PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
1996 1995 1994
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,359,593 $1,464,128 $1,255,466
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . 910,517 987,921 845,655
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 449,076 476,207 409,811
Selling, general and administrative expenses . . . . . . . . . . . 401,338 428,634 353,109
Plant and store closing and restructuring expenses . . . . . . . . 27,000 7,000
Income before interest and taxes . . . . . . . . . . . . . . . . . 47,738 20,573 49,702
Interest expense, net. . . . . . . . . . . . . . . . . . . . . . . 23,164 23,199 12,793
Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . 24,574 (2,626) 36,909
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . 6,044 (2,920) 6,894
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,530 $ 294 $ 30,015
Net income per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.69 $ 0.01 $ 1.11
Average shares outstanding . . . . . . . . . . . . . . . . . . . . 27,004 26,726 27,154
See notes to consolidated financial statements.
1
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Feb. 2, 1997 Jan. 28, 1996
ASSETS
Current Assets:
Cash, including cash equivalents of $1,861 and $8,474 . . . . . . . . . . . $ 11,590 $ 17,533
Trade receivables, less allowances of $3,401 and $5,514 . . . . . . . . . . 91,806 109,866
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,422 276,773
Income tax refund receivable. . . . . . . . . . . . . . . . . . . . . . . . 16,987
Other, including deferred taxes of $4,300 and $9,801. . . . . . . . . . . . 22,140 23,505
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 362,958 444,664
Property, Plant and Equipment. . . . . . . . . . . . . . . . . . . . . . . . . 137,060 143,398
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,324 119,914
Other Assets, including deferred taxes of $16,617 and $22,113. . . . . . . . . 37,094 41,079
$657,436 $749,055
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 20,000 $ 61,590
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,355 38,796
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,754 72,603
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 10,157 10,137
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . 122,266 183,126
Long-Term Debt, less current portion . . . . . . . . . . . . . . . . . . . . . 189,398 229,548
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,614 61,089
Stockholders' Equity:
Preferred stock, par value $100 per share; 150,000 shares
authorized; no shares outstanding
Common stock, par value $1 per share; 100,000,000 shares
authorized; shares issued 27,045,705 and 26,979,352 . . . . . . . . . . . 27,046 26,979
Additional capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,296 115,977
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,816 132,336
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 290,158 275,292
$657,436 $ 749,055
See notes to consolidated financial statements.
2
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
1996 1995 1994
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,530 $ 294 $ 30,015
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 29,438 33,740 24,765
Amortization of contributions from landlords . . . . . . . . . . . . . (6,171) (7,584) (5,732)
Write-off of property, plant and equipment . . . . . . . . . . . . . . 13,000
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 8,214 3,363 (6,275)
Equity income in Pyramid Sportswear. . . . . . . . . . . . . . . . . . (1,250) (85)
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,060 (13,927) (15,541)
Income tax refund receivable . . . . . . . . . . . . . . . . . . . . . . 16,987
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,351 16,315 14,627
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . (17,782) (83,897) 3,242
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,741) (3,183) 4,293
Net Cash Provided (Used) By Operating Activities . . . . . . . . . . . . 102,636 (41,964) 49,394
Investing activities:
Acquisition of the Apparel Group of Crystal Brands, Inc. . . . . . . . . . (114,503)
Property, plant and equipment acquired . . . . . . . . . . . . . . . . . . (22,578) (39,773) (53,140)
Investment in Pyramid Sportswear . . . . . . . . . . . . . . . . . . . . . (6,950)
Contributions from landlords . . . . . . . . . . . . . . . . . . . . . . . 2,685 7,800 15,310
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,302) 3,376 2,438
Net Cash Used By Investing Activities. . . . . . . . . . . . . . . . . . (23,195) (150,050) (35,392)
Financing activities:
Proceeds from revolving line of credit . . . . . . . . . . . . . . . . . . 52,582 204,996
Payments on revolving line of credit and long-term borrowings. . . . . . . (134,302) (73,660) (245)
Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . 386 1,745 2,630
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,050) (4,007) (3,984)
Net Cash Provided (Used) By Financing Activities . . . . . . . . . . . . (85,384) 129,074 (1,599)
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . (5,943) (62,940) 12,403
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 17,533 80,473 68,070
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 11,590 $ 17,533 $ 80,473
See notes to consolidated financial statements.
3
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
$1 par Additional Retained Treasury Stockholders'
Shares Value Capital Earnings Stock Equity
January 30, 1994 . . . . . . . . . 33,190,750 $33,191 $118,360 $269,055 $(173,807) $246,799
Stock options exercised. . . . . 148,471 148 2,493 2,641
Net income . . . . . . . . . . . 30,015 30,015
Cash dividends . . . . . . . . . (3,984) (3,984)
Retirement of treasury stock . . (6,728,576) (6,729) (8,041) (159,037) 173,807 -0-
Stock repurchased and cancelled (335) (11) (11)
January 29, 1995 . . . . . . . . . 26,610,310 26,610 112,801 136,049 -0- 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 -0- 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 $ -0- $290,158
See notes to consolidated financial statements.
4
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 the Company 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 year 1996 represent the 53 weeks ended February 2, 1997.
Fiscal years 1995 and 1994 represent the 52 weeks ended January 28, 1996, and
January 29, 1995, respectively.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Asset Impairments - The Company records impairment losses on long-lived
assets (including goodwill) 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 the apparel business is determined principally using the last-in,
first-out method (LIFO), except for certain sportswear inventories which are
determined using the first-in, first-out method (FIFO). Cost for the footwear
business is determined using FIFO.
Property, Plant and Equipment - Depreciation is computed principally by
the straight line method over the estimated useful lives of the various
classes of property.
Goodwill - Goodwill, net of accumulated amortization of $8,615 and $5,474
in 1996 and 1995, respectively, is being amortized principally by the straight
line method over 40 years.
