| PHILLIPS VAN HEUSEN CORP /DE/ Item 1A Risk Factors Our substantial level of debt could impair our financial condition |
| Our significant level of debt could have important consequences to investors, including: • requiring a substantial portion of our cash flows from operations be used for the payment of interest on our debt, therefore reducing the funds available to us for our operations or other capital needs; • limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate because our available cash flow after paying principal and interest on our debt may not be sufficient to make the capital and other expenditures necessary to address these changes; • increasing our vulnerability to general adverse economic and industry conditions because, during periods in which we experience lower earnings and cash flow, we will be required to devote a proportionally greater amount of our cash flow to paying principal and interest on our debt; • limiting our ability to obtain additional financing in the future to fund working capital, capital expenditures, acquisitions and general corporate requirements; • placing us at a competitive disadvantage to other relatively less leveraged competitors that have more cash flow available to fund working capital, capital expenditures and general corporate requirements; and • any borrowings we make at variable interest rates, including our revolving credit facility, leave us vulnerable to increases in interest rates generally |
| We may not be able to continue to realize revenue growth from Calvin Klein |
| A significant portion of our business strategy involves growing our Calvin Klein business |
| Our realization of revenue growth from Calvin Klein will depend largely upon our ability to: • continue to maintain and enhance the distinctive brand identity of Calvin Klein; • continue to maintain good working relationships with Calvin Kleinapstas licensees; • continue to enter into new licensing agreements for the Calvin Klein brands, both domestically and internationally; • successfully design and market the Calvin Klein menapstas better sportswear line over time; and • continue to open Calvin Klein retail outlet stores in premium outlet malls and successfully operate over time a chain of such stores |
| We cannot assure you that we can successfully execute any of these actions or our growth strategy for the Calvin Klein brands, nor can we assure you that the launch of any Calvin Klein branded products by us or our licensees or that the continued offering of these lines will achieve the degree of consistent success necessary to generate profits or positive cash flow |
| Our ability to successfully carry out our growth strategy may be affected by, among other things, our ability to enhance our relationships with existing customers to obtain additional selling space and develop new relationships with apparel retailers, economic and competitive conditions, changes in consumer spending patterns and changes in consumer tastes and style trends |
| If we fail to develop and grow successfully the Calvin 17 _________________________________________________________________ Klein business, our financial condition and results of operations may be materially and adversely affected |
| A substantial portion of our revenues and gross profit is derived from a small number of large customers and the loss of any of these customers could substantially reduce our revenues |
| A few of our customers, including Federated Department Stores, Inc, J C Penney Company, Inc, Kohlapstas Corporation and Wal-Mart Stores, Inc, account for significant portions of our revenues |
| Federated, our largest customer, accounted for 13dtta7prca of our revenues in fiscal 2005 |
| We do not have long-term agreements with any of our customers and purchases generally occur on an order-by-order basis |
| A decision by any of our major customers, whether motivated by marketing strategy, competitive conditions, financial difficulties or otherwise, to decrease significantly the amount of merchandise purchased from us or our licensing or other business partners, or to change their manner of doing business with us or our licensing or other business partners, could substantially reduce our revenues and materially adversely affect our profitability |
| The retail industry has recently experienced a great deal of consolidation and other ownership changes and we expect such changes to be ongoing |
| For example, in August 2005, Federated acquired The May Department Stores Company and is in the process of closing 79 stores |
| Store closings will decrease the number of stores carrying our apparel products, while the remaining stores may purchase a smaller amount of our products and may reduce the retail floor space designated for our brands |
| Federated may also close additional stores, which could further reduce our revenues |
| In the future, retailers may further consolidate, undergo restructurings or reorganizations, realign their affiliations or reposition their stores &apos target markets |
| Any of these types of actions could decrease the number of stores that carry our products or increase the ownership concentration within the retail industry, in each case having a material adverse effect on our financial condition and results of operations |
| These changes could decrease our opportunities in the market, increase our reliance on a smaller number of large customers and decrease our negotiating strength with our customers |
