SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended February 1, 1998 Commission file number: 1-724
PHILLIPS-VAN HEUSEN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1166910
(State of incorporation) (IRS Employer
Identification No.)
1290 Avenue of the Americas
New York, New York 10104
(Address of principal executive offices)
212-541-5200
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1.00 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock of registrant held by
nonaffiliates of the registrant as of April 1, 1998 was approximately
$322,000,000.
Number of shares of Common Stock outstanding as of April 1, 1998:
27,187,644.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K
Document in which incorporated
Registrant's Proxy Statement Part III
for the Annual Meeting of
Stockholders to be held on June 18, 1998
<PAGE>
* * *
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*
* SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF*
* 1995 *
* *
* Forward-looking statements in this Form 10-K report, including, without *
* limitation, statements relating to the Company's plans, strategies, *
* objectives, expectations and intentions, 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; (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 Securities and Exchange Commission. *
* *
******************************************************************************
PART I
Item 1. Business
Unless the context otherwise requires, 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.
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 earnings before interest, taxes, depreciation
and amortization (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
1
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.
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
2
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, have each 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 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
3
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 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
4
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 significantly improved 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 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
5
<PAGE>
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.
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, have each been the Company's customers for more than
6
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.
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
7
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.
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
8
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 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.
9
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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 1995 to 441 in 1997. In 1998, Gant will be offered as
a collection in selected Federated stores, including Macy's East and 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,
10
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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.
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
11
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 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
12
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 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.
13
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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 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.
14
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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.
15
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Item 2. 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 leases which expire 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 prior to the end of 1998 in order to
consolidate its offices now located at 1290 Avenue of the Americas and 404
Fifth Avenue, New York, New York. 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
Square Feet of
Floor Space (000's)
Owned Leased Total
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
Footwear and Related Products
Owned Leased Total
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
Information with respect to minimum annual rental commitments under leases
in which the Company is a lessee is included in the note entitled "Leases" in
the Notes to Consolidated Financial Statements included in Item 8 of this
report.
Item 3. Legal Proceedings
The Company is a party to certain litigation which, in the Company's
judgment based in part on the opinion of legal counsel, will not have a
material adverse effect on the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Executive Officers of the Registrant
The following table sets forth certain information concerning the Company's
Executive Officers:
Name Position Age
Bruce J. Klatsky Chairman and Chief Executive Officer;
Director 49
Mark Weber President and Chief Operating Officer;
Director 49
Irwin W. Winter Executive Vice President and Chief Financial
Officer; Director 64
Allen E. Sirkin Vice Chairman 55
Michael J. Blitzer Senior Vice President 48
Emanuel Chirico Vice President and Controller 40
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 has served as a director of the Company since 1985 and 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 Office 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
1995, Mr. Blitzer was named Senior Vice President. For the previous five
years, Mr. Blitzer served as President of the Company's Van Heusen retail
operations.
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.
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PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters
Information with respect to the market for the Company's common stock and
related security holder matters appears under the heading "Selected Quarterly
Financial Data" on page F-19. As of April 1, 1998, there were 1,540
stockholders of record of the Company's common stock.
Item 6. Selected Financial Data
Selected Financial Data appears under the heading "Ten Year Financial
Summary" on pages F-21 and F-22.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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
(In thousands) 1997 1996 1995
Net Sales $1,350,007 $1,359,593 $1,464,128
Cost of goods sold 937,965 910,517 987,921
Non-recurring charges (46,000)
Gross profit before non-recurring charges 458,042 449,076 476,207
SG&A expenses and non-recurring charges 499,195 401,338 455,634
Non-recurring charges (86,700) (27,000)
SG&A expenses before non-recurring charges 412,495 401,338 428,634
Income before interest, taxes and
non-recurring charges 45,547 47,738 47,573
Interest expense, net 20,672 23,164 23,199
Income before taxes and non-recurring
charges 24,875 24,574 24,374
Income tax expense 5,954 6,044 7,064
Income from ongoing operations before
non-recurring charges 18,921 18,530 17,310
Non-recurring charges, net of tax benefit (85,500) (17,016)
Net income (loss) $ (66,579) $ 18,530 $ 294
18
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Adjusted Segment Data
(In thousands) 1997 1996 1995
Net sales-Apparel $ 911,047 $ 897,370 $1,006,701
Net sales-Footwear and Related Products 438,960 462,223 457,427
Total net sales $1,350,007 $1,359,593 $1,464,128
Operating income-Apparel $ 45,416 $ 30,021 $ 37,432
Operating income-Footwear and
Related Products 15,382 32,888 23,026
Total operating income 60,798 62,909 60,458
Corporate expenses (15,251) (15,171) (12,885)
Income-before interest, taxes and
non-recurring charges $ 45,547 $ 47,738 $ 47,573
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.
19
<PAGE>
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.
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 much 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.
20
<PAGE>
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.
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.
21
<PAGE>
Liquidity and Capital Resources
The following table shows key cash flow elements over the last three years:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from operations before non-recurring charges adjusted
for non-cash items. . . . . . . . . . . . . . . . . . . . . . . $ 42,021 $ 55,282 $ 67,328
Change in working capital.. . . . . . . . . . . . . . . . . . . . (16,275) 54,104 (35,344)
Cash flow before non-recurring charges. . . . . . . . . . . . . . 25,746 109,386 31,984
Non-recurring charges -- cash impact. . . . . . . . . . . . . . . (34,100) (7,510) (6,490)
Working capital acquired(1).. . . . . . . . . . . . . . . . . . . -- -- (56,282)
(8,354) 101,876 (30,788)
INVESTMENT ACTIVITIES
Acquisition of Izod and Gant. . . . . . . . . . . . . . . . . . . -- -- (114,503)
Investment in Pyramid Sportswear. . . . . . . . . . . . . . . . . -- -- (6,950)
Capital spending. . . . . . . . . . . . . . . . . . . . . . . . . (17,923) (22,578) (39,773)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 143 --
(17,563) (22,435) (161,226)
FINANCING ACTIVITIES
Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . (4,065) (4,050) (4,007)
Exercise of stock options.. . . . . . . . . . . . . . . . . . . . 791 386 1,745
(3,274) (3,664) (2,262)
Increase (decrease) in cash before net change in debt. . . . . . . $ (29,191) $ 75,777 $(194,276)
</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
22
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 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.
Primarily as a result of the non-recurring charge to earnings recorded in
the fourth quarter of 1997, the Company negotiated amendments to certain
covenant levels through the second quarter of fiscal 1998 under the Company's
Senior Notes Due 1999-2002 and its Existing Credit Agreement pending issuance
of the Notes and the entering into of the New Credit Facility. As a result,
under generally accepted accounting principles, such debt is required to be
classified as short-term debt in the Company's financial statements. The
Senior Notes Due 1999-2002 and the Existing Credit Facility are intended to be
repaid from the proceeds of this offering and borrowings under the New Credit
Facility. The Notes and substantially all of the indebtedness evidenced by the
New Credit Facility will be classified as long-term debt.
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.
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 total cost
of the Year 2000 Project is estimated at a range of $20-$24 million and is
being funded through operating cash flows. Of the total project cost,
approximately $3 million is attributable to the purchase of new software which
will be capitalized, with the remaining cost expensed as incurred.
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.
23
<PAGE>
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.
Item 8. Financial Statements and Supplementary Data
See page F-1 for a listing of the consolidated financial statements and
supplementary data included in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
24
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated herein by reference to
the section entitled "Election of Directors" of the Company's proxy statement
for the Annual Meeting of Stockholders to be held on June 18, 1998.
Item 11. Executive Compensation
Information with respect to Executive Compensation is incorporated herein
by reference to the sections entitled "Executive Compensation", "Compensation
Committee Report on Executive Compensation" and "Performance Graph" of the
Company's proxy statement for the Annual Meeting of Stockholders to be held on
June 18, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the section
entitled "Security Ownership of Certain Beneficial Owners and Management" of
the Company's proxy statement for the Annual Meeting of Stockholders to be
held on June 18, 1998.
Item 13. Certain Relationships and Related Transactions
Information with respect to Certain Relationships and Related Transactions
is incorporated herein by reference to the sections entitled "Election of
Directors" and "Compensation of Directors" of the Company's proxy statement
for the Annual Meeting of Stockholders to be held on June 18, 1998.
25
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) See page F-1 for a listing of the consolidated financial statements
included in Item 8 of this report.
(a)(2) See page F-1 for a listing of financial statement schedules submitted
as part of this report.
(a)(3) The following exhibits are included in this report:
Exhibit
Number
3.1 Certificate of Incorporation (incorporated by reference to Exhibit
5 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1977).
3.2 Amendment to Certificate of Incorporation, filed June 27, 1984
(incorporated by reference to Exhibit 3B to the Company's Annual
Report on Form 10-K for the fiscal year ended February 3, 1985).
3.3 Certificate of Designation of Series A Cumulative Participating
Preferred Stock, filed June 10, 1986 (incorporated by reference to
Exhibit A of the document filed as Exhibit 3 to the Company's
Quarterly Report as filed on Form 10-Q for the period ended May 4,
1986).
3.4 Amendment to Certificate of Incorporation, filed June 2, 1987
(incorporated by reference to Exhibit 3(c) to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1988).
3.5 Amendment to Certificate of Incorporation, filed June 1, 1993
(incorporated by reference to Exhibit 3.5 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 30, 1994).
3.6 Amendment to Certificate of Incorporation, filed June 20, 1996
(incorporated by reference to Exhibit 3.1 to the Company's Report
on Form 10-Q for the period ended July 28, 1996).
3.7 By-Laws of Phillips-Van Heusen Corporation, as amended through
June 18, 1996 (incorporated by reference to Exhibit 3.2 to the
Company's Report on Form 10-Q for the period ended July 28, 1996).
