SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A No. 1
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended February 1, 1998 Commission file number: 1-724
PHILLIPS-VAN HEUSEN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1166910
(State of incorporation) (IRS Employer
Identification No.)
1290 Avenue of the Americas
New York, New York 10104
(Address of principal executive offices)
212-541-5200
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1.00 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock of registrant held by
nonaffiliates of the registrant as of April 1, 1998 was approximately
$322,000,000.
Number of shares of Common Stock outstanding as of April 1, 1998:
27,187,644.
This Form 10-K/A No. 1 for Phillips-Van Heusen Corporation (the "Company")
is being filed to amend the Company's financial statements for the fiscal year
ended February 1, 1998. The financial statements included in the Company's
previously filed Form 10-K for the fiscal year ended February 1, 1998 included
certain debt which was classified as a current liability. As more fully
explained in the Notes to Consolidated Financial Statements included in Item 8
of this Form 10-K/A No. 1, the Company completed refinancing such debt on
April 22, 1998. As a result, such debt has been reclassified as long-term
debt in the Company's consolidated balance sheet as of February 1, 1998.
Item 6, Selected Financial Data, and Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, have also been
amended to reflect the completion of this refinancing.
* * *
*******************************************************************************
* *
* SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF *
* 1995 *
* *
* Forward-looking statements in this Form 10-K/A No. 1 report, including, *
* without limitation, statements relating to the Company's plans, strategies, *
* objectives, expectations and intentions, are made pursuant to the safe *
* harbor provisions of the Private Securities Litigation Reform Act of 1995. *
* Investors are cautioned that such forward-looking statements are inherently *
* subject to risks and uncertainties, many of which cannot be predicted with *
* accuracy, and some of which might not be anticipated, including, without *
* limitation, the following: (i) the Company's plans, strategies, *
* objectives, expectations and intentions are subject to change at any time *
* at the discretion of the Company; (ii) the levels of sales of the *
* Company's apparel and footwear products, both to its wholesale customers *
* and in its retail stores, and the extent of discounts and promotional *
* pricing in which the Company is required to engage; (iii) the Company's *
* plans and results of operations will be affected by the Company's ability *
* to manage its growth and inventory; and (iv) other risks and uncertainties *
* indicated from time to time in the Company's filings with the Securities *
* and Exchange Commission. *
* *
*******************************************************************************
Item 6. Selected Financial Data
Selected Financial Data appears under the heading "Ten Year Financial
Summary" on pages F-20 and F-21.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company manages and analyzes its operating results by two vertically
integrated business segments: (i) apparel and (ii) footwear and related
products. As described more fully in the "Non-Recurring Charges" section of
this review, the results of operations for 1997 and 1995 include pre-tax non-
recurring charges of $132.7 million and $27 million, respectively.
The following adjusted statements of operations and segment data segregate the
non-recurring charges from the Company's ongoing operations, and the review
which follows discusses the Company's results of operations before the non-
recurring charges.
1
Adjusted Statements of Operations
(In thousands) 1997 1996 1995
Net Sales $1,350,007 $1,359,593 $1,464,128
Cost of goods sold 937,965 910,517 987,921
Non-recurring charges (46,000)
Gross profit before non-recurring charges 458,042 449,076 476,207
SG&A expenses and non-recurring charges 499,195 401,338 455,634
Non-recurring charges (86,700) (27,000)
SG&A expenses before non-recurring charges 412,495 401,338 428,634
Income before interest, taxes and
non-recurring charges 45,547 47,738 47,573
Interest expense, net 20,672 23,164 23,199
Income before taxes and non-recurring
charges 24,875 24,574 24,374
Income tax expense 5,954 6,044 7,064
Income from ongoing operations before
non-recurring charges 18,921 18,530 17,310
Non-recurring charges, net of tax benefit (85,500) (17,016)
Net income (loss) $ (66,579) $ 18,530 $ 294
Adjusted Segment Data
(In thousands) 1997 1996 1995
Net sales-Apparel $ 911,047 $ 897,370 $1,006,701
Net sales-Footwear and Related Products 438,960 462,223 457,427
Total net sales $1,350,007 $1,359,593 $1,464,128
Operating income-Apparel $ 45,416 $ 30,021 $ 37,432
Operating income-Footwear and
Related Products 15,382 32,888 23,026
Total operating income 60,798 62,909 60,458
Corporate expenses (15,251) (15,171) (12,885)
Income-before interest, taxes and
non-recurring charges $ 45,547 $ 47,738 $ 47,573
Apparel
Net sales of the Company's apparel segment were $911.0 million in 1997
compared with $897.4 million in 1996 and $1,006.7 million in 1995. In both
1997 and 1996, sales growth was limited by the planned closing of retail
outlet stores and the contraction of the private label business, including the
closing in 1997 of the Company's sweater manufacturing operations. The
Company's sales of wholesale branded products increased 24% and 3% in 1997 and
1996, respectively, to $387.2 million in 1997 from $311.9 million in 1996 and
$303.2 million in 1995. The major areas of growth in 1997 were Van Heusen and
Geoffrey Beene dress shirts, as well as Izod sportswear.
Gross margin increased to 32.9% in 1997 from 31.3% in 1996 and 31.4% in
1995. All divisions had gross margin improvements with the exception of Izod
Club, which experienced a particularly difficult competitive environment.
2
Strong inroads by high-visibility men's department store brands into the
'green grass' channel of distribution serviced by Izod Club caused price
pressures which, in turn, led to price promotions and a reduced gross margin.
The Company believes that the consolidation during 1997 of Izod Club into the
various functional departments of Izod should result in significant cost
reductions, as well as provide major improvements in product and product
distribution.
Two factors were key to the improvement in gross margin:
1. The closing of underperforming retail outlet stores and the contraction of
the less profitable private label business.
2. Improvement, across the board, in product and presentation in all of the
Company's brands.
The Company believes these factors should continue in 1998 as the Company's
brands continue to improve their positioning in department store accounts and
as the Company's marketing efforts continue to increase consumer awareness of
the considerable attributes that each of the Company's brands offers.
Selling, general and administrative expenses were 27.9% of net sales in
1997 and 1996 compared with 27.7% in 1995. While overall expense levels have
remained flat, there has been a significant shift in the mix of these
expenditures to marketing and advertising from more general logistical areas.
Included in 1997 were incremental advertising expenses of $15.0 million.
Operating income increased 51.3% in 1997 to $45.4 million compared with
$30.0 million in 1996 and $37.4 million in 1995. The Company believes that its
wholesale sales gains, gross margin improvement, operating efficiency and
marketing investment are all very positive indications of the impact of the
Company's strategic initiatives.
Footwear and Related Products
The process of implementing the Company's strategic initiatives has not
been without disappointment. In the footwear and related products segment,
fiscal 1997 net sales declined 5.0% to $439.0 million compared with $462.2
million in 1996 and $457.4 million in 1995. A closing of retail outlet stores
was a factor in the reduction of overall Bass sales in 1997. However, the
larger negative factor in 1997 was the disappointing results of the Company's
attempt to reposition its Bass brand to higher price points. While the higher
price position was endorsed by the Company's wholesale customers, the
initiatives were not well executed and did not meet with consumer support,
resulting in an inventory build up at both the wholesale level and in the
Company's own factory outlet retail stores. To protect its franchise and
preserve its wholesale customer relationships, the Company took substantial
markdowns in its own retail stores and aggressively financed the markdowns
required by its wholesale customers to sell this inventory. Line management
responsible for the Bass business has been changed, a decision was made to
close the United States mainland footwear manufacturing facilities and the
brand was returned to its historic positioning targeted in the moderate price
range as a family oriented, 'Americana'-associated, casual lifestyle brand.
