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HomeMy WebLinkAbout2006-26150 ResoRESOLUTION NO. 2006-26150 A RESOLUTION OF THE MAYOR AND CITY COMMISSION OF THE CITY OF MIAMI BEACH, FLORIDA, WAIVING BY 5/7TH VOTE, THE COMPETITIVE BIDDING PROCESS, FINDING SUCH WAIVER TO BE IN THE CITY'S BEST INTEREST, AND APPROVING A THREE YEAR SPONSORSHIP AGREEMENT BETWEEN THE CITY OF MIAMI BEACH AND PHILLIPS -VAN HEUSEN CORPORATION (IZOD). WHEREAS, the City of Miami Beach was approached by representatives of Phillips -Van Heusen Corporation to discuss an opportunity to enter into a Sponsorship Agreement with the City of Miami Beach for the provision of lifeguard uniforms through their subsidiary Company, IZOD; and WHEREAS, during discussions with Phillips -Van Heusen, the Company also agreed to provide free uniform items for the Fire Department, as well as the Miami Beach golf course staff; and WHEREAS, in addition to free uniform items which otherwise would have been purchased by the City, the City will also benefit from positive national exposure associated with IZOD advertising; and WHEREAS, the terms and conditions of the Phillip -Van Heusen sponsorship have been reduced to a written agreement; and WHEREAS, after review, the members of the City Commission find that the Sponsorship Agreement is beneficial to the City of Miami Beach and in the City's best interest and therefore agree that a waiver of competitive bidding for such Sponsorship Agreement by the members of the City Commission is appropriate. NOW, THEREFORE, BE IT DULY RESOLVED BY THE MAYOR AND THE CITY COMMISSION OF THE CITY OF MIAMI BEACH, FLORIDA, that the Mayor and City Commission hereby waive by 5/7th vote, the competitive bidding process, finding such waiver to be in the City's best interest, and approving a three (3) year Sponsorship Agreement between the City of Miami Beach and Phillips -Van Heusen Corporation (IZOD). PASSED and ADOPTED this 8th day of March anacta,. , 2006. Matti Herrera Bower CITY CLERK Robert Parcher FAcmgaALL11308\SponsorshipAgreementPhillips-VanHeuseniZODReso3-8-06.doc APPROVED AS TO FORM & LA'4GUAGE & FOR I CUT ON 1)110? COMMISSION ITEM SUMMARY Condensed Title: IA Resolution waiving the competitive bidding process and approving a three year Sponsorship Agreement between the City of Miami Beach and Phillips -Van Heusen Corporation (IZOD). Key Intended Outcome Supported: IEnsure expenditure trends are sustainable over the long term. Issue: Shall the City Commission approve a three year Sponsorship Agreement between the City of Miami Beach and Phillips -Van Heusen Corporation (IZOD)? • Item Summary/Recommendation: In early 2002, representatives of Phillips -Van Heusen Corporation approached the City of Miami Beach to explore the opportunity to enter into a Sponsorship Agreement with the City for the provision of lifeguard uniforms through their subsidiary company, IZOD. Phillips -Van Heusen Corporation (PVH) had recently completed a Sponsorship Agreement for lifeguard clothing with the Los Angeles County Fire Department (Home department of the Los Angeles County Ocean Rescue) and wished to secure a visible east coast community for a similar sponsorship arrangement. The Sponsorship Agreement between the City and PVH generally provides that in exchange for advertising and promotional considerations associated with the City of Miami Beach name, Phillips -Van Heusen will provide a variety of uniform items at no cost to the City of Miami Beach. The clothing items are pattemed after those already provided to Los Angeles County for our Ocean Rescue personnel and Pool Guards. These items are provided to the City through the PVH subsidiary, IZOD. The items are a high quality sportswear product line referred to a PerformX. The Agreement also incorporates the provision of uniform items at no cost for the Fire Department and Miami Beach Golf Course staff. IZOD will also be the provider of these uniform items. The Sponsorship Agreement with PVH (IZOD) is beneficial to the City by virtue of the supply of a number of high quality uniform items at no cost and the ability to purchase other items at lesser than market cost. The City will also benefit from a positive exposure in national advertising. Adequate review and approvals are retained to assure the proper use andpromotion of the City's name and logo. PVH expected to benefit from the Agreement by virtue of improved sales from their promotions. Approval of the Sponsorship Agreement is recommended. Advisory Board Recommendation: N/A Financial Information: Source of Funds: OBPI Financial Impact Summary: City Clerk's Office Legislative Tracking: 1 Robert C. Middaugh Sign -Offs: I;4:. iimY+;,�+aq'a;as ...((yyrrjj��.�.t . V:s��' �I +�.itpesiriWsi'J Carxi� ,....0 ....��.vi FAcmgr\$ALL\BOB\SponsorshipggreemenWhillips-VanHeusenSum.doc MIAMIBEACH 213 AGENDA ITEM C 7 T DATE 34-O& m MIAMIBEACH City of Miami Beach, 1700 Convention Center Drive, Miami Beach, Florida 33139, www.miamibeachH.gov COMMISSION MEMORANDUM TO: Mayor David Dermer and Members of the City Commission FROM: Jorge M. Gonzalez, City Manager DATE: March 8, 2006 SUBJECT: A RESOLUTION OF THE MAYOR AND CITY COMMISSION OF THE CITY OF MIAMI BEACH, FLORIDA, WAIVING BY 517TH VOTE, THE COMPETITIVE BIDDING PROCESS, FINDING SUCH WAIVER TO BE IN THE CITY'S BEST INTEREST, AND APPROVING ATHREE YEAR SPONSORSHIP AGREEMENT BETWEEN THE CITY OF MIAMI BEACH AND PHILLIPS VAN HEUSEN CORPORATION (IZOD). ADMINISTRATION RECOMMENDATION Adopt the Resolution. BACKGROUND In early 2002, representatives of Phillips -Van Heusen Corporation approached the City of Miami Beach to explore the opportunity to enter into a Sponsorship Agreement with the City for the provision of lifeguard uniforms through their subsidiary company, IZOD. Phillips -Van Heusen Corporation (PVH) had recently completed a Sponsorship Agreement for lifeguard clothing with the Los Angeles County Fire Department (Home department of the Los Angeles County Ocean Rescue) and wished to secure a visible east coast community for a similar sponsorship arrangement. In order to determine the interest in a Sponsorship Agreement and to determine the philosophic compatibility, a meeting with senior City staff, as well as the President and Vice President and Marketing Director of PVH took place. This early meeting between the City and PVH was essentially an interview process in which each of the parties discussed their respective missions, ethical philosophy and the image that each wished to portray. As a result of this meeting it was determined that PVH and the City of Miami Beach had the opportunity for a compatible relationship in a Sponsorship Agreement and that there was not any conflict or ethical issues associated with such an Agreement. The image each entity wished to portray was one of a healthy, wholesome and upbeat identity. In fairly short order, City and PVH representatives worked out the key terms of a Sponsorship Agreement. The initial focus and key issue was the provision of an extensive set of uniforms for the Ocean Rescue Division of the City of Miami Beach. With the passage of time, the agreement has changed slightly and has been enhanced to the version presented for Commission action. One change that needed to be addressed was the movement of Ocean Rescue from the Parks Department into the Fire Department. 