Hanesbrands Inc.
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-142371
PROSPECTUS
EXCHANGE
OFFER FOR
$500,000,000
FLOATING RATE SENIOR NOTES DUE 2014
We are
offering to exchange
up to $500,000,000 of our new Floating Rate Senior Notes due
2014, Series B
for
a like amount of our outstanding Floating Rate Senior Notes due
2014
Material Terms of Exchange Offer
|
|
|
|
|
The terms of the new notes to be issued in the exchange offer,
which we refer to as the Exchange Notes, are substantially
identical to the outstanding Floating Rate Senior Notes due
2014, which we refer to as the Notes, except that the transfer
restrictions and registration rights relating to the Notes will
not apply to the Exchange Notes.
|
|
|
|
The Exchange Notes will be guaranteed on a senior basis by
substantially all of our existing and future domestic
subsidiaries.
|
|
|
|
See the section of this prospectus entitled Description of
the Exchange Notes that begins on page 130 for more
information about the Exchange Notes.
|
|
|
|
There is no existing public market for the Notes or the Exchange
Notes. We do not intend to list the Exchange Notes on any
securities exchange or seek approval for quotation through any
automated trading system.
|
|
|
|
You may withdraw your tender of Notes at any time before the
expiration of the exchange offer. We will exchange all of the
Notes that are validly tendered and not withdrawn.
|
|
|
|
|
|
The exchange offer expires at 5:00 p.m., New York City
time, on June 12, 2007, unless extended.
|
|
|
|
|
|
The exchange of Notes will not be a taxable event for
U.S. federal income tax purposes.
|
|
|
|
The exchange offer is not subject to any condition other than
that it not violate applicable law or any applicable
interpretation of the Staff of the Securities and Exchange
Commission.
|
|
|
|
We will not receive any proceeds from the exchange offer.
|
For a discussion of certain factors that you
should consider before participating in this exchange offer, see
Risk Factors beginning on page 11 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved the Exchange
Notes to be distributed in the exchange offer, nor have any of
these organizations determined that this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
May 11, 2007
We have not authorized anyone to give any information or
represent anything to you other than the information contained
in this prospectus. You must not rely on any unauthorized
information or representations.
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
|
iii
|
|
|
|
|
1
|
|
|
|
|
11
|
|
|
|
|
27
|
|
|
|
|
29
|
|
|
|
|
30
|
|
|
|
|
31
|
|
|
|
|
32
|
|
|
|
|
34
|
|
|
|
|
72
|
|
|
|
|
86
|
|
|
|
|
91
|
|
|
|
|
113
|
|
|
|
|
114
|
|
|
|
|
116
|
|
|
|
|
120
|
|
|
|
|
123
|
|
|
|
|
130
|
|
|
|
|
172
|
|
|
|
|
178
|
|
|
|
|
179
|
|
|
|
|
179
|
|
|
|
|
179
|
|
|
|
|
F-1
|
|
Trademarks,
Trade Names and Service Marks
We own or have rights to use the trademarks, service marks and
trade names that we use in conjunction with the operation of our
business. Some of the more important trademarks that we own or
have rights to use that appear in this prospectus include the
Hanes, Champion, Playtex, Bali, Just My Size, barely there,
Wonderbra, C9 by Champion, Leggs, Beefy-T and Outer
Banks marks, which may be registered in the
United States and other jurisdictions. We do not own any
trademark, trade name or service mark of any other company
appearing in this prospectus.
The Exchange Notes are being offered by Hanesbrands Inc., a
Maryland corporation organized in September 2005 that was spun
off from Sara Lee Corporation (Sara Lee) on
September 5, 2006. In connection with the spin off, Sara
Lee contributed its branded apparel Americas and Asia business
to Hanesbrands Inc. and distributed all of the outstanding
shares of Hanesbrands Inc. common stock to its stockholders on a
pro rata basis. As a result of the spin off, Sara Lee ceased to
own any equity interest in Hanesbrands Inc. and Hanesbrands Inc.
became an independent, separately traded, publicly held company.
Unless the context otherwise requires, (i) references in
this prospectus to Hanesbrands, HBI,
we, our and us mean
Hanesbrands Inc. and its subsidiaries (ii) the term
issuer refers to Hanesbrands Inc. and not to any of
its subsidiaries and (iii) the term guarantors
refers to the direct and indirect subsidiaries of Hanesbrands
Inc. that guarantee Hanesbrands Inc.s obligations under
the Exchange Notes.
i
We describe in this prospectus the businesses contributed to us
by Sara Lee in the spin off as if the contributed businesses
were our business for all historical periods described.
References in this prospectus to our assets, liabilities,
products, businesses or activities of our business for periods
including or prior to the spin off are generally intended to
refer to the historical assets, liabilities, products,
businesses or activities of the contributed businesses as the
businesses were conducted as part of Sara Lee and its
subsidiaries prior to the spin off.
In making an investment decision, you must rely on your own
examination of our business and the terms of this exchange
offer, including the merits and risks involved. The Exchange
Notes have not been recommended by any U.S. or
non-U.S. federal
or state securities commission or regulatory authority.
Furthermore, these authorities have not confirmed the accuracy
or determined the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
ii
MARKET
AND INDUSTRY DATA
Market data and certain industry data and forecasts used
throughout this prospectus were obtained from internal company
surveys, market research, consultant surveys, publicly available
information, reports of governmental agencies and industry
publications and surveys. The NPD Group/Consumer Panel
TrackSM
(NPD), Millward Brown Market Research and
Womens Wear Daily were the primary sources for third-party
industry data and forecasts. Industry surveys, publications,
consultant surveys and forecasts generally state that the
information contained therein has been obtained from sources
believed to be reliable, but that the accuracy and completeness
of such information is not guaranteed. We have not independently
verified any of the data from third-party sources, nor have we
ascertained the underlying economic assumptions relied upon
therein. Similarly, internal surveys, industry forecasts and
market research, which we believe to be reliable based upon our
managements knowledge of the industry, have not been
independently verified. Forecasts are particularly likely to be
inaccurate, especially over long periods of time. For example,
in 1983, the U.S. Department of Energy forecast that oil
would cost $74 per barrel in 1995, however, the price of
oil was actually $17 per barrel. In addition, we do not
know what assumptions regarding general economic growth were
used in preparing the forecasts we cite. We do not make any
representation as to the accuracy of information described in
this paragraph. Statements as to our market position are based
on the most currently available data. While we are not aware of
any misstatements regarding our industry data presented herein,
our estimates involve risks and uncertainties and are subject to
change based on various factors, including those discussed under
the heading Risk Factors in this prospectus. We
cannot guarantee the accuracy or completeness of any such
information contained in this prospectus.
iii
SUMMARY
The following is a summary of material information discussed
in this prospectus or in the documents incorporated by reference
into this prospectus, and is qualified in its entirety by the
more detailed information, including the section entitled
Risk Factors and the financial statements and
related notes, included elsewhere in this prospectus and in the
documents incorporated by reference into this prospectus. This
summary may not contain all the information that may be
important to you. You should read the entire prospectus and the
documents incorporated by reference into this prospectus,
including the financial statements and related notes, before
deciding whether to participate in the exchange offer.
Our
Company
Introduction
We are a consumer goods company with a portfolio of leading
apparel brands, including Hanes, Champion, Playtex, Bali,
Just My Size, barely there and Wonderbra. We design,
manufacture, source and sell a broad range of apparel essentials
such as t-shirts, bras, panties, mens underwear,
kids underwear, socks, hosiery, casualwear and activewear.
We were spun off from Sara Lee Corporation, or Sara
Lee, on September 5, 2006. In connection with the
spin off, Sara Lee contributed its branded apparel Americas and
Asia business to us and distributed all of the outstanding
shares of our common stock to its stockholders on a pro rata
basis. As a result of the spin off, Sara Lee ceased to own any
equity interest in our company. In this prospectus, we describe
the businesses contributed to us by Sara Lee in the spin off as
if the contributed businesses were our business for all
historical periods described. References in this prospectus to
our assets, liabilities, products, businesses or activities of
our business for periods including or prior to the spin off are
generally intended to refer to the historical assets,
liabilities, products, businesses or activities of the
contributed businesses as the businesses were conducted as part
of Sara Lee and its subsidiaries prior to the spin off.
Following the spin off, we changed our fiscal year end from the
Saturday closest to June 30 to the Saturday closest to
December 31. This change created a transition period
beginning on July 2, 2006, the day following the end of our
2006 fiscal year on July 1, 2006, and ending on
December 30, 2006.
In the six month transition period ended December 30, 2006,
we generated $2.3 billion in net sales and
$190.0 million in operating profit. Our products are sold
through multiple distribution channels. During the six months
ended December 30, 2006, approximately 47% of our net sales
were to mass merchants, 20% were to national chains and
department stores, 9% were direct to consumer, 9% were in our
international segment and 15% were to other retail channels such
as embellishers, specialty retailers, warehouse clubs and
sporting goods stores. In addition to designing and marketing
apparel essentials, we have a long history of operating a global
supply chain that incorporates a mix of self-manufacturing,
third-party contractors and third-party sourcing.
The apparel essentials segment of the apparel industry is
characterized by frequently replenished items, such as t-shirts,
bras, panties, mens underwear, kids underwear, socks
and hosiery. Growth and sales in the apparel essentials industry
are not primarily driven by fashion, in contrast to other areas
of the broader apparel industry. Rather, we focus on the core
attributes of comfort, fit and value, while remaining current
with regard to consumer trends.
Our business is subject to risks. For a more detailed
description of these risks, see Risk Factors.
Our
Competitive Strengths
Strong Brands with Leading Market
Positions. Our brands have a strong heritage in
the apparel essentials industry. According to NPD, our brands
hold either the number one or number two U.S. market
position by sales in most product categories in which we
compete, on a rolling year-end basis as of December 2006.
Our brands enjoy high awareness among consumers according to a
2006 brand equity analysis by Millward Brown Market Research.
According to a 2006 survey of consumer brand awareness by
1
Womens Wear Daily, Hanes is the most recognized
apparel and accessory brand among women in the United States.
According to Millward Brown Market Research, Hanes is
found in over 85% of the United States households who have
purchased mens or womens casual clothing or
underwear in the
12-month
period ended December 31, 2006. Our creative, focused
advertising campaigns have been an important element in the
continued success and visibility of our brands. We employ a
multimedia marketing plan involving national television, radio,
Internet, direct mail and in-store advertising, as well as
targeted celebrity endorsements, to communicate the key features
and benefits of our brands to consumers. We believe that these
marketing programs reinforce and enhance our strong brand
awareness across our product categories.
High-Volume, Core Essentials Focus. We sell
high-volume, frequently replenished apparel essentials. The
majority of our core styles continue from year to year, with
variations only in color, fabric or design details, and are
frequently replenished by consumers. For example, we believe the
average U.S. consumer makes 3.5 trips to retailers to
purchase mens underwear and 4.5 trips to purchase panties
annually. We believe that our status as a high-volume seller of
core apparel essentials creates a more stable and predictable
revenue base and reduces our exposure to dramatic fashion shifts
often observed in the general apparel industry.
Significant Scale of Operations. According to
NPD, we are the largest seller of apparel essentials in the
United States as measured by sales on a rolling year-end basis
as of December 2006. Most of our products are sold to large
retailers which have high-volume demands. We have met the
demands of our customers by developing vertically integrated
operations and an extensive network of owned facilities and
third-party manufacturers over a broad geographic footprint. We
believe that we are able to leverage our significant scale of
operations to provide us with greater manufacturing
efficiencies, purchasing power and product design, marketing and
customer management resources than our smaller competitors.
Significant Cash Flow Generation. Due to our
strong brands and market position, our business has historically
generated significant cash flow. In the six months ended
December 30, 2006 and in fiscal 2006, 2005 and 2004, we
generated $113.0, $400.0 million, $446.8 million and
$410.2 million, respectively, of cash from operating
activities net of cash used in investing activities. Our goal is
to maximize cash flow in a manner that gives us the flexibility
to create shareholder value by investing in our business,
reducing debt and returning capital to our shareholders.
Strong Customer Relationships. We sell our
products primarily through large, high-volume retailers,
including mass merchants, department stores and national chains.
We have strong, long-term relationships with our top customers,
including relationships of more than ten years with each of our
top ten customers. The size and operational scale of the
high-volume retailers with which we do business require
extensive category and product knowledge and specialized
services regarding the quantity, quality and planning of orders.
In the late 1980s, we undertook a shift in our approach to our
relationships with our largest customers when we sought to align
significant parts of our organization with corresponding parts
of their organizations. For example, we are organized into teams
that sell to and service our customers across a range of
functional areas, such as demand planning, replenishment and
logistics. We also have entered into customer-specific programs
such as the introduction in 2004 of C9 by Champion
products marketed and sold through Target Corporation
(Target) stores. Through these efforts, we have
become the largest apparel essentials supplier to many of our
customers.
Strong Management Team. We have strengthened
our management team through the addition of experienced
executives in key leadership roles. Richard Noll, our Chief
Executive Officer, has extensive management experience in the
apparel and consumer products industries. During his
14-year
tenure at Sara Lee, Mr. Noll led Sara Lees sock
and hosiery businesses, Sara Lee Direct and Sara Lee Mexico (all
of which are now part of our business), as well as the Sara Lee
Bakery Group and Sara Lee Australia. Lee Wyatt, our Executive
Vice President, Chief Financial Officer, has broad experience in
executive financial management, including tenures as Chief
Financial Officer at Sonic Automotive, a publicly traded
automotive aftermarket supplier, and Sealy Corporation. Gerald
Evans, our Executive Vice President, Chief Supply Chain Officer,
Kevin Hall, our Executive Vice President, Chief Marketing
Officer, and Joia Johnson, our Executive Vice President, General
Counsel and Corporate Secretary, also add significant experience
and leadership to our management team. The additions of
Messrs. Noll and Wyatt complement the leadership and
experience
2
provided by Lee Chaden, our Executive Chairman, who has
extensive experience within the apparel and consumer products
industries.
Key
Business Strategies
Our core strategies are to build our largest, strongest brands
in core categories by driving innovation in key items, to
continually reduce our costs by consolidating our organization
and globalizing our supply chain and to use our strong,
consistent cash flows to fund business growth, supply-chain
reorganization and debt reduction and to repurchase shares to
offset dilution. Specifically, we intend to focus on the
following strategic initiatives:
Increase the Strength of Our Brands with
Consumers. Our advertising and marketing
campaigns have been an important element in the success and
visibility of our brands. We intend to increase our level of
marketing support behind our key brands with targeted, effective
advertising and marketing campaigns. For example, in fiscal
2005, we launched a comprehensive marketing campaign titled
Look Who Weve Got Our Hanes on Now, which we
believe significantly increased positive consumer attitudes
about the Hanes brand in the areas of stylishness,
distinctiveness and
up-to-date
products.
Our ability to react to changing customer needs and industry
trends will continue to be key to our success. Our design,
research and product development teams, in partnership with our
marketing teams, drive our efforts to bring innovations to
market. We intend to leverage our insights into consumer demand
in the apparel essentials industry to develop new products
within our existing lines and to modify our existing core
products in ways that make them more appealing, addressing
changing customer needs and industry trends. Examples of our
success to date include:
|
|
|
|
|
Tagless garments where the label is embroidered or
printed directly on the garment instead of attached on a
tag which we first released in t-shirts under our
Hanes brand (2002), and subsequently expanded into other
products such as outerwear tops (2003) and panties (2004).
|
|
|
|
Comfort Soft bands in our underwear and bra lines,
which deliver to our consumers a softer, more comfortable feel
with the same durable fit (2004 and 2005).
|
|
|
|
New versions of our Double Dry wicking products and Friction
Free running products under our Champion brand (2005).
|
|
|
|
The no poke wire which was successfully introduced
to the market in our Bali brand bras (2004).
|
Strengthen Our Retail Relationships. We intend
to expand our market share at large, national retailers by
applying our extensive category and product knowledge,
leveraging our use of multi-functional customer management teams
and developing new customer-specific programs such as C9 by
Champion for Target. Our goal is to strengthen and deepen
our existing strategic relationships with retailers and develop
new strategic relationships. Additionally, we plan to expand
distribution by providing manufacturing and production of
apparel essentials products to specialty stores and other
distribution channels, such as direct to consumer through the
Internet.
Develop a Lower-Cost Efficient Supply
Chain. As a provider of high-volume products, we
are continually seeking to improve our cost-competitiveness and
operating flexibility through supply chain initiatives. In this
regard, we have launched two textile manufacturing projects
outside of the United States an owned textile
manufacturing facility in the Dominican Republic, which began
production in early 2006, and a strategic alliance with a
third-party textile manufacturer in El Salvador, which began
production in 2005. Over the next several years, we will
continue to transition additional parts of our supply chain from
the United States to locations in Central America, the
Caribbean Basin and Asia in an effort to optimize our cost
structure. We intend to continue to self-manufacture core
products where we can protect or gain a significant cost
advantage through scale or in cases where we seek to protect
proprietary processes and technology. We plan to continue to
selectively source product categories that do not meet these
criteria from third-party manufacturers. We expect that in
future years our supply chain will become more balanced across
the Eastern and Western Hemispheres. Our customers require a
high level of service and responsiveness, and we intend to
continue to
3
meet these needs through a carefully managed facility migration
process. We expect that these changes in our supply chain will
result in significant cost efficiencies and increased asset
utilization.
Create a More Integrated, Focused
Company. Historically, we have had a
decentralized operating structure, with many distinct operating
units. We are in the process of consolidating functions, such as
purchasing, finance, manufacturing/sourcing, planning, marketing
and product development, across all of our product categories in
the United States. We also are in the process of integrating our
distribution operations and information technology systems. We
believe that these initiatives will streamline our operations,
improve our inventory management, reduce costs, standardize
processes and allow us to distribute our products more
effectively to retailers. We expect that our initiative to
integrate our technology systems also will provide us with more
timely information, increasing our ability to allocate capital
and manage our business more effectively.
Recent
Developments
On March 29, 2007, in furtherance of our efforts to migrate
portions of our manufacturing operations to lower-cost
locations, we announced plans to close a textile manufacturing
facility located in the United States.
On April 26, 2007, we issued a press release announcing our
financial results for the first quarter ended March 31,
2007. Highlights for the quarter include:
|
|
|
|
|
Total net sales increased by $7 million, or 0.7%, to
$1.04 billion, up from $1.03 billion in the quarter
ended April 1, 2006.
|
|
|
|
|
|
Growth in the outerwear segment resulted from double-digit gains
for Champion activewear and increases for Hanes
casualwear and more than offset generally flat sales in the
innerwear segment and declines in other segments.
|
|
|
|
|
|
Operating profit, as measured under generally accepted
accounting principles, was $68.9 million, a decrease of
28.4% from $96.2 million a year ago. The profit decline
primarily reflected restructuring and related charges for plant
closures, higher cotton costs and increased investment in
business operations.
|
|
|
|
|
|
Net income for the quarter was $12.0 million, down from
$74.6 million a year ago, primarily as a result of the
companys new independent structure. The decrease in net
income reflected increased interest expense, reduced operating
profit and a higher effective income tax rate.
|
|
|
|
|
|
Interest expense increased in the quarter by $48.6 million
to $51.7 million, up from $3.1 million a year ago as a
result of debt incurred in our spin off. The effective income
tax rate for the quarter was 30.0 percent, up from
19.9 percent a year ago as a result of our tax structure as
an independent company.
|
|
|
|
|
|
Using cash flow from operations, we made a voluntary
$42 million pension contribution in the quarter, reducing
the companys underfunded liability for qualified pension
plans to approximately $131 million. Our qualified pension
plan liability is now 84% funded, which meets our 2007 goal.
|
Company
Information
We were incorporated in Maryland on September 30, 2005 and
became an independent public company following our spin off from
Sara Lee on September 5, 2006. Our principal executive
offices are located at 1000 East Hanes Mill Road, Winston-Salem,
North Carolina 27105. Our main telephone number is
(336) 519-4400.
Our website is www.hanesbrands.com. Information on our website
is not a part of this prospectus and is not incorporated into
this prospectus by reference.
4
The
Exchange Offer
|
|
|
The Initial Offering of Notes |
|
We sold the Notes on December 14, 2006 to Morgan
Stanley & Co. Incorporated, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, ABN AMRO Incorporated,
Barclays Capital Inc., Citigroup Global Markets Inc. and HSBC
Securities (USA) Inc. We collectively refer to those parties in
this prospectus as the initial purchasers. The
initial purchasers subsequently resold the Notes: (i) to
qualified institutional buyers pursuant to Rule 144A; or
(ii) outside the United States in compliance with
Regulation S, each as promulgated under the Securities Act of
1933, as amended. |
|
Registration Rights Agreement |
|
Simultaneously with the initial sale of the Notes, we entered
into a registration rights agreement for the exchange offer. In
the registration rights agreement, we agreed, among other
things, to use our commercially reasonable efforts to file a
registration statement with the SEC and to commence and complete
this exchange offer. The exchange offer is intended to satisfy
your rights under the registration rights agreement. After the
exchange offer is complete, you will no longer be entitled to
any exchange or registration rights with respect to your Notes. |
|
The Exchange Offer |
|
We are offering to exchange the Exchange Notes, which have been
registered under the Securities Act, for your Notes, which were
issued on December 14, 2006 in the initial offering. In
order to be exchanged, a Note must be properly tendered and
accepted. All Notes that are validly tendered and not validly
withdrawn will be exchanged. We will issue the Exchange Notes
promptly after the expiration of the exchange offer. |
|
Resales |
|
We believe that the Exchange Notes issued in the exchange offer
may be offered for resale, resold and otherwise transferred by
you without compliance with the registration and prospectus
delivery requirements of the Securities Act provided that: |
|
|
|
the Exchange Notes are being acquired in the
ordinary course of your business;
|
|
|
|
you are not participating, do not intend to
participate, and have no arrangement or understanding with any
person to participate, in the distribution of the Exchange Notes
issued to you in the exchange offer; and
|
|
|
|
you are not an affiliate of ours.
|
|
|
|
If any of these conditions are not satisfied and you transfer
any Exchange Notes issued to you in the exchange offer without
delivering a prospectus meeting the requirements of the
Securities Act or without an exemption from registration of your
Exchange Notes from these requirements you may incur liability
under the Securities Act. We will not assume, nor will we
indemnify you against, any such liability. |
|
|
|
Each broker-dealer that is issued Exchange Notes in the exchange
offer for its own account in exchange for Notes that were
acquired by that broker-dealer as a result of market-marking or
other trading activities must acknowledge that it will deliver a
prospectus |
5
|
|
|
|
|
meeting the requirements of the Securities Act in connection
with any resale of the Exchange Notes. A broker-dealer may use
this prospectus for an offer to resell, resale or other
retransfer of the Exchange Notes issued to it in the exchange
offer. |
|
|
|
Record Date |
|
We mailed this prospectus and the related exchange offer
documents to registered holders of Notes on May 10, 2007. |
|
|
|
Expiration Date |
|
The exchange offer will expire at 5:00 p.m., New York City
time, June 12, 2007, unless we decide to extend the
expiration date. |
|
|
|
Conditions to the Exchange Offer |
|
The exchange offer is not subject to any condition other than
that the exchange offer not violate applicable law or any
applicable interpretation of the staff of the SEC. |
|
Procedures for Tendering Outstanding Notes
|
|
If you wish to tender your Notes for exchange in this exchange
offer, you must transmit to the exchange agent on or before the
expiration date either: |
|
|
|
an original or a facsimile of a properly completed
and duly executed copy of the letter of transmittal, which
accompanies this prospectus, together with your Notes and any
other documentation required by the letter of transmittal, at
the address provided on the cover page of the letter of
transmittal; or
|
|
|
|
if the Notes you own are held of record by The
Depository Trust Company, or DTC, in book-entry form
and you are making delivery by book-entry transfer, a
computer-generated message transmitted by means of the Automated
Tender Offer Program System of DTC, or ATOP, in
which you acknowledge and agree to be bound by the terms of the
letter of transmittal and which, when received by the exchange
agent, forms a part of a confirmation of book-entry transfer. As
part of the book-entry transfer, DTC will facilitate the
exchange of your Notes and update your account to reflect the
issuance of the Exchange Notes to you. ATOP allows you to
electronically transmit your acceptance of the exchange offer to
DTC instead of physically completing and delivering a letter of
transmittal to the exchange agent.
|
|
|
|
In addition, you must deliver to the exchange agent on or before
the expiration date: |
|
|
|
a timely confirmation of book-entry transfer of your
Notes into the account of the Notes exchange agent at DTC if you
are effecting delivery of book-entry transfer, or
|
|
|
|
if necessary, the documents required for compliance
with the guaranteed delivery procedures.
|
|
Special Procedures for Beneficial Owners
|
|
If you are the beneficial owner of book-entry interests and your
name does not appear on a security position listing of DTC as
the holder of the book-entry interests or if you are a
beneficial owner of Notes that are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee
and you wish to tender the book-entry interest or Notes in the
exchange offer, you |
6
|
|
|
|
|
should contact the person in whose name your book-entry
interests or Notes are registered promptly and instruct that
person to tender on your behalf. |
|
|
|
Withdrawal Rights |
|
You may withdraw the tender of your Notes at any time prior to
5:00 p.m., New York City time on June 12, 2007. |
|
|
|
Federal Income Tax Considerations |
|
The exchange of Notes will not be a taxable event for
United States federal income tax purposes. |
|
Appraisal and Dissenters Rights |
|
Holders of Notes do not have any appraisal or dissenters
rights in connection with the exchange offer. |
|
Exchange Agent |
|
Branch Banking & Trust Company is serving as the
exchange agent in connection with the exchange offer. |
The
Exchange Notes
The form and terms of the Exchange Notes are the same as the
form and terms of the Notes, except that the Exchange Notes will
be registered under the Securities Act. As a result, the
Exchange Notes will not bear legends restricting their transfer
and the registration rights relating to the Notes will not apply
to the Exchange Notes. The Exchange Notes represent the same
debt as the Notes. Both the Notes and the Exchange Notes are
governed by the same indenture.
The following is not intended to be complete. You should read
the full text and more specific details contained elsewhere in
this prospectus. For a more detailed description of the Exchange
Notes, see Description of the Exchange Notes.
|
|
|
Issuer |
|
Hanesbrands Inc. |
|
Securities Offered |
|
$500.0 million Floating Rate Senior Notes due 2014,
Series B |
|
Maturity Date |
|
December 15, 2014. |
|
Interest |
|
The Exchange Notes will bear interest at an annual rate equal to
LIBOR plus 3.375%, payable semi-annually in arrears. |
|
Optional Redemption |
|
We may redeem any of the Exchange Notes beginning on
December 15, 2008 at the redemption prices listed under
Description of the Exchange Notes Optional
Redemption, plus accrued interest. |
|
|
|
On or prior to December 15, 2008, we may redeem up to 35%
of the Exchange Notes at a redemption price described in this
prospectus, plus accrued interest, using the net cash proceeds
from sales of certain types of capital stock as described under
Description of the Exchange Notes Optional
Redemption. |
|
|
|
We may also redeem any of the Exchange Notes at any time prior
to December 15, 2008 in cash at the redemption prices
described in this prospectus plus accrued interest to the date
of redemption and a make-whole premium as described under
Description of the Exchange Notes Optional
Redemption. |
|
Change of Control and Asset Sales |
|
Upon the occurrence of certain change of control events
described under Description of the Exchange
Notes Repurchase of Exchange Notes Upon a
Change of Control, you may require us to repurchase some
or all of your Exchange Notes at 101% of their |
7
|
|
|
|
|
principal amount plus accrued and unpaid interest to the date of
repurchase. |
|
|
|
In addition, to the extent we or a restricted subsidiary receive
proceeds from the sale of certain assets and do not apply the
proceeds of such asset sale in the manner set forth in the
indenture governing the Exchange Notes within twelve months of
receipt of such proceeds, we will be required to make an offer
to purchase an aggregate amount of the Exchange Notes equal to
the amount of such unapplied proceeds. See Description of
the Exchange Notes Covenants Limitation
on Asset Sales. |
|
Guarantees |
|
Substantially all of our existing and future domestic restricted
subsidiaries (other than immaterial subsidiaries) will fully and
unconditionally guarantee the Exchange Notes on a senior
unsecured basis. We own 100% of the equity interests of each of
our subsidiaries that will guarantee the Exchange Notes as of
the closing of the exchange offer. |
|
Ranking |
|
The Exchange Notes and the subsidiary guarantees will be
unsecured senior obligations and will rank: |
|
|
|
senior in right of payment to all of our and our
subsidiary guarantors existing and future senior
subordinated and subordinated indebtedness;
|
|
|
|
equally in right of payment with any of our and our
subsidiary guarantors existing and future senior unsecured
indebtedness;
|
|
|
|
effectively junior in right of payment to all our
and our subsidiary guarantors secured indebtedness,
including any indebtedness under our senior secured credit
facility, to the extent of the value of the assets securing such
indebtedness; and
|
|
|
|
structurally junior to all of the obligations,
including trade payables, of any subsidiaries that do not
guarantee the Exchange Notes.
|
|
Certain Covenants |
|
The indenture under which the Notes were issued will govern the
Exchange Notes. The indenture contains certain covenants that
limit our ability and the ability of our restricted subsidiaries
to: |
|
|
|
incur additional debt or issue preferred stock;
|
|
|
|
create liens;
|
|
|
|
create restrictions on our subsidiaries
ability to make payments to Hanesbrands Inc.;
|
|
|
|
pay dividends and make other distributions in
respect of our capital stock;
|
|
|
|
redeem or repurchase our capital stock or prepay
subordinated indebtedness;
|
|
|
|
make certain investments or certain other restricted
payments;
|
|
|
|
guarantee indebtedness;
|
|
|
|
designate unrestricted subsidiaries;
|
8
|
|
|
|
|
sell certain kinds of assets;
|
|
|
|
enter into certain types of transactions with
affiliates;
|
|
|
|
engage in certain business activities; or
|
|
|
|
effect mergers or consolidations.
|
|
|
|
At any time after the Exchange Notes are rated Baa3 or better by
Moodys Investors Service, Inc. and BBB- or better by
Standard and Poors Ratings Group and no default has
occurred and is continuing, the foregoing covenants will
thereafter cease to be in effect with the exception of covenants
that contain limitations on liens and on, among other things,
certain consolidations and mergers. If the rating by either
rating agency should subsequently decline to below Baa3 or BBB-,
respectively, the suspended covenants will be reinstated as of
and from the date of such rating decline. |
|
|
|
These covenants are subject to a number of important exceptions
and qualifications. See Description of the Exchange
Notes. |
Risk
Factors
Before making an investment decision, you should carefully
consider all of the information in this prospectus, including
the discussion under the caption Risk Factors
beginning on page 11, for a discussion of risks and
uncertainties relating to us, our subsidiaries, our business and
your participation in the exchange offer.
9
Summary
Financial and Other Data
The following table presents our summary historical financial
data. The statements of income data for each of the fiscal years
in the three fiscal years ended July 1, 2006 and the
six-month period ended December 30, 2006, and the balance
sheet data as of December 30, 2006, July 1, 2006 and
July 2, 2005 have been derived from our audited Combined
and Consolidated Financial Statements included elsewhere in this
prospectus.
Our historical financial data is not necessarily indicative of
our future performance or what our financial position and
results of operations would have been if we had operated as a
separate, stand-alone entity during all of the periods shown.
The data should be read in conjunction with our historical
financial statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
Statements of Income
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
Cost of sales
|
|
|
1,530,119
|
|
|
|
2,987,500
|
|
|
|
3,223,571
|
|
|
|
3,092,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
720,354
|
|
|
|
1,485,332
|
|
|
|
1,460,112
|
|
|
|
1,540,715
|
|
Selling, general and
administrative expenses
|
|
|
547,469
|
|
|
|
1,051,833
|
|
|
|
1,053,654
|
|
|
|
1,087,964
|
|
Gain on curtailment of
postretirement benefits
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
11,278
|
|
|
|
(101
|
)
|
|
|
46,978
|
|
|
|
27,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
190,074
|
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
425,285
|
|
Other expenses
|
|
|
7,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
70,753
|
|
|
|
17,280
|
|
|
|
13,964
|
|
|
|
24,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
111,920
|
|
|
|
416,320
|
|
|
|
345,516
|
|
|
|
400,872
|
|
Income tax expense (benefit)
|
|
|
37,781
|
|
|
|
93,827
|
|
|
|
127,007
|
|
|
|
(48,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic(1)
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
Net income per share diluted(2)
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
Weighted average shares basic(1)
|
|
|
96,309
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
Weighted average shares diluted(2)
|
|
|
96,620
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
155,973
|
|
|
$
|
298,252
|
|
|
$
|
1,080,799
|
|
|
$
|
674,154
|
|
Total assets
|
|
|
3,435,620
|
|
|
|
4,903,886
|
|
|
|
4,257,307
|
|
|
|
4,402,758
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,484,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
271,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
Total noncurrent liabilities
|
|
|
2,755,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
Total stockholders or parent
companies equity
|
|
|
69,271
|
|
|
|
3,229,134
|
|
|
|
2,602,362
|
|
|
|
2,797,370
|
|
|
|
|
(1) |
|
Prior to the spin off on September 5, 2006, the number of
shares used to compute basic and diluted earnings per share is
96,306,232, which was the number of shares of our common stock
outstanding on September 5, 2006. |
|
(2) |
|
Subsequent to the spin off on September 5, 2006, the number
of shares used to compute diluted earnings per share is based on
the number of shares of our common outstanding, plus the
potential dilution that could occur if restricted stock units
and options granted under the equity-based compensation
arrangements were exercised or converted into common stock. |
10
RISK
FACTORS
You should carefully consider the risks described below
before deciding whether to participate in the exchange offer.
