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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%
======= ==== ======= ==== ======= ===
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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.
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INCOME TAXES
Our inco