214 An important part of the Agreement conversations involved CWA, which is the Union which represents the lifeguards. The Labor Agreement with the lifeguards had specific provisions relative to the number of uniform items and nature of those items to be provided by the City. As the City proposal would significantly expand the number of uniform items provided, an increase from six items to twenty-four items, it also changed the material from which the items are made. The Union approval of the uniform items and materials was solicited. Unfortunately, this issue was caught up in the larger impasse on the Labor Agreement between CWA and the City. Conversation with PVH continued over the years to assure them of continued interest in an Agreement upon the resolution of the issues with the lifeguard union. The PVH representatives were both very understanding and patient over this extended time period. With the recent Commission and CWA approval of contract language relative to uniforms, it is now possible for the City to proceed with the Sponsorship Agreement and present such Agreement for City Commission approval. The determination to enter into a Sponsorship Agreement with PVH Corporation started with the compatibility of mission, ethical practices and image, and advanced because of mutual benefit to the City and PVH. PVH Corporation is a large multi -national corporation that is one of the largest clothing manufacturers in the world. PVH sees benefit in an association with Miami Beach, while the City would receive quality employee uniforms, a potential revenue stream and positive national advertising exposure. The PVH Annual Corporate Report is attached which indicates the scope of the PVH business. Aareement Terms The Sponsorship Agreement between the City and PVH generally provides that in exchange for advertising and promotional considerations associated with the City of Miami Beach Ocean Rescue name, Phillips -Van Heusen will provide a variety of uniform items at no cost to the City of Miami Beach. The clothing items are patterned after those already provided to Los Angeles County for our Ocean Rescue personnel and Pool Guards. These items are provided to the City through the PVH subsidiary, IZOD. The items are a high quality sportswear product line referred to a PerformX. The Agreement also incorporates the provision of uniform items at no cost for the Fire Department and Miami Beach Golf Club staff. IZOD will also be the provider of these uniform items. Specific provisions of the Sponsorship Agreement are as follows: • Term — The Agreement is for an initial term of three (3) years renewable upon mutual agreement of the parties for two additional three (3) year terms. • Donated Uniforms — The City will receive uniforms for the Ocean Rescue and Pool Lifeguards, the Fire Department and Miami Beach Golf Club employees as follows: Ocean Rescue and Pool Guards —135 sets of uniforms each set consisting of: Polo Shirt 2 Combination of long and short sleeve T-shirts 6 Warm-up Jacket 1 Warm-up Pant 1 Combination of Water or Board Shorts (individual choice) 6 Fleece line (mid -weight) Jacket 1 Fleece Pullover with zipper 1 Competition Swim Suit (male or female) 3 Hat (Baseball or floppy) 3 TOTAL PIECES PER SET 24 2 215 In the first of each three (3) year Agreement, 100 fleece lined wind and water resistant jackets are to be provided. Fire Department — 200 sets of uniforms as follows: Polo Shirts 4 Cargo Style Pant 4 TOTAL PIECES PER SET 8 Miami Beach Golf Club Employees— 35 sets of uniforms as follows: Polo Shirt 5 Cargo Style Pant or Short 5 Golf Windbreaker Jacket 1 TOTAL PIECES PER SET 11 Each of the uniform sets defined above for the Ocean Rescue Lifeguards and Pool Guards, the Fire Department and the Golf Course employees are issued in the above amount annually. • The retail value of the various uniform items is estimated at $240,000.00. As many of these items are new uniform pieces, this is not a direct savings to the City. • At the beginning of each three (3) year contract term Phillips -Van Heusen will provide to the City of Miami Beach $15,000.00 to be applied to a new replacement Lifeguard Tower at the City's discretion and an agreed upon location. • The City has the right to purchase uniform items for any other City employee at 8% over the cost of Phillips -Van Heusen to produce the specific clothing item. The City also reserves a right to buy an unlimited quantity of clothing items for resale to the general public at Phillips Van Heusen's production cost plus 20%. The pricing advantage to the City in this Agreement provision is that typically a clothing item is marked up by a manufacturer 40% to 50%. If the City elects to purchase uniform items from IZOD for other departments there should be a cost saving or quality enhancement available for the City. In the event the City determines to buy and resell clothing items there should be a small revenue stream available to the City for this purpose. • In consideration of the items available to the City, Phillips -Van Heusen (IZOD) receives the right to: Promote and advertise itself as the official outfitter of the Ocean Rescue Division of the City of Miami Beach. Have the IZOD Corporate Logo displayed on all donated uniform items as agreed upon by the City in design of those items. The ability to use the lifeguard logo in the sale of or promotion of items to the general public. The right to publicize the Sponsorship arrangement with prior review and approval reserved for the City. The right to apply for (4) four Special Events Permits in which they are the principal sponsor, waiving the City's $2,500.00 application fee. All other 3 216 costs associated with the event are the responsibility of the sponsor as with any other Special Event. - Twenty rounds of golf at the Miami Beach Golf Club or other City owned and operated golf course. CONCLUSION The Sponsorship Agreement with PVH (IZOD) is beneficial to the City by virtue of the supply of a number of high quality uniform items at no cost and the ability to purchase other items at lesser than market cost. The City will also benefit from a positive exposure in national advertising. Adequate review and approvals are retained to assure the proper use and promotion of the City's name and logo. PVH expected to benefit from the Agreement by virtue of improved sales from their promotions. The business points of the Agreement have been negotiated and are represented in the attached Agreement. Some edits to clarify points without changing the substance are still anticipated. It is recommended that the Agreement be approved in substantially the form attached subject to final review and approval of the City Attorney's office. JMG\RCM1sam F:\cmgr\.$ALL160BBSponsorshIpAgeementPhIliips-Van Heusencommemo.doc Attachments 4 217 LETTER TO SHAREI-- OLDERS As vvio gathered our fhoiif.iiihts to restruCk noire ikon eyei. great herito-:::;e ohci.ac)teatial ore, privile,geclfit) 1! is. on. institution o ancii powcii-folItu that affords fp.-...c.ii(.)rft:t.i,,ty to its ompioye:oi.;., ri.itti(jviaes its i,-.ustoraars quality nroclucts, itzi portneirs.aarl t:Thorcwnh :qf; th*• and ;11Ve:.0C)f.bose. Af3 c,i)rrip(iny's.irierfortri,.71rict.e for tile future, we. ore: vet,/ Droad of. what hove tione ir) year:: stabiliz.o. tci\lit(tlize :Jed (dtovi, our i:orapcici. Bruce J. Klatskr C.I:a".n;,un or•.