4.1 Specimen of Common Stock certificate (incorporated by reference to
Exhibit 4 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1981).
4.2 Preferred Stock Purchase Rights Agreement (the "Rights Agreement"),
dated June 10, 1986 between PVH and The Chase Manhattan Bank, N.A.
(incorporated by reference to Exhibit 3 to the Company's Quarterly
Report as filed on Form 10-Q for the period ended May 4, 1986).
4.3 Amendment to the Rights Agreement, dated March 31, 1987 between PVH
and The Chase Manhattan Bank, N.A. (incorporated by reference to
Exhibit 4(c) to the Company's Annual Report on Form 10-K for the
year ended February 2, 1987).
4.4 Supplemental Rights Agreement and Second Amendment to the Rights
Agreement, dated as of July 30, 1987, between PVH and The Chase
Manhattan Bank, N.A. (incorporated by reference to Exhibit (c)(4)
to the Company's Schedule 13E-4, Issuer Tender Offer Statement,
dated July 31, 1987).
26
<PAGE>
4.5 Notice of extension of the Rights Agreement, dated June 5, 1996,
from Phillips-Van Heusen Corporation to The Bank of New York
(incorporated by reference to Exhibit 4.13 to the Company's report
on Form 10-Q for the period ended April 28, 1996).
4.6 Credit Agreement, dated as of December 16, 1993, among PVH, Bankers
Trust Company, The Chase Manhattan Bank, N.A., Citibank, N.A., The
Bank of New York, Chemical Bank and Philadelphia National Bank, and
Bankers Trust Company, as agent (incorporated by reference to
Exhibit 4.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 30, 1994).
4.7 First Amendment, dated as of February 13, 1995, to the Credit
Agreement dated as of December 16, 1993 (incorporated by reference
to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 29, 1995).
4.8 Second Amendment, dated as of July 17, 1995, to the Credit
Agreement dated as of December 16, 1993 (incorporated by reference
to Exhibit 4.7 to the Company's report on Form 10-Q for the period
ending October 29, 1995).
4.9 Third Amendment, dated as of September 27, 1995, to the Credit
Agreement dated as of December 16, 1993 (incorporated by reference
to Exhibit 4.8 to the Company's report on Form 10-Q for the period
ending October 29, 1995).
4.10 Fourth Amendment, dated as of September 28, 1995, to the Credit
Agreement dated as of December 16, 1993 (incorporated by reference
to Exhibit 4.9 to the Company's report on Form 10-Q for the period
ending October 29, 1995).
4.11 Fifth Amendment, dated as of April 1, 1996, to the Credit Agreement
dated as of December 16, 1993 (incorporated by reference to Exhibit
4.10 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 28, 1996).
4.12 Sixth Amendment, dated as of July 3, 1997, to the Credit Agreement
dated as of December 16, 1993 (incorporated by reference to Exhibit
4.12 to the Company's report on Form 10-Q for the period ending
August 3, 1997).
4.13 Seventh Amendment, dated as of January 30, 1998, to the Credit
Agreement dated as of December 16, 1993.
4.14 Note Agreement, dated October 1, 1992, among PVH, The Equitable
Life Assurance Society of the United States, Equitable Variable
Life Insurance Company, Unum Life Insurance Company of America,
Nationwide Life Insurance Company, Employers Life Insurance Company
of Wausau and Lutheran Brotherhood (incorporated by reference to
Exhibit 4.21 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1993).
4.15 First Amendment Agreement, dated as of June 24, 1996, to the Note
Agreement, dated as of October 1, 1992 (incorporated by reference
to Exhibit 4.14 to the Company's report on Form 10-Q for the period
ended July 28, 1996).
4.16 Second Amendment Agreement, dated as of July 15, 1997, to the Note
Agreement, dated as of October 1, 1992 (incorporated by reference
to Exhibit 4.15 to the Company's report on Form 10-Q for the period
ending August 3, 1997).
27
<PAGE>
4.17 Third Amendment Agreement, dated as of February 1, 1998, to the
Note Agreement, dated as of October 1, 1992.
4.18 Indenture, dated as of November 1, 1993, between PVH and The Bank
of New York, as Trustee (incorporated by reference to Exhibit 4.01
to the Company's Registration Statement on Form S-3 (Reg. No. 33-
50751) filed on October 26, 1993).
*10.1 1987 Stock Option Plan, including all amendments through April 29,
1997 (incorporated by reference to Exhibit 10.1 to the Company's
report on Form 10-Q for the period ended May 4, 1997).
*10.2 1973 Employees' Stock Option Plan (incorporated by reference to
Exhibit 1 to the Company's Registration Statement on Form S-8 (Reg.
No. 2-72959) filed on July 15, 1981).
*10.3 Supplement to 1973 Employees' Stock Option Plan (incorporated by
reference to the Company's Prospectus filed pursuant to Rule 424(c)
to the Registration Statement on Form S-8 (Reg. No. 2-72959) filed
on March 31, 1982).
*10.4 Amendment to 1973 Employees' Stock Option Plan, effective as of
April 29, 1997 (incorporated by reference to Exhibit 10.12 to the
Company's report on Form 10-Q for the period ended May 4, 1997).
*10.5 Phillips-Van Heusen Corporation Special Severance Benefit Plan, as
amended as of April 16, 1996 (incorporated by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 28, 1996).
*10.6 Phillips-Van Heusen Corporation Capital Accumulation Plan
(incorporated by reference to the Company's Report on Form 8-K
filed on January 16, 1987).
*10.7 Phillips-Van Heusen Corporation Amendment to Capital Accumulation
Plan (incorporated by reference to Exhibit 10(n) to the Company's
Annual Report on Form 10-K for the fiscal year ended February 2,
1987).
*10.8 Form of Agreement amending Phillips-Van Heusen Corporation Capital
Accumulation Plan with respect to individual participants
(incorporated by reference to Exhibit 10(1) to the Company's
Annual Report on Form 10-K for the fiscal year ended January 31,
1988).
*10.9 Form of Agreement amending Phillips-Van Heusen Corporation Capital
Accumulation Plan with respect to individual participants
(incorporated by reference to Exhibit 10.8 to the Company's report
on Form 10-Q for the period ending October 29, 1995).
*10.10 Agreement amending Phillips-Van Heusen Corporation Capital
Accumulation Plan with respect to Bruce J. Klatsky (incorporated by
reference to Exhibit 10.13 to the Company's report on Form 10-Q for
the period ended May 4, 1997).
*10.11 Phillips-Van Heusen Corporation Supplemental Defined Benefit Plan,
dated January 1, 1991, as amended and restated on June 2, 1992
(incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1993).
*10.12 Phillips-Van Heusen Corporation Supplemental Savings Plan,
effective as of January 1, 1991 and amended and restated as of
April 29, 1997 (incorporated by reference to Exhibit 10.10 to the
Company's report on Form 10-Q for the period ended May 4, 1997).
28
<PAGE>
*10.13 Non-Incentive Stock Option Agreement, dated as of December 3, 1993,
between the Company and Bruce J. Klatsky (incorporated by reference
to Exhibit 10.12 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 29, 1995).
*10.14 Phillips-Van Heusen Corporation 1997 Stock Option Plan, effective
as of April 29, 1997 (incorporated by reference to Exhibit 10.14 to
the Company's report on Form 10-Q for the period ending August 3,
1997).
*10.15 Phillips-Van Heusen Corporation Senior Management Bonus Program for
fiscal year 1997 (incorporated by reference to Exhibit 10.15 to the
Company's report on Form 10-Q for the period ending November 2,
1997).
21. Subsidiaries of the Company.
23. Consent of Independent Auditors.
27. Financial Data Schedule
(b) Reports filed on Form 8-K filed during the fourth quarter of 1997:
None
(c) Exhibits: See (a)(3) above for a listing of the exhibits included as part
of this report.
(d) Financial Statement Schedules: See page F-1 for a listing of the
financial statement schedules submitted as part of this report.
(e) The Company agrees to furnish to the Commission upon request a copy of
each agreement with respect to long-term debt where the total amount of
securities authorized thereunder does not exceed 10% of the total
consolidated assets of the Company.
