SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 3, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-724 PHILLIPS-VAN HEUSEN CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-1166910 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1290 Avenue of the Americas New York, New York 10104 (Address of principal executive offices) (Zip Code) Registrant's telephone number (212) 541-5200 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 (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No The number of outstanding shares of common stock, par value $1.00 per share, of Phillips-Van Heusen Corporation as of August 29, 1997: 27,121,420 shares.
PHILLIPS-VAN HEUSEN CORPORATION INDEX PART I -- FINANCIAL INFORMATION Independent Accountants Review Report................................. 1 Condensed Consolidated Balance Sheets as of August 3, 1997 and February 2, 1997...................................................... 2 Condensed Consolidated Statements of Operations for the thirteen weeks and twenty-six weeks ended August 3, 1997 and July 28, 1996..... 3 Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended August 3, 1997 and July 28, 1996............... 4 Notes to Condensed Consolidated Financial Statements.................. 5-8 Management's Discussion and Analysis of Results of Operations and Financial Condition............................................... 9-14 PART II -- OTHER INFORMATION ITEM 4 - Submission of Matters to a Vote of Stockholders.............. 15 ITEM 6 - Exhibits and Reports on Form 8-K............................. 15-18 Signatures............................................................ 19 Exhibit--Acknowledgment of Independent Accountants.................... 20 Exhibit--Financial Data Schedule...................................... 21
Independent Accountants Review Report Stockholders and Board of Directors Phillips-Van Heusen Corporation We have reviewed the accompanying condensed consolidated balance sheet of Phillips-Van Heusen Corporation as of August 3, 1997, and the related condensed consolidated statements of operations for the thirteen and twenty- six week periods ended August 3, 1997 and July 28, 1996, and the related condensed consolidated statements of cash flows for the twenty-six week periods ended August 3, 1997 and July 28, 1996. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Phillips-Van Heusen Corporation as of February 2, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated March 11, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 2, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP New York, New York August 18, 1997 -1-
Phillips-Van Heusen Corporation Condensed Consolidated Balance Sheets (In thousands, except share data) <TABLE> <CAPTION> UNAUDITED AUDITED August 3, February 2, 1997 1997 <S> <C> <C> ASSETS Current Assets: Cash, including cash equivalents of $2,950 and $1,861 $ 14,474 $ 11,590 Trade receivables, less allowances of $3,712 and $3,401 82,905 91,806 Inventories 322,166 237,422 Other, including deferred taxes of $13,575 and $4,300 29,478 22,140 Total Current Assets 449,023 362,958 Property, Plant and Equipment 130,208 137,060 Goodwill 118,709 120,324 Other Assets, including deferred taxes of $27,330 and $16,617 49,113 37,094 $747,053 $657,436 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable $ 77,000 $ 20,000 Accounts payable 41,567 36,355 Accrued expenses 81,469 55,754 Current portion of long-term debt 10,157 10,157 Total Current Liabilities 210,193 122,266 Long-Term Debt, less current portion 209,401 189,398 Other Liabilities 77,908 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 27,087,868 and 27,045,705 27,088 27,046 Additional Capital 116,517 116,296 Retained Earnings 105,946 146,816 Total Stockholders' Equity 249,551 290,158 $747,053 $657,436 See accompanying notes. </TABLE> -2-
Phillips-Van Heusen Corporation Condensed Consolidated Statements of Operations Unaudited (In thousands, except per share data) <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended August 3, July 28, August 3, July 28, 1997 1996 1997 1996 <S> <C> <C> <C> <C> Net sales $313,458 $313,807 $599,383 $587,467 Cost of goods sold 219,270 208,482 406,227 389,045 Gross profit 94,188 105,325 193,156 198,422 Selling, general and administrative expenses 99,551 96,363 200,205 192,721 Facility and store closing and restructuring and other expenses 41,150 - 41,150 - Income (loss) before interest and taxes (46,513) 8,962 (48,199) 5,701 Interest expense, net 5,344 5,918 10,276 12,071 Income (loss) before taxes (51,857) 3,044 (58,475) (6,370) Income tax expense (benefit) (18,572) 918 (20,650) (1,942) Net income (loss) $(33,285) $ 2,126 $(37,825) $ (4,428) Net income (loss) per share $ (1.23) $ 0.08 $ (1.40) $ (0.16) Average shares outstanding 27,074 26,992 27,066 26,988 Cash dividends per share $ 0.0375 $ 0.0375 $ 0.075 $ 0.075 </TABLE> In the second quarter of 1997, the Company recorded a non-recurring pre-tax charge of $57 million related to a series of actions the Company will take to accelerate the execution of its ongoing strategy to build its core brands. Such amount has been recorded in the statements of operations for the thirteen-weeks and twenty-six weeks ended August 3, 1997 as follows: Cost of goods sold $15,850 Facility and store closing and restructuring and other expenses 41,150 57,000 Income tax benefit (20,200) $36,800 See accompanying notes. -3-
Phillips-Van Heusen Corporation Condensed Consolidated Statements of Cash Flows Unaudited (In thousands) Twenty-Six Weeks Ended August 3, July 28, 1997 1996 OPERATING ACTIVITIES: Net loss $(37,825) $ (4,428) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 13,067 15,097 Amortization of contributions from landlords (2,481) (3,212) Write-off of assets 18,800 - Deferred income taxes (19,988) - Equity income in Pyramid Sportswear (700) (625) Changes in operating assets and liabilities: Receivables 8,901 26,427 Income tax refund - 16,987 Inventories (84,744) (48,900) Accounts payable and accrued expenses 30,567 (8,970) Other-net 9,671 (3,830) Net Cash Used By Operating Activities (64,732) (11,454) INVESTING ACTIVITIES: Property, plant and equipment acquired (6,794) (10,565) Contributions from landlords 192 974 Other-net - 2,181 Net Cash Used By Investing Activities (6,602) (7,410) FINANCING ACTIVITIES: Proceeds from revolving line of credit and long-term borrowings 77,000 47,414 Payments on revolving line of credit and long-term borrowings - (29,000) Exercise of stock options 263 95 Cash dividends (3,045) (3,039) Net Cash Provided By Financing Activities 74,218 15,470 Increase (decrease) In Cash 2,884 (3,394) Cash at beginning of period 11,590 17,533 Cash at end of period $ 14,474 $ 14,139 See accompanying notes. -4-
PHILLIPS-VAN HEUSEN CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) GENERAL The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen and twenty-six weeks ended August 3, 1997 are not necessarily indicative of the results that may be expected for the year ended February 1, 1998 due, in part, to seasonal factors. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report to Stockholders for the year ended February 2, 1997. As part of its ongoing strategic and expense reduction initiatives, the Company continues to evaluate its operations. Certain reclassifications have been made to the condensed consolidated financial statements for the twenty-six weeks ended July 28, 1996 to present that information on a basis consistent with the twenty-six weeks ended August 3, 1997. INVENTORIES Inventories are summarized as follows: August 3, February 2, 1997 1997 Raw materials $ 23,455 $ 16,670 Work in process 17,675 13,208 Finished goods 281,036 207,544 Total $322,166 $237,422 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. Inventories would have been $13,000 higher than reported at August 3, 1997 and February 2, 1997, if the FIFO method of inventory accounting had been used for the entire apparel business. -5-
The final determination of cost of sales and inventories under the LIFO method can only be made at the end of each fiscal year based on inventory cost and quantities on hand. Interim LIFO determinations are based on management's estimates of expected year-end inventory levels and costs. Such estimates are subject to revision at the end of each quarter. Since estimates of future inventory levels and costs are subject to external factors, interim financial results are subject to year-end LIFO inventory adjustments. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share," which is required to be adopted by the Company on February 1, 1998. At that time, the Company will be required to change the method currently used to compute net income per share and restate all prior periods. Under the new requirements for calculating primary net income per share, the dilutive effect of stock options will be excluded. Implementation of the new requirements will not have a material effect on the calculation of earnings per share. FACILITY AND STORE CLOSING AND RESTRUCTURING AND OTHER EXPENSES On July 31, 1997, the Company announced that it would take a series of actions to accelerate the execution of its ongoing strategy to build its core brands. Included in these actions are the closing of approximately 150 additional outlet stores, repositioning the Gant brand in the United States to be consistent with its highly successful positioning in Europe and Asia, exiting the sweater manufacturing business and restructuring warehousing and distribution facilities as well as other logistical and administrative areas in order to reduce costs and improve efficiencies. As a result, the Company recorded a non-recurring pre-tax charge of $57,000 ($36,800 after tax or $1.36 per share) in the second quarter of 1997 summarized as follows: Outlet stores $17,000 Gant brand repositioning 13,500 Exiting the sweater manufacturing business 13,000 Restructuring warehousing and distribution facilities and other areas 13,500 Total charge, including $15,850 in cost of goods sold 57,000 Less income tax benefit (20,200) Net charge $36,800 The retail outlet store closings will continue the elimination of the Company's weakest and worst-trending stores. At the same time, it will expedite the realignment of the Company's wholesale/retail sales mix and generate positive cash flow as working capital is reduced. The charge relates principally to asset write-offs, accruals of lease termination fees and inventory markdowns (included in cost of goods sold) associated with store closings. -6-
Gant is successfully marketed as an upscale brand in 24 countries throughout Europe, Canada, the Middle East and Asia. Included in this global network are 47 independent Gant retail stores in 18 countries, with 11 additional stores scheduled to be opened in Europe this year. The repositioning of the Gant brand in the United States encompasses new and upgraded products and the consolidation of the worldwide design and sourcing functions -- all focused on promoting consistency of product and quality throughout the world. It is a major step forward in creating "one image" for this global brand. Enhancing this image will be the Gant Flagship Store on Fifth Avenue in New York City which is scheduled to open this Fall. The charge relates principally to asset write-offs (primarily merchandise display fixtures) and inventory markdowns (included in cost of goods sold) associated with the phase-out of old product lines. The Company's sweater manufacturing business is capital intensive and losing money, and its operations are not a part of the Company's strategy of building its brands. The charge relates principally to exiting the manufacturing facility in Barranquitas, Puerto Rico, and includes asset write-offs (primarily manufacturing equipment), accruals for employee termination and severance costs and a write-down of inventory values (included in cost of goods sold) associated with exiting the facility. The Company's warehousing and distribution facilities are being reconfigured, including the closing of the Company's Atlanta, Georgia distribution facility, to reduce costs and maximize efficiencies. Certain other logistical and administrative areas are also being restructured to streamline costs. The charge relates principally to the write-off of equipment and accrual of employee termination and severance costs. In summary, the $57,000 pre-tax non-recurring charge consists of the following: Asset write-offs $18,800 Inventory markdowns and write-downs (included in cost of goods sold) 15,850 Employee termination and severance costs for approximately 700 employees 7,200 Lease and other obligations 10,350 Other 4,800 $57,000 -7-
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 and women's apparel to wholesale customers 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 wholesale customers 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. Thirteen Weeks Ended Twenty-Six Weeks Ended August 3, July 28, August 3, July 28, 1997 1996 1997 1996 Net sales-apparel $227,179 $223,227 $441,605 $423,425 Net sales-footwear 86,279 90,580 157,778 164,042 Total net sales $313,458 $313,807 $599,383 $587,467 Operating income (loss)-apparel* $(44,435) $ 3,491 $(45,815) $ 1,185 Operating income-footwear* 454 8,115 3,263 10,330 Total operating income (loss)* (43,981) 11,606 (42,552) 11,515 Corporate expenses (2,532) (2,644) (5,647) (5,814) Interest expense, net (5,344) (5,918) (10,276) (12,071) Income (loss) before taxes $(51,857) $ 3,044 $(58,475) $ (6,370) * Operating income (loss) for the thirteen and twenty-six weeks ended August 3, 1997, includes a $57,000 