The result of these actions was a non-recurring charge to fiscal 1997 earnings
of $54.2 million and a decline in footwear and related products operating
income (before such charge) of $17.5 million to $15.4 million. Operating
income in 1995 was $23.0 million.
Gross margin in 1997 was 36.0% compared with 36.3% in 1996 and 34.9% in
1995. As in all of the Company's branded businesses, the footwear and related
products segment represents a combination of wholesale and retail businesses.
The sales problems described above caused gross margin reductions across the
board as markdown allowances to wholesale customers took place
contemporaneously with markdowns taken at the Company's retail outlet stores.
However, the much sharper declines in the Company's wholesale sector created a
greater weighting to the Company's higher margin retail sector and this shift
offset most of the overall percentage decline. The Company believes that the
3
repositioning of the Bass brand should enable both the mix of business and
their respective gross margins to return to more normal levels.
Selling, general and administrative expenses were 32.5% of net sales in
1997 compared with 29.2% in 1996 and 29.9% in 1995. The increase in 1997 was
caused principally by increased national advertising as well as a ramping up
of design and selling costs to support the upgrading of product and product
presentation which was a part of the Bass repositioning.
The Bass misstep is by far the biggest disappointment that the Company has
had in executing its brand strategy. However much it negatively impacted the
Company's results of operations in 1997, and is expected to dampen 1998, the
Company believes its impact should be substantially behind the Company by the
fall 1998 season. In the process, the Company has strengthened the Bass
management team and has substantially redirected the sourcing of Bass product.
The Company believes it can lower its costs considerably and build on Bass'
historically strong record of profitability.
Non-Recurring Charges
The Company recorded pre-tax non-recurring charges of $132.7 million ($85.5
million after tax) in 1997 related to a series of actions the Company has
taken towards:
o Exiting all United States mainland footwear manufacturing with the
closing of its Wilton, Maine footwear manufacturing facility;
o Exiting the sweater manufacturing business with the sale and liquidation
of its Puerto Rico sweater operations;
o Consolidating and contracting plant and warehouse and distribution
facilities as well as restructuring other logistical and administrative
areas in order to reduce product costs and operating expenses and improve
efficiencies;
o Repositioning the Gant brand in the United States to be consistent with
its highly successful positioning in Europe;
o Closing an additional 150 underperforming retail outlet stores; and
o Modifying a repositioning of Bass, including the liquidation of a
resulting excess inventory.
The Company believes that these initiatives will enable the Company to
significantly reduce future operating expenses and product costs. It is
expected that the actions which gave rise to the 1997 charge will result in
aggregate cost savings of over $40 million in the period 1998 to 2000, and
will exceed $20 million annually by 2000.
The Company had recorded a pre-tax non-recurring charge of $27.0 million
($17.0 million after tax) in 1995 to provide for the closing of some 300
retail outlet stores, the closing of three domestic shirt manufacturing
facilities and a reorganization of the Company's management structure.
Corporate Expenses
Corporate expenses were $15.3 million in 1997 compared with $15.2 million
in 1996 and $12.9 million in 1995. The increase in 1996 compared with 1995 was
attributable to an increase in spending relating to information technology.
Interest Expense
Interest expense was $20.7 million in 1997 compared with $23.2 million in
both 1996 and 1995. A strong cash flow in 1996 reduced overall debt levels
early in 1997 and was the principal reason for the reduction in interest
expense in 1997. The 1997 restructuring activities, described above, will
result in a cash outflow that will likely increase interest expense in 1998.
These activities should become cash positive in 1999 with a resulting interest
expense reduction.
4
Income Taxes
Excluding the non-recurring charges, the income tax expense rate was 23.9%
in 1997, 24.6% in 1996 and 29.0% in 1995. The Company's effective tax rate is
lower than statutory rates due to tax exempt income from operations in Puerto
Rico, as well as other permanent differences between book income and taxable
income.
Liquidity and Capital Resources
The following table shows key cash flow elements over the last three years:
1997 1996 1995
(In thousands)
OPERATING ACTIVITIES
Income from operations before non-recurring charges adjusted
for non-cash items. . . . . . . . . . . . . . . . . . . $ 42,021 $ 55,282 $ 67,328
Change in working capital.. . . . . . . . . . . . . . . . (16,275) 54,104 (35,344)
Cash flow before non-recurring charges. . . . . . . . . . 25,746 109,386 31,984
Non-recurring charges -- cash impact. . . . . . . . . . . (34,100) (7,510) (6,490)
Working capital acquired(1).. . . . . . . . . . . . . . . -- -- (56,282)
(8,354) 101,876 (30,788)
INVESTMENT ACTIVITIES
Acquisition of Izod and Gant. . . . . . . . . . . . . . . -- -- (114,503)
Investment in Pyramid Sportswear. . . . . . . . . . . . . -- -- (6,950)
Capital spending. . . . . . . . . . . . . . . . . . . . . (17,923) (22,578) (39,773)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . 360 143 --
(17,563) (22,435) (161,226)
FINANCING ACTIVITIES
Cash dividends. . . . . . . . . . . . . . . . . . . . . . (4,065) (4,050) (4,007)
Exercise of stock options.. . . . . . . . . . . . . . . . 791 386 1,745
(3,274) (3,664) (2,262)
Increase (decrease) in cash before net change in debt. . . $ (29,191) $ 75,777 $(194,276)
(1) Represents working capital related to the acquisition of the Izod and Gant
businesses.
As noted in the table above, the Company's cash flow before non-recurring
charges was positive in each of the three fiscal years ended February 1, 1998.
The cash impact in 1997 of the initiatives covered by the Company's
restructuring charges totaled $34.1 million. The principal areas of outflow
related to the repositioning of Gant and costs associated with the inventory
correction at Bass.
Capital spending in 1997 was $17.9 million compared with $22.6 million in
1996 and $39.8 million in 1995. The reduced level of spending in the latest
two years reflects the completion in 1995 of several large capital spending
projects, including the Company's new distribution center in North Carolina.
In 1998, upon the expiration of the lease at the Company's New York
headquarters, the Company anticipates consolidating all of its New York office
space into one location. Capital expenditures related to that move are
anticipated to be approximately $15 million. Capital expenditures, in total,
for 1998 are planned at approximately $40 million. Beyond that, the Company
anticipates returning to the lower level of capital expenditures of the past
two years.
5
Total debt as a percentage of total capital was 53.0% at the end of fiscal
1997 compared with 43.1% at the end of fiscal 1996 and 52.3% at the end of
fiscal 1995.
In fiscal 1998, the Company anticipates additional cash outflows of
approximately $47 million to substantially complete the restructuring programs
provided for in 1997. Most of that amount should be funded by cash flow from
operations as well as certain of the cash flow benefits stemming from these
restructuring moves, particularly the closing of retail stores and the exiting
from the capital-intensive sweater manufacturing business. Beyond that, the
Company anticipates that the cash flow benefits from the balance of
restructuring together with cash flow from operations should allow it to begin
to realize an overall positive cash flow in its individual business units and
in the Company as a whole.
Notwithstanding the Company's positive feelings about future cash flow,
including the cash impact of the non-recurring charges, the Company believed
that it made a great deal of sense to avail itself of the favorable fixed
income market to extend the maturities of its existing debt. Therefore, on
April 22, 1998, the Company issued $150 million of senior subordinated notes
due 2008, and used the proceeds to eliminate its intermediate term senior
notes and reduce its revolving credit debt. Accordingly, such debt as of
February 1, 1998 has been classified as long-term debt in the 1997 year end
balance sheet.
At the same time, the Company re-syndicated and refinanced its revolving
credit facility, which was scheduled to mature in early 1999, with a new $325
million senior secured credit facility with a group of 12 banks.