# Chief Executive taflice, Mark Weber eeideni and Chi. Operatl.nu Officer PHILLI"S-VAt! I -I LIS t4 (LOKI' OkATIC/N tetter to Shareholders 2004: A Year Of Progress Throughout 2004, we were especially glad to see our legacy businesses — the three core components of our business before the Calvin Klein acquisition — doing so well. Our Dress Shirt Group, for example, remains the clear market leader. In 2004, we enhanced our status as the world's largest dress shirt company, culminating in our second consecutive year in which we achieved record profitability in this business. At the same time, the Sportswear Group fulfilled its promise of serving as a significant contributor to our growth. Our Retail Group is successfully turning a corner. Rationalized in size and structure, it is now an important complement to our branded marketing efforts. Even as these core components of PVH thrived in recent years, we have seen the Calvin Klein acquisition materially transform our company. As we expand the products available under this outstanding brand, it became obvious that it may offer even more growth opportunity than we had originally believed. It has literally changed the financial model of our company, with its substantial royalty stream improving our operating margins. As we posted these strong performances from our various divisions, a less visible change has token place behind the scenes in the realm of infrastructure. Our distribution, information technology, human resources, sourcing and financial capabilities have grown significantly, producing support resources and capacity that will afford us the opportunity to add businesses and product extensions in the years ahead, both within our existing brands and through acquisitions. Most importantly, we have done all this while staying true to our core values of involvement in the community, diversity, associate development and fairness in the workplace. All our divisions have demonstrated a commitment to making a positive difference wherever they operate. .5 Lstler to Sborehoidara rHILLIPS•'v:.M HEUSfr1 C CkrOgAT1cr' Dress Shirts: Leadership For a business that is supposed to be "slow growth,' we saw a good deal of activity, as we posted another record year in 2004 in our Dress Shirt Group. We maintained our leadership, with Van Heusen again the number one brand in America and Geoffrey Beene again the number one designer brand. The year was highlighted by several major brand launches: BCBG Max Azrio, BCBG Attitude, CHAPS, MICHAEL Michael Kors and Sean John. The Introductions not only contributed to profitability in the year just dosed, they offer substantial additional opportunity for the future. Sportswear: Innovation The Sportswear Group exceeded our expectations in 2004, as the IZOD brand continued to garner more retail square footage. Today, IZOD is presented as a related separates concept in most department store groups. Pants, jeanswear and golf apparel provided the fuel to drive this growth. On the main floor of deportment stores, Van Heusen sportswear has become a true cornerstone, At the same time, ARROW has continued to exceed plan and provides us with a considerable presence in the mid -tier channel. Of extraordinary consequence was the success our sportswear team had with the launch of Calvin Klein men's better sportswear in the department store channel. Their execution and results exceeded our expectations. Calvin Klein: Preeminence At Calvin Klein, brand performance continues to exceed expectations. Historic partnerships in such areas as fragrance, jeans and underwear concluded a wonderfully successful year. Increased brand presence was a major highlight, as the men's and women's better sportswear launches had their effect, benefiting the profile and prestige of all Calvin Klein products. Three notable initiatives that began in 2003 bore fruit in 2004. First, the addition of eleven freestanding ck Colvin Klein 'bridge" sportswear stores in southeast Asia performed very well. Restructuring of the Colvin Klein operation in Japan by our partner Onward Kashiyama resulted in a much stronger jeans and sportswear presence. The re -launch of Calvin Klein Jeans in Europe with our partners, the Fratini Group, met with great success. The new partnerships we forged in 2004 for the U.S. — for men's and women's shoes, accessories and bridge sportswear — should start to benefit us as 2005 draws to a close and in 2006. Strategic Initiatives: Fundamentals While not large in terms of purchase price ($70 million), the acquisition of the ARROW brand hod great significance for those of us with some tenure at the company. Over the years, ARROW has been a great brand with a long, well-established history in the apparel industry. We hod achieved great success under our license agreement marketing dress shirts and sportswear in the United States and the ARROW brand performed beyond riILLIrs•VAIJ CL'krOkATI71, Lor expectations. As a result, we became convinced of its global strength and the desirability of controlling its marketing worldwide. With the ARROW brand acquisition, we have the opportunity to build the business and global royalties associated with it, increasing market share and deriving profits from It for. yeors to come. Our historic retail businesses (Von Heusen, Bass, IZOD, and Geoffrey Beene) continued their evolution into an important complement to our branded marketing efforts. The Retail Group exited aging, unproductive outlet centers, and delivered their revenue and profit pion for the year. Importantly, our plan to open Colvin Klein stores in premieroutlet centers is being executed and meeting with strong success. Our various logistics groups continued to enhance their productivity and capabilities, affording us a plotform to increase. the efficiency with which we deliver our product to consumers, while at the same time providing us with an infrastructure that will enable us to pursue acquisitions of consequence. The Financial Group did an outstanding lob in many areas. It successfully refinanced $1.50 million of debt, reducing the interest rate from 9 1/2 to 71/8 percent, and also renegotiated our $325 million credit agreement, increasing our flexibility, reducing borrowing costs and extending its moturity to December 2009. It also performed well In leading our company to address the requirements of the new Sabgnes-Oxley regulations with its rigorous, new procedures and formalities that affect every U.S. public company. tor .1* 5haroholdor, 7 Corporate principles: Commitment Finally, we continued to follow our guiding principle of maintaining our focus on being o positive force in society. Internally, we concentrated on improving our training capabilities, in one case partnering with the state of New Jersey to further develop and enhonce the skills of our associates at our administrative center in Bridgewater. We boosted our internal communications systems, focilitating outreach to all associates via a new Intranetsite called "The Thread." We acted upon our longstanding commitment to diverse workforce by continuing our relationship with the Inroads intern program and by forming o new partnership with the Black Retail Action Group. Both are designed to broaden the pool of candidates available to us as we work to enhance our workforce. Management Is not alone in living up to, the principles we espouse. The enthusiasm of our associates continues to impress us at every turn. We rely on our employees to identify opportunities to serve our communities. Some of the most notable activities Included our involvement