309, respectively, are included in other liabilities as the accrued cost
of this plan.
Savings and Retirement Plans -- PVH has a savings and retirement plan (the
'Associates Investment Plan') and a supplemental savings plan for the benefit of
its eligible employees who elect to participate. Participants generally may
elect to contribute up to 15% of their annual compensation, as defined, to the
plans. PVH contributions to the plans are equal to 50% of the amounts
contributed by participating employees with respect to the first 6% of
compensation and were $2,668 (1995), $2,249 (1996) and $1,959 (1997). In
accordance with the terms of the Associates Investment Plan, PVH matching
contributions are invested in the Company's common stock.
Post-Retirement Benefits -- PVH and its domestic subsidiaries provide
certain health care and life insurance benefits to retired employees. Employees
become eligible for these benefits if they reach retirement age while working
for the Company. Retirees contribute to the cost of this plan, which is
unfunded.
Net post-retirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Service cost............................................................. $ 466 $ 687 $ 389
Interest cost............................................................ 2,128 2,166 2,403
Amortization of net loss................................................. 37 44 284
Amortization of transition obligation.................................... 273 273 273
------ ------ ------
$2,904 $3,170 $3,349
------ ------ ------
------ ------ ------
</TABLE>
F-13
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
RETIREMENT AND BENEFIT PLANS--(CONTINUED)
The following reconciles the plan's accumulated post-retirement benefit
with amounts recognized in the Company's balance sheets:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees receiving benefits................................................. $ 21,505 $ 27,389
Fully eligible active plan participants..................................... 2,132 2,547
Active plan participants not eligible for benefits.......................... 5,503 4,171
-------- --------
29,140 34,107
Unrecognized transition obligation............................................ (4,370) (4,097)
Unrecognized net loss......................................................... (4,729) (8,689)
-------- --------
Post-retirement liability recognized in the balance sheets.................... $ 20,041 $ 21,321
-------- --------
-------- --------
</TABLE>
The weighted average annual assumed rate of increase in the cost of covered
benefits (i.e., health care cost trend rate) is 7.0% for 1998 and is assumed to
decrease gradually to 5.5% by 2010 and remain at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage point would
increase the accumulated post-retirement benefit obligation as of February 1,
1998 by $3,391, and the aggregate of the service and interest cost components of
net post-retirement benefit cost for 1997 by $303. The discount rate used in
determining the accumulated post-retirement benefit obligation at February 2,
1997 and February 1, 1998 was 8.0% and 7.25%, respectively.
SEGMENT DATA
PVH manages and analyzes its operating results by its two vertically
integrated business segments: (i) Apparel and (ii) Footwear and Related
Products. In prior years, the Apparel segment included sales, income and assets
related to apparel marketed by the Company's footwear division. In the fourth
quarter of 1997, PVH adopted FASB Statement No. 131, 'Disclosures about Segments
of an Enterprise and Related Information'. In identifying its reportable
segments under the provisions of Statement No. 131, PVH evaluated its operating
divisions and product offerings. Under the aggregation criteria of Statement No.
131, PVH aggregated the results of its apparel divisions into the Apparel
segment, which now excludes Bass apparel. The apparel segment derives revenues
from marketing dresswear, sportswear and accessories, principally under the
brand names Van Heusen, Izod, Izod Club, Gant and Geoffrey Beene. PVH's footwear
business has been identified as the Footwear and Related Products segment. This
segment derives revenues from marketing casual and weekend footwear, apparel and
accessories under the Bass brand name.
F-14
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
SEGMENT DATA--(CONTINUED)
Sales for both segments occur principally in the United States. There are
no inter-segment sales. The Bass apparel data for prior years has been
reclassified for consistent presentation with the current year.