The risks described below are not the only ones facing our
company. Additional risks and uncertainties not presently known
to us or that we currently believe to be immaterial may also
materially and adversely affect our business, financial
condition or results of operations. Any of the following risks
could materially and adversely affect our business, results of
operations or financial condition. In such case, you may lose
all or part of your original investment.
Risks
Related to Our Business
A
significant portion of our textile manufacturing operations are
located in higher-cost locations, placing us at a product cost
disadvantage to our competitors who have a higher percentage of
their manufacturing operations in lower-cost, offshore
locations.
Though there has been a general industry-wide migration of
manufacturing operations to lower-cost locations, such as
Central America, the Caribbean Basin and Asia, a significant
portion of our textile manufacturing operations are still
located in higher-cost locations, such as the United States. In
addition, our competitors generally source or produce a greater
portion of their textiles from regions with lower costs than us,
placing us at a cost disadvantage. Our competitors are able to
exert pricing pressure on us by using their manufacturing cost
savings to reduce prices of their products, while maintaining
higher margins than us. To remain competitive, we must, among
other things, react to these pricing pressures by lowering our
prices from time to time. We will continue to experience pricing
pressure and remain at a cost disadvantage to our competitors
unless we are able to successfully migrate a greater portion of
our textile manufacturing operations to lower-cost locations.
However, we cannot guarantee that our migration plans, as
executed, will relieve these pricing pressures and our cost
disadvantage.
We are
in the process of relocating a significant portion of our
textile manufacturing operations to overseas locations and this
process involves significant costs and the risk of operational
interruption.
We currently are relocating and expect to continue to relocate a
significant portion of our textile manufacturing operations to
locations in Central America, the Caribbean Basin and Asia. The
process of relocating significant portions of our textile
manufacturing and production operations has resulted in and will
continue to result in significant costs. As further plans are
developed and approved by management and our board of directors,
we expect to recognize additional restructuring costs to
eliminate duplicative functions within the organization and
transition a significant portion of our manufacturing capacity
to lower-cost locations. As a result of these efforts, we expect
to incur approximately $250 million in restructuring and
related charges over the three year period following the spin
off from Sara Lee of which approximately half is expected to be
noncash. This process also may result in operational
interruptions, which may have an adverse effect on our business,
results of operations and financial condition.
The
integration of our information technology systems is complex,
and any delay or problem with this integration may cause serious
disruption or harm to our business.
As part of our efforts to consolidate our operations, we are in
the process of integrating currently unrelated information
technology systems across our company which has resulted in
operational inefficiencies and in some cases increased our
costs. This process involves the replacement of eight
independent systems environments running on different technology
platforms with a unified enterprise system that will integrate
all of our departments and functions onto common software that
runs off a single database. We are subject to the risk that we
will not be able to absorb the level of systems change, commit
the necessary resources or focus the management attention
necessary for the implementation to succeed. Many key strategic
initiatives of major business functions, such as our supply
chain and our finance operations, depend on advanced
capabilities enabled by the new systems and if we fail to
properly execute or if we miss critical deadlines in the
implementation of this initiative, we could experience serious
disruption and harm to our business.
11
We
operate in a highly competitive and rapidly evolving market, and
our market share and results of operations could be adversely
affected if we fail to compete effectively in the
future.
The apparel essentials market is highly competitive and evolving
rapidly. Competition is generally based upon price, brand name
recognition, product quality, selection, service and purchasing
convenience. Our businesses face competition today from other
large corporations and foreign manufacturers. These competitors
include Berskhire Hathaway Inc. through its subsidiary Fruit of
the Loom, Inc., Warnaco Group Inc. and Maidenform Brands, Inc.
in our innerwear business segment and Gildan Activewear, Inc.
and Berkshire Hathaway Inc. through its subsidiaries Russell
Corporation and Fruit of the Loom, Inc. in our outerwear
business segment. We also compete with many small companies
across all of our business segments. Additionally, department
stores and other retailers, including many of our customers,
market and sell apparel essentials products under private labels
that compete directly with our brands. These customers may buy
goods that are manufactured by others, which represents a lost
business opportunity for us, or they may sell private label
products manufactured by us, which have significantly lower
gross margins than our branded products. We also face intense
competition from specialty stores that sell private label
apparel not manufactured by us, such as Victorias Secret,
Old Navy and The Gap. Increased competition may result in a loss
of or a reduction in shelf space and promotional support and
reduced prices, in each case decreasing our cash flows,
operating margins and profitability. Our ability to remain
competitive in the areas of price, quality, brand recognition,
research and product development, manufacturing and distribution
will, in large part, determine our future success. If we fail to
compete successfully, our market share, results of operations
and financial condition will be materially and adversely
affected.
If we
fail to manage our inventory effectively, we may be required to
establish additional inventory reserves or we may not carry
enough inventory to meet customer demands, causing us to suffer
lower margins or losses.
We are faced with the constant challenge of balancing our
inventory with our ability to meet marketplace needs. Excess
inventory reserves can result from the complexity of our supply
chain, a long manufacturing process and the seasonal nature of
certain products. As a result, we are subject to high levels of
obsolescence and excess stock. Based on discussions with our
customers and internally generated projections, we produce,
purchase
and/or store
raw material and finished goods inventory to meet our expected
demand for delivery. However, we sell a large number of our
products to a small number of customers, and these customers
generally are not required by contract to purchase our goods.
If, after producing and storing inventory in anticipation of
deliveries, demand is lower than expected, we may have to hold
inventory for extended periods or sell excess inventory at
reduced prices, in some cases below our cost. There are inherent
uncertainties related to the recoverability of inventory, and it
is possible that market factors and other conditions underlying
the valuation of inventory may change in the future and result
in further reserve requirements. Excess inventory can reduce
gross margins or result in operating losses, lowered plant and
equipment utilization and lowered fixed operating cost
absorption, all of which could have a material adverse effect on
our business, results of operations or financial condition. For
example, while our total inventory reserves were approximately
$99 million at December 30, 2006, $88 million at
July 1, 2006 and $89 million at July 3, 2004, our
total inventory reserves were approximately $116 million at
July 2, 2005, due in part to lower demand for some of our
products than forecasted.
Conversely, we also are exposed to lost business opportunities
if we underestimate market demand and produce too little
inventory for any particular period. Because sales of our
products are generally not made under contract, if we do not
carry enough inventory to satisfy our customers demands
for our products within an acceptable time frame, they may seek
to fulfill their demands from one or several of our competitors
and may reduce the amount of business they do with us. Any such
action could have a material adverse effect on our business,
results of operations and financial condition.
12
Sales
of and demand for our products may decrease if we fail to keep
pace with evolving consumer preferences and trends, which could
have an adverse effect on net sales and
profitability.
Our success depends on our ability to anticipate and respond
effectively to evolving consumer preferences and trends and to
translate these preferences and trends into marketable product
offerings. If we are unable to successfully anticipate, identify
or react to changing styles or trends or misjudge the market for
our products, our sales may be lower than expected and we may be
faced with a significant amount of unsold finished goods
inventory. In response, we may be forced to increase our
marketing promotions, provide markdown allowances to our
customers or liquidate excess merchandise, any of which could
have a material adverse effect on our net sales and
profitability. Our brand image may also suffer if customers
believe that we are no longer able to offer innovative products,
respond to consumer preferences or maintain the quality of our
products.
We
rely on a relatively small number of customers for a significant
portion of our sales, and the loss of or material reduction in
sales to any of our top customers would have a material adverse
effect on our business, results of operations and financial
condition.
During the six months ended December 30, 2006, our top ten
customers accounted for 62% of our net sales and our top
customer, Wal-Mart, accounted for 28% of our net sales. We
expect that these customers will continue to represent a
significant portion of our net sales in the future. In addition,
our top ten customers are the largest market participants in our
primary distribution channels across all of our product lines.
Any loss of or material reduction in sales to any of our top ten
customers, especially Wal-Mart Stores, Inc.
(Wal-Mart),
would be difficult to recapture, and would have a material
adverse effect on our business, results of operations and
financial condition.
We
generally do not sell our products under contracts, and, as a
result, our customers are generally not contractually obligated
to purchase our products, which causes some uncertainty as to
future sales and inventory levels.
We generally do not enter into purchase agreements that obligate
our customers to purchase our products, and as a result, most of
our sales are made on a purchase order basis. For example, we
have no agreements with Wal-Mart that obligate Wal-Mart to
purchase our products. If any of our customers experiences a
significant downturn in its business, or fails to remain
committed to our products or brands, the customer is generally
under no contractual obligation to purchase our products and,
consequently, may reduce or discontinue purchases from us. In
the past, such actions have resulted in a decrease in sales and
an increase in our inventory and have had an adverse effect on
our business, results of operations and financial condition. If
such actions occur again in the future, our business, results of
operations and financial condition will likely be similarly
affected.
Further
consolidation among our customer base and continued growth of
our existing customers could result in increased pricing
pressure, reduced floor space for our products and other changes
that could be harmful to our business.
In recent years there has been a growing trend toward retailer
consolidation. As a result of this consolidation, the number of
retailers to which we sell our products continues to decline
and, as such, larger retailers now are able to exercise greater
negotiating power when purchasing our products. Continued
consolidation in the retail industry could result in further
price and other competition that may damage our business.
Additionally, as our customers grow larger, they increasingly
may require us to provide them with some of our products on an
exclusive basis, which could cause an increase in the number of
stock keeping units, or SKUs, we must carry and,
consequently, increase our inventory levels and working capital
requirements.
Moreover, as our customers consolidate and grow larger they may
increasingly seek markdown allowances, incentives and other
forms of economic support which reduce our gross margins and
affect our profitability. Our financial performance is
negatively affected by these pricing pressures when we are
forced to reduce our prices without being able to
correspondingly reduce our production costs.
13
Our
customers generally purchase our products on credit, and as a
result, our results of operations and financial condition may be
adversely affected if our customers experience financial
difficulties.
During the past several years, various retailers, including some
of our largest customers, have experienced significant
difficulties, including restructurings, bankruptcies and
liquidations. This could adversely affect us because our
customers generally pay us after goods are delivered. Adverse
changes in our customers financial position could cause us
to limit or discontinue business with that customer, require us
to assume more credit risk relating to that customers
future purchases or limit our ability to collect accounts
receivable relating to previous purchases by that customer, all
of which could have a material adverse effect on our business,
results of operations and financial condition.
International
trade regulations may increase our costs or limit the amount of
products that we can import from suppliers in a particular
country, which could have an adverse effect on our
business.
Because a significant amount of our manufacturing and production
operations are in, or our products are sourced from, overseas
locations, we are subject to international trade regulations.
The international trade regulations to which we are subject or
may become subject include tariffs, safeguards or quotas. These
regulations could limit the countries from which we produce or
source our products or significantly increase the cost of
operating in or obtaining materials originating from certain
countries. Restrictions imposed by international trade
regulations can have a particular impact on our business when,
after we have moved our operations to a particular location, new
unfavorable regulations are enacted in that area or favorable
regulations currently in effect are changed. The countries in
which our products are manufactured or into which they are
imported may from time to time impose additional new
regulations, or modify existing regulations, including:
|
|
|
|
|
additional duties, taxes, tariffs and other charges on imports,
including retaliatory duties or other trade sanctions, which may
or may not be based on World Trade Organization, or
WTO, rules, and which would increase the cost of
products purchased from suppliers in such countries;
|
|
|
|
quantitative limits that may limit the quantity of goods which
may be imported into the United States from a particular
country, including the imposition of further
safeguard mechanisms by the U.S. government or
governments in other jurisdictions, limiting our ability to
import goods from particular countries, such as China;
|
|
|
|
changes in the classification of products that could result in
higher duty rates than we have historically paid;
|
|
|
|
modification of the trading status of certain countries;
|
|
|
|
requirements as to where products are manufactured;
|
|
|
|
creation of export licensing requirements, imposition of
restrictions on export quantities or specification of minimum
export pricing; or
|
|
|
|
creation of other restrictions on imports.
|
Adverse international trade regulations, including those listed
above, would have a material adverse effect on our business,
results of operations and financial condition.
Significant
fluctuations and volatility in the price of cotton and other raw
materials we purchase may have a material adverse effect on our
business, results of operations and financial
condition.
Cotton is the primary raw material used in the manufacture of
many of our products. Our costs for cotton yarn and cotton-based
textiles vary based upon the fluctuating and often volatile cost
of cotton, which is affected by weather, consumer demand,
speculation on the commodities market, the relative valuations
and fluctuations of the currencies of producer versus consumer
countries and other factors that are generally unpredictable and
beyond our control. In addition, fluctuations in crude oil or
petroleum prices may also influence the prices of related items
used in our business, such as chemicals, dyestuffs, polyester
yarn and foam.
14
We are not always successful in our efforts to protect our
business from the volatility of the market price of cotton
through short-term supply agreements and hedges, and our
business can be adversely affected by dramatic movements in
cotton prices. For example, we estimate that, excluding the
impact of futures contracts, a change of $0.01 per pound in
cotton prices would affect our annual raw material costs by
$3.3 million, at current levels of production. The ultimate
effect of this change on our earnings cannot be quantified, as
the effect of movements in cotton prices on industry selling
prices are uncertain, but any dramatic increase in the price of
cotton would have a material adverse effect on our business,
results of operations and financial condition.
We
incurred substantial indebtedness in connection with the spin
off, which subjects us to various restrictions and could
decrease our profitability and otherwise adversely affect our
business.
We incurred substantial indebtedness of $2.6 billion in
connection with our spin off from Sara Lee as described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources. In December 2006, we repaid
$500 million of that indebtedness with the proceeds of the
offering of the Notes. We are subject to significant financial
and operating restrictions contained in the senior secured
credit facility we entered into on September 5, 2006 (the
Senior Secured Credit Facility) and the senior
secured second lien credit facility we entered into on
September 5, 2006 (the Second Lien Credit
Facility and, together with the Senior Secured Credit
Facility, the Credit Facilities) and the indenture
governing the Notes. These restrictions affect, and in some
cases significantly limit or prohibit, among other things, our
ability to:
|
|
|
|
|
borrow funds;
|
|
|
|
pay dividends or make other distributions;
|
|
|
|
make investments;
|
|
|
|
engage in transactions with affiliates; or
|
|
|
|
create liens on our assets.
|
In addition, the Credit Facilities require us to maintain
financial ratios. If we fail to comply with the covenant
restrictions contained in the Credit Facilities, that failure
could result in a default that accelerates the maturity of the
indebtedness under such facilities.
Our substantial leverage also could put us at a significant
competitive disadvantage compared to our competitors which are
less leveraged. These competitors could have greater financial
flexibility to pursue strategic acquisitions, secure additional
financing for their operations by incurring additional debt,
expend capital to expand their manufacturing and production
operations to lower-cost areas and apply pricing pressure on us.
In addition, because many of our customers rely on us to fulfill
a substantial portion of their apparel essentials demand, any
concern these customers may have regarding our financial
condition may cause them to reduce the amount of products they
purchase from us. Our substantial leverage could also impede our
ability to withstand downturns in our industry or the economy in
general.
As a
result of our substantial indebtedness, we may not have
sufficient funding for our operations and capital
requirements.
We paid $2.4 billion of the proceeds of the borrowings we
incurred in connection with the spin off to Sara Lee and, as a
result, those proceeds are not available for our business needs,
such as funding working capital or the expansion of our
operations. In addition, the restrictions contained in the
Credit Facilities and in the indenture governing the Notes
restrict our ability to obtain additional capital in the future
to:
|
|
|
|
|
fund capital expenditures or acquisitions;
|
|
|
|
meet our debt payment obligations and capital commitments;
|
|
|
|
fund any operating losses or future development of our business
affiliates;
|
15
|
|
|
|
|
obtain lower borrowing costs that are available from secured
lenders or engage in advantageous transactions that monetize our
assets; or
|
|
|
|
conduct other necessary or prudent corporate activities.
|
We may need to incur additional debt or issue equity in order to
fund working capital and capital expenditures or to make
acquisitions and other investments. We cannot assure you that
debt or equity financing will be available to us on acceptable
terms or at all. If we are not able to obtain sufficient
financing, we may be unable to maintain or expand our business.
It may be more expensive for us to raise funds through the
issuance of additional debt than it was while we were part of
Sara Lee.
If we raise funds through the issuance of debt or equity, any
debt securities or preferred stock issued will have rights,
preferences and privileges senior to those of holders of our
common stock in the event of a liquidation, and the terms of the
debt securities may impose restrictions on our operations. If we
raise funds through the issuance of equity, the issuance would
dilute the ownership interest of our stockholders.
To
service our substantial debt obligations, we may need to
increase the portion of the income of our foreign subsidiaries
that is expected to be remitted to the United States, which
could significantly increase our income tax
expense.
We pay U.S. federal income taxes on that portion of the
income of our foreign subsidiaries that is expected to be
remitted to the United States and be taxable. The amount of the
income of our foreign subsidiaries we remit to the United States
may significantly impact our U.S. federal income tax rate.
In order to service our substantial debt obligations, we may
need to increase the portion of the income of our foreign
subsidiaries that we expect to remit to the United States, which
may significantly increase our income tax expense. Consequently,
we believe that our tax rate in future periods is likely to be
higher, on average, than our historical income tax rates in
periods prior to the spin off on September 5, 2006.
If we
fail to meet our payment or other obligations under some of the
Credit Facilities, the lenders could foreclose on, and acquire
control of, substantially all of our assets.
In connection with our incurrence of indebtedness under the
Credit Facilities, the lenders under those facilities have
received a pledge of substantially all of our existing and
future direct and indirect subsidiaries, with certain customary
or
agreed-upon
exceptions for foreign subsidiaries and certain other
subsidiaries. Additionally, these lenders generally have a lien
on substantially all of our assets and the assets of our
subsidiaries, with certain exceptions. As a result of these
pledges and liens, if we fail to meet our payment or other
obligations under the Senior Secured Credit Facility or the
Second Lien Credit Facility, the lenders under those facilities
will be entitled to foreclose on substantially all of our assets
and, at their option, liquidate these assets.
Our
supply chain relies on an extensive network of foreign
operations and any disruption to or adverse impact on such
operations may adversely affect our business, results of
operations and financial condition.
We have an extensive global supply chain in which a significant
portion of our products are manufactured in or sourced from
locations in Central America, the Caribbean Basin, Mexico and
Asia. Potential events that may disrupt our foreign operations
include:
|
|
|
|
|
political instability and acts of war or terrorism;
|
|
|
|
disruptions in shipping and freight forwarding services;
|
|
|
|
increases in oil prices, which would increase the cost of
shipping;
|
|
|
|
interruptions in the availability of basic services and
infrastructure, including power shortages;
|
|
|
|
fluctuations in foreign currency exchange rates resulting in
uncertainty as to future asset and liability values, cost of
goods and results of operations that are denominated in foreign
currencies;
|
16
|
|
|
|
|
extraordinary weather conditions or natural disasters, such as
hurricanes, earthquakes or tsunamis; and
|
|
|
|
the occurrence of an epidemic, the spread of which may impact
our ability to obtain products on a timely basis.
|
Disruptions to our foreign operations have an adverse impact on
our supply chain that can result in production and sourcing
interruptions, increases in our cost of sales and delayed
deliveries of our products to our customers, all of which can
have an adverse affect on our business, results of operations
and financial condition.
The
loss of one or more of our suppliers of finished goods or raw
materials may interrupt our supplies and materially harm our
business.
We purchase all of the raw materials used in our products and
approximately 25% of the apparel designed by us from a limited
number of third-party suppliers and manufacturers. Our ability
to meet our customers needs depends on our ability to
maintain an uninterrupted supply of raw materials and finished
products from our third-party suppliers and manufacturers. Our
business, financial condition or results of operations could be
adversely affected if any of our principal third-party suppliers
or manufacturers experience production problems, lack of
capacity or transportation disruptions. The magnitude of this
risk depends upon the timing of the changes, the materials or
products that the third-party manufacturers provide and the
volume of production.
Our dependence on third parties for raw materials and finished
products subjects us to the risk of supplier failure and
customer dissatisfaction with the quality of our products.
Quality failures by our third-party manufacturers or changes in
their financial or business condition that affect their
production could disrupt our ability to supply quality products
to our customers and thereby materially harm our business.
We may
suffer negative publicity if we or our third-party manufacturers
violate labor laws or engage in practices that are viewed as
unethical or illegal, which could cause a loss of
business.
We cannot fully control the business and labor practices of our
third-party manufacturers, the majority of whom are located in
Central America, the Caribbean Basin and Asia. If one of our own
manufacturing operations or one of our third-party manufacturers
violates or is accused of violating local or international labor
laws or other applicable regulations, or engages in labor or
other practices that would be viewed in any market in which our
products are sold as unethical, we could suffer negative
publicity which could tarnish our brands image or result
in a loss of sales. In addition, if such negative publicity
affected one of our customers, it could result in a loss of
business for us.
We had
approximately 49,000 employees worldwide as of December 30,
2006, and our business operations and financial performance
could be adversely affected by changes in our relationship with
our employees or changes to U.S. or foreign employment
regulations.
We had approximately 49,000 employees worldwide as of
December 30, 2006. This means we have a significant
exposure to changes in domestic and foreign laws governing our
relationships with our employees, including wage and hour laws
and regulations, fair labor standards, minimum wage
requirements, overtime pay, unemployment tax rates,
workers compensation rates, citizenship requirements and
payroll taxes, which likely would have a direct impact on our
operating costs. Approximately 35,700 of those employees were
outside of the United States. A significant increase in minimum
wage or overtime rates in countries where we have employees
could have a significant impact on our operating costs and may
require that we relocate those operations or take other steps to
mitigate such increases, all of which may cause us to incur
additional costs, expend resources responding to such increases
and lower our margins.
In addition, some of our employees are members of labor
organizations or are covered by collective bargaining
agreements. If there were a significant increase in the number
of our employees who are members of labor organizations or
become parties to collective bargaining agreements, we would
become vulnerable to
17
a strike, work stoppage or other labor action by these employees
that could have an adverse effect on our business.
Due to
the extensive nature of our foreign operations, fluctuations in
foreign currency exchange rates could negatively impact our
results of operations.
We sell a majority of our products in transactions denominated
in U.S. dollars; however, we purchase many of our products,
pay a portion of our wages and make other payments in our supply
chain in foreign currencies. As a result, if the
U.S. dollar were to weaken against any of these currencies,
our cost of sales could increase substantially. We are also
exposed to gains and losses resulting from the effect that
fluctuations in foreign currency exchange rates have on the
reported results in our Combined and Consolidated Financial
Statements due to the translation of operating results and
financial position of our foreign subsidiaries. We use foreign
exchange forward and option contracts to hedge material exposure
to adverse changes in foreign exchange rates. In addition,
currency fluctuations can impact the price of cotton, the
primary raw material we use in our business.
We
have significant unfunded employee benefit liabilities; if
assumptions underlying our calculation of these liabilities
prove incorrect, the amount of these liabilities could increase
or we could be required to make contributions to these plans in
excess of our current expectations, both of which could have a
negative impact on our cash flows, liquidity and results of
operations.
We assumed significant unfunded employee benefit liabilities of
$299 million as of September 5, 2006 for pension,
postretirement and other retirement benefit qualified and
nonqualified plans from Sara Lee in connection with the spin
off. Included in these unfunded liabilities are pension
obligations that have not been reflected in our historical
financial statements for periods prior to the six months ended
December 30, 2006 because these obligations have
historically been obligations of Sara Lee. The pension
obligations we assumed were $225 million more than the
corresponding pension assets we acquired, and as a result our
pension plans are underfunded. As a result of provisions of the
Pension Protection Act of 2006, we may be required, commencing
with plan years beginning after 2007, to make larger
contributions to our pension plans than Sara Lee made with
respect to these plans in past years. In addition, we could be
required to make contributions to the pension plans in excess of
our current expectations if financial conditions change or if
the assumptions we have used to calculate our pension costs and
obligations prove to be inaccurate. A significant increase in
our funding obligations could have a negative impact on our cash
flows, liquidity and results of operations.
We are
prohibited from selling our Wonderbra and Playtex intimate
apparel products in the EU, as well as certain other countries
in Europe and South Africa, and therefore are unable to take
advantage of business opportunities that may arise in such
countries.
In February 2006, Sara Lee sold its European branded apparel
business to Sun Capital. In connection with the sale, Sun
Capital received an exclusive, perpetual, royalty-free license
to sell and distribute apparel products under the Wonderbra
and Playtex trademarks in the member states of the
EU, as well as Russia, South Africa, Switzerland and certain
other nations in Europe. Due to the exclusive license, we are
not permitted to sell Wonderbra and Playtex
branded products in these nations and Sun Capital is not
permitted to sell Wonderbra and Playtex branded
products outside of these nations. Consequently, we will not be
able to take advantage of business opportunities that may arise
relating to the sale of Wonderbra and Playtex
products in these nations. For more information on these
sales restrictions see Business Intellectual
Property.
The
success of our business is tied to the strength and reputation
of our brands, including brands that we license to other
parties. If other parties take actions that weaken, harm the
reputation of or cause confusion with our brands, our business,
and consequently our sales and results of operations, may be
adversely affected.
We license some of our important trademarks to third parties.
For example, we license Champion to third parties
for athletic-oriented accessories. Although we make concerted
efforts to protect our brands through quality control mechanisms
and contractual obligations imposed on our licensees, there is a
risk that
18
some licensees may not be in full compliance with those
mechanisms and obligations. In that event, or if a licensee
engages in behavior with respect to the licensed marks that
would cause us reputational harm, we could experience a
significant downturn in that brands business, adversely
affecting our sales and results of operations. Similarly, any
misuse of the Wonderbra and Playtex brands by Sun
Capital could result in negative publicity and a loss of sales
for our products under these brands, any of which may have a
material adverse effect on our business, results of operations
or financial condition.
We
design, manufacture, source and sell products under trademarks
that are licensed from third parties. If any licensor takes
actions related to their trademarks that would cause their
brands or our company reputational harm, our business may be
adversely affected.
We design, manufacture, source and sell a number of our products
under trademarks that are licensed from third parties such as
our Polo Ralph Lauren mens underwear. Because we do
not control the brands licensed to us, our licensors could make
changes to their brands or business models that could result in
a significant downturn in a brands business, adversely
affecting our sales and results of operations. If any licensor
engages in behavior with respect to the licensed marks that
would cause us reputational harm, or if any of the brands
licensed to us violates the trademark rights of another or are
deemed to be invalid or unenforceable, we could experience a
significant downturn in that brands business, adversely
affecting our sales and results of operations, and we may be
required to expend significant amounts on public relations,
advertising and, possibly, legal fees.
Risks
Related to the Exchange Offer
Because
there is no public market for the Exchange Notes, you may not be
able to resell your Exchange Notes.
The Exchange Notes will be registered under the Securities Act,
but will constitute a new issue of securities with no
established trading market, and there can be no assurance as to:
|
|
|
|
|
the liquidity of any trading market that may develop;
|
|
|
|
the ability of holders to sell their Exchange Notes; or
|
|
|
|
the price at which the holders would be able to sell their
Exchange Notes.
|
If a trading market were to develop, the Exchange Notes might
trade at higher or lower prices than their principal amount or
purchase price, depending on many factors, including prevailing
interest rates, the market for similar securities and our
financial performance. There can be no assurance that an active
trading market will exist for the Exchange Notes or that any
trading market that does develop will be liquid.
In addition, any holder of Notes who tenders in the exchange
offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted
securities, and if so, will be required to comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. For a
description of these requirements, see The Exchange
Offer.
Your
Notes will not be accepted for exchange if you fail to follow
the exchange offer procedures and, as a result, your Notes will
continue to be subject to existing transfer restrictions and you
may not be able to sell your Notes.
We will not accept your Notes for exchange if you do not follow
the exchange offer procedures. We will issue Exchange Notes as
part of this exchange offer only after a timely receipt of your
Notes, a properly completed and duly executed letter of
transmittal and all other required documents. Therefore, if you
want to tender your Notes, please allow sufficient time to
ensure timely delivery. If we do not receive your Notes, letter
of transmittal and other required documents by the expiration
date of the exchange offer, we will not accept your Notes for
exchange. We are under no duty to give notification of defects
or irregularities with respect to the tenders of Notes for
exchange. If there are defects or irregularities with respect to
your tender of Notes, we may not accept your Notes for exchange.
For more information, see The Exchange Offer.
19
If you
do not exchange your Notes, your Notes will continue to be
subject to the existing transfer restrictions and you may not be
able to sell your Notes.
We did not register the Notes, nor do we intend to do so
following the exchange offer. Outstanding Notes that are not
tendered will therefore continue to be subject to the existing
transfer restrictions and may be transferred only in limited
circumstances under the securities laws. If you do not exchange
your Notes in the exchange offer, you will lose your right to
have your Notes registered under the federal securities laws. As
a result, if you hold Notes after the exchange offer, you may
not be able to sell your Notes.
Risks
Related to the Exchange Notes
We may
not be able to generate sufficient cash flows to meet our debt
service obligations.
Our ability to make payments on and to refinance our
indebtedness, including the Exchange Notes, and to fund planned
capital expenditures will depend on our ability to generate cash
from our future operations. This, to a certain extent, is
subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control. See Risks Related to Our
Business.
Our business may not generate sufficient cash flow from
operations, or future borrowings under our senior secured credit
facilities or from other sources may not be available to us in
an amount sufficient, to enable us to repay our indebtedness,
including the Exchange Notes, or to fund our other liquidity
needs, including capital expenditure requirements. We cannot
guarantee that we will be able to obtain enough capital to
service our debt and fund our planned capital expenditures and
business plan. If we complete an acquisition, our debt service
requirements could also increase. For the six months ended
December 30, 2006, our cash flow from operating activities
was $136.1 million and our cash interest expense was
approximately $68.9 million. A substantial portion of our
indebtedness, including all of our indebtedness under the Credit
Facilities, bears interest at floating rates, and therefore if
interest rates increase, our debt service requirements will
increase with respect to any portion of the indebtedness with
respect to which we have not entered into hedging or other
interest rate protection arrangements. For a discussion of
certain hedging arrangements with respect to our floating rate
debt, see Managements Discussion and Analysis of
Results of Operations and Financial Condition
Liquidity and Capital Resources Derivatives.
We may need to refinance or restructure all or a portion of our
indebtedness, including the Exchange Notes, on or before
maturity. We may not be able to refinance any of our
indebtedness, including the Credit Facilities and the Exchange
Notes, on commercially reasonable terms, or at all. If we cannot
service our indebtedness, we may have to take actions such as
selling assets, seeking additional equity investments or
reducing or delaying capital expenditures, strategic
acquisitions, investments and alliances, any of which could have
a material adverse effect on our operations. Additionally, we
may not be able to effect such actions, if necessary, on
commercially reasonable terms, or at all.
The
Exchange Notes will be structurally subordinated in right of
payment to the indebtedness and other liabilities of those of
our existing and future subsidiaries that do not guarantee the
Exchange Notes, and to the indebtedness and other liabilities of
any guarantor whose guarantee of the Exchange Notes is deemed to
be unenforceable.
All of our subsidiaries that are guarantors under the Senior
Secured Credit Facility will guarantee the Exchange Notes.
Certain of our existing
non-U.S. subsidiaries
will not guarantee the Exchange Notes as of the issue date, and
such
non-U.S. subsidiaries
(and certain future
non-U.S. subsidiaries)
will only be required to guarantee the Exchange Notes in the
future under very limited circumstances. In addition, any future
subsidiary that we properly designate as an unrestricted
subsidiary under the indenture will not provide guarantees of
the Exchange Notes. Moreover, for the reasons described below
under Federal and state statutes allow courts,
under specific circumstances, to void guarantees and require
note holders to return payments received from guarantors,
the guarantees that are given by our subsidiaries may be
unenforceable in whole or in part.