| These factors could have a material adverse effect on our financial condition and results of operations |
| Our business could be adversely affected by financial instability experienced by our customers |
| During the past several years, various retailers have experienced significant financial difficulties, which have resulted in bankruptcies, liquidations and store closings |
| We sell our products primarily to national and regional department, mid-tier department and mass market stores in the United States on credit and evaluate each customerapstas financial condition on a regular basis in order to determine the credit risk we take in selling goods to them |
| The financial difficulties of a customer could cause us to curtail business with that customer and we may be unable to shift sales to another viable customer |
| We may also assume more credit risk relating to receivables of a customer experiencing financial instability |
| Should these circumstances arise with respect to our customers, our inability to shift sales or to collect on our trade accounts receivable from any one of our customers could substantially reduce our revenues and have a material adverse effect on our financial condition and results of operations |
| We primarily use foreign suppliers for our products and raw materials, which poses risks to our business operations |
| During 2005, in excess of 95prca of our apparel products and 95prca of our raw materials for apparel were produced by and purchased or procured from independent manufacturers located in countries in the Far East, Indian subcontinent, the Middle East, the Caribbean and Central America |
| We believe that we are one of the largest procurers of shirting fabric in the world |
| Additionally, our footwear products and the raw materials therefor were produced by and purchased or procured from manufacturers located principally in countries in the Far East, Europe, South America and the Caribbean |
| Although no single supplier and no one country is critical to our production needs, any of 18 _________________________________________________________________ the following could materially and adversely affect our ability to produce or deliver our products and, as a result, have a material adverse effect on our business, financial condition and results of operations: • political or labor instability in countries where contractors and suppliers are located; • political or military conflict involving the United States, which could cause a delay in the transportation of our products and raw materials to us and an increase in transportation costs; • heightened terrorism security concerns, which could subject imported or exported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods or could result in decreased scrutiny by customs officials for counterfeit goods, leading to lost sales, increased costs for our anti-counterfeiting measures and damage to the reputation of our brands; • a significant decrease in availability or increase in cost of raw materials, particularly petroleum-based synthetic fabrics, which are currently in high demand; • disease epidemics and health-related concerns, such as the SARS outbreak and the mad cow and hoof-and-mouth disease outbreaks in recent years and current concerns over an avian flu pandemic, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas; • the migration and development of manufacturers, which could affect where our products are or are planned to be produced; • imposition of regulations, quotas and safeguards relating to imports and our ability to adjust timely to changes in trade regulations, which, among other things, could limit our ability to produce products in cost-effective countries that have the labor and expertise needed; • imposition of duties, taxes and other charges on imports; • significant fluctuation of the value of the dollar against foreign currencies; and • restrictions on transfers of funds out of countries where our foreign licensees are located |
| If our manufacturers fail to use acceptable ethical business practices, our business could suffer |
| We require our manufacturers to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices and environmental compliance |
| Additionally, we impose upon our business partners operating guidelines that require additional obligations in those areas in order to promote ethical business practices, and our staff and third parties we retain for such purposes periodically visit and monitor the operations of our independent manufacturers to determine compliance |
| However, we do not control our independent manufacturers or their labor and other business practices |
| If one of our manufacturers violates labor or other laws or implements labor or other business practices that are generally regarded as unethical in the United States, the shipment of finished products to us could be interrupted, orders could be cancelled, relationships could be terminated and our reputation could be damaged |
| Any of these events could have a material adverse effect on our revenues and, consequently, our results of operations |
| Our reliance on independent manufacturers could cause delay and damage customer relationships |
| In 2005, we relied upon independent third parties for the manufacture of more than 95prca of our apparel products and 100prca of our footwear products |
| On March 6, 2006, we committed to a plan to close our apparel manufacturing facility in Ozark, Alabama by May 15, 2006 |
| As a result, 100prca of our products will be produced by independent third parties |
