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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2003
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER
0-50186
PHILLIPS-VAN HEUSEN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1166910
(State of incorporation) (IRS Employer
Identification No.)
200 MADISON AVENUE
NEW YORK, NEW YORK 10016
(Address of principal executive offices)
212-381-3500
(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.
(X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
--
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant (assuming, for purposes of this calculation
only, that the registrant's directors, executive officers and greater than 10%
shareholders are affiliates of the registrant) based upon the closing sale price
of the registrants common stock on April 15, 2003 was $320,590,069.
Number of shares of Common Stock outstanding as of April 15, 2003:
30,324,716.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT LOCATION IN FORM 10-K
-------- IN WHICH INCORPORATED
---------------------
REGISTRANT'S PROXY STATEMENT
FOR THE ANNUAL MEETING OF PART III
STOCKHOLDERS TO BE HELD ON JUNE 10, 2003
* * *
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Forward-looking statements in this Annual Report on Form 10-K,
including, without limitation, statements relating to our 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: (1) our
plans, strategies, objectives, expectations and intentions are subject
to change at any time at our discretion; (2) the levels of sales of our
apparel and footwear products, both to our wholesale customers and in
our retail stores, and the levels of sales of our licensees at
wholesale and retail, and the extent of discounts and promotional
pricing in which we and our licensees are required to engage, all of
which can be affected by weather conditions, changes in the economy,
fuel prices, reductions in travel, fashion trends and other factors;
(3) our plans and results of operations will be affected by our ability
to manage our growth and inventory, including our ability to realize
revenue growth, cost savings or synergies from integrating, developing
and growing Calvin Klein; (4) our operations and results of operations
could be affected by quota restrictions (which, among other things,
could limit our ability to produce products in cost-effective countries
that have the labor and technical expertise needed), the availability
and cost of raw materials (particularly petroleum-based synthetic
fabrics, which are currently in high demand), our ability to adjust
timely to changes in trade regulations and the migration and
development of manufacturers (which can affect where our products can
best be produced), and civil conflict, war or terrorist acts, the
threat of any of the foregoing or political and labor instability in
the United States or any of the countries where our products are or are
planned to be produced; (5) acquisitions and issues arising with
acquisitions and proposed transactions, including without limitation,
the ability to integrate an acquired entity into us with no substantial
adverse effect on the acquired entity's or our existing operations,
employee relationships, vendor relationships, customer relationships or
financial performance and (6) other risks and uncertainties indicated
from time to time in our filings with the Securities and Exchange
Commission. See "BUSINESS - RISK FACTORS."
We do not undertake any obligation to update publicly any
forward-looking statement, including, without limitation, any estimate
regarding revenues or earnings, whether as a result of the receipt of
new information, future events or otherwise.
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, the terms "we," "our" or "us"
refer to Phillips-Van Heusen Corporation and its subsidiaries taken as a whole.
Our fiscal years are based on the 52-53 week period ending on the Sunday closest
to February 1, and are designated by the calendar year in which the fiscal year
commences. We derive market share data information used herein from various
industry sources. References to the brand names Calvin Klein, CK, cK Calvin
Klein, Van Heusen, Izod, Izod Club, Bass, G.H. Bass & Co., Geoffrey Beene,
Arrow, DKNY, Kenneth Cole New York and Reaction by Kenneth Cole and to other
brand names in this report are to registered trademarks owned by us or licensed
to us by the owner. References to our acquisition of Calvin Klein refer to our
February 2003 acquisition of Calvin Klein, Inc., Calvin Klein (Europe), Inc.,
Calvin Klein (Europe II) Corp., Calvin Klein Europe S.r.l. and CK Service Corp.,
which companies we refer to collectively as "Calvin Klein."
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OVERVIEW
We are one of the largest apparel and footwear companies in the world,
with a heritage dating back over 120 years. We design and market nationally
recognized branded dress shirts, sportswear and footwear. We believe we market
one in three of the dress shirts sold in the United States and have a leading
position in men's sportswear tops and men's casual footwear. Our portfolio of
brands includes our own brands, Van Heusen, Bass, and IZOD, and our licensed
brands, Geoffrey Beene, Arrow, DKNY, Kenneth Cole New York and Reaction by
Kenneth Cole. We recently acquired Calvin Klein, a leading lifestyle design and
marketing company, whose brands enjoy high global recognition.
We design, source and market substantially all of our products on a
brand-by-brand basis targeting distinct consumer demographics and lifestyles. We
market our brands at multiple price points and across multiple channels of
distribution. This allows us to provide products to a broad range of consumers,
while minimizing competition among our brands and reducing our reliance on any
one demographic group, merchandise preference or distribution channel.
Currently, our products are distributed at wholesale through more than 10,000
doors in national and regional department, mid-tier department, mass market,
specialty and independent stores in the United States. We also leverage our
apparel design and sourcing expertise by offering private label programs to
retailers. Our wholesale business represents our core business and we believe
that it is the basis for our brand equity. As a profitable complement to our
wholesale business, we also market our products directly to consumers through
our Van Heusen, IZOD, Geoffrey Beene and Bass retail stores, primarily located
in outlet malls throughout the United States.
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We were incorporated in the State of Delaware in 1976 as the successor
to a business begun in 1881, and, with respect to our footwear group, to G.H.
Bass & Co., a business begun in 1876. Our principal executive offices are
located at 200 Madison Avenue, New York, New York 10016; our telephone number is
(212) 381-3500.
We make available, at no cost, on or through our corporate website our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
have electronically filed such material with the Securities and Exchange
Commission. Our corporate website address is www.pvh.com.
THE CALVIN KLEIN ACQUISITION
On February 12, 2003, we acquired Calvin Klein. Over the past 30 years,
we believe Calvin Klein has become one of the best known designer names in the
world. We believe that the Calvin Klein brands - Calvin Klein, cK and cK Calvin
Klein - complement our existing portfolio of brands by providing us with the
opportunity to market products at higher price points, in higher-end
distribution channels and to different consumer groups than our existing product
offerings. Although the Calvin Klein brand is well established and enjoys 96%
brand awareness among consumers worldwide, there are numerous product areas in
which no products, or only a limited number of products, are offered under any
Calvin Klein label, including men's and women's better sportswear, footwear and
certain accessories. We believe our expertise in brand management, product
design, sourcing and other logistics provides us with the ability to
successfully expand product offerings and distribution under the Calvin Klein
brands while preserving the brands' prestige and global presence. As a result,
we believe we have the opportunity to realize sales growth and enhanced
profitability.
Worldwide retail sales of products sold under the Calvin Klein brands
exceeded $3 billion in calendar 2002. These products are sold primarily under
licenses and other arrangements and include jeans, underwear, fragrances,
eyewear, men's tailored clothing, ties, shoes, hosiery, socks, swimwear,
watches, coats, leather goods, table top and soft home furnishings and
accessories. Calvin Klein also designs, manufactures and markets high-end
ready-to-wear collection apparel and accessories for men and women under the
Calvin Klein brand. We believe these collections are an important factor in
maintaining the Calvin Klein image. The collection apparel and accessories are
sold to a limited number of high-end department stores and independent boutiques
throughout the world and through three company-operated stores located in New
York City, Dallas and Paris. We have recently entered into an agreement to
license the existing collection apparel businesses to Vestimenta, S.p.A., one of
the world's leading manufacturers and distributors of women's and men's high-end
ready-to-wear apparel, commencing with the spring 2004 collection. During the
period prior to our license of the businesses, we will transfer the operations
of the businesses to Vestimenta. Calvin Klein controls all design operations and
product development for most of its licensees and all of its collection apparel,
which it will continue to do under its agreement with Vestimenta. Calvin Klein
oversees a worldwide marketing and advertising budget of over $200 million, the
majority of which is funded by its licensees. We believe that maintaining
control over design and advertising through Calvin Klein's dedicated in-house
teams plays a key role in the continued strength of the Calvin Klein brands. We
believe that Calvin Klein's corporate overhead and back office expenses are
significantly higher than required by the size and needs of its business. We
intend to significantly reduce these costs and integrate many Calvin Klein
overhead functions with our current operations, thereby increasing the cash flow
and profitability of Calvin Klein. It is not our intention to reduce the
in-house marketing and advertising and design divisions of Calvin Klein.
OUR BUSINESS
Our business includes the design, sourcing and marketing of a varied
selection of branded and private label dress shirts, sportswear and footwear as
well as the licensing of our brands for an assortment of products. Our business
is currently reported in two segments: Apparel, and Footwear and Related
Products. The Apparel segment is operated in two groups: dress shirts and
sportswear. Sales of our products are made principally in the United States. See
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Segment Data" in the Notes to Consolidated Financial
Statements included in "Item 15 - Exhibits, Financial Statement Schedules and
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Reports on Form 8-K" for information regarding the revenues, profits and total
assets attributable to the Apparel and Footwear and Related Products segments.
APPAREL
DRESS SHIRTS
We market our dress shirts principally under the Van Heusen, Arrow,
IZOD, Geoffrey Beene, cK Calvin Klein, Kenneth Cole New York, Reaction by
Kenneth Cole and DKNY brands.
Our dress shirt business, which generated, through the wholesale
channel, 22.7% of our fiscal 2002 revenues, includes the design and marketing of
dress shirts in a broad selection of styles and colors that are sold at retail
price points generally ranging from $20 to $65 a shirt.
The Van Heusen dress shirt has provided a strong foundation for us for
most of our history and is the best selling dress shirt brand in the United
States. The Van Heusen dress shirt targets the updated classical consumer, is
marketed at opening to moderate price points and is distributed through more
than 3,500 doors, principally in department stores, including Belk, Inc.,
Federated Department Stores, Inc., J. C. Penney Company, Inc., The May
Department Stores Company and Saks Inc., and through our Van Heusen retail
stores.
The Arrow dress shirt targets the updated classical consumer, is
marketed at opening to moderate price points and is distributed through more
than 2,000 doors, principally in mid-tier department stores, including Kohl's
Corporation and Sears, Roebuck & Co. The Arrow dress shirt is positioned as a
mid-tier department store complement to Van Heusen. We market Arrow dress shirts
under a license agreement with Cluett American Corp. that expires on June 30,
2007 and which we may extend through June 30, 2017.
IZOD dress shirts were launched in the third quarter of fiscal 2001.
The IZOD dress shirt targets the modern traditional consumer, is marketed at
moderate price points and is distributed through more than 1,200 doors,
principally in department stores, including Belk, JCPenney and May.
The Geoffrey Beene dress shirt is the best selling designer dress shirt
brand in U.S. department stores in the United States. The Geoffrey Beene dress
shirt targets the more style conscious consumer, is marketed at moderate to
upper moderate price points and is distributed through more than 2,500 doors,
principally in department stores, including Federated, Marshall Field's, May and
Saks, and through our Geoffrey Beene retail stores. We market Geoffrey Beene
dress shirts under a license agreement with Geoffrey Beene Inc. that expires on
December 31, 2008 and which we may extend through December 31, 2013.
cK Calvin Klein dress shirts were launched for the holiday 2002 season.
The cK Calvin Klein dress shirt targets the classical contemporary consumer, is
marketed at better price points and currently is distributed through more than
550 doors, principally in department and specialty stores, including Federated,
Marshall Field's and May. We market cK Calvin Klein dress shirts under a license
agreement with Calvin Klein, which we entered into prior to our acquisition of
Calvin Klein.
The Kenneth Cole New York dress shirt targets the modern consumer, is
marketed at better price points and is distributed through more than 650 doors,
principally in department stores including Dillards, Inc., Federated, Marshall
Field's and May. The Reaction by Kenneth Cole dress shirt targets the more
youthful, modern consumer, is marketed at opening better to better price points
and is distributed through more than 350 doors, principally in department
stores, including Federated and May. We market the two Kenneth Cole brands of
dress shirts under a license agreement with K.C.P.L., Inc. that expires on
December 31, 2005.
The DKNY dress shirt targets the contemporary consumer, is marketed at
better price points and is distributed through more than 900 doors, principally
in department and specialty stores, including Federated, Marshall Field's and
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Saks. We market DKNY dress shirts under a license agreement with Donna Karan
Studio that expires on December 31, 2003.
We also offer private label programs to retailers. Private label
offerings allow a retailer to sell its own line of exclusive merchandise and
give the retailer control over distribution of the product. These programs
present an opportunity for us to leverage our design, sourcing and logistics
expertise. Our private label customers work with our designers to develop shirts
in the styles, sizes and cuts that the customers desire to sell in their stores
under their private labels. Private label programs offer the consumer quality
product and offer the retailer the opportunity to enjoy product exclusivity at
generally higher margins. Private label products, however, generally 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. We
market private label dress shirts to national department and mass market stores.
Our private label programs include Stafford for JCPenney, Grant Thomas for Lord
& Taylor, Cezani for Saks and Puritan and George for Wal-Mart Stores, Inc.
SPORTSWEAR
We market our sportswear principally under the IZOD, Van Heusen, Arrow
and Geoffrey Beene brands. Our sportswear business, which generated 50.7% of our
fiscal 2002 revenues, includes men's knit and woven sports shirts, sweaters,
bottoms, swimwear, boxers and outerwear marketed at wholesale and sportswear,
accessories and other apparel for men and women offered in our Van Heusen, IZOD
and Geoffrey Beene retail stores.
IZOD is the best selling main floor department store men's sportswear
tops brand. IZOD apparel consists of active-inspired men's sportswear, including
sweaters, knit and woven sports shirts, slacks, fleecewear and microfiber
jackets. IZOD sportswear targets the active consumer, is marketed at moderate to
upper moderate price points and is distributed through more than 2,400 doors,
principally in department stores, including Belk, Federated, JCPenney, May and
Saks, and through our IZOD retail stores. Our IZOD stores offer men's and
women's active-inspired sportswear, with a focus on golf, travel and resort
apparel.
Van Heusen is the best selling main floor department store men's woven
sport shirt brand in the United States. Van Heusen sportswear also includes knit
sport shirts and sweaters. Like Van Heusen dress shirts, Van Heusen sport shirts
and sweaters target the updated classical consumer, are marketed at opening to
moderate price points and are distributed through more than 3,500 doors,
principally in department stores, including Belk, Federated, JCPenney, May and
Saks, and through our Van Heusen retail stores. Our Van Heusen stores offer a
range of men's products from dress furnishings to sportswear, as well as women's
sportswear.
Arrow sportswear targets the updated classical consumer, is marketed at
moderate price points and is distributed through more than 2,000 doors,
principally in mid-tier department stores, including Kohl's and Sears. Arrow
sportswear consists of men's knit and woven tops, sweaters and bottoms. We
market Arrow sportswear at wholesale under the same license agreement as Arrow
dress shirts.
Geoffrey Beene sportswear targets a more style conscious consumer than
IZOD, Van Heusen and Arrow and is positioned as a designer label for men's woven
and knit sports shirts on the main floor of department stores. Geoffrey Beene
sportswear is marketed at upper moderate price points and is distributed through
more than 800 doors, principally in department stores, including Federated,
Marshall Field's and May, and through our Geoffrey Beene retail stores. Our
Geoffrey Beene stores offer men's furnishings, casual and dress casual
sportswear and women's casual and dress casual sportswear, under a license
agreement which expires on December 31, 2005, which we may extend for up to two
additional three-year periods, the last of which would end on December 31, 2011.
We market Geoffrey Beene men's sportswear at wholesale under the same license
agreement as the Geoffrey Beene dress shirts.
Our extensive resources in both product development and sourcing have
permitted us to market private label sport shirts to department and mass market
stores. Our private label programs include Cherokee and Merona for Target Corp.
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and Puritan for Wal-Mart. We also market private label sport shirts to companies
in service industries, including airlines and restaurant chains.
As Calvin Klein does not currently offer men's better sportswear, we
plan to launch a men's better sportswear line in fall 2004, reflecting the
Calvin Klein style and capitalizing on the strong Calvin Klein brand identity.
These products will target better fashion department and specialty store
customers and be sold in sportswear collection areas, complementing the existing
main floor sportswear offerings of our other brands. We expect to capitalize on
our experience in developing successful sportswear lines, sourcing expertise and
strong wholesale customer relationships to take advantage of this market
opportunity. The foregoing is a forward-looking statement and there can be no
assurances that we will be able to launch successfully, grow and maintain such
a business. Factors that could affect the business include the willingness of
retailers to allocate appropriate selling space and consumer acceptance of the
goods produced. See "RISK FACTORS" in this Item.
We are seeking a strategic relationship with an experienced women's
apparel partner to develop a women's better sportswear line, another large
market segment for which Calvin Klein does not currently offer products. We
intend to oversee all design operations and product development in order to
ensure that the distinctive brand image of Calvin Klein is maintained. The
Calvin Klein advertising team will play a key role in the marketing of this new
line. There can be no assurance that we will be able to reach an agreement with
a licensee on such basis, if at all.
FOOTWEAR AND RELATED PRODUCTS
Our Footwear and Related Products segment, which generated 25.8% of our
fiscal 2002 revenues, includes casual and dress casual shoes for men, women and
children marketed at wholesale and in our Bass retail stores and Bass apparel
and accessories for men and women offered only in our Bass retail stores.
The Bass brand has a leading position in men's casual footwear in the
United States. Bass footwear is generally known for its classic American style,
is marketed at moderate price points and is distributed through more than 3,600
doors, principally in department and specialty shoe stores, including Dillards,
Federated and May, as well as in our Bass retail stores. Our Bass stores
typically carry a modified assortment of Bass footwear from our wholesale line,
as well as styles not available at wholesale. Most of our stores also carry Bass
apparel for men and women, as well as accessories such as handbags, belts and
travel gear. Bass brand products are sold in over 30 countries, including
through 38 Bass stores offering exclusively Bass footwear and footwear-related
products operated by distributors.
In the fall of 2002, we introduced a line of IZOD footwear consisting
of men's and women's active footwear for market-testing purposes. IZOD footwear
is marketed at moderate to upper moderate price points and is distributed in
Belk, Federated, May and Saks.
LICENSING
We license our brands globally for a broad range of products. The
licensing of our brands generated 0.8% of our fiscal 2002 revenues. On a pro
forma basis reflecting our acquisition of Calvin Klein, royalty, design and
similar fees from business partners would have generated 8.7% of our fiscal 2002
revenues. We believe royalty, design and similar fees provide us with a
relatively stable flow of revenues with high margins, and extend and strengthen
our brands globally. The pro forma data is unaudited and is based upon our
audited consolidated financial statements included in Item 15 to this report and
in the audited combined financial statements of Calvin Klein to be included in
Item 7 to our current report on Form 8-K/A in respect of our acquisition of
Calvin Klein. The pro forma data does not purport to represent what our actual
results would have been in fiscal 2002 had we completed the transaction on the
first day of fiscal 2002 nor what they will be in any future priod.
We grant licensing partners the right to manufacture and sell at
wholesale specified products under one or more of our brands. In addition,
certain foreign licensees are granted the right to open retail stores under the
licensed brand name and sell only goods under that name in such stores. A
substantial portion of the sales by our domestic licensing partners are made to
our largest wholesale customers. As compensation for our contributions under
these agreements, each licensing partner pays us royalties based upon its sales
of our branded products, subject generally, to payment of a minimum royalty.