Because a portion of our operations are conducted by
subsidiaries that will not guarantee the Exchange Notes, our
cash flow and our ability to service debt, including our and the
guarantors ability to pay the
20
interest on and principal of the Exchange Notes when due, are
dependent to a significant extent on interest payments, cash
dividends and distributions and other transfers of cash from
subsidiaries that will not guarantee the Exchange Notes. In
addition, any payment of interest, dividends, distributions,
loans or advances by subsidiaries that will not guarantee the
Exchange Notes to us and the guarantors, as applicable, could be
subject to taxation or other restrictions on dividends or
repatriation of earnings under applicable local law, monetary
transfer restrictions and foreign currency exchange regulations
in the jurisdiction in which these subsidiaries operate.
Moreover, payments to us and the guarantors by subsidiaries that
will not guarantee the Exchange Notes will be contingent on
these subsidiaries earnings. Our subsidiaries that will
not guarantee the Exchange Notes are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to the Exchange Notes, or to make any
funds available therefore, whether by dividends, loans,
distributions or other payments. Any right that we or the
guarantors have to receive any assets of any subsidiaries that
will not guarantee the Exchange Notes upon the liquidation or
reorganization of those subsidiaries, and the consequent rights
of holders of Exchange Notes to realize proceeds from the sale
of any of those subsidiaries assets, will be effectively
subordinated to the claims of that subsidiarys creditors,
including trade creditors and holders of debt and preferred
stock of that subsidiary. Therefore, if there was a dissolution,
bankruptcy, liquidation or reorganization of any such entity,
the holders of the Exchange Notes would not receive any amounts
with respect to the Exchange Notes from the assets of such
entity until after the payment in full of the claims of
creditors (including preferred stockholders) of such entity.
As of December 30, 2006, the total liabilities of our
consolidated subsidiaries that will not be guarantors of the
Exchange Notes was $121 million, after eliminations, all of
which would have been structurally senior to the Exchange Notes.
For the six months ended December 30, 2006, our
subsidiaries that will not guarantee the Exchange Notes
represented approximately 5% of net sales after eliminations.
These non-guarantor subsidiaries held assets of
$566 million, representing 17% of our combined total assets
after eliminations as of December 30, 2006.
Because
the Exchange Notes are unsecured, your right to enforce remedies
is limited by the rights of holders of secured
debt.
Our obligations under the Exchange Notes and the
guarantors obligations under the guarantees will not be
secured by any of our assets, while our obligations and the
obligations of the guarantors under the Credit Facilities are
secured by substantially all of the assets and intercompany
loans made by us and the guarantors, and pledges of the
outstanding shares of capital stock of all of our domestic and
non-U.S. subsidiaries,
except in certain limited circumstances. Therefore, the lenders
under the Credit Facilities, and the holders of any other
secured debt that we or the guarantors may incur in the future,
will have claims with respect to these assets that have priority
over the claims of holders of Exchange Notes. As of
December 30, 2006, we had $2.0 billion of secured
debt, all of which consisted of outstanding borrowings and
related guarantees under the Credit Facilities. As of
December 30, 2006, the initial guarantors of the Exchange
Notes had no secured indebtedness outstanding.
The
Exchange Notes may be redeemed prior to maturity.
We may redeem any of the Exchange Notes beginning on
December 15, 2008, at the redemption prices listed under
Description of the Exchange Notes Optional
Redemption, plus accrued interest. On or prior to
December 15, 2008, we may redeem up to 35% of the Exchange
Notes at the redemption prices described in this prospectus
using the net cash proceeds from sales of certain types of
capital stock as described under Description of the
Exchange Notes Optional Redemption. We may
also redeem any of the Exchange Notes at any time prior to
December 15, 2008 in cash at the redemption prices
described in this prospectus plus accrued interest to the date
of redemption and a make-whole premium as described under
Description of the Exchange Notes Optional
Redemption.
If the Exchange Notes were redeemed, the redemption would be a
taxable event to you. In addition, you might not be able to
reinvest the money you receive upon redemption of the Exchange
Notes at the same rate as the relevant rate of return on the
Exchange Notes.
21
Federal
and state statutes allow courts, under specific circumstances,
to void guarantees and require holders of Exchange Notes to
return payments received from guarantors.
The issuance of the guarantees of the Exchange Notes by the
guarantors may be subject to review under state and federal laws
if a bankruptcy, liquidation or reorganization case or a
lawsuit, including in circumstances in which bankruptcy is not
involved, were commenced at some future date by, or on behalf
of, the unpaid creditors of a guarantor. Under the
U.S. bankruptcy law and comparable provisions of state
fraudulent transfer and conveyance laws, any guarantees of the
Exchange Notes could be voided, or claims in respect of a
guarantee could be subordinated to all other existing and future
debts of that guarantor if, among other things, and depending
upon the jurisdiction whose laws are applied, the guarantor, at
the time it incurs the indebtedness evidenced by its guarantee
or, in some jurisdictions, when payments came due under such
guarantee:
|
|
|
|
|
issued the guarantee with the intent of hindering, delaying or
defrauding any present or future creditor; or
|
|
|
|
received less than reasonably equivalent value or fair
consideration for the incurrence of such guarantee and
(1) was insolvent or rendered insolvent by reason of such
incurrence, (2) was engaged in a business or transaction
for which the guarantors remaining assets constitute
unreasonably small capital or (3) intended to incur, or
believed or reasonably should have believed that it would incur,
debts beyond its ability to pay such debts as they mature.
|
We cannot assure you that a court would find that a guarantor
did receive reasonably equivalent value or fair consideration
for its guarantee.
The measures of insolvency for purposes of these fraudulent
transfer laws will vary depending upon the law applied in any
proceeding to determine whether a fraudulent transfer has
occurred. Generally, however, a guarantor would be considered
insolvent if:
|
|
|
|
|
the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all of its assets;
|
|
|
|
the present fair saleable value of its assets was less than the
amount that would be required to pay its probable liability on
its existing debts, including contingent liabilities, as they
become absolute and mature; or
|
|
|
|
it could not pay its debts as they become due.
|
Each guarantee will contain a provision intended to limit the
guarantors liability to the maximum amount that it could
incur without causing the incurrence of obligations under its
guarantee to be a fraudulent transfer. This provision may not be
effective to protect the guarantees from being voided under
fraudulent transfer law, or may reduce the guarantors
obligation to an amount that effectively makes the guarantee
worthless. If a guarantee were legally challenged, such
guarantee could also be subject to the claim that, because the
guarantee was incurred for our benefit, and only indirectly for
the benefit of the guarantor, the obligations of the guarantor
were incurred for less than fair consideration. A court could
thus void the obligations under a guarantee, subordinate it to a
guarantors other debt or take other action detrimental to
the holders of the Exchange Notes.
We cannot be certain as to the standard that a court would use
to determine whether or not a guarantor was solvent upon
issuance of the guarantee or, regardless of the actual standard
applied by the court, that the issuance of the guarantee of the
Exchange Notes would not be voided or subordinated to any
guarantors other debt.
If a court voided a guarantee, you would no longer have a claim
against such guarantor for amounts owed in respect of such
guarantee. In addition, a court might direct you to repay any
amounts already received from such guarantor. If a court were to
void any guarantee, funds may not be available from any other
source to pay our obligations under the Exchange Notes.
22
We may
not have the ability to raise the funds necessary to finance the
change of control offer required by the indenture.
Upon the occurrence of certain specific kinds of change of
control events, we will be required to offer to repurchase all
Exchange Notes at 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase. However,
it is possible that we will not have sufficient funds at the
time of the change of control to make the required repurchase of
Exchange Notes or that restrictions in the Credit Facilities
will not allow such repurchases. In addition, certain important
corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a
Change of Control under the indenture. See
Description of the Exchange Notes Repurchase
of Exchange Notes upon a Change of Control.
Risks
Related to Our Spin Off from Sara Lee
If the
IRS determines that the spin off does not qualify as a
tax-free distribution or a tax-free
reorganization, we may be subject to substantial
liability.
Sara Lee has received a private letter ruling from the Internal
Revenue Service, or the IRS, to the effect that,
among other things, the spin off qualifies as a tax-free
distribution for U.S. federal income tax purposes under
Section 355 of the Internal Revenue Code of 1986, as
amended, or the Internal Revenue Code, and as part
of a tax-free reorganization under Section 368(a)(1)(D) of
the Internal Revenue Code, and the transfer to us of assets and
the assumption by us of liabilities in connection with the spin
off will not result in the recognition of any gain or loss for
U.S. federal income tax purposes to Sara Lee.
Although the private letter ruling relating to the qualification
of the spin off under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code generally is binding on the IRS, the
continuing validity of the ruling is subject to the accuracy of
factual representations and assumptions made in connection with
obtaining such private letter ruling. Also, as part of the
IRSs general policy with respect to rulings on spin off
transactions under Section 355 of the Internal Revenue
Code, the private letter ruling obtained by Sara Lee is based
upon representations by Sara Lee that certain conditions which
are necessary to obtain tax-free treatment under
Section 355 and Section 368(a)(1)(D) of the Internal
Revenue Code have been satisfied, rather than a determination by
the IRS that these conditions have been satisfied. Any
inaccuracy in these representations could invalidate the ruling.
If the spin off does not qualify for tax-free treatment for
U.S. federal income tax purposes, then, in general, Sara
Lee would be subject to tax as if it has sold the common stock
of our company in a taxable sale for its fair market value. Sara
Lees stockholders would be subject to tax as if they had
received a taxable distribution equal to the fair market value
of our common stock that was distributed to them, taxed as a
dividend (without reduction for any portion of a Sara Lees
stockholders basis in its shares of Sara Lee common stock)
for U.S. federal income tax purposes and possibly for
purposes of state and local tax law, to the extent of a Sara
Lees stockholders pro rata share of Sara Lees
current and accumulated earnings and profits (including any
arising from the taxable gain to Sara Lee with respect to the
spin off). It is expected that the amount of any such taxes to
Sara Lees stockholders and to Sara Lee would be
substantial.
Pursuant to a tax sharing agreement we entered into with Sara
Lee in connection with the spin off, we agreed to indemnify Sara
Lee and its affiliates for any liability for taxes of Sara Lee
resulting from: (1) any action or failure to act by us or
any of our affiliates following the completion of the spin off
that would be inconsistent with or prohibit the spin off from
qualifying as a tax-free transaction to Sara Lee and to Sara
Lees stockholders under Sections 355 and 368(a)(1)(D)
of the Internal Revenue Code, or (2) any action or failure
to act by us or any of our affiliates following the completion
of the spin off that would be inconsistent with or cause to be
untrue any material, information, covenant or representation
made in connection with the private letter ruling obtained by
Sara Lee from the IRS relating to, among other things, the
qualification of the spin off as a tax-free transaction
described under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code. Our indemnification obligations to Sara
Lee and its affiliates are not limited in amount or subject to
any cap. We expect that the amount of any such taxes to Sara Lee
would be substantial. For more information about the tax sharing
agreement, see The Spin Off below.
23
We
have virtually no operating history as an independent company
upon which our performance can be evaluated and, accordingly,
our prospects must be considered in light of the risks that any
newly independent company encounters.
Prior to the consummation of the spin off, we operated as part
of Sara Lee. Accordingly, we have virtually no experience
operating as an independent company and performing various
corporate functions, including human resources, tax
administration, legal (including compliance with the
Sarbanes-Oxley Act of 2002 and with the periodic reporting
obligations of the Securities Exchange Act of 1934, or the
Exchange Act), treasury administration, investor
relations, internal audit, insurance, information technology and
telecommunications services, as well as the accounting for many
items such as equity compensation, income taxes, derivatives,
intangible assets and pensions. Our prospects must be considered
in light of the risks, expenses and difficulties encountered by
companies in the early stages of independent business
operations, particularly companies such as ours in highly
competitive markets with complex supply chain operations.
Our
historical financial information is not necessarily indicative
of our results as a separate company and therefore may not be
reliable as an indicator of our future financial
results.
Much of our historical financial statements have been created
from Sara Lees financial statements using our historical
results of operations and historical bases of assets and
liabilities as part of Sara Lee. For example, we operated as
part of Sara Lee for all periods discussed in this prospectus,
other than the last four months of the six months ended
December 30, 2006. Accordingly, the historical financial
information we have included in this prospectus is not
necessarily indicative of what our financial position, results
of operations and cash flows would have been if we had been a
separate, stand-alone entity during all of the periods presented.
Much of the historical financial information is not necessarily
indicative of what our results of operations, financial position
and cash flows will be in the future and, for periods prior to
the six months ended December 30, 2006, does not reflect
many significant changes in our capital structure, funding and
operations resulting from the spin off. While our historical
results of operations include all costs of Sara Lees
branded apparel business, our historical costs and expenses do
not include all of the costs that would have been or will be
incurred by us as an independent company. In addition, we have
not made adjustments to our historical financial information to
reflect changes, many of which are significant, that occurred in
our cost structure, financing and operations as a result of the
spin off, including the substantial debt we incurred and pension
liabilities we assumed in connection with the spin off. These
changes include potentially increased costs associated with
reduced economies of scale and purchasing power.
Our effective income tax rate as reflected in our historical
financial information for periods prior to the six months ended
December 30, 2006 also may not be indicative of our future
effective income tax rate. Among other things, the rate may be
materially impacted by:
|
|
|
|
|
changes in the mix of our earnings from the various
jurisdictions in which we operate;
|
|
|
|
the tax characteristics of our earnings;
|
|
|
|
the timing and amount of earnings of foreign subsidiaries that
we repatriate to the United States, which may increase our tax
expense and taxes paid;
|
|
|
|
the timing and results of any reviews of our income tax filing
positions in the jurisdictions in which we transact
business; and
|
|
|
|
the expiration of the tax incentives for manufacturing
operations in Puerto Rico, which are no longer in effect.
|
24
We and
Sara Lee provide a number of services to each other pursuant to
a master transition services agreement. When this agreement
terminates, we will be required to replace Sara Lees
services internally or through third parties on terms that may
be less favorable to us.
Under the terms of a master transition services agreement that
we entered into with Sara Lee in connection with the spin off,
we and Sara Lee are providing to each other, for a fee,
specified support services related to human resources and
payroll functions, financial and accounting functions and
information technology for periods of up to 12 months
following the spin off (with some renewal terms available). When
the master transition services agreement terminates, Sara Lee
will no longer be obligated to provide any of these services to
us or pay us for the services we are providing Sara Lee, and we
will be required to either enter into a new agreement with Sara
Lee or another services provider or assume the responsibility
for these functions ourselves. At such time, the economic terms
of the new arrangement may be less favorable than the
arrangement with Sara Lee under the master transition services
agreement, which may have a material adverse effect on our
business, results of operations and financial condition. For
more information about the master transition services agreement,
see The Spin Off below.
We
agreed with Sara Lee to certain restrictions in order to comply
with U.S. federal income tax requirements for a tax-free
spin off and we may not be able to engage in acquisitions and
other strategic transactions that may otherwise be in our best
interests.
Current U.S. federal tax law that applies to spin offs
generally creates a presumption that the spin off would be
taxable to Sara Lee but not to its stockholders if we engage in,
or enter into an agreement to engage in, a plan or series of
related transactions that would result in the acquisition of a
50% or greater interest (by vote or by value) in our stock
ownership during the four-year period beginning on the date that
begins two years before the spin off, unless it is established
that the transaction is not pursuant to a plan related to the
spin off. U.S. Treasury Regulations generally provide that
whether an acquisition of our stock and a spin off are part of a
plan is determined based on all of the facts and circumstances,
including specific factors listed in the regulations. In
addition, the regulations provide certain safe
harbors for acquisitions of our stock that are not
considered to be part of a plan related to the spin off.
There are other restrictions imposed on us under current
U.S. federal tax law for spin offs and with which we will
need to comply in order to preserve the favorable tax treatment
of the distribution, such as continuing to own and manage our
apparel business and limitations on sales or redemptions of our
common stock for cash or other property following the
distribution.
In our tax sharing agreement with Sara Lee, we agreed that,
among other things, we will not take any actions that would
result in any tax being imposed on Sara Lee as a result of the
spin off. Further, for the two-year period following the spin
off, we agreed, among other things, not to: (1) sell or
otherwise issue equity securities or repurchase any of our stock
except in certain circumstances permitted by the IRS guidelines;
(2) voluntarily dissolve or liquidate or engage in any
merger (except certain cash acquisition mergers), consolidation,
or other reorganizations except for certain mergers of our
wholly-owned subsidiaries to the extent not inconsistent with
the tax-free status of the spin off; (3) sell, transfer or
otherwise dispose of more than 50% of our assets, excluding any
sales conducted in the ordinary course of business; or
(4) cease, transfer or dispose of all or any portion of our
socks business.
We are, however, permitted to take certain actions otherwise
prohibited by the tax sharing agreement if we provide Sara Lee
with an unqualified opinion of tax counsel or private letter
ruling from the IRS, acceptable to Sara Lee, to the effect that
these actions will not affect the tax-free nature of the spin
off. These restrictions could substantially limit our strategic
and operational flexibility, including our ability to finance
our operations by issuing equity securities, make acquisitions
using equity securities, repurchase our equity securities, raise
money by selling assets or enter into business combination
transactions. For more information about the tax sharing
agreement, see Certain Relationships and Related
Transactions, and Director Independence below.
25
The
terms of our spin off from Sara Lee, anti-takeover provisions of
our charter and bylaws, as well as Maryland law and our
stockholder rights agreement, may reduce the likelihood of any
potential change of control or unsolicited acquisition proposal
that you might consider favorable.
The terms of our spin off from Sara Lee could delay or prevent a
change of control that our stockholders may favor. An
acquisition or issuance of our common stock could trigger the
application of Section 355(e) of the Internal Revenue Code.
Under the tax sharing agreement that we entered into with Sara
Lee, we are required to indemnify Sara Lee for the resulting tax
in connection with such an acquisition or issuance and this
indemnity obligation might discourage, delay or prevent a change
of control that our stockholders may consider favorable. Our
charter and bylaws and Maryland law contain provisions that
could make it harder for a third-party to acquire us without the
consent of our board of directors. Our charter permits our board
of directors, without stockholder approval, to amend the charter
to increase or decrease the aggregate number of shares of stock
or the number of shares of stock of any class or series that we
have the authority to issue. In addition, our board of directors
may classify or reclassify any unissued shares of common stock
or preferred stock and may set the preferences, conversion or
other rights, voting powers and other terms of the classified or
reclassified shares. Our board of directors could establish a
series of preferred stock that could have the effect of
delaying, deferring or preventing a transaction or a change in
control that might involve a premium price for our common stock
or otherwise be in the best interest of our stockholders. Our
board of directors also is permitted, without stockholder
approval, to implement a classified board structure at any time.
Our bylaws, which only can be amended by our board of directors,
provide that nominations of persons for election to our board of
directors and the proposal of business to be considered at a
stockholders meeting may be made only in the notice of the
meeting, by our board of directors or by a stockholder who is
entitled to vote at the meeting and has complied with the
advance notice procedures of our bylaws. Also, under Maryland
law, business combinations between us and an interested
stockholder or an affiliate of an interested stockholder,
including mergers, consolidations, share exchanges or, in
circumstances specified in the statute, asset transfers or
issuances or reclassifications of equity securities, are
prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. An
interested stockholder includes any person who beneficially owns
10% or more of the voting power of our shares or any affiliate
or associate of ours who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10%
or more of the voting power of our stock. A person is not an
interested stockholder under the statute if our board of
directors approved in advance the transaction by which he
otherwise would have become an interested stockholder. However,
in approving a transaction, our board of directors may provide
that its approval is subject to compliance, at or after the time
of approval, with any terms and conditions determined by our
board. After the five-year prohibition, any business combination
between us and an interested stockholder generally must be
recommended by our board of directors and approved by two
supermajority votes or our common stockholders must receive a
minimum price, as defined under Maryland law, for their shares.
The statute permits various exemptions from its provisions,
including business combinations that are exempted by our board
of directors prior to the time that the interested stockholder
becomes an interested stockholder.
In addition, we have adopted a stockholder rights agreement
which provides that in the event of an acquisition of or tender
offer for 15% of our outstanding common stock, our stockholders
shall be granted rights to purchase our common stock at a
certain price. The stockholder rights agreement could make it
more difficult for a third-party to acquire our common stock
without the approval of our board of directors.
These and other provisions of Maryland law or our charter and
bylaws could have the effect of delaying, deferring or
preventing a transaction or a change in control that might
involve a premium price for our common stock or otherwise be
considered favorably by our stockholders.
26
FORWARD-LOOKING
STATEMENTS
Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can generally
be identified by the use of words such as may,
believe, will, expect,
project, estimate, intend,
anticipate, plan, continue
or similar expressions. In particular, information appearing
under Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Description of Our Business
includes forward-looking statements. Forward-looking statements
inherently involve many risks and uncertainties that could cause
actual results to differ materially from those projected in
these statements. Where, in any forward-looking statement, we
express an expectation or belief as to future results or events,
such expectation or belief is based on the current plans and
expectations of our management and expressed in good faith and
believed to have a reasonable basis, but there can be no
assurance that the expectation or belief will result or be
achieved or accomplished. The following include some but not all
of the factors that could cause actual results or events to
differ materially from those anticipated:
|
|
|
|
|
our ability to migrate our production and manufacturing
operations to lower-cost locations around the world;
|
|
|
|
the highly competitive and evolving nature of the industry in
which we compete;
|
|
|
|
our ability to effectively manage our inventory and reduce
inventory reserves;
|
|
|
|
failure by us to successfully streamline our operations;
|
|
|
|
retailer consolidation and other changes in the apparel
essentials industry;
|
|
|
|
our ability to keep pace with changing consumer preferences in
intimate apparel;
|
|
|
|
loss of or reduction in sales to any of our top customers,
especially Wal-Mart;
|
|
|
|
financial difficulties experienced by any of our top customers;
|
|
|
|
risks associated with our foreign operations or foreign supply
sources, such as disruption of markets, changes in import and
export laws, currency restrictions and currency exchange rate
fluctuations;
|
|
|
|
the impact of economic and business conditions and industry
trends in the countries in which we operate our supply chain;
|
|
|
|
failure by us to protect against dramatic changes in the
volatile market price of cotton, the primary material used in
the manufacture of our products;
|
|
|
|
costs and adverse publicity arising from violations of labor and
environmental laws by us or any of our third-party manufacturers;
|
|
|
|
our ability to attract and retain key personnel;
|
|
|
|
our substantial debt and debt service requirements that restrict
our operating and financial flexibility, and impose significant
interest and financing costs;
|
|
|
|
the risk of inflation or deflation;
|
|
|
|
consumer disposable income and spending levels, including the
availability and amount of individual consumer debt;
|
|
|
|
the receipt of licenses and other rights associated with Sara
Lee Corporations branded apparel business;
|
|
|
|
rapid technological changes;
|
|
|
|
future financial performance, including availability, terms and
deployment of capital;
|
|
|
|
the outcome of any pending or threatened litigation;
|
|
|
|
our ability to comply with environmental and occupational health
and safety laws and regulations;
|
27
|
|
|
|
|
general economic conditions; and
|
|
|
|
possible terrorists attacks and ongoing military action in the
Middle East and other parts of the world.
|
There may be other factors that may cause our actual results to
differ materially from the forward-looking statements. Our
actual results, performance or achievements could differ
materially from those expressed in, or implied by, the
forward-looking statements. We can give no assurances that any
of the events anticipated by the forward-looking statements will
occur or, if any of them does, what impact they will have on our
results of operations and financial condition. You should
carefully read the factors described in the Risk
Factors section of this prospectus for a description of
certain risks that could, among other things, cause our actual
results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this
prospectus and are expressly qualified in their entirety by the
cautionary statements included in this prospectus. We undertake
no obligation to update or revise forward-looking statements
which may be made to reflect events or circumstances that arise
after the date made or to reflect the occurrence of
unanticipated events, other than as required by law.
28
USE OF
PROCEEDS
This exchange offer is intended to satisfy certain of our
obligations under the registration rights agreement that we
entered into simultaneously with the initial sale of the Notes.
We will not receive any cash proceeds from the issuance of the
Exchange Notes. In consideration for issuing the Exchange Notes
contemplated by this prospectus, we will receive Notes from you
in like principal amount. The Notes surrendered in exchange for
the Exchange Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not
result in any change to our indebtedness.
29
CAPITALIZATION
The following table sets forth our capitalization on a
historical basis as of December 30, 2006. This table should
be read in conjunction with Selected Historical Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
Combined and Consolidated Financial Statements and corresponding
notes included in this prospectus.
|
|
|
|
|
|
|
December 30,
|
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
155,973
|
|
Debt, including current and
long-term:
|
|
|
|
|
Senior secured credit facility:
|
|
|
|
|
Term A facility
|
|
|
246,875
|
|
Term B facility
|
|
|
1,296,500
|
|
Revolving credit facility
|
|
|
|
|
Second lien credit facility
|
|
|
450,000
|
|
Notes
|
|
|
500,000
|
|
Capital lease obligations
including related interest payments
|
|
|
2,575
|
|
Notes payable to banks
|
|
|
14,264
|
|
|
|
|
|
|
Total debt
|
|
|
2,510,214
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
69,271
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
2,579,485
|
|
|
|
|
|
|
30
RATIO OF
EARNINGS TO FIXED CHARGES
Set forth below is information concerning our ratio of earnings
to fixed charges. For purposes of determining the ratio of
earnings to fixed charges, earnings consist of the total of
(i) the following (a) pretax income from continuing
operations before adjustment for minority interests in
consolidated subsidiaries or income or loss from equity
investees, (b) fixed charges, (c) amortization of
capitalized interest, and (d) distributed income of equity
investees, minus the total of (ii) the following:
(a) interest capitalized and (b) the minority
interest in pre-tax income of subsidiaries that have not
incurred fixed charges. Fixed charges are defined as the sum of
the following: (a) interest expensed and capitalized,
(b) amortized premiums, discounts and capitalized expenses
related to indebtedness, and (c) an estimate of the
interest within rental expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 28,
|
|
|
June 29,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Ratio of Earnings to Fixed
Charges(1)
|
|
|
2.24x
|
|
|
|
10.37x
|
|
|
|
7.64x
|
|
|
|
8.71x
|
|
|
|
10.35x
|
|
|
|
26.95x
|
|
|
|
|
(1) |
|
As part of our historical relationship with Sara Lee, we engaged
in intercompany borrowings. We also have borrowed monies from
third parties under a credit facility and a revolving line of
credit. The interest charged under these facilities was recorded
as interest expense. We are no longer able to borrow from Sara
Lee. As part of the spin off on September 5, 2006, we
incurred $2.6 billion of debt in the form of the Senior
Secured Credit Facility, the Second Lien Credit Facility and a
bridge loan facility (the Bridge
Loan Facility), $2.4 billion of the proceeds of
which was paid to Sara Lee, and subsequent to the spin off, we
repaid all amounts outstanding under the Bridge
Loan Facility with the proceeds from the offering of the
Notes. As a result, our interest expense in periods including
and following the spin off will be substantially higher than in
historical periods. |
31
SELECTED
FINANCIAL DATA
The following table presents our selected historical financial
data. The statements of income data for each of the fiscal years
in the three fiscal years ended July 1, 2006 and the
six-month period ended December 30, 2006, and the balance
sheet data as of December 30, 2006, July 1, 2006 and
July 2, 2005 have been derived from our audited Combined
and Consolidated Financial Statements included elsewhere in this
prospectus. The statements of income data for the years ended
June 28, 2003 and June 29, 2002 and the balance sheet
data as of July 3, 2004, June 28, 2003 and
June 29, 2002 has been derived from our financial
statements not included in this prospectus.
Our historical financial data is not necessarily indicative of
our future performance or what our financial position and
results of operations would have been if we had operated as a
separate, stand-alone entity during all of the periods shown.
The data should be read in conjunction with our historical
financial statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 28,
|
|
|
June 29,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
Statements of Income
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
|
$
|
4,669,665
|
|
|
$
|
4,920,840
|
|
Cost of sales
|
|
|
1,530,119
|
|
|
|
2,987,500
|
|
|
|
3,223,571
|
|
|
|
3,092,026
|
|
|
|
3,010,383
|
|
|
|
3,278,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
720,354
|
|
|
|
1,485,332
|
|
|
|
1,460,112
|
|
|
|
1,540,715
|
|
|
|
1,659,282
|
|
|
|
1,642,334
|
|
Selling, general and
administrative expenses
|
|
|
547,469
|
|
|
|
1,051,833
|
|
|
|
1,053,654
|
|
|
|
1,087,964
|
|
|
|
1,126,065
|
|
|
|
1,146,549
|
|
Gain on curtailment of
postretirement benefits
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
11,278
|
|
|
|
(101
|
)
|
|
|
46,978
|
|
|
|
27,466
|
|
|
|
(14,397
|
)
|
|
|
27,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
190,074
|
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
425,285
|
|
|
|
547,614
|
|
|
|
468,205
|
|
Other expenses
|
|
|
7,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
70,753
|
|
|
|
17,280
|
|
|
|
13,964
|
|
|
|
24,413
|
|
|
|
(2,386
|
)
|
|
|
(11,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
111,920
|
|
|
|
416,320
|
|
|
|
345,516
|
|
|
|
400,872
|
|
|
|
550,000
|
|
|
|
479,449
|
|
Income tax expense (benefit)
|
|
|
37,781
|
|
|
|
93,827
|
|
|
|
127,007
|
|
|
|
(48,680
|
)
|
|
|
121,560
|
|
|
|
139,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
|
$
|
428,440
|
|
|
$
|
339,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic(1)
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
|
$
|
4.45
|
|
|
$
|
3.53
|
|
Net income per share diluted(2)
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
|
$
|
4.45
|
|
|
$
|
3.53
|
|
Weighted average shares basic(1)
|
|
|
96,309
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
Weighted average shares diluted(2)
|
|
|
96,620
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 28,
|
|
|
June 29,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
155,973
|
|
|
$
|
298,252
|
|
|
$
|
1,080,799
|
|
|
$
|
674,154
|
|
|
$
|
289,816
|
|
|
$
|
106,250
|
|
Total assets
|
|
|
3,435,620
|
|
|
|
4,903,886
|
|
|
|
4,257,307
|
|
|
|
4,402,758
|
|
|
|
3,915,573
|
|
|
|
4,064,730
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,484,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
271,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
|
|
49,251
|
|
|
|
59,971
|
|
Total noncurrent liabilities
|
|
|
2,755,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
|
|
49,251
|
|
|
|
59,971
|
|
Total stockholders or parent
companies equity
|
|
|
69,271
|
|
|
|
3,229,134
|
|
|
|
2,602,362
|
|
|
|
2,797,370
|
|
|
|
2,237,448
|
|
|
|
1,762,824
|
|
|
|
|
(1) |
|
Prior to the spin off on September 5, 2006, the number of
shares used to compute basic and diluted earnings per share is
96,306,232, which was the number of shares of our common stock
outstanding on September 5, 2006. |
|
(2) |
|
Subsequent to the spin off on September 5, 2006, the number
of shares used to compute diluted earnings per share is based on
the number of shares of our common outstanding, plus the
potential dilution that could occur if restricted stock units
and options granted under the equity-based compensation
arrangements were exercised or converted into common stock. |
33
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This managements discussion and analysis of financial
condition and results of operations, or MD&A, contains
forward-looking statements that involve risks and uncertainties.
Please see Forward-Looking Statements in this
prospectus for a discussion of the uncertainties, risks and
assumptions associated with these statements. This discussion
should be read in conjunction with our historical financial
statements and related notes thereto and the other disclosures
contained elsewhere in this prospectus. On October 26,
2006, our Board of Directors approved a change in our fiscal
year end from the Saturday closest to June 30 to the
Saturday closest to December 31. We refer to the resulting
transition period from July 2, 2006 to December 30,
2006 in this prospectus as the six months ended
December 30, 2006. All references to fiscal years 2006 and
earlier, unless otherwise noted, are references to our 52- or
53-week
fiscal year that ended on the Saturday closest to June 30
of that calendar year. Fiscal years 2006, 2005 and 2004 were
52-, 52- and
53-week
years, respectively. All reported results for fiscal 2004
include the impact of the additional week. The results of
operations for the periods reflected herein are not necessarily
indicative of results that may be expected for future periods,
and our actual results may differ materially from those
discussed in the forward-looking statements as a result of
various factors, including but not limited to those listed under
Risk Factors in this prospectus and included
elsewhere in this prospectus.