* Management contract or compensatory plan or arrangement required to be
identified pursuant to Item 14(a) of this report.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PHILLIPS-VAN HEUSEN CORPORATION
By: Bruce J. Klatsky
Bruce J. Klatsky
Chairman, Chief Executive
Officer and Director
Date: April 10, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
Bruce J. Klatsky Chairman, Chief Executive April 10, 1998
Bruce J. Klatsky Officer and Director (Principal
Executive Officer)
Mark Weber President, Chief Operating April 14, 1998
Mark Weber Officer and Director
Irwin W. Winter Executive Vice President and April 14, 1998
Irwin W. Winter Chief Financial Officer
Emanuel Chirico Vice President and Controller April 14, 1998
Emanuel Chirico (Principal Accounting Officer)
Edward H. Cohen Director April 10, 1998
Edward H. Cohen
Joseph B. Fuller Director April 14, 1998
Joseph B. Fuller
Joel H. Goldberg Director April 13, 1998
Joel H. Goldberg
Marc Grosman Director April 14, 1998
Marc Grosman
Dennis F. Hightower Director April 10, 1998
Dennis F. Hightower
Maria Elena Lagomasino Director April 10, 1998
Maria Elena Lagomasino
Harry N.S. Lee Director April 13, 1998
Harry N.S. Lee
Bruce Maggin Director April 14, 1998
Bruce Maggin
Slyvia M. Rhone Director April 14, 1998
Slyvia M. Rhone
Peter J. Solomon Director April 13, 1998
Peter J. Solomon
30
<PAGE>
FORM 10-K-ITEM 14(a)(1) and 14(a)(2)
PHILLIPS-VAN HEUSEN CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
14(a)(1) The following consolidated financial statements and supplementary
data are included in Item 8 of this report:
Consolidated Statements of Operations--Years Ended
February 1, 1998, February 2, 1997 and January 28, 1996 . . . . F-2
Consolidated Balance Sheets--February 1, 1998 and
February 2, 1997. . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Cash Flows--Years Ended
February 1, 1998, February 2, 1997 and January 28, 1996 . . . . F-4
Consolidated Statements of Changes in Stockholders'
Equity--Years Ended February 1, 1998, February 2, 1997
and January 28, 1996. . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . F-6
Selected Quarterly Financial Data . . . . . . . . . . . . . . . . F-19
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . F-20
10 Year Financial Summary . . . . . . . . . . . . . . . . . . . . F-21
14(a)(2) The following consolidated financial statement schedule is included
herein:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . F-23
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
F-1
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,350,007 $1,359,593 $1,464,128
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . 937,965 910,517 987,921
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412,042 449,076 476,207
Selling, general and administrative expenses. . . . . . . . . . . . . 412,495 401,338 428,634
Facility and store closing, restructuring and
other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 86,700 27,000
Income (loss) before interest and taxes . . . . . . . . . . . . . . . (87,153) 47,738 20,573
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . 20,672 23,164 23,199
Income (loss) before taxes. . . . . . . . . . . . . . . . . . . . . . (107,825) 24,574 (2,626)
Income tax expense (benefit). . . . . . . . . . . . . . . . . . . . . (41,246) 6,044 (2,920)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (66,579) $ 18,530 $ 294
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.46) $ 0.69 $ 0.01
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.46) $ 0.68 $ 0.01
</TABLE>
In 1997 and 1995, PVH recorded pre-tax charges of $132,700 and $27,000
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:
1997 1995
Cost of goods sold $ 46,000
Facility and store closing,
restructuring and other expenses 86,700 $27,000
132,700 27,000
Income tax benefit (47,200) (9,984)
$ 85,500 $17,016
See notes to consolidated financial statements.
F-2
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
Feb. 1, 1998 Feb. 2, 1997
<S> <C> <C>
ASSETS
Current Assets:
Cash, including cash equivalents of $1,413 and $1,861. . . . . . . . . . . . . $ 11,748 $ 11,590
Trade receivables, less allowances of $2,911 and $3,401. . . . . . . . . . . . 88,656 91,806
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,534 237,422
Other, including deferred taxes of $19,031 and $4,300. . . . . . . . . . . . . 35,080 22,140
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385,018 362,958
Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 94,582 137,060
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,467 120,324
Other Assets, including deferred taxes of $44,094 and $16,617 . . . . . . . . . . 64,392 37,094
$660,459 $657,436
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 20,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,233 36,355
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,202 55,754
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . 9,857 10,157
Long-term debt classified as current debt. . . . . . . . . . . . . . . . . . . 138,929
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 274,221 122,266
Long-Term Debt, less current portion. . . . . . . . . . . . . . . . . . . . . . . 100,118 189,398
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,815 55,614
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 27,179,244 and 27,045,705. . . . . . . . . . . . . 27,179 27,046
Additional capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,954 116,296
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,172 146,816
Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . . 220,305 290,158
$660,459 $657,436
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(66,579) $ 18,530 $ 294
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 25,300 29,438 33,740
Write-off of property, plant and equipment. . . . . . . . . . . . . . . . 40,800 13,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (42,208) 8,214 3,363
Equity income in Pyramid Sportswear . . . . . . . . . . . . . . . . . . . (792) (900) (85)
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,150 18,060 (13,927)
Income tax refund receivable. . . . . . . . . . . . . . . . . . . . . . . . 16,987
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,112) 39,351 16,315
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 34,038 (17,782) (83,897)
Deferred landlord contributions . . . . . . . . . . . . . . . . . . . . . . (5,949) (5,001) (399)
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,998 (5,021) 808
Net Cash Provided (Used) By Operating Activities. . . . . . . . . . . . . . (8,354) 101,876 (30,788)
Investing activities:
Acquisition of the Apparel Group of Crystal Brands, Inc.. . . . . . . . . . . (114,503)
Property, plant and equipment acquired. . . . . . . . . . . . . . . . . . . . (17,923) (22,578) (39,773)
Investment in Pyramid Sportswear. . . . . . . . . . . . . . . . . . . . . . . (6,950)
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 143
Net Cash Used By Investing Activities . . . . . . . . . . . . . . . . . . . (17,563) (22,435) (161,226)
Financing activities:
Proceeds from revolving line of credit. . . . . . . . . . . . . . . . . . . . 123,000 52,582 204,996
Payments on revolving line of credit and long-term borrowings . . . . . . . . (93,651) (134,302) (73,660)
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . 791 386 1,745
Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,065) (4,050) (4,007)
Net Cash Provided (Used) By Financing Activities. . . . . . . . . . . . . . 26,075 (85,384) 129,074
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . 158 (5,943) (62,940)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . 11,590 17,533 80,473
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,748 $ 11,590 $ 17,533
</TABLE>
See notes to consolidated financial statements.
F-4
<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-5
<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 1997 and 1995 represent the 52 weeks ended February
1, 1998 and January 28, 1996, 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 $90,999 (1997) and $90,151 (1996) 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 $11,358 and $8,615
in 1997 and 1996, 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 $12,798 and $18,747 in 1997 and 1996,
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".
F-6
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summary of Significant Accounting Policies (Continued)
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 totalled
$37,762 (1997), $19,427 (1996) and $21,136 (1995).
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:
1997 1996 1995
Weighted Average Common Shares Outstanding
for Basic Earnings Per Share 27,107,633 27,004,115 26,725,804
Impact of Dilutive Employee Stock Options 209,462 295,529
Total Shares for Diluted Earnings Per Share 27,107,633 27,213,577 27,021,333
Income Taxes
Income taxes consist of:
1997 1996 1995
Federal:
Current . . . . . . . . . . . . . . . $ 400 $(4,620) $(8,219)
Deferred. . . . . . . . . . . . . . . (42,985) 7,959 2,995
State, foreign and local:
Current . . . . . . . . . . . . . . . 562 2,450 1,936
Deferred. . . . . . . . . . . . . . . 777 255 368
$(41,246) $ 6,044 $(2,920)
Taxes paid were $1,155 (1997), $1,262 (1996) and $3,371 (1995). In
addition, PVH received an income tax refund of $16,987 in 1996.
F-7
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes (Continued)
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>
1997 1996
<S> <C> <C>
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . $(18,427) $(18,349)
Landlord contributions . . . . . . . . . . . . . . . . . . . . . 5,030 7,367
Facility and store closing,
restructuring and other expenses . . . . . . . . . . . . . . . 27,295 415
Employee compensation and benefits . . . . . . . . . . . . . . . 10,302 9,243
Tax loss and credit carryforwards. . . . . . . . . . . . . . . . 31,179 17,231
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,746 5,010
$ 63,125 $ 20,917
</TABLE>
A reconciliation of the statutory Federal income tax to the income tax
expense (benefit) is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory 35% federal tax. . . . . . . . . . . . . . . . . . $(37,739) $ 8,601 $ (919)
State, foreign and local income taxes,
net of Federal income tax benefit . . . . . . . . . . . . . 805 1,463 1,454
Income of Puerto Rico Subsidiaries(1). . . . . . . . . . . . (3,258) (3,757) (3,298)
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . (1,054) (263) (157)
Income tax expense (benefit) . . . . . . . . . . . . . . . . $(41,246) $ 6,044 $(2,920)
</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>
1997 1996
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,964 $ 16,670
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,216 13,208
Finished goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,354 207,544
$249,534 $237,422
</TABLE>
Inventories would have been approximately $12,000 and $13,000 higher than
reported at February 1, 1998 and February 2, 1997, 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)
Property, Plant and Equipment
Property, plant and equipment, at cost, are summarized as follows:
<TABLE>
<CAPTION>
Estimated
Useful
Lives 1997 1996
<S> <C> <C> <C>
Land. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,646 $ 1,774
Buildings and building improvements . . . . . . . . . . 15-40 years 24,932 37,778
Machinery and equipment, furniture
and fixtures and leasehold
improvements. . . . . . . . . . . . . . . . . . . . . 5-15 years 187,671 233,884
214,249 273,436
Less: Accumulated depreciation
and amortization . . . . . . . . . . . . . . . . 119,667 136,376
$ 94,582 $137,060
</TABLE>
Long-Term Debt
Long-term debt, exclusive of current portion, is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . $ 99,500 $ 40,000
7.75% Debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . 99,448 99,442
7.75% Senior Notes. . . . . . . . . . . . . . . . . . . . . . . . . . 39,429 49,286
Other debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670 670
239,047 189,398
Less: Long-term debt classified as
current debt . . . . . . . . . . . . . . . . . . . . . . . . 138,929
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,118 $189,398
</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.
PVH issued a series of Senior Notes due 1996-2002 with an average interest
rate of 7.75% to a group of investors on October 29, 1992. The average
interest rate on these Notes was increased in 1996 to 8.25%. The notes are
payable in seven equal annual installments which commenced November 1, 1996.
Interest is payable semi-annually.
PVH has a credit agreement which includes a revolving credit facility
under which the Company may, at its option, borrow and repay amounts within
certain limits. The credit agreement also includes a letter of credit
facility. The total amount available to PVH under each of the revolving
credit and the letter of credit facility is $250,000, provided, however, that
the aggregate maximum amount outstanding at any time under both facilities is
$400,000. All outstanding borrowings and letters of credit under the credit
agreement are due February 13, 1999. Interest on amounts borrowed under the
revolving credit facility is payable quarterly at a spread over LIBOR or the
F-9
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-Term Debt (Continued)
prime rate, at the borrower's option, with the spread based on PVH's credit
rating. A commitment fee of .25% is payable quarterly on the $250,000
revolving credit facility. The amount outstanding at February 1, 1998 and
February 2, 1997 under the letter of credit facility was $125,078 and $99,115,
respectively.