These payments generally range from 3.0% to 7.0% of the licensing partners'
sales of the licensed products. In addition, licensing partners are generally
required to spend an amount equal to between 2.0% and 5.0% of their sales to
advertise our products. We provide support to our business partners and seek to
preserve the integrity of our brand names by taking an active role in the
design, quality control, advertising, marketing and distribution of each
licensed product, most of which are subject to our prior approval and continuing
oversight.
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CALVIN KLEIN ROYALTY AND DESIGN REVENUES
An important source of revenues for Calvin Klein is its business
arrangements with licensees and other third parties worldwide that manufacture
and distribute globally a broad array of products under the Calvin Klein brands.
For fiscal 2002, approximately 52% of revenues from Calvin Klein's business
partners was generated by its domestic business partners and approximately 48%
was generated by its foreign business partners. Worldwide retail sales of
products sold under the Calvin Klein brands exceeded $3 billion in calendar
2002. Calvin Klein combines its design, marketing and imaging skills with the
specific manufacturing, distribution and geographic capabilities of its business
partners to enter into new product categories and extend existing lines of
business. Calvin Klein's largest business partners in terms of royalty, design
and similar fees paid to Calvin Klein in fiscal 2002 were:
o Warnaco, Inc. accounting for approximately 36%
o Calvin Klein Cosmetics Corporation (Unilever N.V.) accounting for
approximately 23%
o Marchon Eyewear, Inc. accounting for approximately 9%
Calvin Klein has a total of 28 licensing and other strategic
arrangements. The products offered by Calvin Klein's key business partners
include:
Business Partner Product Category
---------------- ----------------
Warnaco, Inc. ............................................ Men's, women's and children's jeanswear;
men's underwear and sleepwear; women's
intimate apparel and sleepwear
Calvin Klein Cosmetics Corporation (Unilever N.V.)........ Men's, women's and children's fragrance and
bath products
Marchon Eyewear, Inc...................................... Men's and women's optical frames and
sunglasses
O.B.T. Co., Ltd (Japan)................................... Men's and women's cK Calvin Klein bridge
apparel and certain casual attire and women's
coats and accessories
CK Jeanswear Europe, S.p.A................................ Men's, women's and children's jeanswear and
women's belts
CK Jeanswear Asia Ltd..................................... Men's, women's and children's jeanswear
Design Works Inc.......................................... Soft home furnishing products
CK Watch Co., Ltd. (Swatch SA)............................ Men's and women's watches and clocks
McGregor Industries, Inc.................................. Men's and women's socks and women's tights
Peerless Delaware, Inc. .................................. Men's tailored clothing
Additional products sold bearing Calvin Klein brands include certain men's
furnishings and small leather goods, table top furnishings, women's better
footwear and swimwear and men's dress footwear.
With respect to revenues generated from the sale of Calvin Klein men's
underwear and sleepwear and women's intimate apparel and sleepwear, Warnaco pays
us an administration fee based on Warnaco's worldwide sales of underwear,
intimate apparel and sleepwear bearing any of the Calvin Klein marks under an
administration agreement between Calvin Klein and Warnaco. As a result of our
acquisition of Calvin Klein, Warnaco is entitled to control design and
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advertising related to the sale of underwear, intimate apparel and sleepwear
products bearing the Calvin Klein name. See "--Trademarks".
We intend to continue to license the Calvin Klein brands to existing
licensees and to seek additional licensing partners as profitable opportunities
arise. We believe that licensing the brands provides us with a relatively stable
flow of revenues with high margins and enables us to market globally the Calvin
Klein brands across multiple product categories, further enhancing the image and
reach of these lifestyle brands.
We recently entered into an agreement to license our men's and women's
high-end ready-to-wear collection apparel businesses to Vestimenta, one of the
world's leading manufacturers and distributors of women's and men's high-end
ready-to-wear apparel. The license is an exclusive, worldwide, 10-year license
for the Calvin Klein Collection brand. During a transition period we will
transfer the operations of our collection apparel businesses to Vestimenta.
Vestimenta will be responsible for the merchandising, manufacturing, quality
control, selling, warehousing and shipping aspects of such businesses. Our
Calvin Klein design and advertising teams will be responsible for substantially
all design, marketing, advertising and public relations aspects of the
collection apparel businesses and will approve the wholesale customers to which
Vestimenta will sell the collections. We believe this business relationship will
optimize our global opportunities, enhance the brand image of Calvin Klein and
result in cost savings.
OTHER LICENSING REVENUES
We license our Van Heusen, IZOD, IZOD Club and G.H. Bass & Co. brand
names for various products worldwide. We also sublicense to others the Arrow and
Geoffrey Beene brand names for various products. Our largest licensing partners
in fiscal 2002 by licensing revenues paid to us were:
o Fishman & Tobin, Inc. accounting for approximately 18%
o Oxford Industries, Inc. accounting for approximately 15%
o Block Sportswear, Inc. accounting for approximately 14%
We license under a total of 58 license agreements. The products offered
by our key domestic licensing partners include:
Licensing Partner Licensed Product Category
----------------- -------------------------
Block Sportswear, Inc.................................... Van Heusen and IZOD 'big and tall'
sportswear
Custom Leather Canada Limited............................ Van Heusen belts
Fishman & Tobin, Inc..................................... Van Heusen and IZOD boys' sportswear
Host Apparel, Inc........................................ Van Heusen pajamas and robes
Aptaker Co., Inc. d/b/a Nouveau Eyewear.................. Van Heusen and G.H. Bass eyewear
Randa Neckwear Corp...................................... Van Heusen neckwear
Tropical Sportswear International, Inc................... Van Heusen men's pants
Westport Corporation..................................... Van Heusen small leather goods
Clearvision Optical Company, Inc......................... IZOD eyewear
Gold Toe Brand, Inc...................................... IZOD and IZOD Club hosiery
Humphrey's Accessories LLC............................... IZOD belts
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International Home Textiles, Inc......................... IZOD soft home furnishing products
Kellwood Company......................................... IZOD women's sportswear
Knothe Corporation....................................... IZOD sleepwear and loungewear
Mallory & Church Corporation............................. IZOD neckwear
Peerless Delaware, Inc................................... IZOD tailored clothing
Oxford Industries, Inc................................... IZOD Club men's and women's golf
apparel
Additional products sold bearing our marks include Van Heusen
underwear, handkerchiefs, scarves and hosiery and IZOD leather outerwear. A
large number of our Van Heusen licenses are with foreign licensees that offer
dress shirts and sportswear under that brand name.
WHOLESALE CUSTOMERS
Our wholesale business represents our core business and we believe that
it is the basis for our brand equity. Currently, our products are distributed at
wholesale through more than 10,000 doors in national and regional department,
mid-tier department, mass market, specialty and independent stores in the United
States. A few of our customers, including Federated, JCPenney, Kohl's, May and
Wal-Mart account for significant portions of our revenues. Sales to our five
largest customers were 30.7% of our revenues in fiscal 2002, 27.7% of our
revenues in fiscal 2001 and 28.3% of our revenues in fiscal 2000. No single
customer accounted for greater than 10% of our revenues in fiscal 2002.
We believe we provide our customers with a significantly high level of
service. We have six separate sales forces covering the following products and
product categories:
o national brand dress shirts - Van Heusen, Arrow and IZOD
o designer brand dress shirts - cK Calvin Klein, Geoffrey Beene,
Kenneth Cole New York, Reaction by Kenneth Cole and DKNY
o Van Heusen and Geoffrey Beene sportswear
o IZOD sportswear
o Arrow sportswear
o Bass and IZOD footwear
Each sales force includes a team of sales professionals that work closely with
our customers providing them with a dedicated level of service including
designing a focused selling strategy for each brand while ensuring that each
brand's particular qualities and identities are strategically positioned to
target a distinct consumer base. Our customers offer our dress shirts and men's
sportswear on the main floor of their stores and we offer our customers
merchandising support with visual display fixtures and in-store marketing. When
a line of our products is displayed in a stand-alone area on the main floor, we
are able to further enhance brand recognition, to permit more complete
merchandising of our lines and to differentiate the presentation of products. We
believe the broad appeal of our products, with multiple well known brands
offering differing styles at different price points, together with our customer,
advertising and marketing support and our ability to offer products with
innovative qualities, allow us to expand and develop relationships with apparel
retailers in the United States.
We believe that our investments in logistics and supply chain
management allow us to respond rapidly to changes in sales trends and consumer
demands while enhancing our inventory management efficiencies. We believe our
customers can better manage their inventories as a result of our continuous
analysis of sales trends, our broad array of product availability and our quick
response capabilities. Certain of our products can be ordered at any time
9
through our EDI replenishment systems. For customers who reorder these products,
we generally ship these products within one to two days of order receipt.
The Calvin Klein men's and women's high-end ready-to-wear collection
apparel and accessories are sold to a limited number of high-end department
stores and independent boutiques throughout the world, including Bergdorf
Goodman, Neiman Marcus, Nordstrom and Saks. We also operate three stores that
offer the collections. Ranging in size from 5,400 to 20,000 square feet, these
stores are located in New York City, Dallas and Paris.
RETAIL STORES
We operate over 700 retail stores under the Van Heusen, IZOD, Bass and
Geoffrey Beene names. Ranging in size from 1,000 to 11,000 square feet, with an
average of approximately 4,000 square feet, our stores are primarily located in
outlet malls throughout the United States. We believe our profitable retail
division is an important complement to our wholesale operations because we
believe that the stores further enhance consumer awareness of our brands,
including by offering products that are not available in our wholesale lines,
while also providing a means for managing excess inventory.
Our Van Heusen outlet stores offer men's dress shirts and neckwear,
men's and women's sportswear, including woven and knit shirts, sweaters, bottoms
and outerwear, and men's and women's accessories. The stores are targeted to the
value-conscious, middle American consumer.
Our IZOD outlet stores offer men's and women's active-inspired
sportswear, including knit and woven shirts, sweaters, bottoms and activewear.
These stores focus on golf, travel and resort clothing.
Our Bass outlet stores offer a modified assortment of Bass footwear
from our wholesale line, as well as styles not available at wholesale. Most of
our stores also carry apparel for men and women, including tops, bottoms and
outerwear and accessories such as handbags, wallets, belts and travel gear.
Our Geoffrey Beene outlet stores offer men's dress shirts and neckwear,
men's and women's sportswear including woven and knit shirts, sweaters, bottoms
and outerwear and men's and women's accessories. These stores are targeted
towards a more fashion-conscious, designer-oriented consumer.
We also market selected Bass/G.H. Bass & Co. and footwear and IZOD
sportswear over the Internet on a limited basis.
We intend to enhance our retail position by opening Calvin Klein stores
in premium outlet malls that are consistent with the Calvin Klein image and in
which other prestige designers maintain stores. We currently intend to open
between 75 and 85 Calvin Klein outlet stores over time in such premium outlet
malls. We believe that the strength of the Calvin Klein brands, our strong
presence and considerable experience operating stores in outlet malls across the
United States and our established relationships with landlords of the premium
outlet malls should enable us to successfully execute this strategy. The
foregoing is a forward-looking statement and there can be no assurances that we
will be able to open and successfully operate such stores. Factors that could
affect our plans and the business include the availability of appropriate
locations at a cost acceptable to us and consumer acceptance of the goods we
offer. See "RISK FACTORS" in this Item.
DESIGN
Our business depends on our ability to stimulate consumer tastes and
demands, as well as on our ability to remain competitive in the areas of quality
and price.
A significant factor that plays a key role in the continued strength of
our brands is our in-house design teams. We form separate teams of designers and
merchandisers for each of our brands, and with respect to Calvin Klein, for each
product category, creating a structure that focuses on the special qualities and
identity of each brand and product. These designers and merchandisers consider
consumer taste and lifestyle and trends when creating a brand or product plan
for a particular season. The process from initial design to finished product
varies greatly, but generally spans six to ten months prior to each selling
season. Apparel and footwear product lines are developed primarily for two major
10
selling seasons, spring and fall. However, certain of our product lines offer
more frequent introductions of new merchandise.
Calvin Klein has developed a cohesive team of senior design directors
who share a vision for the Calvin Klein brands and who each lead a separate
design team. We intend to maintain the in-house design teams of Calvin Klein.
These teams will continue to control all design operations and product
development for most licensees and other strategic alliances. In addition, new
teams sharing the same vision will be assembled to play a key role in developing
our men's better sportswear line, and oversee all design operation and product
development in connection with the licensing of a women's better sportswear
line.
SOURCING AND PRODUCTION
To address the needs of our customers, we are continuing to make
investments and develop strategies to enhance our ability to provide our
customers with timely product availability and delivery. Our investments in
sophisticated systems should allow us to reduce the cycle time between the
design of products to the delivery of those products to our customers. We
believe the enhancement of our supply chain efficiencies and working capital
management through the effective use of our distribution network and overall
infrastructure will allow us to better control costs and provide improved
service to our customers.
Approximately 225 different manufacturers produce our products in over
300 factories worldwide. During fiscal 2002, in excess of 95% of our products
were produced by manufacturers located in foreign countries. We source finished
products and raw materials. Raw materials include fabric, buttons, thread,
labels, leather and similar materials. Raw materials and production commitments
are generally made two to six months prior to production and quantities are
finalized at that time. We believe we are one of the largest procurers of
shirting fabric in the world. Finished products consist of manufactured and
fully assembled products ready for shipment to our customers and our stores.
Most of our dress shirts and all of our sportswear are sourced and manufactured
to our specifications by independent manufacturers in the Far East, Indian
subcontinent, Middle East, Caribbean and Central America who meet our quality,
cost and human rights requirements. Our footwear is sourced and manufactured to
our specifications by independent manufacturers who meet our quality, cost and
human rights requirements, principally located in the Far East, Europe, South
America and the Caribbean. No single supplier is critical to our production
needs, and we believe that an ample number of alternative suppliers exist should
we need to secure additional or replacement production capacity and raw
materials. Given our extensive network of sourcing partners, we believe we are
able to obtain goods at low cost and on a timely basis.
Our foreign offices and buying agents enable us to monitor the quality
of the goods manufactured by, and the delivery performance of, our suppliers,
which includes the enforcement of human rights standards through our on-going
approval and monitoring system. In addition, sales are monitored regularly at
both the retail and wholesale levels and modifications in production can be made
either to increase or reduce inventories. We continually seek additional
suppliers throughout the world for our sourcing needs and place our orders in a
manner designed to limit the risk that a disruption of production at any one
facility could cause a serious inventory problem. We have not experienced
significant production delays or difficulties in importing goods. Our purchases
from our suppliers are effected through individual purchase orders specifying
the price and quantity of the items to be produced.
Approximately 7% of our dress shirts are manufactured in our domestic
apparel manufacturing facility located in Ozark, Alabama. This facility, which
we own, is approximately 108,000 square feet, and is utilized by us primarily as
a quick response facility, including by fulfilling product replenishment orders.
WAREHOUSING AND DISTRIBUTION
To facilitate distribution, our products are shipped from manufacturers
to our wholesale and retail warehousing and distribution centers for inspection,
sorting, packing and shipment to our customers. Ranging in size from 67,000 to
575,000 square feet our centers are located in North Carolina, Tennessee,
Pennsylvania, Georgia, Arkansas, Maine and New Jersey. Each of our centers is
generally dedicated to serving either our wholesale customers or our retail
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stores. Our warehousing and distribution centers are designed to provide
responsive service to our customers and our retail stores, as the case may be,
on a cost-effective basis. This includes the use of various forms of electronic
communications to meet customer needs, including advance shipping notices for
all major customers. We believe our current warehousing and distribution centers
have sufficient capacity to accommodate future growth, including our strategies
for Calvin Klein, without a significant increase in capital expenditures. We
further believe that our distribution centers and capabilities compare favorably
on a cost and service basis with those of our competitors and that these
constitute part of our core competencies.
ADVERTISING AND PROMOTION
We market substantially all of our products on a brand-by-brand basis
targeting distinct consumer demographics and lifestyles. Our marketing programs
are an integral feature of our product offerings. Advertisements generally
portray a lifestyle rather than a specific item. We intend for each of our
brands to be a leader in its respective market segment, with strong consumer
awareness and consumer loyalty. We believe that our brands are successful in
their respective segments because we have strategically positioned each brand to
target a distinct consumer demographic. We will continue to design and market
our products to complement each other, satisfy lifestyle needs, emphasize
product features important to our target consumers and produce consumer loyalty.
We advertise our brands primarily in national print media, including
fashion, entertainment/human interest, business, men's, women's, niche and
sports magazines and The New York Times. We also participate in cooperative
advertising programs with our customers, as we believe that brand awareness and
in-store positioning are further strengthened by our contributions to such
programs.
With respect to our retail operations, we rely 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.
In acquiring Calvin Klein, we believe we acquired one of the best known
designer names in the world. One of the efforts that has helped to establish the
Calvin Klein image has been its high-profile, cutting-edge advertising campaigns
that have stimulated admiration, publicity, curiosity and debate. Calvin Klein
has a dedicated in-house advertising agency with experienced in-house creative
and media teams that develop and execute a substantial portion of the
advertising for products under the Calvin Klein brands. The teams work closely
with other functional areas within Calvin Klein and its licensing and other
business partners to deliver a consistent and unified brand message to the
consumer. Calvin Klein oversees a worldwide marketing and advertising budget of
over $200 million, a majority of which is funded by its licensees.
Calvin Klein products are advertised primarily in national print media,
through outdoor signage and, with respect to fragrances, in television
advertising spots. We believe promotional activities throughout the year further
strengthen brand awareness of the Calvin Klein brands. The spring and fall
Calvin Klein high-end ready-to-wear apparel collections are presented at major
fashion shows in New York City and Milan, which typically generate extensive
media coverage. Other Calvin Klein promotional efforts include in-store
appearances by fashion models, providing wardrobes to celebrities for award
ceremonies, product launches, gift-with-purchase programs, charity events and
special corporate-sponsored events.
It is our intention to continue the Calvin Klein advertising and
promotional practices and strategies. In order to accomplish this, we intend to
leave the Calvin Klein marketing and advertising teams in place and to continue
to maintain the Calvin Klein advertising and promotions budget at or above
recent historical levels. The foregoing is a forward-looking statement and there
can be no assurances in this regard. See "RISK FACTORS" in this Item.
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TRADEMARKS
We own the Van Heusen, Bass, G.H. Bass & Co., IZOD and IZOD Club
brands, as well as related trademarks and lesser-known names. As a result of our
acquisition of Calvin Klein, we beneficially own the Calvin Klein, cK and cK
Calvin Klein marks. Calvin Klein and Warnaco are co-owners of the Calvin Klein
Trademark Trust, which is the sole and exclusive title owner of substantially
all registered Calvin Klein, cK and cK Calvin Klein trademarks. The sole purpose
of the trust is to hold these marks. Calvin Klein maintains and protects the
marks on behalf of the trust pursuant to a servicing agreement. The trust
exclusively licenses to Warnaco on a perpetual, royalty-free basis the use of
the marks on men's underwear and sleepwear and women's intimate apparel and
sleepwear, and to Calvin Klein on a perpetual, royalty-free basis the use of the
marks on all other products. Warnaco pays us a fee based on Warnaco's worldwide
sales of underwear, intimate apparel and sleepwear products bearing any of the
Calvin Klein marks under an administration agreement between Calvin Klein and
Warnaco.