MD&A is a supplement to our Combined and Consolidated
Financial Statements and notes thereto included elsewhere in
this prospectus, and is provided to enhance your understanding
of our results of operations and financial condition. Our
MD&A is organized as follows:
|
|
|
|
|
Overview. This section provides a general
description of our company and operating segments, business and
industry trends, our key business strategies and background
information on other matters discussed in this MD&A.
|
|
|
|
Components of Net Sales and Expense. This
section provides an overview of the components of our net sales
and expense that are key to an understanding of our results of
operations.
|
|
|
|
Combined and Consolidated Results of Operations and Operating
Results by Business Segment. These sections
provide our analysis and outlook for the significant line items
on our statements of income, as well as other information that
we deem meaningful to an understanding of our results of
operations on both a combined and consolidated basis and a
business segment basis.
|
|
|
|
Liquidity and Capital Resources. This section
provides an analysis of our liquidity and cash flows, as well as
a discussion of our commitments that existed as of
December 30, 2006.
|
|
|
|
Significant Accounting Policies and Critical
Estimates. This section discusses the accounting
policies that are considered important to the evaluation and
reporting of our financial condition and results of operations,
and whose application requires significant judgments or a
complex estimation process.
|
|
|
|
Recently Issued Accounting Standards. This
section provides a summary of the most recent authoritative
accounting standards and guidance that the company will be
required to adopt in a future period.
|
Overview
Our
Company
We are a consumer goods company with a portfolio of leading
apparel brands, including Hanes, Champion, Playtex, Bali,
Just My Size, barely there and Wonderbra. We design,
manufacture, source and sell a broad range of apparel essentials
such as t-shirts, bras, panties, mens underwear,
kids underwear, socks, hosiery, casualwear and activewear.
Our brands hold either the number one or number two
U.S. market position by sales in most product categories in
which we compete.
We were spun off from Sara Lee on September 5, 2006. In
connection with the spin off, Sara Lee contributed its branded
apparel Americas and Asia business to us and distributed all of
the outstanding shares of our common stock to its stockholders
on a pro rata basis. As a result of the spin off, Sara Lee
ceased to
34
own any equity interest in our company. In this prospectus, we
describe the businesses contributed to us by Sara Lee in the
spin off as if the contributed businesses were our business for
all historical periods described. References in this prospectus
to our assets, liabilities, products, businesses or activities
of our business for periods including or prior to the spin off
are generally intended to refer to the historical assets,
liabilities, products, businesses or activities of the
contributed businesses as the businesses were conducted as part
of Sara Lee and its subsidiaries prior to the spin off.
Our
Segments
During the six months ended December 30, 2006, we changed
our internal reporting structure such that operations are
managed and reported in five operating segments, each of which
is a reportable segment: innerwear, outerwear, hosiery,
international and other. These segments are organized
principally by product category and geographic location.
Management of each segment is responsible for the assets and
operations of these businesses. Prior to the six months ended
December 30, 2006, we evaluated segment operating
performance based upon a definition of segment operating profit
that included restructuring and related accelerated depreciation
charges. Beginning in the six months ended December 30,
2006, we began evaluating the operating performance of our
segments based upon a new definition of segment operating
profit, which is defined as operating profit before general
corporate expenses, amortization of trademarks and other
identifiable intangibles and restructuring and related
accelerated depreciation charges. Prior period segment results
have been conformed to the new measurements of segment financial
performance.
|
|
|
|
|
Innerwear. The innerwear segment focuses on
core apparel essentials, and consists of products such as
womens intimate apparel, mens underwear, kids
underwear, socks, thermals and sleepwear, marketed under
well-known brands that are trusted by consumers. We are an
intimate apparel category leader in the United States with our
Hanes, Playtex, Bali, barely there, Just My Size and
Wonderbra brands. We are also a leading manufacturer and
marketer of mens underwear, and kids underwear under
the Hanes and Champion brand names. Our net sales
for the six months ended December 30, 2006 from our
innerwear segment were $1.3 billion, representing
approximately 57% of total segment net sales.
|
|
|
|
Outerwear. We are a leader in the casualwear
and activewear markets through our Hanes, Champion and
Just My Size brands, where we offer products such as
t-shirts and fleece. Our casualwear lines offer a range of
quality, comfortable clothing for men, women and children
marketed under the Hanes and Just My Size brands.
The Just My Size brand offers casual apparel designed
exclusively to meet the needs of plus-size women. In addition to
activewear for men and women, Champion provides uniforms
for athletic programs and in 2004 launched an apparel program at
Target stores, C9 by Champion. We also license our
Champion name for collegiate apparel and footwear. We
also supply our t-shirts, sportshirts and fleece products to
screen printers and embellishers, who imprint or embroider the
product and then resell to specialty retailers and organizations
such as resorts and professional sports clubs. Our net sales for
the six months ended December 30, 2006 from our outerwear
segment were $616 million, representing approximately 27%
of total segment net sales.
|
|
|
|
Hosiery. We are the leading marketer of
womens sheer hosiery in the United States. We compete in
the hosiery market by striving to offer superior values and
executing integrated marketing activities, as well as focusing
on the style of our hosiery products. We market hosiery products
under our Hanes, Leggs and Just My Size
brands. Our net sales for the six months ended
December 30, 2006 from our hosiery segment were
$144 million, representing approximately 6% of total
segment net sales. Consistent with a sustained decline in the
hosiery industry due to changes in consumer preferences, our net
sales from hosiery sales have declined each year since 1995.
|
|
|
|
International. International includes products
that span across the innerwear, outerwear and hosiery reportable
segments. Our net sales for the six months ended
December 30, 2006 in our international segment were
$198 million, representing approximately 9% of total
segment net sales and included sales in Europe, Asia, Canada and
Latin America. Japan, Canada and Mexico are our largest
international markets, and we also have opened sales offices in
India and China.
|
35
|
|
|
|
|
Other. Our net sales for the six months ended
December 30, 2006 in our other segment were
$19 million, representing approximately 1% of total segment
net sales and are comprised of sales of nonfinished products
such as fabric and certain other materials in the United States,
Asia and Latin America in order to maintain asset
utilization at certain manufacturing facilities.
|
Business
and Industry Trends
Our businesses are highly competitive and evolving rapidly.
Competition generally is based upon price, brand name
recognition, product quality, selection, service and purchasing
convenience. While the majority of our core styles continue from
year to year, with variations only in color, fabric or design
details, other products such as intimate apparel and sheer
hosiery have a heavier emphasis on style and innovation. Our
businesses face competition today from other large corporations
and foreign manufacturers, as well as department stores,
specialty stores and other retailers that market and sell
apparel essentials products under private labels that compete
directly with our brands.
Our distribution channels range from direct to consumer sales at
our outlet stores, to national chains and department stores to
warehouse clubs and mass-merchandise outlets. For the six months
ended December 30, 2006, approximately 47% of our net sales
were to mass merchants, 20% were to national chains and
department stores, 9% were direct to consumer, 9% were in our
international segment and 15% were to other retail channels such
as embellishers, specialty retailers, warehouse clubs and
sporting goods stores.
In recent years, there has been a growing trend toward retailer
consolidation, and as result, the number of retailers to which
we sell our products continues to decline. For the six months
ended December 30, 2006, for example, our top ten customers
accounted for 62% of our net sales and our top customer,
Wal-Mart, accounted for over $630 million of our sales. Our
largest customers in the six months ended December 30, 2006
were Wal-Mart, Target and Kohls, which accounted for 28%,
15% and 6% of total sales, respectively. This trend toward
consolidation has had and will continue to have significant
effects on our business. Consolidation creates pricing pressures
as our customers grow larger and increasingly seek to have
greater concessions in their purchase of our products, while
they also are increasingly demanding that we provide them with
some of our products on an exclusive basis. To counteract these
and other effects of consolidation, it has become increasingly
important to increase operational efficiency and lower costs. As
discussed below, for example, we are moving more of our supply
chain from domestic to foreign locations to lower the costs of
our operational structure.
Anticipating changes in and managing our operations in response
to consumer preferences remains an important element of our
business. In recent years, we have experienced changes in our
net sales, revenues and cash flows in accordance with changes in
consumer preferences and trends. For example, since fiscal 1995,
net sales in our hosiery segment have declined in connection
with a larger sustained decline in the hosiery industry. The
hosiery segment only comprised 6% of our net sales in the six
months ended December 30, 2006 however, and as a result,
the decline in the hosiery segment has not had a significant
impact on our net sales, revenues or cash flows. Generally, we
manage the hosiery segment for cash, placing an emphasis on
reducing our cost structure and managing cash efficiently.
Restructuring
and Transformation Plans
Over the past several years, we have undertaken a variety of
restructuring efforts designed to improve operating efficiencies
and lower costs. We have closed plant locations, reduced our
workforce, and relocated some of our domestic manufacturing
capacity to lower cost locations. For example, during the six
months ended December 30, 2006 we announced decisions to
close four textile and sewing plants in the United States,
Puerto Rico and Mexico and consolidate three distribution
centers in the United States. While we believe that these
efforts have had and will continue to have a beneficial impact
on our operational efficiency and cost structure, we have
incurred significant costs to implement these initiatives. In
particular, we have recorded charges for severance and other
employment-related obligations relating to workforce reductions,
as well as payments in connection with lease and other contract
terminations. These amounts are included in the Cost of
sales, Restructuring and Selling,
general and administrative expenses lines of our
statements of income.
36
As a result of the restructuring actions taken since the
beginning of fiscal 2004 through the spin off on
September 5, 2006, our cost structure was reduced and
efficiencies improved, generating savings of $80.2 million
for periods prior to the spin off. Savings from recently
announced restructuring actions are expected to occur in future
periods. For more information about our restructuring actions,
see Note 4, titled Restructuring to our
Combined and Consolidated Financial Statements included in this
prospectus.
As further plans are developed and approved by management and
our board of directors, we expect to recognize additional
restructuring costs to eliminate duplicative functions within
the organization and transition a significant portion of our
manufacturing capacity to lower-cost locations. As a result of
these efforts, we expect to incur approximately
$250 million in restructuring and related charges over the
three year period following the spin off from Sara Lee of which
approximately half is expected to be noncash. As part of our
efforts to consolidate our operations, we also are in the
process of integrating information technology systems across our
company. This process involves the replacement of eight
independent information technology platforms with a unified
enterprise system, which will integrate all of our departments
and functions into common software that runs off a single
database. Once this plan is developed and approved by
management, a number of variables will impact the cost and
timing of installing and transitioning to new information
technology systems over the next several years.
Components
of Net Sales and Expense
Net
sales
We generate net sales by selling apparel essentials such as
t-shirts, bras, panties, mens underwear, kids
underwear, socks, hosiery, casualwear and activewear. Our net
sales are recognized net of discounts, coupons, rebates,
volume-based incentives and cooperative advertising costs. We
recognize net sales when title and risk of loss pass to our
customers. Net sales include an estimate for returns and
allowances based upon historical return experience. We also
offer a variety of sales incentives to resellers and consumers
that are recorded as reductions to net sales.
Cost
of sales
Our cost of sales includes the cost of manufacturing finished
goods, which consists largely of labor and raw materials such as
cotton and petroleum-based products. Our cost of sales also
includes finished goods sourced from third-party manufacturers
that supply us with products based on our designs as well as
charges for slow moving or obsolete inventories. Rebates,
discounts and other cash consideration received from a vendor
related to inventory purchases are reflected in cost of sales
when the related inventory item is sold. Our costs of sales do
not include shipping and handling costs, and thus our gross
margins may not be comparable to those of other entities that
include such costs in costs of sales.
Selling,
general and administrative expenses
Our selling, general and administrative expenses include
selling, advertising, shipping, handling and distribution costs,
research and development, rent on leased facilities,
depreciation on owned facilities and equipment and other general
and administrative expenses. Also included for periods presented
prior to the spin off on September 5, 2006 are allocations
of corporate expenses that consist of expenses for business
insurance, medical insurance, employee benefit plan amounts and,
because we were part of Sara Lee during all periods presented,
allocations from Sara Lee for certain centralized administration
costs for treasury, real estate, accounting, auditing, tax, risk
management, human resources and benefits administration. These
allocations of centralized administration costs were determined
on bases that we and Sara Lee considered to be reasonable and
take into consideration and include relevant operating profit,
fixed assets, sales and payroll. Selling, general and
administrative expenses also include management payroll,
benefits, travel, information systems, accounting, insurance and
legal expenses.
37
Restructuring
We have from time to time closed facilities and reduced
headcount, including in connection with previously announced
restructuring and business transformation plans. We refer to
these activities as restructuring actions. When we decide to
close facilities or reduce headcount, we take estimated charges
for such restructuring, including charges for exited
non-cancelable leases and other contractual obligations, as well
as severance and benefits. If the actual charge is different
from the original estimate, an adjustment is recognized in the
period such change in estimate is identified.
Other
Expenses
Our other expenses include charges such as losses on
extinguishment of debt and certain other non-operating items.
Interest
expense, net
As part of our historical relationship with Sara Lee, we engaged
in intercompany borrowings. We also have borrowed monies from
third parties under a credit facility and a revolving line of
credit. The interest charged under these facilities was recorded
as interest expense. We are no longer able to borrow from Sara
Lee. As part of the spin off on September 5, 2006, we
incurred $2.6 billion of debt in the form of the Senior
Secured Credit Facility, the Second Lien Credit Facility and a
bridge loan facility (the Bridge Loan Facility),
$2.4 billion of the proceeds of which was paid to Sara Lee,
and subsequent to the spin off, we repaid all amounts
outstanding under the Bridge Loan Facility with the
proceeds from the offering of the Notes. As a result, our
interest expense in the current and future periods will be
substantially higher than in historical periods.
Our interest expense is net of interest income. Interest income
is the return we earned on our cash and cash equivalents and,
historically, on money we lent to Sara Lee as part of its
corporate cash management practices. Our cash and cash
equivalents are invested in highly liquid investments with
original maturities of three months or less.
Income
tax expense (benefit)
Our effective income tax rate fluctuates from period to period
and can be materially impacted by, among other things:
|
|
|
|
|
changes in the mix of our earnings from the various
jurisdictions in which we operate;
|
|
|
|
the tax characteristics of our earnings;
|
|
|
|
the timing and amount of earnings of foreign subsidiaries that
we repatriate to the United States, which may increase our tax
expense and taxes paid;
|
|
|
|
the timing and results of any reviews of our income tax filing
positions in the jurisdictions in which we transact business; and
|
|
|
|
the expiration of the tax incentives for manufacturing
operations in Puerto Rico, which are no longer in effect.
|
In particular, to service the substantial amount of debt we
incurred in connection with and subsequent to the spin off and
to meet other general corporate needs, we may have less
flexibility than we have had previously regarding the timing or
amount of future earnings that we repatriate from foreign
subsidiaries. As a result, we believe that our income tax rate
in future periods is likely to be higher, on average, than our
historical effective tax rates in periods prior to the spin off
on September 5, 2006.
Inflation
and Changing Prices
We believe that changes in net sales and in net income that have
resulted from inflation or deflation have not been material
during the periods presented. There is no assurance, however,
that inflation or deflation will
38
not materially affect us in the future. Cotton is the primary
raw material we use to manufacture many of our products and is
subject to fluctuations in prices. Further discussion of the
market sensitivity of cotton is included in Quantitative
and Qualitative Disclosures about Market Risk.
Combined
and Consolidated Results of Operations Six Months
Ended December 30, 2006 Compared with Six Months Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
2,319,839
|
|
|
$
|
(69,366
|
)
|
|
|
(3.0
|
)%
|
Cost of sales
|
|
|
1,530,119
|
|
|
|
1,556,860
|
|
|
|
26,741
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
720,354
|
|
|
|
762,979
|
|
|
|
(42,625
|
)
|
|
|
(5.6
|
)
|
Selling, general and
administrative expenses
|
|
|
547,469
|
|
|
|
505,866
|
|
|
|
(41,603
|
)
|
|
|
(8.2
|
)
|
Gain on curtailment of
postretirement benefits
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
28,467
|
|
|
|
NM
|
|
Restructuring
|
|
|
11,278
|
|
|
|
(339
|
)
|
|
|
(11,617
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
190,074
|
|
|
|
257,452
|
|
|
|
(67,378
|
)
|
|
|
(26.2
|
)
|
Other expenses
|
|
|
7,401
|
|
|
|
|
|
|
|
(7,401
|
)
|
|
|
NM
|
|
Interest expense, net
|
|
|
70,753
|
|
|
|
8,412
|
|
|
|
(62,341
|
)
|
|
|
(741.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
111,920
|
|
|
|
249,040
|
|
|
|
(137,120
|
)
|
|
|
(55.1
|
)
|
Income tax expense
|
|
|
37,781
|
|
|
|
60,424
|
|
|
|
22,643
|
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
188,616
|
|
|
$
|
(114,477
|
)
|
|
|
(60.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
2,319,839
|
|
|
$
|
(69,366
|
)
|
|
|
(3.0
|
)%
|
Net sales decreased $52 million, $12 million and
$17 million in our innerwear, hosiery and other segments,
respectively. These declines were offset by increases in net
sales of $13 million and $2 million in our outerwear
and international segments, respectively. Overall net sales
decreased due to a $28 million impact from our intentional
discontinuation of low-margin product lines in the outerwear
segment and a $12 million decrease in sheer hosiery sales.
Additionally, the acquisition of National Textiles, L.L.C. in
September 2005 caused a $16 million decrease in our other
segment as sales to this business were included in net sales in
periods prior to the acquisition. Finally, we experienced slower
sell-through of innerwear products in the mass merchandise and
department store retail channels during the latter half of the
six months ended December 30, 2006. We expect the trend of
declining hosiery sales to continue as a result of shifts in
consumer preferences, which is consistent with the long-term
decline in the overall hosiery industry.
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Cost of sales
|
|
$
|
1,530,119
|
|
|
$
|
1,556,860
|
|
|
$
|
26,741
|
|
|
|
1.7
|
%
|
39
Cost of sales were lower year over year as a result of a
decrease in net sales, favorable spending from the benefits of
manufacturing cost savings initiatives and a favorable impact
from shifting certain production to lower cost locations. These
savings were offset partially by higher cotton costs, unusual
charges primarily to exit certain contracts and low margin
product lines, and accelerated depreciation as a result of our
announced plans to close four textile and sewing plants in the
United States, Puerto Rico and Mexico.
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Gross profit
|
|
$
|
720,354
|
|
|
$
|
762,979
|
|
|
$
|
(42,625
|
)
|
|
|
(5.6
|
)%
|
As a percent of net sales, gross profit percentage decreased to
32.0% for the six months ended December 30, 2006 from 32.9%
for the six months ended December 31, 2005. The decrease in
gross profit percentage was due to $21 million in
accelerated depreciation as a result of our announced plans to
close four textile and sewing plants, higher cotton costs of
$18 million, $15 million of unusual charges primarily
to exit certain contracts and low margin product lines and an
$11 million impact from lower manufacturing volume. The
higher costs were partially offset by $38 million of net
favorable spending from our prior year restructuring actions,
manufacturing cost savings initiatives and a favorable impact of
shifting certain production to lower cost locations. In
addition, the impact on gross profit from lower net sales was
$16 million.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
$
|
547,469
|
|
|
$
|
505,866
|
|
|
$
|
(41,603
|
)
|
|
|
(8.2
|
)%
|
Selling, general and administrative expenses increased partially
due to higher non-recurring spin off and related costs of
$17 million and incremental costs associated with being an
independent company of $10 million, excluding the corporate
allocations associated with Sara Lee ownership in the prior year
of $21 million. Media, advertising and promotion costs
increased $12 million primarily due to unusual charges to
exit certain license agreements and additional investments in
our brands. Other unusual charges increasing selling, general
and administrative expenses by $12 million primarily
included certain freight revenue being moved to net sales during
the six months ended December 30, 2006 and a reduction of
estimated allocations to inventory costs. In addition, we
experienced slightly higher spending of approximately
$10 million in numerous areas such as technology
consulting, distribution, severance and market research, which
were partially offset by headcount savings from prior year
restructuring actions and a reduction in pension and
postretirement expenses.
Gain
on Curtailment of Postretirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Gain on curtailment of
postretirement benefits
|
|
$
|
(28,467
|
)
|
|
$
|
|
|
|
$
|
28,467
|
|
|
|
NM
|
|
In December 2006, we notified retirees and employees that we
will phase out premium subsidies for early retiree medical
coverage and move to an access-only plan for early retirees by
the end of 2007. We will also eliminate the medical plan for
retirees ages 65 and older as a result of coverage
available under the expansion of Medicare with Part D drug
coverage and eliminate future postretirement life benefits. The
gain on curtailment represents the unrecognized amounts
associated with prior plan amendments that were being amortized
into income over the remaining service period of the
participants prior to the December 2006
40
amendments. We will record postretirement benefit income related
to this plan in 2007, primarily representing the amortization of
negative prior service costs, which is partially offset by
service costs, interest costs on the accumulated benefit
obligation and actuarial gains and losses accumulated in the
plan. We expect to record a final gain on curtailment of plan
benefits in December 2007.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Restructuring
|
|
$
|
11,278
|
|
|
$
|
(339
|
)
|
|
$
|
(11,617
|
)
|
|
|
NM
|
|
During the six months ended December 30, 2006, we approved
actions to close four textile and sewing plants in the United
States, Puerto Rico and Mexico and consolidate three
distribution centers in the United States. These actions
resulted in a charge of $11 million, representing costs
associated with the planned termination of 2,989 employees for
employee termination and other benefits in accordance with
benefit plans previously communicated to the affected employee
group. In connection with these restructuring actions, a charge
of $21 million for accelerated depreciation of buildings
and equipment is reflected in the Cost of sales line
of the Combined and Consolidated Statement of Income. These
actions are expected to be completed in early 2007. These
actions, which are a continuation of our long-term global supply
chain globalization strategy, are expected to result in benefits
of moving production to lower-cost manufacturing facilities,
improved alignment of sewing operations with the flow of
textiles, leveraging our large scale in high-volume products and
consolidating production capacity.
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Operating profit
|
|
$
|
190,074
|
|
|
$
|
257,452
|
|
|
$
|
(67,378
|
)
|
|
|
(26.2
|
)%
|
Operating profit for the six months ended December 30, 2006
decreased as compared to the six months ended December 31,
2005 primarily as a result of facility closures announced in the
current period and restructuring related costs of
$32 million, higher non-recurring spin off and related
charges of $17 million, higher costs associated with being
an independent company of $10 million, unusual charges of
$35 million primarily to exit certain contracts and low
margin product lines, charges to exit certain license agreements
and additional investments in our brands. In addition, we
experienced higher cotton and production related costs of
$29 million, lower gross margin from lower net sales of
$16 million and slightly higher selling, general and
administrative spending of approximately $10 million in
numerous areas such as technology consulting, distribution,
severance and market research. These higher costs were offset
partially by favorable spending from our prior year
restructuring actions, manufacturing cost savings initiatives, a
favorable impact of shifting certain production to lower cost
locations and lower corporate allocations from Sara Lee totaling
$59 million and the gain on curtailment of postretirement
benefits of $28 million.
Other
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Losses on early extinguishment of
debt
|
|
$
|
7,401
|
|
|
$
|
|
|
|
$
|
(7,401
|
)
|
|
|
NM
|
|
In connection with the offering of the Notes as described below
under interest expense, net, we recognized a $6 million
loss on early extinguishment of debt for unamortized debt
issuance costs on the Bridge Loan Facility entered into in
connection with the spin off from Sara Lee. We recognized
approximately
41
$1 million loss on early extinguishment of debt related to
unamortized debt issuance costs on the Senior Secured Credit
Facility for the prepayment of $100 million of principal in
December 2006.
Interest
Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Interest expense, net
|
|
$
|
70,753
|
|
|
$
|
8,412
|
|
|
$
|
(62,341
|
)
|
|
|
(741.1
|
)%
|
In connection with the spin off, we incurred $2.6 billion
of debt pursuant to the Senior Secured Credit Facility, the
Second Lien Credit Facility and the Bridge Loan Facility,
$2.4 billion of the proceeds of which was paid to Sara Lee.
As a result, our net interest expense in the six months ended
December 30, 2006 was substantially higher than in the
comparable period.
Under the Credit Facilities, we are required to hedge a portion
of our floating rate debt to reduce interest rate risk caused by
floating rate debt issuance. During the six months ended
December 30, 2006, we entered into various hedging
arrangements whereby we capped the interest rate on
$1 billion of our floating rate debt at 5.75%. We also
entered into interest rate swaps tied to the
3-month
London Interbank Offered Rate, or LIBOR, whereby we
fixed the interest rate on an aggregate of $500 million of
our floating rate debt at a blended rate of approximately 5.16%.
Approximately 60% of our total debt outstanding at
December 30, 2006 is at a fixed or capped rate. There was
no hedge ineffectiveness during the current period related to
these instruments.
In December 2006, we completed the offering of $500 million
aggregate principal amount of the Notes. The Notes will bear
interest at a per annum rate, reset semiannually, equal to the
six month LIBOR plus a margin of 3.375 percent. The
proceeds from the offering were used to repay all outstanding
borrowings under the Bridge Loan Facility.
Income
Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Income tax expense
|
|
$
|
37,781
|
|
|
$
|
60,424
|
|
|
$
|
22,643
|
|
|
|
37.5
|
%
|
Our effective income tax rate increased from 24.3% for the six
months ended December 31, 2005 to 33.8% for the six months
ended December 30, 2006. The increase in our effective tax
rate as an independent company is attributable primarily to the
expiration of tax incentives for manufacturing in Puerto Rico of
$9 million, which were repealed effective for the periods after
July 1, 2006, higher taxes on remittances of foreign earnings
for the period of $9 million and $5 million tax effect of
lower unremitted earnings from foreign subsidiaries in the six
months ended December 30, 2006 taxed at rates less than the
U.S. statutory rate. The tax expense for both periods was
impacted by a number of significant items that are set out in
the reconciliation of our effective tax rate to the
U.S. statutory rate in Note 17 titled Income
Taxes to our Combined and Consolidated Financial
Statements.
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
188,616
|
|
|
$
|
(114,477
|
)
|
|
|
(60.7
|
)%
|
Net income for the six months ended December 30, 2006 was
lower than for the six months ended December 31, 2005
primarily as a result of reduced operating profit, increased
interest expense, higher incomes taxes as an independent company
and losses on early extinguishment of debt.
42
Operating
Results by Business Segment Six Months Ended
December 30, 2006 Compared with Six Months Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
1,295,868
|
|
|
$
|
1,347,582
|
|
|
$
|
(51,714
|
)
|
|
|
(3.8
|
)%
|
Outerwear
|
|
|
616,298
|
|
|
|
603,585
|
|
|
|
12,713
|
|
|
|
2.1
|
|
Hosiery
|
|
|
144,066
|
|
|
|
155,897
|
|
|
|
(11,831
|
)
|
|
|
(7.6
|
)
|
International
|
|
|
197,729
|
|
|
|
195,980
|
|
|
|
1,749
|
|
|
|
0.9
|
|
Other
|
|
|
19,381
|
|
|
|
36,096
|
|
|
|
(16,715
|
)
|
|
|
(46.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net segment sales
|
|
|
2,273,342
|
|
|
|
2,339,140
|
|
|
|
(65,798
|
)
|
|
|
(2.8
|
)
|
Intersegment
|
|
|
(22,869
|
)
|
|
|
(19,301
|
)
|
|
|
(3,568
|
)
|
|
|
(18.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,250,473
|
|
|
$
|
2,319,839
|
|
|
$
|
(69,366
|
)
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
172,008
|
|
|
$
|
192,449
|
|
|
$
|
(20,441
|
)
|
|
|
(10.6
|
)
|
Outerwear
|
|
|
21,316
|
|
|
|
49,248
|
|
|
|
(27,932
|
)
|
|
|
(56.7
|
)
|
Hosiery
|
|
|
36,205
|
|
|
|
26,531
|
|
|
|
9,674
|
|
|
|
36.5
|
|
International
|
|
|
15,236
|
|
|
|
16,574
|
|
|
|
(1,338
|
)
|
|
|
(8.1
|
)
|
Other
|
|
|
(288
|
)
|
|
|
1,202
|
|
|
|
(1,490
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
244,477
|
|
|
|
286,004
|
|
|
|
(41,527
|
)
|
|
|
(14.5
|
)
|
Items not included in segment
operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses
|
|
|
(46,927
|
)
|
|
|
(24,846
|
)
|
|
|
(22,081
|
)
|
|
|
(88.9
|
)
|
Amortization of trademarks and
other intangibles
|
|
|
(3,466
|
)
|
|
|
(4,045
|
)
|
|
|
579
|
|
|
|
14.3
|
|
Gain on curtailment of
postretirement benefits
|
|
|
28,467
|
|
|
|
|
|
|
|
28,467
|
|
|
|
NM
|
|
Restructuring
|
|
|
(11,278
|
)
|
|
|
339
|
|
|
|
(11,617
|
)
|
|
|
NM
|
|
Accelerated depreciation
|
|
|
(21,199
|
)
|
|
|
|
|
|
|
(21,199
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
|
190,074
|
|
|
|
257,452
|
|
|
|
(67,378
|
)
|
|
|
(26.2
|
)
|
Other expenses
|
|
|
(7,401
|
)
|
|
|
|
|
|
|
(7,401
|
)
|
|
|
NM
|
|
Interest expense, net
|
|
|
(70,753
|
)
|
|
|
(8,412
|
)
|
|
|
(62,341
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
111,920
|
|
|
$
|
249,040
|
|
|
$
|
(137,120
|
)
|
|
|
(55.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
1,295,868
|
|
|
$
|
1,347,582
|
|
|
$
|
(51,714
|
)
|
|
|
(3.8
|
)%
|
Segment operating profit
|
|
|
172,008
|
|
|
|
192,449
|
|
|
|
(20,441
|
)
|
|
|
(10.6
|
)
|
Net sales in our innerwear segment decreased primarily due to
lower mens underwear and kids underwear sales of
$36 million and lower thermal sales of $14 million, as
well as additional investments in our brands as compared to the
six months ended December 31, 2005. We experienced lower
sell-through of products in the mass merchandise and department
store retail channels primarily in the latter half of the six
months ended December 30, 2006.
43
As a percent of segment net sales, gross profit percentage in
the innerwear segment increased from 36.5% for the six months
ended December 31, 2005 to 37.0% for the six months ended
December 30, 2006, reflecting a positive impact of
favorable spending of $21 million from our prior year
restructuring actions, cost savings initiatives and savings
associated with moving to lower cost locations. These changes
were partially offset by an unfavorable impact of lower volumes
of $18 million, higher cotton costs of $7 million and
unusual costs of $8 million primarily associated with
exiting certain low margin product lines.
The decrease in segment operating profit is primarily
attributable to the gross profit impact of the items noted above
and higher allocated selling, general and administrative
expenses of $8 million. Media, advertising and promotion
costs were slightly higher due to changes in license agreements,
net of lower media spend on innerwear categories. Our total
selling, general and administrative expenses before segment
allocations increased as a result of unusual charges, higher
stand alone costs as an independent company and higher spending
in numerous areas such as technology consulting, distribution,
severance and market research, which were partially offset by
headcount savings from prior year restructuring actions and a
reduction in pension and postretirement expenses.
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
616,298
|
|
|
$
|
603,585
|
|
|
|
12,713
|
|
|
|
2.1
|
%
|
Segment operating profit
|
|
|
21,316
|
|
|
|
49,248
|
|
|
|
(27,932
|
)
|
|
|
(56.7
|
)
|
Net sales in our outerwear segment increased primarily due to
$33 million of increased sales of activewear and
$33 million of increased sales of boys fleece as
compared to the six months ended December 31, 2005. These
changes were partially offset by the $28 million impact of
our intentional exit of certain lower margin fleece product
lines, lower womens and girls fleece sales of
$16 million and $9 million of lower sportshirt, jersey
and other fleece sales.
As a percent of segment net sales, gross profit percentage
declined from 20.7% for the six months ended December 31,
2005 to 19.8% for the six months ended December 30, 2006
primarily as a result of higher cotton costs of
$11 million, $5 million associated with exiting
certain low margin product lines and higher duty, freight and
contractor costs of $6 million, partially offset by
$19 million in cost savings initiatives and a favorable
impact with shifting production to lower cost locations.