Both the 7.75% Senior Notes and the revolving credit facility contain
certain covenants which, due to the 1997 non-recurring charges, required PVH
to obtain amendments to the debt agreements. PVH plans to take advantage of
the favorable interest rate environment by issuing new long-term debt in the
first quarter of 1998, and expects to use the net proceeds to repay the 7.75%
Senior Notes and borrowings under the revolving credit facility. As a result,
PVH sought and received the necessary amendments through May 1, 1998, by which
time the new financings are expected to be in place. Since the amendments do
not extend through a full year, the long-term portion of the 7.75% Senior
Notes and all amounts due under the revolving credit facility have been shown
as "Long-term debt classified as current debt" in PVH's consolidated balance
sheet as of February 1, 1998.
The weighted average interest rate on outstanding borrowings under the
revolving credit facility at February 1, 1998 and February 2, 1997 was 6.4%
and 6.2%, respectively.
Interest paid was $20,784 (1997), $24,039 (1996) and $22,949 (1995).
Scheduled maturities of long-term debt, including current portion, for the
next five years are as follows: 1998-$9,857, 1999-$9,857, 2000-$9,857, 2001-
$9,857 and 2002-$9,858.
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").
F-10
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stockholders' Equity - (Continued)
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.
The following summarizes the assumptions used to estimate the fair value
of stock options granted in each year and certain proforma information:
1997 1996 1995
Risk-free interest rate 6.49% 6.61% 6.05%
Expected option life 7 Years 7 Years 7 Years
Expected volatility 26.0% 30.6% 30.6%
Expected dividends per share $ 0.15 $ 0.15 $ 0.15
Weighted average estimated fair
value per share of options granted $ 5.43 $ 5.29 $ 6.11
Proforma net income (loss) $(68,242) $17,396 $ (127)
Proforma basic and diluted net income
(loss) per share $ (2.52) $ 0.65 $(0.00)
As any options granted in the future will also be subject to the fair
value proforma calculations, the proforma adjustments for 1997, 1996 and 1995
may not be indicative of future years.
F-11
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stockholders' Equity - (Continued)
Other data with respect to stock options follows:
<TABLE>
<CAPTION>
Option Price Weighted Average
Shares Per Share Price Per Share
<S> <C> <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 1, 1998 and February 2, 1997,
options covering 650,479 and 645,091 shares were exercisable at a weighted
average price of $10.56 and $9.35, respectively. Stock options available for
grant at February 1, 1998 and February 2, 1997 amounted to 1,704,250 and
311,496 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.
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:
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,232
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,049
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,183
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,036
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,653
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 48,174
Total minimum lease payments . . . . . . . . . . . . . . . . $232,327
F-12
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Leases (Continued)
Rent expense, principally for real estate, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Minimum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $65,177 $67,914 $69,988
Percentage and other . . . . . . . . . . . . . . . . . . . . . . . . 11,139 11,166 11,807
$76,316 $79,080 $81,795
</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>
1997 1996 1995
<S> <C> <C> <C>
Defined Benefit Plans:
Service cost - benefits earned during the period. . . . . . . . . . . $ 2,004 $ 2,528 $2,145
Interest cost on projected benefit obligation . . . . . . . . . . . . 7,935 7,425 7,107
Actual gain on plan assets. . . . . . . . . . . . . . . . . . . . . . (19,772) (13,688) (19,533)
Net amortization and deferral of actuarial gains. . . . . . . . . . . 11,259 5,354 12,028
Net pension cost of defined benefit plans. . . . . . . . . . . . . . . 1,426 1,619 1,747
Multi-employer plans . . . . . . . . . . . . . . . . . . . . . . . . . 213 253 219
Total pension expense. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,639 $ 1,872 $1,966
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:
1997 1996 1995
Discount rate used in determining projected benefit obligation . . . . . 7.25% 8.00% 7.50%
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-13
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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>
1997 1996
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . $ 108,656 $ 91,379
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . $ 110,171 $ 93,373
Plan assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . $ 124,663 $ 110,830
Less: projected benefit obligation for services rendered to date . . . . . (116,622) (101,065)
Plan assets in excess of projected benefit obligation. . . . . . . . . . . 8,041 9,765
Unrecognized prior service cost. . . . . . . . . . . . . . . . . . . . . . 2,536 3,099
Unrecognized net actuarial gain. . . . . . . . . . . . . . . . . . . . . . (2,403) (3,665)
Unrecognized net asset at adoption date of FASB Statement No. 87 (238) (305)
Net pension asset recognized in the balance sheets . . . . . . . . . . . . $ 7,936 $ 8,894
</TABLE>
Plan assets in excess of projected benefit obligation at February 1, 1998
and February 2, 1997 are net of $4,264 and $3,729, 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 1, 1998 and
February 2, 1997, $8,309 and $7,450, 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 $1,959 (1997), $2,249 (1996) and $2,668 (1995). 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.
F-14
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Retirement and Benefit Plans - (Continued)
Net post-retirement benefit cost includes the following components:
1997 1996 1995
Service cost $ 389 $ 687 $ 466
Interest cost 2,403 2,166 2,128
Amortization of net loss 284 44 37
Amortization of transition obligation 273 273 273
$3,349 $3,170 $2,904
The following reconciles the plan's accumulated post-retirement benefit with
amounts recognized in the Company's balance sheets:
1997 1996
Accumulated post-retirement benefit obligation:
Retirees receiving benefits $27,389 $21,505
Fully eligible active plan participants 2,547 2,132
Active plan participants not eligible for benefits 4,171 5,503
34,107 29,140
Unrecognized transition obligation (4,097) (4,370)
Unrecognized net loss (8,689) (4,729)
Post-retirement liability recognized in the
balance sheets $21,321 $20,041
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 1, 1998 and February 2, 1997 was 7.25% and
8.0%, 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-15
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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>
1997 1996 1995
<S> <C> <C> <C>
Net Sales
Apparel. . . . . . . . . . . . . . . . . . . . . . . . . . $ 911,047 $ 897,370 $1,006,701
Footwear and Related Products. . . . . . . . . . . . . . . 438,960 462,223 457,427
Total Net Sales. . . . . . . . . . . . . . . . . . . . . . $1,350,007 $1,359,593 $1,464,128
Operating Income (Loss)
Apparel(1) . . . . . . . . . . . . . . . . . . . . . . . . $ (33,049) $ 30,021 $ 12,432
Footwear and Related Products(2) . . . . . . . . . . . . . (38,853) 32,888 21,026
Total Operating Income (Loss). . . . . . . . . . . . . . . (71,902) 62,909 33,458
Corporate Expenses. . . . . . . . . . . . . . . . . . . . . . (15,251) (15,171) (12,885)
Interest Expense, net . . . . . . . . . . . . . . . . . . . . (20,672) (23,164) (23,199)
Income (Loss) Before Taxes . . . . . . . . . . . . . . . . $ (107,825) $ 24,574 $ (2,626)
Identifiable Assets
Apparel. . . . . . . . . . . . . . . . . . . . . . . . . . $ 355,979 $ 381,274 $ 468,618
Footwear and Related Products. . . . . . . . . . . . . . . 152,518 143,631 165,390
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 151,962 132,531 115,047
$ 660,459 $ 657,436 $ 749,055
Depreciation and Amortization
Apparel. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,484 $ 16,105 $ 22,399
Footwear and Related Products. . . . . . . . . . . . . . . 6,561 5,780 7,074
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 8,255 7,553 4,267
$ 25,300 $ 29,438 $ 33,740
Identifiable Capital Expenditures
Apparel. . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,103 $ 4,269 $ 20,555
Footwear and Related Products. . . . . . . . . . . . . . . 3,957 6,650 7,281
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 5,863 11,659 11,937
$ 17,923 $ 22,578 $ 39,773
</TABLE>
(1) Operating income of the Apparel segment includes charges for facility and
store closing, restructuring and other expenses of $78,465 (1997) and
$25,000 (1995).
(2) Operating income of the Footwear and Related Products segment includes
charges for facility and store closing, restructuring and other expenses
of $54,235 (1997) and $2,000 (1995).
F-16
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Facility and Store Closing, Restructuring and Other Expenses
During 1997 and 1995, the Company recorded pre-tax charges of $132,700 and
$27,000 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
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:
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
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.
F-17
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 1997, 1996 and 1995, the Company purchased approximately $26,500,
$35,000 and $45,000, respectively, of products from TAL Apparel Limited and
certain related companies.
The Company is a party to certain litigation which, in management's
judgement based in part on the opinion of legal counsel, will not have a
material adverse effect on the Company's financial position.
During 1997, 1996 and 1995, the Company paid a $0.0375 per share cash
dividend each quarter on its common stock.
Certain items in 1996 and 1995 have been reclassified to present them on a
basis consistent with 1997.
F-18
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1997 1996 1997(1) 1996 1997 1996 1997(2) 1996(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . $285,925 $273,660 $313,458 $313,807 $413,643 $391,245 $336,981 $380,881
Gross profit . . . . . . . . . . . 98,968 93,097 94,188 105,325 139,766 129,709 79,120 120,945
Net income (loss). . . . . . . . . (4,540) (6,554) (33,285) 2,126 14,552 15,035 (43,306) 7,923
Net income (loss) per share:
Basic(4) . . . . . . . . . . . . (0.17) (0.24) (1.23) 0.08 0.54 0.56 (1.59) 0.29
Diluted. . . . . . . . . . . . . (0.17) (0.24) (1.23) 0.08 0.53 0.55 (1.59) 0.29
Price range of common stock
per share
High. . . . . . . . . . . . . 14 5/8 13 3/8 15 3/4 14 1/2 15 7/8 11 3/4 14 1/2 15 1/8
Low . . . . . . . . . . . . . 11 1/2 9 5/8 12 3/8 11 13 1/2 10 3/8 11 1/2 10 3/4
</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) 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.