Contributions from Landlords - The Company receives contributions from
landlords for fixturing retail stores which the Company leases. Such amounts
are amortized as a reduction of rent expense over the life of the related
lease. Unamortized contributions are included in accrued expenses and other
liabilities and amounted to $18,747 and $23,748 in 1996 and 1995,
respectively.
Fair Value of Financial Instruments - Using discounted cash flow analyses,
the Company estimates that the fair value of all financial instruments
approximates their carrying value, except as noted in the footnote entitled
"Long-Term Debt."
5
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation - The Company accounts for its stock options
under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and has adopted the disclosure requirements of FASB Statement No.
123, "Accounting for Stock-Based Compensation."
Advertising - Advertising costs are expensed as incurred and totalled
$19,427 (1996), $21,136 (1995) and $18,532 (1994).
Net Income Per Share - Net income per share has been computed by dividing
net income by the weighted average number of shares outstanding during the
year and, in 1994, share equivalents applicable to dilutive stock options. In
1996 and 1995, share equivalents applicable to dilutive stock options were
immaterial and have been excluded from the net income per share calculations.
Acquisition
On February 17, 1995, the Company completed the acquisition of the Apparel
Group of Crystal Brands, Inc. (Izod and Gant) for $114,503 in cash, net of
cash acquired. This acquisition was accounted for as a purchase. The
acquired operations are included in the Company's consolidated financial
statements since February 17, 1995.
In connection with the acquisition, the Company acquired assets with a
fair value estimated to be $207,101 (including $104,504 of excess of cost over
net assets acquired) and assumed liabilities estimated to be $92,598.
If the acquisition had occurred on the first day of fiscal 1994 instead of
February 17, 1995, the Company's proforma consolidated results of operations
would have been:
1995 1994
Net sales $1,470,259 $1,486,476
Net income $ 231 $ 31,011
Net income per share $ 0.01 $ 1.14
Income Taxes
Income taxes consist of:
1996 1995 1994
Federal:
Current. . . . . . . . . . . . . . . . . . . . . . . . . $(4,620) $(8,219) $11,720
Deferred . . . . . . . . . . . . . . . . . . . . . . . . 7,959 2,995 (5,585)
State, foreign and local:
Current. . . . . . . . . . . . . . . . . . . . . . . . . 2,450 1,936 1,449
Deferred . . . . . . . . . . . . . . . . . . . . . . . . 255 368 (690)
$ 6,044 $(2,920) $ 6,894
Taxes paid were $1,262 (1996), $3,371 (1995) and $12,766 (1994). In
addition, the Company received an income tax refund of $16,987 in 1996.
6
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:
1996 1995
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . $(18,349) $(14,574)
Landlord contributions. . . . . . . . . . . . . . . . . . . . 7,367 9,334
Plant and store closing and restructuring . . . . . . . . . . 415 7,555
Employee compensation and benefits. . . . . . . . . . . . . . 9,243 8,797
Tax loss and credit carryforwards . . . . . . . . . . . . . . 17,231 16,328
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . 5,010 4,474
$ 20,917 $ 31,914
A reconciliation of the statutory Federal income tax to the income tax
expense (benefit) is as follows:
1996 1995 1994
Statutory 35% federal tax . . . . . . . . . . . . . . . . $ 8,601 $ (919) $12,918
State, foreign and local income taxes,
net of Federal income tax benefit. . . . . . . . . . . . 1,463 1,454 1,845
Income of Puerto Rico Subsidiaries(1) . . . . . . . . . . (3,757) (3,298) (2,953)
Reversal of estimated tax liabilities(2). . . . . . . . . (4,100)
Other-net . . . . . . . . . . . . . . . . . . . . . . . . (263) (157) (816)
Income tax expense (benefit). . . . . . . . . . . . . . . $ 6,044 $(2,920) $ 6,894
(1) Exemption from Puerto Rico income tax expires in 1998.
(2) During 1994, the Company reversed estimated tax liabilities which were no
longer deemed necessary.
During 1995 and 1994, the Company recognized tax benefits of $397 and $1,568,
respectively, related to the exercise of stock options. These benefits were
credited to additional capital.
Inventories
Inventories are summarized as follows:
1996 1995
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,670 $ 14,194
Work in process. . . . . . . . . . . . . . . . . . . . . . . . . . 13,208 13,145
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . 207,544 249,434
$237,422 $276,773
Inventories would have been approximately $13,000 higher than reported at
February 2, 1997 and January 28, 1996, if the FIFO method of inventory
accounting had been used for the entire apparel business.
7
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property, Plant and Equipment
Property, plant and equipment, at cost, are summarized as follows:
1996 1995
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,774 $ 1,789
Buildings and building improvements. . . . . . . . . . . . . . . . 37,778 37,661
Machinery and equipment, furniture and
fixtures and leasehold improvements. . . . . . . . . . . . . . . 233,884 228,754
273,436 268,204
Less: Accumulated depreciation and amortization 136,376 124,806
$137,060 $143,398
Long-Term Debt
Long-term debt, exclusive of current portion, is as follows:
1996 1995
Revolving Credit Facilities. . . . . . . . . . . . . . . . . . . . $ 40,000 $ 70,000
7.75% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . 99,442 99,435
7.75% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . 49,286 59,143
Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670 970
$189,398 $229,548
The Company 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, the Company estimates that the fair value
of these Debentures on February 2, 1997, using discounted cash flow analyses,
was approximately $86,066.
The Company issued a series of Senior Notes due 1996-2002 with an average
interest rate of 7.75% to a group of investors on October 29, 1992. The notes
are payable in seven equal annual installments which commenced November 1,
1996. Interest is payable semi-annually.
The Company has a credit agreement which includes a revolving credit
facility under which the Company may, at its option, borrow and repay amounts
within certain limits. The credit agreement also includes a letter of credit
facility. The total amount available to the Company under each of the
revolving credit and the letter of credit facility is $250,000, provided,
however, that the aggregate maximum amount outstanding at any time under both
facilities is $400,000. All outstanding borrowings and letters of credit
under the credit agreement are due February 13, 1999. Interest on amounts
borrowed under the revolving credit facility is payable quarterly at the prime
rate or at LIBOR plus .25%. A commitment fee of .25% is payable quarterly on
the $250,000 revolving credit facility. The amount outstanding at February 2,
1997 and January 28, 1996 under the letter of credit facility was $99,115 and
$115,462, respectively.