non-recurring pre-tax charge, of which $50,765 and $6,235 relate to the Company's apparel and footwear businesses, respectively. -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS In the second quarter of 1997, the Company recorded a non-recurring pre-tax charge of $57 million related to a series of actions the Company will take to accelerate the execution of its ongoing strategy to build its core brands. See Notes to Condensed Consolidated Financial Statements. The following statements of operations, segment data and discussion (where noted) segregate this non-recurring charge from the Company's ongoing operations. Statements of Operations (In thousands) Thirteen Weeks Ended Twenty-Six Weeks Ended 8/3/97 7/28/96 8/3/97 7/28/96 Net sales $313,458 $313,807 $599,383 $587,467 Cost of goods sold (per page 3) 219,270 208,482 406,227 389,045 Non-recurring charge (15,850) - (15,850) - Gross profit before non-recurring charge 110,038 105,325 209,006 198,422 SG&A expenses and non-recurring charge 140,701 96,363 241,355 192,721 Non-recurring charge (41,150) - (41,150) - Selling, general and administrative expenses 99,551 96,363 200,205 192,721 Income before interest, taxes and non-recurring charge 10,487 8,962 8,801 5,701 Interest expense, net 5,344 5,918 10,276 12,071 Income tax expense (benefit) 1,628 918 (450) (1,942) Income (loss) from ongoing operations before non-recurring charge 3,515 2,126 (1,025) (4,428) Non-recurring charge, net of tax benefit (36,800) - (36,800) - Net income (loss) $(33,285) $ 2,126 $(37,825) $ (4,428) Segment Data (In thousands) Thirteen Weeks Ended Twenty-Six Weeks Ended 8/3/97 7/28/96 8/3/97 7/28/96 Net sales-apparel $227,179 $223,227 $441,605 $423,425 Net sales-footwear 86,279 90,580 157,778 164,042 Total net sales $313,458 $313,807 $599,383 $587,467 Operating income-apparel $ 6,330 $ 3,491 $ 4,950 $ 1,185 Operating income-footwear 6,689 8,115 9,498 10,330 Total operating income 13,019 11,606 14,448 11,515 Corporate expenses (2,532) (2,644) (5,647) (5,814) Interest expense, net (5,344) (5,918) (10,276) (12,071) Income (loss) before taxes and non-recurring charge $ 5,143 $ 3,044 $ (1,475) $ (6,370) -9-
Thirteen Weeks Ended August 3, 1997 Compared With Thirteen Weeks Ended July 28, 1996 APPAREL Net sales of the Company's apparel segment in the second quarter increased to $227.2 million in 1997 compared with $223.2 million last year. Net sales of the Company's wholesale branded business increased 21% in the current year's second quarter compared with last year's second quarter, which more than offset the planned decrease in retail sales resulting from the Company's strategic initiative to close outlet stores. Gross margin on apparel sales before the non-recurring charge was 32.7% in the second quarter of 1997 compared with 31.4% in last year's second quarter. In the second quarter, virtually all of the Company's branded apparel businesses showed gross margin improvement in 1997 compared with last year as product upgrades and brand development began to take hold. These initiatives have enabled the Company to command higher prices and take fewer markdowns. The only exception was in sales of golf apparel to pro shops, where significantly increased competition served to weaken gross margin percentages. The Company has moved to strengthen its competitive position in this channel with new and upgraded product and with an aggressive marketing campaign. Selling, general and administrative expenses, before the non-recurring charge, as a percentage of apparel sales was 29.9% in the second quarter of both 1997 and 1996. These expense levels are expected to increase as a percentage of net sales, for the balance of the year, as the Company significantly increases its advertising expenditures in the second half of this year. FOOTWEAR Net sales of the Company's footwear segment in the second quarter were $86.3 million in 1997 and $90.6 million last year, a decrease of 4.7%. The decrease was due principally to weakness in seasonal merchandise, principally sandals, in the Company's wholesale branded business. Gross margin on footwear sales before the non-recurring charge was 41.2% in the second quarter of 1997 compared with 38.5% in last year's second quarter. The improvement in gross margin began in the second half of 1996 as the impact of the Company's product upgrades and brand development began to take hold. These initiatives have enabled the Company to command higher prices and take fewer markdowns resulting in increased gross margin in the Company's wholesale business and in its outlet stores. In addition, the difficulties experienced by Bass during the first half of last year in restructuring its Puerto Rico manufacturing operations did not recur, thus adding to margin improvement. Selling, general and administrative expenses, before the non-recurring charge, as a percentage of footwear sales in the second quarter was 33.4% in 1997 and 29.5% in 1996. The increase is due primarily to additional brand investment in design. As in apparel, these expense levels are expected to increase as a percentage of net sales, for the balance of the year, as the Company significantly increases its advertising expenditures in the second half of this year. -10-