In acquiring the Calvin Klein, cK and cK Calvin Klein marks, we agreed
to allow Mr. Calvin Klein to retain the right to use his name, on a
non-competitive basis, with respect to his right of publicity, unless those
rights were already being used in the Calvin Klein business. We also granted Mr.
Klein a royalty-free worldwide right to use the Calvin Klein mark with respect
to certain personal businesses and activities, such as motion picture,
television and video businesses; a book business; writing, speaking and/or
teaching engagements; non-commercial photography; charitable activities; and
architectural and industrial design projects, subject to certain limitations
designed to protect the image and prestige of the Calvin Klein brands and to
avoid competitive conflicts.
Our trademarks are the subject of registrations and pending
applications throughout the world for use on a variety of apparel, footwear and
related products, and we continue to expand our worldwide usage and registration
of new and related trademarks. In general, trademarks remain valid and
enforceable as long as the marks continue to be used in connection with the
products and services with which they are identified and, as to registered trade
names, the required registration renewals are filed. In markets outside of the
United States, particularly those where products bearing any of our brands are
not sold by us or any of our licensees or other authorized users, our rights to
the use of trademarks may not be clearly established.
We regard the license to use our trademarks and our other intellectual
property rights in and to the trademarks as valuable assets in marketing our
products and, on a worldwide basis, vigorously seek to protect them against
infringement. We are susceptible to others imitating our products and infringing
our intellectual property rights. This is especially the case since our
acquisition of Calvin Klein, as the Calvin Klein brands enjoy significant
worldwide consumer recognition and its generally higher pricing provides
significant opportunity and incentive for counterfeiters and infringers. Calvin
Klein has a broad, proactive enforcement program, which we believe has been
generally effective in controlling the sale of counterfeit products in the
United States and in major markets abroad. We have taken enforcement action with
respect to our other marks on an as needed basis.
OUR RELATIONSHIP WITH MR. KLEIN
In order to assist in a seamless transition of our acquisition of
Calvin Klein, we have entered into a three-year consulting agreement with Mr.
Klein for $1.0 million per year. Mr. Klein is available to consult on
advertising, marketing, design, promotion and publicity aspects of Calvin Klein.
Prior to our acquisition of Calvin Klein, Calvin Klein was obligated to
pay Mr. Klein and his heirs in perpetuity a percentage of sales of certain
products bearing any of the Calvin Klein brands under a design services letter
agreement. In connection with our acquisition of Calvin Klein, we bought all of
Mr. Klein's rights under that agreement in consideration of a warrant to
purchase our common stock and for granting him the right to receive from us
contingent purchase price payments for a period of 15 years based on a
percentage of total worldwide net sales of products bearing any of the Calvin
Klein brands. In addition, Mr. Klein was released from all of his obligations
under that agreement, including his obligation to render design services to
Calvin Klein, and the design services letter agreement was terminated. On a pro
forma basis reflecting our acquisition of Calvin Klein, such payment to Mr.
Klein would have been $20.1 million for fiscal 2002. Our obligation to make
contingent purchase price payments to Mr. Klein in connection with our
13
acquisition of Calvin Klein is guaranteed by our Calvin Klein subsidiaries and
is secured by a subordinated pledge of all of the equity interests in our Calvin
Klein subsidiaries. Upon repayment of the $125.0 million term loan from the
affiliates of Apax Managers, Inc. and Apax Partners Europe Managers Limited,
this obligation will also be secured by a subordinated lien on substantially all
of our domestic Calvin Klein subsidiaries' assets. Events of default under the
agreements governing the collateral for our contingent payment obligations to
Mr. Klein, include, but are not limited to (1) our failure to make payments to
Mr. Klein when due, (2) covenant defaults, (3) cross-defaults to other
indebtedness in excess of an agreed amount, (4) events of bankruptcy, (5)
monetary judgment defaults and (6) a change of control, including the sale of
any portion of the equity interests in our Calvin Klein subsidiaries. An event
of default under those agreements would permit Mr. Klein to foreclose on his
security interest in the collateral. In addition, if we fail to pay Mr. Klein a
contingent purchase price payment when due and such failure to pay continues for
60 days or more after a final judgment by a court is rendered relating to our
failure to pay, Mr. Klein will no longer be restricted from competing with us as
he otherwise would be under the non-competition provisions contained in the
purchase agreement relating to our acquisition of Calvin Klein, although he
would still not be able to use any of the Calvin Klein brands or any similar
trademark in any competing business.
COMPETITION
The apparel industry is competitive as a result of its fashion
orientation, its mix of large and small producers, the flow of domestic and
imported merchandise and the wide diversity of retailing methods. Some of our
larger branded apparel competitors include Polo/Ralph Lauren, Tommy Hilfiger,
Nautica, Perry Ellis and Chaps. As a result of our acquisition of Calvin Klein,
we believe Donna Karan, Ralph Lauren's Purple Label, Giorgio Armani, Gucci and
Prada also will be our competitors. In addition, we face significant competition
from retailers, including our own wholesale customers, through their private
label programs.
The footwear 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, the Bass brand has maintained
an important position in casual footwear, while we have extended the brand's
offerings to modern, contemporary casual and dress casual styles. We believe
that few of our competitors have the overall men's and women's brand recognition
of Bass. Our primary footwear competitors include Dockers, Timberland, Rockport,
Sperry and Naturalizer.
We compete primarily on the basis of style, quality and service. Our
business depends on our ability to stimulate consumer tastes and demands, as
well as on our ability to remain competitive in the areas of quality, service
and price. We believe we are particularly well positioned to compete in the
apparel and footwear industries. Our diversified portfolio of apparel brands and
apparel and footwear products and our use of multiple channels of distribution
has allowed us to develop a business that produces results which are not
dependent on any one demographic group, merchandise preference or distribution
channel. We have developed a portfolio of brands that appeal to a broad spectrum
of consumers. Our owned brands have long histories and enjoy high recognition
within their respective consumer segments. We develop our owned and licensed
brands to complement each other and to generate strong consumer loyalty. The
acquisition of Calvin Klein and its prestigious brands provides us with the
opportunity to develop businesses that target different consumer groups at
higher price points and in higher-end distribution channels than our other
brands, as well as with significant global opportunities due to the worldwide
recognition of the Calvin Klein brands.
TARIFFS AND IMPORT RESTRICTIONS
A substantial portion of our products is manufactured by contractors
located outside the United States. These products are imported and are subject
to U.S. customs laws, which impose tariffs as well as import quota restrictions
for textiles and apparel established by the U.S. government. In addition, a
portion of our imported products is eligible for certain duty-advantaged
programs commonly known as NAFTA, AGOA, CBTPA and CBI. While importation of
goods from some countries from which we obtain goods may be subject to embargo
by U.S. Customs authorities if shipments exceed quota limits, we closely monitor
import quotas and can, in most cases, shift production to contractors located in
14
countries with available quotas. The existence of import quotas has, therefore,
not had a material adverse effect on our business. Moreover, with the gradual
elimination of textile and apparel quotas over the next few years by the World
Trade Organization, these quota restrictions will no longer affect our business
in most countries.
ENVIRONMENTAL MATTERS
Our facilities and operations are subject to various environmental,
health and safety laws and regulations, including the proper maintenance of
asbestos-containing materials. In addition, we may incur liability under
environmental statutes and regulations with respect to the contamination of
sites that we own or operate or previously owned or operated (including
contamination caused by prior owners and operators of such sites, abutters or
other persons) and the off-site disposal of hazardous materials. We believe our
operations are in compliance with terms of all applicable laws and regulations.
EMPLOYEES
As of April 15, 2003, we employed approximately 5,670 persons on a
full-time basis and approximately 3,760 persons on a part-time basis.
Approximately 5.4% of our employees are represented for the purpose of
collective bargaining by five different unions. Additional persons, some
represented by these five unions, are employed from time to time based upon our
manufacturing schedules and retailing seasonal needs. Our collective bargaining
agreements generally are for three-year terms. One of these agreements, which
covers 62 employees, expires in May 2003. We believe that our relations with our
employees are satisfactory.
OUR EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of
our executive officers:
NAME AGE POSITION
- ---- --- --------
Bruce J. Klatsky 54 Chairman and Chief Executive Officer; Director
Mark Weber 54 President and Chief Operating Officer; Director
Emanuel Chirico 45 Executive Vice President and Chief Financial Officer
Francis K. Duane 46 Vice Chairman, Sportswear
Allen E. Sirkin 60 Vice Chairman, Dress Shirts
Diane M. Sullivan 47 Vice Chairman, Footwear
Michael Zaccaro 57 Vice Chairman, Retail Apparel
Mr. Bruce J. Klatsky has been employed by us in various capacities over
the last 30 years, and was our President from 1987 to March 1998. Mr. Klatsky
was named Chief Executive Officer in June of 1993 and Chairman of the Board in
June of 1994.
Mr. Mark Weber has been employed by us in various capacities over the
last 30 years, had been a Vice President since 1988, was Vice Chairman since
1995 and was named President and Chief Operating Officer in 1998.
Mr. Emanuel Chirico joined us as Vice President and Controller in 1993.
Mr. Chirico was named Executive Vice President and Chief Financial Officer in
1999.
Mr. Francis K. Duane became our Vice Chairman, Sportswear in February
2001, after serving as President of our IZOD division since May 1998. From 1996
until 1998, he was President, Worldwide Sales, of Guess, Inc., an apparel
company.
Mr. Allen E. Sirkin has been employed by us since 1985. He served as
Chairman of our Apparel Group from 1990 until 1995 and was named Vice Chairman,
Dress Shirts in 1995.
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Ms. Diane M. Sullivan joined us as Vice Chairman, Footwear in September
2001. From 1999 until 2001, she was President, Chief Operating Officer and a
Director of The Stride Rite Corporation, a footwear company. From 1997 until
1999, Ms. Sullivan was a Group President with The Stride Rite Corporation.
Mr. Michael Zaccaro became our Vice Chairman, Retail Apparel in April
2002. Prior to that he was Group President, Van Heusen and IZOD Retail from
August 2001 until April 2002, President, IZOD Retail from January 1999 until
July 2001 and President, Van Heusen Retail from August 1996 until December 1998.
Each of our executive officers holds the office indicated until his or
her successor is chosen and qualified at the regular meeting of the board of
directors held immediately following the annual meeting of stockholders.
RISK FACTORS
OUR SUBSTANTIAL LEVEL OF DEBT COULD IMPAIR OUR FINANCIAL CONDITION.
We currently have a substantial amount of debt. Our significant level
of debt could have important consequences to investors, including:
o requiring a substantial portion of our cash flows from operations
be used for the payment of interest on our debt, therefore
reducing the funds available to us for our operations or other
capital needs;
o limiting our flexibility in planning for, or reacting to, changes
in our business and the industries in which we operate because our
available cash flow after paying principal and interest on our
debt may not be sufficient to make the capital and other
expenditures necessary to address these changes;
o increasing our vulnerability to general adverse economic and
industry conditions because, during periods in which we experience
lower earnings and cash flow, we will be required to devote a
proportionally greater amount of our cash flow to paying principal
and interest on our debt;
o limiting our ability to obtain additional financing in the future
to fund working capital, capital expenditures, acquisitions and
general corporate requirements;
o placing us at a competitive disadvantage to other relatively less
leveraged competitors that have more cash flow available to fund
working capital, capital expenditures and general corporate
requirements; and
o any borrowings we make at variable interest rates, including our
revolving credit facility, leave us vulnerable to increases in
interest rates generally.
WE MAY NOT BE ABLE TO REALIZE REVENUE GROWTH, COST SAVINGS OR SYNERGIES
FROM INTEGRATING, DEVELOPING AND GROWING CALVIN KLEIN.
A significant portion of our business strategy involves integrating,
developing and growing the Calvin Klein business. Our realization of any revenue
growth, cost savings or synergies from Calvin Klein will depend largely upon our
ability to:
o quickly and substantially reduce the administrative and corporate
overhead and back office expenses of Calvin Klein;
o develop, and obtain selling space for, a Calvin Klein men's better
sportswear line and successfully design and market that line over
time;
o enter into a strategic licensing relationship on satisfactory
terms with an experienced women's apparel partner to develop a
successful Calvin Klein women's better sportswear line;
16
o successfully develop the licensing relationship with Vestimenta
for the men's and women's high-end ready-to-wear collection
apparel businesses;
o open and successfully operate a chain of Calvin Klein retail
outlet stores in premium outlet malls;
o maintain and enhance the distinctive brand identity of Calvin
Klein while integrating the Calvin Klein business within our
company;
o maintain good working relationships with Calvin Klein's licensees
and enter into new licensing arrangements; and
o execute our strategies for Calvin Klein without adversely
impacting our existing business.
We cannot assure you that we can successfully execute any of these
actions or our growth strategy for the Calvin Klein brands or that the launch of
our Calvin Klein men's better sportswear line or the launch of any other Calvin
Klein branded products by us or our licensees will achieve the degree of
consistent success necessary to generate profits or positive cash flow. Our
ability to successfully carry out our growth strategy may be affected by, among
other things, our ability to enhance our relationships with existing customers
to obtain additional selling space and develop new relationships with apparel
retailers, economic and competitive conditions, changes in consumer spending
patterns and changes in consumer tastes and style trends. If we fail to develop
and grow successfully the Calvin Klein business, our financial condition and
results of operations may be materially and adversely affected.
WE FACE SIGNIFICANT CHALLENGES INTEGRATING CALVIN KLEIN.
To achieve the anticipated benefits of our acquisition of Calvin Klein,
we will need to integrate our Calvin Klein subsidiaries into our operations. We
will face significant challenges in consolidating functions and integrating
management procedures, personnel and operations in an efficient and effective
manner, including:
o increased demands on management related to the significant
increase in our size and diversity of our businesses after our
acquisition of Calvin Klein;
o the diversion of management's attention from our company's daily
operations to implement our strategies for Calvin Klein;
o the retention and integration of key Calvin Klein employees,
including designers and marketing and advertising professionals;
o identifying and maintaining aspects of Calvin Klein that are to be
kept separate and distinct from our other businesses, such as our
plans in the areas of design, marketing and advertising, and
difficulties in assimilating the different cultures and practices
between our businesses and the Calvin Klein business where
operations are to be merged; and
o merging administrative systems and other functions, including
information technology, accounting, financial reporting and
logistics systems, distribution facilities and operations and
books and records practices and procedures, as well as in
maintaining uniform standards and controls, including internal
accounting and audit controls, procedures and policies.
A SUBSTANTIAL PORTION OF OUR REVENUES AND GROSS PROFIT IS DERIVED FROM
A SMALL NUMBER OF LARGE CUSTOMERS AND THE LOSS OF ANY OF THESE CUSTOMERS COULD
SUBSTANTIALLY REDUCE OUR REVENUES.
A few of our customers, including Federated, JCPenney, Kohl's, May and
Wal-Mart, account for significant portions of our revenues. Sales to our five
largest customers were 30.7% of our revenues in fiscal 2002, 27.7% of our
revenues in fiscal 2001 and 28.3% of our revenues in fiscal 2000. We do not have
long-term agreements with any of our customers and purchases generally occur on
an order-by-order basis. A decision by any of our major customers, whether
motivated by competitive conditions, financial difficulties or otherwise, to
decrease significantly the amount of merchandise purchased from us or our
licensing or other business partners, or to change their manner of doing
business with us or our licensing or other business partners, could
substantially reduce our revenues and have a material adverse effect on our
financial condition and results of operations. The retail industry has, in the
17
past, experienced a great deal of consolidation and other ownership changes.
Retailers, in the future, may further consolidate, undergo restructurings or
reorganizations, or realign their affiliations, any of which could decrease the
number of stores that carry our products or increase the ownership concentration
within the retail industry. These changes could increase our reliance on a
smaller number of large customers.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY FINANCIAL INSTABILITY
EXPERIENCED BY OUR CUSTOMERS.
During the past several years, various retailers have experienced
significant financial difficulties, which have resulted in bankruptcies,
liquidations and store closings. We sell our products primarily to national and
regional department, mid-tier department and mass market stores in the United
States on credit and evaluate each customer's financial condition on a regular
basis in order to determine the credit risk we take in selling goods to them.
The financial difficulties of a customer could cause us to curtail business with
that customer and we may be unable to shift sales to another viable customer. We
may also assume more credit risk relating to receivables of a customer
experiencing financial instability. Should these circumstances arise with
respect to our customers, our inability to shift sales or to collect on our
trade accounts receivable from any one of our customers could substantially
reduce our revenues and have a material adverse effect on our financial
condition and results of operations.
WE PRIMARILY USE FOREIGN SUPPLIERS FOR OUR PRODUCTS AND RAW MATERIALS,
WHICH POSES RISKS TO OUR BUSINESS OPERATIONS.
During fiscal 2002, in excess of 95% of our apparel products and 95% of
our raw materials for apparel were produced by and purchased or procured from
independent manufacturers located in countries in the Far East, Indian
subcontinent, Middle East, Caribbean and Central America. We believe that we are
one of the largest procurers of shirting fabric in the world. Additionally, 100%
of our footwear products and of the raw materials therefor were produced by and
purchased or procured from independent manufacturers located in countries in the
Far East, Europe, South America and the Caribbean. Although no single supplier
and no one country is critical to our production needs, any of the following
could materially and adversely affect our ability to produce or deliver our
products and, as a result, have a material adverse effect on our business,
financial condition and results of operations:
o political or labor instability in countries where contractors and
suppliers are located;
o political or military conflict involving the United States, which
could cause a delay in the transportation of our products and raw
materials to us and an increase in transportation costs;
o heightened terrorism security concerns, which could subject
imported or exported goods to additional, more frequent or more
thorough inspections, leading to delays in deliveries or
impoundment of goods for extended periods or could result in
decreased scrutiny by customs officials for counterfeit goods,
leading to lost sales, increased costs for our anti-counterfeiting
measures and damage to the reputation of our brands;
o a significant decrease in availability or increase in cost of raw
materials, particularly petroleum-based synthetic fabrics, which
are currently in high demand;
o the migration and development of manufacturers, which can affect
where our products are or are planned to be produced;
o imposition of regulations and quotas relating to imports and our
ability to adjust timely to changes in trade regulations, which,
among other things, could limit our ability to produce products in
cost-effective countries that have the labor and expertise needed;
o imposition of duties, taxes and other charges on imports;
o significant fluctuation of the value of the dollar against foreign
currencies; and
o restrictions on transfers of funds out of countries where our
foreign licensees are located.
18
IF OUR MANUFACTURERS FAIL TO USE ACCEPTABLE ETHICAL BUSINESS PRACTICES,
OUR BUSINESS COULD SUFFER.
We require our manufacturers to operate in compliance with applicable
laws, rules and regulations regarding working conditions, employment practices
and environmental compliance. Additionally, we impose upon our business
partners, operating guidelines that require additional obligations in those
areas in order to promote ethical business practices, and our staff periodically
visits and monitors the operations of our independent manufacturers to determine
compliance. However, we do not control our independent manufacturers or their
labor and other business practices. If one of our manufacturers violates labor
or other laws or implements labor or other business practices that are generally
regarded as unethical in the United States, the shipment of finished products to
us could be interrupted, orders could be cancelled, relationships could be
terminated and our reputation could be damaged. Any of these events could have a
material adverse effect on our revenues and, consequently, our results of
operations.