8
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-Term Debt (Continued)
The Company had a secondary revolving credit agreement in 1995 which has
not been renewed.
The weighted average interest rate on outstanding borrowings from the
revolving credit facility at February 2, 1997 and January 28, 1996 was 6.2%
and 6.0%, respectively.
Interest paid was $24,039 (1996), $22,949 (1995) and $14,131 (1994).
Scheduled maturities of long-term debt, including current portion, for the
next five years are as follows: 1997-$10,157, 1998-$10,182, 1999-$10,202,
2000-$9,857 and 2001-$9,857.
Investment in Pyramid Sportswear
During the fourth quarter of 1995, the Company acquired 25% of Pyramid
Sportswear ("Pyramid") for $6,950 in cash and $1,800 in the Company's common
stock. The Company 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 the Company and markets such
sportswear in 20 countries around the world. In connection with this
investment, the Company also acquired an option to purchase the remaining 75%
of Pyramid in the year 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 the Company is the surviving corporation in a merger or other business
combination then, under certain circumstances, each holder of a Right will
have the right to receive upon exercise the number of shares of common stock
having a market value equal to two times the exercise price of the Right.
9
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stockholders' Equity - (Continued)
In the event the Company is not the surviving corporation in a merger or
other business combination, or more than 50% of the Company's assets or
earning power is sold or transferred, each holder of a Right will have the
right to receive upon exercise the number of shares of common stock of the
acquiring company having a market value equal to two times the exercise price
of the Right.
At any time prior to the close of business on the Distribution Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.05
per Right. 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 the Company'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 two years after the date of grant for grants issued
prior to March 30, 1993, and commencing three years after the date of grant
for grants issued after March 30, 1993.
Under APB Opinion No. 25, the Company does not recognize compensation
expense because the exercise price of the Company's stock options equals the
market price of the underlying stock on the date of grant. 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, the Company estimated the fair value
of stock options granted in 1996 and 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:
1996 1995
Risk-free interest rate 6.61% 6.05%
Expected option life 7 Years 7 Years
Expected volatility 30.6% 30.6%
Expected dividends per share $ 0.15 $ 0.15
Weighted average estimated fair
value per share of options granted $ 5.29 6.11
Proforma net income (loss) $17,396 $ (127)
Proforma net income (loss) per share $ 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 1996 and 1995 may
not be indicative of future years.
10
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 30, 1994. . . . . . . . 1,558,460 $ 3.80 - $36.00 $14.87
Granted. . . . . . . . . . . . . . . . . . . . 196,907 15.25 - 36.25 27.76
Exercised. . . . . . . . . . . . . . . . . . . 148,471 4.75 - 22.38 7.23
Cancelled. . . . . . . . . . . . . . . . . . . 52,647 4.75 - 33.25 22.30
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
Of the outstanding options at February 2, 1997, 574,155 shares have an
exercise price below $12.25, 1,365,635 shares have an exercise price from
$12.25 to $16.50 and 17,750 shares have an exercise price above $16.50. The
weighted average remaining contractual life for all options outstanding at
February 2, 1997 is 7.4 years.
Of the outstanding options at February 2, 1997 and January 28, 1996,
options covering 645,091 and 842,912 shares were exercisable at a weighted
average price of $9.35 and $11.07, respectively. Stock options available for
grant at February 2, 1997 and January 28, 1996 amounted to 311,496 and 532,041
shares, respectively.
Leases
The Company 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 2, 1997, minimum annual rental commitments under non-
cancellable operating leases, including leases for new retail stores which had
not begun operating at February 2, 1997, are as follows:
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,020
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,847
1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,577
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,665
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,219
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . 51,665
Total minimum lease payments. . . . . . . . . . . . . . . . . . $251,993
11
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Leases (Continued)
Rent expense, principally for real estate, is as follows:
1996 1995 1994
Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $67,914 $69,988 $56,089
Percentage and other. . . . . . . . . . . . . . . . . . . . . . . 11,166 11,807 10,435
$79,080 $81,795 $66,524
Retirement and Benefit Plans
Defined Benefit Plans - The Company has noncontributory, defined benefit
pension plans covering substantially all U.S. employees meeting certain age
and service requirements. For those vested (after five years of service), the
plans provide monthly benefits upon retirement based on career compensation
and years of credited service. It is the Company's policy to fund pension cost
annually in an amount consistent with Federal law and regulations. The assets
of the plans are principally invested in a mix of fixed income and equity
investments. In addition, the Company 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:
1996 1995 1994
Defined Benefit Plans:
Service cost - benefits earned during the period . . . . . . . . . $ 2,528 $2,145 $2,294
Interest cost on projected benefit obligation. . . . . . . . . . . 7,425 7,107 2,922
Actual (gain) loss on plan assets. . . . . . . . . . . . . . . . . (13,688) (19,533) 1,854
Net amortization and deferral of actuarial gains (losses). . . . . 5,354 12,028 (3,048)
Net pension cost of defined benefit plans . . . . . . . . . . . . . 1,619 1,747 4,022
Multi-employer plans. . . . . . . . . . . . . . . . . . . . . . . . 253 219 214
Total pension expense . . . . . . . . . . . . . . . . . . . . . . . $ 1,872 $1,966 $4,236
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:
1996 1995 1994
Discount rate used in determining projected benefit obligation. . . . 8.00% 7.50% 8.75%
Rate of increase in compensation levels . . . . . . . . . . . . . . . 4.50% 4.00% 5.25%
Long-term rate of return on assets. . . . . . . . . . . . . . . . . . 8.75% 8.75% 8.75%
12
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:
1996 1995
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . $ 91,379 $ 95,815
Accumulated benefit obligation. . . . . . . . . . . . . . . . . . . . $ 93,373 $ 98,087
Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . $ 110,830 $ 103,797
Less: projected benefit obligation for services rendered to date. . . . (101,065) (106,568)
Plan assets in excess of (less than) projected benefit obligation . . . 9,765 (2,771)
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . 3,099 3,302
Unrecognized net actuarial (gain) loss. . . . . . . . . . . . . . . . . (3,665) 7,370
Unrecognized net asset at adoption date of FASB Statement No. 87 (305) (374)
Net pension asset recognized in the balance sheets. . . . . . . . . . . $ 8,894 $ 7,527
The plan assets in excess of projected benefit obligation at February 2,
1997 includes $13,494 for certain overfunded plans.