The Company believes that these refinancings should provide a secure
financial base and allow the Company to fully focus its attention on the
execution of its strategic business plan.
Year 2000
Until recently, computer programs were written using two digits rather than
four to define the applicable year. Thus, such programs were unable to
properly distinguish between the year 1900 and the year 2000. In October 1996,
the Company initiated a comprehensive Year 2000 Project to address this issue.
The Company determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company has also
initiated discussions with its significant suppliers and large customers to
determine the status of their compliance programs.
The Company is utilizing both internal and external resources to remediate,
or replace, and test the software for year 2000 modifications. The Company
anticipates completing the Year 2000 Project by June 30, 1999. The total cost
of the Year 2000 Project is estimated at a range of $20-$24 million and is
being funded through operating cash flows. Of the total project cost,
approximately $3 million is attributable to the purchase of new software which
will be capitalized, with the remaining cost expensed as incurred.
The cost of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of resources, third party modification plans and
other factors. The Company presently believes that the year 2000 issue will
not pose significant operational problems for its computer systems. However,
if such modifications and conversions are not made, or are not completed
timely, or the systems of other companies on which the Company's systems and
operations rely are not converted on a timely basis, the year 2000 issue could
have a material adverse impact on the Company's operations.
Seasonality
The Company's business is seasonal, with higher sales and income during its
third and fourth quarters, which coincide with the Company's two peak retail
6
selling seasons: the first running from the start of the back-to-school and
fall selling seasons beginning in August and continuing through September, and
the second being the Christmas selling season beginning with the weekend
following Thanksgiving and continuing through the week after Christmas.
Also contributing to the strength of the third quarter is the high volume
of fall shipments to wholesale customers which are generally more profitable
than spring shipments. The slower spring selling season at wholesale combines
with retail seasonality to make the first quarter particularly weak.
Item 8. Financial Statements and Supplementary Data
See page F-1 for a listing of the consolidated financial statements and
supplementary data included in this report.
7
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PHILLIPS-VAN HEUSEN CORPORATION
By: Emanuel Chirico
Emanuel Chirico
Vice President and Controller
(Principal Accounting Officer)
Date: April 24, 1998
8
FORM 10-K/A No. 1
PHILLIPS-VAN HEUSEN CORPORATION
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements and supplementary data are
included in Item 8 of this report:
Consolidated Statements of Operations--Years Ended
February 1, 1998, February 2, 1997 and January 28, 1996 . . . . F-2
Consolidated Balance Sheets--February 1, 1998 and
February 2, 1997. . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Cash Flows--Years Ended
February 1, 1998, February 2, 1997 and January 28, 1996 . . . . F-4
Consolidated Statements of Changes in Stockholders'
Equity--Years Ended February 1, 1998, February 2, 1997
and January 28, 1996. . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . F-6
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . F-19
10 Year Financial Summary . . . . . . . . . . . . . . . . . . . . F-20
F-1
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
1997 1996 1995
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,350,007 $1,359,593 $1,464,128
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . 937,965 910,517 987,921
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412,042 449,076 476,207
Selling, general and administrative expenses. . . . . . . . . . . . . 412,495 401,338 428,634
Facility and store closing, restructuring and
other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 86,700 27,000
Income (loss) before interest and taxes . . . . . . . . . . . . . . . (87,153) 47,738 20,573
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . 20,672 23,164 23,199
Income (loss) before taxes. . . . . . . . . . . . . . . . . . . . . . (107,825) 24,574 (2,626)
Income tax expense (benefit). . . . . . . . . . . . . . . . . . . . . (41,246) 6,044 (2,920)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (66,579) $ 18,530 $ 294
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.46) $ 0.69 $ 0.01
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.46) $ 0.68 $ 0.01
In 1997 and 1995, PVH recorded pre-tax charges of $132,700 and $27,000
respectively, related principally to a series of actions the Company has taken
to accelerate the execution of PVH's ongoing strategy to build its brands.
Such charges have been recorded in the consolidated statements of operations
as follows:
1997 1995
Cost of goods sold $ 46,000
Facility and store closing,
restructuring and other expenses 86,700 $27,000
132,700 27,000
Income tax benefit (47,200) (9,984)
$ 85,500 $17,016
See notes to consolidated financial statements.
F-2
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Feb. 1, 1998 Feb. 2, 1997
ASSETS
Current Assets:
Cash, including cash equivalents of $1,413 and $1,861. . . . . . . . . . . . . $ 11,748 $ 11,590
Trade receivables, less allowances of $2,911 and $3,401. . . . . . . . . . . . 88,656 91,806
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,534 237,422
Other, including deferred taxes of $19,031 and $4,300. . . . . . . . . . . . . 35,080 22,140
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385,018 362,958
Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 94,582 137,060
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,467 120,324
Other Assets, including deferred taxes of $44,094 and $16,617 . . . . . . . . . . 64,392 37,094
$660,459 $657,436
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,900 $ 20,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,233 36,355
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,202 55,754
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . 10,157
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 133,335 122,266
Long-Term Debt, less current portion. . . . . . . . . . . . . . . . . . . . . . . 241,004 189,398
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,815 55,614
Stockholders' Equity:
Preferred stock, par value $100 per share; 150,000 shares
authorized; no shares outstanding
Common stock, par value $1 per share; 100,000,000 shares
authorized; shares issued 27,179,244 and 27,045,705. . . . . . . . . . . . . 27,179 27,046
Additional capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,954 116,296
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,172 146,816
Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . . 220,305 290,158
$660,459 $657,436
See notes to consolidated financial statements.
F-3
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
1997 1996 1995
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(66,579) $ 18,530 $ 294
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 25,300 29,438 33,740
Write-off of property, plant and equipment. . . . . . . . . . . . . . . . 40,800 13,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (42,208) 8,214 3,363
Equity income in Pyramid Sportswear . . . . . . . . . . . . . . . . . . . (792) (900) (85)
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,150 18,060 (13,927)
Income tax refund receivable. . . . . . . . . . . . . . . . . . . . . . . . 16,987
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,112) 39,351 16,315
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 34,038 (17,782) (83,897)
Deferred landlord contributions . . . . . . . . . . . . . . . . . . . . . . (5,949) (5,001) (399)
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,998 (5,021) 808
Net Cash Provided (Used) By Operating Activities. . . . . . . . . . . . . . (8,354) 101,876 (30,788)
Investing activities:
Acquisition of the Apparel Group of Crystal Brands, Inc.. . . . . . . . . . . (114,503)
Property, plant and equipment acquired. . . . . . . . . . . . . . . . . . . . (17,923) (22,578) (39,773)
Investment in Pyramid Sportswear. . . . . . . . . . . . . . . . . . . . . . . (6,950)
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 143
Net Cash Used By Investing Activities . . . . . . . . . . . . . . . . . . . (17,563) (22,435) (161,226)
Financing activities:
Proceeds from revolving line of credit. . . . . . . . . . . . . . . . . . . . 123,000 52,582 204,996
Payments on revolving line of credit and long-term borrowings . . . . . . . . (93,651) (134,302) (73,660)
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . 791 386 1,745
Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,065) (4,050) (4,007)
Net Cash Provided (Used) By Financing Activities. . . . . . . . . . . . . . 26,075 (85,384) 129,074
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . 158 (5,943) (62,940)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . 11,590 17,533 80,473
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,748 $ 11,590 $ 17,533
See notes to consolidated financial statements.