INTEREST EXPENSE Interest expense in the second quarter was $5.3 million in 1997 compared with $5.9 million last year. The decrease reflects lower average debt which results from lower working capital levels, principally inventory. INCOME TAXES Income tax was estimated at a rate of 35.8% in the second quarter of 1997 compared with 30.2% in last year's second quarter. The tax rates reflect the relationship of U.S. income taxed at normal rates versus tax exempted income from operations in Puerto Rico. CORPORATE EXPENSES Corporate expenses in the second quarter were $2.5 million in 1997 compared with $2.6 million in 1996. Twenty-Six Weeks Ended August 3, 1997 Compared With Twenty-Six Weeks Ended July 28, 1996 APPAREL Net sales of the Company's apparel segment in the first half were $441.6 million in 1997, an increase of 4.3% from the prior year's $423.4 million. Net sales of the Company's wholesale branded business increased 22% in the current year's first half compared with last year's first half, which more than offset the planned decrease in retail sales resulting from the Company's strategic initiative to close outlet stores. Gross margin on apparel sales before the non-recurring charge was 32.8% in the first half of 1997 compared with 32.4% in last year's first half. In the first half, virtually all of the Company's branded apparel businesses showed gross margin improvement in 1997 compared with last year as product upgrades and brand development began to take hold. These initiatives have enabled the Company to command higher prices and take fewer markdowns. The only exception was in sales of golf apparel to pro shops, where significantly increased competition served to weaken gross margin percentages. The Company has moved to strengthen its competitive position in this channel with new and upgraded product and with an aggressive marketing campaign. Selling, general and administrative expenses, before the non-recurring charge, as a percentage of apparel sales in the first half was 31.7% in 1997 and 32.1% in 1996. These expense levels are expected to increase as a percentage of net sales, for the balance of the year, as the Company significantly increases its advertising expenditures in the second half of this year. FOOTWEAR Net sales of the Company's footwear segment in the first half were $157.8 million in 1997, compared with $164.0 million last year. The reduction in net sales was due to the planned decrease in retail sales resulting from the Company's strategic initiative to close outlet stores and to weakness in seasonal merchandise, principally sandals, at the Company's wholesale branded business. -11-
Gross margin on footwear sales before the non-recurring charge was 40.4% in the first half of 1997 compared with 37.3% in last year's first half. The improvement in gross margin began in the second half of 1996 as the impact of the Company's product upgrades and brand development began to take hold. These initiatives have enabled the Company to command higher prices and take fewer markdowns resulting in increased gross margin in the Company's wholesale business and in its outlet stores. In addition, the difficulties experienced by Bass during the first half of last year in restructuring its Puerto Rico manufacturing operations did not recur, thus adding to margin improvement. Selling, general and administrative expenses, before the non-recurring charge, as a percentage of footwear sales in the first half was 34.4% in 1997 and 31.0% in 1996. The increase is due principally to additional brand investment in design. As in apparel, these expense levels are expected to increase as a percentage of net sales, for the balance of the year, as the Company significantly increases its advertising expenditures in the second half of this year. INTEREST EXPENSE Interest expense in the first half was $10.3 million in 1997 