OUR RELIANCE ON INDEPENDENT MANUFACTURERS COULD CAUSE DELAY AND DAMAGE
CUSTOMER RELATIONSHIPS.
In fiscal 2002, we relied upon independent third parties for the
manufacture of more than 95% of our apparel products and 100% of our footwear
products. We do not have long-term contracts with any of our suppliers. A
manufacturer's failure to ship products to us in a timely manner or to meet
required quality standards could cause us to miss the delivery date requirements
of our customers for those products. As a result, customers may cancel their
orders, refuse to accept deliveries or demand reduced prices. Any of these
actions taken by our customers may have a material adverse effect on our
revenues and, consequently, our results of operations.
AS A RESULT OF OUR ACQUISITION OF CALVIN KLEIN, WE HAVE INCREASED OUR
DEPENDENCE ON REVENUES FROM ROYALTY, DESIGN AND SIMILAR FEES.
In fiscal 2002, $10.8 million, or 0.8%, of our revenues were derived
from licensing royalties. In fiscal 2002, 73.3% of Calvin Klein's revenues were
derived from royalty, design and similar fees from business partners. On a pro
forma basis reflecting our acquisition of Calvin Klein, royalty, design and
similar fees would have generated 8.7% of our fiscal 2002 revenues (and will
account for a significant portion of our revenues in the future). A few of
Calvin Klein's business partners, including Warnaco, Unilever and Marchon
Eyewear account for significant portions of its revenues. Royalty, design and
similar fees from Calvin Klein's three largest business partners accounted for
approximately 46% of its revenues in fiscal 2002. The operating profit
associated with our royalty, design and similar fee revenues is significant
because the operation expenses directly associated with administering and
monitoring an individual licensing or similar agreement are minimal. Therefore,
the loss of a significant business partner, whether due to the termination or
expiration of the relationship, the cessation of the business partner's
operations or otherwise, (including as a result of financial difficulties),
without an equivalent replacement, could materially affect our profitability.
For example, Warnaco accounted for approximately 26% of Calvin Klein's revenues
and approximately 36% of Calvin Klein's royalty, design and similar fee
revenues, in fiscal 2002. Although Warnaco has emerged from bankruptcy
proceedings, no assurance can be given as to its future financial stability.
While we generally have significant control over our business partners' products
and advertising, we rely on our business partners for, among other things,
operational and financial controls over their businesses. Our business partners'
failure to successfully market licensed products or our inability to replace our
existing business partners could adversely affect our revenues both directly
from reduced royalty, design and similar fees received and indirectly from
reduced sales of our other products. Risks are also associated with a business
partner's ability to:
o obtain capital;
o manage its labor relations;
o maintain relationships with its suppliers;
o manage its credit risk effectively; and
o maintain relationships with its customers.
19
In addition, we rely on our business partners to preserve the value of
our brands. Although we make every attempt to protect our brands through, among
other things, approval rights over design, production quality, packaging,
merchandising, distribution, advertising and promotion of our products, we
cannot assure you that we can control the use by our business partners of each
of our licensed brands. The misuse of our brands by a material business partner
could have a material adverse effect on our business, financial condition and
results of operations. For example, Calvin Klein in the past has been involved
in legal proceedings with Warnaco with respect to certain quality and
distribution issues. As a result of our acquisition of Calvin Klein, Warnaco is
entitled to control design and advertising related to the sale of underwear,
intimate apparel and sleepwear products bearing the Calvin Klein brands. We
cannot assure you that Warnaco will maintain the same standards of design and
advertising previously maintained by Calvin Klein, although we believe they are
generally obligated to do so.
OUR RETAIL STORES ARE HEAVILY DEPENDENT ON THE ABILITY AND DESIRE OF
CONSUMERS TO TRAVEL AND SHOP.
Our retail stores are located principally in outlet malls, which are
typically located in or near vacation destinations or away from large population
centers where department stores and other traditional retailers are
concentrated. As a result, fuel shortages, increased fuel prices, travel
restrictions, travel concerns and other circumstances, including as a result of
war, terrorist attacks or the perceived threat of war or terrorist attacks,
which would lead to decreased travel, could have a material adverse affect on
us, as was the case after the September 11th terrorist attacks. Other factors
which could affect the success of our stores include:
o the location of the mall or the location of a particular store
within the mall;
o the other tenants occupying space at the mall;
o increased competition in areas where the outlet malls are located;
o a downturn in the economy generally or in a particular area where
an outlet mall is located; and
o the amount of advertising and promotional dollars spent on
attracting consumers to the malls.
WE MAY BE UNABLE TO PROTECT OUR TRADEMARKS AND OTHER INTELLECTUAL
PROPERTY RIGHTS.
Our trademarks and other intellectual property rights are important to
our success and our competitive position. We are susceptible to others imitating
our products and infringing our intellectual property rights. Since our
acquisition of Calvin Klein, we are more susceptible to infringement of our
intellectual property rights, as the Calvin Klein brands enjoy significant
worldwide consumer recognition and the generally higher pricing of Calvin Klein
branded products creates additional incentive for counterfeiters and infringers.
Imitation or counterfeiting of our products or infringement of our intellectual
property rights could diminish the value of our brands or otherwise adversely
affect our revenues. We have and, prior to our acquisition, Calvin Klein has in
the past resolved conflicts regarding our intellectual property through both
legal action and negotiated settlements, none of which, we believe, has had a
material impact on our business, financial condition and results of operations.
Nevertheless, we cannot assure you that the actions we have taken to establish
and protect our trademarks and other intellectual property rights will be
adequate to prevent imitation of our products by others or to prevent others
from seeking to invalidate our trademarks or block sales of our products as a
violation of the trademarks and intellectual property rights of others. In
addition, we cannot assure you that others will not assert rights in, or
ownership of, trademarks and other intellectual property rights of ours or in
marks that are similar to ours or marks that we license and/or market or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In some cases, there may be trademark owners who have prior rights
to our marks because the laws of certain foreign countries may not protect
intellectual property rights to the same extent as do the laws of the United
States. In other cases there may be holders who have prior rights to similar
marks. For example, we were involved in a proceeding relating to a company's
claim of prior rights to the IZOD mark in Mexico, and Calvin Klein was involved
in a proceeding relating to a company's claim of prior rights to the Calvin
Klein mark in Chile. We are currently involved in opposition and cancellation
proceedings with respect to marks similar to some of our brands, both
domestically and internationally.
20
THE SUCCESS OF CALVIN KLEIN DEPENDS ON THE VALUE OF OUR CALVIN KLEIN
BRANDS, AND IF THE VALUE OF THOSE BRANDS WERE TO DIMINISH, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
Our success depends on our brands and their value. The Calvin Klein
name is integral to the existing Calvin Klein business, as well as to the
implementation of our strategies for growing and expanding Calvin Klein.
Although Mr. Klein will continue as a consultant for three years, he is no
longer a member of management. Our Calvin Klein business could be adversely
affected if there is a perception by consumers that, as a result of the sale of
the business, Mr. Klein's role has changed in a manner that is disadvantageous
to the Calvin Klein business. The Calvin Klein brands could be adversely
affected if Mr. Klein's public image or reputation were to be tarnished. We may
seek in the future stockholder approval to change the name of our company to
"Calvin Klein Inc." or a similar name. Any such name change could increase our
risks related to the public perception of the Calvin Klein name. In addition, we
market some of our products under the names and brands of other recognized
designers: Geoffrey Beene, Kenneth Cole and Donna Karan (DKNY). Our sales of
those products could be materially and adversely affected if any of those
designer's images or reputations were to be negatively impacted.
OUR REVENUES AND PROFITS ARE CYCLICAL AND SENSITIVE TO GENERAL ECONOMIC
CONDITIONS, CONSUMER CONFIDENCE AND SPENDING PATTERNS.
The apparel and footwear industries in which we operate have
historically been subject to substantial cyclical variations and are
particularly affected by adverse trends in the general economy, with consumer
spending tending to decline during recessionary periods. The success of our
operations depends on consumer spending. Consumer spending is impacted by a
number of factors, including actual and perceived economic conditions affecting
disposable consumer income (such as unemployment, wages and salaries), business
conditions, interest rates, availability of credit and tax rates in the general
economy and in the international, regional and local markets where our products
are sold. Any significant deterioration in general economic conditions (such as
the current economic downturn) or increases in interest rates could reduce the
level of consumer spending and inhibit consumers' use of credit. In addition,
war, terrorist activity or the threat of war and terrorist activity may
adversely affect consumer spending, and thereby have a material adverse effect
on our financial condition and results of operations.
WE FACE INTENSE COMPETITION IN THE APPAREL AND FOOTWEAR INDUSTRIES.
Competition is strong in the segments of the apparel and footwear
industries in which we operate. We compete with numerous domestic and foreign
designers, brands and manufacturers of apparel, accessories and footwear, some
of which are significantly larger or more diversified or have greater resources
than we do. In addition, through their use of private label programs, we compete
directly with our wholesale customers. We compete within the apparel and
footwear industries primarily on the basis of:
o anticipating and responding to changing consumer tastes and
demands in a timely manner and developing attractive, quality
products;
o maintaining favorable brand recognition;
o appropriately pricing products and creating an acceptable value
proposition for customers;
o providing strong and effective marketing support;
o ensuring product availability and optimizing supply chain
efficiencies with third-party manufacturers and retailers; and
o obtaining sufficient retail floor space and effective presentation
of our products at retail.
We attempt to minimize risks associated with competition, including
risks related to changing style trends and product acceptance, by closely
monitoring retail sales trends. The failure, however, to compete effectively or
to keep pace with rapidly changing markets could have a material adverse effect
on our business, financial condition and results of operations. In addition, if
21
we misjudge the market for our products, we may be faced with significant excess
inventories for some products and missed opportunities with others.
THE LOSS OF MEMBERS OF OUR EXECUTIVE MANAGEMENT AND OTHER KEY EMPLOYEES
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We depend on the services and management experience of Bruce J.
Klatsky, Mark Weber and other of our executive officers who have substantial
experience and expertise in our business. We also depend on key employees
involved in our licensing, design and advertising operations. Competition for
qualified personnel in the apparel and footwear industries is intense, and
competitors may use aggressive tactics to recruit our key employees. The
unexpected loss of services of one or more of these individuals could materially
adversely affect us.
SIGNIFICANT INFLUENCE BY CERTAIN STOCKHOLDERS.
In connection with our acquisition of Calvin Klein, affiliates of Apax
Managers, Inc. and Apax Partners Europe Managers Limited purchased our Series B
convertible preferred stock, which is currently convertible by them into 37.1%
of our outstanding common stock. If we elect not to pay a cash dividend for any
quarter, then the Series B convertible preferred stock will be treated for
purposes of the payment of future dividends and upon conversion, redemption or
liquidation as if an in-kind dividend has been paid. As a result, it is possible
that if we do not pay a cash dividend in any quarter through the third quarter
of fiscal 2009 (assuming no further issuances of common stock, including as a
result of the exercise of stock options), a change in control will result under
our existing various indentures and certain other agreements.
While the holders of our Series B convertible preferred stock are
prohibited from initiating a takeover, in certain circumstances, they may be
able to participate in a bidding process initiated by a third party. As long as
affiliates of the Apax affiliates own at least 50% of the shares of our Series B
convertible preferred stock initially sold to the Apax affiliates, they will
have the ability to prevent a change of control, or a sale of all or
substantially all of our assets. Additionally, as long as 50% of our Series B
convertible preferred stock remains outstanding, the holders of our Series B
convertible preferred stock will have a right to purchase their pro rata share
of newly issued securities. The holders of our Series B convertible preferred
stock have certain additional rights, including the right to approve the
issuance of certain new series of our preferred stock, which could also have the
effect of discouraging a third party from pursuing a non-negotiated takeover,
and preventing changes in control, of our company.
As a result of the rights related to their ownership of our Series B
convertible preferred stock, the Apax affiliates have substantial influence over
our company, including by virtue of their right to elect separately as a class
three directors and to have one of their directors serve on the audit,
compensation, nominating and executive committees of our board.
22
ITEM 2. PROPERTIES
The general location, use, ownership status and approximate size of the
principal properties which we currently occupy are set forth below:
APPROXIMATE
OWNERSHIP AREA IN
LOCATION USE STATUS SQUARE FEET
-------- --- ------ -----------
New York, New York.................Corporate, apparel and footwear administrative Leased 138,000
offices and showrooms
Bridgewater, New Jersey............Corporate and apparel administrative offices Leased 163,000
S. Portland, Maine.................Footwear administrative offices Leased 99,000
Ozark, Alabama.....................Apparel manufacturing facilities Owned 108,000
Reading, Pennsylvania..............Apparel warehouse and distribution center Owned 410,000
Chattanooga, Tennessee.............Apparel warehouse and distribution center Owned 451,000
Chattanooga, Tennessee.............Apparel storage Leased 60,000
Schuylkill Haven,
Pennsylvania....................Apparel warehouse and distribution center Owned 251,000
Austell, Georgia...................Apparel warehouse and distribution center Leased 421,000
Brinkley, Arkansas.................Apparel warehouse and distribution center Owned 112,000
Wilton, Maine......................Footwear warehouse and distribution center Owned 352,000
North Jay, Maine...................Footwear warehouse and distribution center Owned 67,000
Jonesville, North Carolina.........Apparel and footwear warehouse and distribution Owned 575,000
center
Hong Kong..........................Corporate, apparel and footwear administrative Leased 18,000
offices
In addition, we lease certain other administrative/support offices in
various domestic and international locations. We also currently operate and
lease over 700 apparel and footwear retail stores in the United States.
In connection with our acquisition of Calvin Klein, we acquired leases
for administrative offices and showrooms in New York, New York, where we occupy
approximately 159,000 square feet, a warehouse and distribution center in North
Bergen, New Jersey, where we occupy approximately 180,000 square feet, and
certain other administrative/support offices and retail stores in various
domestic and international locations, including three outlet stores and four
company-operated stores, three of which sell collection apparel and accessories
and one of which sells jeanswear. We intend to close the distribution center in
New Jersey in connection with our licensing arrangement with Vestimenta. We also
intend to close the three outlet stores, and the company-operated store that
sells jeanswear and is located in London.
Information with respect to minimum annual rental commitments under
leases in which we are 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
We are a party to certain litigation which, in management's judgment
based in part on the opinions of legal counsel, will not have a material adverse
effect on our financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Certain information with respect to the market for our common stock,
which is listed on the New York Stock Exchange, and related security holder
matters appear in the Notes to Consolidated Financial Statements under the
headings "Other Comments" on page F-19 "Selected Quarterly Financial Data" on
page F-21 and "Ten Year Financial Summary" on pages F-23 and F-24. As of April
11, 2003, there were 1,093 stockholders of record of our common stock. The
closing price of our common stock on April 11, 2003 was $12.81.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data appears under the heading "Ten Year Financial
Summary" on pages F-23 and F-24.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We manage and analyze our operating results in two business segments:
(1) Apparel and (2) Footwear and Related Products. We derive revenues
principally from marketing products to wholesale customers and in our own retail
stores. Our fiscal years are based on the 52 to 53 week period ending on the
Sunday closest to February 1, and are designated by the calendar year in which
the fiscal year commences. Results for fiscal year 2002 represent the 52 weeks
ended February 2, 2003. Results for fiscal year 2001 represent the 52 weeks
ended February 3, 2002. Results for fiscal year 2000 represent the 53 weeks
ended February 4, 2001.
The following table summarizes our results of operations in fiscal
2002, 2001 and 2000.
FISCAL YEAR
------------------------------------------------------------------------
($ IN THOUSANDS)
2002 2001 2000
----------------------- ----------------------- ---------------------
Total revenues....................... $ 1,404,973 100.0% $ 1,431,892 100.0% $ 1,455,548 100.0%
Gross profit......................... 531,230 37.8 506,230 35.4 505,372 34.7
Selling, general & administrative
expenses........................... 462,195 32.9 465,091 32.5 434,835 29.9
----------- ---- ----------- ---- ----------- ----
Earnings before interest and taxes... 69,035 4.9 41,139 2.9 70,537 4.8
Interest expense, net................ 22,729 1.6 24,451 1.7 22,322 1.5
----------- --- ----------- --- ----------- ---
Income before taxes.................. 46,306 3.3 16,688 1.2 48,215 3.3
Income tax expense................... 15,869 1.1 6,008 0.4 18,115 1.2
----------- --- ----------- --- ----------- ---
Net income........................... $ 30,437 2.2% $ 10,680 0.8% $ 30,100 2.1%
=========== === =========== === =========== ===
Fiscal 2002 presented a challenging economic climate. Total revenues
for the first half of the year were below prior year levels, followed by a
modest improvement in the second half, resulting in total revenues of $1.4
billion, down 2% compared with fiscal 2001. However, our ability to manage
inventory efficiently in the face of this difficult environment allowed us to
reduce markdowns, which resulted in a 240 basis point improvement in gross
margin and a 68% increase in earnings before interest and taxes. Working capital
management also provided significant cash flow benefits that, in addition to
reducing net interest expense, enabled us to end the year with $117.1 million of
cash, an increase of $73.5 million over the prior fiscal year.
Fiscal 2001 should be viewed as two distinct time periods. During the
first half of fiscal 2001, total revenues and net income grew 10% and 84%,
respectively, over the prior year principally driven by the financial
performance of the Kenneth Cole dress shirt and the Arrow dress shirt and
sportswear businesses. The licenses for those businesses were acquired in
24
July 2000. Circumstances changed drastically after the tragic events of
September 11th, which had a major negative impact on our business in the second
half of the year causing full year revenues to be down 2% and net income to be
down 65% after giving effect to the $13.4 million after tax charge ($21.0
million before tax) for restructuring described below. Despite this decline in
sales, we ended fiscal 2001 with inventories 14% below the prior year level and
positive cash flow of $23.4 million.
In the fourth quarter of fiscal 2001, in response to the changing
economic climate and the gradual elimination, over the next few years, of import
quotas on apparel in most countries from which we source our products, we made a
decision to effect certain staff reductions, exit three Central American dress
shirt manufacturing facilities and liquidate certain related dress shirt
inventories. As a result, we recorded a $21.0 million charge, which included
$15.6 million related to closing the manufacturing facilities and staff
reductions in the first quarter of fiscal 2002 and $5.4 million related to the
liquidation of related dress shirt inventories. We believe these actions have
resulted in greater efficiency and flexibility in our sourcing and lower cost of
goods.
ACQUISITION OF CALVIN KLEIN
On February 12, 2003, we acquired Calvin Klein. The total net
consideration paid was $438.0 million, subject to post closing adjustments, and
was comprised of $408.0 million in net cash and $30.0 million of our common
stock. In addition, as part of the purchase price and in consideration for Mr.