F-4
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
$1 par Additional Retained Stockholders'
Shares Value Capital Earnings Equity
January 29, 1995. . . . . . . . . . 26,610,310 $26,610 $112,801 $136,049 $275,460
Stock options exercised . . . . . 187,908 188 1,557 1,745
Net income. . . . . . . . . . . . 294 294
Cash dividends .. . . . . . . . . (4,007) (4,007)
Investment in Pyramid Sportswear 181,134 181 1,619 1,800
January 28, 1996. . . . . . . . . . 26,979,352 26,979 115,977 132,336 275,292
Stock options exercised . . . . . 66,353 67 319 386
Net income. . . . . . . . . . . . 18,530 18,530
Cash dividends. . . . . . . . . . (4,050) (4,050)
February 2, 1997. . . . . . . . . . 27,045,705 27,046 116,296 146,816 290,158
Stock options exercised . . . . . 133,539 133 658 791
Net loss. . . . . . . . . . . . . (66,579) (66,579)
Cash dividends. . . . . . . . . . (4,065) (4,065)
February 1, 1998. . . . . . . . . . 27,179,244 $ 27,179 $116,954 $ 76,172 $220,305
See notes to consolidated financial statements.
F-5
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of PVH and its subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
the estimates.
Fiscal Year - Fiscal years are designated in the financial statements and
notes by the calendar year in which the fiscal year commences. Accordingly,
results for fiscal years 1997 and 1995 represent the 52 weeks ended February
1, 1998 and January 28, 1996, respectively. Fiscal year 1996 represents the
53 weeks ended February 2, 1997.
Cash and Cash Equivalents - PVH considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Asset Impairments - PVH records impairment losses on long-lived assets
(including goodwill) used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by the related assets are less than the carrying amounts of those
assets.
Inventories - Inventories are stated at the lower of cost or market. Cost
for apparel inventories of $90,999 (1997) and $90,151 (1996) is determined
using the last-in, first-out method (LIFO). Cost for footwear and certain
sportswear inventories is determined using the first-in, first-out method
(FIFO).
Property, Plant and Equipment - Depreciation is computed principally by
the straight line method over the estimated useful lives of the various
classes of property.
Goodwill - Goodwill, net of accumulated amortization of $11,358 and $8,615
in 1997 and 1996, respectively, is being amortized principally by the straight
line method over 40 years.
Contributions from Landlords - PVH receives contributions from landlords
for fixturing retail stores which the Company leases. Such amounts are
amortized as a reduction of rent expense over the life of the related lease.
Unamortized contributions are included in accrued expenses and other
liabilities and amounted to $12,798 and $18,747 in 1997 and 1996,
respectively.
Fair Value of Financial Instruments - Using discounted cash flow analyses,
PVH estimates that the fair value of all financial instruments approximates
their carrying value, except as noted in the footnote entitled "Long-Term
Debt".
F-6
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation - PVH accounts for its stock options under the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and complies with the disclosure requirements of FASB Statement No. 123,
"Accounting for Stock-Based Compensation".
Advertising - Advertising costs are expensed as incurred and totalled
$37,762 (1997), $19,427 (1996) and $21,136 (1995).
Earnings Per Share
In 1997, PVH adopted FASB Statement No. 128, "Earnings Per Share". This
statement replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share.
PVH computed its basic and diluted earnings per share by dividing net
income or loss by:
1997 1996 1995
Weighted Average Common Shares Outstanding
for Basic Earnings Per Share 27,107,633 27,004,115 26,725,804
Impact of Dilutive Employee Stock Options 209,462 295,529
Total Shares for Diluted Earnings Per Share 27,107,633 27,213,577 27,021,333
Income Taxes
Income taxes consist of:
1997 1996 1995
Federal:
Current . . . . . . . . . . . . . . . $ 400 $(4,620) $(8,219)
Deferred. . . . . . . . . . . . . . . (42,985) 7,959 2,995
State, foreign and local:
Current . . . . . . . . . . . . . . . 562 2,450 1,936
Deferred. . . . . . . . . . . . . . . 777 255 368
$(41,246) $ 6,044 $(2,920)
Taxes paid were $1,155 (1997), $1,262 (1996) and $3,371 (1995). In
addition, PVH received an income tax refund of $16,987 in 1996.
F-7
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes (Continued)
The approximate tax effect of items giving rise to the deferred income tax
asset recognized in the Company's balance sheets is as follows:
1997 1996
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . $(18,427) $(18,349)
Landlord contributions . . . . . . . . . . . . . . . . . . . . . 5,030 7,367
Facility and store closing,
restructuring and other expenses . . . . . . . . . . . . . . . 27,295 415
Employee compensation and benefits . . . . . . . . . . . . . . . 10,302 9,243
Tax loss and credit carryforwards. . . . . . . . . . . . . . . . 31,179 17,231
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,746 5,010
$ 63,125 $ 20,917
A reconciliation of the statutory Federal income tax to the income tax
expense (benefit) is as follows:
1997 1996 1995
Statutory 35% federal tax. . . . . . . . . . . . . . . . . . $(37,739) $ 8,601 $ (919)
State, foreign and local income taxes,
net of Federal income tax benefit . . . . . . . . . . . . . 805 1,463 1,454
Income of Puerto Rico Subsidiaries(1). . . . . . . . . . . . (3,258) (3,757) (3,298)
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . (1,054) (263) (157)
Income tax expense (benefit) . . . . . . . . . . . . . . . . $(41,246) $ 6,044 $(2,920)
(1) Exemption from Puerto Rico income tax expires in 1998. PVH anticipates
this exemption will be extended through 2008.
Inventories
Inventories are summarized as follows:
1997 1996
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,964 $ 16,670
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,216 13,208
Finished goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,354 207,544
$249,534 $237,422
Inventories would have been approximately $12,000 and $13,000 higher than
reported at February 1, 1998 and February 2, 1997, respectively, if the FIFO
method of inventory accounting had been used for all apparel.
F-8
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property, Plant and Equipment
Property, plant and equipment, at cost, are summarized as follows:
Estimated
Useful
Lives 1997 1996
Land. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,646 $ 1,774
Buildings and building improvements . . . . . . . . . . 15-40 years 24,932 37,778
Machinery and equipment, furniture
and fixtures and leasehold
improvements. . . . . . . . . . . . . . . . . . . . . 5-15 years 187,671 233,884
214,249 273,436
Less: Accumulated depreciation
and amortization . . . . . . . . . . . . . . . . 119,667 136,376
$ 94,582 $137,060
Long-Term Debt
Long-term debt, exclusive of current portion, is as follows:
1997 1996
Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . $ 91,600 $ 40,000
7.75% Debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . 99,448 99,442
7.75% Senior Notes. . . . . . . . . . . . . . . . . . . . . . . . . . 49,286 49,286
Other debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670 670
$241,004 $189,398
PVH issued $100,000 of 7.75% Debentures due 2023 on November 15, 1993 with
a yield to maturity of 7.80%. Interest is payable semi-annually. Based on
current market conditions, PVH estimates that the fair value of these
Debentures on February 1, 1998, using discounted cash flow analyses, was
approximately $93,400.
On April 22, 1998, PVH completed a refinancing of its Revolving Credit
Facility and its 7.75% Senior Notes by entering into a new $325,000 Senior
Secured Credit Facility with a group of banks and by issuing $150,000 of 9.5%
Senior Subordinated Notes due May 1, 2008. The net proceeds from the Senior
Subordinated Notes were used to retire the 7.75% Senior Notes and to repay a
portion of the amount due under PVH's prior Revolving Credit Facility.
Accordingly, such amounts have been classified as long-term debt as of
February 1, 1998.
The new $325,000 Credit Facility has a 5 year term and all borrowings
thereunder are due April 22, 2003. The Facility includes a revolving credit
facility which allows PVH, at its option, to borrow and repay amounts up to
$325,000. The Facility also includes a letter of credit facility with a sub-
limit of $250,000 provided, however, that the aggregate maximum amount
outstanding under both the revolving credit facility and the letter of credit
facility is $325,000. Interest is payable quarterly at a spread over LIBOR or
the prime rate, at the borrower's option, with the spread based on PVH's
credit rating and certain financial ratios. The Facility also provides for
payment of a fee on the unutilized portion of the Facility.