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales
Apparel............................................. $ 1,006,701 $ 897,370 $ 911,047
Footwear and Related Products....................... 457,427 462,223 438,960
----------- ----------- -----------
Total Net Sales..................................... $ 1,464,128 $ 1,359,593 $ 1,350,007
----------- ----------- -----------
----------- ----------- -----------
Operating Income (Loss)
Apparel(1).......................................... $ 12,432 $ 30,021 $ (33,049)
Footwear and Related Products(2).................... 21,026 32,888 (38,853)
----------- ----------- -----------
Total Operating Income (Loss)....................... 33,458 62,909 (71,902)
Corporate Expenses.................................... (12,885) (15,171) (15,251)
Interest Expense, net................................. (23,199) (23,164) (20,672)
----------- ----------- -----------
Income (Loss) Before Taxes.......................... $ (2,626) $ 24,574 $ (107,825)
----------- ----------- -----------
----------- ----------- -----------
Identifiable Assets
Apparel............................................. $ 468,618 $ 381,274 $ 355,979
Footwear and Related Products....................... 165,390 143,631 152,518
Corporate........................................... 115,047 132,531 151,962
----------- ----------- -----------
$ 749,055 $ 657,436 $ 660,459
----------- ----------- -----------
----------- ----------- -----------
Depreciation and Amortization
Apparel............................................. $ 22,399 $ 16,105 $ 10,484
Footwear and Related Products....................... 7,074 5,780 6,561
Corporate........................................... 4,267 7,553 8,255
----------- ----------- -----------
$ 33,740 $ 29,438 $ 25,300
----------- ----------- -----------
----------- ----------- -----------
Identifiable Capital Expenditures
Apparel............................................. $ 20,555 $ 4,269 $ 8,103
Footwear and Related Products....................... 7,281 6,650 3,957
Corporate........................................... 11,937 11,659 5,863
----------- ----------- -----------
$ 39,773 $ 22,578 $ 17,923
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------
(1) Operating income of the Apparel segment includes charges for facility and
store closing, restructuring and other expenses of $25,000 (1995) and
$78,465 (1997).
(2) Operating income of the Footwear and Related Products segment includes
charges for facility and store closing, restructuring and other expenses of
$2,000 (1995) and $54,235 (1997).
FACILITY AND STORE CLOSING, RESTRUCTURING AND OTHER EXPENSES
During 1995 and 1997, the Company recorded pre-tax charges of $27,000 and
$132,700, respectively, related principally to a series of actions the Company
has taken to accelerate the execution of its ongoing strategies to build its
brands. The initiatives related to the 1997 charges are as follows:
Exiting all U.S. mainland footwear manufacturing with the closing of the
Company's Wilton,
Maine footwear manufacturing facility
Exiting sweater manufacturing with the sale and liquidation of the
Company's Puerto Rico
sweater operations
Restructuring plant, warehouse and distribution and other administrative
areas to reduce
product costs and operating expenses and improve efficiencies
Closing an additional 150 underperforming retail outlet stores
F-15
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
FACILITY AND STORE CLOSING, RESTRUCTURING AND OTHER EXPENSES--(CONTINUED)
Repositioning the Gant brand in the United States to be consistent with its
highly successful
positioning in Europe
Modifying a repositioning of the Bass brand, including the liquidation of a
resulting excess
inventory
The cost components of the 1997 charges are as follows:
<TABLE>
<S> <C>
Inventory markdowns included in cost of goods sold....................................... $ 46,000
Fixed asset write-offs................................................................... 40,800
Termination benefits for approximately 2,150 employees................................... 19,500
Lease and other obligations.............................................................. 19,100
Other.................................................................................... 7,300
--------
$132,700
--------
--------
</TABLE>
As of February 1, 1998, approximately $84,900 had been charged against this
reserve, of which approximately $26,600 related to inventory markdowns.
The initiatives related to the 1995 charges were the closing of three
domestic shirt manufacturing facilities, closing approximately 300
underperforming retail outlet stores and reorganizing the Company's management
structure to enhance the Company's focus on its brands. Approximately $13,000 of
the charges related to the write-off of fixed assets located in such factories
and retail outlet stores. The remaining $14,000 related to termination benefits,
including pension settlements and curtailments of $1,200, for approximately
1,250 employees. As of February 1, 1998, all of this reserve had been utilized.