(3) The fourth quarter of 1996 includes 14 weeks of operations.
(4) Due to averaging the quarterly shares outstanding when computing basic
earnings per share, basic earnings per share totalled for the four
quarters of 1997 does not agree with the annual amount.
F-19
<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.
E&Y SIGNATURE STAMP
New York, New York
March 10, 1998
F-20
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
TEN-YEAR FINANCIAL SUMMARY
(In thousands, except per share data, percents and ratios)
<TABLE>
<CAPTION>
1997(1) 1996(2) 1995(3) 1994(4) 1993
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net sales
Apparel. . . . . . . . . . . . . . . . . . . . . . . $ 911,047 $ 897,370 $1,006,701 $ 812,993 $ 757,452
Footwear and Related Products. . . . . . . . . . . . 438,960 462,223 457,427 442,472 394,942
1,350,007 1,359,593 1,464,128 1,255,466 1,152,394
Cost of goods sold and expenses. . . . . . . . . . . . 1,437,160 1,311,855 1,443,555 1,205,764 1,072,083
Interest expense, net. . . . . . . . . . . . . . . . . 20,672 23,164 23,199 12,793 16,679
Income (loss) before taxes . . . . . . . . . . . . . . (107,825) 24,574 (2,626) 36,909 63,632
Income tax expense (benefit) . . . . . . . . . . . . . (41,246) 6,044 (2,920) 6,894 20,380
Income (loss) from continuing operations . . . . . . . (66,579) 18,530 294 30,015 43,252
Loss from discontinued operations. . . . . . . . . . .
Extraordinary loss, net of tax . . . . . . . . . . . . (11,394)
Net income (loss) . . . . . . . . . . . . . . . . $ (66,579) $ 18,530 $ 294 $ 30,015 $ 31,858
Per Share Statistics(5)
Basic Earnings Per Share:
Continuing operations. . . . . . . . . . . . . . . . . $ (2.46) $ 0.69 $ 0.01 $ 1.13 $ 1.66
Discontinued operations. . . . . . . . . . . . . . . .
Extraordinary loss . . . . . . . . . . . . . . . . . . (0.44)
Net income (loss) . . . . . . . . . . . . . . . . $ (2.46) $ 0.69 $ 0.01 $ 1.13 $ 1.22
Diluted Earnings Per Share:
Continuing operations. . . . . . . . . . . . . . . . . $ (2.46) $ 0.68 $ 0.01 $ 1.11 $ 1.60
Discontinued operations. . . . . . . . . . . . . . . .
Extraordinary loss . . . . . . . . . . . . . . . . . . (0.42)
Net income (loss) . . . . . . . . . . . . . . . . $ (2.46) $ 0.68 $ 0.01 $ 1.11 $ 1.18
Dividends paid per share . . . . . . . . . . . . . . . $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.15
Stockholders' equity per share.. . . . . . . . . . . . 8.11 10.73 10.20 10.35 9.33
Financial Position
Current assets . . . . . . . . . . . . . . . . . . . . $ 385,018 $ 362,958 $ 444,664 $ 429,670 $ 418,702
Current liabilities. . . . . . . . . . . . . . . . . . 274,221 122,266 183,126 114,033 109,156
Working capital. . . . . . . . . . . . . . . . . . . . 110,797 240,692 261,538 315,637 309,546
Total assets . . . . . . . . . . . . . . . . . . . . . 660,459 657,436 749,055 596,284 554,771
Long-term debt . . . . . . . . . . . . . . . . . . . . 241,004 189,398 229,548 169,679 169,934
Convertible redeemable preferred stock . . . . . . . .
Stockholders' equity . . . . . . . . . . . . . . . . . 220,305 290,158 275,292 275,460 246,799
Other Statistics
Total debt to total capital (6). . . . . . . . . . . . 53.0% 43.1% 52.3% 38.2% 40.8%
Market value of stockholders' equity . . . . . . . . . $328,000 $ 365,000 $ 270,000 $ 426,000 $ 949,000
Current ratio. . . . . . . . . . . . . . . . . . . . . 1.4 3.0 2.4 3.8 3.8
Average shares outstanding . . . . . . . . . . . . . . 27,108 27,004 26,726 26,563 26,142
</TABLE>
(1) 1997 includes pre-tax charges of $132,700 for facility and store
closing, restructuring and other expenses.
(2) 1996 and 1990 include 53 weeks of operations.
(3) 1995 includes the operations of Izod and Gant from date of acquisition,
February 17, 1995, and includes pre-tax charges of $27,000 for
facility and store closing, restructuring and other expenses.
(4) 1994 includes pre-tax charges of $7,000 for restructuring and other
expenses.
(5) The earnings per share amounts for years prior to 1997 have been restated
to comply with FASB Statement No. 128, "Earnings Per Share."
(6) Total capital equals interest-bearing debt, preferred stock and
stockholders' equity.
F-21
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
TEN-YEAR FINANCIAL SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
1992 1991 1990(2) 1989 1988
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net sales
Apparel. . . . . . . . . . . . . . . . . . . . . . . $ 709,361 $596,383 $536,352 $493,395 $460,342
Footwear and Related Products. . . . . . . . . . . . 333,204 307,717 269,963 239,541 180,696
1,042,565 904,100 806,315 732,936 641,038
Cost of goods sold and expenses. . . . . . . . . . . . 972,357 843,367 752,252 682,687 597,543
Interest expense, net. . . . . . . . . . . . . . . . . 15,727 16,686 18,884 17,555 16,109
Income before taxes. . . . . . . . . . . . . . . . . . 54,481 44,047 35,179 32,694 27,386
Income tax expense . . . . . . . . . . . . . . . . . . 16,600 12,910 8,795 8,502 6,565
Income from continuing operations. . . . . . . . . . . 37,881 31,137 26,384 24,192 20,821
Loss from discontinued operations. . . . . . . . . . . (152)
Extraordinary loss, net of tax . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . $ 37,881 $ 31,137 $ 26,384 $ 24,192 $ 20,669
Per Share Statistics(5)
Basic Earnings Per Share:
Continuing operations. . . . . . . . . . . . . . . . . $ 1.50 $ 1.24 $ 1.00 $ 0.88 $ 0.70
Discontinued operations. . . . . . . . . . . . . . . . (0.01)
Extraordinary loss . . . . . . . . . . . . . . . . . . -
Net income (loss). . . . . . . . . . . . . . . . . . . $ 1.50 $ 1.24 $ 1.00 $ 0.88 $ 0.69
Diluted Earnings Per Share:
Continuing operations. . . . . . . . . . . . . . . . . $ 1.42 $ 1.15 $ 0.95 $ 0.84 $ 0.68
Discontinued operations. . . . . . . . . . . . . . . . (0.01)
Extraordinary loss . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . $ 1.42 $ 1.15 $ 0.95 $ 0.84 $ 0.67
Dividends paid per share . . . . . . . . . . . . . . . $ 0.15 $ 0.1425 $ 0.14 $ 0.14 $ 0.14
Stockholders' equity per share.. . . . . . . . . . . . 8.14 4.52 3.38 2.53 1.79
Financial Position
Current assets . . . . . . . . . . . . . . . . . . . . $ 410,522 $ 303,143 $ 285,315 $ 266,867 $ 265,039
Current liabilities. . . . . . . . . . . . . . . . . . 115,208 102,976 90,748 84,190 88,191
Working capital. . . . . . . . . . . . . . . . . . . . 295,314 200,167 194,567 182,677 176,848
Total assets . . . . . . . . . . . . . . . . . . . . . 517,362 398,969 376,790 333,108 323,133
Long-term debt . . . . . . . . . . . . . . . . . . . . 170,235 121,455 140,259 118,776 116,400
Convertible redeemable preferred stock . . . . . . . . 72,800 72,800 72,800 72,800
Stockholders' equity . . . . . . . . . . . . . . . . . 211,413 84,903 62,324 46,085 32,476
Other Statistics
Total debt to total capital (6). . . . . . . . . . . . 46.8% 46.0% 53.2% 52.6% 55.1%
Market value of stockholders' equity . . . . . . . . . $ 753,000 $392,000 $173,000 $132,000 $127,000
Current ratio. . . . . . . . . . . . . . . . . . . . . 3.6 2.9 3.1 3.2 3.0
Average shares outstanding . . . . . . . . . . . . . . 23,766 18,552 18,260 18,140 18,090
</TABLE>
(1) 1997 includes pre-tax charges of $132,700 for facility and store closing,
restructuring and other expenses.
(2) 1996 and 1990 include 53 weeks of operations.
(3) 1995 includes the operations of Izod and Gant from date of acquisition,
February 17, 1995, and includes pre-tax charges of $27,000 for
facility and store closing, restructuring and other expenses.
(4) 1994 includes pre-tax charges of $7,000 for restructuring and other
expenses.
(5) The earnings per share amounts for years prior to 1997 have been restated
to comply with FASB Statement No. 128, "Earnings Per Share."
(6) Total capital equals interest-bearing debt, preferred stock and
stockholders' equity.
F-22
<PAGE>
SCHEDULE II
PHILLIPS-VAN HEUSEN CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expense Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
Year Ended February 1, 1998
Deducted from asset accounts:
Allowance for doubtful
accounts. . . . . . . . . . . . $3,401 $ 492(a) $ 202(b) $1,184(c) $2,911
Year Ended February 2, 1997
Deducted from asset accounts:
Allowance for doubtful
accounts. . . . . . . . . . . . $5,363 $1,207(a) $ 958(b) $4,127(c) $3,401
Year Ended January 28, 1996
Deducted from asset accounts:
Allowance for doubtful
accounts. . . . . . . . . . . . $1,617 $ 913(a) $3,331(d) $ 498(c) $5,363
</TABLE>
(a) Provisions for doubtful accounts.