The Company has an unfunded supplemental defined benefit plan covering 23
current and retired executives under which the participants will receive a
predetermined amount during the 10 years following the attainment of age 65,
provided that prior to the termination of employment with the Company, the
participant has been in the plan for at least 10 years and has attained age
55. The Company does not intend to admit new participants in the future. At
February 2, 1997 and January 28, 1996, $7,450 and $6,696, respectively, are
included in other liabilities as the accrued cost of this plan.
Savings and Retirement Plans - The Company 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. Company contributions to the plans are equal to 50% of
the amounts contributed by participating employees with respect to the first
6% of compensation and were $2,249 (1996), $2,668 (1995) and $2,406 (1994).
In accordance with the terms of the Associates Investment Plan, Company
matching contributions are invested in the Company's common stock.
Post-Retirement Benefits - The Company 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.
13
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Retirement and Benefit Plans - (Continued)
Net post-retirement benefit cost includes the following components:
1996 1995 1994
Service cost $ 687 $ 466 $ 402
Interest cost 2,166 2,128 850
Amortization of net loss 44 37
Amortization of transition obligation 273 273 273
$3,170 $2,904 $1,525
The following reconciles the plan's accumulated post-retirement benefit with
amounts recognized in the Company's balance sheets:
1996 1995
Accumulated post-retirement benefit obligation:
Retirees receiving benefits $21,505 $22,877
Fully eligible active plan participants 2,132 2,104
Active plan participants not eligible for benefits 5,503 4,980
29,140 29,961
Unrecognized transition obligation (4,370) (4,643)
Unrecognized net loss (4,729) (6,432)
Post-retirement liability recognized in the
balance sheets $20,041 $18,886
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 1997 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 2, 1997 by $2,747, and the aggregate of the service
and interest cost components of net post-retirement benefit cost for 1996 by
$283. The discount rate used in determining the accumulated post-retirement
benefit obligation at February 2, 1997 and January 28, 1996 was 8.0% and 7.5%,
respectively.
Segment Data
The Company operates in two industry segments: (i) apparel - the
manufacture, procurement for sale and marketing of a broad range of men's,
women's and children's apparel to traditional wholesale accounts as well as
through Company-owned retail stores, and (ii) footwear - the manufacture,
procurement for sale and marketing of a broad range of men's, women's and
children's shoes to traditional wholesale accounts as well as through
Company-owned retail stores.
Operating income represents net sales less operating expenses. Excluded
from operating results of the segments are interest expense, net, corporate
expenses and income taxes.
14
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Segment Data (Continued)
1996 1995 1994
Net Sales
Apparel . . . . . . . . . . . . . . . . . . . . . . . . $1,007,533 $1,100,040 $ 883,949
Footwear. . . . . . . . . . . . . . . . . . . . . . . . 352,060 364,088 371,517
Total Net Sales . . . . . . . . . . . . . . . . . . . . $1,359,593 $1,464,128 $1,255,466
Operating Income
Apparel(1). . . . . . . . . . . . . . . . . . . . . . . $ 33,927 $ 7,948 $ 28,676
Footwear(2) . . . . . . . . . . . . . . . . . . . . . . 28,982 25,510 31,525
Total Operating Income. . . . . . . . . . . . . . . . . 62,909 33,458 60,201
Corporate Expenses . . . . . . . . . . . . . . . . . . . . (15,171) (12,885) (10,499)
Interest Expense, net. . . . . . . . . . . . . . . . . . . (23,164) (23,199) (12,793)
Income (Loss) Before Taxes. . . . . . . . . . . . . . . $ 24,574 $ (2,626) $ 36,909
Identifiable Assets
Apparel . . . . . . . . . . . . . . . . . . . . . . . . $ 381,274 $ 468,618 $ 307,111
Footwear. . . . . . . . . . . . . . . . . . . . . . . . 143,631 165,390 176,261
Corporate . . . . . . . . . . . . . . . . . . . . . . . 132,531 115,047 112,912
$ 657,436 $ 749,055 $ 596,284
Depreciation and Amortization
Apparel . . . . . . . . . . . . . . . . . . . . . . . . $ 18,723 $ 25,487 $ 18,433
Footwear. . . . . . . . . . . . . . . . . . . . . . . . 3,162 3,986 4,125
Corporate . . . . . . . . . . . . . . . . . . . . . . . 7,553 4,267 2,207
$ 29,438 $ 33,740 $ 24,765
Identifiable Capital Expenditures
Apparel . . . . . . . . . . . . . . . . . . . . . . . . $ 6,959 $ 23,627 $ 36,176
Footwear. . . . . . . . . . . . . . . . . . . . . . . . 3,960 4,209 6,152
Corporate . . . . . . . . . . . . . . . . . . . . . . . 11,659 11,937 10,812
$ 22,578 $ 39,773 $ 53,140
(1) Operating income of the apparel segment includes charges for plant and
store closing and restructuring expenses of $25,000 (1995) and $7,000
(1994).
(2) Operating income of the footwear segment includes charges for store
closing and restructuring expenses of $2,000 in 1995.