The decrease in segment operating profit is primarily
attributable to the gross profit impact of the items noted
above, higher media advertising and promotion expenses directly
attributable to our casualwear products of $15 million and
higher allocated selling, general and administrative expenses of
$10 million. Our total selling, general and administrative
expenses before segment allocations increased as a result of
unusual charges, higher stand-alone costs as an independent
company and higher spending in numerous areas such as technology
consulting, distribution, severance and market research, which
were partially offset by headcount savings from prior year
restructuring actions and a reduction in pension and
postretirement expenses.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
144,066
|
|
|
$
|
155,897
|
|
|
$
|
(11,831
|
)
|
|
|
(7.6
|
)%
|
Segment operating profit
|
|
|
36,205
|
|
|
|
26,531
|
|
|
|
9,674
|
|
|
|
36.5
|
|
Net sales in our hosiery segment decreased primarily due to the
continued decline in U.S. sheer hosiery consumption. As
compared to the six months ended December 31 2005, overall
sales for the hosiery segment declined 8% due to a continued
reduction in sales of Leggs to mass retailers and
food and drug stores and
44
declining sales of Hanes to department stores. Overall,
the hosiery market declined 4.5% for the six months ended
December 30, 2006. We expect the trend of declining hosiery
sales to continue as a result of shifts in consumer preferences,
which is consistent with the long-term decline in the overall
hosiery industry.
Gross profit declined slightly primarily due to the decline in
net sales offset by favorable spending of $3 million from
cost savings initiatives and a reduction in pension and
postretirement expenses.
Segment operating profit increased due primarily to
$10 million of lower allocated selling, general and
administrative expenses.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
197,729
|
|
|
$
|
195,980
|
|
|
$
|
1,749
|
|
|
|
0.9
|
%
|
Segment operating profit
|
|
|
15,236
|
|
|
|
16,574
|
|
|
|
(1,338
|
)
|
|
|
(8.1
|
)
|
Net sales in our international segment increased slightly due to
higher sales of t-shirts in Europe and higher sales in our
emerging markets in China, India and Brazil, partially offset by
softer sales in Mexico and lower sales in Japan due to a shift
in the launch of fall seasonal products. Changes in foreign
currency exchange rates increased net sales by $3 million.
As a percent of segment net sales, gross profit percentage
increased from 39.7% to 40.2% for the six months ended
December 30, 2006. The increase resulted primarily from a
$3 million decrease in overall spending and $1 million
from positive changes in foreign currency exchange rates. These
changes were offset by a $4 million impact from unfavorable
manufacturing efficiencies compared to the prior period.
The decrease in segment operating profit is attributable to the
gross profit impact of the items noted above offset by higher
allocated selling, general and administrative expenses of
$3 million.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
19,381
|
|
|
$
|
36,096
|
|
|
$
|
(16,715
|
)
|
|
|
(46.3
|
)%
|
Segment operating profit
|
|
|
(288
|
)
|
|
|
1,202
|
|
|
|
(1,490
|
)
|
|
|
NM
|
|
Net sales in the other segment decreased primarily due to the
acquisition of National Textiles, L.L.C. in September 2005 which
caused a $16 million decline as sales to this business were
previously included in net sales prior to the acquisition.
As a percent of segment net sales, gross profit percentage
increased from 4.8% for the six months ended December 31,
2005 to 9.9% for the six months ended December 30, 2006
primarily as a result of favorable manufacturing variances.
The decrease in segment operating profit is primarily
attributable to higher allocated selling, general and
administrative expenses in the current period of $2 million
offset by the favorable manufacturing variances noted above. As
sales of this segment are generated for the purpose of
maintaining asset utilization at certain manufacturing
facilities, gross profit and operating profit are lower than
those of our other segments.
General
Corporate Expenses
General corporate expenses increased primarily due to higher
nonrecurring spin off and related costs of $17 million and
higher stand alone costs of $10 million of operating as an
independent company.
45
Combined
and Consolidated Results of Operations Fiscal 2006
Compared with Fiscal 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
(210,851
|
)
|
|
|
(4.5
|
)%
|
Cost of sales
|
|
|
2,987,500
|
|
|
|
3,223,571
|
|
|
|
236,071
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,485,332
|
|
|
|
1,460,112
|
|
|
|
25,220
|
|
|
|
1.7
|
|
Selling, general and
administrative expenses
|
|
|
1,051,833
|
|
|
|
1,053,654
|
|
|
|
1,821
|
|
|
|
0.2
|
|
Restructuring
|
|
|
(101
|
)
|
|
|
46,978
|
|
|
|
47,079
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
74,120
|
|
|
|
20.6
|
|
Interest expense, net
|
|
|
17,280
|
|
|
|
13,964
|
|
|
|
(3,316
|
)
|
|
|
(23.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
416,320
|
|
|
|
345,516
|
|
|
|
70,804
|
|
|
|
20.5
|
|
Income tax expense
|
|
|
93,827
|
|
|
|
127,007
|
|
|
|
33,180
|
|
|
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
103,984
|
|
|
|
47.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
(210,851
|
)
|
|
|
(4.5
|
)%
|
Net sales declined primarily due to the $142 million impact
from the discontinuation of low-margin product lines in the
innerwear, outerwear and international segments and a
$48 million decline in sheer hosiery sales. Other factors
netting to $21 million of this decline include lower
selling prices and changes in product sales mix. Going forward,
we expect the trend of declining hosiery sales to continue as a
result of shifts in consumer preferences.
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Cost of sales
|
|
$
|
2,987,500
|
|
|
$
|
3,223,571
|
|
|
$
|
236,071
|
|
|
|
7.3
|
%
|
Cost of sales declined year over year primarily as a result of
the decline in net sales. As a percent of net sales, gross
margin increased from 31.2% in fiscal 2005 to 33.2% in fiscal
2006. The increase in gross margin percentage was primarily due
to a $140 million impact from lower cotton costs, and lower
charges for slow moving and obsolete inventories and a
$13 million impact from the benefits of prior year
restructuring actions partially offset by an $84 million
impact of lower selling prices and changes in product sales mix.
Although our fiscal 2006 results benefited from lower cotton
prices, we currently anticipate cotton costs to increase in
future periods.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
$
|
1,051,833
|
|
|
$
|
1,053,654
|
|
|
$
|
1,821
|
|
|
|
0.2
|
%
|
Selling, general and administrative expenses declined due to a
$31 million benefit from prior year restructuring actions,
an $11 million reduction in variable distribution costs and
a $7 million reduction in pension plan expense. These
decreases were partially offset by a $47 million decrease
in recovery of bad debts, higher share-based compensation
expense, increased advertising and promotion costs and higher
costs
46
incurred related to the spin off. Measured as a percent of net
sales, selling, general and administrative expenses increased
from 22.5% in fiscal 2005 to 23.5% in fiscal 2006.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Restructuring
|
|
$
|
(101
|
)
|
|
$
|
46,978
|
|
|
$
|
47,079
|
|
|
|
NM
|
|
The charge for restructuring in fiscal 2005 is primarily
attributable to costs for severance actions related to the
decision to terminate 1,126 employees, most of whom are located
in the United States. The income from restructuring in fiscal
2006 resulted from the impact of certain restructuring actions
that were completed for amounts more favorable than originally
expected which is partially offset by $4 million of costs
associated with the decision to terminate 449 employees.
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Operating profit
|
|
$
|
433,600
|
|
|
$
|
359,480
|
|
|
$
|
74,120
|
|
|
|
20.6
|
%
|
Operating profit in fiscal 2006 was higher than in fiscal 2005
as a result of the items discussed above.
Interest
Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Interest expense, net
|
|
$
|
17,280
|
|
|
$
|
13,964
|
|
|
$
|
(3,316
|
)
|
|
|
(23.7
|
)%
|
Interest expense decreased year over year as a result of lower
average balances on borrowings from Sara Lee. Interest
income decreased significantly as a result of lower average cash
balances. As a result of the spin off on September 5, 2006,
our net interest expense will increase substantially as a result
of our increased indebtedness.
Income
Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Income tax expense
|
|
$
|
93,827
|
|
|
$
|
127,007
|
|
|
$
|
33,180
|
|
|
|
26.1
|
%
|
Our effective income tax rate decreased from 36.8% in fiscal
2005 to 22.5% in fiscal 2006. The decrease in our effective tax
rate is attributable primarily to an $81.6 million charge
in fiscal 2005 related to the repatriation of the earnings of
foreign subsidiaries to the United States. Of this total,
$50.0 million was recognized in connection with the
remittance of current year earnings to the United States, and
$31.6 million related to earnings repatriated under the
provisions of the American Jobs Creation Act of 2004. The tax
expense for both periods was impacted by a number of significant
items which are set out in the reconciliation of our effective
tax rate to the U.S. statutory rate in Note 17 titled
Income Taxes to our Combined and Consolidated
Financial Statements.
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net income
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
103,984
|
|
|
|
47.6
|
%
|
Net income in fiscal 2006 was higher than in fiscal 2005 as a
result of the items discussed above.
47
Operating
Results by Business Segment Fiscal 2006 Compared
with Fiscal 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
2,627,101
|
|
|
$
|
2,703,637
|
|
|
$
|
(76,536
|
)
|
|
|
(2.8
|
)%
|
Outerwear
|
|
|
1,140,703
|
|
|
|
1,198,286
|
|
|
|
(57,583
|
)
|
|
|
(4.8
|
)
|
Hosiery
|
|
|
290,125
|
|
|
|
338,468
|
|
|
|
(48,343
|
)
|
|
|
(14.3
|
)
|
International
|
|
|
398,157
|
|
|
|
399,989
|
|
|
|
(1,832
|
)
|
|
|
(0.5
|
)
|
Other
|
|
|
62,809
|
|
|
|
88,859
|
|
|
|
(26,050
|
)
|
|
|
(29.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net segment sales
|
|
|
4,518,895
|
|
|
|
4,729,239
|
|
|
|
(210,344
|
)
|
|
|
(4.4
|
)
|
Intersegment
|
|
|
(46,063
|
)
|
|
|
(45,556
|
)
|
|
|
(507
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
(210,851
|
)
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
344,643
|
|
|
$
|
300,796
|
|
|
$
|
43,847
|
|
|
|
14.6
|
%
|
Outerwear
|
|
|
74,170
|
|
|
|
68,301
|
|
|
|
5,869
|
|
|
|
8.6
|
|
Hosiery
|
|
|
39,069
|
|
|
|
40,776
|
|
|
|
(1,707
|
)
|
|
|
(4.2
|
)
|
International
|
|
|
37,003
|
|
|
|
32,231
|
|
|
|
4,772
|
|
|
|
14.8
|
|
Other
|
|
|
127
|
|
|
|
(174
|
)
|
|
|
301
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
495,012
|
|
|
|
441,930
|
|
|
|
53,082
|
|
|
|
12.0
|
|
Items not included in segment
operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses
|
|
|
(52,482
|
)
|
|
|
(21,823
|
)
|
|
|
(30,659
|
)
|
|
|
(140.5
|
)
|
Amortization of trademarks and
other identifiable intangibles
|
|
|
(9,031
|
)
|
|
|
(9,100
|
)
|
|
|
69
|
|
|
|
0.8
|
|
Restructuring
|
|
|
101
|
|
|
|
(46,978
|
)
|
|
|
47,079
|
|
|
|
NM
|
|
Accelerated depreciation
|
|
|
|
|
|
|
(4,549
|
)
|
|
|
4,549
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
74,120
|
|
|
|
20.6
|
|
Interest expense, net
|
|
|
(17,280
|
)
|
|
|
(13,964
|
)
|
|
|
(3,316
|
)
|
|
|
(23.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
416,320
|
|
|
$
|
345,516
|
|
|
$
|
70,804
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
2,627,101
|
|
|
$
|
2,703,637
|
|
|
$
|
(76,536
|
)
|
|
|
(2.8
|
)%
|
Segment operating profit
|
|
|
344,643
|
|
|
|
300,796
|
|
|
|
43,847
|
|
|
|
14.6
|
|
Net sales in the innerwear segment decreased primarily due to a
$65 million impact of our discontinuation of certain
sleepwear, thermal and private label product lines and the
closure of certain retail stores. Net sales were also negatively
impacted by $15 million of lower sock sales due to both
lower shipment volumes and lower pricing.
Gross profit percentage in the innerwear segment increased from
35.1% in fiscal 2005 to 37.2% in fiscal 2006, reflecting a
$78 million impact of lower charges for slow moving and
obsolete inventories, lower cotton costs and benefits from prior
restructuring actions, partially offset by lower gross margins
for socks due to pricing pressure and mix.
The increase in innerwear segment operating profit is primarily
attributable to the increase in gross margin and a
$37 million impact of lower allocated selling expenses and
other selling, general and administrative expenses due to
headcount reductions. This is partially offset by
$21 million related to higher allocated media advertising
and promotion costs.
48
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
1,140,703
|
|
|
$
|
1,198,286
|
|
|
$
|
(57,583
|
)
|
|
|
(4.8
|
)%
|
Segment operating profit
|
|
|
74,170
|
|
|
|
68,301
|
|
|
|
5,869
|
|
|
|
8.6
|
|
Net sales in the outerwear segment decreased primarily due to
the $64 million impact of our exit of certain lower-margin
fleece product lines and a $33 million impact of lower
sales of casualwear products both in the retail channel and in
the embellishment channel, resulting from lower prices and an
unfavorable sales mix, partially offset by a $44 million
impact from higher sales of activewear products.
Gross profit percentage in the outerwear segment increased from
18.9% in fiscal 2005 to 20.0% in fiscal 2006, reflecting a
$72 million impact of lower charges for slow moving and
obsolete inventories, lower cotton costs, benefits from prior
restructuring actions and the exit of certain lower-margin
fleece product lines, partially offset by pricing pressures and
an unfavorable sales mix of t-shirts sold in the embellishment
channel.
The increase in outerwear segment operating profit is primarily
attributable to a higher gross profit percentage and a
$7 million impact of lower allocated selling, general and
administrative expenses due to the benefits of prior
restructuring actions.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
290,125
|
|
|
$
|
338,468
|
|
|
$
|
(48,343
|
)
|
|
|
(14.3
|
)%
|
Segment operating profit
|
|
|
39,069
|
|
|
|
40,776
|
|
|
|
(1,707
|
)
|
|
|
(4.2
|
)
|
Net sales in the hosiery segment decreased primarily due to the
continued decline in sheer hosiery consumption in the United
States. Outside unit volumes in the hosiery segment decreased by
13% in fiscal 2006, with an 11% decline in Leggs
volume to mass retailers and food and drug stores and a 22%
decline in Hanes volume to department stores. Overall the
hosiery market declined 11%. We expect this trend to continue as
a result of shifts in consumer preferences.
Gross profit percentage in the hosiery segment increased from
38.0% in fiscal 2005 to 40.2% in fiscal 2006. The increase
resulted primarily from improved product sales mix and pricing.
The decrease in hosiery segment operating profit is primarily
attributable to lower sales volume.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
398,157
|
|
|
$
|
399,989
|
|
|
$
|
(1,832
|
)
|
|
|
(0.5
|
)%
|
Segment operating profit
|
|
|
37,003
|
|
|
|
32,231
|
|
|
|
4,772
|
|
|
|
14.8
|
|
Net sales in the international segment decreased primarily as a
result of $4 million in lower sales in Latin America which
were mainly the result of a $13 million impact from our
exit of certain low-margin product lines. Changes in foreign
currency exchange rates increased net sales by $10 million.
Gross profit percentage increased from 39.1% in fiscal 2005 to
40.6% in fiscal 2006. The increase is due to lower allocated
selling, general and administrative expenses and margin
improvements in sales in Canada resulting from greater
purchasing power for contracted goods.
The increase in international segment operating profit is
primarily attributable to a $7 million impact of
improvements in gross profit in Canada.
49
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
62,809
|
|
|
$
|
88,859
|
|
|
$
|
(26,050
|
)
|
|
|
(29.3
|
)%
|
Segment operating profit
|
|
|
127
|
|
|
|
(174
|
)
|
|
|
301
|
|
|
|
NM
|
|
Net sales decreased primarily due to the acquisition of National
Textiles, L.L.C. in September 2005 which caused a
$72 million decline as sales to this business were
previously included in net sales prior to the acquisition. Sales
to National Textiles, L.L.C. subsequent to the acquisition of
this business are eliminated for purposes of segment reporting.
This decrease was partially offset by $40 million in fabric
sales to third parties by National Textiles, L.L.C. subsequent
to the acquisition. An additional offset was related to
increased sales of $7 million due to the acquisition of a
Hong Kong based sourcing business at the end of fiscal 2005.
Gross profit and segment operating profit remained flat as
compared to fiscal 2005. As sales of this segment are generated
for the purpose of maintaining asset utilization at certain
manufacturing facilities, gross profit and operating profit are
lower than those of our other segments.
General
Corporate Expenses
General corporate expenses not allocated to the segments
increased in fiscal 2006 from fiscal 2005 as a result of higher
incurred costs related to the spin off.
Combined
and Consolidated Results of Operations Fiscal 2005
Compared with Fiscal 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
|
$
|
50,942
|
|
|
|
1.1
|
%
|
Cost of sales
|
|
|
3,223,571
|
|
|
|
3,092,026
|
|
|
|
(131,545
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,460,112
|
|
|
|
1,540,715
|
|
|
|
(80,603
|
)
|
|
|
(5.2
|
)
|
Selling, general and
administrative expenses
|
|
|
1,053,654
|
|
|
|
1,087,964
|
|
|
|
34,310
|
|
|
|
3.2
|
|
Restructuring
|
|
|
46,978
|
|
|
|
27,466
|
|
|
|
(19,512
|
)
|
|
|
(71.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
359,480
|
|
|
|
425,285
|
|
|
|
(65,805
|
)
|
|
|
(15.5
|
)
|
Interest expense, net
|
|
|
13,964
|
|
|
|
24,413
|
|
|
|
10,449
|
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
345,516
|
|
|
|
400,872
|
|
|
|
(55,356
|
)
|
|
|
(13.8
|
)
|
Income tax expense (benefit)
|
|
|
127,007
|
|
|
|
(48,680
|
)
|
|
|
(175,687
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
|
$
|
(231,043
|
)
|
|
|
(51.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
|
$
|
50,942
|
|
|
|
1.1
|
%
|
Net sales increased year over year primarily as a result of a
$91 million impact from increases in net sales in the
innerwear and outerwear segments. Approximately
$106 million of this increase was due to increased sales of
our activewear products, primarily due to the introduction of
our C9 by Champion line toward the end of fiscal 2004.
Net sales were adversely affected by a $55 million impact
from declines in the hosiery and international segments. The
total impact of the 53rd week in fiscal 2004 was
$77 million.
50
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Cost of sales
|
|
$
|
3,223,571
|
|
|
$
|
3,092,026
|
|
|
$
|
(131,545
|
)
|
|
|
(4.3
|
)%
|
Cost of sales increased year over year as a result of the
increase in net sales. Also contributing to the increase in cost
of sales was a $94 million impact from higher raw material
costs for cotton and charges for slow moving and obsolete
inventories. Our gross margin declined from 33.3% in fiscal 2004
to 31.2% in fiscal 2005.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
$
|
1,053,654
|
|
|
$
|
1,087,964
|
|
|
$
|
34,310
|
|
|
|
3.2
|
%
|
Selling, general and administrative expenses declined due to a
$36 million impact from lower benefit plan costs, increased
recovery of bad debts and a lower cost structure achieved
through prior restructuring actions, offset in part by increases
in total advertising and promotion costs. Selling, general and
administrative expenses in fiscal 2004 included a
$7.5 million charge related to the discontinuation of the
Lovable U.S. trademark, while selling, general and
administrative expenses in fiscal 2005 included a
$4.5 million charge for accelerated depreciation of
leasehold improvements as a result of exiting certain store
leases. Measured as a percent of net sales, selling, general and
administrative expenses declined from 23.5% in fiscal 2004 to
22.5% in fiscal 2005.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Restructuring
|
|
$
|
46,978
|
|
|
$
|
27,466
|
|
|
$
|
(19,512
|
)
|
|
|
(71.0
|
)%
|
The charge for restructuring in fiscal 2005 is primarily
attributable to costs for severance actions related to the
decision to terminate 1,126 employees, most of whom are located
in the United States. The charge for restructuring in fiscal
2004 is primarily attributable to a charge for severance actions
related to the decision to terminate 4,425 employees, most of
whom are located outside the United States. The increase year
over year is primarily attributable to the relative costs
associated with terminating U.S. employees as compared to
international employees.
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Operating profit
|
|
$
|
359,480
|
|
|
$
|
425,285
|
|
|
|
(65,805
|
)
|
|
|
(15.5
|
)%
|
Operating profit in fiscal 2005 was lower than in fiscal 2004
primarily due to higher raw material costs for cotton and
charges for slow moving and obsolete inventories.
Interest
Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Interest expense, net
|
|
$
|
13,964
|
|
|
$
|
24,413
|
|
|
$
|
10,449
|
|
|
|
42.8
|
%
|
Interest expense decreased year over year as a result of lower
average balances on borrowings from Sara Lee. Interest
income increased significantly as a result of higher average
cash balances. As a result of the
51
spin off on September 5, 2006, our net interest expense
will increase substantially as a result of our increased
indebtedness.
Income
Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
127,007
|
|
|
$
|
(48,680
|
)
|
|
$
|
(175,687
|
)
|
|
|
NM
|
|
Our effective income tax rate increased from a negative 12.1% in
fiscal 2004 to 36.8% in fiscal 2005. The increase in our
effective tax rate is attributable primarily to an
$81.6 million charge in fiscal 2005 related to the
repatriation of the earnings of foreign subsidiaries to the
United States. Of this total, $50.0 million was recognized
in connection with the remittance of current year earnings to
the United States, and $31.6 million related to earnings
repatriated under the provisions of the American Jobs Creation
Act of 2004. The negative rate in fiscal 2004 is attributable
primarily to an income tax benefit of $128.1 million
resulting from Sara Lees finalization of tax reviews
and audits for amounts that were less than originally
anticipated and recognized in fiscal 2004. The tax expense for
both periods was impacted by a number of significant items which
are set out in the reconciliation of our effective tax rate to
the U.S. statutory rate in Note 17 titled Income
Taxes to our Combined and Consolidated Financial
Statements.
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net income
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
|
$
|
(231,043
|
)
|
|
|
(51.4
|
)%
|
Net income in fiscal 2005 was lower than in fiscal 2004 as a
result of the decline in operating profit and the increase in
income tax expense, as discussed above.
52
Operating
Results by Business Segment Fiscal 2005 Compared
with Fiscal 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
2,703,637
|
|
|
$
|
2,668,876
|
|
|
$
|
34,761
|
|
|
|
1.3
|
%
|
Outerwear
|
|
|
1,198,286
|
|
|
|
1,141,677
|
|
|
|
56,609
|
|
|
|
5.0
|
|
Hosiery
|
|
|
338,468
|
|
|
|
382,728
|
|
|
|
(44,260
|
)
|
|
|
(11.6
|
)
|
International
|
|
|
399,989
|
|
|
|
410,889
|
|
|
|
(10,900
|
)
|
|
|
(2.7
|
)
|
Other
|
|
|
88,859
|
|
|
|
86,888
|
|
|
|
1,971
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net segment sales
|
|
|
4,729,239
|
|
|
|
4,691,058
|
|
|
|
38,181
|
|
|
|
0.8
|
|
Intersegment
|
|
|
(45,556
|
)
|
|
|
(58,317
|
)
|
|
|
12,761
|
|
|
|
21.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
|
$
|
50,942
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
300,796
|
|
|
$
|
366,988
|
|
|
$
|
(66,192
|
)
|
|
|
(18.0
|
)
|
Outerwear
|
|
|
68,301
|
|
|
|
47,059
|
|
|
|
21,242
|
|
|
|
45.1
|
|
Hosiery
|
|
|
40,776
|
|
|
|
38,113
|
|
|
|
2,663
|
|
|
|
7.0
|
|
International
|
|
|
32,231
|
|
|
|
38,248
|
|
|
|
(6,017
|
)
|
|
|
(15.7
|
)
|
Other
|
|
|
(174
|
)
|
|
|
35
|
|
|
|
(209
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
441,930
|
|
|
|
490,443
|
|
|
|
(48,513
|
)
|
|
|
(9.9
|
)
|
Items not included in segment
operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses
|
|
|
(21,823
|
)
|
|
|
(28,980
|
)
|
|
|
7,157
|
|
|
|
24.7
|
|
Amortization of trademarks and
other identifiable intangibles
|
|
|
(9,100
|
)
|
|
|
(8,712
|
)
|
|
|
(388
|
)
|
|
|
(4.5
|
)
|
Restructuring
|
|
|
(46,978
|
)
|
|
|
(27,466
|
)
|
|
|
(19,512
|
)
|
|
|
(71.0
|
)
|
Accelerated depreciation
|
|
|
(4,549
|
)
|
|
|
|
|
|
|
(4,549
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
|
359,480
|
|
|
|
425,285
|
|
|
|
(65,805
|
)
|
|
|
(15.5
|
)
|
Interest expense, net
|
|
|
(13,964
|
)
|
|
|
(24,413
|
)
|
|
|
10,449
|
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
345,516
|
|
|
$
|
400,872
|
|
|
$
|
(55,356
|
)
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
2,703,637
|
|
|
$
|
2,668,876
|
|
|
$
|
34,761
|
|
|
|
1.3
|
%
|
Segment operating profit
|
|
|
300,796
|
|
|
|
366,988
|
|
|
|
(66,192
|
)
|
|
|
(18.0
|
)
|
Net sales in the innerwear segment increased primarily due to a
$40 million impact from volume increases in the sales of
mens underwear and socks. Net sales were adversely
affected year over year by a $47 million impact of the
53rd week in fiscal 2004.
Gross profit percentage in the innerwear segment declined from
37.5% in fiscal 2004 to 35.1% in fiscal 2005, reflecting a
$60 million impact of higher raw material costs for cotton
and charges for slow moving and obsolete underwear inventories.
The decrease in innerwear segment operating profit is primarily
attributable to the following factors. First, we increased
inventory reserves by $30 million for slow moving and
obsolete underwear inventories in fiscal 2005 as compared to
fiscal 2004. Second, innerwear operating profit was adversely
affected by a $12 million impact of the 53rd week in
fiscal 2004. The remaining decrease in segment operating profit
was primarily the
53
result of higher unit volume offset in part by higher allocated
distribution and media advertising and promotion costs.
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
1,198,286
|
|
|
$
|
1,141,677
|
|
|
$
|
56,609
|
|
|
|
5.0
|
%
|
Segment operating profit
|
|
|
68,301
|
|
|
|
47,059
|
|
|
|
21,242
|
|
|
|
45.1
|
|
Net sales in the outerwear segment increased primarily due to
$106 million impact from increases in sales of activewear
products, offsetting $45 million in volume declines in
t-shirts sold through our embellishment channel. Net sales were
adversely affected year over year by an $18 million impact
of the 53rd week in fiscal 2004.
Gross profit percentage in the outerwear segment decreased from
21.2% in fiscal 2004 to 18.9% in fiscal 2005, reflecting a
$45 million impact of higher raw material costs for cotton
and additional
start-up
costs associated with new product rollouts. These charges are
partially offset by favorable manufacturing variances as a
result of higher sales volume.
The increase in outerwear segment operating profit is
attributable primarily to higher net sales and lower allocated
selling, general and administrative expenses. Segment operating
profit also was adversely affected year over year by a
$1 million impact of the 53rd week in fiscal 2004.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
338,468
|
|
|
$
|
382,728
|
|
|
$
|
(44,260
|
)
|
|
|
(11.6
|
)%
|
Segment operating profit
|
|
|
40,776
|
|
|
|
38,113
|
|
|
|
2,663
|
|
|
|
7.0
|
|
Net sales in the hosiery segment decreased primarily due to
$42 million from unit volume decreases and $5 million
from unfavorable product sales mix. Outside unit volumes in the
hosiery segment decreased by 8% in fiscal 2005, with a 7%
decline in Leggs volume to mass retailers and food
and drug stores and a 13% decline in Hanes volume to
department stores. The 8% volume decrease was in line with the
overall hosiery market decline. Net sales also were adversely
affected year over year by a $6 million impact of the
53rd week in fiscal 2004.
Gross profit percentage in the hosiery segment decreased from
38.7% in fiscal 2004 to 38.0% in fiscal 2005. The decrease
resulted primarily from $1 million in unfavorable product
sales mix.
The increase in hosiery segment operating profit is attributable
primarily to a $16 million decrease in allocated media
advertising and promotion costs and allocated selling, general
and administrative expenses partially offset by a decrease in
sales. Hosiery segment operating profit was also adversely
affected year over year by a $2 million impact of the
53rd week in fiscal 2004.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
399,989
|
|
|
$
|
410,889
|
|
|
$
|
(10,900
|
)
|
|
|
(2.7
|
)%
|
Segment operating profit
|
|
|
32,231
|
|
|
|
38,248
|
|
|
|
(6,017
|
)
|
|
|
(15.7
|
)
|
Net sales in the international segment decreased primarily as a
result of a $19 million decrease in sales from Latin
America and Asia, partially offset by an $11 million impact
from changes in foreign currency
54
exchange rates during fiscal 2005. Net sales were adversely
affected year over year by a $6 million impact of the
53rd week in fiscal 2004.
Gross profit percentage increased from 36.4% in fiscal 2004 to
39.1% in fiscal 2005. The increase resulted primarily from
margin improvements in Canada and Latin America, partially
offset by declines in Asia.
The decrease in international segment operating profit is
attributable primarily to the decrease in net sales and higher
allocated media advertising and promotion expenditures and
selling, general and administrative expenses in fiscal 2005 as
compared to fiscal 2004. These effects were offset in part by
the improvement in gross profit and $3 million from changes
in foreign currency exchange rates. International segment
operating profit also was affected adversely year over year by a
$2 million impact of the 53rd week in fiscal 2004.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
88,859
|
|
|
$
|
86,888
|
|
|
$
|
1,971
|
|
|
|
2.3
|
%
|
Segment operating profit
|
|
|
(174
|
)
|
|
|
35
|
|
|
|
(209
|
)
|
|
|
NM
|
|
Net sales increased due to higher sales of yarn and other
materials to National Textiles, L.L.C. Gross profit and segment
operating profit remained flat as compared to fiscal 2004. As
sales of this segment are generated for the purpose of
maintaining asset utilization at certain manufacturing
facilities, gross profit and operating profit are lower than
those of our other segments.
General
Corporate Expenses
General corporate expenses not allocated to the segments
decreased in fiscal 2005 from fiscal 2004 as a result of lower
allocations of Sara Lee centralized costs and employee benefit
costs, offset in part by expenses incurred for the spin off.
Liquidity
and Capital Resources
Trends
and Uncertainties Affecting Liquidity
Following the spin off that occurred on September 5, 2006,
our capital structure, long-term capital commitments and sources
of liquidity changed significantly from our historical capital
structure, long-term capital commitments and sources of
liquidity. Our primary sources of liquidity are cash provided
from operating activities and availability under the Revolving
Loan Facility (as defined below). The following has or is
expected to negatively impact liquidity:
|
|
|
|
|
we incurred long-term debt in connection with the spin off of
$2.6 billion;
|
|
|
|
we expect to continue to invest in efforts to improve operating
efficiencies and lower costs;
|
|
|
|
we expect to continue to add new manufacturing capacity in
Central America, the Caribbean Basin and Asia;
|
|
|
|
we assumed net pension and other benefit obligations from Sara
Lee of $299 million; and
|
|
|
|
we may need to increase the portion of the income of our foreign
subsidiaries that is expected to be remitted to the United
States, which could significantly increase our income tax
expense.
|
We incurred indebtedness of $2.6 billion in connection with
the spin off as further described below. On September 5,
2006 we paid $2.4 billion of the proceeds from these
borrowings to Sara Lee and, as a result, those proceeds are not
available for our business needs, such as funding working
capital or the expansion of our operations. In addition, in
order to service our substantial debt obligations, we may need
to increase the portion of the income of our foreign
subsidiaries that is expected to be remitted to the United
States, which could significantly increase our income tax
expense. We believe that our cash provided from operating
55
activities, together with our available credit capacity, will
enable us to comply with the terms of our indebtedness and meet
presently foreseeable financial requirements.
We expect to continue the restructuring efforts that we have
undertaken over the last several years. For example, in the six
months ended December 30, 2006 we announced decisions to
close four textile and sewing plants in the United States,
Puerto Rico and Mexico and consolidate three distribution
centers in the United States. The implementation of these
efforts, which are designed to improve operating efficiencies
and lower costs, has resulted and is likely to continue to
result in significant costs. As further plans are developed and
approved by management and our board of directors, we expect to
recognize additional restructuring to eliminate duplicative
functions within the organization and transition a significant
portion of our manufacturing capacity to lower-cost locations.
As a result of these efforts, we expect to incur approximately
$250 million in restructuring and related charges over the
three year period following the spin off from Sara Lee of which
approximately half is expected to be noncash. We also expect to
incur costs associated with the integration of our information
technology systems across our company.