with Safe Horizon, which works to reduce and prevent domestic violence; Orphan Foundation of Americo; and the Special Olympics. Our associates were also the foundation of the work we did with community food kitchens; they were behind our Adopt -o -Soldier program; and they led the way in our tsunami relief efforts. In today's global economy, we in the apparel industry find ourselves active in production and sourcing around the world. Of course, the necessity for such a globol presence is not ;'f Lerier to Shareholder-, YMILIIP:.V:\N HEUSEN coF rOI'ATION unique to our industry. Indeed, it is common in many labor- intensive fields and con be a major force for good in developing economies. At PVH, we believe that with our involvement in overseas manufacturing comes a responsibility to ensure that all our products are produced in safe and healthful work environments, with respect end fairness to all workers. We are proud to be a charter member of the Fair labor Association, underscoring our obsolute commitment to monitoring the conditions in which our products are manufactured and to ensure that workplace abuses are remedied when abuses occur. Under our Critical Engagement and Impoct Program (CEIP), aggressive monitoring of all facilities is combined with. engagement, education and remediation. We feel strongly that the jobs we create represent an Important economic resource. In our view, simply pulling out when abuses are encountered is unfair io those who could benefit the most from correcting the situation, the workers. In the CEIP approach, we discuss problems with factory management, educate them as to why corrections are necessary and assist in remediation within the context of local culture. The result — for the company, local management and the community — is a win-win. Future Prospects: Opportunity The last few years — 2004 Included — hove been tremendously productive. And while we ore satisfied with the growing levels of profitability achieved, we are even more excited by prospects for the future. We ore well positioned for growth, with the resources and capabilities for further expansion largely in place. That we find ourselves in this position is a testament to the hard work and energy of our associates, to the guidance and counsel of our board of directors, to the support of our retail partners and to the Inherent strength of our company. We appreciate the confidence that our many stakeholders hove expressed in our stewardship and are committed to continue moving our company forward in 2005 and beyond. Bruce Klntsky Chairman and Chief Executive Officer Mark Weber President and Chief Operating Officer -,} } 1 ...F. M.C1`C'r -1 'cu: 1'1ac thtrr� r- SC?1".c11 C3C1:1 1r.,1 '.i r ti ;an 3< I:'t q pp!'1:"C' 01'`111 $10-• h{` !',Cifl J 1;(:°1 i ,CP.'G rri.ony to nd Cl 131.011 t rlE; Y F'[. Vii•.,, r, •,i�u1„t-I de tJCir I ., ;Jit'+c :fit:no- 5 ri,. CORPORATE STRATEGY At PVH, we design, source and market substantially all of our products on a brand -by -brand basis targeting distinct consumer demographics and lifestyles. We market our brands at multiple price points and across multiple channels of distribution. This allows us to provide products to a broad range of consumers, while minimizing competition among our brands and reducing our reliance on any one demographic group, merchandise preference or distribution channel. Currently, our apparel products are distributed through more than 10,000 doors in notional and regional department, mid -tier deportment, mass market, specialty and independent stores in the United States. We also license our brands, where appropriate, to qualified business portners, domestically and around the world. This enhances brand awareness and strength while increasing revenues and expanding operating margins, Leveraged Infrastructure We leverage our corporate central services to company divisions forpurposes of creating greater efficiency and consumer value. Shared Services Logistics including warehousing and distribution — global sourcing — information technology advertising and marketing — human resources — human rights compliance ------------ Dress Shirt Group Sportswear Group PVH Licensing Calvin Klein Product design and sales Product design and sates Licensing Licensing and product design PVH Marketing Advertising and marketing CRK Advertising Advertising and marketing Product design and sales are within each division, by brand, to maintain close relationships with customers. • The PVH Brands CalvinKlein VANFIEusEN IZOD ARROW Owned Licensed Bass PHILLIP•VAN IVEUSEN CORPOEATIC/N Corporate Stralegy GEOFFREY BEENE KENNETH COLE a e 21.71 N BCBOMAXAZ R IA BC130 11 ATTITUDE MICHAEL CHAPS The brands identified above are registered trademarks of ours and our licensors. Diverse Distribution Our multiple brand, multiple chonnel, multiple price point strategy is designed to provide stability should market trends shift. Strategically segmenting our brands ensures we reach the consumer at multiple price levels. Collection stores Specialty stores Premier department stores Department stores Mid -tier department stores Company stores Discount stores • ....Y -• - • -• • ,• .• -• Distribution Channels Colvin Klein Collection_,;_ ck Colvin Klein CBGWSXAZeIA Sean John /0 KennelhCole New York •ED Colvin Klein / MICHAEL Michael Kors PCEG ATTITUDE B., Kenneth Cole Reaction Geoff/ay Beene • izoo e Boss j/ CHAPS Von Heasen ARROW Brond Pricing Strategy $ 1 0,0 00 ' Lc '• 2. E. •Z' 3 :r A cp. fr• P HILllPS.VAN HEVSEN COIP,OkA11ON Financloi Review 75 RESULTS OF OPERATIONS Operations Overview We generate net sales from (1) the wholesale distribution of men's dress shirts and sportswear, principally under the brand names Van Heusen, IZOD, Geoffrey Beene, ARROW, Kenneth Cole New York, Reaction Kenneth Cole, Calvin Klein, ck Calvin Klein, BCBG Max AZ7io, BCBG Attitude, MICHAEL Mlchae! Kors, CHAPS, Sean John and various private labels, and, through the end of 2003, footwear under the Bass brand and (ii) the sale, through approximately 700 company operated retail stores, of apparel, footwear and accessories under the brand names Van Heusen, IZOD, Geoffrey Beene, Bass and, beginning in 2003, Calvin Klein. Our stores operate in an outlet format, except for three Calvin Klein image stores located in New York City, Dallas and Paris selling men's and women's high-end collection apparel and accessories, soft home furnishings and tableware. We are introducing a line of dress shirts under the Donald J. Trump Signature Collection brand in 2005. We generate royalty and other revenues from fees for licensing the use of our trademarks. Prior to 2003, royalty and other revenues related principally to licensing the IZOD and Van Heusen trademarks. In 2003, royalty and other revenues increased significantly due to the acquisition of Calvin Klein. Calvin Klein royalty and other revenues are derived under licenses and other arrangements primarily for jeans, underwear, fragrances, eyewear, watches, table top and soft home furnishings. In December 2004, we acquired the companies that own and license the ARROW trodemark, which will generate additional royalty and other income In 2005. Gross profit on total revenues is total revenues less cost of goods sold. We Include as cost of goods sold costs of production and procurement of product, including inbound freight, inspection and internal transfer costs. Since there Is no cost of goods sold associated with royalty and other revenues, 100% of such revenues are included in gross profit. Due to the above factors, our gross profit may not be comparable to that of other entities. Selling, general and administrative expenses include all operating expenses other than expenses included In cost of goods sold. Salaries and related fringe benefits are the largest component of selling, general and administrative expenses, comprising 49% of such expenses in 2004. Rent and occupancy for offices, warehouses and retail stores is the next largest expense, comprising 21% of selling, general and administrative expenses in 2004. 