compared with $12.1 million last year. The decrease reflects lower average debt which results from lower working capitals levels, principally inventory. INCOME TAXES Income tax was estimated at a rate of 35.3% in 1997 compared with last year's rate of 30.5%. The tax rates reflect the relationship of U.S. income taxed at normal rates versus tax exempted income from operations in Puerto Rico. CORPORATE EXPENSES Corporate expenses in the first half were $5.6 million in 1997 compared with $5.8 million in 1996. FACILITY AND STORE CLOSING AND RESTRUCTURING AND OTHER EXPENSES On July 31, 1997, the Company announced that it would take a series of actions to accelerate the execution of its ongoing strategy to build its core brands. Included in these actions are the closing of approximately 150 additional outlet stores, repositioning the Gant brand in the United States to be consistent with its highly successful positioning in Europe and Asia, exiting the sweater manufacturing business and restructuring warehousing and distribution facilities as well as other logistical and administrative areas in order to reduce costs and improve efficiencies. As a result, the Company recorded a non-recurring pre-tax charge of $57 million ($36.8 million after tax or $1.36 per share) in the second quarter of 1997. -12-
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; 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 fiscal quarter particularly weak. LIQUIDITY AND CAPITAL RESOURCES The seasonal nature of the Company's business typically requires the use of cash to fund a build-up in the Company's inventory in the first half of each fiscal year. During the third and fourth quarters, the Company's higher level of sales tends to reduce its inventory and generate cash from operations. Net cash used by operations in the first half totalled $64.7 million in 1997 and $11.5 million last year. This increase is related to later than usual shipments in the latter part of 1995 which, in turn, created a significant increase in collections in the first half of 1996. This pattern did not repeat itself in 1996 and, as a result, collections in the first half of 1997 were significantly less than in the prior year's first half. Additionally, inventory growth in last year's first half was moderate compared to more seasonal trends, while this year's increase reflects more normalized growth. At the end of the current year's first half, inventory levels were slightly below last year's first half. Capital spending in the first half was $6.8 million in 1997 compared with $10.6 million last year. The Company anticipates overall capital spending levels for 1997 to be flat compared with 1996 levels. 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 facilities is $250 million provided, however, that the aggregate maximum amount outstanding at any time under both facilities is $400 million. The Company believes that its borrowing capacity under these facilities is adequate for its 1997 peak seasonal needs. Although total debt was $23.1 million less than a year ago ($296.6 million vs. $319.7 million), the ratio of total debt to total capital was about flat (54.3% to 54.4%). This was due principally to the non-recurring charge taken in the second quarter of the current year. The cash impact of this charge will result in a net outflow of funds in the current year. This outflow should be offset next year by the positive cash flow benefits derived from the restructuring initiatives. -13-
* * * ******************************************************************************* * * * SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT * * OF 1995 * * * * Forward-looking statements in this Form 10-Q 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 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. * * * ****************************************************************************** -14-