| A manufacturerapstas failure to ship products to us in a timely manner or to meet 19 _________________________________________________________________ required quality standards could cause us to miss the delivery date requirements of our customers for those products |
| As a result, customers could cancel their orders, refuse to accept deliveries or demand reduced prices |
| Any of these actions taken by our customers could have a material adverse effect on our revenues and, consequently, our results of operations |
| A significant portion of our revenues is dependent on royalties and licensing |
| In 2005, dlra211dtta6 million, or 11dtta1prca, of our revenues were derived from licensing royalties and other revenues, principally in our Calvin Klein Licensing segment |
| Royalty and other revenues from Calvin Kleinapstas three largest business partners accounted for approximately 55prca of its royalty and other revenues in 2005 |
| This concentration will increase as a result of Warnacoapstas acquisition of the licensees of jeanswear in Europe and Asia and bridge apparel and accessories in Europe |
| Those licensees, which were controlled by the Fratini family, accounted for approximately 11prca of the segmentapstas 2005 royalty and other revenues; Warnaco accounted for another 28prca |
| We also derive licensing revenues from our Van Heusen, IZOD, IZOD G, GH Bass & Co |
| and Arrow brand names, as well as from sublicensing of Geoffrey Beene, BCBG Max Azria, BCBG Attitude and Donald J Trump Signature Collection |
| Our three largest licensing partners accounted for approximately 35dtta5prca of licensing revenue for these brand names as a group in 2005 |
| The operating profit associated with our royalty and other revenues is significant because the operating expenses directly associated with administering and monitoring an individual licensing or similar agreement are minimal |
| Therefore, the loss of a significant business partner, whether due to the termination or expiration of the relationship, the cessation of the business partnerapstas operations or otherwise (including as a result of financial difficulties of the partner), without an equivalent replacement, could materially affect our profitability |
| While we generally have significant control over our business partners &apos products and advertising, we rely on our business partners for, among other things, operational and financial controls over their businesses |
| Our business partners &apos failure to successfully market licensed products or our inability to replace our existing business partners could materially and adversely affect our revenues both directly from reduced royalty and other revenues received and indirectly from reduced sales of our other products |
| Risks are also associated with a business partnerapstas ability to: • obtain capital; • execute its business plans, including timely delivery of quality products; • manage its labor relations; • maintain relationships with its suppliers; • manage its credit risk effectively; and • maintain relationships with its customers |
| Although we make every attempt to protect our brands through, among other things, approval rights over design, production quality, packaging, merchandising, distribution, advertising and promotion of our products, we cannot assure you that we can control the use by our business partners of each of our licensed brands |
| The misuse of our brands by a business partner could have a material adverse effect on our business, financial condition and results of operations |
| For example, Calvin Klein in the past has been involved in legal proceedings with Warnaco with respect to certain quality and distribution issues |
| As a result of our acquisition of Calvin Klein in 2003, Warnaco is entitled to control design and advertising related to the sale of underwear, intimate apparel and sleepwear products bearing the Calvin Klein brands, although to date, it has only exercised this right with respect to design |
| We cannot assure you that Warnaco will continue to maintain the same standards of design and, if it assumes control, 20 _________________________________________________________________ advertising previously maintained by Calvin Klein, although we believe they are generally obligated to do so |
| Our retail stores are heavily dependent on the ability and desire of consumers to travel and shop |
| Our retail stores are located principally in outlet malls, which are typically located in or near vacation destinations or away from large population centers where department stores and other traditional retailers are concentrated |
| As a result, fuel shortages, increased fuel prices, travel restrictions, travel concerns and other circumstances, including as a result of war, terrorist attacks or the perceived threat of war or terrorist attacks, which would lead to decreased travel, could have a material adverse affect on us |
| Other factors which could affect the success of our stores include: • the location of the mall or the location of a particular store within the mall; • the other tenants occupying space at the mall; • increased competition in areas where the outlet malls are located; • a downturn in the economy generally or in a particular area where an outlet mall is located; and • the amount of advertising and promotional dollars spent on attracting consumers to the malls |
| We may be unable to protect our trademarks and other intellectual property rights |