Klein's sale to us of all of his rights under a design services letter agreement
with Calvin Klein, Mr. Klein received a warrant to purchase 320,000 shares of
our common stock at $28 per share and will receive contingent purchase price
payments based on the worldwide net sales of products bearing any of the Calvin
Klein brands for a period of 15 years. Such contingent purchase price payments
will be charged to goodwill and intangible assets. The cash portion of the
consideration was financed by the issuance of $250.0 million of our Series B
convertible preferred stock to affiliates of Apax Managers, Inc. and Apax
Partners Europe Managers Limited, the borrowing of $100.0 million of a $125.0
million secured term loan from the Apax affiliates and with a portion of our
available cash. The additional $25.0 million of the term loan was drawn down on
March 14, 2003. The Series B convertible preferred stock is convertible into
common stock at a current conversion price of $14 per share and carries an 8%
dividend, payable in cash. If we elect not to pay a cash dividend for any
quarter, then the Series B convertible preferred stock will be treated for
purposes of the payment of future dividends and upon conversion, redemption or
liquidation as if an in-kind dividend had been paid.
As a result of the acquisition, we will generate a substantially
greater level of royalty, design and similar fees, which are expected to be
reported separately as a component of total revenues. Royalty, design and
similar fees, which generate higher margins, are expected to have a positive
impact on our reported operating margins when compared with historical levels.
RESULTS OF OPERATIONS
As noted above, in fiscal 2001, we incurred a $21.0 million charge for
restructuring and other costs, of which the Apparel segment incurred $19.0
million and the Footwear and Related Products segment incurred $2.0 million. The
following discussion of financial performance separately identifies these costs.
We believe that presenting the comparisons in this manner is a more meaningful
presentation as it more appropriately reflects the results of our on-going
operations and relative performance.
25
APPAREL
The following table summarizes the operating results of our Apparel
segment in fiscal 2002, 2001 and 2000.
FISCAL YEAR
------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------
($ IN THOUSANDS)
Total revenues............................. $1,042,855 100.0% $1,061,412 100.0% $1,071,029 100.0%
Gross profit............................... 376,091 36.1 347,377 32.7 350,943 32.8
Selling, general & administrative
expenses................................ 302,784 29.0 302,387 28.5 276,008 25.8
---------- ---- ---------- ---- ---------- ----
Operating income........................... $ 73,307 7.0% $ 44,990 4.2% $ 74,935 7.0%
========== ==== ========== ==== ========== ====
- ----------------------
NOTE: This table includes the $19.0 million portion of the restructuring charge
incurred by the Apparel segment in fiscal 2001, of which $5.4 million was
charged to gross profit and $13.6 million was charged to selling, general and
administrative expenses. Without taking into account the restructuring charge,
gross margin in fiscal 2001 was 33.2%, selling, general and administrative
expenses as a percentage of total revenues was 27.2% and operating margin was
6.0%.
Revenues in both fiscal 2002 and 2001 were adversely affected by a very
weak apparel environment, particularly in dress shirts, compared with a strong
selling environment in fiscal 2000. The decrease in fiscal 2002 was also the
result of a reduction in promotional and close-out dress shirt sales used to
liquidate excess inventory during fiscal 2001. Adjusting for the 53rd week in
fiscal 2000, apparel sales increased by 1.0% in fiscal 2001.
Gross margin increased 290 basis points in fiscal 2002 to 36.1%, from
33.2% in fiscal 2001 and 32.8% in fiscal 2000. The gross margin in fiscal 2001
of 33.2% excludes a $5.4 million portion of the charge for restructuring and
other costs, which reduced fiscal 2001 gross margin to 32.7%. The improvement in
gross margin in fiscal 2002 resulted from the cost benefits realized from the
closure, at the beginning of the year, of our three Central American dress shirt
manufacturing facilities, as well as the higher level of regular price selling
experienced during the year. Aggressive inventory management during fiscal 2001
enabled us to manage through a weak sales environment at both wholesale and in
our retail stores and resulted in an increase in gross margin to 33.2% compared
with 32.8% in fiscal 2000.
Our selling, general and administrative expenses as a percentage of
total revenues were 29.0% in fiscal 2002, compared with 27.2% in fiscal 2001 and
25.8% in fiscal 2000. Such expenses in fiscal 2001 exclude a $13.6 million
portion of the charge for restructuring and other costs, which increased fiscal
2001 selling, general and administrative expenses to 28.5% of total revenues.
The increase in these expenses as a percentage of total revenues over the last
two fiscal years is due to higher payroll, incentive compensation, medical and
other employee benefit expenses coupled with the lack of off-setting sales
growth over the period.
Operating income was $73.3 million in fiscal 2002, up from $64.0
million in fiscal 2001, excluding the charge for restructuring and other costs
of $19.0 million incurred by this segment. This compares with $74.9 million in
fiscal 2000. The significant improvement in gross profit in fiscal 2002 offset
the decline in revenues and resulted in a 14.6% improvement in operating income.
Our operating income margin increased to 7.0% in fiscal 2002 from 6.0% in fiscal
2001, excluding the charge for restructuring and other costs, which reduced
operating income margin to 4.2%. Our operating income margin was 7.0% in fiscal
2000.
FOOTWEAR AND RELATED PRODUCTS
The following table summarizes the operating results of our Footwear
and Related Products segment in fiscal 2002, 2001 and 2000.
26
FISCAL YEAR
------------------------------------------------------------------
2002 2001 2000
-------------------- ------------------------- -----------------
($ IN THOUSANDS)
Total revenues........................... $362,118 100.0% $370,480 100.0% $384,519 100.0%
Grossprofit.............................. 155,139 42.8 158,853 42.9 150,570 39.2
Selling, general & administrative
expenses.............................. 133,932 37.0 139,328 37.6 132,817 34.6
------- ---- ------- ---- ------- ----
Operatingincome.......................... $21,207 5.9% $19,525 5.3% $17,753 4.6%
======= ==== ======= ==== ======= ===
- ------------------
NOTE: This table includes the $2.0 million portion of the restructuring charge
incurred by the Footwear and Related Products segment in fiscal 2001. Without
taking into account the restructuring charge, in fiscal 2001 selling, general
and administrative expenses as a percentage of total revenues was 37.1% and
operating margin was 5.8%.
The decline in revenues in fiscal 2002 resulted from a weak
back-to-school season and a sluggish holiday season, particularly in our own
retail stores, which were partially offset by increases in revenues in the first
half of the year. The fiscal 2001 decline in revenues was principally
attributable to the soft retail environment in the second half of the year,
exacerbated by the events of September 11th, which negatively impacted both our
wholesale and retail store sales.
Gross margin remained relatively flat in fiscal 2002 at 42.8% and 42.9%
in fiscal 2001, compared with 39.2% in fiscal 2000. The increase in fiscal 2001
was a result of improved merchandising strategies, which resulted in reduced
levels of promotional selling from the prior year.
Selling, general and administrative expenses as a percentage of total
revenues were 37.0% in fiscal 2002, compared with 37.1% in fiscal 2001 and 34.6%
in fiscal 2000. The fiscal 2001 expenses exclude the $2.0 million portion of the
charge for restructuring and other costs incurred by the segment, which
increased fiscal 2001 selling, general and administrative expenses to 37.6% of
total revenues. The increase in these expenses as a percentage of total revenues
in fiscal 2001 was a result of higher payroll, medical and other employee
benefit expenses coupled with a lack of offsetting sales growth over the period.
Operating income was $21.2 million in fiscal 2002, compared with $21.5
million in fiscal 2001, before the $2.0 million portion of the charge for
restructuring and other costs incurred by the segment. This compares with $17.8
million in fiscal 2000. Our operating income margins were 5.9% in fiscal 2002
and 5.8% in fiscal 2001, before the charge for restructuring and other costs,
which reduced operating income margin to 5.3%. Our operating income margin was
4.6% in fiscal 2000.
CORPORATE EXPENSES
Corporate expenses were $25.5 million in fiscal 2002, $23.4 million in
fiscal 2001 and $22.2 million in fiscal 2000. The increase in both years
resulted principally from an increase in certain logistical and information
technology expenses. We continue to make investments in information technology
and back-office logistics in order to improve our supply chain management, which
we believe enables us to better manage our inventories.
INTEREST EXPENSE
Net interest expense in fiscal 2002 was $22.7 million, compared with
$24.5 million in fiscal 2001 and $22.3 million in fiscal 2000. The reduction in
fiscal 2002 was the result of higher cash balances due to the significant
positive cash flow generated during the year. The increase in fiscal 2001
resulted from funding the acquisition of the Arrow and Kenneth Cole licenses in
July 2000, as well as the acquisition at the end of fiscal 2000 of the Van
Heusen trademark in parts of the world where we did not previously own the
trademark.
27
INCOME TAXES
Our income tax expense rate was 34.3% in fiscal 2002, compared with
36.0% in fiscal 2001 and 37.6% in fiscal 2000. The reduction in the tax rate
over the prior two years reflects various tax saving strategies which generated
certain federal and state income tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements are principally to fund growth in working
capital, primarily accounts receivable and inventory to support increases in
sales, and capital expenditures, including investments in information
technology, warehousing and distribution and our retail stores. Historically, we
have financed these requirements from internally generated cash flow or seasonal
borrowings under our revolving credit facility.
Cash provided by our operating activities was $105.2 million in fiscal
2002, $63.7 million in fiscal 2001 and $35.4 million in fiscal 2000. The
increase in fiscal 2002 was driven by the improvement in our net income, as well
as our continued effective management of working capital, particularly
receivables which benefited from strong year-end collections. The increase in
cash flow from operations in fiscal 2001 compared with fiscal 2000 was the
result of aggressive working capital management, particularly inventory. We
currently anticipate that cash flow from operations will be lower in fiscal 2003
than the prior year resulting in part from funding approximately $35.0 million
to $40.0 million of costs associated with integrating and restructuring the
Calvin Klein business. The balance of approximately $5.0 million to $10.0
million of cash restructuring expenses will occur in fiscal 2004. The foregoing
is a forward-looking statement. Our cash flow may be different than anticipated
if our actual sales are less than or greater than projected sales levels or
collection of receivables differs from what is projected. In addition, our cash
flow will be impacted if we are unable to quickly and substantially reduce the
administrative and corporate overhead and back office expenses of Calvin Klein.
We refer you to "BUSINESS - RISK FACTORS."
Capital spending in fiscal 2002 was $29.5 million compared with $33.4
million in fiscal 2001 and $31.9 million in fiscal 2000. The reduction in
spending in fiscal 2002 resulted from the level and timing of expenditures
related to investments in information technology and warehousing and
distribution. We currently anticipate capital spending in fiscal 2003 will
approximate $33.0 million to $38.0 million, which we would expect to fund from
our operating cash flow. We will also be making contingent purchase price
payments to Mr. Klein as required under the acquisition agreement, based on a
percentage of worldwide sales of products bearing any of the Calvin Klein
brands. We estimate such payments will be approximately $20.0 million in fiscal
2003. We expect to fund these payments from internally generated operating cash
flow and existing cash balances. The foregoing is a forward-looking statement.
Changes in our plans or projections regarding investments in information
technology and warehousing and distribution, as well as a change in cash flow
could affect actual capital spending levels. See "BUSINESS - RISK FACTORS." In
addition, the actual payments to Mr. Klein will be dependent on the level of
sales of goods bearing any of the Calvin Klein brands by us, by our licensees
and by other authorized users.
Total debt as a percentage of total capital was 47.8% at the end of
fiscal 2002, compared with 48.4% and 48.1% at the end of fiscal 2001 and fiscal
2000, respectively. These percentages, net of cash, were 32.6%, 43.6% and 46.0%
at the end of each of the last three fiscal years, respectively, reflecting our
generation of significant amounts of cash flow in fiscal years 2002 and 2001.
In October 2002, we refinanced our $325.0 million revolving credit
facility with a syndicate of lenders for a term of five years. The new facility
was structured as an asset based loan and, as such, we are subject to fewer
covenants than under our prior revolving credit facility. The new facility
provides for revolving credit borrowings, as well as the issuance of letters of
credit. Borrowing spreads and letters of credit fees are based on spreads above
Eurodollar and other available interest rates, with the spreads changing based
upon a pricing grid. For example, revolving credit spreads range from 175 to 275
basis points over Eurodollar loan rates and 100 to 200 basis points on
outstanding letters of credit. The initial spreads and fees under the new
facility were approximately 100 basis points higher than under the previous
facility due to a much tighter lending environment than existed at the time of
entering into the prior facility. As of February 2, 2003, there were no
revolving credit loans outstanding and $143.0 million in letters of credit
outstanding.
28
In conjunction with the acquisition of Calvin Klein on February 12,
2003, we entered into a two-year secured term loan agreement for $125.0 million
with affiliates of Apax Managers, Inc. and Apax Partners Europe Managers
Limited.
We have entered into agreements that create contractual obligations and
commercial commitments. These obligations and commitments will have an impact on
future liquidity and the availability of capital resources. The tables set forth
below present a summary of these obligations and commitments as of February 2,
2003.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------------------
TOTAL LESS THAN ONE TO FOUR TO AFTER
DESCRIPTION OBLIGATIONS ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
- ----------- -------------- --------------- ---------------- ------------------- -----------------
(IN THOUSANDS)
Long-term debt......... $ 249,012 $ - $ - $ - $ 249,012
Operating leases(1).... 209,289 59,894 97,384 24,534 27,477
------------- ------------- --------------- ---------------- --------------
Total contractual cash
obligations......... $ 458,301 $ 59,894 $ 97,384 $ 24,534 $ 276,489
============= =========== ============= ============== ============
- ---------------
(1) Includes store operating leases, which generally provide for payment of
direct operating costs in addition to rent. These obligation amounts
include future minimum lease payments and exclude such direct operating
costs.
COMMERCIAL COMMITMENTS(1)
AMOUNT OF COMMITMENT PER PERIOD
----------------------------------------------------------------------------------------
TOTAL LESS THAN ONE TO FOUR TO AFTER
DESCRIPTION OBLIGATIONS ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
- ----------- ----------------- --------------- --------------- ----------------- ------------------
(IN THOUSANDS)
Trade letters of credit
outstanding(2)....... $ 137,813 $ 137,813 $ - $ - $ -
Standby letters of
credit(2).............. 5,202 5,202 - - -
Raw material purchase
guarantees(3)......... 4,500 - 4,500 - -
Contingent purchase
price payments(4).... - - - - -
------------ --------- ------------ ------------ ------------
Total commercial
commitments......... $ 147,515 $ 143,015 $ 4,500 $ - $ -
============= ========= ============ ============ ============
------------------
(1) Excludes purchase orders for merchandise and supplies in the normal
course of business, which are fulfilled (or expire if not fulfilled)
within 12 months.
(2) Issued under our revolving credit facility. At February 2, 2003, there
were no outstanding borrowings under this facility.
(3) Represents the maximum amount guaranteed for the purchase of raw
materials by Productos Textiles, S.A. de C.V., one of our suppliers.
(4) Represents contingent purchase price payments to Mr. Klein. As part of
the Calvin Klein acquisition purchase price, Mr. Klein will receive
contingent purchase price payments for 15 years based on a percentage
of total worldwide net sales of products bearing any of the Calvin
Klein brands. Such payment would have been $20.1 million in fiscal
2002.
29
MARKET RISK
Financial instruments held by us include cash equivalents and long-term
debt. Based upon the amount of cash equivalents held by us at February 2, 2003
and the average net amount of cash equivalents which we currently anticipate
holding during fiscal 2003, we believe that a change of 100 basis points in
interest rates would not have a material effect on our financial position. The
long-term debt note to our consolidated financial statements on page F-10 of
this report outlines the principal amounts, interest rates, fair values and
other terms required to evaluate the expected sensitivity of interest rate
changes on the fair value of our fixed rate long-term debt.
SEASONALITY
Historically our business has been seasonal, with higher sales and
income in the second half of the year which coincides with our two peak retail
selling seasons. Our first peak selling season runs from the start of the
back-to-school and fall selling season beginning in August and continues through
September, and our second peak selling season is the Christmas selling season
which begins on the weekend following Thanksgiving and continues through the
week after Christmas.
Also contributing to the strength of the second half is the high volume
of fall shipments to wholesale customers, which as a result of sales leverage
generate more profit than spring shipments. Historically, the spring selling
season at wholesale, with its lower sales volume, combines with similar retail
seasonality to make the first quarter weaker than the other quarters. In the
future, however, some of this historical seasonality is expected to be
moderated, especially in the first quarter of the year. This is due to the
impact of the substantial level of royalty, design and similar fee revenues from
Calvin Klein, which tend to be earned more evenly throughout the year.
ADOPTION OF NEW ACCOUNTING STANDARD
In 2002, we adopted FASB Statement No. 142, "Goodwill and Other
Intangible Assets." This standard requires that goodwill and other indefinitely
lived intangible assets not be amortized, but instead be tested for impairment.
The notes to our consolidated financial statements provide information regarding
the impact that such amortization had on our net income and earnings per share
in 2001 and 2000. During 2002, we completed the required transitional impairment
tests. No impairment resulted from these tests.
ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES
Our financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. We believe that the following are the more critical
judgmental areas in the application of our accounting policies that currently
affect our financial condition and results of operations:
Sales allowance accrual - We have arrangements with many of our
department and specialty store customers to support their sales of our products.
We establish accruals which, based on a review of the individual customer
arrangements and the expected performance of our products in their stores, we
believe will be required to satisfy our obligations to them. It is possible that
our estimates could vary from actual results, which would require adjustment to
the allowance accruals.
Inventories - We state our inventories at the lower of cost or market.
When market conditions indicate that inventories may need to be sold below cost,
we write down our inventories to the estimated net realizable value. We believe
that all inventory writedowns required at February 2, 2003 have been recorded.
If market conditions were to change, it is possible that the required level of
inventory reserves would need to be adjusted.
Income taxes - As of February 2, 2003, we have deferred tax assets
totaling $51.4 million, of which $33.0 million relates to tax loss and credit
carryforwards which begin to expire principally in 2010. Realization of these
carryforwards is primarily dependent upon our achievement of future taxable
income. Based on the extended
30
expiration dates and projections of future taxable income, we have determined
that realization of these assets is more likely than not. If future changes to
market conditions require us to change our judgment as to realization, it is
possible that material adjustments to deferred tax assets may be required.
Goodwill and other intangible assets - As discussed above and in the
notes to our audited consolidated financial statements, in fiscal 2002 we
adopted FASB Statement No. 142. This statement requires, among other things,
that goodwill and other indefinitely lived intangible assets no longer be
amortized, and instead be tested for impairment based on fair value. An
impairment loss could have a material adverse impact on our financial condition
and results of operations. Performance of the goodwill impairment tests requires
significant judgments regarding the allocation of net assets to the reporting
unit level, which is the level at which the impairment tests are required. The
determination of whether an impairment exists also depends on, among other
factors, the estimated fair value of the reporting units, which itself depends
in part on market conditions.
Investment in Gant AB - As of February 2, 2003, other noncurrent assets
included $13.4 million for an equity investment in Gant AB, which owns the Gant
trademark. We evaluate annually whether the carrying amount of this investment
is impaired based on the estimated fair market value of Gant AB.
Medical claims accrual - We self-insure a significant portion of our
employee medical costs. Based on trends and the number of covered employees, we
record estimates of medical claims which have been incurred but not paid. If
actual medical claims varied significantly from these estimates, an adjustment
to the medical claims accrual would be required.