Part II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS The annual stockholders' meeting was held on June 17, 1997. There were present in person or by proxy, holders of 24,650,080 shares of Common Stock or 91% of all votes eligible for the meeting. The following directors were elected to serve for a term of one year: For Vote Withheld Edward H. Cohen 23,777,415 872,665 Joseph B. Fuller 22,721,256 1,928,824 Joel H. Goldberg 23,761,414 888,666 Marc Grosman 23,640,498 1,009,582 Dennis F. Hightower 23,639,820 1,010,260 Bruce J. Klatsky 23,774,684 875,396 Maria Elena Lagomasino 23,772,047 878,033 Harry N.S. Lee 23,767,440 882,640 Bruce Maggin 23,767,440 882,640 Sylvia M. Rhone 23,776,675 873,405 Peter J. Solomon 23,635,710 1,014,370 Irwin W. Winter 23,777,425 872,655 Ratification of Like-Value Exchange of Certain Director's Stock Options was approved with a vote of 21,569,237 For and 2,846,414 Against. The 1997 Stock Option Plan, which replaces the 1987 Stock Option Plan, which expired pursuant to its term on April 1, 1997, was adopted with a vote of 19,938,481 For and 1,884,482 Against. Ernst & Young LLP were appointed to serve as the Company's independent auditors until the next stockholders' meeting. The vote was 24,465,585 For and 65,830 Against. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: 3.1 Certificate of Incorporation (incorporated by reference to Exhibit 5 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1977). 3.2 Amendment to Certificate of Incorporation, filed June 27, 1984 (incorporated by reference to Exhibit 3B to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1985). 3.3 Certificate of Designation of Series A Cumulative Participating Preferred Stock, filed June 10, 1986 (incorporated by reference to Exhibit A of the document filed as Exhibit 3 to the Company's Quarterly Report as filed on Form 10-Q for the period ended May 4, 1986). -15-
3.4 Amendment to Certificate of Incorporation, filed June 2, 1987 (incorporated by reference to Exhibit 3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1988). 3.5 Amendment to Certificate of Incorporation, filed June 1, 1993 (incorporated by reference to Exhibit 3.5 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994). 3.6 Amendment to Certificate of Incorporation, filed June 20, 1996 (incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-Q for the period ended July 28, 1996). 3.7 By-Laws of Phillips-Van Heusen Corporation, as amended through June 18, 1996 (incorporated by reference to Exhibit 3.2 to the Company's Report on Form 10-Q for the period ended July 28, 1996). 4.1 Specimen of Common Stock certificate (incorporated by reference to Exhibit 4 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1981). 4.2 Preferred Stock Purchase Rights Agreement (the "Rights Agreement"), dated June 10, 1986 between PVH and The Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 3 to the Company's Quarterly Report as filed on Form 10-Q for the period ended May 4, 1986). 4.3 Amendment to the Rights Agreement, dated March 31, 1987 between PVH and The Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended February 2, 1987). 4.4 Supplemental Rights Agreement and Second Amendment to the Rights Agreement, dated as of July 30, 1987, between PVH and The Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit (c)(4) to the Company's Schedule 13E-4, Issuer Tender Offer Statement, dated July 31, 1987). 4.5 Notice of extension of the Rights Agreement, dated June 5, 1996, from Phillips-Van Heusen Corporation to The Bank of New York (incorporated by reference to Exhibit 4.13 to the Company's report on Form 10-Q for the period ended April 28, 1996). 4.6 Credit Agreement, dated as of December 16, 1993, among PVH, Bankers Trust Company, The Chase Manhattan Bank, N.A., Citibank, N.A., The Bank of New York, Chemical Bank and Philadelphia National Bank, and Bankers Trust Company, as agent (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994). 4.7 First Amendment, dated as of February 13, 1995, to the Credit Agreement dated as of December 16, 1993 (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1995). 4.8 Second Amendment, dated as of July 17, 1995, to the Credit Agreement dated as of December 16, 1993 (incorporated by reference to Exhibit 4.7 to the Company's report on Form 10-Q for the period ending October 29, 1995). -16-
4.9 Third Amendment, dated as of September 27, 1995, to the Credit Agreement dated as of December 16, 1993 (incorporated by reference to Exhibit 4.8 to the Company's report on Form 10-Q for the period ending October 29, 1995). 4.10 Fourth Amendment, dated as of September 28, 1995, to the Credit Agreement dated as of December 16, 1993 (incorporated by reference to Exhibit 4.9 to the Company's report on Form 10-Q for the period ending October 29, 1995). 4.11 Fifth Amendment, dated as of April 1, 1996, to the Credit Agreement dated as of December 16, 1993 (incorporated by reference to Exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996). 4.12 Sixth Amendment, dated as of July 3, 1997, to the Credit Agreement dated as of December 16, 1993. 