OTHER COMMENTS
One of the Company's directors, Mr. Harry N.S. Lee, is a director of TAL
Apparel Limited, an apparel manufacturer and exporter based in Hong Kong. During
1995, 1996 and 1997, the Company purchased approximately $45,000, $35,000 and
$26,500, respectively, of products from TAL Apparel Limited and certain related
companies.
The Company is a party to certain litigation which, in management's
judgment based in part on the opinion of legal counsel, will not have a material
adverse effect on the Company's financial position.
During 1995, 1996 and 1997, the Company paid a $0.0375 per share cash
dividend each quarter on its common stock.
Certain items in 1995 and 1996 have been reclassified to present them on a
basis consistent with 1997.
F-16
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
RESERVE FOR DOUBTFUL ACCOUNTS
The following reflects PVH's allowance for bad debts:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Allowance at Beginning of Year........................................... $1,617 $5,363 $3,401
Provision for Bad Debts.................................................. 4,244 2,165 694
Deductions Charged Against Allowance..................................... 498 4,127 1,184
------ ------ ------
Allowance at End of Year................................................. $5,363 $3,401 $2,911
------ ------ ------
------ ------ ------
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA -- UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------------- ------------------- ------------------- -------------------
1996 1997 1996 1997(1) 1996 1997 1996(2) 1997(3)
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $273,660 $285,925 $313,807 $313,458 $391,245 $413,643 $380,881 $336,981
Gross profit................. 93,097 98,968 105,325 94,188 129,709 139,766 120,945 79,120
Net income (loss)............ (6,554) (4,540) 2,126 (33,285) 15,035 14,552 7,923 (43,306)
Net income (loss) per share:
Basic(4)................... (0.24) (0.17) 0.08 (1.23) 0.56 0.54 0.29 (1.59)
Diluted.................... (0.24) (0.17) 0.08 (1.23) 0.55 0.53 0.29 (1.59)
Price range of common stock
per share:
High....................... 13 3/8 14 5/8 14 1/2 15 3/4 11 3/4 15 7/8 15 1/8 14 1/2
Low........................ 9 5/8 11 1/2 11 12 3/8 10 3/8 13 1/2 10 3/4 11 1/2
</TABLE>
- ------------------
(1) Net loss for the second quarter of 1997 includes a pre-tax charge of $57,000
for facility and store closing, restructuring and other expenses.
(2) The fourth quarter of 1996 includes 14 weeks of operations.
(3) Net loss for the fourth quarter of 1997 includes a pre-tax charge of $75,700
for facility and store closing, restructuring and other expenses.
(4) Due to averaging the quarterly shares outstanding when computing basic
earnings per share, basic earnings per share totaled for the four quarters
of 1997 does not agree with the annual amount.
F-17
<PAGE>
INDEPENDENT ACCOUNTANTS REVIEW REPORT
Stockholders and Board of Directors
Phillips-Van Heusen Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Phillips-Van Heusen Corporation as of May 3, 1998, and the related condensed
consolidated statements of operations and cash flows for the thirteen week
periods ended May 3, 1998 and May 4, 1997. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
---------------------
New York, New York
May 20, 1998
F-18
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 3,
1998
-----------
(UNAUDITED)
<S> <C>
ASSETS
Current Assets:
Cash, including cash equivalents of $6,009........................................................ $ 12,694
Trade receivables, less allowances of $2,769...................................................... 101,901
Inventories....................................................................................... 261,739
Other, including deferred taxes of $19,031........................................................ 34,994
-----------
Total Current Assets........................................................................... 411,328
Property, Plant and Equipment....................................................................... 92,614
Goodwill............................................................................................ 115,683
Other Assets, including deferred taxes of $44,659................................................... 70,620
-----------
$ 690,245
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable..................................................................................... $ 48,000
Accounts payable.................................................................................. 32,214
Accrued expenses.................................................................................. 82,623
-----------
Total Current Liabilities...................................................................... 162,837
Long-Term Debt...................................................................................... 249,349
Other Liabilities................................................................................... 65,262
Stockholders' Equity:
Preferred Stock, par value $100 per share; 150,000 shares authorized; no shares outstanding
Common Stock, par value $1 per share; 100,000,000 shares authorized; shares issued 27,188,644..... 27,189
Additional Capital................................................................................ 117,019
Retained Earnings................................................................................. 68,589
-----------
Total Stockholders' Equity..................................................................... 212,797
-----------
$ 690,245
-----------
-----------
</TABLE>
See notes to condensed consolidated financial statements.