(b) Recoveries of doubtful accounts previously written off.
(c) Primarily uncollectible accounts charged against the allowance provided
therefor.
(d) Primarily reserves acquired in connection with the acquisition of the Izod
and Gant businesses from Crystal Brands.
F-23
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following table lists all of the subsidiaries of the Company and the
jurisdiction of incorporation of each subsidiary. Each subsidiary does business
under its corporate name indicated in the table.
Name State or Other Jurisdiction of Incorporation
G. H. Bass Franchises Inc. Delaware
G. H. Bass Caribbean, Inc. Delaware
Caribe M&I Ltd. Cayman Islands
GHB (Far East) Limited Hong Kong
Phillips-Van Heusen (Far East) Ltd. Hong Kong
Confecciones Imperio, S.A. Costa Rica
Camisas Modernas, S.A. Guatemala
G. H. Bass Comercio
Exportacacao Ltda. Brazil
PVH Retail Corp. Delaware
The IZOD Gant Corporation Pennsylvania
Phillips-Van Heusen Puerto Rico LLC Delaware
BassNet, Inc. Delaware
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in
(i) Post-Effective Amendment No. 2 to the Registration Statement (Form S-8,
No. 2-73803), which relates to the Phillips-Van Heusen Corporation Employee
Savings and Retirement Plan,
(ii) Registration Statement (Form S-8, No. 33-50841) and Registration
Statement (Form S-8, No. 33-59602), each of which relate to the Phillips-Van
Heusen Corporation Associates Investment Plan for Residents of the
Commonwealth of Puerto Rico,
(iii) Registration Statement (Form S-8, No. 33-59101), which relates to the
Voluntary Investment Plan of Phillips-Van Heusen Corporation (Crystal Brands
Division),
(iv) Post-Effective Amendment No. 4 to Registration Statement (Form S-8, No.
2-72959), Post Effective Amendment No. 6 to Registration Statement (Form S-8,
No. 2-64564), and Post Effective Amendment No. 13 to Registration Statement
(Form S-8, No. 2-47910), each of which relate to the 1973 Employee's Stock
Option Plan of Phillips-Van Heusen Corporation, and
(v) Registration Statement (Form S-8, No. 33-38698), Post-Effective Amendment
No. 1 to Registration Statement (Form S-8, No. 33-24057) and Registration
Statement (Form S-8, No. 33-60793), each of which relate to the Phillips-Van
Heusen Corporation 1987 Stock Option Plan,
(vi) Registration Statement (Form S-8, No. 333-29765) which relates to the
Phillips-Van Heusen Corporation 1997 Stock Option Plan.
of Phillips-Van Heusen Corporation and in the related Prospectuses of our report
dated March 10, 1998, with respect to the consolidated financial statements and
schedules of Phillips-Van Heusen Corporation included in this Form 10-K for the
year ended February 1, 1998.
Our audits also included the financial statement schedule of Phillips-Van Heusen
Corporation listed in Item 14(a)(2). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
April 14, 1998
SEVENTH AMENDMENT
SEVENTH AMENDMENT, dated as of January 30, 1998 (this
"Amendment"), among PHILLIPS-VAN HEUSEN CORPORATION (the
"Borrower"), the financial institutions party to the Credit
Agreement referred to below (the "Banks"), and BANKERS TRUST
COMPANY, as agent (in such capacity, the "Agent") for the Banks.
All capitalized terms used herein and not otherwise defined shall
have the meanings specified in the Credit Agreement referred to
below.
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Agent are
parties to a Credit Agreement, dated as of December 16, 1993 (as
modified, supplemented or amended prior to the date hereof, the
"Credit Agreement");
WHEREAS, subject to the terms and conditions hereof,
the Banks and the Borrower have agreed to amend the Credit
Agreement as set forth herein;
NOW, THEREFORE, in consideration of the mutual premises
contained herein and other valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties
hereto hereby agree as follows:
1. Section 2.01(b)(ii) of the Credit Agreement is
hereby amended by deleting the reference to "$8,000,000" therein
and by inserting in lieu thereof a reference to "$14,000,000".
2. Section 8.05 of the Credit Agreement is hereby
amended by deleting the ratio "3.25:1.00" appearing opposite the
date of April 30, 1998 in the table therein and inserting in lieu
thereof the ratio "2.75:1.00".
3. Section 8.07 of the Credit Agreement is hereby
amended by inserting at the end thereof the following proviso:
"; provided, that notwithstanding the
foregoing, at any time on and after February
2, 1998 and on or before May 3, 1998, the
Borrower will not permit such ratio to exceed
0.62 to 1."
4. Section 10 of the Credit Agreement is hereby
amended by (a) deleting the definition of "EBIT" in its entirety
and (b) inserting the following new definition in appropriate
alphabetical order:
<PAGE>
"EBIT" shall mean, for any period, the sum of (i)
Consolidated Net Income of the Borrower for such period,
(ii) provisions for taxes based on income or profits to the
extent such income or profits were included in computing
Consolidated Net Income and (iii) consolidated interest
expense (including amortization of original issue discount
and non-cash interest payments or accruals and the interest
component of capitalized lease obligations), net of interest
income theretofore deducted from earnings in computing
Consolidated Net Income for such period; provided, however,
that EBIT shall be determined without giving effect to (a)
the Borrower's $55,000,000 pre-tax restructuring charge
reflected in its financial statements for the fiscal quarter
ending on or about July 31, 1997, or any subsequent reversal
of all or part of such restructuring charge, (b) the
Borrower's $75,000,000 pre-tax restructuring charge
reflected in its financial statements for the fiscal quarter
ending on or about January 31, 1998, or any subsequent
reversal of all or part of such restructuring charge, and
(c) costs and expenses of up to $3,000,000 incurred by the
Borrower in the fiscal quarter ending on or about April 30,
1998 in connection with updating and modifying its computer
systems to address the "Year 2000 Problem".
5. Section 10 of the Credit Agreement is hereby
further amended by deleting the reference to "$8,000,000" in
clause (i)(x) of the provision in the definition of "Standby
Letter of Credit" and by inserting in lieu thereof a reference to
"$14,000,000".
6. This Amendment shall become effective on the date
(the "Amendment Effective Date") on which (i) the Borrower and
the Required Banks shall have executed and delivered a
counterpart of this Amendment and (ii) the Borrower and the
holders of the 1992 Notes shall have entered into a waiver,
consent or amendment in respect of the 1992 Note Purchase
Agreements, which waiver, consent or amendment shall be in form
and substance reasonably satisfactory to the Agent and shall have
become effective in accordance with the terms of the 1992 Note
Purchase Agreements.
7. Except as expressly amended hereby, the terms and
conditions of the Credit Agreement shall remain unchanged and in
full force and effect.
8. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall
be an original, but all of which shall together constitute one
and the same instrument.
2
<PAGE>
9. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW
YORK.
* * * * *
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused
their duly authorized officers to execute and deliver this
Amendment as of the date first above written.
PHILLIPS-VAN HEUSEN CORPORATION
By
Title:
BANKERS TRUST COMPANY,
Individually, and as Agent
By
Title:
THE CHASE MANHATTAN BANK
By
Title:
CITIBANK, N.A.
By
Title:
4
<PAGE>
THE BANK OF NEW YORK
By
Title:
CHEMICAL BANK
By
Title:
BANK BOSTON
By
Title:
CIBC, INC.
By
Title:
UNION BANK
By
Title:
5
PHILLIPS-VAN HEUSEN CORPORATION
___________________________________
THIRD AMENDMENT AGREEMENT
Dated as of February 1, 1998
to
NOTE AGREEMENTS
Dated as of October 1, 1992
Re: $55,000,000 7.85% Series A Senior Notes
Due November 1, 2002
and
$8,000,000 7.02% Series B Senior Notes
Due November 1, 1999
and
$6,000,000 7.75% Series C Senior Notes
Due November 1, 2002
<PAGE>
PHILLIPS-VAN HEUSEN CORPORATION
1290 Avenue of the Americas-11th Floor
New York, New York 10104
THIRD AMENDMENT AGREEMENT
TO
NOTE AGREEMENTS
DATED AS OF OCTOBER 1, 1992
Re: $55,000,000 7.85% Series A Senior Notes
Due November 1, 2002
and
$8,000,000 7.02% Series B Senior Notes
Due November 1, 1999
and
$6,000,000 7.75% Series C Senior Notes
Due November 1, 2002
Dated as of
February 1, 1998
To the Holders as
defined hereinbelow
Ladies and Gentlemen:
Reference is made to the separate Note Agreements each dated as of October
1, 1992 (the "Outstanding Note Agreements") between PHILLIPS-VAN HEUSEN
CORPORATION, a Delaware corporation (the "Company"), and each of the Purchasers
named on Schedule I thereto (the "Purchasers") as amended pursuant to that
certain First Amendment Agreement dated as of June 24, 1996 and that certain
Second Amendment Agreement dated as of July 15, 1997, pursuant to which the
Company issued and sold (i) $55,000,000 original aggregate principal amount of
its 7.85% Series A Senior Notes due November 1, 2002 (the "Series A Notes"),
(ii) $8,000,000 original aggregate principal amount of its 7.02% Series B
Senior Notes due November 1, 1999 (the "Series B Notes") and (iii) $6,000,000
original aggregate principal amount of its 7.75% Series C Senior Notes due
November 1, 2002 (the "Series C Notes"). The Purchasers or transferees of
such Purchasers are hereinafter collectively referred to as the "Holders."