| Our trademarks and other intellectual property rights are important to our success and our competitive position |
| We are susceptible to others imitating our products and infringing on our intellectual property rights |
| Since our acquisition of Calvin Klein in 2003, we are more susceptible to infringement of our intellectual property rights, as the Calvin Klein brands enjoy significant worldwide consumer recognition, and the generally higher pricing of Calvin Klein branded products creates additional incentive for counterfeiters and infringers |
| Imitation or counterfeiting of our products or infringement of our intellectual property rights could diminish the value of our brands or otherwise adversely affect our revenues |
| We cannot assure you that the actions we have taken to establish and protect our trademarks and other intellectual property rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to invalidate our trademarks or block sales of our products as a violation of the trademarks and intellectual property rights of others |
| In addition, we cannot assure you that others will not assert rights in, or ownership of, trademarks and other intellectual property rights of ours or in marks that are similar to ours or marks that we license and/or market or that we will be able to successfully resolve these types of conflicts to our satisfaction |
| In some cases, there may be trademark owners who have prior rights to our marks because the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States |
| For example, we were involved in a proceeding relating to a companyapstas claim of prior rights to the IZOD mark in Mexico, and Calvin Klein was involved in a proceeding relating to a companyapstas claim of prior rights to the Calvin Klein mark in Chile |
| We are currently involved in opposition and cancellation proceedings with respect to marks similar to some of our brands, both domestically and internationally |
| The success of Calvin Klein depends on the value of our Calvin Klein brands, and if the value of those brands were to diminish, our business could be adversely affected |
| Our success depends on our brands and their value |
| The Calvin Klein name is integral to the existing Calvin Klein business, as well as to our strategies for continuing to grow and expand Calvin Klein |
| The Calvin Klein brands could be adversely affected if Mr |
| Calvin Kleinapstas public image or reputation were to be tarnished |
| We may seek in the future stockholder approval to change the name of our company to "e Calvin Klein Inc "e |
| Any such name change could increase our risks related to the public perception of the Calvin Klein name |
| 21 _________________________________________________________________ Our success is dependent on the strategies and reputation of our licensors |
| Our business strategy is to offer our products on a multiple brand, multiple channel and multiple price point basis |
| This strategy is designed to provide stability should market trends shift |
| As part of this strategy we license the names and brands of recognized designers and celebrities, including Kenneth Cole, Max Azria, Michael Kors, Sean "e Diddy "e Combs (Sean John), Donald J Trump and Joseph Abboud |
| In entering into these license agreements, we plan our products to be targeted towards certain market segments based on consumer demographics, design, suggested pricing and channel of distribution in order to minimize competition between our own products and maximize profitability |
| If any of our licensors determines to "e re-position "e a brand we license from them, introduce similar products under similar brand names or otherwise change the parameters of design, pricing, distribution, target market or competitive set, we could experience a significant downturn in that brandapstas business, adversely affecting our sales and profitability |
| In addition, as products may be personally associated with these designers and celebrities, our sales of those products could be materially and adversely affected if any of those individualapstas images or reputations were to be negatively impacted |
| Our revenues and profits are cyclical and sensitive to general economic conditions, consumer confidence and spending patterns |
| The apparel and footwear industries in which we operate have historically been subject to substantial cyclical variations and are particularly affected by adverse trends in the general economy, with consumer spending tending to decline during recessionary periods |
| The success of our operations depends on consumer spending |
| Consumer spending is impacted by a number of factors, including actual and perceived economic conditions affecting disposable consumer income (such as unemployment, wages and salaries), business conditions, interest rates, availability of credit and tax rates in the general economy and in the international, regional and local markets where our products are sold |
| Any significant deterioration in general economic conditions or increases in interest rates could reduce the level of consumer spending and inhibit consumers &apos use of credit |
| In addition, war, terrorist activity or the threat of war and terrorist activity could adversely affect consumer spending, and thereby have a material adverse effect on our financial condition and results of operations |
| We face intense competition in the apparel industry |
| Competition is strong in the apparel industry |