Apparel inventories as of February 2, 1997 and January 28, 1996 of
$137,659 and $166,606, respectively, were determined principally using the
LIFO method.
15
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Plant and Store Closing and Restructuring Expenses
During 1995, the Company adopted and began to implement a plan designed to
reduce costs and realign the product distribution mix primarily within the
Company's apparel business. Significant components of the plan included the
closing of three domestic shirt manufacturing facilities, closing
approximately 300 unprofitable retail outlet stores and reorganizing the
Company's management structure which combines the Company's wholesale and
retail businesses into eight discrete operating units, each with total
marketing and profit responsibility for its brand. As a result, the Company
recorded a pre-tax charge during 1995 of $27,000 (approximately $26,000 has
been utilized as of February 2, 1997). Approximately $13,000 of this charge
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 impacted by this restructuring.
During 1994, the Company implemented a plan to restructure and consolidate
certain functions associated with its retail operations, and adopted a plan to
realign its wholesale apparel business into a dress shirt division and a
sportswear division. Also, in connection with the acquisition of the Izod and
Gant businesses, the Company adopted a plan to convert its private label
retail stores to stores which market branded apparel under the Izod and Gant
labels. As a result, the Company recorded a pre-tax charge of $7,000, of
which $3,300 was for the elimination of approximately 85 positions. As of
January 28, 1996, all of the 1994 reserve had been utilized in completing this
restructuring plan.
As part of its ongoing strategic and expense reduction initiatives, the
Company continues to evaluate its operations.
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 1996 and 1995, the Company purchased approximately $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
judgment based in part on the opinion of legal counsel, will not have a
material adverse effect on the Company's financial position.
During 1996, 1995 and 1994, the Company paid a $0.0375 per share cash
dividend each quarter on its common stock.
Certain items in 1995 and 1994 have been reclassified to present these
items on a basis consistent with 1996.
16
PHILLIPS-VAN HEUSEN CORPORATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(In thousands, except per share data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1996 1995 1996 1995 1996 1995(1) 1996(2) 1995(3)
Net sales. . . . . . . . . . . . $273,660 $282,987 $313,807 $349,493 $391,245 $448,007 $380,881 $383,641
Gross profit . . . . . . . . . . 93,097 97,404 105,325 119,597 129,709 139,055 120,945 120,151
Net income (loss). . . . . . . . (6,554) (3,360) 2,126 3,894 15,035 (4,374) 7,923 4,134
Net income (loss) per share (4). (0.24) (0.13) 0.08 0.15 0.56 (0.16) 0.29 0.15
Price range of common stock
per share
High . . . . . . . . . . . . 13 3/8 18 14 1/2 17 11 3/4 15 7/8 15 1/8 11 3/4
Low. . . . . . . . . . . . . 9 5/8 15 11 14 10 3/8 9 1/8 10 3/4 9 1/4
(1) Net loss for the third quarter of 1995 includes a pre-tax charge of
$25,000 for plant and store closing and restructuring expenses.
(2) The fourth quarter of 1996 includes 14 weeks of operations.
(3) Net income for the fourth quarter of 1995 includes a pre-tax charge of
$2,000 for plant and store closing and restructuring expenses.
(4) Fully diluted net income per share has not been presented since the
results are not materially different from primary net income per share.
17
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
Management of the Company has the responsibility for preparing the
accompanying financial statements and for their integrity and objectivity.
The statements have been prepared by management in conformity with generally
accepted accounting principles. The financial statements include some amounts
that are based on management's best estimates and judgements. Management also
prepared the other information in the annual report and is responsible for its
accuracy and consistency with the financial statements.
The Company maintains a system of internal accounting controls designed to
provide management with reasonable assurance that transactions are executed in
accordance with management's authorization and recorded properly. The concept
of reasonable assurance is based on the recognition that the cost of a system
of internal accounting control should not exceed the benefits derived and that
the evaluation of those factors requires estimates and judgements by
management. Further, because of inherent limitations in any system of
internal accounting control, errors or irregularities may occur and not be
detected. Nevertheless, management believes that a high level of internal
accounting control is maintained by the Company through the selection and
training of qualified personnel, the establishment and communication of
accounting and business policies, and its internal audit program.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with management and the Company's internal
auditors and independent auditors to review matters relating to the quality of
financial reporting and internal accounting control and the nature, extent and
results of their audits. The Company's internal auditors and independent
auditors have complete access to the Audit Committee.
SIGNATURE STAMP SIGNATURE STAMP
BRUCE J. KLATSKY IRWIN W. WINTER
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
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 2, 1997 and January 28,
1996, 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 2, 1997. 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 2, 1997 and January 28, 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended February 2, 1997 in conformity with
generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, in
1996 the Company adopted Financial Accounting Standards Board Statement No.
123 "Accounting for Stock-Based Compensation."
E&Y SIGNATURE STAMP
New York, New York
March 11, 1997
19
PHILLIPS-VAN HEUSEN CORPORATION
TEN-YEAR FINANCIAL SUMMARY
(In thousands, except per share data, percents and ratios)
1996(1) 1995(2) 1994 1993 1992
Summary of Operations
Net sales
Apparel. . . . . . . . . . . . . . . . . . . . . . $1,007,533 $1,100,040 $ 883,949 $ 800,454 $ 709,361
Footwear . . . . . . . . . . . . . . . . . . . . . 352,060 364,088 371,517 351,940 333,204
1,359,593 1,464,128 1,255,466 1,152,394 1,042,565
Cost of goods sold and expenses. . . . . . . . . . . 1,311,855 1,443,555 1,205,764 1,072,083 972,357
Interest expense, net. . . . . . . . . . . . . . . . 23,164 23,199 12,793 16,679 15,727
Income (loss) before taxes . . . . . . . . . . . . . 24,574 (2,626) 36,909 63,632 54,481
Income tax expense (benefit) . . . . . . . . . . . . 6,044 (2,920) 6,894 20,380 16,600
Income from continuing operations. . . . . . . . . . 18,530 294 30,015 43,252 37,881
Income (loss) from discontinued operations . . . . .