As we continue to add new manufacturing capacity in Central
America, the Caribbean Basin and Asia, our exposure to events
that could disrupt our foreign supply chain, including political
instability, acts of war or terrorism or other international
events resulting in the disruption of trade, disruptions in
shipping and freight forwarding services, increases in oil
prices (which would increase the cost of shipping),
interruptions in the availability of basic services and
infrastructure and fluctuations in foreign currency exchange
rates, is increased. Disruptions in our foreign supply chain
could negatively impact our liquidity by interrupting production
in offshore facilities, increasing our cost of sales, disrupting
merchandise deliveries, delaying receipt of the products into
the United States or preventing us from sourcing our products at
all. Depending on timing, these events could also result in lost
sales, cancellation charges or excessive markdowns.
We assumed $299 million in unfunded employee benefit
liabilities for pension, postretirement and other retirement
benefit qualified and nonqualified plans from Sara Lee in
connection with the spin off that occurred on September 5,
2006. Included in these liabilities are pension obligations that
have not been reflected in our historical financial statements
for periods prior to the spin off, because these obligations
have historically been obligations of Sara Lee. The pension
obligations we assumed are $225 million more than the
corresponding pension assets we acquired. In addition, we could
be required to make contributions to the pension plans in excess
of our current expectations if financial conditions change or if
our actual experience is significantly different than the
assumptions we have used to calculate our pension costs and
obligations. A significant increase in our funding obligations
could have a negative impact on our liquidity.
Net
Cash from Operating Activities
Net cash from operating activities decreased to
$136.1 million in the six months ended December 30,
2006 from $358.9 million in the six months ended
December 31, 2005. The $222.8 million decrease was
primarily the result of lower earnings in the business due to
higher interest expense and income taxes, a pension contribution
of $48.1 million and other changes in the use of working
capital. The net cash from operating activities of
$358.9 million for the six months ended December 31,
2005 was unusually high due to the timing of other working
capital reductions.
Net
Cash Used in Investing Activities
Net cash used in investing activities decreased to
$23.0 million in the six months ended December 30,
2006 from $49.9 million in the six months ended
December 31, 2005. The $26.9 million decrease was
primarily the result of more cash received from sales of
property and equipment, and lower purchases of property and
equipment, partially offset by the acquisition of a sewing
facility in Thailand in November 2006.
Net
Cash Used in Financing Activities
Net cash used in financing activities decreased to
$253.9 million in the six months ended December 30,
2006 from $881.4 million in the six months ended
December 31, 2005. The decrease was primarily the result of
net transactions with parent companies and related entities. In
connection with the spin off on September 5,
56
2006, we incurred indebtedness of $2.6 billion pursuant to
the $2.15 billion Senior Secured Credit Facility, the
$450 million Second Lien Credit Facility and the
$500 million Bridge Loan Facility. We used proceeds
from borrowings under these facilities to distribute a cash
dividend payment to Sara Lee of $1.95 billion and repay a
loan from Sara Lee in the amount of $450 million. In
connection with the incurrence of debt under these credit
facilities and the issuance of the Notes in December 2006, we
paid $50 million in debt issuance costs, which are included
in the accompanying Combined and Consolidated Balance Sheet. The
debt issuance costs are being amortized to interest expense in
the accompanying Combined and Consolidated Statement of Income
over the life of these credit facilities.
In December 2006, we completed an offering of $500 million
aggregate principal amount of the Notes. The proceeds from the
offering were used to repay all outstanding borrowings under the
Bridge Loan Facility, which were $500 million.
Also in December 2006, we elected to prepay $106.6 million
of long-term debt primarily under the Term B Loan Facility
(as defined below), which bears interest at a higher rate than
the Term A Loan Facility (as defined below), to reduce our
overall indebtedness and lower our ongoing interest costs.
Approximately $6.6 million of the amount included in this
prepayment was due in the first quarter of 2007.
Cash
and Cash Equivalents
As of December 30, 2006 and July 1, 2006, cash and
cash equivalents were $156.0 million and
$298.3 million, respectively. The decrease in cash and cash
equivalents as of December 30, 2006 was primarily the
result of transactions associated with the spin off,
$106.6 million prepayment of long-term debt and a voluntary
pension contribution of $48.1 million. The July 1,
2006 balance was also impacted by a $275 million bank
overdraft which was classified as a current liability. As part
of Sara Lee, we participated in Sara Lees cash pooling
arrangements under which positive and negative cash balances are
netted within geographic regions. The recapitalization
undertaken in conjunction with the spin off resulted in a
reduction in cash and cash equivalents. In periods after the
spin off, our primary sources of liquidity are cash provided
from operating activities and availability under the Revolving
Loan Facility.
Credit
Facilities and Notes Payable
In connection with the spin off, on September 5, 2006, we
entered into the $2.15 billion Senior Secured Credit
Facility which includes a $500 million revolving loan
facility, or the Revolving Loan Facility, that
was undrawn at the time of the spin off, the $450 million
Second Lien Credit Facility and the $500 million Bridge
Loan Facility with various financial institution lenders,
including Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Morgan Stanley Senior Funding, Inc., as the
co-syndication agents and the joint lead arrangers and joint
bookrunners. Citicorp USA, Inc. is acting as administrative
agent and Citibank, N.A. is acting as collateral agent for the
Senior Secured Credit Facility and the Second Lien Credit
Facility. Morgan Stanley Senior Funding, Inc. acted as the
administrative agent for the Bridge Loan Facility. As a
result of this debt incurrence, the amount of interest expense
will increase significantly in periods after the spin off. We
paid $2.4 billion of the proceeds of these borrowings to
Sara Lee in connection with the consummation of the spin off. As
noted above, we repaid all amounts outstanding under the Bridge
Loan Facility with the proceeds of the offering of the
Notes in December 2006.
Senior
Secured Credit Facility
The Senior Secured Credit Facility provides for aggregate
borrowings of $2.15 billion, consisting of: (i) a
$250.0 million Term A loan facility (the Term A
Loan Facility); (ii) a $1.4 billion Term B
loan facility (the Term B Loan Facility); and
(iii) the $500.0 million Revolving Loan Facility
that was undrawn as of December 30, 2006. Any issuance of
commercial paper would reduce the amount available under the
Revolving Loan Facility. As of December 30, 2006,
$122.5 million of standby and trade letters of credit were
issued under this facility and $377.5 million was available
for borrowing.
The Senior Secured Credit Facility is guaranteed by
substantially all of our existing and future direct and indirect
U.S. subsidiaries, with certain customary or
agreed-upon
exceptions for certain subsidiaries. We and
57
each of the guarantors under the Senior Secured Credit Facility
have granted the lenders under the Senior Secured Credit
Facility a valid and perfected first priority (subject to
certain customary exceptions) lien and security interest in the
following:
|
|
|
|
|
the equity interests of substantially all of our direct and
indirect U.S. subsidiaries and 65% of the voting securities
of certain foreign subsidiaries; and
|
|
|
|
substantially all present and future property and assets, real
and personal, tangible and intangible, of Hanesbrands and each
guarantor, except for certain enumerated interests, and all
proceeds and products of such property and assets.
|
The final maturity of the Term A Loan Facility is
September 5, 2012. The Term A Loan Facility will
amortize in an amount per annum equal to the following: year
1 5.00%; year 2 10.00%; year
3 15.00%; year 4 20.00%; year
5 25.00%; year 6 25.00%. The final
maturity of the Term B Loan Facility is September 5,
2013. The Term B Loan Facility will be repaid in equal
quarterly installments in an amount equal to 1% per annum,
with the balance due on the maturity date. The final maturity of
the Revolving Loan Facility is September 5, 2011. All
borrowings under the Revolving Loan Facility must be repaid
in full upon maturity. Outstanding borrowings under the Senior
Secured Credit Facility are prepayable without penalty.
At our option, borrowings under the Senior Secured Credit
Facility may be maintained from time to time as (a) Base
Rate loans, which shall bear interest at the higher of
(i) 1/2 of 1% in excess of the federal funds rate and
(ii) the rate published in the Wall Street Journal as the
prime rate (or equivalent), in each case in effect
from time to time, plus the applicable margin in effect from
time to time (which is currently 0.75%), or (b) LIBOR-based
loans, which shall bear interest at the LIBO Rate (as defined in
the Senior Secured Credit Facility and adjusted for maximum
reserves), as determined by the administrative agent for the
respective interest period plus the applicable margin in effect
from time to time (which is currently 1.75%).
In February 2007, we entered into an amendment to the Senior
Secured Credit Facility, pursuant to which the applicable margin
with respect to Term B Loan Facility was reduced from 2.25%
to 1.75% with respect to LIBOR-based loans and from 1.25% to
0.75% with respect to loans maintained as Base Rate loans. The
amendment also provides that in the event that, prior to
February 22, 2008, we: (i) incur a new tranche of
replacement loans constituting obligations under the Senior
Secured Credit Facility having an effective interest rate margin
less than the applicable margin for loans pursuant to the Term B
Loan Facility (Term B Loans), the proceeds of
which are used to repay or return, in whole or in part,
principal of the outstanding Term B Loans, (ii) consummate
any other amendment to the Senior Secured Credit Facility that
reduces the applicable margin for the Term B Loans, or
(iii) incur additional Term B loans having an effective
interest rate margin less than the applicable margin for Term B
Loans, the proceeds of which are used in whole or in part to
prepay or repay outstanding Term B Loans, then in any such case,
we will pay to the Administrative Agent, for the ratable account
of each Lender with outstanding Term B Loans, a fee in an amount
equal to 1.0% of the aggregate principal amount of all Term B
Loans being replaced on such date immediately prior to the
effectiveness of such transaction.
The Senior Secured Credit Facility requires us to comply with
customary affirmative, negative and financial covenants. The
Senior Secured Credit Facility requires that we maintain a
minimum interest coverage ratio and a maximum total debt to
earnings before income taxes, depreciation expense and
amortization, or EBITDA ratio. The interest coverage
covenant requires that the ratio of our EBITDA for the preceding
four fiscal quarters to our consolidated total interest expense
for such period shall not be less than 2 to 1 for each fiscal
quarter ending after December 15, 2006. The interest
coverage ratio will increase over time until it reaches 3.25 to
1 for fiscal quarters ending after October 15, 2009. The
total debt to EBITDA covenant requires that the ratio of our
total debt to our EBITDA for the preceding four fiscal quarters
will not be more than 5.5 to 1 for each fiscal quarter ending
after December 15, 2006. This ratio limit will decline over
time until it reaches 3 to 1 for fiscal quarters after
October 15, 2009. The method of calculating all of the
components used in the covenants is included in the Senior
Secured Credit Facility. As of December 30, 2006, we were
in compliance with all covenants.
58
The Senior Secured Credit Facility contains customary events of
default, including nonpayment of principal when due; nonpayment
of interest, fees or other amounts after stated grace period;
inaccuracy of representations and warranties; violations of
covenants; certain bankruptcies and liquidations; any
cross-default of more than $50 million; certain judgments
of more than $50 million; certain events related to the
Employee Retirement Income Security Act of 1974, as amended, or
ERISA, and a change in control (as defined in the
Senior Secured Credit Facility).
Second
Lien Credit Facility
The Second Lien Credit Facility provides for aggregate
borrowings of $450 million by Hanesbrands
wholly-owned subsidiary, HBI Branded Apparel Limited, Inc. The
Second Lien Credit Facility is unconditionally guaranteed by
Hanesbrands and each entity guaranteeing the Senior Secured
Credit Facility, subject to the same exceptions and exclusions
provided in the Senior Secured Credit Facility. The Second Lien
Credit Facility and the guarantees in respect thereof are
secured on a second-priority basis (subordinate only to the
Senior Secured Credit Facility and any permitted additions
thereto or refinancings thereof) by substantially all of the
assets that secure the Senior Secured Credit Facility (subject
to the same exceptions).
Loans under the Second Lien Credit Facility will bear interest
in the same manner as those under the Senior Secured Credit
Facility, subject to a margin of 2.75% for Base Rate loans and
3.75% for LIBOR based loans.
The Second Lien Credit Facility requires us to comply with
customary affirmative, negative and financial covenants. The
Second Lien Credit Facility requires that we maintain a minimum
interest coverage ratio and a maximum total debt to EBITDA
ratio. The interest coverage covenant requires that the ratio of
our EBITDA for the preceding four fiscal quarters to our
consolidated total interest expense for such period shall not be
less than 1.5 to 1 for each fiscal quarter ending after
December 15, 2006. The interest coverage ratio will
increase over time until it reaches 2.5 to 1 for fiscal quarters
ending after April 15, 2009. The total debt to EBITDA
covenant requires that the ratio of our total debt to our EBITDA
for the preceding four fiscal quarters will not be more than 6
to 1 for each fiscal quarter ending after December 15,
2006. This ratio will decline over time until it reaches 3.75 to
1 for fiscal quarters ending after October 15, 2009. The
method of calculating all of the components used in the
covenants is included in the Second Lien Credit Facility. As of
December 30, 2006, we were in compliance with all covenants.
The Second Lien Credit Facility contains customary events of
default, including nonpayment of principal when due; nonpayment
of interest, fees or other amounts after stated grace period;
inaccuracy of representations and warranties; violations of
covenants; certain bankruptcies and liquidations; any
cross-default of more than $60 million; certain judgments
of more than $60 million; certain ERISA-related events; and
a change in control (as defined in the Second Lien Credit
Facility).
The Second Lien Credit Facility matures on March 5, 2014,
may not be prepaid prior to September 5, 2007, and includes
premiums for prepayment of the loan prior to September 5,
2009 based on the timing of the prepayment. The Second Lien
Credit Facility will not amortize and will be repaid in full on
its maturity date.
Bridge
Loan Facility
Prior to its repayment in full, the Bridge Loan Facility
provided for a borrowing of $500 million and was
unconditionally guaranteed by each entity guaranteeing the
Senior Secured Credit Facility. The Bridge Loan Facility
was unsecured and was scheduled to mature on September 5,
2007. If the Bridge Loan Facility had not been repaid prior to
or at maturity, the outstanding principal amount of the facility
was to roll over into a rollover loan in the same amount that
was to mature on September 5, 2014. Lenders that extended
rollover loans to us would have been entitled to request that we
issue exchange notes to them in exchange for the
rollover loans, and also to request that we register such notes
upon request.
In December 2006 as discussed below, the proceeds from the
issuance of the Notes were used to repay the entire outstanding
principal of the Bridge Loan Facility. In connection with the
issuance of the Notes, we
59
recognized a $6 million loss on early extinguishment of
debt for unamortized finance fees on the Bridge
Loan Facility.
Notes Payable
Notes payable to banks were $14.3 million at
December 30, 2006, $3.5 million at July 1, 2006
and $83.3 million at July 2, 2005.
During the six months ended December 30, 2006, we amended
our short-term revolving facility arrangement with a Chinese
branch of a U.S. bank. The facility, renewable annually,
was initially in the amount of RMB 30 million and was
increased to RMB 56 million (approximately
$7.2 million) as of December 30, 2006. Borrowings
under the facility accrue interest at the prevailing base
lending rates published by the Peoples Bank of China from
time to time less 10%. As of December 30, 2006,
$6.6 million was outstanding under this facility with
$0.6 million of borrowing available. We were in compliance
with the covenants contained in this facility at
December 30, 2006.
We had other short-term obligations amounting to
$7.7 million which consisted of a short-term revolving
facility arrangement with an Indian branch of a U.S. bank
amounting to INR 220 million (approximately
$5.0 million) of which $3.9 million was outstanding at
December 30, 2006 which accrues interest at 10.5%, and
multiple short-term credit facilities and promissory notes
acquired as part of our acquisition of a sewing facility in
Thailand, totaling THB 241 million (approximately
$6.6 million) of which $3.8 million was outstanding at
December 30, 2006, which accrues interest at an average
rate of 5.9%.
Historically, we maintained a
364-day
short-term non-revolving credit facility under which the Company
could borrow up to 107 million Canadian dollars at a
floating rate of interest that was based upon either the
announced bankers acceptance lending rate plus 0.6% or the
Canadian prime lending rate. Under the agreement, we had the
option to borrow amounts for periods of time less than
364 days. The facility expired at the end of the
364-day
period and the amount of the facility could not be increased
until the next renewal date. During fiscal 2004 and 2005 we and
the bank renewed the facility. At the end of fiscal 2005, we had
borrowings under this facility of $82.0 million at an
interest rate of 3.16%. In 2006, the borrowings under this
agreement were repaid at the end of the year and the facility
was closed.
The
Notes
On December 14, 2006, we issued $500.0 million
aggregate principal amount of the Notes. The Notes are senior
unsecured obligations that rank equal in right of payment with
all of our existing and future unsubordinated indebtedness. The
Notes bear interest at an annual rate, reset semi-annually,
equal to LIBOR plus 3.375%. Interest is payable on the Notes on
June 15 and December 15 of each year beginning on June 15,
2007. The Notes will mature on December 15, 2014. The net
proceeds from the sale of the Notes were approximately
$492.0 million. These proceeds, together with our working
capital, were used to repay in full the $500 million
outstanding under the Bridge Loan Facility. The Notes are
guaranteed by substantially all of our domestic subsidiaries.
We may redeem some or all of the Notes at any time on or after
December 15, 2008 at a redemption price equal to the
principal amount of the Notes plus a premium of 102% if redeemed
during the
12-month
period commencing on December 15, 2008, 101% if redeemed
during the
12-month
period commencing on December 15, 2009 and 100% if redeemed
during the
12-month
period commencing on December 15, 2010, as well as any
accrued and unpaid interest as of the redemption date. At any
time on or prior to December 15, 2008, we may redeem up to
35% of the principal amount of the Notes with the net cash
proceeds of one or more sales of certain types of capital stock
at a redemption price equal to the product of (x) the sum
of (1) 100% and (2) a percentage equal to the per
annum rate of interest on the Notes then applicable on the date
on which the notice of redemption is given, and (y) the
principal amount thereof, plus accrued and unpaid interest to
the redemption date, provided that at least 65% of the aggregate
principal amount of the Notes originally issued remains
outstanding after each such redemption. At any time prior to
December 15, 2008, we may also redeem all or a part of the
Notes upon not less than 30 nor more than 60 days
prior notice, at a
60
redemption price equal to 100% of the principal amount of the
Notes redeemed plus a specified premium as of, and accrued and
unpaid interest and additional interest, if any, to the
redemption date.
The Exchange Notes will bear identical terms to those described
above. See Description of the Exchange Notes for
further information regarding the terms of the Exchange Notes.
Derivatives
We are required under the Credit Facilities entered into in
connection with the spin off to hedge a portion of our floating
rate debt to reduce interest rate risk caused by floating rate
debt issuance. During the six months ended December 30,
2006, we entered into various hedging arrangements whereby we
capped the interest rate on $1 billion of our floating rate
debt at 5.75%. We also entered into interest rate swaps tied to
the 3-month
LIBOR rate whereby we fixed the interest rate on an aggregate of
$500 million of our floating rate debt at a blended rate of
approximately 5.16%. Approximately 60% of our total debt
outstanding at December 30, 2006 is at a fixed or capped
rate. There was no hedge ineffectiveness during the current
period related to these instruments.
Cotton is the primary raw material we use to manufacture many of
our products. We generally purchase our raw materials at market
prices. In fiscal 2006, we started to use commodity financial
instruments, options and forward contracts to hedge the price of
cotton, for which there is a high correlation between the hedged
item and the hedged instrument. We generally do not use
commodity financial instruments to hedge other raw material
commodity prices.
Off-Balance
Sheet Arrangements
We engage in off-balance sheet arrangements that we believe are
reasonably likely to have a current or future effect on our
financial condition and results of operations. These off-balance
sheet arrangements include operating leases for manufacturing
facilities, warehouses, office space, vehicles and machinery and
equipment.
Minimum operating lease obligations are scheduled to be paid as
follows: $32.4 million in 2007, $27.1 million in 2008,
$22.5 million in 2009, $17.6 million in 2010,
$12.6 million in 2011 and $15.1 million thereafter.
Future
Contractual Obligations and Commitments
The following table contains information on our contractual
obligations and commitments as of December 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Period
|
|
|
|
At December 30,
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
1 Year
|
|
|
1 3 Years
|
|
|
3 5 Years
|
|
|
Thereafter
|
|
|
|
(in thousands)
|
|
|
Long-term debt
|
|
$
|
2,493,375
|
|
|
$
|
9,375
|
|
|
$
|
89,000
|
|
|
$
|
124,500
|
|
|
$
|
2,270,500
|
|
Notes payable to banks
|
|
|
14,264
|
|
|
|
14,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on debt obligations(1)
|
|
|
1,371,515
|
|
|
|
202,264
|
|
|
|
396,688
|
|
|
|
379,686
|
|
|
|
392,877
|
|
Operating lease obligations
|
|
|
127,385
|
|
|
|
32,440
|
|
|
|
49,652
|
|
|
|
30,194
|
|
|
|
15,099
|
|
Capital lease obligations
including related interest payments
|
|
|
2,575
|
|
|
|
1,290
|
|
|
|
1,285
|
|
|
|
|
|
|
|
|
|
Purchase obligations(2)
|
|
|
623,784
|
|
|
|
569,821
|
|
|
|
47,801
|
|
|
|
6,162
|
|
|
|
|
|
Other long-term obligations(3)
|
|
|
68,317
|
|
|
|
52,503
|
|
|
|
8,418
|
|
|
|
7,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,701,215
|
|
|
$
|
881,957
|
|
|
$
|
592,844
|
|
|
$
|
547,938
|
|
|
$
|
2,678,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest obligations on floating rate debt instruments are
calculated for future periods using interest rates in effect at
December 30, 2006. |
61
|
|
|
(2) |
|
Purchase obligations, as disclosed in the table, are
obligations to purchase goods and services in the ordinary
course of business for production and inventory needs (such as
raw materials, supplies, packaging, and manufacturing
arrangements), capital expenditures, marketing services,
royalty-bearing license agreement payments and other
professional services. This table only includes purchase
obligations for which we have agreed upon a fixed or minimum
quantity to purchase, a fixed, minimum or variable pricing
arrangement, and an approximate delivery date. Actual cash
expenditures relating to these obligations may vary from the
amounts shown in the table above. We enter into purchase
obligations when terms or conditions are favorable or when a
long-term commitment is necessary. Many of these arrangements
are cancelable after a notice period without a significant
penalty. This table omits purchase obligations that did not
exist as of December 30, 2006, as well as obligations for
accounts payable and accrued liabilities recorded on the balance
sheet. |
|
(3) |
|
Represents the projected payment for long-term liabilities
recorded on the balance sheet for deferred compensation,
deferred income, and the fiscal 2007 projected minimum pension
contribution of $33 million. We have employee benefit
obligations consisting of pensions and other postretirement
benefits including medical. Other than the fiscal 2007 projected
minimum pension contribution of $33 million, pension and
postretirement obligations have been excluded from the table. A
discussion of our pension and postretirement plans is included
in Notes 15 and 16 to our Combined and Consolidated
Financial Statements. Our obligations for employee health and
property and casualty losses are also excluded from the table. |
Pension
Plans
Prior to the spin off on September 5, 2006, the exact
amount of contributions made to pension plans by us in any year
depended upon a number of factors and included minimum funding
requirements in the jurisdictions in which Sara Lee operated and
Sara Lees policy of charging its operating units for
pension costs. In conjunction with the spin off which occurred
on September 5, 2006, we established the Hanesbrands Inc.
Pension and Retirement Plan, which assumed the portion of the
underfunded liabilities and the portion of the assets of pension
plans sponsored by Sara Lee that relate to our employees. In
addition, we assumed sponsorship of certain other Sara Lee plans
and will continue sponsorship of the Playtex Apparel Inc.
Pension Plan and the National Textiles, L.L.C. Pension Plan. We
are required to make periodic pension contributions to the
assumed plans, the Playtex Apparel Inc. Pension Plan, the
National Textiles, L.L.C. Pension Plan and the Hanesbrands Inc.
Pension and Retirement Plan. Our net unfunded liability for
these qualified pension plans as of December 30, 2006 is
$173.1 million, exclusive of liabilities for our
nonqualified supplemental retirement plans. The levels of
contribution will differ from historical levels of contributions
by Sara Lee due to a number of factors, including the funded
status of the plans as of the completion of the spin off, as
well as our operation as a stand-alone company, regulatory
requirements, financing costs, tax positions and jurisdictional
funding requirements.
During the six months ended December 30, 2006, we were not
required to make any contributions to our pension plans, however
we voluntarily contributed $48 million to our pension plans
based upon minimum funding estimates for fiscal 2007. We
currently expect to contribute, at a minimum, an additional
$33 million to our pension plans during fiscal 2007. We may
make further contributions to our pension plans in fiscal 2007
depending upon changes in the funded status of those plans and
as we gain more clarity with respect to the Pension Protection
Act of 2006, or PPA, that was signed into law on
August 17, 2006. The United States Treasury Department is
in the process of developing implementation guidance for the
PPA, however, it is likely the PPA will accelerate minimum
funding requirements beginning in fiscal 2009. We may choose to
pre-fund some of this anticipated funding.
Share
Repurchase Program
On February 1, 2007, we announced that our Board of
Directors has granted authority for the repurchase of up to
10 million shares of our common stock. Share repurchases
will be made periodically in open-market transactions, and are
subject to market conditions, legal requirements and other
factors. Additionally, management has been granted authority to
establish a trading plan under
Rule 10b5-1
of the Exchange Act in connection with share repurchases, which
will allow use to repurchase shares in the open market during
62
periods in which the stock trading window is otherwise closed
for our company and certain of our officers and employees
pursuant to our insider trading policy.
Significant
Accounting Policies and Critical Estimates
We have chosen accounting policies that we believe are
appropriate to accurately and fairly report our operating
results and financial position in conformity with accounting
principles generally accepted in the United States. We apply
these accounting policies in a consistent manner. Our
significant accounting policies are discussed in Note 2,
titled Summary of Significant Accounting Policies,
to our Combined and Consolidated Financial Statements.
The application of these accounting policies requires that we
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and related
disclosures. These estimates and assumptions are based on
historical and other factors believed to be reasonable under the
circumstances. We evaluate these estimates and assumptions on an
ongoing basis and may retain outside consultants to assist in
our evaluation. If actual results ultimately differ from
previous estimates, the revisions are included in results of
operations in the period in which the actual amounts become
known. The accounting policies that involve the most significant
management judgments and estimates used in preparation of our
Combined and Consolidated Financial Statements, or are the most
sensitive to change from outside factors, are the following:
Sales
Recognition and Incentives
We recognize sales when title and risk of loss passes to the
customer. We record provisions for any uncollectible amounts
based upon our historical collection statistics and current
customer information. Our management reviews these estimates
each quarter and makes adjustments based upon actual experience.
Note 2(d), titled Summary of Significant Accounting
Policies Sales Recognition and Incentives, to
our Combined and Consolidated Financial Statements describes a
variety of sales incentives that we offer to resellers and
consumers of our products. Measuring the cost of these
incentives requires, in many cases, estimating future customer
utilization and redemption rates. We use historical data for
similar transactions to estimate the cost of current incentive
programs. Our management reviews these estimates each quarter
and makes adjustments based upon actual experience and other
available information.
Catalog
Expenses
We incur expenses for printing catalogs for our products to aid
in our sales efforts. We initially record these expenses as a
prepaid item and charge it against selling, general and
administrative expenses over time as the catalog is distributed
into the stream of commerce. Expenses are recognized at a rate
that approximates our historical experience with regard to the
timing and amount of sales attributable to a catalog
distribution.
Inventory
Valuation
We carry inventory on our balance sheet at the estimated lower
of cost or market. Cost is determined by the
first-in,
first-out, or FIFO, method for our inventories at
December 30, 2006. We carry obsolete, damaged, and excess
inventory at the net realizable value, which we determine by
assessing historical recovery rates, current market conditions
and our future marketing and sales plans. Because our assessment
of net realizable value is made at a point in time, there are
inherent uncertainties related to our value determination.
Market factors and other conditions underlying the net
realizable value may change, resulting in further reserve
requirements. A reduction in the carrying amount of an inventory
item from cost to market value creates a new cost basis for the
item that cannot be reversed at a later period. During the six
months ended December 30, 2006, we elected to convert all
inventory valued by the
last-in,
first-out, or LIFO, method to the FIFO method. In
accordance with the Statement of Financial Accounting Standards,
or SFAS, No. 154, Accounting Changes and Error
Corrections, or SFAS 154, a change from the
LIFO to FIFO method of inventory valuation constitutes a change
in accounting principle. Historically, inventory valued under
the LIFO method, which was 4% of total inventories, would have
had the same value if measured under the FIFO method. Therefore,
the conversion has no retrospective reporting impact.
63
Rebates, discounts and other cash consideration received from a
vendor related to inventory purchases are reflected as
reductions in the cost of the related inventory item, and are
therefore reflected in cost of sales when the related inventory
item is sold. While we believe that adequate write-downs for
inventory obsolescence have been provided in the Combined and
Consolidated Financial Statements, consumer tastes and
preferences will continue to change and we could experience
additional inventory write-downs in the future.
Depreciation
and Impairment of Property, Plant and Equipment
We state property, plant and equipment at its historical cost,
and we compute depreciation using the straight-line method over
the assets life. We estimate an assets life based on
historical experience, manufacturers estimates,
engineering or appraisal evaluations, our future business plans
and the period over which the asset will economically benefit
us, which may be the same as or shorter than its physical life.
Our policies require that we periodically review our
assets remaining depreciable lives based upon actual
experience and expected future utilization. A change in the
depreciable life is treated as a change in accounting estimate
and the accelerated depreciation is accounted for in the period
of change and future periods. Based upon current levels of
depreciation, the average remaining depreciable life of our net
property other than land is five years.
We test an asset for recoverability whenever events or changes
in circumstances indicate that its carrying value may not be
recoverable. Such events include significant adverse changes in
business climate, several periods of operating or cash flow
losses, forecasted continuing losses or a current expectation
that an asset or asset group will be disposed of before the end
of its useful life. We evaluate an assets recoverability
by comparing the asset or asset groups net carrying amount
to the future net undiscounted cash flows we expect such asset
or asset group will generate. If we determine that an asset is
not recoverable, we recognize an impairment loss in the amount
by which the assets carrying amount exceeds its estimated
fair value.
When we recognize an impairment loss for an asset held for use,
we depreciate the assets adjusted carrying amount over its
remaining useful life. We do not restore previously recognized
impairment losses.
Trademarks
and Other Identifiable Intangibles
Trademarks and computer software are our primary identifiable
intangible assets. We amortize identifiable intangibles with
finite lives, and we do not amortize identifiable intangibles
with indefinite lives. We base the estimated useful life of an
identifiable intangible asset upon a number of factors,
including the effects of demand, competition, expected changes
in distribution channels and the level of maintenance
expenditures required to obtain future cash flows. As of
December 30, 2006, the net book value of trademarks and
other identifiable intangible assets was $137 million, of
which we are amortizing the entire balance. We anticipate that
our amortization expense for the 2007 fiscal year will be
$7.3 million.
We evaluate identifiable intangible assets subject to
amortization for impairment using a process similar to that used
to evaluate asset amortization described above under
Depreciation and Impairment of Property, Plant
and Equipment. We assess identifiable intangible assets
not subject to amortization for impairment at least annually and
more often as triggering events occur. In order to determine the
impairment of identifiable intangible assets not subject to
amortization, we compare the fair value of the intangible asset
to its carrying amount. We recognize an impairment loss for the
amount by which an identifiable intangible assets carrying
value exceeds its fair value.
We measure a trademarks fair value using the royalty saved
method. We determine the royalty saved method by evaluating
various factors to discount anticipated future cash flows,
including operating results, business plans, and present value
techniques. The rates we use to discount cash flows are based on
interest rates and the cost of capital at a point in time.
Because there are inherent uncertainties related to these
factors and our judgment in applying them, the assumptions
underlying the impairment analysis may change in such a manner
that impairment in value may occur in the future. Such
impairment will be recognized in the period in which it becomes
known.
64
Assets
and Liabilities Acquired in Business Combinations
We account for business acquisitions using the purchase method,
which requires us to allocate the cost of an acquired business
to the acquired assets and liabilities based on their estimated
fair values at the acquisition date. We recognize the excess of
an acquired businesss cost over the fair value of acquired
assets and liabilities as goodwill as discussed below under
Goodwill. We use a variety of information sources to
determine the fair value of acquired assets and liabilities. We
generally use third-party appraisers to determine the fair value
and lives of property and identifiable intangibles, consulting
actuaries to determine the fair value of obligations associated
with defined benefit pension plans, and legal counsel to assess
obligations associated with legal and environmental claims.