F-9
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-Term Debt (Continued)
The 9.5% Senior Subordinated Notes have a yield to maturity of 9.58% and
interest payable semi-annually.
In connection with the 7.75% Debentures and the $325,000 Credit Facility,
substantially all of PVH's trade receivables, inventories and property, plant
and equipment have been pledged as collateral.
In connection with the early retirement of the 7.75% Senior Notes, PVH
paid a yield maintenance premium of $1,446, which will be classified as an
extraordinary item in 1998.
The weighted average interest rate on outstanding borrowings under the
revolving credit facility at February 1, 1998 and February 2, 1997 was 6.4%
and 6.2%, respectively.
Interest paid was $20,784 (1997), $24,039 (1996) and $22,949 (1995).
Scheduled maturities of long-term debt, including current portion, for the
next five years are as follows: 1998-$9,857, 1999-$9,857, 2000-$9,857, 2001-
$9,857 and 2002-$9,858.
Investment in Pyramid Sportswear
During the fourth quarter of 1995, PVH acquired 25% of Pyramid Sportswear
("Pyramid") for $6,950 in cash and $1,800 in the Company's common stock. PVH
accounts for its investment in Pyramid under the equity method of accounting.
Pyramid, headquarted in Sweden, designs, develops and sources Gant sportswear
under a license from PVH and markets such sportswear in 35 countries around
the world. In connection with this investment, PVH also acquired an option to
purchase the remaining 75% of Pyramid beginning in 2000.
Stockholders' Equity
Preferred Stock Rights - On June 10, 1986, the Board of Directors declared
a distribution of one Right (the "Rights") to purchase Series A Cumulative
Participating Preferred Stock, par value $100 per share, for each outstanding
share of common stock. As a result of subsequent stock splits, each
outstanding share of common stock now carries with it one-fifth of one Right.
Under certain circumstances, each Right will entitle the registered holder
to acquire from the Company one one-hundredth (1/100) of a share of said
Series A Preferred Stock at an exercise price of $100. The Rights will be
exercisable, except in certain circumstances, commencing ten days following a
public announcement that (i) a person or group has acquired or obtained the
right to acquire 20% or more of the common stock, in a transaction not
approved by the Board of Directors or (ii) a person or group has commenced or
intends to commence a tender offer for 30% or more of the common stock (the
"Distribution Date").
If PVH is the surviving corporation in a merger or other business
combination then, under certain circumstances, each holder of a Right will
have the right to receive upon exercise the number of shares of common stock
having a market value equal to two times the exercise price of the Right.
F-10
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stockholders' Equity - (Continued)
In the event PVH is not the surviving corporation in a merger or other
business combination, or more than 50% of PVH's assets or earning power is
sold or transferred, each holder of a Right will have the right to receive
upon exercise the number of shares of common stock of the acquiring company
having a market value equal to two times the exercise price of the Right.
At any time prior to the close of business on the Distribution Date, PVH
may redeem the Rights in whole, but not in part, at a price of $.05 per Right.
During 1996, the rights were extended for a period of 10 years from the date
of initial expiration and will expire on June 16, 2006.
Stock Options - Under PVH's stock option plans, non-qualified and
incentive stock options ("ISOs") may be granted. Options are granted at fair
market value at the date of grant. ISOs and non-qualified options granted have
a ten year duration. Generally, options are cumulatively exercisable in three
installments commencing three years after the date of grant.
Under APB Opinion No. 25, PVH does not recognize compensation expense
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant. Under FASB Statement No.
123, proforma information regarding net income and earnings per share is
required as if the Company had accounted for its employee stock options under
the fair value method of that Statement.
For purposes of proforma disclosures, PVH estimated the fair value of
stock options granted since 1995 at the date of grant using the Black-Scholes
option pricing model. The estimated fair value of the options is amortized to
expense over the options' vesting period.
The following summarizes the assumptions used to estimate the fair value
of stock options granted in each year and certain proforma information:
1997 1996 1995
Risk-free interest rate 6.49% 6.61% 6.05%
Expected option life 7 Years 7 Years 7 Years
Expected volatility 26.0% 30.6% 30.6%
Expected dividends per share $ 0.15 $ 0.15 $ 0.15
Weighted average estimated fair
value per share of options granted $ 5.43 $ 5.29 $ 6.11
Proforma net income (loss) $(68,242) $17,396 $ (127)
Proforma basic and diluted net income
(loss) per share $ (2.52) $ 0.65 $(0.00)
As any options granted in the future will also be subject to the fair
value proforma calculations, the proforma adjustments for 1997, 1996 and 1995
may not be indicative of future years.
F-11
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stockholders' Equity - (Continued)
Other data with respect to stock options follows:
Option Price Weighted Average
Shares Per Share Price Per Share
Outstanding at January 29, 1995 . . . . . . . . 1,554,249 $ 4.75 - $36.25 $16.99
Granted. . . . . . . . . . . . . . . . . . . 568,390 10.75 - 17.50 15.02
Exercised. . . . . . . . . . . . . . . . . . 187,908 4.75 - 10.69 7.17
Cancelled. . . . . . . . . . . . . . . . . . 131,383 4.75 - 34.75 20.37
Outstanding at January 28, 1996 . . . . . . . . 1,803,348 4.75 - 36.25 17.14
Granted. . . . . . . . . . . . . . . . . . . 948,411 10.75 - 14.38 12.83
Exercised. . . . . . . . . . . . . . . . . . 66,353 4.75 - 8.75 5.81
Cancelled. . . . . . . . . . . . . . . . . . 727,866 6.88 - 36.25 26.07
Outstanding at February 2, 1997 . . . . . . . . 1,957,540 4.75 - 31.63 12.12
Granted. . . . . . . . . . . . . . . . . . . 817,250 12.81 - 15.68 14.23
Exercised. . . . . . . . . . . . . . . . . . 133,539 4.75 - 13.13 5.93
Cancelled. . . . . . . . . . . . . . . . . . 179,587 6.88 - 31.63 14.49
Outstanding at February 1, 1998 . . . . . . . . 2,461,664 $ 5.94 - $31.63 $12.98
Of the outstanding options at February 1, 1998, 434,466 shares have an
exercise price below $12.25, 2,023,558 shares have an exercise price from
$12.25 to $16.50 and 3,640 shares have an exercise price above $16.50. The
weighted average remaining contractual life for all options outstanding at
February 1, 1998 is 7.6 years.
Of the outstanding options at February 1, 1998 and February 2, 1997,
options covering 650,479 and 645,091 shares were exercisable at a weighted
average price of $10.56 and $9.35, respectively. Stock options available for
grant at February 1, 1998 and February 2, 1997 amounted to 1,704,250 and
311,496 shares, respectively.
Leases
PVH leases retail stores, manufacturing facilities, office space and
equipment. The leases generally are renewable and provide for the payment of
real estate taxes and certain other occupancy expenses. Retail store leases
generally provide for the payment of percentage rentals based on store sales
and other costs associated with the leased property.
At February 1, 1998, minimum annual rental commitments under non-
cancellable operating leases, including leases for new retail stores which had
not begun operating at February 1, 1998, are as follows:
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,232
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,049
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,183
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,036
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,653
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 48,174
Total minimum lease payments . . . . . . . . . . . . . . . . $232,327
F-12
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Leases (Continued)
Rent expense, principally for real estate, is as follows:
1997 1996 1995
Minimum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $65,177 $67,914 $69,988
Percentage and other . . . . . . . . . . . . . . . . . . . . . . . . 11,139 11,166 11,807
$76,316 $79,080 $81,795
Retirement and Benefit Plans
Defined Benefit Plans - PVH has noncontributory, defined benefit pension
plans covering substantially all U.S. employees meeting certain age and
service requirements. For those vested (after five years of service), the
plans provide monthly benefits upon retirement based on career compensation
and years of credited service. It is PVH's policy to fund pension cost
annually in an amount consistent with Federal law and regulations. The assets
of the plans are principally invested in a mix of fixed income and equity
investments. In addition, PVH also participates in multi-employer plans,
which provide defined benefits to their union employees.