F-19
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------
MAY 4, MAY 3,
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales............................................................................ $285,925 $295,765
Cost of goods sold................................................................... 186,957 193,257
-------- --------
Gross profit......................................................................... 98,968 102,508
Selling, general and administrative expenses......................................... 100,654 101,954
Year 2000 computer conversion expenses............................................... 2,000
-------- --------
Loss before interest, taxes and extraordinary item................................... (1,686) (1,446)
Interest expense, net................................................................ 4,932 5,466
-------- --------
Loss before taxes and extraordinary item............................................. (6,618) (6,912)
Income tax benefit................................................................... 2,078 2,427
-------- --------
Loss before extraordinary item....................................................... (4,540) (4,485)
Extraordinary loss on debt retirement................................................ (1,060)
-------- --------
Net loss............................................................................. $ (4,540) $ (5,545)
-------- --------
-------- --------
Basic and diluted net loss per share:
Loss before extraordinary item..................................................... $ (0.17) $ (0.16)
Extraordinary loss................................................................. (0.04)
-------- --------
Net loss per share................................................................. $ (0.17) $ (0.20)
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
---------------------------------------
MAY 4, 1997 MAY 3, 1998
---------------- --------------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net loss............................................................................. $ (4,540) $ (5,545)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization..................................................... 6,982 6,785
Equity income in Pyramid Sportswear............................................... (228) (260)
Deferred income taxes............................................................. (565)
Changes in operating assets and liabilities:
Receivables....................................................................... (5,398) (13,245)
Inventories....................................................................... (29,690) (12,205)
Accounts payable and accrued expenses............................................. (3,869) (10,428)
Deferred landlord contributions................................................... (1,382) (1,129)
Other-net......................................................................... (967) (1,264)
----------- ---------
Net cash used by operating activities........................................ (39,092) (37,856)
Investing activities:
Property, plant and equipment acquired............................................... (3,354) (3,553)
Financing activities:
Net proceeds from issuance of 9.5% senior subordinated notes......................... 145,104
Repayment of 7.75% senior notes...................................................... (49,286)
Proceeds from revolving lines of credit.............................................. 49,001 117,000
Payments on revolving lines of credit................................................ (168,500)
Exercise of stock options............................................................ 105 75
Cash dividends....................................................................... (2,030) (2,038)
----------- ---------
Net cash provided by financing activities.................................... 47,076 42,355
----------- ---------
Increase in cash....................................................................... 4,630 946
Cash at beginning of period............................................................ 11,590 11,748
----------- ---------
Cash at end of period.................................................................. $ 16,220 $ 12,694
----------- ---------
----------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
F-21
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(IN THOUSANDS)
GENERAL
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not contain all disclosures
required by generally accepted accounting principles for complete financial
statements. Reference should be made to the annual financial statements,
including the notes thereto, for the year ended February 1, 1998 which are
included elsewhere herein.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
The results of operations for the thirteen weeks ended May 4, 1997 and May
3, 1998 are not necessarily indicative of those for a full fiscal year due, in
part, to seasonal factors. The data contained in these financial statements are
unaudited and are subject to year-end adjustments; however, in the opinion of
management, all known adjustments (which consist only of normal recurring
accruals) have been made to present fairly the consolidated operating results
for the unaudited periods.