Pension benefits - Included in the calculations of expense and
liability for our pension plans are various assumptions, including return on
assets, discount rate and future compensation increases. Based on these
assumptions, and due in large part to the poor performance of U.S. equity
markets in the past few years, we have certain unrecognized costs for our
pension plans at February 2, 2003. Depending on future asset performance and
discount rates, we could be required to amortize these costs in the future which
could have a material effect on future pension expense. We are currently
estimating that our fiscal 2003 pension expense will increase by approximately
$5.0 million compared with fiscal 2002. We could be required to fund a
significant portion of pension costs, beginning as early as fiscal 2004.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to Quantitative and Qualitative Disclosures
About Market Risk appears under the heading "Market Risk" in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page F-1 of this report 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.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 is incorporated herein by reference to
the section entitled "Election of Directors" in our proxy statement for the
Annual Meeting of Stockholders to be held on June 10, 2003. Information with
regard to compliance by our officers and directors with Section 16(a) of the
Securities Exchange Act is incorporated herein by reference to the section
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in our proxy
statement for the Annual Meeting of Stockholders to be held on June 10, 2003.
Information with regard to our executive officers is contained in the section
entitled "Executive Officers of the Registrant" in Item 1, Part I of this
report.
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" in our proxy statement for the Annual Meeting of Stockholders to be held
on June 10, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to the Security Ownership of Certain
Beneficial Owners and Management and Equity Compensation Plan Information is
incorporated herein by reference to the sections entitled "Security Ownership of
Certain Beneficial Owners and Management" and "Equity Compensation Plan
Information" in our proxy statement for the Annual Meeting of Stockholders to be
held on June 10, 2003.
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" in our proxy statement
for the Annual Meeting of Stockholders to be held on June 10, 2003.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective. Disclosure controls and procedures are controls and procedures that
are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.
33
PART IV
ITEM 15. 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
------
2.1 Stock Purchase Agreement, dated December 17, 2002, among
Phillips-Van Heusen Corporation, Calvin Klein, Inc., Calvin Klein
(Europe), Inc., Calvin Klein (Europe II) Corp., Calvin Klein
Europe S.r.l., CK Service Corp., Calvin Klein, Barry Schwartz,
Trust for the Benefit of the Issue of Calvin Klein, Trust for the
Benefit of the Issue of Barry Schwartz, Stephanie
Schwartz-Ferdman and Jonathan Schwartz (incorporated by reference
to Exhibit 10.1 to our Report on Form 8-K of Phillips-Van Heusen
Corporation, filed on December 20, 2002). The registrant agrees
to furnish supplementally a copy of any omitted schedules to the
Commission upon request.
3.1 Certificate of Incorporation (incorporated by reference to
Exhibit 5 to our 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 our 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 our 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 our 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 our 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 our 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 our
Quarterly Report on Form 10-Q for the period ended July 28,
1996).
3.8 Certificate of Designations, Preferences, and Rights of Series B
Convertible Preferred Stock of Phillips-Van Heusen Corporation
(incorporated by reference to Exhibit 3.1 to our Current Report
on Form 8-K, filed on February 26, 2003).
+ 3.9 Corrected Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock of Phillips-Van Heusen
Corporation, dated April 17, 2003.
4.1 Specimen of Common Stock certificate (incorporated by reference
to Exhibit 4 to our Annual Report on Form 10-K for the fiscal
year ended January 31, 1981).
34
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
our 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 our 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 our Schedule 13E-4, Issuer Tender Offer Statement, dated July
31, 1987).
4.5 Third Amendment to Rights Agreement, dated June 30, 1992, from
Phillips-Van Heusen Corporation to The Chase Manhattan Bank, N.A.
and The Bank of New York (incorporated by reference to Exhibit
4.5 to our Quarterly Report on Form 10-Q for the period ended
April 30, 2000).
4.6 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 our Quarterly
Report on Form 10-Q for the period ended April 28, 1996).
4.7 Fourth Amendment to Rights Agreement, dated April 25, 2000, from
Phillips-Van Heusen Corporation to The Bank of New York
(incorporated by reference to Exhibit 4.7 to our Quarterly Report
on Form 10-Q for the period ended April 30, 2000).
4.8 Supplemental Rights Agreement and Fifth Amendment to the Rights
Agreement dated February 12, 2003, between Phillips-Van Heusen
Corporation and The Bank of New York (successor to The Chase
Manhattan Bank, N.A.), as rights agent (incorporated by reference
to Exhibit 4.1 to our Current Report on Form 8-K, filed on
February 26, 2003).
4.9 Indenture, dated as of April 22, 1998, with PVH as issuer and
Union Bank of California, N.A., as Trustee (incorporated by
reference to Exhibit 4.7 to our Quarterly Report on Form 10-Q for
the period ended May 3, 1998).
4.10 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 our Registration Statement on Form S-3 (Reg. No.
33-50751) filed on October 26, 1993).
4.11 First Supplemental Indenture, dated as of October 17, 2002 to
Indenture dated as of November 1, 1993 between PVH and The Bank
of New York, as Trustee (incorporated by reference to Exhibit
4.15 to our Quarterly Report on Form 10-Q for the period ended
November 3, 2002).
4.12 Second Supplemental Indenture, dated as of February 12, 2002 to
Indenture, dated as of November 1, 1993, between Phillips-Van
Heusen Corporation and the Bank Of New York, As Trustee
(incorporated by reference to Exhibit 4.2 to our Current Report
on Form 8-K, filed on February 26, 2003).
*10.1 1987 Stock Option Plan, including all amendments through April
29, 1997 (incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the period ended May 4, 1997).
*10.2 Phillips-Van Heusen Corporation Special Severance Benefit Plan,
as amended through March 7, 2002 (incorporated by reference to
Exhibit 10.2 to our Annual Report on Form 10-K for the period
ended February 3, 2002).
35
*10.3 Phillips-Van Heusen Corporation Capital Accumulation Plan
(incorporated by reference to our Current Report on Form 8-K
filed on January 16, 1987).
*10.4 Phillips-Van Heusen Corporation Amendment to Capital
Accumulation Plan (incorporated by reference to Exhibit 10(n)
to our Annual Report on Form 10-K for the fiscal year ended
February 2, 1987).
*10.5 Form of Agreement amending Phillips-Van Heusen Corporation
Capital Accumulation Plan with respect to individual
participants (incorporated by reference to Exhibit 10(1) to
our Annual Report on Form 10-K for the fiscal year ended
January 31, 1988).
*10.6 Form of Agreement amending Phillips-Van Heusen Corporation
Capital Accumulation Plan with respect to individual
participants (incorporated by reference to Exhibit 10.8 to our
Quarterly Report on Form 10-Q for the period ending October
29, 1995).
*10.7 Agreement amending Phillips-Van Heusen Corporation Capital
Accumulation Plan with respect to Bruce J. Klatsky
(incorporated by reference to Exhibit 10.13 to our Quarterly
Report on Form 10-Q for the period ended May 4, 1997).
*10.8 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 our
Annual Report on Form 10-K for the fiscal year ended January
31, 1993).
*10.9 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
our Quarterly Report on Form 10-Q for the period ended May 4,
1997).
*10.10 Phillips-Van Heusen Corporation 1997 Stock Option Plan,
effective as of April 29, 1997, as amended through December
18, 2001 (incorporated by reference to Exhibit 10.10 to our
Annual Report on Form 10-K for the period ended February 3,
2002).
*10.11 Phillips-Van Heusen Corporation Senior Management Bonus
Program for fiscal year 1999 (incorporated by reference to
Exhibit 10.13 to our Quarterly Report on Form 10-Q for the
period ended August 1, 1999).
*10.12 Phillips-Van Heusen Corporation Long-Term Incentive Plans for
the 21 month period ending February 4, 2001 and the 33 month
period ending February 3, 2002 (incorporated by reference to
Exhibit 10.14 to our Annual Report on Form 10-K for the fiscal
year ended January 30, 2000).
*10.13 Phillips-Van Heusen Corporation 2000 Stock Option Plan,
effective as of April 27, 2000, as amended through December
18, 2001 (incorporated by reference to Exhibit 10.13 to our
Annual Report on Form 10-K for the period ended February 3,
2002).
*10.14 Phillips-Van Heusen Corporation Performance Incentive Bonus
Plan, effective as of March 2, 2000, as amended through March
7, 2001 (incorporated by reference to Exhibit 10.15 to our
Annual Report on Form 10-K for the fiscal year ended February
4, 2001).
*10.15 Phillips-Van Heusen Corporation Long-Term Incentive Plan,
effective as of January 31, 2000 (incorporated by reference to
Exhibit 10.17 to our Quarterly Report on Form 10-Q for the
period ended July 30, 2000).
36
10.16 Revolving Credit Agreement, dated as of October 17, 2002, among
PVH, The IZOD Corporation, PVH Wholesale Corp., PVH Retail Corp.,
izod.com.inc., G.H. Bass Franchises Inc., CD Group Inc., and the
lender parties thereto, JP Morgan Chase Bank, as Administrative
Agent and Collateral Agent, Lead Arranger and Sole Bookrunner,
Fleet Retail Finance Inc., as Co-Arranger and Co-Syndication
Agent, Sun Trust Bank, as Co-Syndication Agent, The CIT
Group/Commercial Services, Inc., as Co-Documentation Agent, and
Bank of America, N.A., as Co-Documentation Agent (incorporated by
reference to Exhibit 10.01 to our Quarterly Report on Form 10-Q
for the period ended November 3, 2002).
10.17 Securities Purchase Agreement, dated December 16, 2002, among
Phillips-Van Heusen Corporation, Lehman Brothers Inc. and the
Investors named therein (incorporated by reference to Exhibit
10.2 to our Current Report on Form 8-K, filed on December 20,
2002).
10.18 Warrant, issued on February 12, 2003, by Phillips-Van Heusen
Corporation to the Calvin Klein 2001 Revocable Trust
(incorporated by reference to Exhibit 10.2 to our Current Report
on Form 8-K, filed on February 26, 2003).
10.19 Term Loan Agreement, dated as of December 16, 2002, by and
between Phillips-Van Heusen Corporation, each of the lenders
listed therein, and Apax Managers, Inc., as administrative agent
for the lenders (incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K, filed on February 26, 2003).
10.20 First Amendment to the Term Loan Agreement, dated as of February
12, 2003, by and between Phillips-Van Heusen Corporation, each of
the lenders listed therein, and Apax Managers, Inc., as
administrative agent for the lenders (incorporated by reference
to Exhibit 10.4 to our Current Report on Form 8-K, filed on
February 26, 2003).
10.21 First Amendment and Waiver Agreement, dated as of December 13,
2002 to the Revolving Credit Agreement, dated as of October 17,
2002, among Phillips-Van Heusen Corporation, The IZOD
Corporation, PVH Wholesale Corp., PVH Retail Corp.,
izod.com.inc., G.H. Bass Franchises Inc., CD Group Inc., and the
lender parties thereto, JPMorgan Chase Bank, as Administrative
Agent and Collateral Agent, Lead Arranger and Sole Bookrunner,
Fleet Retail Finance Inc., as Co-Arranger and Co-Syndication
Agent, Sun Trust Bank, as Co-Syndication Agent, The CIT
Group/Commercial Services, Inc., as Co-Documentation Agent, and
Bank of America, N.A., as Co-Documentation Agent (incorporated by
reference to Exhibit 10.5 to our Current Report on Form 8-K,
filed on February 26, 2003).
10.22 Consent dated as of February 12, 2003 among Phillips-Van Heusen
Corporation, The IZOD Corporation, PVH Wholesale Corp., PVH
Retail Corp., izod.com.inc., G.H. Bass Franchises Inc., CD Group
Inc., and the lender parties thereto, JPMorgan Chase Bank, as
Administrative Agent and Collateral Agent, Lead Arranger and Sole
Bookrunner, Fleet Retail Finance Inc., as Co-Arranger and
Co-Syndication Agent, Sun Trust Bank, as Co-Syndication Agent,
The CIT Group/Commercial Services, Inc., as Co-Documentation
Agent, and Bank of America, N.A., as Co-Documentation Agent
(incorporated by reference to Exhibit 10.6 to our Current Report
on Form 8-K, filed on February 26, 2003).
10.23 Registration Rights Agreement, dated as of February 12, 2003, by
and among Phillips-Van Heusen Corporation, the Calvin Klein 2001
Revocable Trust, Barry Schwartz, Trust for the Benefit of the
Issue of Calvin Klein, Trust for the Benefit of the Issue of
Barry Schwartz, Stephanie Schwartz-Ferdman and Jonathan Schwartz,
and the Investors listed therein (incorporated by reference to
Exhibit 10.7 to our Current Report on Form 8-K, filed on February
26, 2003).
10.24 Investors' Rights Agreement, dated as of February 12, 2003, by
and among Phillips-Van Heusen Corporation and the Investors
listed therein (incorporated by reference to Exhibit 10.8 to our
Current Report on Form 8-K, filed on February 26, 2003).
37
+ 21 Phillips-Van Heusen Subsidiaries.
+ 23 Consent of Independent Auditors.
+ 99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act.
+ 99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act.
- --------------------------
* Management contract or compensatory plan or arrangement required to be
identified pursuant to Item 15(c) of this report.
+ Filed herewith.
(b) Reports on Form 8-K filed during the fourth quarter of 2002:
We filed a report on Form 8-K, dated as of December 17, 2002 regarding our
intent to purchase all of the issued and outstanding shares of certain
Calvin Klein related companies.
(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.
38
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.
Dated: April 21, 2003
PHILLIPS-VAN HEUSEN CORPORATION
By: /s/ Bruce J. Klatsky
----------------------
BRUCE J. KLATSKY
CHAIRMAN, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
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
--------- ----- ----
/s/ Bruce J. Klatsky Chairman, Chief Executive April 21, 2003
-------------------- Officer and Director
Bruce J. Klatsky (Principal Executive Officer)
/s/ Mark Weber President, Chief Operating April 21, 2003
-------------- Officer and Director
Mark Weber
/s/ Emanuel Chirico Executive Vice President and April 16, 2003
------------------- Chief Financial Officer
Emanuel Chirico (Principal Financial Officer)
/s/ Vincent A. Russo Vice President and Controller April 17, 2003
-------------------- (Principal Accounting Officer)
Vincent A. Russo
/s/ Edward H. Cohen Director April 21, 2003
-------------------
Edward H. Cohen
/s/ Joseph B. Fuller Director April 21, 2003
--------------------
Joseph B. Fuller
/s/ Joel H. Goldberg Director April 21, 2003
--------------------
Joel H. Goldberg
/s/ Marc Grosman Director April 21, 2003
----------------
Marc Grosman
/s/ Dennis F. Hightower Director April 21, 2003
-----------------------
Dennis F. Hightower
/s/ David A. Landau Director April 21, 2003
-------------------
David A. Landau
/s/ Harry N.S. Lee Director April 17, 2003
------------------
Harry N.S. Lee
/s/ Bruce Maggin Director April 21, 2003
----------------
Bruce Maggin
/s/ Henry Nasella Director April 21, 2003
-----------------
Henry Nasella
/s/ Christian Nather Director April 21, 2003
--------------------
Christian Nather
/s/ Peter J. Solomon Director April 21, 2003
--------------------
Peter J. Solomon
39
I, Bruce J. Klatsky, certify that:
1. I have reviewed this annual report on Form 10-K of Phillips-Van Heusen
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: April 21, 2003
/s/ Bruce J. Klatsky
--------------------
Bruce J. Klatsky
Chairman and Chief Executive Officer
I, Emanuel Chirico, certify that:
1. I have reviewed this annual report on Form 10-K of Phillips-Van Heusen
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: April 21, 2003
/s/ Emanuel Chirico
-------------------
Emanuel Chirico
Executive Vice President and
Chief Financial Officer
FORM 10-K-ITEM 15(a)(1) AND 15(a)(2)
PHILLIPS-VAN HEUSEN CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
15(a)(1) The following consolidated financial statements and supplementary data
are included in Item 8 of this report:
Consolidated Income Statements--Years Ended
February 2, 2003, February 3, 2002 and February 4, 2001............................ F-2
Consolidated Balance Sheets--February 2, 2003 and
February 3, 2002................................................................... F-3
Consolidated Statements of Cash Flows--Years Ended
February 2, 2003, February 3, 2002 and February 4, 2001............................ F-4
Consolidated Statements of Changes in Stockholders' Equity--Years Ended
February 2, 2003, February 3, 2002
and February 4, 2001............................................................... F-5
Notes to Consolidated Financial Statements............................................. F-6
Selected Quarterly Financial Data...................................................... F-21
Report of Ernst & Young LLP, Independent Auditors...................................... F-22
10-Year Financial Summary.............................................................. F-23
15(a)(2) The following consolidated financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts........................................ F-25
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
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001 2000
---- ---- ----
Net sales.................................................. $1,394,212 $1,422,177 $1,447,934
Royalty and other revenues................................. 10,761 9,715 7,614
---------- ---------- ----------
Total revenues............................................. 1,404,973 1,431,892 1,455,548
Cost of goods sold......................................... 873,743 925,662 950,176
---------- ---------- ----------
Gross profit............................................... 531,230 506,230 505,372
Selling, general and administrative expenses............... 462,195 465,091 434,835
---------- ---------- ----------
Income before interest and taxes........................... 69,035 41,139 70,537
Interest expense, net...................................... 22,729 24,451 22,322
---------- ---------- ----------
Income before taxes........................................ 46,306 16,688 48,215
Income tax expense......................................... 15,869 6,008 18,115
---------- ---------- ----------
Net income................................................. $ 30,437 $ 10,680 $ 30,100
========== ========== ==========
Basic net income per share................................. $ 1.10 $ 0.39 $ 1.10
========== ========== ==========
Diluted net income per share............................... $ 1.08 $ 0.38 $ 1.10
========== ========== ==========
See notes to consolidated financial statements.
F-2
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 2, FEBRUARY 3,
2003 2002
---- ----
ASSETS
Current Assets:
Cash and cash equivalents..................................................... $117,121 $ 43,579
Trade receivables, less allowances for doubtful accounts
of $2,872 and $2,496........................................................ 68,371 81,551
Inventories................................................................... 230,971 233,704
Other, including deferred taxes of $19,404 and $19,656........................ 34,664 46,466
-------- --------
Total Current Assets....................................................... 451,127 405,300
Property, Plant and Equipment................................................... 142,635 135,817
Goodwill ....................................................................... 94,742 94,742
Other Intangible Assets......................................................... 18,233 18,233
Other Assets, including deferred taxes of $32,043 and $29,633................... 64,963 54,841
-------- --------
$771,700 $708,933
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................................................. $ 40,638 $ 29,375
Accrued expenses.............................................................. 86,801 84,983
-------- --------
Total Current Liabilities.................................................. 127,439 114,358
Long-Term Debt.................................................................. 249,012 248,935
Other Liabilities............................................................... 123,022 79,913
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 27,812,954 and 27,646,172......................... 27,813 27,646
Additional capital............................................................ 123,645 121,659
Retained earnings............................................................. 155,525 129,248
Accumulated other comprehensive loss.......................................... (34,370) (12,500)
-------- --------
272,613 266,053
Less: 28,581 and 24,627 shares of common stock held in
treasury-at cost..................................................... (386) (326)
-------- --------
Total Stockholders' Equity.................................................. 272,227 265,727
-------- --------
$771,700 $708,933
======== ========
See notes to consolidated financial statements.