Extraordinary loss, net of tax . . . . . . . . . . . (11,394)
Net income. . . . . . . . . . . . . . . . . . . $ 18,530 $ 294 $ 30,015 $ 31,858 $ 37,881
Per Share Statistics(4)
Income from continuing operations. . . . . . . . . . $ 0.69 $ 0.01 $ 1.11 $ 1.60 $ 1.42
Discontinued operations. . . . . . . . . . . . . . .
Extraordinary loss . . . . . . . . . . . . . . . . . (0.42) -
Net income. . . . . . . . . . . . . . . . . . . $ 0.69 $ 0.01 $ 1.11 $ 1.18 $ 1.42
Dividends paid per share . . . . . . . . . . . . . . $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.15
Stockholders' equity per share.. . . . . . . . . . . 10.73 10.20 10.35 9.33 8.14
Financial Position
Invested cash. . . . . . . . . . . . . . . . . . . .$ 1,861 $ 8,474 $ 68,586 $ 66,064 $ 75,862
Current assets . . . . . . . . . . . . . . . . . . . 362,958 444,664 429,670 418,702 410,522
Current liabilities. . . . . . . . . . . . . . . . . 122,266 183,126 114,033 109,156 115,208
Working capital. . . . . . . . . . . . . . . . . . . 240,692 261,538 315,637 309,546 295,314
Total assets . . . . . . . . . . . . . . . . . . . . 657,436 749,055 596,284 554,771 517,362
Long-term debt . . . . . . . . . . . . . . . . . . . 189,398 229,548 169,679 169,934 170,235
Convertible redeemable preferred stock . . . . . . .
Stockholders' equity . . . . . . . . . . . . . . . . 290,158 275,292 275,460 246,799 211,413
Other Statistics
Total debt to total capital (5). . . . . . . . . . . 43.1% 52.3% 38.2% 40.8% 46.8%
Net debt to net capital (6). . . . . . . . . . . . . 42.9% 51.5% 26.9% 29.7% 34.3%
Market value of stockholders' equity . . . . . . . . $ 365,000 $ 270,000 $ 426,000 $ 949,000 $ 753,000
Current ratio. . . . . . . . . . . . . . . . . . . . 3.0 2.4 3.8 3.8 3.6
Average shares and equivalents outstanding . . . . . 27,004 26,726 27,154 27,106 25,253
(1) 1996 and 1990 include 53 weeks of operations.
(2) 1995 includes the operations of Izod and Gant from date of acquisition,
February 17, 1995, and includes a $27,000 pre-tax restructuring charge.
(3) 1987 includes the operations of G.H. Bass & Co. from date of
acquisition, August 21, 1987.
(4) Fully diluted net income per share has not been presented since the
results are either not materially different from primary net income
per share or are anti-dilutive.
(5) Total capital equals interest-bearing debt, preferred stock and
stockholders' equity.
(6) Net debt and net capital are total debt and total capital reduced by
invested cash.
20
PHILLIPS-VAN HEUSEN CORPORATION
TEN-YEAR FINANCIAL SUMMARY (CONTINUED)
1991 1990(1) 1989 1988 1987(3)
Summary of Operations
Net sales
Apparel. . . . . . . . . . . . . . . . . . . . . . $596,383 $536,352 $493,395 $460,342 $416,407
Footwear . . . . . . . . . . . . . . . . . . . . . 307,717 269,963 239,541 180,696 83,618
904,100 806,315 732,936 641,038 500,025
Cost of goods sold and expenses. . . . . . . . . . . 843,367 752,252 682,687 597,543 457,842
Interest expense, net. . . . . . . . . . . . . . . . 16,686 18,884 17,555 16,109 6,210
Income before taxes. . . . . . . . . . . . . . . . . 44,047 35,179 32,694 27,386 35,973
Income tax expense (benefit) . . . . . . . . . . . . 12,910 8,795 8,502 6,565 14,655
Income from continuing operations. . . . . . . . . . 31,137 26,384 24,192 20,821 21,318
Income (loss) from discontinued operations . . . . . (152) 8,691
Extraordinary loss, net of tax . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . $ 31,137 $ 26,384 $ 24,192 $ 20,669 $ 30,009
Per Share Statistics(4)
Income from continuing operations. . . . . . . . . . $ 1.15 $ 0.95 $ 0.84 $ 0.68 $ 0.66
Discontinued operations. . . . . . . . . . . . . . . (0.01) 0.33
Extraordinary loss . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . $ 1.15 $ 0.95 $ 0.84 $ 0.67 $ 0.99
Dividends paid per share . . . . . . . . . . . . . . $ 0.1425 $ 0.14 $ 0.14 $ 0.14 $ 0.125
Stockholders' equity per share.. . . . . . . . . . . 4.52 3.38 2.53 1.79 1.24
Financial Position
Invested cash. . . . . . . . . . . . . . . . . . . . $ 5,326 $ 5,796 $ 3,551 $ 7,191 $ 8,979
Current assets . . . . . . . . . . . . . . . . . . . 303,143 285,315 266,867 265,039 258,135
Current liabilities. . . . . . . . . . . . . . . . . 102,976 90,748 84,190 88,191 86,741
Working capital. . . . . . . . . . . . . . . . . . . 200,167 194,567 182,677 176,848 171,394
Total assets . . . . . . . . . . . . . . . . . . . . 398,969 376,790 333,108 323,133 317,773
Long-term debt . . . . . . . . . . . . . . . . . . . 121,455 140,259 118,776 116,400 120,848
Convertible redeemable preferred stock . . . . . . . 72,800 72,800 72,800 72,800 72,800
Stockholders' equity . . . . . . . . . . . . . . . . 84,903 62,324 46,085 32,476 22,456
Other Statistics
Total debt to total capital (5). . . . . . . . . . . 46.0% 53.2% 52.6% 55.1% 56.9%
Net debt to net capital (6). . . . . . . . . . . . . 45.0% 52.2% 51.9% 53.7% 55.1%
Market value of stockholders' equity . . . . . . . . $392,000 $173,000 $132,000 $127,000 $ 86,000
Current ratio. . . . . . . . . . . . . . . . . . . . 2.9 3.1 3.2 3.0 3.0
Average shares and equivalents outstanding . . . . . 19,897 19,094 19,140 18,572 26,258
(1) 1996 and 1990 include 53 weeks of operations.