76 Flnanclol R.vi.w PHILLIPS -VAN He11,E11 COkPORATION The following table summarizes our results of operations in 2004, 2003 and 2002; Net Sales Net sales in 2004 increased to $1,460.2 million from $1,425.7 million in 2003 and $1,380.2 million in 2002. The 2004 net sales increase of $34.5 million over 2003 net soles is due principally to the net effect of the items described below. Net sales increases in 2004 include: The addition of $88.0 million of net sales attributable to the launch of our Calvin Klein men's better sportswear line marketed to upscale specialty and department stores commencing with the Fall 2004 season, as well as the continued opening of Calvin Klein retail outlet stores in premium outlet malls, which we begon to open in 2003. We currently intend to have as many as 75 Calvin Klein outlet stores by the end of 2007. • The addition of $41.5 million attributable to growth in our IZOD and ARROW wholesale sportswear businesses. • The addition of $12.0 million attributoble to growth in our wholesale dress shirt business, particularly from the launch of five new labels: BCBG Max Azria, BCBG Attitude, MICHAEL Michael Kors, Sean John and CHAPS. Net sales decreases in 2004 include: • The Toss of the net soles attributable to the wholesale distribution of footwear, principally under the Bass brand, which in 2003 was $63.2 million. The Bass wholesale footwear business was transferred to a third party under a license agreement. • The loss of the net sales attributable to the wholesale distribution of the Calvin Klein men's and women's high-end collection apparel businesses, which businesses were transferred to a third party under o license agreement. The net sales of these businesses were $20.9 million in 2003. • The loss of the net sales attributable to retail store closings, an 0.8% sales decline in our retail stores open at least two years and reduced wholesale sales of private label sportswear. PHILLIPS -VAN H:454N COkPaRATIOIJ Financial Review In 2003, the $45.5 million net sales increase over 2002 related principally to the Colvin Klein businesses acquired in that year and significant sales increases in our branded wholesale apparel business, offset, in part, by net sales decreases in our retail stores related principally to a weak overall retail environment, as sales in our retail stores open at least two yeors declined 3.6%, and reduced wholesale sales of footwear and private label sportswear. Net sales in 2005 are expected to increase 6% - 8% due principally to growth in Calvin Klein men's better sportswear, which we began selling for the Fall 2004 season, and full year sales for the BCBG Max Azria, BCBG Attitude, MICHAEL Michael Kors, Sean John and CHAPS dress shirt brands which we began selling in mid -to -late -2004 under license agreements and the introduction in 2005 of a licensed line of Donald J. Trump Signature Collection brand dress shirts. Royalty and Other Revenues The royalty and other revenues increases over the prior year of $38.1 million and $131.3 million in 2004 and 2003, respectively, are principally attributable to royalty and other revenues of the Calvin Klein Licensing segment. We currently expect that royalty and other revenues of the segment will increase 6% - 8% in 2005, both as a result of growth in the businesses of existing licensees, as well as royalties generated by new license agreements. In addition, royalty and other revenues of the Apparel and Related Products segment are expected to increase significantly in 2005, principally as a result of the royalties generated by the ARROW brand license agreements acquired as part of our acquisition of the ARROW tradename in December 2004. Gross Profit on Total Revenues The following table shows our revenue mix between net sales and royalty and other revenues, as well as our gross profit, as a percentage of total revenues for 2004, 2003 and 2002: The increases in the 2004 gross profit on total revenues percentage compared with 2003, and the 2003 gross profit on total revenues percentage compared with 2002, are due principally to the increase in royalty and other revenues as a percentage of total revenues. Since royalty and other revenues do not corry a cost of sales, the gross profit percentage on such revenues is 100.0%. In addition to revenue mix, our gross profit percentage improvement in 2004 was enhanced by (i) a stronger retail environment for our outlet stores, which resulted in less promotional selling, (ii) stronger sell-throughs of our product in department stores, requiring less support under margin allowance arrangements with many of our department and specialty store customers and (iii) the exiting of the lower margin Bass wholesale and Colvin Klein Collection businesses at the end of 2003, as both businesses were transferred to third parties under license agreements which went into effect at the beginning of 2004. We currently expect that royalty and other revenues will continue to increase 05 a percentage of total revenues in 2005, but at a slower rate than the 2004 increase. If this occurs, the gross profit on total revenues percentage should increase 30 to 50 basis points in 2005. %'s f;nuncio! Reriew P:IJ1:IP$-vfrI' HtU',5I4 CORPORATION Selling, General and Administrative (SG&A) Expenses Our SG&A expenses as a percentage of total revenues are as follows: The increased 2003 SG&A expense as a percentoge of total revenues compored with 2002 is principally related to two factors: • Revenues associated with the Calvin Klein Licensing segment, which we acquired in 2003, are principally royalty and other revenues which do not carry o cost of sales. Thus, all operating expenses associated with the Calvin Klein Licensing segment's royalty and other revenues are classified as SG&A expenses, which increased our SG&A expense as a percentage of total revenues. In 2003, we incurred approximately $36.4 million of SG&A expense associated with (i) the wholesale distribution of Calvin Klein men's and women's high-end collection apparel products and (ii) the costs of certain duplicative personnel and facilities incurred during the integration of various Calvin Klein logistical and back office functions. The 2003 year also includes on $11.1 million charge for the impairment of long-lived assets in certain of our retail outlet stores, and _ _.., related severance and lease termination costs. The 2004 SG&A expenses as a percentage of total revenues of 37.9% remained relatively flat compared with 37.5% in 2003. While the significant Calvin Klein integration and retail store impairment costs did not recur in 2004, we incurred $12.6 million to exit the wholesale footwear business. In addition, our advertising expenses, principally for Calvin Klein, increased by $23.3 million in 2004. The 2005 SG&A expenses as a