F-3
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net income............................................................. $ 30,437 $ 10,680 $ 30,100
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation and amortization........................................ 25,678 25,734 20,051
Deferred income taxes................................................ 13,594 4,756 9,885
Equity income........................................................ (828) (486) (864)
Changes in operating assets and liabilities:
Receivables.......................................................... 13,180 17,888 (33,018)
Inventories.......................................................... 2,733 39,331 (10,173)
Accounts payable and accrued expenses................................ 13,081 (23,737) 13,515
Prepaids and other-net............................................... 7,353 (10,513) 5,893
-------- -------- --------
Net Cash Provided By Operating Activities............................ 105,228 63,653 35,389
-------- -------- --------
INVESTING ACTIVITIES:
Property, plant and equipment acquired............................... (29,451) (33,406) (31,898)
Acquisition of net assets associated with Arrow
and Kenneth Cole license agreements................................ (5,000) (56,765)
Acquisition of worldwide rights to Van Heusen trademark.............. (600) (18,100)
--------- -------- --------
Net Cash Used By Investing Activities................................ (29,451) (39,006) (106,763)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from revolving line of credit............................... 58,300 50,290
Payments on revolving line of credit................................. (58,300) (50,290)
Exercise of stock options............................................ 1,985 2,845 1,196
Acquisition of treasury shares....................................... (60) (326)
Cash dividends....................................................... (4,160) (4,136) (4,094)
-------- -------- --------
Net Cash Used By Financing Activities................................ (2,235) (1,291) (3,224)
-------- -------- --------
Increase (decrease) in cash.......................................... 73,542 23,356 (74,598)
Cash at beginning of period.......................................... 43,579 20,223 94,821
-------- -------- --------
Cash at end of period................................................ $117,121 $ 43,579 $ 20,223
======== ======== ========
See notes to consolidated financial statements.
F-4
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ACCUMULATED
------------ OTHER
$1 PAR ADDITIONAL RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS LOSS STOCK EQUITY
------ ----- ------- -------- ---- ----- ------
January 30, 2000 27,289,869 $27,290 $117,697 $ 96,698 $241,685
Net income.................. 30,100 30,100
Stock options exercised..... 138,239 138 1,058 1,196
Cash dividends.............. (4,094) (4,094)
Acquisition of 24,627
treasury shares........... $(326) (326)
----- --------
February 4, 2001.............. 27,428,108 27,428 118,755 122,704 (326) 268,561
Net income.................. 10,680 10,680
Minimum pension liability,
net of tax................. $ (12,500) (12,500)
--------
Total comprehensive loss.... (1,820)
Stock options exercised..... 218,064 218 2,627 2,845
Tax benefit from exercise
of stock options.......... 277 277
Cash dividends.............. (4,136) (4,136)
-------- --------
February 3, 2002.............. 27,646,172 27,646 121,659 129,248 (12,500) (326) 265,727
Net income.................. 30,437 30,437
Minimum pension liability,
net of tax................. (21,870) (21,870)
--------
Total comprehensive income.. 8,567
Stock options exercised..... 166,782 167 1,818 1,985
Tax benefit from exercise
of stock options.......... 168 168
Cash dividends.............. (4,160) (4,160)
Acquisition of 3,954
treasury shares........... (60) (60)
----- --------
February 2, 2003.............. 27,812,954 $27,813 $123,645 $155,525 $(34,370) $(386) $272,227
========== ======= ======== ======== ======== ===== ========
See notes to consolidated financial statements.
F-5
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of Phillips-Van Heusen Corporation and its subsidiaries, taken as a
whole (the "Company"). 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. Results for 2002
represent the 52 weeks ended February 2, 2003. Results for 2001 represent the 52
weeks ended February 3, 2002. Results for 2000 represent the 53 weeks ended
February 4, 2001.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Asset Impairments - The Company records impairment losses on long-lived
assets (including goodwill and other indefinitely lived intangible assets) 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 certain apparel inventories of $121,129 (2002) and $105,768 (2001) is
determined using the last-in, first-out method (LIFO). Cost for footwear and
other apparel inventories is determined using the first-in, first-out method
(FIFO).
Property, Plant and Equipment - Property, plant and equipment are carried
at cost less accumulated depreciation. Depreciation is provided over the
estimated useful lives of the related assets on a straight-line basis. The range
of useful lives is as follows: Buildings and building improvements: 15-40 years;
machinery, software and equipment: 3-10 years; furniture and fixtures: 7-10
years. Leasehold improvements are amortized using the straight-line method over
the lesser of the term of the related lease or the estimated useful life of the
asset. Major additions and betterments are capitalized, and repairs and
maintenance are charged to operations in the period incurred.
Contributions from Landlords - The Company receives contributions from
landlords primarily for opening retail stores which the Company leases from the
landlords. Such amounts are amortized as a reduction of rent expense over the
life of the related lease.
Fair Value of Financial Instruments - Using discounted cash flow analyses,
the Company estimates that the fair value of all financial instruments
approximates their carrying value, except as noted in the note entitled
"Long-Term Debt."
Revenue Recognition - Sales are recognized upon shipment of products to
customers since title passes upon shipment and, in the case of sales by our
outlet stores, when goods are sold to consumers. Allowances for estimated
returns and discounts are provided when sales are recorded. Royalty revenue is
recognized when licensed products are sold by the Company's licensees. For
licensees whose sales are not expected to exceed contractual sales minimums,
royalty revenue is recognized based on contractual minimums.
F-6
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Advertising - Advertising costs are expensed as incurred and totalled
$33,544 (2002), $33,132 (2001) and $34,773 (2000).
Shipping and Handling Fees and Costs - Shipping and handling fees billed to
customers are recorded as revenue. The costs associated with shipping goods to
customers are recorded as cost of sales.
Reclassifications - For comparative purposes, certain prior period amounts
have been reclassified to conform to the current period's presentation.
Stock-Based Compensation - The Company accounts for its stock options under
the intrinsic value method 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," as amended by FASB Statement
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
Under APB Opinion No. 25, the Company 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.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123:
2002 2001 2000
---- ---- ----
Net income, as reported........................................... $30,437 $10,680 $30,100
Deduct: Stock-based employee
compensation expense determined under fair
value method, net of related tax effects........................ 3,368 2,998 2,499
------- ------- -------
Net income, as adjusted........................................... $27,069 $ 7,682 $27,601
======= ======= =======
Net income per share:
Basic - as reported............................................. $ 1.10 $ 0.39 $ 1.10
======= ======= =======
Diluted - as reported........................................... $ 1.08 $ 0.38 $ 1.10
======= ======= =======
Basic - as adjusted............................................. $ 0.98 $ 0.28 $ 1.01
======= ======= =======
Diluted - as adjusted........................................... $ 0.97 $ 0.28 $ 1.01
======= ======= =======
The assumptions used to calculate the fair value of stock options at their
grant dates are presented in the note entitled "Stockholder's Equity."
F-7
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
EARNINGS PER SHARE
The Company computed its basic and diluted earnings per share by dividing
net income by:
2002 2001 2000
---- ---- ----
Weighted Average Common Shares Outstanding
for Basic Earnings Per Share................................ 27,770,112 27,595,111 27,305,450
Impact of Dilutive Employee Stock Options..................... 395,030 451,706 110,499
---------- ---------- ----------
Total Shares for Diluted Earnings Per Share................... 28,165,142 28,046,817 27,415,949
========== ========== ==========
F-8
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME TAXES
Income taxes consist of:
2002 2001 2000
---- ---- ----
Federal:
Current.................................................. $ 609 $ 7,200
Deferred................................................. 13,594 $4,284 8,324
State, foreign and local:
Current.................................................. 1,666 1,252 1,030
Deferred................................................. 472 1,561
------- ------ -------
$15,869 $6,008 $18,115
======= ====== =======
The current Federal tax provision in 2002 and 2000 relates to estimated
alternative minimum tax.
Taxes paid were $1,197 (2002), $1,454 (2001) and $8,248 (2000).
The approximate tax effect of items giving rise to the deferred income tax
asset recognized in the Company's balance sheets is as follows:
2002 2001
---- ----
Depreciation and amortization...................................... $(19,343) $(15,213)
Landlord contributions............................................. - 791
Employee compensation and benefits................................. 16,796 14,093
Tax loss and credit carryforwards.................................. 32,983 33,040
Minimum pension liability.......................................... 21,000 7,700
Other-net.......................................................... 11 8,878
-------- --------
$ 51,447 $ 49,289
======== ========
A reconciliation of the statutory Federal income tax to the income tax
expense is as follows:
2002 2001 2000
---- ---- ----
Statutory 35% federal tax....................................... $16,207 $ 5,841 $16,875
State, foreign and local income taxes,
net of Federal income tax benefit............................. 1,082 1,019 1,415
Other-net....................................................... (1,420) (852) (175)
------- ------- -------
Income tax expense.............................................. $15,869 $ 6,008 $18,115
======= ======= =======
INVENTORIES
Inventories, comprised principally of finished goods, are stated at the
lower of cost or market. Cost for certain apparel inventories is determined
using the last-in, first-out method (LIFO). Cost for footwear and other apparel
inventories is determined using the first-in, first-out method (FIFO). At
February 2, 2003 and February 3, 2002, no LIFO reserve was recorded because LIFO
cost approximates FIFO cost.
F-9
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, are summarized as follows:
2002 2001
---- ----
Land........................................................................ $ 1,139 $ 1,139
Buildings and building improvements......................................... 28,004 25,389
Machinery and equipment, furniture
and fixtures and leasehold
improvements.............................................................. 299,396 277,380
-------- --------
328,539 303,908
Less: Accumulated depreciation
and amortization..................................................... 185,904 168,091
-------- --------
$142,635 $135,817
======== ========
LONG-TERM DEBT
Long-term debt is as follows:
2002 2001
---- ----
9 1/2% senior subordinated notes due 2008...................................... $149,521 $149,454
7 3/4% debentures due 2023..................................................... 99,491 99,481
-------- --------
$249,012 $248,935
======== ========
The Company issued $100,000 of 7 3/4% 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, the Company estimates that the fair value of these
debentures on February 2, 2003, using discounted cash flow analyses, was
approximately $82,000. In connection with the debentures, the Company must
maintain a certain level of stockholders' equity in order to make restricted
payments, as defined in the indenture governing the debentures, including cash
dividends.
The Company issued $150,000 of 9 1/2% senior subordinated notes due 2008 on
April 22, 1998 with a yield to maturity of 9.58%. Interest is payable
semi-annually. Based on current market conditions, the Company estimates that
the fair value of these notes on February 2, 2003, using discounted cash flow
analyses, was approximately $153,200. In connection with the notes, the Company
must maintain, among other things, a certain cash flow coverage ratio in order
to make restricted payments, as defined in the indenture governing the notes,
including cash dividends.
The Company has a secured revolving credit facility which provides for
revolving credit borrowings as well as the issuance of letters of credit. The
Company may, at its option, borrow and repay amounts up to a maximum of $325,000
under both the revolving credit borrowings and the issuance of letters of
credit. Borrowing spreads and
F-10
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
letters of credit fees are based on spreads above Eurodollar and other available
interest rates, with the spreads changing based upon a pricing grid. For
example, revolving credit spreads range from 175 to 275 basis points over
Eurodollar loan rates and 100 to 200 basis points on outstanding letters of
credit. All outstanding borrowings and letters of credit under this credit
facility are due October 17, 2007.
In connection with the revolving credit facility and the 7 3/4% debentures
due 2023 substantially all of the Company's assets have been pledged as
collateral.
The amount outstanding under the letter of credit facility as of February
2, 2003 was $143,015.
Interest paid was $23,782 (2002), $24,805 (2001) and $23,818 (2000).
There are no scheduled maturities of long-term debt until 2008.
STOCKHOLDERS' EQUITY
Preferred Stock Rights - On June 10, 1986, the Company's Board of Directors
declared a distribution of one Right (the "Rights") to purchase Series A
Cumulative Participating Preferred Stock, par value $100 per share, for each
outstanding share of common stock. As a result of subsequent stock splits, each
outstanding share of common stock now carries with it one-fifth of one Right.
Under certain circumstances, each Right will entitle the registered holder
to acquire from the Company one one-hundredth (1/100) of a share of said Series
A Preferred Stock at an exercise price of $100. The Rights will be exercisable,
except in certain circumstances, commencing ten days following a public
announcement that (i) a person or group has acquired or obtained the right to
acquire 20% or more of the common stock, in a transaction not approved by the
Board of Directors or (ii) a person or group has commenced or intends to
commence a tender offer for 30% or more of the common stock (the "Distribution
Date").
If the Company 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 the Company is not the surviving corporation in a merger or
other business combination, or more than 50% of the Company'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, the
Company may redeem the Rights in whole, but not in part, at a price of $.05 per
Right. The rights are currently scheduled to expire on June 16, 2006.
F-11
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock Options - Under the Company's stock option plans, non-qualified and
incentive stock options ("ISOs") may be granted. Options are granted with an
exercise price equal to the closing price of the common stock on the trading
date immediately preceding the date of grant. ISOs and non-qualified options
granted have a ten-year duration. Depending upon which plan options have been
granted under, options are cumulatively exercisable in either three installments
commencing three years after the date of grant or in four installments
commencing one year after the date of grant.
For purposes of the required disclosure requirements of FASB Statement No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure," as
illustrated in the Summary of Significant Accounting Policies, the Company
estimated the fair value of stock options granted since 1995 at the date of
grant using the Black-Scholes model. The estimated fair value of the options is
then 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:
2002 2001 2000
---- ---- ----
Risk-free interest rate........................................... 4.75% 5.30% 6.52%
Expected option life ............................................. 7 Years 7 Years 7 Years
Expected volatility............................................... 30.4% 30.7% 30.0%
Expected dividends per share ..................................... $0.15 $0.15 $0.15
Weighted average estimated fair
value per share of options granted.............................. $5.55 $5.17 $3.62
Other data with respect to stock options follows:
OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE PRICE PER SHARE
------ --------- ---------------
Outstanding at January 30, 2000................ 3,568,447 $ 6.38 - $31.63 $12.48
Granted..................................... 868,900 9.00 - 13.19 9.48
Exercised................................... 138,239 6.38 - 10.25 8.65
Cancelled................................... 282,105 7.31 - 14.75 12.14
--------- ---- ----- ------
Outstanding at February 4, 2001................ 4,017,003 6.81 - 31.63 11.99
Granted..................................... 921,600 9.65 - 17.40 13.43
Exercised................................... 218,064 9.38 - 14.75 13.05
Cancelled................................... 314,850 9.00 - 16.50 13.46
--------- ---- ----- ------
Outstanding at February 3, 2002................ 4,405,689 6.81 - 31.63 12.13
Granted..................................... 893,850 10.61 - 15.72 14.80
Exercised................................... 166,782 7.50 - 14.75 11.90
Cancelled................................... 267,132 9.38 - 22.38 12.33
--------- ---- ----- ------
Outstanding at February 2, 2003................ 4,865,625 $ 6.81 - $31.63 $12.62
========= ====== ====== ======
F-12
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Of the outstanding options at February 2, 2003, 1,585,675 shares have an
exercise price below $13.06, 2,470,410 shares have an exercise price from $13.06
to $14.75 and 809,540 shares have an exercise price above $14.75. The weighted
average remaining contractual life for all options outstanding at February 2,
2003 is 6.6 years.
Of the outstanding options at February 2, 2003 and February 3, 2002,
options covering 2,412,946 and 1,705,585 shares were exercisable at a weighted
average price of $12.51 and $12.84, respectively. Stock options available for
grant at February 2, 2003 and February 3, 2002 amounted to 1,007,257 and
1,686,792 shares, respectively.
LEASES
The Company leases retail stores, manufacturing facilities, warehouses,
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 2, 2003, minimum annual rental commitments under
non-cancellable operating leases, including leases for new retail stores which
had not begun operating at February 2, 2003, are as follows:
2003......................................................$59,894
2004.......................................................46,122
2005.......................................................30,581
2006.......................................................20,681
2007.......................................................14,234
Thereafter.................................................37,777
------
Total minimum lease payments.............................$209,289
========
Rent expense is as follows:
2002 2001 2000
---- ---- ----
Minimum....................................................... $65,843 $65,010 $60,919
Percentage and other.......................................... 13,009 11,138 10,299
------- ------- -------
$78,852 $76,148 $71,218
======= ======= =======
RETIREMENT AND BENEFIT PLANS
The Company 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 the Company'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.
The Company and its domestic subsidiaries also provide certain
postretirement health care and life insurance benefits. 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-13
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
During 2002, the postretirement plan was amended to eliminate benefits for
active participants who, as of January 1, 2003, had not attained age 55 and 10
years of service. This change reduced the benefit obligation by $9,297, which
eliminated the unrecognized transition obligation and unrecognized prior service
cost. A negative unrecognized prior service cost was established for the
remainder.
Following is a reconciliation of the changes in the benefit obligation for
each of the last two years:
Pension Plans Postretirement Plan
------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Beginning of year............................. $148,960 $135,167 $ 37,408 $35,490
Service cost.................................. 3,211 2,837 67 669
Interest cost................................. 10,998 10,474 2,012 2,677
Benefit payments, net......................... (8,822) (7,651) (2,494) (2,584)
Actuarial loss................................ 18,587 4,115 7,974 1,156
Plan amendments............................... 4,018 (9,297)
-------- --------
End of year................................... $172,934 $148,960 $ 35,670 $37,408
======== ======== ======== =======
Following is a reconciliation of the fair value of the assets held by the
Company's pension plans for each of the last two years:
2002 2001
---- ----
Beginning of year........................................ $123,187 $136,601
Actual return............................................ (8,239) (6,784)
Benefits paid............................................ (8,822) (7,651)
Company contributions.................................... 5,532 1,021
-------- --------
End of year.............................................. $111,658 $123,187
======== ========
Net benefit cost recognized in each of the last three years is as follows:
Pension Plans Postretirement Plan
------------- --------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Service cost, including
expenses..................................$. 3,371 $ 2,997 $ 2,369 $ 67 $ 669 $ 478
Interest cost.................................10,998 10,474 9,704 2,012 2,677 2,633
Amortization of net loss...................... 161 112 (1,243) 388 339 163
Amortization of transition
(asset) obligation.......................... (21) (40) (46) 273 273
Expected return on
plan assets................................(12,393) (11,949) (12,628)
Amortization of prior
service cost................................ 1,949 2,140 1,453 (444) 104 104
------ ------- -------- ------ ------ ------
$ 4,065 $ 3,734 $ (391) $2,023 $4,062 $3,651
======== ======= ======== ====== ====== ======
F-14
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Following is a reconciliation of the benefit obligation at the end of each
of the last two years to the amounts recognized on the balance sheet:
Pension Plans Postretirement Plan
------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Benefit obligation at year-end..................... $172,934 $148,960 $ 35,670 $37,408
Unrecognized prior service cost.................... (5,412) (7,361) 5,323 (525)
Unrecognized losses................................ (65,567) (29,004) (15,651) (8,073)
Unrecognized transition asset
(obligation)..................................... 21 (3,005)
Minimum pension liability.......................... 55,370 20,200
Plan assets at fair value.......................... (111,658) (123,187)
--------- --------
Liability recognized on the
balance sheet.................................... $ 45,667 $ 9,629 $ 25,342 $25,805
======== ======== ======== =======
Included in the above disclosures are certain pension plans with projected
and accumulated benefit obligations in excess of plan assets of $20,777 and
$15,190, respectively, as of February 3, 2002. As of February 2, 2003, all
pension plans had projected and accumulated benefit obligations in excess of
plan assets.