| We compete with numerous domestic and foreign designers, brands, manufacturers and retailers of apparel, accessories and footwear, some of which are significantly larger or more diversified or have greater resources than we do |
| In addition, through their use of private label programs, we compete directly with our wholesale customers |
| We compete within the apparel industry primarily on the basis of: • anticipating and responding to changing consumer tastes and demands in a timely manner and developing attractive, quality products; • maintaining favorable brand recognition; • appropriately pricing products and creating an acceptable value proposition for customers; • providing strong and effective marketing support; • ensuring product availability and optimizing supply chain efficiencies with third party manufacturers and retailers; and • obtaining sufficient retail floor space and effective presentation of our products at retail |
| The failure to compete effectively or to keep pace with rapidly changing markets could have a material adverse effect on our business, financial condition and results of operations |
| In addition, if we 22 _________________________________________________________________ misjudge the market for our products, we could be faced with significant excess inventories for some products and missed opportunities with others |
| The loss of members of our executive management and other key employees could have a material adverse effect on our business |
| We depend on the services and management experience of our executive officers who have substantial experience and expertise in our business |
| We also depend on other key employees involved in our licensing, design and advertising operations |
| Competition for qualified personnel in the apparel and footwear industries is intense, and competitors may use aggressive tactics to recruit our key employees |
| The unexpected loss of services of one or more of these individuals could materially adversely affect us |
| Acquisitions may not be successful in achieving intended benefits and synergies |
| One component of our growth strategy contemplates our making select acquisitions if appropriate opportunities arise |
| Prior to completing any acquisition, our management team identifies expected synergies, cost savings and growth opportunities |
| However, these benefits may not be realized due to, among other things: • delays or difficulties in completing the integration of acquired companies or assets; • higher than expected costs or a need to allocate resources to manage unexpected operating difficulties; • diversion of the attention and resources of management; • consumers &apos failure to accept product offerings by us or our licensees; • inability to retain key employees in acquired companies; and • assumption of liabilities unrecognized in due diligence |
| We cannot assure you that any acquisition will not have a material adverse impact on our financial condition and results of operations |
| Our segment reporting has changed and the SEC may request further changes that would require us to restate segment information that appears in the notes to our financial statements |
| We manage our business through operating divisions that are aggregated into four reportable segments: Wholesale, Retail Apparel and Related Products, Retail Footwear and Related Products and Calvin Klein Licensing |
| We changed our reporting from two segments—Apparel and Related Products and Calvin Klein Licensing—in response to comments we received from the SEC in connection with an ordinary course review of our annual report on Form 10-K for our fiscal year ended January 30, 2005 |
| In its comments, the SEC has questioned whether we need to report additional segments to satisfy the requirements of Financial Accounting Standards Board (FASB) Statement Nodtta 131 |
| We believe the four segments that we are now reporting satisfy the requirements of FASB Statement Nodtta 131 |
| As of April 13, 2006, we are continuing to discuss with the SEC our segment reporting |
| If, as a result of these discussions, it is concluded that further segments need to be reported, we will be required to restate segment information that appears throughout our notes to financial statements and file an amendment to this annual report on Form 10-K for our 2005 fiscal year |
| The restatement of the notes to our financial statements to report different segments and segment information could materially and adversely affect our stock price |
| Future sales of our common stock may depress our stock price |
| Sales of a substantial number of shares of our common stock in the public market or otherwise, by us or by a major stockholder (including pursuant to a registration rights agreement we have with the 23 _________________________________________________________________ holders of our Series B convertible preferred stock), could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities |
| Our stockholder rights plan, provisions in our certificate of incorporation and our by-laws and Delaware General Corporate Law could make it more difficult to acquire us and may reduce the market price of our common stock |
| We have adopted a stockholder rights plan that, subject to certain limitations, limits the ability of any person to acquire more than 20prca of our common stock |
| Our stockholder rights plan could have the effect of delaying or preventing a change in control or the removal of management, of deterring potential acquirers from making an offer to our stockholders and of limiting any opportunity to realize premiums over prevailing market prices for our common stock |