Goodwill
As of December 30, 2006, we had $281.5 million of
goodwill. We do not amortize goodwill, but we assess for
impairment at least annually and more often as triggering events
occur. Historically, we have performed our annual impairment
review in the second quarter of each year.
In evaluating the recoverability of goodwill, we estimate the
fair value of our reporting units. We have determined that our
reporting units are at the operating segment level. We rely on a
number of factors to determine the fair value of our reporting
units and evaluate various factors to discount anticipated
future cash flows, including operating results, business plans,
and present value techniques. As discussed above under
Trademarks and Other Identifiable Intangibles, there
are inherent uncertainties related to these factors, and our
judgment in applying them and the assumptions underlying the
impairment analysis may change in such a manner that impairment
in value may occur in the future. Such impairment will be
recognized in the period in which it becomes known.
We evaluate the recoverability of goodwill using a two-step
process based on an evaluation of reporting units. The first
step involves a comparison of a reporting units fair value
to its carrying value. In the second step, if the reporting
units carrying value exceeds its fair value, we compare
the goodwills implied fair value and its carrying value.
If the goodwills carrying value exceeds its implied fair
value, we recognize an impairment loss in an amount equal to
such excess.
Insurance
Reserves
Prior to the spin off on September 5, 2006, we were insured
through Sara Lee for property, workers compensation, and
other casualty programs, subject to minimum claims thresholds.
Sara Lee charged an amount to cover premium costs to each
operating unit. Subsequent to the spin off on September 5,
2006, we maintain our own insurance coverage for these programs.
We are responsible for losses up to certain limits and are
required to estimate a liability that represents the ultimate
exposure for aggregate losses below those limits. This liability
is based on managements estimates of the ultimate costs to
be incurred to settle known claims and claims not reported as of
the balance sheet date. The estimated liability is not
discounted and is based on a number of assumptions and factors,
including historical trends, actuarial assumptions and economic
conditions. If actual trends differ from the estimates, the
financial results could be impacted.
Income
Taxes
Prior to spin off on September 5, 2006, all income taxes
were computed and reported on a separate return basis as if we
were not part of Sara Lee. Deferred taxes were recognized for
the future tax effects of temporary differences between
financial and income tax reporting using tax rates in effect for
the years in which the differences are expected to reverse. Net
operating loss carryforwards had been determined in our Combined
and Consolidated Financial Statements as if we were separate
from Sara Lee, resulting in a different net operating loss
carryforward amount than reflected by Sara Lee. Given our
continuing losses in certain geographic locations on a separate
return basis, a valuation allowance has been established for the
deferred tax assets relating to these specific locations.
Federal income taxes are provided on that portion of our income
of foreign subsidiaries that is expected to be remitted to the
United States and be taxable, reflecting the historical
decisions made by Sara Lee with regards to earnings permanently
reinvested in foreign jurisdictions. In periods
65
after the spin off, we may make different decisions as to the
amount of earnings permanently reinvested in foreign
jurisdictions, due to anticipated cash flow or other business
requirements, which may impact our federal income tax provision
and effective tax rate.
We periodically estimate the probable tax obligations using
historical experience in tax jurisdictions and our informed
judgment. There are inherent uncertainties related to the
interpretation of tax regulations in the jurisdictions in which
we transact business. The judgments and estimates made at a
point in time may change based on the outcome of tax audits, as
well as changes to, or further interpretations of, regulations.
Income tax expense is adjusted in the period in which these
events occur, and these adjustments are included in our Combined
and Consolidated Statements of Income. If such changes take
place, there is a risk that our effective tax rate may increase
or decrease in any period.
In conjunction with the spin off, we and Sara Lee entered into a
tax sharing agreement, which allocates responsibilities between
us and Sara Lee for taxes and certain other tax matters. Under
the tax sharing agreement, Sara Lee generally is liable for all
U.S. federal, state, local and foreign income taxes
attributable to us with respect to taxable periods ending on or
before September 5, 2006. Sara Lee also is liable for
income taxes attributable to us with respect to taxable periods
beginning before September 5, 2006 and ending after
September 5, 2006, but only to the extent those taxes are
allocable to the portion of the taxable period ending on
September 5, 2006. We are generally liable for all other
taxes attributable to us. Changes in the amounts payable or
receivable by us under the stipulations of this agreement may
impact our tax provision in any period.
Within 180 days after Sara Lee files its final consolidated
tax return for the period that includes September 5, 2006,
Sara Lee is required to deliver to us a computation of the
amount of deferred taxes attributable to our United States and
Canadian operations that would be included on our balance sheet
as of September 6, 2006. If substituting the amount of
deferred taxes as finally determined for the amount of estimated
deferred taxes that were included on that balance sheet at the
time of the spin off causes a decrease in the net book value
reflected on that balance sheet, then Sara Lee will be required
to pay us the amount of such decrease. If such substitution
causes an increase in the net book value reflected on that
balance sheet, then we will be required to pay Sara Lee the
amount of such increase. For purposes of this computation, our
deferred taxes are the amount of deferred tax benefits
(including deferred tax consequences attributable to deductible
temporary differences and carryforwards) that would be
recognized as assets on our balance sheet computed in accordance
with GAAP, but without regard to valuation allowances, less the
amount of deferred tax liabilities (including deferred tax
consequences attributable to deductible temporary differences)
that would be recognized as liabilities on our balance sheet
computed in accordance with GAAP, but without regard to
valuation allowances. Neither we nor Sara Lee will be required
to make any other payments to the other with respect to deferred
taxes.
Stock
Compensation
In connection with the spin off on September 5, 2006, we
established the Hanesbrands Inc. Omnibus Incentive Plan of 2006,
the (Omnibus Incentive Plan) to award stock options,
stock appreciation rights, restricted stock, restricted stock
units, deferred stock units, performance shares and cash to our
employees, non-employee directors and employees of our
subsidiaries to promote the interest of our Company and incent
performance and retention of employees.
On September 26, 2006, a number of awards were made to
employees and non-employee directors under the Omnibus Incentive
Plan. Two categories of these awards are intended to replace
award values that employees would have received under Sara Lee
incentive plans before the spin off. Three other categories of
these awards were to attract and retain certain employees,
including our 2006 annual awards. See Note 3 to the
Combined and Consolidated Financial Statements regarding
stock-based compensation for further information on these
awards. The cost of these equity-based awards is equal to the
fair value of the award at the date of grant, and compensation
expense is recognized for those awards earned over the service
period. We determined the fair value of the stock option awards
using the Black-Scholes option pricing model using the following
weighted average assumptions: weighted average expected
volatility of 30%; weighted average
66
expected term of 3.7 years; expected dividend yield of 0%;
and risk-free interest rate ranging from 4.52% to 4.59%, with a
weighted average of 4.55%. We use the volatility of peer
companies for a period of time that is comparable to the
expected life of the option to determine volatility assumptions.
We have utilized the simplified method outlined in SEC Staff
Bulletin No. 107 to estimate expected lives of options
granted during the period.
Prior to spin off on September 5, 2006, Sara Lee restricted
stock units, or RSUs, and stock options were issued
to our employees in exchange for employee services. See
Note 3 to the Combined and Consolidated Financial
Statements regarding stock-based compensation for further
information on these awards. The cost of RSUs and other
equity-based awards is equal to the fair value of the award at
the date of grant, and compensation expense is recognized for
those awards earned over the service period. Certain of the Sara
Lee RSUs vest based upon the employee achieving certain defined
performance measures. During the service periods prior to spin
off on September 5, 2006, management estimated the number
of awards that will meet the defined performance measures. With
regard to stock options, at the date of grant, we determined the
fair value of the award using the Black-Scholes option pricing
formula. Management estimated the period of time the employee
will hold the option prior to exercise and the expected
volatility of Sara Lees stock, each of which impacts the
fair value of the stock options.
Defined
Benefit Pension and Postretirement Healthcare and Life Insurance
Plans
For a discussion of our net periodic benefit cost, plan
obligations, plan assets, and how we measure the amount of these
costs, see Notes 15 and 16 titled Defined Benefit
Pension Plans and Postretirement Healthcare and Life
Insurance Plans, respectively, to our Combined and
Consolidated Financial Statements.
In September 2006, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans An Amendment of FASB
No. 87, 88, 106 and 132(R) (SFAS 158).
SFAS 158 requires that the funded status of defined benefit
postretirement plans be recognized on the companys balance
sheet, and changes in the funded status be reflected in
comprehensive income, effective fiscal years ending after
December 15, 2006, which we adopted as of and for the six
months ended December 30, 2006. SFAS 158 also requires
companies to measure the funded status of the plan as of the
date of its fiscal year end, effective for fiscal years ending
after December 15, 2008. The impact of adopting the funded
status provisions of SFAS 158 was an increase in assets of
$1.4 million, an increase in liabilities of
$25.7 million and a pretax increase in the accumulated
other comprehensive loss of $31.8 million.
Prior to the spin off on September 5, 2006, certain
eligible employees of our company participated in the defined
benefit pension plans and the postretirement healthcare and life
insurance plans of Sara Lee. In connection with the spin off on
September 5, 2006, we assumed $299 million in
obligations under the Sara Lee sponsored pension and
postretirement plans and the Sara Lee Corporation Supplemental
Executive Retirement Plan that related to our current and former
employees. The amount of the net liability actually assumed was
evaluated in a manner specified by ERISA and will be finalized
and certified by plan actuaries several months after the
completion of the spin off. Benefits under the pension and
postretirement benefit plans are generally based on age at
retirement and years of service and for some plans, benefits are
also based on the employees annual earnings. The net
periodic cost of the pension and postretirement plans is
determined using the projections and actuarial assumptions, the
most significant of which are the discount rate, the long-term
rate of asset return, and medical trend (rate of growth for
medical costs). The net periodic pension and postretirement
income or expense is recognized in the year incurred. Gains and
losses, which occur when actual experience differs from
actuarial assumptions, are amortized over the average future
service period of employees.
67
The following assumptions were used to calculate the pension
costs and obligations of the plans in which we participated
prior to the spin off and the assumptions used subsequent to the
spin off as a stand alone company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net periodic benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.77
|
%
|
|
|
5.60
|
%
|
|
|
5.50
|
%
|
|
|
5.50
|
%
|
Long-term rate of return on plan
assets
|
|
|
7.57
|
%
|
|
|
7.76
|
%
|
|
|
7.83
|
%
|
|
|
7.75
|
%
|
Rate of compensation increase
|
|
|
3.60
|
%(1)
|
|
|
4.00
|
%(1)
|
|
|
4.50
|
%
|
|
|
5.87
|
%
|
Plan obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.77
|
%
|
|
|
5.80
|
%
|
|
|
5.60
|
%
|
|
|
5.50
|
%
|
Rate of compensation increase
|
|
|
3.60
|
%(1)
|
|
|
4.00
|
%(1)
|
|
|
4.00
|
%
|
|
|
4.50
|
%
|
|
|
|
(1) |
|
The compensation increase assumption applies to the Canadian
plans and portions of the Hanesbrands nonqualified retirement
plans, as benefits under these plans are not frozen at
December 30, 2006 and July 1, 2006. |
Subsequent to the spin off on September 5, 2006, the
Companys policies regarding the establishment of pension
assumptions are as follows:
|
|
|
|
|
In determining the discount rate, we utilized the Citigroup
Pension Discount Curve (rounded to the nearest 10 basis
points) in order to determine a unique interest rate for each
plan and match the expected cash flows for each plan.
|
|
|
|
Salary increase assumptions were based on historical experience
and anticipated future management actions.
|
|
|
|
In determining the long-term rate of return on plan assets we
applied a proportionally weighted blend between assuming the
historical long-term compound growth rate of the plan portfolio
would predict the future returns of similar investments, and the
utilization of forward looking assumptions. The calculated long
term rate of return is reduced by a 1.00% expense load.
|
|
|
|
Retirement rates were based primarily on actual experience while
standard actuarial tables were used to estimate mortality.
|
Prior to the spin off on September 5, 2006, Sara Lees
policies regarding the establishment of pension assumptions and
allocating the cost of participation in its company wide plans
during the periods presented were as follows:
|
|
|
|
|
In determining the discount rate, Sara Lee utilized the yield on
high-quality fixed-income investments that have a AA bond rating
and match the average duration of the pension obligations.
|
|
|
|
Salary increase assumptions were based on historical experience
and anticipated future management actions.
|
|
|
|
In determining the long-term rate of return on plan assets Sara
Lee assumed that the historical long-term compound growth rate
of equity and fixed income securities would predict the future
returns of similar investments in the plan portfolio. Investment
management and other fees paid out of plan assets were factored
into the determination of asset return assumptions.
|
|
|
|
Retirement rates were based primarily on actual experience while
standard actuarial tables were used to estimate mortality.
|
68
|
|
|
|
|
Prior to the spin off on September 5, 2006, operating units
that participated in one of Sara Lees company-wide defined
benefit pension plans were allocated a portion of the total
annual cost of the plan. Consulting actuaries determined the
allocated cost by determining the service cost associated with
the employees of each operating unit. Other elements of the net
periodic benefit cost (interest on the projected benefit
obligation, the estimated return on plan assets, and the
amortization of deferred losses and prior service cost) were
allocated based upon the projected benefit obligation associated
with the current and former employees of the reporting entity as
a percentage of the projected benefit obligation of the entire
defined benefit plan.
|
Recently
Issued Accounting Standards
Accounting
for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes: An Interpretation of
FASB Statement No. 109, or
FIN No. 48. This interpretation clarifies
the accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with
SFAS No. 109. FIN No. 48 prescribes a
recognition threshold and measurement principles for the
financial statement recognition and measurement of tax positions
taken or expected to be taken on a tax return. This
interpretation is effective for fiscal years beginning after
December 15, 2006 and as such, we will adopt
FIN No. 48 in 2007. As a result of the implementation
of FIN No. 48 in 2007, we recognized no adjustment in the
liability for unrecognized income tax benefits.
Fair
Value Measurements
The FASB has issued SFAS 157, Fair Value Measurements, or
SFAS 157, which provides guidance for using
fair value to measure assets and liabilities. The standard also
responds to investors requests for more information about
(1) the extent to which companies measure assets and
liabilities at fair value, (2) the information used to
measure fair value, and (3) the effect that fair-value
measurements have on earnings. SFAS 157 will apply whenever
another standard requires (or permits) assets or liabilities to
be measured at fair value. The standard does not expand the use
of fair value to any new circumstances. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. We are currently evaluating the
impact of SFAS 157 on our results of operations and
financial position.
Pension
and Other Postretirement Benefits
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (an amendment of FASB Statements
No. 87, 88, 106, and 132R), or SFAS 158.
SFAS 158 requires an employer to recognize in its statement
of financial position an asset for a plans over funded
status, or a liability for a plans under funded status,
measure a plans assets and its obligations that determine
its funded status as of the end of the employers fiscal
year (with limited exceptions), and recognize changes in the
funded status of a defined benefit postretirement plan in the
year in which the changes occur. Those changes will be reported
in our comprehensive loss and as a separate component of
stockholders equity. We adopted the provision to recognize
the funded status of a benefit plan and the disclosure
requirements during the six months ended December 30, 2006.
The requirement to measure plan assets and benefit obligations
as of the date of the employers fiscal year-end is
effective for fiscal years ending after December 15, 2008.
We plan to adopt the measurement date provision in 2007.
69
Fair
Value Option for Financial Assets and Financial
Liabilities
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159 permits
companies to choose to measure many financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value and establishes
presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The
provisions of SFAS 159 become effective for fiscal years
beginning after November 15, 2007. We are currently
evaluating the impact that SFAS 159 will have on our
results of operations and financial position.
Quantitative
and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign exchange
rates, interest rates and commodity prices. Our risk management
control system uses analytical techniques including market
value, sensitivity analysis and value at risk estimations. Prior
to the spin off on September 5, 2006, Sara Lee maintained
risk management control systems on our behalf to monitor the
foreign exchange, interest rate and commodities risks and Sara
Lees offsetting hedge position.
Foreign
Exchange Risk
We sell the majority of our products in transactions in
U.S. dollars; however, we purchase some raw materials, pay
a portion of our wages and make other payments in our supply
chain in foreign currencies. Our exposure to foreign exchange
rates exists primarily with respect to the Canadian dollar,
Mexican peso and Japanese yen against the U.S. dollar. We
use foreign exchange forward and option contracts to hedge
material exposure to adverse changes in foreign exchange rates.
A sensitivity analysis technique has been used to evaluate the
effect that changes in the market value of foreign exchange
currencies will have on our forward and option contracts. In
conjunction with the spin off, all foreign currency hedge
contracts were terminated and all gains and losses on these
contracts were realized at the time of termination.
Interest
Rates
Prior to the spin off on September 5, 2006, our interest
rate exposure primarily related to intercompany loans or other
amounts due to or from Sara Lee, cash balances (positive or
negative) in foreign cash pool accounts which we have maintained
with Sara Lee in the past and cash held in short-term investment
accounts outside of the United States. We have not historically
used financial instruments to address our exposure to interest
rate movements.
Various notes receivable and notes payable between us and Sara
Lee are reflected on the Combined and Consolidated Balance
Sheets. These notes receivable and payable were capitalized by
the parties in connection with the spin off that occurred on
September 5, 2006. In connection with the spin off, we
incurred (i) $1.65 billion of indebtedness funded
under the Senior Secured Credit Facility, which includes the
additional $500.0 million Revolving Loan Facility which was
undrawn at the closing of the spin off and
(ii) $450.0 million of indebtedness under the Second
Lien Credit Facility. We also incurred $500.0 million of
indebtedness under the Bridge Loan Facility, which we
repaid with the proceeds of the offering of the Notes. Each of
these credit facilities bears interests as described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources Credit Facilities and
Notes Payable, and there can be no assurance that we
will be able to refinance this indebtedness at the same or
better rates upon maturity. We paid $2.4 billion of the
proceeds of this debt to Sara Lee and used the remainder to pay
debt issuance costs and for working capital.
70
We are required under the Senior Secured Credit Facility and the
Second Lien Credit Facility to hedge a portion of our floating
rate debt to reduce interest rate risk caused by floating rate
debt issuance. During the six months ended December 30,
2006, we entered into various hedging arrangements whereby we
capped the interest payable on $1 billion of our floating
rate debt at 5.75%. We also entered into interest rate swaps
tied to the
3-month
LIBOR rate whereby we fixed the interest payable on an aggregate
of $500 million of our floating rate debt at a blended rate
of approximately 5.16%. Approximately 60% of our total debt
outstanding at December 30, 2006 is at a fixed or capped
rate. After giving effect to these arrangements, a 25-basis
point movement in the annual interest rate charged on the
outstanding debt balances as of December 30, 2006 would
result in a change in annual interest expense of $5 million.
Commodities
Cotton is the primary raw material we use to manufacture many of
our products. In addition, fluctuations in crude oil or
petroleum prices may influence the prices of other raw materials
we use to manufacture our products, such as chemicals,
dyestuffs, polyester yarn and foam. We generally purchase our
raw materials at market prices. In fiscal 2006, we started to
use commodity financial instruments to hedge the price of
cotton, for which there is a high correlation between costs and
the financial instrument. We generally do not use commodity
financial instruments to hedge other raw material commodity
prices. At December 30, 2006, the potential change in fair
value of cotton commodity derivative instruments, assuming a 10%
adverse change in the underlying commodity price, was
$4.2 million.
71
DESCRIPTION
OF OUR BUSINESS
General
We are a consumer goods company with a portfolio of leading
apparel brands, including Hanes, Champion, Playtex, Bali,
Just My Size, barely there and Wonderbra. We design,
manufacture, source and sell a broad range of apparel essentials
such as t-shirts, bras, panties, mens underwear,
kids underwear, socks, hosiery, casualwear and activewear.
We were spun off from Sara Lee on September 5, 2006. In
connection with the spin off, Sara Lee contributed its branded
apparel Americas and Asia business to us and distributed all of
the outstanding shares of our common stock to its stockholders
on a pro rata basis. As a result of the spin off, Sara Lee
ceased to own any equity interest in our company. In this
prospectus, we describe the businesses contributed to us by Sara
Lee in the spin off as if the contributed businesses were our
business for all historical periods described. References in
this prospectus to our assets, liabilities, products, businesses
or activities of our business for periods including or prior to
the spin off are generally intended to refer to the historical
assets, liabilities, products, businesses or activities of the
contributed businesses as the businesses were conducted as part
of Sara Lee and its subsidiaries prior to the spin off.
Following the spin off, we changed our fiscal year end from the
Saturday closest to June 30 to the Saturday closest to
December 31. This change created a transition period
beginning on July 2, 2006, the day following the end of our
2006 fiscal year on July 1, 2006, and ending on
December 30, 2006.
In the six month transition period ended December 30, 2006,
we generated $2.3 billion in net sales and
$190.0 million in operating profit. Our products are sold
through multiple distribution channels. During the six months
ended December 30, 2006, approximately 47% of our net sales
were to mass merchants, 20% were to national chains and
department stores, 9% were direct to consumer, 9% were in our
international segment and 15% were to other retail channels such
as embellishers, specialty retailers, warehouse clubs and
sporting goods stores. In addition to designing and marketing
apparel essentials, we have a long history of operating a global
supply chain that incorporates a mix of self-manufacturing,
third-party contractors and third-party sourcing.
The apparel essentials segment of the apparel industry is
characterized by frequently replenished items, such as t-shirts,
bras, panties, mens underwear, kids underwear, socks
and hosiery. Growth and sales in the apparel essentials industry
are not primarily driven by fashion, in contrast to other areas
of the broader apparel industry. Rather, we focus on the core
attributes of comfort, fit and value, while remaining current
with regard to consumer trends.
Our business is organized into five operating segments. These
segments innerwear, outerwear, hosiery,
international and other are reportable segments for
financial reporting purposes. The following table summarizes our
operating segments by category:
|
|
|
|
|
Segment
|
|
Primary Products
|
|
Primary Brands
|
|
Innerwear
|
|
Intimate apparel, such as bras,
panties and bodywear
|
|
Hanes, Playtex, Bali, barely
there, Just My Size, Wonderbra
|
|
|
Mens underwear and
kids underwear
|
|
Hanes, Champion, Polo Ralph
Lauren*
|
|
|
Socks
|
|
Hanes, Champion
|
Outerwear
|
|
Activewear, such as performance
t-shirts and shorts
|
|
Hanes, Champion, Just My
Size
|
|
|
Casualwear, such as t-shirts,
fleece and sport shirts
|
|
Hanes, Just My Size, Outer
Banks, Hanes Beefy-T
|
Hosiery
|
|
Hosiery
|
|
Leggs, Hanes, Just My
Size
|
International
|
|
Activewear, mens underwear,
kids underwear, intimate apparel, socks, hosiery and
casualwear
|
|
Hanes, Wonderbra**, Playtex**,
Champion, Rinbros, Bali
|
Other
|
|
Nonfinished products, including
fabric and certain other materials
|
|
Not applicable
|
72
|
|
|
* |
|
Brand used under a license agreement. |
|
** |
|
As a result of the February 2006 sale of Sara Lees
European branded apparel business, we are not permitted to sell
this brand in the member states of the European Union, or the
EU, several other European countries and South
Africa. |
Our
Competitive Strengths
Strong Brands with Leading Market
Positions. Our brands have a strong heritage in
the apparel essentials industry. According to NPD, our brands
hold either the number one or number two U.S. market
position by sales in most product categories in which we
compete, on a rolling year-end basis as of December 2006. Our
brands enjoy high awareness among consumers according to a 2006
brand equity analysis by Millward Brown Market Research.
According to a 2006 survey of consumer brand awareness by
Womens Wear Daily, Hanes is the most recognized
apparel and accessory brand among women in the United States.
According to Millward Brown Market Research, Hanes is
found in over 85% of the United States households who have
purchased mens or womens casual clothing or
underwear in the
12-month
period ended December 31, 2006. Our creative, focused
advertising campaigns have been an important element in the
continued success and visibility of our brands. We employ a
multimedia marketing plan involving national television, radio,
Internet, direct mail and in-store advertising, as well as
targeted celebrity endorsements, to communicate the key features
and benefits of our brands to consumers. We believe that these
marketing programs reinforce and enhance our strong brand
awareness across our product categories.
High-Volume, Core Essentials Focus. We sell
high-volume, frequently replenished apparel essentials. The
majority of our core styles continue from year to year, with
variations only in color, fabric or design details, and are
frequently replenished by consumers. For example, we believe the
average U.S. consumer makes 3.5 trips to retailers to
purchase mens underwear and 4.5 trips to purchase panties
annually. We believe that our status as a high-volume seller of
core apparel essentials creates a more stable and predictable
revenue base and reduces our exposure to dramatic fashion shifts
often observed in the general apparel industry.
Significant Scale of Operations. According to
NPD, we are the largest seller of apparel essentials in the
United States as measured by sales on a rolling year-end basis
as of December 2006. Most of our products are sold to large
retailers which have high-volume demands. We have met the
demands of our customers by developing vertically integrated
operations and an extensive network of owned facilities and
third-party manufacturers over a broad geographic footprint. We
believe that we are able to leverage our significant scale of
operations to provide us with greater manufacturing
efficiencies, purchasing power and product design, marketing and
customer management resources than our smaller competitors.
Significant Cash Flow Generation. Due to our
strong brands and market position, our business has historically
generated significant cash flow. In the six months ended
December 30, 2006 and in fiscal 2006, 2005 and 2004, we
generated $113.0, $400.0 million, $446.8 million and
$410.2 million, respectively, of cash from operating
activities net of cash used in investing activities. Our goal is
to maximize cash flow in a manner that gives us the flexibility
to create shareholder value by investing in our business,
reducing debt and returning capital to our shareholders.
Strong Customer Relationships. We sell our
products primarily through large, high-volume retailers,
including mass merchants, department stores and national chains.
We have strong, long-term relationships with our top customers,
including relationships of more than ten years with each of our
top ten customers. The size and operational scale of the
high-volume retailers with which we do business require
extensive category and product knowledge and specialized
services regarding the quantity, quality and planning of orders.
In the late 1980s, we undertook a shift in our approach to our
relationships with our largest customers when we sought to align
significant parts of our organization with corresponding parts
of their organizations. For example, we are organized into teams
that sell to and service our customers across a range of
functional areas, such as demand planning, replenishment and
logistics. We also have entered into customer-specific programs
such as the introduction in 2004 of C9 by Champion
products marketed and sold through Target stores. Through
these efforts, we have become the largest apparel essentials
supplier to many of our customers.
73
Strong Management Team. We have strengthened
our management team through the addition of experienced
executives in key leadership roles. Richard Noll, our Chief
Executive Officer, has extensive management experience in the
apparel and consumer products industries. During his
14-year
tenure at Sara Lee, Mr. Noll led Sara Lees sock and
hosiery businesses, Sara Lee Direct and Sara Lee Mexico (all of
which are now part of our business), as well as the Sara Lee
Bakery Group and Sara Lee Australia. Lee Wyatt, our Executive
Vice President, Chief Financial Officer, has broad experience in
executive financial management, including tenures as Chief
Financial Officer at Sonic Automotive, a publicly traded
automotive aftermarket supplier, and Sealy Corporation. Gerald
Evans, our Executive Vice President, Chief Supply Chain Officer,
Kevin Hall, our Executive Vice President, Chief Marketing
Officer, and Joia Johnson, our Executive Vice President, General
Counsel and Corporate Secretary, also add significant experience
and leadership to our management team. The additions of
Messrs. Noll and Wyatt complement the leadership and
experience provided by Lee Chaden, our Executive Chairman, who
has extensive experience within the apparel and consumer
products industries.
Key
Business Strategies
Our core strategies are to build our largest, strongest brands
in core categories by driving innovation in key items, to
continually reduce our costs by consolidating our organization
and globalizing our supply chain and to use our strong,
consistent cash flows to fund business growth, supply-chain
reorganization and debt reduction and to repurchase shares to
offset dilution. Specifically, we intend to focus on the
following strategic initiatives:
Increase the Strength of Our Brands with
Consumers. Our advertising and marketing
campaigns have been an important element in the success and
visibility of our brands. We intend to increase our level of
marketing support behind our key brands with targeted, effective
advertising and marketing campaigns. For example, in fiscal
2005, we launched a comprehensive marketing campaign titled
Look Who Weve Got Our Hanes on Now, which we
believe significantly increased positive consumer attitudes
about the Hanes brand in the areas of stylishness,
distinctiveness and
up-to-date
products.
Our ability to react to changing customer needs and industry
trends will continue to be key to our success. Our design,
research and product development teams, in partnership with our
marketing teams, drive our efforts to bring innovations to
market. We intend to leverage our insights into consumer demand
in the apparel essentials industry to develop new products
within our existing lines and to modify our existing core
products in ways that make them more appealing, addressing
changing customer needs and industry trends. Examples of our
success to date include:
|
|
|
|
|
Tagless garments where the label is embroidered or
printed directly on the garment instead of attached on a
tag which we first released in t-shirts under our
Hanes brand (2002), and subsequently expanded into other
products such as outerwear tops (2003) and panties (2004).
|
|
|
|
Comfort Soft bands in our underwear and bra lines,
which deliver to our consumers a softer, more comfortable feel
with the same durable fit (2004 and 2005).
|
|
|
|
New versions of our Double Dry wicking products and Friction
Free running products under our Champion brand (2005).
|
|
|
|
The no poke wire which was successfully introduced
to the market in our Bali brand bras (2004).
|
Strengthen Our Retail Relationships. We intend
to expand our market share at large, national retailers by
applying our extensive category and product knowledge,
leveraging our use of multi-functional customer management teams
and developing new customer-specific programs such as C9 by
Champion for Target. Our goal is to strengthen and deepen
our existing strategic relationships with retailers and develop
new strategic relationships. Additionally, we plan to expand
distribution by providing manufacturing and production of
apparel essentials products to specialty stores and other
distribution channels, such as direct to consumer through the
Internet.
74
Develop a Lower-Cost Efficient Supply
Chain. As a provider of high-volume products, we
are continually seeking to improve our cost-competitiveness and
operating flexibility through supply chain initiatives. In this
regard, we have launched two textile manufacturing projects
outside of the United States an owned textile
manufacturing facility in the Dominican Republic, which began
production in early 2006, and a strategic alliance with a
third-party textile manufacturer in El Salvador, which began
production in 2005. Over the next several years, we will
continue to transition additional parts of our supply chain from
the United States to locations in Central America, the Caribbean
Basin and Asia in an effort to optimize our cost structure. We
intend to continue to self-manufacture core products where we
can protect or gain a significant cost advantage through scale
or in cases where we seek to protect proprietary processes and
technology. We plan to continue to selectively source product
categories that do not meet these criteria from third-party
manufacturers. We expect that in future years our supply chain
will become more balanced across the Eastern and Western
Hemispheres. Our customers require a high level of service and
responsiveness, and we intend to continue to meet these needs
through a carefully managed facility migration process. We
expect that these changes in our supply chain will result in
significant cost efficiencies and increased asset utilization.
Create a More Integrated, Focused
Company. Historically, we have had a
decentralized operating structure, with many distinct operating
units. We are in the process of consolidating functions, such as
purchasing, finance, manufacturing/sourcing, planning, marketing
and product development, across all of our product categories in
the United States. We also are in the process of integrating our
distribution operations and information technology systems. We
believe that these initiatives will streamline our operations,
improve our inventory management, reduce costs, standardize
processes and allow us to distribute our products more
effectively to retailers. We expect that our initiative to
integrate our technology systems also will provide us with more
timely information, increasing our ability to allocate capital
and manage our business more effectively.
Our
Industry
The overall U.S. apparel market and the core categories
critical to our future success will continue to be influenced by
a number of broad-based trends:
|
|
|
|
|
the U.S. population is predicted to increase at a rate of
less than 1% annually, with the rate of increase declining
through 2050, with a continued aging of the population and a
shift in the ethnic mix;
|
|
|
|
changing attitudes about fashion, the need for versatility, and
continuing preferences for more casual apparel are expected to
support the strength of basic or classic styles of relaxed
apparel;
|
|
|
|
the impact of a continued deflationary environment in our
business and the apparel essentials industry;
|
|
|
|
continued increases in body size across all age groups and
genders, and especially among children, will drive demand for
plus-sized apparel; and
|
|
|
|
intense competition and continued consolidation in the retail
industry, the shifting of formats among major retailers,
convenience and value will continue to be key drivers.
|
In addition, we anticipate growth in the apparel essentials
industry will be driven in part by product improvements and
innovations. Improvements in product features, such as stretch
in t-shirts or tagless garment labels, or in increased variety
through new sizes or styles, such as half sizes and boy leg
briefs, are expected to enhance consumer appeal and category
demand. Often the innovations and improvements in our industry
are not trend-driven, but are designed to react to identifiable
consumer needs and demands. As a consequence, the apparel
essentials market is characterized by lower fashion risks
compared to other apparel categories.