4.13 Note Agreement, dated October 1, 1992, among PVH, The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company, Unum Life Insurance Company of America, Nationwide Life Insurance Company, Employers Life Insurance Company of Wausau and Lutheran Brotherhood (incorporated by reference to Exhibit 4.21 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.14 First Amendment Agreement, dated as of June 24, 1996, to the Note Agreement, dated as of October 1, 1992 (incorporated by reference to Exhibit 4.14 to the Company's report on Form 10-Q for the period ended July 28, 1996). 4.15 Second Amendment Agreement, dated as of July 15, 1997, to the Note Agreement, dated as of October 1, 1992. 4.16 Indenture, dated as of November 1, 1993, between PVH and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.01 to the Company's Registration Statement on Form S-3 (Reg. No. 33- 50751) filed on October 26, 1993). 10.1 1987 Stock Option Plan, including all amendments through April 29, 1997 (incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-Q for the period ended May 4, 1997). 10.2 1973 Employees' Stock Option Plan (incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form S-8 (Reg. No. 2-72959) filed on July 15, 1981). 10.3 Supplement to 1973 Employees' Stock Option Plan (incorporated by reference to the Company's Prospectus filed pursuant to Rule 424(c) to the Registration Statement on Form S-8 (Reg. No. 2-72959) filed on March 31, 1982). 10.4 Amendment to 1973 Employees' Stock Option Plan, effective as of April 29, 1997 (incorporated by reference to Exhibit 10.12 to the Company's report on Form 10-Q for the period ended May 4, 1997). -17-
10.5 Phillips-Van Heusen Corporation Special Severance Benefit Plan, as amended as of April 16, 1996 (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1996). 10.6 Phillips-Van Heusen Corporation Capital Accumulation Plan (incorporated by reference to the Company's Report on Form 8-K filed on January 16, 1987). 10.7 Phillips-Van Heusen Corporation Amendment to Capital Accumulation Plan (incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1987). 10.8 Form of Agreement amending Phillips-Van Heusen Corporation Capital Accumulation Plan with respect to individual participants (incorporated by reference to Exhibit 10(1) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1988). 10.9 Form of Agreement amending Phillips-Van Heusen Corporation Capital Accumulation Plan with respect to individual participants (incorporated by reference to Exhibit 10.8 to the Company's report on Form 10-Q for the period ending October 29, 1995). 10.10 Agreement amending Phillips-Van Heusen Corporation Capital Accumulation Plan with respect to Bruce J. Klatsky (incorporated by reference to Exhibit 10.13 to the Company's report on Form 10-Q for the period ended May 4, 1997). 10.11 Phillips-Van Heusen Corporation Supplemental Defined Benefit Plan, dated January 1, 1991, as amended and restated on June 2, 1992 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.12 Phillips-Van Heusen Corporation Supplemental Savings Plan, effective as of January 1, 1991 and amended and restated as of April 29, 1997 (incorporated by reference to Exhibit 10.10 to the Company's report on Form 10-Q for the period ended May 4, 1997). 10.13 Non-Incentive Stock Option Agreement, dated as of December 3, 1993, between the Company and Bruce J. Klatsky (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1995). 10.14 Phillips-Van Heusen Corporation 1997 Stock Option Plan, effective as of April 29, 1997. 15. Acknowledgement of Independent Accountants. 27. Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended August 3, 1997. No reports have been filed on Form 8-K during the quarter covered by this report. -18-
SIGNATURES Pursuant to the requirements 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 Registrant September 16, 1997 /s/ Emanuel Chirico Emanuel Chirico, Controller Vice President and Chief Accounting Officer -19-
Exhibit 15 August 18, 1997 Stockholders and Board of Directors Phillips-Van Heusen Corporation We are aware of 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, of our reports dated August 18, 1997 and May 22, 1997 relating to the unaudited condensed consolidated interim financial statements of Phillips-Van Heusen Corporation that are included in its Forms 10-Q for the thirteen week periods ended August 3, 1997 and May 4, 1997. Pursuant to Rule 436(c) of the Securities Act of 1933, our reports are a part of the registration statements or post-effective amendments prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. ERNST & YOUNG LLP New York, New York -20-