percentage of total revenues are currently expected to decrease 75 to 125 basis points as we leverage the revenue increases noted above. Also, we do not expect significant integration or other activity exit costs in 2005. Gain on Sale of Investments In 2004, we sold an investment in marketable securities for a pre-tax gain of $0.7 million. In 2003, we sold our minority interest in Gont Company A8 for $17.2 million, net of related expenses, which resulted in a pre-tax gain of $3.5 million. Interest Expense and Interest Income The 2004 interest expense increase to $44.6 million compared with $37.5 million in 2003 is due to a prepayment penally of $7.3 million and the write-off of debt issuance costs of $2.1 million in connection with the purchase and redemption of our 91/2% senior subordinated notes due 2008 in February of 2004. These notes were purchased and redeemed with the net proceeds of the issuonce on Februory 18, 2004 of 71/4% senior unsecured notes. Excluding the effect of the prepayment penalty and the write-off of debt issuance costs, 2004 interest expense is below 2003 levels due to the realization of the benefits of the lower interest rate of the 71/4% notes. Interest expense of $37.5 million in 2003 increased by $13.6 million from $23.9 million in 2002 due to the acquisition of Colvin Klein. The $401.6 million net cash purchase price was funded by issuing $250.0 million of convertible redeemable preferred stock with the balance being funded by use of our cash and a term loan from the holders of the convertible redeemable preferred stock. The term loon carried an interest rate of 10% and had a principal amount of between $100.0 million and $125.0 million from Februory 12, 2003 through May 5, 2003. The term loan was repaid on May 5, 2003 with the proceeds from our issuance of $150.0 million of 81/e% senior unsecured notes due 2013. Amortization of fees associated with the 81/8% senior unsecured notes also contributed to the increased interest expense in 2003. Income Taxes Income tax expense as a percentage of pre-tax income was as follows: The decreased percentage for 2004 compared with 2003 relates principally to (i) higher pre-tax income, which causes state and local franchise taxes that are not based on income to become a lower percentage, (ii) non-deductible expenses included in 2003 pre-tax income related to the sale of our minority interest in Gant and (iii) a $3.0 million reduction in the valuation allowance for state loss carryforwards. Excluding the effect of the valuation allowance reduction, our income tax expense as a percentage of pre-tax income in 2004 would hove been 36.1%. The increased percentage for 2003 compared with 2002 relates principally to (i) lower pre-tax income, which causes state and local franchise taxes that are not based on income to e'1+1 S:.IP$-Yh N HE U 5 E t! CC k Pa RA1 I C) N Financial Ra ri•w become o higher percentage and (ii) non-deductible expenses included in pre-tax income, related to the sale of Gant. We are currently undergoing examinations of our income tax returns for multiple years by the Internal Revenue Service and other tax authorities. We have reserves for exposures we believe could result from these examinations. Any favorable or unfavorable result as compared with our reserves will affect our tax rate in the year it materializes. Excluding any such discrete items, we currently anticipate our 2005 tax expense as a percentage of pre-tax income will be approximately 37%. LIQUIDITY AND CAPITAL RL -SOURCES Our principal source of cash is from operations, and our principal uses of cash are for capital spending, contingent purchase price payments and dividends. In 2004, our cash flow was also impacted by our acquisition of the ARROW trademark. Operations Cosh provided by operating activities in 2004 was $142.6 million, which significantly exceeded our net income of $58.6 million, principally as a result of depreciation and amortization, tax benefits from the exercise of stock options and deferred taxes. In 2005, we expect our cash provided by operating activities to again exceed net income, but to a lesser extent due to increases in working capital and on expected increase in income tax payments due to exhausting certain net operating loss carryforwards. Capital Spending Our capital spending in 2004 was 546.2 million. We currently expect capital spending in 2005 to be in a range of $40 million to 545 million, and decrease moderately thereafter, Our capital spending is generally for information systems, warehouse and office facilities and retail outlet stores, As such, we have no long-term contractual commitments for capital spending. Contingent Purchase Price Payments In connection with our acquisition of Colvin Klein in 2003, we are obligated to pay Mr. Klein contingent purchase price payments through 2017 based on 1.15% of total worldwide net sales of products bearing any of the Calvin Klein brands. Such contingent purchase price payments are recorded as an addition to goodwill and totaled $22.2 million in 2004. We currently expect that such payments will be 524 million to $26 million in 2005, and will continue to increase moderately thereafter. Dividends Our convertible redeemable preferred stock has a dividend rate of 8.0% per annum, payable in cash. If we elect not to pay a cash dividend for any quarter, then the convertible redeemable preferred stock will be treated for purposes of the payment of future dividends and upon conversion, redemption or liquidation as if an in-kind dividend had been paid. We currently expect to pay our preferred stock dividends in cash for the foreseeable future. Based on the current preferred stock liquidation preference of 5264.7 million, cash dividends are expected to aggregate 521.1 million in 2005. Our common stock currently pays an annual dividend of $0.15 per share. Based on the number of common shares outstanding at January 30, 2005 and our estimates of stock option exercises, we project that cash dividends on our common stock in 2005 will be $4.8 million to 55.0 million. Cash Flow Summary Our net cash outflow in 2004 was $8.4 million, which included 570.5 million used for the ARROW acquisition, Excluding this purchase, our cash flow would have been a positive 561.6 million. Our 2005 cash flow will be impacted by various other factors in addition to those noted above. For example, the exercise of stock options provided 524.8 million of cash in 2004. We currently estimate that 2005 will include a similar amount. Also in 2004, we made approximately 510.0 million of contributions to our defined benefit pension plans. We currently do not expect to make any material contributions to the plans in 2005. We currently expect to generate 565 million to 575 million of cash flow in 2005. There con be no assurance that this estimate will prove to be accurate, or that unforeseen events, including changes in our net income, working capital requirements or other items, including acquisitions, could occur which could cause our cash flow to vary. Financing Arrangements Our capital structure as of January 30, 2005 was as follows: We believe this capital structure provides a secure base. There are no maturities of our long-term debt until 2011. eU Flnonclal Iterlew PHILLIPS -VAN NFIIiFN GC(POkATION Our convertible redeemable preferred stock hos a conversion price of $14.00 per share, and based on current market conditions, and that