(2) 1995 includes the operations of Izod and Gant from date of acquisition,
February 17, 1995, and includes a $27,000 pre-tax restructuring charge.
(3) 1987 includes the operations of G.H. Bass & Co. from date of
acquisition, August 21, 1987.
(4) Fully diluted net income per share has not been presented since the
results are either not materially different from primary net income
per share or are anti-dilutive.
(5) Total capital equals interest-bearing debt, preferred stock and
stockholders' equity.
(6) Net debt and net capital are total debt and total capital reduced by
invested cash.
21
FINANCIAL REVIEW
The Company's primary strategy lies in continuing to build the value of its
brands. We believe this is key to the long-term building of shareholder
value.
In the decade prior to 1995 our growth was driven by committing the majority
of our resources to a single channel of distribution - factory outlet
retailing. That tactic proved to be highly successful in growing the Company
and strengthening its balance sheet. It led, however, to a significant over-
expansion in that area of our business. And that, coupled with a weakening in
outlet retail sales, led to a major downturn in operating results beginning in
1994.
The year 1995 marked the beginning of a major change in the execution of our
business strategy, as the Company responded to that difficult situation with
three very significant initiatives:
1) Acquiring Izod and Gant in early 1995.
o The acquisition has provided a major broadening of our sportswear mix
and added two extremely important men's sportswear brands. It has been
the key component in bringing casualwear up to 85% of total Company
sales.
2) Reorganizing our operating structure from a wholesale/retail configuration
to one of brand marketing business units.
o This change, beginning in February 1996, has been remarkably successful
in placing a dedicated focus on the enhancement and placement of our
brands.
3) Developing a plan to close some 300 of our retail outlet stores (almost
one-third of the total).
o In 1996, these closings began to eliminate our weakest and worst-
trending stores, accelerated the realignment of our wholesale/retail
sales mix and became an important source of cash flow.
While bottom line results do not begin to reflect the accomplishments of 1996,
we believe the progress made in positioning our business for a major
turnaround is very real.
A consistent theme throughout this report is the strong emphasis on brand and
product development during 1996. The resulting upgraded product assortments
will find their way to department store shelves throughout 1997. It is our
intention to leverage these upgraded product assortments with a strong media
marketing program. We believe the combination of upgraded product, good shelf
space and much intensified consumer marketing will have a significant positive
impact on each of our brands beginning in 1997 and accelerating thereafter.
APPAREL
Net sales of the Company's apparel segment were $1.0 billion in 1996, $1.1
billion in 1995 and $883.9 million in 1994. The sales reduction in 1996 was
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expected and resulted from the absence of clearance sales associated with the
acquisition of the Izod and Gant brands as well as from strategic initiatives
to contract several areas of the Company's business - the elimination of the
Company's private label retail formats, the reduction of low margin private
label sales at the wholesale level and the previously discussed retail store
closings. The effect of these changes more than offset sales gains made this
year in the Company's branded product lines at wholesale. The 24.4% sales
growth in 1995 was attributable, principally, to the acquisition of Izod and
Gant.
Gross margin in apparel increased to 31.3% in 1996 compared with 30.9% in 1995
and 30.8% in 1994. There was a very distinct change in gross margin
comparisons between the first and second half of 1996:
Increase
1996 1995 (Decrease)
First Half 32.4% 32.7% (0.3)%
Second Half 30.6% 29.7% 0.9%
Year 31.3% 30.9% 0.4%
Improvement in the second half of 1996 compared with the comparable period in
1995 came, in large part, from the elimination/reduction of certain of the
less profitable businesses described above.
Two business units which performed poorly throughout the year were Somerset
Knitting Mills and Geoffrey Beene retail.
Somerset, which manufactures and markets sweaters, had made progress in 1995
by increasing its branded product mix and maximizing the use of its sweater
facilities in Puerto Rico. In 1996, the retail environment for sweaters
improved, and the Company's branded products moved further upscale with a much
greater emphasis on natural fiber, better goods. These changes, however, hurt
Somerset since its core acrylic product proved to be far less in demand and
margins weakened. As a result, all of the momentum which had been gained in
1995 was lost.
The weakness in Geoffrey Beene retail was reflected in significant markdowns
caused by an overassorted and poorly focused product mix. This was
exacerbated by too much poor real estate. While improvement in the coming
year will be challenging, we believe we've paved the way for improvement by
narrowing our product lines considerably, enhancing our designer focus and
closing our least productive stores.
Offsetting the poor performance in Somerset and Geoffrey Beene retail were
margin improvements throughout the Company's branded businesses - especially
Bass Apparel, where very significant progress was made in the further
advancement of the Bass lifestyle store. We anticipate that overall
improvement will continue as we focus increasing attention on upgrading our
product mix and adding a very considerable marketing thrust.
Selling, general and administrative expenses were 28.0% of sales in 1996
compared with 27.9% and 26.7%, respectively, in 1995 and 1994. Expense levels
increased in 1995 with the inclusion of the Izod and Gant businesses which,
while providing a higher level of gross margin, also have higher selling and
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marketing expenses. Looking ahead, these expense levels will likely increase
as a percentage of sales, in the short-term, as the Company embarks on a
program of major investment in a wide variety of marketing activities.
As our brands grow in size and profitability we anticipate that operating
margins should begin to expand as the improvement in gross margin continues
and expense levels flatten out.