A summary of the components of net pension cost for the defined benefit
plans and the total contributions charged to pension expense for the
multi-employer plans follows:
1997 1996 1995
Defined Benefit Plans:
Service cost - benefits earned during the period. . . . . . . . . . . $ 2,004 $ 2,528 $2,145
Interest cost on projected benefit obligation . . . . . . . . . . . . 7,935 7,425 7,107
Actual gain on plan assets. . . . . . . . . . . . . . . . . . . . . . (19,772) (13,688) (19,533)
Net amortization and deferral of actuarial gains. . . . . . . . . . . 11,259 5,354 12,028
Net pension cost of defined benefit plans. . . . . . . . . . . . . . . 1,426 1,619 1,747
Multi-employer plans . . . . . . . . . . . . . . . . . . . . . . . . . 213 253 219
Total pension expense. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,639 $ 1,872 $1,966
Significant rate assumptions used in determining pension obligations at
the end of each year, as well as pension cost in the following year, were as
follows:
1997 1996 1995
Discount rate used in determining projected benefit obligation . . . . . 7.25% 8.00% 7.50%
Rate of increase in compensation levels. . . . . . . . . . . . . . . . . 4.00% 4.50% 4.00%
Long-term rate of return on assets . . . . . . . . . . . . . . . . . . . 8.75% 8.75% 8.75%
F-13
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Retirement and Benefit Plans - (Continued)
The following table sets forth the plans' funded status and amounts
recognized for defined benefit plans in the Company's balance sheets:
1997 1996
Actuarial present value of benefit obligations:
Vested benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . $ 108,656 $ 91,379
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . $ 110,171 $ 93,373
Plan assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . $ 124,663 $ 110,830
Less: projected benefit obligation for services rendered to date . . . . . (116,622) (101,065)
Plan assets in excess of projected benefit obligation. . . . . . . . . . . 8,041 9,765
Unrecognized prior service cost. . . . . . . . . . . . . . . . . . . . . . 2,536 3,099
Unrecognized net actuarial gain. . . . . . . . . . . . . . . . . . . . . . (2,403) (3,665)
Unrecognized net asset at adoption date of FASB Statement No. 87 (238) (305)
Net pension asset recognized in the balance sheets . . . . . . . . . . . . $ 7,936 $ 8,894
Plan assets in excess of projected benefit obligation at February 1, 1998
and February 2, 1997 are net of $4,264 and $3,729, respectively for certain
underfunded plans.
PVH has an unfunded supplemental defined benefit plan covering 23 current
and retired executives under which the participants will receive a
predetermined amount during the 10 years following the attainment of age 65,
provided that prior to the termination of employment with PVH, the participant
has been in the plan for at least 10 years and has attained age 55. PVH does
not intend to admit new participants in the future. At February 1, 1998 and
February 2, 1997, $8,309 and $7,450, respectively, are included in other
liabilities as the accrued cost of this plan.
Savings and Retirement Plans - PVH has a savings and retirement plan (the
"Associates Investment Plan") and a supplemental savings plan for the benefit
of its eligible employees who elect to participate. Participants generally may
elect to contribute up to 15% of their annual compensation, as defined, to the
plans. PVH contributions to the plans are equal to 50% of the amounts
contributed by participating employees with respect to the first 6% of
compensation and were $1,959 (1997), $2,249 (1996) and $2,668 (1995). In
accordance with the terms of the Associates Investment Plan, PVH matching
contributions are invested in the Company's common stock.
Post-Retirement Benefits - PVH and its domestic subsidiaries provide
certain health care and life insurance benefits to retired employees.
Employees become eligible for these benefits if they reach retirement age
while working for the Company. Retirees contribute to the cost of this plan,
which is unfunded.
F-14
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Retirement and Benefit Plans - (Continued)
Net post-retirement benefit cost includes the following components:
1997 1996 1995
Service cost $ 389 $ 687 $ 466
Interest cost 2,403 2,166 2,128
Amortization of net loss 284 44 37
Amortization of transition obligation 273 273 273
$3,349 $3,170 $2,904
The following reconciles the plan's accumulated post-retirement benefit with
amounts recognized in the Company's balance sheets:
1997 1996
Accumulated post-retirement benefit obligation:
Retirees receiving benefits $27,389 $21,505
Fully eligible active plan participants 2,547 2,132
Active plan participants not eligible for benefits 4,171 5,503
34,107 29,140
Unrecognized transition obligation (4,097) (4,370)
Unrecognized net loss (8,689) (4,729)
Post-retirement liability recognized in the
balance sheets $21,321 $20,041
The weighted average annual assumed rate of increase in the cost of
covered benefits (i.e., health care cost trend rate) is 7.0% for 1998 and is
assumed to decrease gradually to 5.5% by 2010 and remain at that level
thereafter. Increasing the assumed health care cost trend rate by one
percentage point would increase the accumulated post-retirement benefit
obligation as of February 1, 1998 by $3,391, and the aggregate of the service
and interest cost components of net post-retirement benefit cost for 1997 by
$303. The discount rate used in determining the accumulated post-retirement
benefit obligation at February 1, 1998 and February 2, 1997 was 7.25% and
8.0%, respectively.
Segment Data
PVH manages and analyzes its operating results by its two vertically
integrated business segments: (i) Apparel and (ii) Footwear and Related
Products. In prior years, the Apparel segment included sales, income and
assets related to apparel marketed by the Company's footwear division. In the
fourth quarter of 1997, PVH adopted FASB Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". In identifying its
reportable segments under the provisions of Statement No. 131, PVH evaluated
its operating divisions and product offerings. Under the aggregation criteria
of Statement No. 131, PVH aggregated the results of its apparel divisions into
the Apparel segment, which now excludes Bass apparel. The apparel segment
derives revenues from marketing dresswear, sportswear and accessories,
principally under the brand names Van Heusen, Izod, Izod Club, Gant and
Geoffrey Beene. PVH's footwear business has been identified as the Footwear
and Related Products segment. This segment derives revenues from marketing
casual and weekend footwear, apparel and accessories under the Bass brand
name.
F-15
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Segment Data - (Continued)
Sales for both segments occur principally in the United States. There are
no inter-segment sales. The Bass apparel data for prior years has been
reclassified for consistent presentation with the current year.