redemption cannot be required until November 2013, we believe the preferred stock will be converted to common stock rather than redeemed. For near-term liquidity, in addition to our cash balonce, we have a $325.0 million secured revolving credit facility that provides for revolving credit borrowings, as well as the issuance of letters of credit. We may, at our option, borrow and repay amounts up to a maximum of $325.0 million for revolving credit borrowings and the issuance of letters of credit, with no sublimits. Based on our working capital projections, we believe that our borrowing capacity under this facility provides us with adequate liquidity for our peak seasonal needs for the foreseeable future. During 2004, we had no revolving credit borrowings under the facility, and the maximum amount of letters of credit outstanding was $186.3 million. As of January 30, 2005, we had $169.8 million outstanding letters of credit under this facility. Given our capitol structure and our projections for future profitability and cash flow, we believe we could obtain additional financing, if necessary, for refinancing our long-term debt or preferred stock, or, if opportunities present themselves, future acquisitions. Contractual Obligations The following table summarizes, as of January 30, 2005, our contractual cosh obligations by future period: Ft Includes store operating leases, which generally provide for payment of direct operating costs in addition to rent. These obligation amounts include future minimum lease payments and exclude such direct operating costs. (2) We currently anticipate that future payments required under our license agreements on an aggregate basis will exceed significantly the contractual minimums shown in the table. 13) We have an unfunded supplemental defined benefit plan covering 23 executives under which the participants will receive a predetermined amount during the 10 years following the attainment of age 65. Also not included in the above table are contingent purchase price payments we are obligated to pay Mr. Klein through 2017 based on 1.15% of total worldwide net soles of products bearing any of the Calvin Klein brands. Such payments were $22.2 million in 2004. Not included in the above table are payments of cash dividends on our convertible redeemable preferred stock. If we elect not to pay a cash dividend, then the convertible redeemable preferred stock will be treated for purposes of the payment of future dividends and upon conversion, redemption or liquidation as if on in-kind dividend had been paid. We currently expect to pay our preferred stock dividends in cash for the forseeable future. Based on the current preferred stock liquidation preference of $264.7 million, cash dividends are expected to aggregate $21.1 million in each year. In addition, the preferred stockholders can require the Company to redeem for cash all of the then outstanding shares of convertible redeemable preferred stock on or after November 1, 2013. Based on the conversion price of $14.00 per share, we believe the preferred stock will be converted to common stock rather than redeemed. PNIt,IPS-VAN HEUSk Id CGI.POkATION Financial Review Off -Balance Sheet Arrangements We do not have any off-bolance sheet arrangements that hove a material current effect, or that are reasonably likely to have a material future effect, on our financial position, changes In financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capitol resources. MARKET RISK - INTEREST AND EXCHANGE RATE SENSITIVITY Financial instruments held by us include cash equivalents and long-term debt. Based upon the amount of cosh equivalents held at January 30, 2005 and the average net amount of cash equivalents that we currently anticipate holding during 2005, we believe that a change of 100 basis points in interest rotes would not have o material effect on our financial position or results of operations. Note 9, "Long -Term Debt" in the Notes to the Consolidated Financial Statements outlines the principal amounts, interest rates, fair values and other terms required to evaluate the expected sensitivity of interest rate changes on the fair value of our fixed rate long-term debt. Substantially all of our sales and expenses are currently denominated in United States dollars. However, certain of our operations and license agreements, particularly in the Colvin Klein Licensing segment, expose us to fluctuations in foreign currency exchange rotes, primarily the rote of exchange of the United States dollar against the Euro and the Yen. Exchange rate fluctuations can cause the United States dollar equivalent of the foreign currency cosh flows to vary. This exposure arises as o result of (i) license agreements that require licensees to make royalty and other payments to us based on the local currency in which the licensees operate, with us bearing the risk of exchange rate fluctuations and (ii) our retail and administrative operations that require cash outflows in foreign currencies. To a certain extent, there is a natural hedge of exchange rate changes in that the foreign license agreements generally produce cash inflows and the foreign retail and administrative operations generally produce cash outflows. We may from time to time purchase foreign currency forward exchange contracts to hedge against changes in exchange rates. No forward exchange contracts were held os of January 30, 2005. We believe that future exchange rote changes will not hove a material effect on our financial position or results of operations. SEASONALITY Our seasonality has changed significantly in the last two years due to the Colvin Klein acquisition, and the ARROW acquisition in December 2004 will further modify our seasonality in 2005 by increasing royalty and other revenues, which tend to be earned somewhat evenly throughout the year. The third quarter has the highest level of royalty income. Our dress shirt and sportswear wholesale businesses generate higher levels of soles and income in the first and third quarters, os the selling of spring and fall merchandise to our department store customers occurs at higher levels as these selling seasons begin. The aggregate effect of our seasonality is that our first and third quarters hove the highest levels of sales and Income. Revenues in the second and fourth quarters are relatively equal, but earnings in the fourth quarter are lower from significant holiday marketing costs as well as post -holiday promotional selling and inventory clearance activity. ACCOUNTING POLICY CHANGES In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, "Share -Based Payment,' which is a revision of FASB Statement No. 123, Accounting for Stock -Based Compensation" and supersedes APB Opinion No, 25, Accounting for Stock Issued to Employees" and FASB Statement No. 148, Accounting for Stock -Based Compensation - Tronsition and Disclosure." FASB Statement No. 123R requires all share -based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, effective at the beginning of the first interim or annual period beginning after June 15, 2005, which will be our third quarter of 2005. We are in the process of determining the impact FASB Statement No. 123R will have on our consolidated financial statements, which will depend; In part, on the timing and amount of any future stock option grants. ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions, We believe that the following ore the more critical judgmental 82 finonciol Review PHILLIPS -VAN HEUSEN CORPORATION areas in the application of our accounting policies that currently affect our financial position and results of operations: Safes allowances and returns - We have arrangements with many of our department and specialty store customers to support their soles of our products. We establish accruals which, based on a review of the individual customer arrangements and the expected performance of our products in their stores, we believe will be required to satisfy our sales allowance obligations. We also establish accruals, which are partly based on historical data, that we believe ore necessary to provide for inventory returns. It is possible that the accrual estimates could vary from actual results, which would require adjustment to the allowance and returns accruals. Inventories - Inventories related to our wholesale operations, comprised principally of finished goods, ore stated at the lower of cost or market. Inventories related to our retail operations, comprised entirely of finished goods, are valued at the lower of average cost or market using the retail inventory method. Under the retail inventory method, the valuation of inventories at cost is calculated by applying a cost -to -retail ratio to the retail value inventories. Permanent and point of sale markdowns, when taken, reduce both the retail and cost components of inventory on hand so os to maintain the already established cost -to -retail relationship. Based on a review of current business trends, inventory agings and discontinued merchandise categories, o further adjustment to inventory is recorded to reflect additional markdowns which are estimated to be necessary to liquidate existing clearance inventories and reduce inventories to the lower of cost or market. We believe that all inventory writedowns required at January 30, 2005 hove been recorded. If market conditions were to change, it is possible that the required level of inventory reserves would need to be adjusted. Allowance for doubtful accounts - Accounts receivable as shown on the consolidated balance sheets is net of an allowance for doubtful accounts. An allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable, assessments of collectibility based on historic trends, the finoncial position of our customers and an evaluation of economic conditions. Any significant changes to the above factors could impact our financial position and results of operations. income taxes As of January 30, 2005, we hove deferred tax ossets of $61.9 million related to tax loss and credit carryforwards which begin to expire principally in 2010. Realization of these carryforwards is primarily dependent upon the achievement of future taxable income. Bosed on the extended expiration dotes and projections of future taxable income, we have determined that realization of $55.8 million of these assets is more likely than not. If future conditions require a change in judgment as to realization, it is possible that material adjustments to these deferred tax assets may be required. Goodwill and other intangible assets - Goodwill and other indefinitely lived intangible assets ore tested for impairment based on fair value. An impairment Toss could have a material adverse impact on our financial position and results of operations. Performance of the goodwill impairment tests requires significant judgments regarding the allocation of net assets to the reporting unit level, which is the level at which the impairment tests ore required. The determination of whether an impairment exists also depends on, among other factors, the estimated fair value of the reporting units, which itself depends in part on market conditions. Medical claims accrual - We self -insure a significant portion of our employee medical costs. Based on trends and the number of covered employees, we record estimates of medical claims which have been incurred but not paid. If actual medical claims varied significantly from these estimates, an adjustment to the medical claims accrual would be required. Pension benefits - Included in the calculations of expense and liability for our pension plans are various assumptions, including return on assets, discount rote and future compensation increases. Based on these assumptions, and due in Targe part to decreases in discount rates and the poor performance of U.S. equity markets in 2001 and 2002, we have significant unrecognized costs for our pension plans. Depending on future asset performance and discount rates, such costs could be required to be amortized in the future which could have a material effect on future pension expense. We are currently estimating that our 2005 pension expense will approximate our 2004 pension expense. Long-lived asset impairment - In each of the last two years, we determined that the long-lived assets in various retail outlet stores were not recoverable, which resulted in us recording impairment charges. In order to calculate the impairment charges, we estimated each store's undiscounted future cash flows and the fair value of the related long-lived assets. The undiscounted future cash flows for each store were estimated using current sales trends and other assumptions. If different assumptions had been used for future sales trends, the number of impaired stores could have been significantly higher or lower. Tan Yaor Financial Summery . :i Ii.L.1P;•' Ar; Ci,)NCO NATION TEN YEAR FINANCIAL SUMMARY $ 1,469,443. 171,985 1,641,428 1,51 1,549 129,879 42,857 28,407 $ 58,615 1.20 1.14 0.15 ;', 11.23 491,692 208,493 283,199 1,549,582 399,512 264,746 364,026 38.9% 3C.5% 2.4 31,1)7:; I1) 2004 includes pre-tax charges of $9,374 related to debt extinguishment costs, pre-tax charges of $14,033 associated with the closing of certain retail outlet stores and exiting the wholesale footwear business and relocating the Company's existing retail footwear operations and a $3,016 fax benefit associated with the realization of certain state net operating loss carryforwards. (2) 2003 includes pre-tax charges of $36,366 related to integration costs associated with the Company's acquisition of Calvin Klein, Inc. and certain affiliated companies, pre-tax charges of $20,739 associated with the impairment and closing of certain retail outlet stores and exiting the wholesale footwear business and relocating the Company's existing retail footwear operations and a pre-tax gain of $3,496 resulting from the Company's sale of its minority interest in Gant. Calvin Klein integration costs consist of (a) the operating losses of certain Calvin Klein businesses which the Company has closed or licensed, and associated costs in connection therewith and (b) the costs of certain duplicative personnel and facilities incurred during the integration of various logistical and bock office functions. rail t � IPS-cAr: M: U7[' Ii C OkYOkA7 SON T.n Y•or Financial Summary TEN YEAR FINANCIAL SUMMARY (3) 2001 includes pre-tax charges of $21,000 for restructuring and other expenses. (4) 2000 and 1996 include 53 weeks of operations. (5) 1997 includes pre-tax charges of $132,700 for restructuring and other expenses. (6) 1995 includes pre-tax charges of $27,000 for restructuring and other expenses. (7) Total capital equals interest-bearing debt, preferred stock and stockholders' equity. (8). Net debtand net capital are total debt and total capital reduced by cash.