| Our certificate of incorporation and by-laws contain certain provisions, including provisions requiring supermajority voting (80prca of the outstanding voting power) to approve certain business combinations with beneficial owners of 5prca or more of our outstanding stock entitled to vote for election of directors, permitting the board of directors to fill vacancies on the board and authorizing the board of directors to issue additional shares of preferred stock without approval of our stockholders |
| These provisions could also have the effect of deterring changes of control |
| In addition, Section 203 of the Delaware General Corporate Law imposes restrictions on mergers and other business combinations between us and any holder of 15prca or more of our common stock |
| The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board of directors |
| Significant influence by certain stockholders |
| In connection with our acquisition of Calvin Klein, affiliates of Apax Managers, Inc |
| and Apax Partners Europe Managers Limited purchased dlra250 million of our Series B convertible preferred stock |
| During 2005, the Apax affiliates voluntarily converted a portion of such Series B convertible preferred stock, as further discussed in Note 10, "e Series B Convertible Preferred Stock, "e in the Notes to the Consolidated Financial Statements included in Item 8 of this report |
| As of January 29, 2006, the remaining Series B convertible preferred stock held by the Apax affiliates had liquidation preference of dlra161dtta9 million and was convertible by them into 21dtta1prca of our outstanding common stock |
| If we elect not to pay a cash dividend for any quarter, then the Series B convertible preferred stock will be treated for purposes of the payment of future dividends and upon conversion, redemption or liquidation as if an in-kind dividend has been paid |
| Pursuant to the Investors &apos Rights Agreement we have with the Apax affiliates, the holders of our Series B convertible preferred stock are generally prohibited from initiating a takeover of us |
| In certain circumstances, the Apax affiliates may be able to participate in a bidding process initiated by a third party |
| As long as Apax affiliates own at least 50prca of the shares of our Series B convertible preferred stock initially sold to the Apax affiliates, they will have the ability to prevent a change of control, or a sale of all or substantially all of our assets |
| As of January 29, 2006, the Apax affiliates owned approximately 61prca of the shares of our Series B convertible preferred stock initially issued to them |
| Additionally, as long as 50prca of our Series B convertible preferred stock remains outstanding, the holders of our Series B convertible preferred stock will have a right to purchase their pro rata share of newly issued securities |
| The holders of our Series B convertible preferred stock have certain additional rights, including the right to approve the issuance of certain new series of our preferred stock, which could also have the effect of discouraging a third party from pursuing a non-negotiated takeover, and preventing changes in control, of us |
| Prior to the conversion of a portion of our Series B convertible preferred stock during 2005, the Apax affiliates had the right to elect separately as a class three directors and to have one of their 24 _________________________________________________________________ directors serve on the audit, compensation, nominating and executive committees of our board, subject to applicable law, rule and regulation; current regulation precludes service on the audit committee |
| In connection with the conversion, the remaining preferred stockholders agreed to reduce their right to elect directors from three directors to two directors and to further reduce this right to one director if they did not have more than one director elected as of December 31, 2005 |
| The remaining preferred stockholders did not elect an additional director as of December 31, 2005 and, as such, only one such director can be and is currently elected |
| If the Apax affiliates continue to own at least 10prca of the Series B convertible preferred stock issued in connection with the acquisition of Calvin Klein they will maintain their right to elect separately as a class one director |
| However, the right of the Series B convertible preferred stockholders to elect a director will be terminated if the previously announced acquisition of the Tommy Hilfiger Corporation by certain affiliates of the Apax affiliates is consummated |
| As a result of these and other rights related to their ownership of our Series B convertible preferred stock, the Apax affiliates have substantial influence over us |
| The interests of the Apax affiliates or the holders of Series B convertible preferred stock may at any time conflict with, or diverge from, those of our other stockholders |
| The Apax affiliates or such other Series B convertible preferred stockholders, by virtue of their large percentage of voting rights and the terms of the Series B convertible preferred stock, will be able to substantially influence, and may effectively be able to prevent or veto, certain corporate actions, such as the sale of our company, the issuance of a new class or series of our stock in connection with a corporate transaction or other major corporate action |