1997 1996 1995
Net Sales
Apparel. . . . . . . . . . . . . . . . . . . . . . . . . . $ 911,047 $ 897,370 $1,006,701
Footwear and Related Products. . . . . . . . . . . . . . . 438,960 462,223 457,427
Total Net Sales. . . . . . . . . . . . . . . . . . . . . . $1,350,007 $1,359,593 $1,464,128
Operating Income (Loss)
Apparel(1) . . . . . . . . . . . . . . . . . . . . . . . . $ (33,049) $ 30,021 $ 12,432
Footwear and Related Products(2) . . . . . . . . . . . . . (38,853) 32,888 21,026
Total Operating Income (Loss). . . . . . . . . . . . . . . (71,902) 62,909 33,458
Corporate Expenses. . . . . . . . . . . . . . . . . . . . . . (15,251) (15,171) (12,885)
Interest Expense, net . . . . . . . . . . . . . . . . . . . . (20,672) (23,164) (23,199)
Income (Loss) Before Taxes . . . . . . . . . . . . . . . . $ (107,825) $ 24,574 $ (2,626)
Identifiable Assets
Apparel. . . . . . . . . . . . . . . . . . . . . . . . . . $ 355,979 $ 381,274 $ 468,618
Footwear and Related Products. . . . . . . . . . . . . . . 152,518 143,631 165,390
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 151,962 132,531 115,047
$ 660,459 $ 657,436 $ 749,055
Depreciation and Amortization
Apparel. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,484 $ 16,105 $ 22,399
Footwear and Related Products. . . . . . . . . . . . . . . 6,561 5,780 7,074
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 8,255 7,553 4,267
$ 25,300 $ 29,438 $ 33,740
Identifiable Capital Expenditures
Apparel. . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,103 $ 4,269 $ 20,555
Footwear and Related Products. . . . . . . . . . . . . . . 3,957 6,650 7,281
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 5,863 11,659 11,937
$ 17,923 $ 22,578 $ 39,773
(1) Operating income of the Apparel segment includes charges for facility and
store closing, restructuring and other expenses of $78,465 (1997) and
$25,000 (1995).
(2) Operating income of the Footwear and Related Products segment includes
charges for facility and store closing, restructuring and other expenses
of $54,235 (1997) and $2,000 (1995).
F-16
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Facility and Store Closing, Restructuring and Other Expenses
During 1997 and 1995, the Company recorded pre-tax charges of $132,700 and
$27,000 respectively, related principally to a series of actions the Company
has taken to accelerate the execution of its ongoing strategies to build its
brands. The initiatives related to the 1997 charges are as follows:
Exiting all U.S. mainland footwear manufacturing with the closing of the
Company's Wilton, Maine footwear manufacturing facility
Exiting sweater manufacturing with the sale and liquidation of the
Company's Puerto Rico sweater operations
Restructuring plant, warehouse and distribution and other administrative
areas to reduce product costs and operating expenses and improve
efficiencies
Closing an additional 150 underperforming retail outlet stores
Repositioning the Gant brand in the United States to be consistent with
its highly successful positioning in Europe
Modifying a repositioning of the Bass brand, including the liquidation of
a resulting excess inventory
The cost components of the 1997 charges are as follows:
Inventory markdowns included in cost of goods sold $ 46,000
Fixed asset write-offs 40,800
Termination benefits for approximately 2,150 employees 19,500
Lease and other obligations 19,100
Other 7,300
$132,700
As of February 1, 1998, approximately $84,900 had been charged against
this reserve, of which approximately $26,600 related to inventory markdowns.
The initiatives related to the 1995 charges were the closing of three
domestic shirt manufacturing facilities, closing approximately 300
underperforming retail outlet stores and reorganizing the Company's management
structure to enhance the Company's focus on its brands. Approximately $13,000
of the charges related to the write-off of fixed assets located in such
factories and retail outlet stores. The remaining $14,000 related to
termination benefits, including pension settlements and curtailments of
$1,200, for approximately 1,250 employees. As of February 1, 1998, all of
this reserve had been utilized.
F-17
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Comments
One of the Company's directors, Mr. Harry N.S. Lee, is a director of TAL
Apparel Limited, an apparel manufacturer and exporter based in Hong Kong.
During 1997, 1996 and 1995, the Company purchased approximately $26,500,
$35,000 and $45,000, respectively, of products from TAL Apparel Limited and
certain related companies.
The Company is a party to certain litigation which, in management's
judgement based in part on the opinion of legal counsel, will not have a
material adverse effect on the Company's financial position.
During 1997, 1996 and 1995, the Company paid a $0.0375 per share cash
dividend each quarter on its common stock.
Certain items in 1996 and 1995 have been reclassified to present them on a
basis consistent with 1997.
F-18
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and the Board of Directors
Phillips-Van Heusen Corporation
We have audited the accompanying consolidated balance sheets of Phillips-
Van Heusen Corporation and subsidiaries as of February 1, 1998 and February 2,
1997, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended February 1, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Phillips-Van
Heusen Corporation and subsidiaries at February 1, 1998 and February 2, 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended February 1, 1998 in conformity with
generally accepted accounting principles.
E&Y SIGNATURE STAMP
New York, New York
March 10, 1998, except for the
Long-Term Debt Note, which
is as of April 22, 1998
F-19
PHILLIPS-VAN HEUSEN CORPORATION
TEN-YEAR FINANCIAL SUMMARY
(In thousands, except per share data, percents and ratios)
1997(1) 1996(2) 1995(3) 1994(4) 1993
Summary of Operations
Net sales
Apparel. . . . . . . . . . . . . . . . . . . . . . . $ 911,047 $ 897,370 $1,006,701 $ 812,993 $ 757,452
Footwear and Related Products. . . . . . . . . . . . 438,960 462,223 457,427 442,472 394,942
1,350,007 1,359,593 1,464,128 1,255,466 1,152,394
Cost of goods sold and expenses. . . . . . . . . . . . 1,437,160 1,311,855 1,443,555 1,205,764 1,072,083
Interest expense, net. . . . . . . . . . . . . . . . . 20,672 23,164 23,199 12,793 16,679
Income (loss) before taxes . . . . . . . . . . . . . . (107,825) 24,574 (2,626) 36,909 63,632
Income tax expense (benefit) . . . . . . . . . . . . . (41,246) 6,044 (2,920) 6,894 20,380
Income (loss) from continuing operations . . . . . . . (66,579) 18,530 294 30,015 43,252
Loss from discontinued operations. . . . . . . . . . .
Extraordinary loss, net of tax . . . . . . . . . . . . (11,394)
Net income (loss) . . . . . . . . . . . . . . . . $ (66,579) $ 18,530 $ 294 $ 30,015 $ 31,858
Per Share Statistics(5)
Basic Earnings Per Share:
Continuing operations. . . . . . . . . . . . . . . . . $ (2.46) $ 0.69 $ 0.01 $ 1.13 $ 1.66
Discontinued operations. . . . . . . . . . . . . . . .
Extraordinary loss . . . . . . . . . . . . . . . . . . (0.44)
Net income (loss) . . . . . . . . . . . . . . . . $ (2.46) $ 0.69 $ 0.01 $ 1.13 $ 1.22
Diluted Earnings Per Share:
Continuing operations. . . . . . . . . . . . . . . . . $ (2.46) $ 0.68 $ 0.01 $ 1.11 $ 1.60
Discontinued operations. . . . . . . . . . . . . . . .
Extraordinary loss . . . . . . . . . . . . . . . . . . (0.42)
Net income (loss) . . . . . . . . . . . . . . . . $ (2.46) $ 0.68 $ 0.01 $ 1.11 $ 1.18
Dividends paid per share . . . . . . . . . . . . . . . $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.15
Stockholders' equity per share.. . . . . . . . . . . . 8.11 10.73 10.20 10.35 9.33
Financial Position
Current assets . . . . . . . . . . . . . . . . . . . . $ 385,018 $ 362,958 $ 444,664 $ 429,670 $ 418,702
Current liabilities. . . . . . . . . . . . . . . . . . 133,335 122,266 183,126 114,033 109,156
Working capital. . . . . . . . . . . . . . . . . . . . 251,683 240,692 261,538 315,637 309,546
Total assets . . . . . . . . . . . . . . . . . . . . . 660,459 657,436 749,055 596,284 554,771
Long-term debt . . . . . . . . . . . . . . . . . . . . 241,004 189,398 229,548 169,679 169,934
Convertible redeemable preferred stock . . . . . . . .