FOOTWEAR
Net sales of the Company's footwear segment were $352.1 million in 1996,
$364.1 million in 1995 and $371.5 million in 1994, reflecting sales decreases
of 3.3% in 1996 and 2.0% in 1995. A major factor in the 1996 sales reduction
was the closing of underproductive outlet stores.
Gross margin in footwear was 37.7% in 1996 compared with 37.4% in 1995 and
37.1% in 1994. As in apparel, the gross margin comparison with the prior year
was very different in the second half of the year compared with the first
half:
Increase
1996 1995 (Decrease)
First Half 37.3% 38.7% (1.4)%
Second Half 38.1% 36.2% 1.9%
Year 37.7% 37.4% 0.3%
During the first half of the year, Bass experienced difficulties in the
restructuring of its Puerto Rico manufacturing operations. This was resolved
by mid-year with increasingly positive results as the year progressed. In
addition, a less promotional retail business in the second half of the year
contributed to the margin improvement.
Selling, general and administrative expenses were 29.5% of sales in 1996
compared with 29.8% in 1995 and 28.6% in 1994. A key feature of the 1995
expense level was a slowdown in retail sales per square foot with a
corresponding increase in in-store expense levels. This reversed itself in
1996 as retail sales improved.
Looking ahead, we anticipate that, as in apparel, gross margin improvement
should come from a combination of strong product development and much
intensified consumer marketing, which will cause an increase in expense
levels. Also, as in apparel, as Bass grows in size and profitability,
operating margins should improve as gross margin continues to improve and
expense levels flatten out.
RESTRUCTURING CHARGES
The Company recorded a $27 million pre-tax restructuring charge in 1995 to
provide for the closing of some 300 outlet stores, the closing of three
domestic shirt manufacturing facilities and the reorganization of PVH's
management structure. Approximately one-half of the charge related to non-
cash items.
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In 1994, the Company recorded a $7 million pre-tax restructuring charge to
realign its wholesale apparel business from four operating units into a dress
shirt division and a sportswear division. The 1995 reorganization referred to
above provided for the split-up of the sportswear division into separate brand
marketing units.
CORPORATE EXPENSES
Corporate expenses were $15.2 million in 1996 compared with $12.9 million in
1995 and $10.5 million in 1994. The increase in 1996 is attributable to an
increase in spending relating to information technology. The 1994 expense
level was unusually low, principally because of a reduction in the Company's
liability for its supplemental savings plan which is linked to the market
value of PVH common stock.
INTEREST EXPENSE
Interest expense was $23.2 in both 1996 and 1995. The Company's total debt
level at the beginning of 1995 was a relatively low $169.9 million and then
rose significantly with the acquisition of the Izod and Gant businesses early
in 1995. Total debt at year end 1995 was $301.3 million. The positive cash
flow in 1996 reduced that total debt to $219.6 million. As a result, average
debt in both years remained much the same - but with a very different
composition. Starting 1997 with $81.7 million less debt will have a very
positive impact on 1997 interest expense levels.
INCOME TAXES
The income tax expense rate for 1996 is 24.6% and reflects the relationship of
U.S. income taxed at normal rates to tax exempt income from operations in
Puerto Rico. In 1995, the Company's pre-tax loss of $2.6 million represented
a combination of pre-tax income earned in Puerto Rico and a U.S. tax loss.
Since the U.S. tax loss was available for carryback without limitation and the
Puerto Rico income was tax exempt, the net result was a tax benefit which
eliminated the full amount of the pre-tax loss.
SEASONALITY
The Company's business is seasonal, with higher sales and income during its
third and fourth quarters, which coincide with the Company's two peak retail
selling seasons: the first running from the start of the back to school and
fall selling seasons beginning in August and continuing through September, and
the second being the Christmas selling season beginning with the weekend
following Thanksgiving and continuing through the week after Christmas.
Also contributing to the strength of the third quarter is the high volume of
fall shipments to wholesale customers which are generally more profitable than
spring shipments. The slower spring selling season at wholesale combines with
retail seasonality to make the first quarter particularly weak.
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LIQUIDITY AND CAPITAL RESOURCES
The following table shows key cash flow elements over the last three years:
(In Thousands) 1996 1995 1994
Operating Activities
Income from operations $ 48,761 $ 42,728 $42,773
adjusted for non-cash items
Change in working capital 53,875 (84,692)(1) 6,621
102,636 (41,964) 49,394
Investment Activities
Acquisition of Izod and Gant (114,503)
Investment in Pyramid Sportswear (6,950)
Capital spending, net (19,893) (31,973) (37,830)
Other, net (3,302) 3,376 2,438
(23,195) (150,050) (35,392)
Financing Activities
Cash dividends (4,050) (4,007) (3,984)
Exercise of stock options 386 1,745 2,630
(3,664) (2,262) (1,354)
Increase (decrease) in cash
before net change in debt $ 75,777 ($194,276) $12,648
(1) Includes ($56,282) related to the acquisition of the Izod and Gant
businesses.
While the year 1995 was characterized as a year of major investment, 1996
marked the start of what we believe will be a period of positive free cash
flow. A major factor in 1996 was a reduction in working capital which, in
large part, resulted from the planned contraction of certain parts of our
business (discussed above). In addition, most of our ongoing businesses
improved their turn of working capital.
With the completion of several large capital spending projects in 1995,
including the new Jonesville Distribution Center, total capital spending in
1996 was reduced to $19.9 million from $32.0 million a year ago. Looking
ahead to 1997, we anticipate a modest increase over 1996 in overall capital
spending levels.
Total debt as a percentage of total capital was 43.1% at year end 1996
compared with 52.3% at year end 1995 and 38.2% at year end 1994. The higher
percentage of debt at year end 1995 came principally from the acquisition of
the Izod and Gant businesses, and was a temporary interruption of the prior
seven years of improving financial position.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Forward-looking statements in this Annual Report to Stockholders, including
without limitation, statements relating to the Company's plan, 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 involve risks and
uncertainties, 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.
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