The Series A Notes, Series B Notes and Series C Notes are hereinafter
collectively referred to as the "Outstanding Notes."
The Company and the Holders now desire to amend the Outstanding Note
Agreements in the respects, but only in the respects, hereinafter set forth.
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
Now, therefore, the Company and the Holders, in consideration of good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, do hereby agree as follows:
SECTION 1. AMENDMENTS TO THE OUTSTANDING NOTE AGREEMENTS.
Section 1.1. Sections 2.2 and 2.3 of the Existing Note Agreements are
hereby amended to read in their entirety as follows:
Section 2.2. Prepayment with Premium. (a) Subject to Sec. 2.2(b),
in addition to the payments required by Sec. 2.1, upon compliance with Sec.
2.3 the Company shall have the privilege, at any time and from time to
time, of prepaying the outstanding Notes, either in whole or in part (but
if in part then in a minimum aggregate principal amount of $1,000,000) by
payment of the principal amount of the Notes, or portion thereof to be
prepaid, and accrued interest thereon to the date of such prepayment,
together with a premium equal to the Make-Whole Amount, determined for the
date of prepayment as of the date three Business Days prior to the date of
such prepayment pursuant to this Sec. 2.2(a). Any prepayment of less than
all of the outstanding Notes pursuant to this Sec. 2.2(a) shall be applied
in accordance with Sec. 2.1(e).
(b) In addition to the payments required by Sec. 2.1, the Company
agrees that within five (5) days of completion of any public or Rule 144A
debt offering by the Company, the Company shall prepay and apply and there
shall become due and payable on the principal indebtedness evidenced by the
Notes an amount equal to 100% of the aggregate outstanding principal amount
thereof together with accrued and unpaid interest thereon to the date of
such prepayment, and in the case of any such prepayment on or prior to July
31, 1998, together with a premium equal to the Modified Make-Whole Amount
and in the case of any such prepayment thereafter, together with a premium
equal to the Make-Whole Amount, in each case, determined for the date of
such prepayment as of the date two Business Days prior to the date of such
prepayment pursuant to this Sec. 2.2(b).
Section 2.3. Notice of Prepayments. The Company will give notice
of any prepayment of the Notes pursuant to Sec. 2.2 to each holder thereof
not less than 30 days nor more than 60 days in the case of Sec. 2.2(a), and
not less than 2 Business Days or more than 30 days in the case of Sec.
2.2(b), before the date fixed for such prepayment specifying (i) such date,
(ii) the principal amount of the holder's Notes to be prepaid on such date,
(iii) that a premium may be payable, (iv) the date when such premium will
be calculated, (v) the estimated premium, and (vi) the accrued interest
applicable to the prepayment. Such notice of prepayment shall also certify
all facts, if any, which are conditions precedent to any such prepayment.
Notice of prepayment having been so given, the aggregate principal amount
of the Notes specified in such notice, together with accrued interest
thereon and the premium, if any, payable with respect thereto shall become
due and payable on the prepayment date specified in said notice. Not later
than two Business Days prior to the prepayment date specified in such
notice, the Company shall provide each holder of a Note written notice of
the premium, if any, payable in connection with such prepayment and,
whether or not any premium is payable, a reasonably detailed computation of
the Make-Whole Amount or the Modified Make-Whole Amount, as the case may
be.
2
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
Section 1.2. Section 5.5 of the Existing Note Agreements is hereby amended
to read in its entirety as follows:
Section 5.5. Consolidated Net Worth. The Company will at all times
keep and maintain Consolidated Net Worth at an amount not less than the sum
of:
(i) $150,000,000;
plus
(ii) 50% of the amount of any positive Consolidated Net Income
for each fiscal year of the Company beginning with the fiscal year ending
January 31, 1993 (except that in the case of the fiscal year ending January
31, 1993, the period of calculation shall begin May 3, 1992) computed on a
cumulative basis for the entire period beginning May 3, 1992 to and
including the last day of the fiscal year immediately preceding the date of
any determination hereunder (it being agreed that for the purposes of this
clause (ii) of this Sec. 5.5, (a) Consolidated Net Income shall be deemed
to be zero for any fiscal year (or the three fiscal-quarter period in the
case of the fiscal year ending January 31, 1993) in which Consolidated Net
Income was a deficit figure, and (b) the after tax restructuring charge in
the amount of $48,000,000 taken by the Company in the fourth quarter of the
fiscal year ended February 1, 1998 shall be added back to Consolidated Net
Income to the extent deducted therefrom).
Section 1.3. Section 5.6 of the Existing Note Agreements is hereby amended
to read in its entirety as follows:
Section 5.6. Limitations on Debt; Interest Charges Coverage Ratio.
(a) The Company will not, and will not permit any Restricted Subsidiary to,
create, assume or incur or in any manner be or become liable in respect of
any Current Debt or Funded Debt, except:
(1) Funded Debt evidenced by the Notes;
(2) Funded Debt of the Company and its Restricted Subsidiaries
outstanding as of October 1, 1992 and reflected on Annex B to Exhibit B
hereto;
(3) additional Funded Debt of the Company and its Restricted
Subsidiaries incurred subsequent to the First Amendment Agreement Closing
Date;
(4) Current Debt of the Company or any Restricted Subsidiary;
provided, however, that during the twelve-month period immediately
preceding the date of any determination hereunder, there shall have been a
period of thirty consecutive days during which the average daily amount of
Current Debt of the Company and all Restricted Subsidiaries shall not
exceed an amount equal to $25,000,000 plus the amount of Funded Debt which
could have been incurred (in addition to any Funded Debt then outstanding)
on each such day by the Company and all Restricted Subsidiaries pursuant to
Sec. 5.6(a)(3) and Sec. 5.6(b)(3); and
3
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
(5) Current Debt or Funded Debt of a Restricted Subsidiary to the
Company or to a Wholly-owned Restricted Subsidiary.
(b) In addition to the restrictions contained in Sec. 5.6(a), the Company
shall not:
(1) permit Basket Obligations to exceed 15% of Consolidated Net
Worth;
(2) create, assume or incur or in any manner become liable in
respect of any Debt secured by a Lien described in Sec. 5.7(viii), if,
after giving effect thereto, the sum of (i) Basket Obligations plus (ii)
all Debt secured by Liens incurred pursuant to Sec. 5.7(a)(vii), would
exceed 15% of Consolidated Net Worth; and
(3) permit the ratio of Funded Debt to Consolidated Total
Capitalization for the respective periods set forth below to exceed the
ratio set forth opposite such period:
PERIOD RATIO
From the date hereof through and including .55 to 1
the fiscal year ending February 1, 1998
From February 1, 1998 to and including .60 to 1
August 1, 1998
and at all times thereafter: .45 to 1
(c) Any corporation which becomes a Restricted Subsidiary after the
date hereof shall for all purposes of this Sec. 5.6 be deemed to have
created, assumed or incurred at the time it becomes a Restricted Subsidiary
all Debt of such corporation existing immediately after it becomes a
Restricted Subsidiary.
(d) The Company will not permit the ratio of Net Income Available
for Interest Charges to Interest Charges for the period of four consecutive
fiscal quarters ending on or about the end of each month specified below to
be less than the ratio set forth opposite such month:
PERIOD RATIO
April 1996 1.25x
July 1996 1.25x
October 1996 1.30x
February 1997 1.40x
April 1997 1.70x
July 1997 1.70x
October 1997 2.00x
January 1998 2.00x
April 1998 1.50x
July 1998 1.50x
October 1998 and each
April, July, October and
January thereafter 2.50x
4
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
Section 1.4. Section 8.1 of the Outstanding Note Agreements shall be and
is hereby amended as follows:
a. The definition of "Reinvestment Rate" included in the definition
of "Make-Whole Amount" is hereby amended to read in its entirety as
follows:
"Reinvestment Rate" shall mean .50%, plus the yield
to maturity of the United States Treasury obligations
with a maturity (as reported on the applicable
Government PX Screen on the Bloomberg Financial Markets
Services Screens (or such other display as may replace
the Government PX Screen on Bloomberg Financial Markets
Services Screens) not more than three Business Days
immediately preceding the payment date) most nearly
equal to the remaining Weighted Average Life to Maturity
of the principal being prepaid (taking into account the
application of such prepayment required by Sec. 2.1).
If such rate shall not have been so reported on the
applicable Government PX Screen on the Bloomberg
Financial Markets Services Screens (or its replacement),
the Reinvestment Rate in respect of such payment date
shall mean the mean of the yields to maturity of United
States Treasury obligations (as compiled by and
published in the statistical release designated
"H.15(519)" or its successor publication for each of the
two weeks immediately preceding the payment date) with
a constant maturity most nearly equal to the Weighted
Average Life to Maturity of the principal being prepaid
(taking into account the application of such prepayment
required by Sec. 2.1). If no maturity exactly
corresponding to the Weighted Average Life to Maturity
shall appear therein, yields for the next longer and the
next shorter published maturities shall be calculated
pursuant to the foregoing sentence and the Reinvestment
Rate shall be interpolated from such yields on a
straight-line basis (rounding to the nearest month). If
such rates shall not have been so published in
statistical release H.15(519) (or its successor
publication), the Reinvestment Rate in respect of such
determination date shall be calculated pursuant to the
next preceding sentence on the basis of the average of
the respective averages of the secondary market ask
rates, as of approximately 3:30 P.M., New York City
time, on the last Business Days of each of the two weeks
preceding the payment date, for the actively traded U.S.
Treasury security or securities with a maturity or
maturities most closely corresponding to the remaining
Weighted Average Life to Maturity, as reported by three
primary United States Government securities dealers in
New York City of national standing selected in good
faith by the Company.