Stockholders' equity . . . . . . . . . . . . . . . . . 220,305 290,158 275,292 275,460 246,799
Other Statistics
Total debt to total capital (6). . . . . . . . . . . . 53.0% 43.1% 52.3% 38.2% 40.8%
Market value of stockholders' equity . . . . . . . . . $328,000 $ 365,000 $ 270,000 $ 426,000 $ 949,000
Current ratio. . . . . . . . . . . . . . . . . . . . . 2.9 3.0 2.4 3.8 3.8
Average shares outstanding . . . . . . . . . . . . . . 27,108 27,004 26,726 26,563 26,142
(1) 1997 includes pre-tax charges of $132,700 for facility and store closing,
restructuring and other expenses.
(2) 1996 and 1990 include 53 weeks of operations.
(3) 1995 includes the operations of Izod and Gant from date of acquisition,
February 17, 1995, and includes pre-tax charges of $27,000 for facility
and store closing, restructuring and other expenses.
(4) 1994 includes pre-tax charges of $7,000 for restructuring and other
expenses.
(5) The earnings per share amounts for years prior to 1997 have been restated
to comply with FASB Statement No. 128, "Earnings Per Share."
(6) Total capital equals interest-bearing debt, preferred stock and
stockholders' equity.
F-20
PHILLIPS-VAN HEUSEN CORPORATION
TEN-YEAR FINANCIAL SUMMARY (CONTINUED)
1992 1991 1990(2) 1989 1988
Summary of Operations
Net sales
Apparel. . . . . . . . . . . . . . . . . . . . . . . $ 709,361 $596,383 $536,352 $493,395 $460,342
Footwear and Related Products. . . . . . . . . . . . 333,204 307,717 269,963 239,541 180,696
1,042,565 904,100 806,315 732,936 641,038
Cost of goods sold and expenses. . . . . . . . . . . . 972,357 843,367 752,252 682,687 597,543
Interest expense, net. . . . . . . . . . . . . . . . . 15,727 16,686 18,884 17,555 16,109
Income before taxes. . . . . . . . . . . . . . . . . . 54,481 44,047 35,179 32,694 27,386
Income tax expense . . . . . . . . . . . . . . . . . . 16,600 12,910 8,795 8,502 6,565
Income from continuing operations. . . . . . . . . . . 37,881 31,137 26,384 24,192 20,821
Loss from discontinued operations. . . . . . . . . . . (152)
Extraordinary loss, net of tax . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . $ 37,881 $ 31,137 $ 26,384 $ 24,192 $ 20,669
Per Share Statistics(5)
Basic Earnings Per Share:
Continuing operations. . . . . . . . . . . . . . . . . $ 1.50 $ 1.24 $ 1.00 $ 0.88 $ 0.70
Discontinued operations. . . . . . . . . . . . . . . . (0.01)
Extraordinary loss . . . . . . . . . . . . . . . . . . -
Net income (loss). . . . . . . . . . . . . . . . . . . $ 1.50 $ 1.24 $ 1.00 $ 0.88 $ 0.69
Diluted Earnings Per Share:
Continuing operations. . . . . . . . . . . . . . . . . $ 1.42 $ 1.15 $ 0.95 $ 0.84 $ 0.68
Discontinued operations. . . . . . . . . . . . . . . . (0.01)
Extraordinary loss . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . $ 1.42 $ 1.15 $ 0.95 $ 0.84 $ 0.67
Dividends paid per share . . . . . . . . . . . . . . . $ 0.15 $ 0.1425 $ 0.14 $ 0.14 $ 0.14
Stockholders' equity per share.. . . . . . . . . . . . 8.14 4.52 3.38 2.53 1.79
Financial Position
Current assets . . . . . . . . . . . . . . . . . . . . $ 410,522 $ 303,143 $ 285,315 $ 266,867 $ 265,039
Current liabilities. . . . . . . . . . . . . . . . . . 115,208 102,976 90,748 84,190 88,191
Working capital. . . . . . . . . . . . . . . . . . . . 295,314 200,167 194,567 182,677 176,848
Total assets . . . . . . . . . . . . . . . . . . . . . 517,362 398,969 376,790 333,108 323,133
Long-term debt . . . . . . . . . . . . . . . . . . . . 170,235 121,455 140,259 118,776 116,400
Convertible redeemable preferred stock . . . . . . . . 72,800 72,800 72,800 72,800
Stockholders' equity . . . . . . . . . . . . . . . . . 211,413 84,903 62,324 46,085 32,476
Other Statistics
Total debt to total capital (6). . . . . . . . . . . . 46.8% 46.0% 53.2% 52.6% 55.1%
Market value of stockholders' equity . . . . . . . . . $ 753,000 $392,000 $173,000 $132,000 $127,000
Current ratio. . . . . . . . . . . . . . . . . . . . . 3.6 2.9 3.1 3.2 3.0
Average shares outstanding . . . . . . . . . . . . . . 23,766 18,552 18,260 18,140 18,090
(1) 1997 includes pre-tax charges of $132,700 for facility and store closing,
restructuring and other expenses.
(2) 1996 and 1990 include 53 weeks of operations.
(3) 1995 includes the operations of Izod and Gant from date of acquisition,
February 17, 1995, and includes pre-tax charges of $27,000 for facility
and store closing, restructuring and other expenses.
(4) 1994 includes pre-tax charges of $7,000 for restructuring and other
expenses.
(5) The earnings per share amounts for years prior to 1997 have been restated
to comply with FASB Statement No. 128, "Earnings Per Share."
(6) Total capital equals interest-bearing debt, preferred stock and
stockholders' equity.
F-21
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in
(i) Post-Effective Amendment No. 2 to the Registration Statement (Form S-
8, No. 2-73803), which relates to the Phillips-Van Heusen Corporation
Employee Savings and Retirement Plan,
(ii) Registration Statement (Form S-8, No. 33-50841) and Registration
Statement (Form S-8, No. 33-59602), each of which relate to the Phillips-
Van Heusen Corporation Associates Investment Plan for Residents of the
Commonwealth of Puerto Rico,
(iii) Registration Statement (Form S-8, No. 33-59101), which relates to
the Voluntary Investment Plan of Phillips-Van Heusen Corporation (Crystal
Brands Division),
(iv) Post-Effective Amendment No. 4 to Registration Statement (Form S-8,
No. 2-72959), Post Effective Amendment No. 6 to Registration Statement
(Form S-8, No. 2-64564), and Post Effective Amendment No. 13 to
Registration Statement (Form S-8, No. 2-47910), each of which relate to
the 1973 Employee's Stock Option Plan of Phillips-Van Heusen Corporation,
and
(v) Registration Statement (Form S-8, No. 33-38698), Post-Effective
Amendment No. 1 to Registration Statement (Form S-8, No. 33-24057) and
Registration Statement (Form S-8, No. 33-60793), each of which relate to
the Phillips-Van Heusen Corporation 1987 Stock Option Plan,
(vi) Registration Statement (Form S-8, No. 333-29765) which relates to the
Phillips-Van Heusen Corporation 1997 Stock Option Plan.
of Phillips-Van Heusen Corporation and in the related Prospectuses of our
report dated March 10, 1998 (except for the Long-Term Debt Note, which is as
of April 22, 1998), with respect to the consolidated financial statements as
amended and schedules of Phillips-Van Heusen Corporation included in this Form
10-K/A No. 1 for the year ended February 1, 1998.
ERNST & YOUNG LLP
New York, New York
April , 1998
5
1,000
YEAR
FEB-01-1998
FEB-01-1998
11,748
0
91,567
2,911
249,534
385,018
94,582
0
660,459
133,335
241,004
0
0
27,179
193,126
660,459
1,350,007
1,350,007
937,965
937,965
499,195
0
20,672
(107,825)
(41,246)
(66,579)
0
0
0
(66,579)
(2.46)
(2.46)
Property, plant and equipment is presented net of accumulated depreciation.
Provision for doubtful accounts is included in other costs and expenses.