Certain reclassifications have been made to the condensed consolidated
financial statements for the thirteen weeks ended May 4, 1997 to present them on
a basis consistent with the thirteen weeks ended May 3, 1998.
INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MAY 3,
1998
--------
<S> <C>
Raw materials.................................................................... $ 14,325
Work in process.................................................................. 14,509
Finished goods................................................................... 232,905
--------
Total.......................................................................... $261,739
--------
--------
</TABLE>
Inventories are stated at the lower of cost or market. Cost for apparel
inventories, excluding certain sportswear inventories, is determined using the
last-in, first-out method (LIFO). Cost for footwear and certain sportswear
inventories is determined using the first-in, first-out method (FIFO).
Inventories would have been approximately $12,200 higher than reported at May 3,
1998, if the FIFO method of inventory accounting had been used for all apparel.
The final determination of cost of sales and inventories under the LIFO
method can only be made at the end of each fiscal year based on inventory cost
and quantities on hand. Interim LIFO determinations are based on management's
estimates of expected year-end inventory levels and costs. Such estimates are
subject to revision at the end of each quarter. Since estimates of future
inventory levels and costs are subject to external factors, interim financial
results are subject to year-end LIFO inventory adjustments.
EXTRAORDINARY LOSS
On April 22, 1998, PVH issued $150 million of 9.5% senior subordinated
notes due May 1, 2008 and used the net proceeds to retire its intermediate term
7.75% senior notes and to repay a portion of the borrowings under its prior
revolving credit facility. On the same day, PVH refinanced its revolving credit
facility by entering into a new $325 million senior secured credit facility. In
connection therewith,
F-22
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
(IN THOUSANDS)
EXTRAORDINARY LOSS--(CONTINUED)
the Company paid a yield maintenance premium of $1.4 million and wrote-off
certain debt issue costs of $0.2 million. These items have been classified as an
extraordinary loss, net of tax benefit of $0.5 million, in the first quarter of
1998.
SEGMENT DATA
PVH manages and analyzes its operating results by its two vertically
integrated business segments: (i) Apparel and (ii) Footwear and Related
Products. In identifying its reportable segments under the provisions of FASB
Statement No. 131, 'Disclosures about Segments of an Enterprise and Related
Information', PVH evaluated its operating divisions and product offerings. Under
the aggregation criteria of Statement No. 131, PVH aggregated the results of its
apparel divisions into the Apparel segment. This segment derives revenues from
marketing dresswear, sportswear and accessories, principally under the brand
names Van Heusen, Izod, Izod Club, Gant and Geoffrey Beene. PVH's footwear
business has been identified as the Footwear and Related Products segment. This
segment derives revenues from marketing casual and weekend footwear, apparel and
accessories under the Bass brand name.
Sales for both segments occur principally in the United States. There are
no inter-segment sales. See 'Management's Discussion and Analysis of Results of
Operations and Financial Condition' for additional segment data.
F-23
<PAGE>
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- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 14
Use of Proceeds................................ 17
Capitalization................................. 18
Selected Consolidated Financial Information.... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
The Exchange Offer............................. 30
Business....................................... 38
Management..................................... 51
Principal Stockholders......................... 53
Description of Senior Debt..................... 54
Description of Exchange Notes.................. 55
Description of Certain Federal Income Tax
Consequences of an Investment in the Exchange
Notes........................................ 78
Plan of Distribution........................... 82
Validity of the Exchange Notes................. 82
Experts........................................ 82
Available Information.......................... 83
Index to Financial Statements.................. F-1
</TABLE>
PHILLIPS-VAN HEUSEN CORPORATION
OFFER TO EXCHANGE UP TO
$150,000,000 OF ITS
9 1/2% SENIOR SUBORDINATED
NOTES DUE 2008
FOR
9 1/2% SENIOR SUBORDINATED NOTES
DUE 2008
------------------------------
PROSPECTUS
------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