5
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
b. The following definition of "Modified Make-Whole Amount" is
hereby inserted in alphabetical order in Section 8.1:
"Modified Make-Whole Amount" shall mean the
"Make-Whole Amount" determined by (a) substituting
"1.00%" for ".50%" in the definition of "Reinvestment
Rate", (b) using the expressed maturity dates of the
Notes and prepayments required pursuant to Sec. 2.1,
notwithstanding the mandatory prepayment pursuant to
Sec. 2.2(b) and (c) using the respective rates of
interest applicable to each series of Notes as set forth
in subparagraphs (a), (b) and (c) of Sec. 1.1, without
regard to any Adjusted Coupon Rates.
c. The definition of "Net Income Available for Interest Charges" is
hereby amended to read in its entirety as follows:
"Net Income Available for Interest Charges" for any
period shall mean the sum of (i) Consolidated Net Income
during such period plus (to the extent deducted in
determining Consolidated Net Income for such period),
(ii) all provisions for any Federal, state or other
income taxes made by the Company and its Restricted
Subsidiaries during such period, (iii) the one-time
restructuring charges of $55,000,000 taken in the second
quarter of the fiscal year ended February 1, 1998 and
$75,000,000 taken in the fourth quarter of the fiscal
year ended February 1, 1998, (iv) Interest Charges of
the Company and its Restricted Subsidiaries during such
period and (v) all expenses incurred by the Company and
its Restricted Subsidiaries in connection with
addressing year 2000 computer compliance in an amount
not to exceed $15,000,000 in the aggregate.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Section 2.1. To induce the Holders to execute and deliver this Third
Amendment Agreement, the Company represents and warrants (which representations
and warranties shall survive the execution and delivery of this Third Amendment
Agreement) to the Holders, as true and correct as of the date of execution and
delivery of this Third Amendment Agreement, that
(a) the Company and each Restricted Subsidiary is a corporation duly
incorporated, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation;
(b) this Third Amendment Agreement has been duly authorized,
executed and delivered by it and this Third Amendment Agreement constitutes
the legal, valid and binding obligation, contract and agreement of the
Company enforceable against it in accordance with its terms;
(c) each of the Outstanding Note Agreements and the Outstanding
Notes, as amended by this Third Amendment Agreement, constitute the legal,
valid and binding obligations, contracts and agreements of the Company
enforceable against it in accordance with their respective terms;
6
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
(d) the execution, delivery and performance by the Company of this
Third Amendment Agreement (i) has been duly authorized by all requisite
corporate action and, if required, shareholder action, (ii) does not
require the consent or approval of any governmental or regulatory body or
agency, and (iii) will not (A) violate or cause a default under (1) any
provision of law, statute, rule or regulation or its certificate of
incorporation or bylaws, (2) any order of any court or any rule, regulation
or order of any other agency or government binding upon it, or (3) any
provision of any material indenture, agreement or other instrument to which
it is a party or by which its properties or assets are or may be bound, or
(B) result in a breach or constitute (alone or with due notice or lapse of
time or both) a default under any indenture, agreement or other instrument
referred to in clause (iii)(A)(3) of this Sec. 2.1(d);
(e) as of the date hereof after giving effect to this Third
Amendment Agreement, no Default or Event of Default has occurred which is
continuing; and
(f) no consents or approvals are necessary from any other holder of
any Indebtedness of the Company to give effect to this Third Amendment
Agreement.
SECTION 3. CONDITIONS PRECEDENT.
Section 3.1. This Third Amendment Agreement shall not become effective
until, and shall become effective when, each and every one of the following
conditions shall have been satisfied:
(a) executed counterparts of this Third Amendment Agreement, duly
executed by the Company and the holders of at least 100% of the outstanding
principal amount of the Outstanding Notes, shall have been delivered to the
Holders;
(b) the representations and warranties of the Company set forth in
Sec. 2 hereof are true and correct as of the date of execution and delivery
of this Third Amendment Agreement; and
(c) the Company shall have paid the reasonable fees and expenses of
Chapman and Cutler, counsel to the Holders, in connection with the
negotiation, preparation, approval, execution and delivery of this Third
Amendment Agreement as required by Sec. 9.4 of the Outstanding Note
Agreements.
Upon receipt of all of the foregoing, this Third Amendment Agreement shall
become effective.
SECTION 4. MISCELLANEOUS.
Section 4.1. This Third Amendment Agreement shall be construed in
connection with and as part of each of the Outstanding Note Agreements, and all
terms, conditions and covenants contained in each of the Outstanding Note
Agreements shall be and remain in full force and effect.
Section 4.2. Any and all notices, requests, certificates and other
instruments executed and delivered after the execution and delivery of this
Third Amendment Agreement may refer to the Outstanding Note Agreements
without making specific reference to this Third Amendment Agreement but
nevertheless all such references shall include this Third Amendment
Agreement unless the context otherwise requires.
7
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
Section 4.3. The descriptive headings of the various Sections or parts of
this Third Amendment Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
Section 4.4. This Third Amendment Agreement shall be governed by and
construed in accordance with New York law.
Section 4.5. This Third Amendment Agreement shall be binding upon the
Company, the Holders and their respective successors and assigns.
8
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
The execution hereof by you shall constitute a contract between us for the
uses and purposes hereinabove set forth, and this Third Amendment Agreement to
each of the Outstanding Note Agreements may be executed in any number of
counterparts, each executed counterpart constituting an original, but all
together only one agreement.
PHILLIPS-VAN HEUSEN CORPORATION
By
Its
9
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
The execution by each of the following Holders shall constitute its
acceptance of the Third Amendment Agreement and its confirmation that it holds
the Outstanding Notes set opposite its name as of the date of its execution and
delivery hereof.
Accepted as of February 1, 1998:
OUTSTANDING NOTES
THE EQUITABLE LIFE ASSURANCE SOCIETY $8,571,429.81 Series A Notes
OF THE UNITED STATES $4,285,714.91 Series A Notes
$4,000,000 Series B Notes
$6,000,000 Series C Notes
By________________________________
Its
UNUM LIFE INSURANCE COMPANY OF $14,285,716.36 Series A Notes
AMERICA
By________________________________
Its
NATIONWIDE LIFE INSURANCE $5,714,285.71 Series A Notes
COMPANY
By________________________________
Its
10
<PAGE>
Phillips-Van Heusen Corporation Third Amendment to Note Agreements
EMPLOYERS LIFE INSURANCE COMPANY $1,428,571.43 Series A Notes
OF WAUSAU
By________________________________
Its
LUTHERAN BROTHERHOOD $5,000,000.73 Series A Notes
By________________________________
Its
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PHILLIPS-VAN HEUSEN CORPORATION FINANCIAL STATEMENTS INCLUDED IN ITS 10-K REPORT
FOR THE YEAR ENDED FEBRUARY 1, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-END> FEB-01-1998
<CASH> 11,748
<SECURITIES> 0
<RECEIVABLES> 91,567
<ALLOWANCES> 2,911
<INVENTORY> 249,534
<CURRENT-ASSETS> 385,018
<PP&E> 94,582<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 660,459
<CURRENT-LIABILITIES> 274,221
<BONDS> 100,118
0
0
<COMMON> 27,179
<OTHER-SE> 193,126
<TOTAL-LIABILITY-AND-EQUITY> 660,459
<SALES> 1,350,007
<TOTAL-REVENUES> 1,350,007
<CGS> 937,965
<TOTAL-COSTS> 937,965
<OTHER-EXPENSES> 499,195
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 20,672
<INCOME-PRETAX> (107,825)
<INCOME-TAX> (41,246)
<INCOME-CONTINUING> (66,579)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (66,579)
<EPS-PRIMARY> (2.46)
<EPS-DILUTED> (2.46)
<FN>
<F1>Property, plant and equipment is presented net of accumulated depreciation.
<F2>Provision for doubtful accounts is included in other costs and expenses.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE YEARS ENDED FEBRUARY 2, 1997 AND JANUARY 28, 1996 ARE PRESENTED TO REFLECT
THE EPS DATA REQUIRED BY FAS128, WHICH WAS ADOPTED BY PHILLIPS-VAN HEUSEN
CORPORATION FOR THE YEAR ENDED FEBRUARY 1, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> FEB-02-1997 JAN-28-1996
<PERIOD-END> FEB-02-1997 JAN-28-1996
<CASH> 11,590 17,533
<SECURITIES> 0 0
<RECEIVABLES> 95,207 115,380
<ALLOWANCES> 3,401 5,514
<INVENTORY> 237,422 276,773
<CURRENT-ASSETS> 362,958 444,664
<PP&E> 137,060<F1> 143,398<F1>
<DEPRECIATION> 0<F1> 0<F1>
<TOTAL-ASSETS> 657,436 749,055
<CURRENT-LIABILITIES> 122,266 183,126
<BONDS> 189,398 229,548
0 0
0 0
<COMMON> 27,046 26,979
<OTHER-SE> 263,112 248,313
<TOTAL-LIABILITY-AND-EQUITY> 657,436 749,055
<SALES> 1,359,593 1,464,128
<TOTAL-REVENUES> 1,359,593 1,464,128
<CGS> 910,517 987,921
<TOTAL-COSTS> 910,517 987,921
<OTHER-EXPENSES> 401,338 455,634
<LOSS-PROVISION> 0<F2> 0<F2>
<INTEREST-EXPENSE> 23,164 23,199
<INCOME-PRETAX> 24,574 (2,626)
<INCOME-TAX> 6,044 (2,920)
<INCOME-CONTINUING> 18,530 294
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 18,530 294
<EPS-PRIMARY> 0.69 0.01
<EPS-DILUTED> 0.68 0.01
<FN>
<F1>Property, plant and equipment is presented net of accumulated depreciation.
<F2>Provision for doubtful accounts is included in other costs and expenses.
</FN>
</TABLE>