The health care cost trend rate assumed for 2003 is 10.5% and is assumed to
decrease by 0.5% per year through 2014. Thereafter, the rate assumed is 5.0%. If
the assumed health care cost trend rate increased or decreased by 1%, the
aggregate effect on the service and interest cost components of the net
postretirement benefit cost for 2002 and on the postretirement benefit
obligation at February 2, 2003 would be as follows:
1% Increase 1% Decrease
----------- -----------
Impact on service and interest cost................................ $ 175 $ (156)
Impact on year-end benefit obligation.............................. $ 3,389 $(2,958)
Significant rate assumptions used in determining the benefit obligations at
the end of each year and benefit cost in the following year, were as follows:
2002 2001
---- ----
Discount rate............................................................ 6.75% 7.50%
Rate of increase in compensation
levels (applies to pension plans only)................................. 4.00% 4.00%
Long-term rate of return on assets....................................... 8.75% 9.00%
F-15
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company 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 the Company, the
participant has been in the plan for at least 10 years and has attained age 55.
At February 2, 2003 and February 3, 2002, $14,471 and $13,053, respectively, are
included in other liabilities as the accrued cost of this plan.
The Company has a savings and retirement plan and a supplemental savings
plan for the benefit of its eligible employees who elect to participate. The
Company matches a portion of employee contributions to the plans. Matching
contributions were $3,061 (2002), $3,082 (2001) and $2,608 (2000).
GOODWILL AND OTHER INTANGIBLE ASSETS
In 2002, the Company adopted FASB Statement No. 142, "Goodwill and Other
Intangible Assets." This standard requires that goodwill and other indefinitely
lived intangible assets not be amortized, but instead be tested for impairment.
During 2002, the Company completed the required transitional impairment tests.
No impairment resulted from these tests.
At the end of each of 2002 and 2001, accumulated amortization was $16,849
for goodwill and $467 for other intangible assets. No amortization for other
intangible assets was recorded in 2002 due to the Company's determination that
such assets are indefinitely lived.
If goodwill and other indefinitely lived intangible assets had not been
amortized in 2001 and 2000, the Company's adjusted net income and earnings per
share would have been as follows:
2001 2000
------------------------------------------- -----------------------------------------
BASIC NET DILUTED NET BASIC NET DILUTED NET
NET INCOME INCOME NET INCOME INCOME
INCOME PER SHARE PER SHARE INCOME PER SHARE PER SHARE
------ --------- --------- ------ --------- ---------
As reported........................ $10,680 $0.39 $0.38 $30,100 $1.10 $1.10
Amortization of goodwill and
other indefinitely lived
intangible assets, net of tax..... 2,849 0.10 0.10 1,877 0.07 0.07
------ ----- ----- ------- ----- -----
As adjusted........................ $13,529 $0.49 $0.48 $31,977 $1.17 $1.17
======= ===== ===== ======= ===== =====
F-16
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ACQUISITIONS
Effective February 2, 2001, the Company acquired from Coats Viyella plc the
rights to the Van Heusen trademark in the parts of the world where the Company
did not previously have such rights. The purchase price and related fees were
$18,700. This amount was recorded in other intangible assets.
On July 24, 2000, the Company entered into a license to market dress shirts
and sportswear under the Arrow brand and acquired the license to market dress
shirts under the Kenneth Cole brand. These transactions were accounted for as an
acquisition using the purchase method of accounting. In connection with these
transactions, the Company acquired $61,765 of net assets (principally
inventory), including $16,932 of goodwill.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 2001, the Company recorded restructuring and other
charges of $21,000 related to streamlining certain corporate and divisional
operations, exiting three dress shirt manufacturing facilities and liquidating
related dress shirt inventories.
The cost components of the charges are as follows:
Termination benefits for approximately 1,200 employees......................... $ 8,900
Inventory liquidations included in cost of goods sold.......................... 5,400
Lease terminations and other exit obligations.................................. 5,200
Asset write-offs............................................................... 1,500
-------
$21,000
=======
Other than inventory liquidations which were charged to cost of goods sold,
all of the charges were included in selling, general and administrative
expenses.
During 2001, the Company charged approximately $9,900 to this reserve, of
which $5,400 related to inventory liquidations, leaving $11,100 in this reserve
at February 3, 2002.
During 2002, the Company charged approximately $7,900 to this reserve,
leaving $3,200 in this reserve at February 2, 2003. The actions related to these
charges have been substantially completed by the Company; however, due to the
extended terms of certain lease and employee termination contractual obligations
associated with these actions, costs continue to be charged to this reserve.
F-17
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEGMENT DATA
The Company manages and analyzes its operating results by its two
vertically integrated business segments: (i) Apparel and (ii) Footwear and
Related Products. In identifying its reportable segments, the Company evaluated
its operating divisions and product offerings. The Company aggregates the
results of its apparel divisions into the Apparel segment. This segment derives
revenues from marketing dress shirts and sportswear, principally under the brand
names Van Heusen, Izod, Geoffrey Beene, DKNY, Arrow, Kenneth Cole New York,
Reaction by Kenneth Cole and ck Calvin Klein. ck Calvin Klein products included
in the Apparel segment consist of dress shirts marketed under a license
agreement which existed prior to the Company's acquisition of Calvin Klein, Inc.
and certain affiliated companies on February 12, 2003, as explained in the note
entitled "Subsequent Event." The Company's footwear business has been identified
as the Footwear and Related Products segment. This segment derives revenues from
marketing casual footwear, apparel and accessories principally under the
Bass/G.H. Bass & Co. brand name. Sales for both segments occur principally in
the United States.
2002 2001 2000
---- ---- ----
Revenues
Apparel.................................................. $1,042,855 $1,061,412 $1,071,029
Footwear and Related Products............................ 362,118 370,480 384,519
---------- ---------- ----------
Total Revenues........................................... $1,404,973 $1,431,892 $1,455,548
========== ========== ==========
Operating Income
Apparel(1)............................................... $ 73,307 $ 44,990 $ 74,935
Footwear and Related Products(1)......................... 21,207 19,525 17,753
---------- ---------- ----------
Total Operating Income(1)................................ 94,514 64,515 92,688
Corporate Expenses.......................................... 25,479 23,376 22,151
Interest Expense, net....................................... 22,729 24,451 22,322
---------- ---------- ----------
Income Before Taxes...................................... $ 46,306 $ 16,688 $ 48,215
========== ========== ==========
Identifiable Assets
Apparel.................................................. $ 362,208 $ 376,747 $ 430,868
Footwear and Related Products............................ 112,614 121,734 122,180
Corporate................................................ 296,878 210,452 171,316
---------- ---------- ----------
$ 771,700 $ 708,933 $ 724,364
========== ========== ==========
Depreciation and Amortization
Apparel.................................................. $ 16,046 $ 18,034 $ 13,258
Footwear and Related Products............................ 6,707 6,049 5,370
Corporate................................................ 2,925 1,651 1,423
---------- ---------- ----------
$ 25,678 $ 25,734 $ 20,051
========== ========== ==========
Identifiable Capital Expenditures
Apparel.................................................. $ 17,126 $ 21,122 $ 20,041
Footwear and Related Products............................ 9,393 9,416 10,147
Corporate................................................ 2,932 2,868 1,710
---------- ---------- ----------
$ 29,451 $ 33,406 $ 31,898
========== ========== ==========
(1) Operating income in 2001 includes $21,000 of restructuring and other
charges, of which $19,000 relates to the Apparel segment and $2,000 relates
to the Footwear and Related Products segment.
F-18
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER COMMENTS
The Company has a minority interest in Gant Company AB. The Company uses
the equity method to account for this investment. As of February 2, 2003, this
investment has a carrying amount of approximately $13,400.
The Company has guaranteed the payment of certain raw material purchases by
Productos Textiles, S.A. de C.V. from three suppliers of Productos Textiles,
S.A. de C.V. Productos Textiles, S.A. de C.V. is a supplier of the Company. The
maximum amount guaranteed under all three contracts is $4,500. The guarantees
expire on January 31, 2005.
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
2002, 2001 and 2000, the Company purchased approximately $14,390, $2,681 and
$2,834, 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 opinions of legal counsel, will not have a
material adverse effect on the Company's financial position.
During each of 2002, 2001 and 2000, the Company paid four $0.0375 per share
cash dividends on its common stock.
SUBSEQUENT EVENT (UNAUDITED)
On February 12, 2003, the Company purchased all of the issued and
outstanding stock of Calvin Klein, Inc. and certain affiliated companies for
$400,000 in cash and 2,535,926 shares of the Company's common stock, valued at
$30,000. The purchase price is subject to adjustment based upon the closing date
value of the acquired entities. The purchase price also included, in
consideration of Mr. Klein's sale to the Company of all of his rights under a
design services letter agreement with Calvin Klein, Inc., a nine-year warrant in
favor of Mr. Klein to purchase 320,000 shares of the Company's common stock at
$28.00 per share, which the Company has valued at $637 based on the
Black-Scholes model, and contingent purchase price payments for 15 years based
on a percentage of total worldwide net sales of products bearing any of the
Calvin Klein brands. Such contingent purchase price payments will be charged to
goodwill and intangible assets. On February 20, 2003, pursuant to the stock
purchase agreement, the Company paid an additional $8,000 in net cash
(consisting of a $13,000 cash payment, net of $5,000 cash acquired) to the
selling stockholders of the acquired entities based upon an estimate of the
closing date net book value of the acquired entities.
In connection with the acquisition, the Company issued to affiliates of
Apax Managers, Inc. and Apax Partners Europe Managers Limited (collectively,
"Apax") $250,000 of Series B convertible preferred stock with a conversion price
of $14.00 per share and a dividend rate of 8% per annum, payable quarterly, in
cash. If the Company elects not to pay a cash dividend for any quarter, then the
Series B convertible preferred stock will be treated for purposes of the payment
of future dividends and upon conversion, redemption or liquidation as if an
in-kind dividend had been paid. Conversion may occur any time at Apax's option.
Conversion may occur at the Company's option on or after February 12, 2007, if
the market value of the Company's common stock trades equals or exceeds 225% of
the conversion price then in effect for 60 consecutive days. Apax can require
the Company to redeem for cash all of the then outstanding shares of Series B
convertible preferred stock on or after the later of (i) six months after the
maturity of indebtedness incurred by the Company to refinance the loan described
in the next paragraph and (ii) November 1, 2008.
F-19
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Also in connection with the acquisition, Apax entered into a $125,000 loan
agreement with the Company. The term is two years but is extendable for an
additional two years at Apax's option. The Company borrowed $100,000 in
connection with the closing of the Calvin Klein acquisition and borrowed the
remaining $25,000 on March 14, 2003. The loan is secured and bears interest at a
rate of 10% per annum for the first year and at 15% per annum for the second
year and any renewal period. The Company would be obligated to pay an extension
fee if the loan is not repaid within the first year and an additional fee if it
is extended beyond the second year. It is the Company's intention to refinance
this loan in 2003.
If the acquisition had occurred on the first day of fiscal 2002 instead of
on February 12, 2003, the Company's proforma consolidated results of operations
for the year ended February 2, 2003 would have been:
Total revenues.............................. $1,576,965
Net income.................................. 37,959
Basic net income per common share........... 0.59
Diluted net income per common share......... 0.58
The Company is in the process of finalizing the estimate of the fair values
of the assets acquired and liabilities assumed at the date of acquisition.
F-20
PHILLIPS-VAN HEUSEN CORPORATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
2002 2001 2002 2001 2002 2001 2002 2001(1)
---- ---- ---- ---- ---- ---- ---- -------
Total revenues............. $349,421 $366,923 $331,192 $334,378 $409,103 $405,002 $315,257 $325,589
Gross profit............... 118,880 121,708 129,660 119,784 150,500 143,754 132,190 120,984
Net income (loss).......... (831) 564 7,853 6,974 17,689 12,607 5,726 (9,465)
Basic net income (loss)
per share................ (0.03) 0.02 0.28 0.25 0.64 0.46 0.21 (0.34)
Diluted net income
(loss) per share.......... (0.03) 0.02 0.28 0.25 0.63 0.45 0.20 (0.34)
Price range of common
stock per share
High.................... 16.00 17.00 16.46 18.74 14.20 14.87 14.20 13.00
Low..................... 10.35 12.70 11.00 11.70 10.80 8.32 11.22 8.45
- ---------------
(1) The fourth quarter of 2001 includes restructuring and other charges of
$21,000, or $13,440 net of tax.
F-21
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 2, 2003 and
February 3, 2002, and the related consolidated income statements, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended February 2, 2003. Our audits also included the financial statement
schedule included in Item 15(a)(2). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 2, 2003 and February 3, 2002,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended February 2, 2003 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
As described in the note entitled "Goodwill and Other Intangible Assets,"
the Company adopted FASB Statement No. 142, "Goodwill and Other Intangible
Assets," effective February 4, 2002.
E&Y SIGNATURE STAMP
New York, New York
March 3, 2003
F-22
PHILLIPS-VAN HEUSEN CORPORATION
TEN YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE DATA, PERCENTS AND RATIOS)
2002 2001(1) 2000(2) 1999 1998
---- ------- ------- ---- ----
SUMMARY OF OPERATIONS
Revenues
Apparel........................................ $1,042,855 $1,061,412 $1,071,029 $ 885,792 $ 896,863
Footwear and Related Products.................. 362,118 370,480 384,519 385,698 406,222
---------- ---------- ---------- ---------- ----------
1,404,973 1,431,892 1,455,548 1,271,490 1,303,085
Cost of goods sold and expenses.................. 1,335,938 1,390,753 1,385,011 1,223,180 1,259,600
---------- ---------- ---------- ---------- ----------
Income (loss) before interest and taxes.......... 69,035 41,139 70,537 48,310 43,485
Interest expense, net............................ 22,729 24,451 22,322 22,430 27,743
Income tax expense (benefit)..................... 15,869 6,008 18,115 9,007 3,915
---------- ---------- ---------- ---------- ----------
Net income (loss)........................... $ 30,437 $ 10,680 $ 30,100 $ 16,873 $ 11,827
========== ========== ========== ========== ==========
PER SHARE STATISTICS
Basic Earnings Per Share......................... $ 1.10 $ 0.39 $ 1.10 $ 0.62 $ 0.43
Diluted Earnings Per Share....................... $ 1.08 $ 0.38 $ 1.10 $ 0.62 $ 0.43
Dividends paid per share......................... $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.15
Stockholders' equity per share................... 9.80 9.62 9.80 8.86 8.39
FINANCIAL POSITION
Current assets................................... $ 451,127 $ 405,300 $ 436,381 $ 425,970 $ 368,017
Current liabilities.............................. 127,439 114,358 138,095 124,580 132,686
Working capital.................................. 323,688 290,942 298,286 301,390 235,331
Total assets..................................... 771,700 708,933 724,364 673,748 674,313
Long-term debt................................... 249,012 248,935 248,851 248,784 248,723
Stockholders' equity............................. 272,227 265,727 268,561 241,685 228,888
OTHER STATISTICS
Total debt to total capital (6).................. 47.8% 48.4% 48.1% 50.7% 54.0%
Net debt to net capital (7)...................... 32.6% 43.6% 46.0% 38.9% 53.0%
Current ratio.................................... 3.5 3.5 3.2 3.4 2.8
Average shares outstanding....................... 27,770 27,595 27,305 27,289 27,218
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(1) 2001 includes pre-tax charges of $21,000 for restructuring and other
expenses.
(2) 2000 and 1996 include 53 weeks of operations.
(3) 1997 includes pre-tax charges of $132,700 for restructuring and other
expenses.
(4) 1995 includes pre-tax charges of $27,000 for restructuring and other
expenses.
(5) 1994 includes pre-tax charges of $7,000 for restructuring and other
expenses.
(6) Total capital equals interest-bearing debt and stockholders' equity.
(7) Net debt and net capital are total debt and total capital reduced by cash.
F-23
PHILLIPS-VAN HEUSEN CORPORATION
TEN YEAR FINANCIAL SUMMARY (CONTINUED)
1997(3) 1996(2) 1995(4) 1994(5) 1993
------- ------- ------- ------- ----
SUMMARY OF OPERATIONS
Revenues
Apparel........................................ $ 911,047 $ 897,370 $1,006,701 $ 812,993 $ 757,452
Footwear and Related Products.................. 438,960 462,223 457,427 442,473 394,942
---------- ---------- ---------- ---------- ----------
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
---------- ---------- ---------- ---------- ----------
Income (loss) before interest and taxes (87,153) 47,738 20,573 49,702 80,311
Interest expense, net............................ 20,672 23,164 23,199 12,793 35,098
Income tax expense (benefit)..................... (41,246) 6,044 (2,920) 6,894 13,355
---------- ---------- ---------- ---------- ----------
Net income (loss)........................... $ (66,579) $ 18,530 $ 294 $ 30,015 $ 31,858
========== ========== ========== ========== ==========
PER SHARE STATISTICS
Basic Earnings Per Share......................... $ (2.46) $ 0.69 $ 0.01 $ 1.13 $ 1.22
Diluted Earnings Per Share....................... $ (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.............................. 133,335 122,266 183,126 114,033 109,156
Working capital.................................. 251,683 240,692 261,538 315,637 309,546
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
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%
Net debt to net capital (7)...................... 51.8% 41.7% 50.8% 24.5% 29.3%
Current ratio.................................... 2.9 3.0 2.4 3.8 3.8
Average shares outstanding....................... 27,108 27,004 26,726 26,563 26,142
- ---------------
(1) 2001 includes pre-tax charges of $21,000 for restructuring and other
expenses.
(2) 2000 and 1996 include 53 weeks of operations.
(3) 1997 includes pre-tax charges of $132,700 for restructuring and other
expenses.
(4) 1995 includes pre-tax charges of $27,000 for restructuring and other
expenses.
(5) 1994 includes pre-tax charges of $7,000 for restructuring and other
expenses.
(6) Total capital equals interest-bearing debt and stockholders' equity.
(7) Net debt and net capital are total debt and total capital reduced by cash.
F-24
SCHEDULE II
PHILLIPS-VAN HEUSEN CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
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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
----------- --------- ------- -------- ---------- ---------
YEAR ENDED FEBRUARY 2, 2003
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Deducted from asset accounts:
Allowance for doubtful
Accounts......................... $2,496 $ 658(a) $ 19(b) $ 301(c) $2,872
====== ====== ====== ====== ======
YEAR ENDED FEBRUARY 3, 2002
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Deducted from asset accounts:
Allowance for doubtful
Accounts......................... $2,051 $ 829(a) $ 76(b) $ 460(c) $2,496
====== ====== ====== ====== ======
YEAR ENDED FEBRUARY 4, 2001
- ---------------------------
Deducted from asset accounts:
Allowance for doubtful
accounts......................... $2,305 $ 415(a) $ 178(b) $ 847(c) $2,051
====== ====== ====== ====== ======
(a) Provisions for doubtful accounts.
(b) Recoveries of doubtful accounts previously written off.
(c) Primarily uncollectible accounts charged against the allowance provided.
F-25