Our
Brands
Our portfolio of leading brands is designed to address the needs
and wants of various consumer segments across a broad range of
apparel essentials products. Each of our brands has a particular
consumer positioning that distinguishes it from its competitors
and guides its advertising and product development. We discuss
our brands in more detail below.
75
Hanes is the largest and most widely recognized brand in
our portfolio. According to a 2006 survey of consumer brand
awareness by Womens Wear Daily, Hanes is the most
recognized apparel and accessory brand among women in the United
States. The Hanes brand covers all of our product
categories, including mens underwear, kids
underwear, bras, panties, socks, t-shirts, fleece and sheer
hosiery. Hanes stands for outstanding comfort, style and
value. According to Millward Brown Market Research, Hanes
is found in over 85% of the United States households who
have purchased mens or womens casual clothing or
underwear in the
12-month
period ended December 31, 2006.
Champion is our second-largest brand. Specializing in
athletic performance apparel, the Champion brand is
designed for everyday athletes. We believe that
Champions combination of comfort, fit and style
provides athletes with mobility, durability and
up-to-date
styles, all product qualities that are important in the sale of
athletic products. We also distribute products under the C9
by Champion brand exclusively through Target stores.
Playtex, the third-largest brand within our portfolio,
offers a line of bras, panties and shapewear, including products
that offer solutions for hard to fit figures. Bali is the
fourth-largest brand within our portfolio. Bali offers a
range of bras, panties and shapewear sold in the department
store channel. Our brand portfolio also includes the following
well-known brands: Leggs, Just My Size,
barely there, Wonderbra, Outer Banks and
Duofold. These brands serve to round out our product
offerings, allowing us to give consumers a variety of options to
meet their diverse needs.
Our
Segments
We manage and report our operations in five segments, each of
which is a reportable segment: innerwear, outerwear, hosiery,
international and other. These segments are organized
principally by product category and geographic location.
Management of each segment is responsible for the assets and
operations of these businesses. For more information about our
segments, see Note 20 to our Combined and Consolidated
Financial Statements included in this prospectus.
Innerwear
The innerwear segment focuses on core apparel essentials, and
consists of products such as womens intimate apparel,
mens underwear, kids underwear, socks, thermals and
sleepwear, marketed under well-known brands that are trusted by
consumers. We are an intimate apparel category leader in the
United States with our Hanes, Playtex,
Bali, barely there, Just My Size and
Wonderbra brands, offering a full line of bras, panties
and bodywear. We are also a leading manufacturer and marketer of
mens underwear and kids underwear under the Hanes
and Champion brand names. We also produce underwear
products under a licensing agreement with Polo Ralph Lauren. Our
net sales for the six months ended December 30, 2006 from
our innerwear segment were $1.3 billion, representing
approximately 57% of total segment net sales.
Outerwear
We are a leader in the casualwear and activewear markets through
our Hanes, Champion and Just My Size
brands, where we offer products such as t-shirts and fleece.
Our casualwear lines offer a range of quality, comfortable
clothing for men, women and children marketed under the Hanes
and Just My Size brands. The Just My Size
brand offers casual apparel designed exclusively to meet the
needs of plus-size women. In addition to activewear for men and
women, Champion provides uniforms for athletic programs
and in 2004 launched an apparel program at Target stores, C9
by Champion. We also license our Champion name for
collegiate apparel and footwear. We also supply our t-shirts,
sportshirts and fleece products to screen printers and
embellishers, who imprint or embroider the product and then
resell to specialty retailers and organizations such as resorts
and professional sports clubs. We sell our products to screen
printers and embellishers primarily under the Hanes,
Hanes Beefy-T and Outer Banks brands. Our net
sales for the six months ended December 30, 2006 from our
outerwear segment were $616 million, representing
approximately 27% of total segment net sales.
76
Hosiery
We are the leading marketer of womens sheer hosiery in the
United States. We compete in the hosiery market by striving to
offer superior values and executing integrated marketing
activities, as well as focusing on the style of our hosiery
products. We market hosiery products under our Hanes,
Leggs and Just My Size brands. Our net sales
for the six months ended December 30, 2006 from our hosiery
segment were $144 million, representing approximately 6% of
total segment net sales. Consistent with a sustained decline in
the hosiery industry due to changes in consumer preferences, our
net sales from hosiery sales have declined each year since 1995.
International
International includes products that span across the innerwear,
outerwear and hosiery reportable segments. Our net sales in this
segment included sales in Europe, Asia, Canada and Latin
America. Japan, Canada and Mexico are our largest international
markets, and we also have opened sales offices in India and
China. Our net sales for the six months ended December 30,
2006 from our international segment were $198 million,
representing approximately 9% of total segment net sales.
Other
Our net sales in this segment are comprised of sales of
nonfinished products such as fabric and certain other materials
in the United States, Asia and Latin America in order to
maintain asset utilization at certain manufacturing facilities.
Our net sales for the six months ended December 30, 2006
from our other segment were $19 million, representing
approximately 1% of total segment net sales.
Design,
Research and Product Development
At the core of our design, research and product development
capabilities is a team of more than 300 professionals. As
part of plan to consolidate our operations, we combined our
design, research and development teams into an integrated group
for all of our product categories. A facility located in
Winston-Salem, North Carolina, is the center of our research,
technical design and product development efforts. We also employ
creative design and product development personnel in our design
center in New York City. During the six months ended
December 30, 2006 and fiscal 2006, 2005 and 2004, we spent
approximately $23 million, $55 million,
$51 million and $53 million, respectively, on design,
research and product development.
Customers
In the six months ended December 30, 2006, approximately
91% of our net sales were to customers in the United States and
approximately 9% were to customers outside the United States.
Domestically, almost 82% of our net sales were wholesale sales
to retailers, 9% were wholesale sales to third-party
embellishers and 9% were direct to consumer. We have
well-established relationships with some of the largest apparel
retailers in the world. Our largest customers are Wal-Mart
Stores, Inc., or Wal-Mart, Target and Kohls
Corporation, or Kohls, accounting for 28%, 15%
and 6%, respectively, of our total sales in the six months ended
December 30, 2006. As is common in the apparel essentials
industry, we generally do not have purchase agreements that
obligate our customers, including Wal-Mart, to purchase our
products. However, all of our key customer relationships have
been in place for ten years or more. Wal-Mart and Target are our
only customers with sales that exceed 10% of any individual
segments sales. In our innerwear segment, Wal-Mart
accounted for 35% of sales and Target accounted for 12% of sales
during the six months ended December 30, 2006. In our
outerwear segment, Wal-Mart accounted for 24% of sales and
Target accounted for 29% of sales during the six months ended
December 30, 2006. In our hosiery and international
segments, Wal-Mart accounted for 22% and 14% of sales,
respectively, during the six months ended December 30, 2006.
Due to their size and operational scale, high-volume retailers
require extensive category and product knowledge and specialized
services regarding the quantity, quality and timing of product
orders. We have organized multifunctional customer management
teams, which has allowed us to form strategic long-term
relationships with these customers and efficiently focus
resources on category, product and service expertise.
77
Smaller regional customers attracted to our leading brands and
quality products also represent an important component of our
distribution, and our organizational model provides for an
efficient use of resources that delivers a high level of
category and channel expertise and services to these customers.
Sales to the mass merchant channel accounted for approximately
47% of our net sales in the six months ended December 30,
2006. We sell all of our product categories in this channel
primarily under our Hanes, Just My Size,
Playtex and C9 by Champion brands. Mass merchants
feature high-volume, low-cost sales of basic apparel items along
with a diverse variety of consumer goods products, such as
grocery and drug products and other hard lines, and are
characterized by large retailers, such as Wal-Mart. Wal-Mart,
which accounted for approximately 28% of our net sales during
the six months ended December 30, 2006, is our largest mass
merchant customer.
Sales to the national chains and department stores channel
accounted for approximately 20% of our net sales during the six
months ended December 30, 2006. These retailers target a
higher-income consumer than mass merchants, focus more of their
sales on apparel items rather than other consumer goods such as
grocery and drug products, and are characterized by large
retailers such as Sears, Roebuck and Co., JC Penney Company,
Inc. and Kohls. We sell all of our product categories in
this channel. Traditional department stores target higher-income
consumers and carry more high-end, fashion conscious products
than national chains or mass merchants and tend to operate in
higher-income areas and commercial centers. Traditional
department stores are characterized by large retailers such as
Macys and Dillards, Inc. We sell products in our
intimate apparel, hosiery and underwear categories through these
department stores.
Sales to the direct to consumer channel accounted for
approximately 9% of our net sales in the six months ended
December 30, 2006. We sell our branded products directly to
consumers through our approximately 220 outlet stores, as well
as our catalogs and our web sites operating under the Hanes
name as well as OneHanes Place, Outer Banks,
Just My Size and Champion. Our outlet stores are
value-based, offering the consumer a savings of 25% to 40% off
suggested retail prices, and sell first-quality, excess,
post-season, obsolete and slightly imperfect products. Our
catalogs and web sites address the growing direct to consumer
channel that operates in todays 24/7 retail environment,
and we have an active database of approximately two million
consumers receiving our catalogs and emails. Our web sites have
experienced significant growth and we expect this trend to
continue as more consumers embrace this retail shopping channel.
Sales in our international segment represented approximately 9%
of our net sales during the six months ended December 30,
2006, and included sales in Europe, Asia, Canada and Latin
America. Japan, Canada and Mexico are our largest international
markets, and we also have opened sales offices in India and
China. We operate in several locations in Latin America
including Mexico, Puerto Rico, Argentina, Brazil and Central
America. From an export business perspective, we use
distributors to service customers in the Middle East and Asia,
and have a limited presence in Latin America. The primary focus
of the export business is Hanes underwear and
Bali, Playtex, Wonderbra and barely
there intimate apparel.
Sales in other channels represented approximately 15% of our net
sales during the six months ended December 30, 2006. We
sell t-shirts, golf and sport shirts and fleece sweatshirts to
third-party embellishers primarily under our Hanes,
Hanes Beefy-T and Outer Banks brands. Sales to
third-party embellishers accounted for approximately 9% of our
net sales during the six months ended December 30, 2006. We
also sell a significant range of our underwear, activewear and
sock products under the Champion brand to wholesale
clubs, such as Costco, and sporting goods stores, such as The
Sports Authority, Inc. We sell primarily legwear and underwear
products under the Hanes and Leggs brands to
food, drug and variety stores. We sell our branded apparel
essentials products to the U.S. military for sale to
servicemen and servicewomen.
Inventory
Effective inventory management is a key component of our future
success. Because our customers do not purchase our products
under long-term supply contracts, but rather on a purchase order
basis, effective inventory management requires close
coordination with the customer base. We employ various types of
inventory management techniques that include collaborative
forecasting and planning, vendor-managed inventory, key event
management and various forms of replenishment management
processes. We have demand
78
management planners in our customer management group who work
closely with customers to develop demand forecasts that are
passed to the supply chain. We also have professionals within
the customer management group who coordinate daily with our
larger customers to help ensure that our customers planned
inventory levels are in fact available at their individual
retail outlets. Additionally, within our supply chain
organization we have dedicated professionals that translate the
demand forecast into our inventory strategy and specific
production plans. These individuals work closely with our
customer management team to balance inventory
investment/exposure with customer service targets.
Seasonality
Generally, our diverse range of product offerings helps mitigate
the impact of seasonal changes in demand for certain items.
Nevertheless, we are subject to some degree of seasonality.
Sales are typically higher in the two quarters ending in
September and December. Socks, hosiery and fleece products
generally have higher sales during this period as a result of
cooler weather,
back-to-school
shopping and holidays. Sales levels in a period are also
impacted by customers decisions to increase or decrease
their inventory levels in response to anticipated consumer
demand.
Marketing
Our strategy is to bring consumer-driven innovation to market in
a compelling way. Our approach is to build targeted, effective
multimedia advertising and marketing campaigns regarding our
portfolio of key brands. In addition, we will explore new
marketing opportunities through which we can communicate the key
features and benefits of our brands to consumers. For example,
in fiscal 2005, we launched our comprehensive Look Who
Weve Got Our Hanes on Now marketing campaign, which
we believe significantly increased positive consumer attitudes
about the Hanes brand in the areas of stylishness,
distinctiveness and
up-to-date
products. We believe that the strength of our consumer insights,
our distinctive brand propositions and our focus on integrated
marketing give us a competitive advantage in the fragmented
apparel marketplace.
Distribution
We distribute our products for the U.S. market primarily
from
U.S.-based
company-owned and company-operated distribution centers. As of
December 30, 2006, we operated 32 distribution centers and
also performed direct ship services from selected Central
America-, Caribbean Basin- and Mexico-based operations to the
U.S. markets. International distribution operations use a
combination of third-party logistics providers, as well as owned
and operated distribution operations, to distribute goods to our
various international markets. We are currently in the process
of consolidating several of our U.S. distribution centers.
In this process, we intend to centralize our distribution
centers around our Winston-Salem, North Carolina, base, and we
announced the closure of three distribution centers in the
United States during the six months ended December 30,
2006. During the six months ended December 30, 2006, we
opened our first West Coast distribution center in California.
Manufacturing
and Sourcing
During the six months ended December 30, 2006,
approximately 77% of our finished goods sold in the United
States were manufactured through a combination of facilities we
own and operate and facilities owned and operated by third-party
contractors. These contractors perform some of the steps in the
manufacturing process for us, such as cutting
and/or
sewing. We sourced the remainder of our finished goods from
third-party manufacturers who supply us with finished products
based on our designs. We believe that our balanced approach to
product supply, which relies on a combination of owned,
contracted and sourced manufacturing located across different
geographic regions, increases the efficiency of our operations,
reduces product costs and offers customers a reliable source of
supply.
79
Finished
Goods That Are Manufactured by Hanesbrands
The manufacturing process for finished goods that we manufacture
begins with raw materials we obtain from third parties. The
principal raw materials in our product categories are cotton and
synthetics. Our costs for cotton yarn and cotton-based textiles
vary based upon the fluctuating and often volatile cost of
cotton, which is affected by, among other factors, weather,
consumer demand, speculation on the commodities market and the
relative valuations and fluctuations of the currencies of
producer versus consumer countries. We attempt to mitigate the
effect of fluctuating raw material costs by entering into
short-term supply agreements that set the price we will pay for
cotton yarn and cotton-based textiles in future periods. We also
enter into hedging contracts on cotton designed to protect us
from severe market fluctuations in the wholesale prices of
cotton. In addition to cotton yarn and cotton-based textiles, we
use thread and trim for product identification, buttons,
zippers, snaps and lace.
Fluctuations in crude oil or petroleum prices may also influence
the prices of items used in our business, such as chemicals,
dyestuffs, polyester yarn and foam. Alternate sources of these
materials and services are readily available. After they are
sourced, cotton and synthetic materials are spun into yarn,
which is then knitted into cotton, synthetic and blended
fabrics. We spin a significant portion of the yarn and knit a
significant portion of the fabrics we use in our owned and
operated facilities. To a lesser extent, we purchase fabric from
several domestic and international suppliers in conjunction with
scheduled production. These fabrics are cut and sewn into
finished products, either by us or by third-party contractors.
Most of our cutting and sewing operations are located in Central
America and the Caribbean Basin.
In making decisions about the location of manufacturing
operations and third-party sources of supply, we consider a
number of factors including local labor costs, quality of
production, applicable quotas and duties, and freight costs.
Although, according to a 2005 study, approximately 80% of our
workforce in fiscal 2005 was located outside the United States,
approximately 70% of our labor costs in fiscal 2005 were related
to our domestic workforce. We continue to evaluate actions to
reduce our U.S. workforce over time, which should have the
effect of reducing our total labor costs. Over the past ten
years, we have engaged in a substantial asset relocation
strategy designed to eliminate or relocate portions of our
U.S.-based
manufacturing operations to lower-cost locations in Central
America, the Caribbean Basin and Asia. For example, at an owned
textile manufacturing facility in the Dominican Republic, which
began production in early 2006, and through a strategic alliance
with a third-party textile manufacturer in El Salvador, which
began production in 2005, textiles are knit, dyed, finished and
cut in accordance with our specifications. We expect to achieve
cost efficiencies from our operations at these facilities
primarily as a result of lower labor costs. In addition, because
these manufacturing facilities are located in close proximity to
the sewing operations to which the manufactured textiles must be
transported, we expect to achieve additional efficiencies by
reducing the amount of time needed to produce finished goods. We
also expect to increase asset utilization through the operations
at these facilities. In connection with moving operations from
other facilities, we reduced excess manufacturing capacity. We
closed two of our owned textile facilities in the United States
in connection with these projects.
During the six months ended December 30, 2006, we announced
decisions to close four textile and sewing plants in the United
States, Puerto Rico and Mexico and consolidate three
distribution centers in the United States. As further plans are
developed and approved by management and our board of directors,
we expect to recognize additional restructuring costs to
eliminate duplicative functions within the organization and
transition a significant portion of our manufacturing capacity
to lower-cost locations. As a result of these efforts, we expect
to incur approximately $250 million in restructuring and
related charges over the three year period following the spin
off from Sara Lee of which approximately half is expected to be
noncash.
Finished
Goods That Are Manufactured by Third Parties
In addition to our manufacturing capabilities, we also source
finished goods designed by us from third-party manufacturers,
also referred to as turnkey products. Many of these
turnkey products are sourced from international suppliers by our
strategic sourcing hubs in Hong Kong and other locations in Asia.
All contracted and sourced manufacturing must meet our high
quality standards. Further, all contractors and third-party
manufacturers must be preaudited and adhere to our strict
supplier and business practices guidelines. These requirements
provide strict standards covering hours of work, age of workers,
health and
80
safety conditions and conformity with local laws. Each new
supplier must be inspected and agree to comprehensive compliance
terms prior to performance of any production on our behalf. We
audit compliance with these standards and maintain strict
compliance performance records. In addition to our audit
procedures, we require certain of our suppliers to be Worldwide
Responsible Apparel Production, or WRAP, certified.
WRAP is a stringent apparel certification program that
independently monitors and certifies compliance with certain
specified manufacturing standards that are intended to ensure
that a given factory produces sewn goods under lawful, humane,
and ethical conditions. WRAP uses third-party, independent
certification firms and requires
factory-by-factory
certification.
Trade
Regulation
We are exposed to certain risks of doing business outside of the
United States. We import goods from company-owned facilities in
Mexico, Central America and the Caribbean Basin, and from
suppliers in those areas and in Asia, Europe, Africa and the
Middle East. These import transactions had been subject to
constraints imposed by bilateral agreements that imposed quotas
that limited the amount of certain categories of merchandise
from certain countries that could be imported into the United
States and the EU.
Pursuant to a 1995 Agreement on Textiles and Clothing under the
WTO effective January 1, 2005, the United States and other
WTO member countries were required, with few exceptions, to
remove quotas on goods from WTO member countries. The complete
removal of quotas would benefit us, as well as other apparel
companies, by allowing us to source products without
quantitative limitation from any country. Several countries,
including the United States, have imposed safeguard quotas on
China pursuant to the terms of Chinas Accession Agreement
to the WTO, and others may impose similar restrictions in the
future. Our management evaluates the possible impact of these
and similar actions on our ability to import products from
China. We do not expect the imposition of these safeguards to
have a material impact on us.
Our management monitors new developments and risks relating to
duties, tariffs and quotas. In response to the changing import
environment resulting from the elimination of quotas, management
has chosen to continue its balanced approach to manufacturing
and sourcing. We attempt to limit our sourcing exposure through
geographic diversification with a mix of company-owned and
contracted production, as well as shifts of production among
countries and contractors. We will continue to manage our supply
chain from a global perspective and adjust as needed to changes
in the global production environment.
Competition
The apparel essentials market is highly competitive and rapidly
evolving. Competition generally is based upon price, brand name
recognition, product quality, selection, service and purchasing
convenience. Our businesses face competition today from other
large corporations and foreign manufacturers. These competitors
include Berskhire Hathaway Inc. through its subsidiary Fruit of
the Loom, Inc., Warnaco Group Inc. and Maidenform Brands, Inc.
in our innerwear business segment and Gildan Activewear, Inc.
and Berkshire Hathaway Inc. through its subsidiaries Russell
Corporation and Fruit of the Loom, Inc. in our outerwear
business segment. We also compete with many small manufacturers
across all of our business segments. Additionally, department
stores and other retailers, including many of our customers,
market and sell apparel essentials products under private labels
that compete directly with our brands. We also face intense
competition from specialty stores who sell private label apparel
not manufactured by us such as Victorias Secret, Old Navy
and The Gap.
Our competitive strengths include our strong brands with leading
market positions, our high-volume, core essentials focus, our
significant scale of operations and our strong customer
relationships.
|
|
|
|
|
Strong Brands with Leading Market
Positions. According to NPD, our brands hold
either the number one or number two U.S. market position by
sales in most product categories in which we compete, on a
rolling year-end basis as of December 2006. According to NPD,
our largest brand, Hanes, is the top-selling apparel
brand in the United States by units sold, on a rolling year-end
basis as of December 2006.
|
|
|
|
High-Volume, Core Essentials Focus. We sell
high-volume, frequently replenished apparel essentials. The
majority of our core styles continue from year to year, with
variations only in color, fabric or design details, and are
frequently replenished by consumers. We believe that our status
as a high-
|
81
|
|
|
|
|
volume seller of core apparel essentials creates a more stable
and predictable revenue base and reduces our exposure to
dramatic fashion shifts often observed in the general apparel
industry.
|
|
|
|
|
|
Significant Scale of Operations. According to
NPD, we are the largest seller of apparel essentials in the
United States as measured by sales on a rolling year-end basis
as of December 2006. Most of our products are sold to large
retailers which have high-volume demands. We believe that we are
able to leverage our significant scale of operations to provide
us with greater manufacturing efficiencies, purchasing power and
product design, marketing and customer management resources than
our smaller competitors.
|
|
|
|
Strong Customer Relationships. We sell our
products primarily through large, high-volume retailers,
including mass merchants, department stores and national chains.
We have strong, long-term relationships with our top customers,
including relationships of more than ten years with each of our
top ten customers. In the late 1980s, we undertook a shift in
our approach to our relationships with our largest customers
when we sought to align significant parts of our organization
with corresponding parts of their organizations. We also have
entered into customer-specific programs such as the introduction
in 2004 of C9 by Champion products marketed and sold
through Target stores. Through these efforts, we have become the
largest apparel essentials supplier to many of our customers.
|
Intellectual
Property
Overview
We market our products under hundreds of trademarks, service
marks and trade names in the United States and other countries
around the world, the most widely recognized being Hanes,
Champion, Playtex, Bali, Just My
Size, barely there, Wonderbra, C9 by
Champion, Leggs, Beefy-T, Outer
Banks, Duofold, Sol y Oro, Rinbros,
Zorba and Ritmo. Some of our products are sold
under trademarks that have been licensed from third parties,
such as Polo Ralph Lauren mens underwear, and we
also hold licenses from various toy and media companies that
give us the right to use certain of their proprietary
characters, names and trademarks.
Some of our own trademarks are licensed to third parties for
noncore product categories, such as Champion for
athletic-oriented accessories. In the United States, the
Playtex trademark is owned by Playtex Marketing
Corporation, of which we own a 50% share and which grants to us
a perpetual royalty-free license to the Playtex trademark
on and in connection with the sale of apparel in the United
States and Canada. The other 50% share of Playtex Marketing
Corporation is owned by Playtex Products, Inc., an unrelated
third-party, which has a perpetual royalty-free license to the
Playtex trademark on and in connection with the sale of
non-apparel products in the United States. Outside the United
States and Canada, we own the Playtex trademark and perpetually
license such trademark to Playtex Products, Inc. for non-apparel
products. In addition, as described below, as part of Sara
Lees sale in February 2006 of its European branded apparel
business, an affiliate of Sun Capital Partners, Inc., or
Sun Capital, has an exclusive, perpetual,
royalty-free license to sell and distribute apparel products
under the Wonderbra and Playtex trademarks in the
member states of the EU, as well as several other European
nations and South Africa. We also own a number of copyrights.
Our trademarks and copyrights are important to our marketing
efforts and have substantial value. We aggressively protect
these trademarks and copyrights from infringement and dilution
through appropriate measures, including court actions and
administrative proceedings.
Although the laws vary by jurisdiction, trademarks generally
remain valid as long as they are in use
and/or their
registrations are properly maintained and have not been found to
have become generic. Most of the trademarks in our portfolio,
including all of our core brands, are covered by trademark
registrations in the countries of the world in which we do
business, with registration periods ranging between seven and
20 years depending on the country. Trademark registrations
generally can be renewed indefinitely as long as the trademarks
are in use. We have an active program designed to ensure that
our trademarks are registered, renewed, protected and
maintained. We plan to continue to use all of our core
trademarks and plan to renew the registrations for such
trademarks for as long as we continue to use them. Most of our
copyrights are unregistered, although we have a sizable
portfolio of copyrighted lace designs that are the subject of a
number of registrations at the U.S. Copyright Office.
82
We place high importance on product innovation and design, and a
number of these innovations and designs are the subject of
patents. However, we do not regard any segment of our business
as being dependent upon any single patent or group of related
patents. In addition, we own proprietary trade secrets,
technology, and know how that we have not patented.
Shared
Trademark Relationship with Sun Capital
In February 2006, Sara Lee sold its European branded apparel
business to an affiliate of Sun Capital. In connection with the
sale, Sun Capital received an exclusive, perpetual, royalty-free
license to sell and distribute apparel products under the
Wonderbra and Playtex trademarks in the member
states of the EU, as well as Belarus, Bosnia-Herzegovina,
Bulgaria, Croatia, Macedonia, Moldova, Morocco, Norway, Romania,
Russia, Serbia-Montenegro, South Africa, Switzerland, Ukraine,
Andorra, Albania, Channel Islands, Lichtenstein, Monaco,
Gibraltar, Guadeloupe, Martinique, Reunion and French Guyana,
which we refer to as the Covered Nations. We are not
permitted to sell Wonderbra and Playtex branded
products in the Covered Nations and without our agreement Sun
Capital is not permitted to sell Wonderbra and
Playtex branded products outside of the Covered Nations.
In connection with the sale, we also have received an exclusive,
perpetual royalty-free license to sell DIM and UNNO
branded products in Panama, Honduras, El Salvador, Costa
Rica, Nicaragua, Belize, Guatemala, Mexico, Puerto Rico, the
United States, Canada and, for DIM products, Japan. We
are not permitted to sell DIM or UNNO branded
apparel products outside of these countries and Sun Capital is
not permitted to sell DIM or UNNO branded apparel
products inside these countries. In addition, the rights to
certain European-originated brands previously part of Sara
Lees branded apparel portfolio were transferred to Sun
Capital and are not included in our brand portfolio.
Licensing
Relationship with Tupperware Corporation
In December 2005, Sara Lee sold its direct selling business,
which markets cosmetics, skin care products, toiletries and
clothing in 18 countries, to Tupperware Corporation, or
Tupperware. In connection with the sale, Dart
Industries Inc., or Dart, an affiliate of
Tupperware, received a three-year exclusive license agreement to
use the C Logo, Champion U.S.A., Wonderbra,
W by Wonderbra, The One and Only Wonderbra,
Playtex, Just My Size and Hanes trademarks
for the manufacture and sale, under the applicable brands, of
certain mens and womens apparel in the Philippines,
including underwear, socks, sportswear products, bras, panties
and girdles, and for the exhaustion of similar product inventory
in Malaysia. Dart also received a ten-year, royalty-free,
exclusive license to use the Girls Attitudes
trademark for the manufacture and sale of certain
toiletries, cosmetics, intimate apparel, underwear, sports wear,
watches, bags and towels in the Philippines. The rights and
obligations under these agreements were assigned to us as part
of the spin off.
In connection with the sale of Sara Lees direct selling
business, Tupperware also signed two five-year distributorship
agreements providing Tupperware with the right, which is
exclusive for the first three years of the agreements, to
distribute and sell, through
door-to-door
and similar channels, Playtex, Champion,
Rinbros, Aire, Wonderbra, Hanes and
Teens by Hanes apparel items in Mexico that we have
discontinued
and/or
determined to be obsolete. The agreements also provide
Tupperware with the exclusive right for five years to distribute
and sell through such channels such apparel items sold by us in
the ordinary course of business. The agreements also grant a
limited right to use such trademarks solely in connection with
the distribution and sale of those products in Mexico.
Under the terms of the agreements, we reserve the right to apply
for, prosecute and maintain trademark registrations in Mexico
for those products covered by the distributorship agreement. The
rights and obligations under these agreements were assigned to
us as part of the spin off.
Environmental
Matters
We are subject to various federal, state, local and foreign laws
and regulations that govern our activities, operations and
products that may have adverse environmental, health and safety
effects, including laws and regulations relating to generating
emissions, water discharges, waste, product and packaging
content and workplace safety. Noncompliance with these laws and
regulations may result in substantial monetary penalties
83
and criminal sanctions. We are aware of hazardous substances or
petroleum releases at a few of our facilities and are working
with the relevant environmental authorities to investigate and
address such releases. We also have been identified as a
potentially responsible party at a few waste
disposal sites undergoing investigation and cleanup under the
federal Comprehensive Environmental Response, Compensation and
Liability Act (commonly known as Superfund) or state Superfund
equivalent programs. Where we have determined that a liability
has been incurred and the amount of the loss can reasonably be
estimated, we have accrued amounts in our balance sheet for
losses related to these sites. Compliance with environmental
laws and regulations and our remedial environmental obligations
historically have not had a material impact on our operations,
and we are not aware of any proposed regulations or remedial
obligations that could trigger significant costs or capital
expenditures in order to comply.
Government
Regulation
We are subject to U.S. federal, state and local laws and
regulations that could affect our business, including those
promulgated under the Occupational Safety and Health Act, the
Consumer Product Safety Act, the Flammable Fabrics Act, the
Textile Fiber Product Identification Act, the rules and
regulations of the Consumer Products Safety Commission and
various environmental laws and regulations. Our international
businesses are subject to similar laws and regulations in the
countries in which they operate. Our operations also are subject
to various international trade agreements and regulations. See
Trade Regulation. While we believe that we are
in compliance in all material respects with all applicable
governmental regulations, current governmental regulations may
change or become more stringent or unforeseen events may occur,
any of which could have a material adverse effect on our
financial position or results of operations.
Employees
As of December 30, 2006, we had approximately 49,000
employees, approximately 13,300 of whom were located in the
United States. As of December 30, 2006, in the United
States, approximately 100 were covered by collective bargaining
agreements. A portion of our international employees were also
covered by collective bargaining agreements. We believe our
relationships with our employees are good.
Properties
We own and lease facilities supporting our administrative,
manufacturing, distribution and direct outlet activities. We own
our approximately 470,000 square-foot headquarters located
in Winston-Salem, North Carolina. Our headquarters house
our various sales, marketing and corporate business functions.
Research and development as well as certain product-design
functions also are located in Winston-Salem, while other design
functions are located in New York City.
As of December 30, 2006, we had 164 manufacturing,
distribution and office facilities in 21 countries. We owned 76
of our manufacturing, distribution and office facilities and
leased the others as of December 30, 2006. The leases for
these facilities expire between 2007 and 2016, with the
exception of some seasonal warehouses that we lease on a
month-by-month
basis. For more information about our capital lease obligations,
see Managements Discussion and Analysis of Financial
Condition and Results of OperationsFuture Contractual
Obligations and Commitments.
As of December 30, 2006, we also operated 220 direct outlet
stores in 41 states, most of which are leased under
five-year, renewable lease agreements. We believe that our
facilities, as well as equipment, are in good condition and meet
our current business needs.
84
The following table summarizes our facility space by country as
of December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
Leased
|
|
|
|
|
Facilities by Country(1)
|
|
Square Feet
|
|
|
Square Feet
|
|
|
Total
|
|
|
United States
|
|
|
13,516,172
|
|
|
|
4,424,132
|
|
|
|
17,940,304
|
|
Non-U.S. facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico
|
|
|
960,114
|
|
|
|
558,138
|
|
|
|
1,518,252
|
|
Dominican Republic
|
|
|
761,762
|
|
|
|
474,792
|
|
|
|
1,236,554
|
|
Honduras
|
|
|
356,279
|
|
|
|
458,710
|
|
|
|
814,989
|
|
Costa Rica
|
|
|
618,628
|
|
|
|
75,926
|
|
|
|
694,554
|
|
Canada
|
|
|
316,780
|
|
|
|
126,777
|
|
|
|
443,557
|
|
El Salvador
|
|
|
187,056
|
|
|
|
42,375
|
|
|
|
229,431
|
|
Brazil
|
|
|
|
|
|
|
172,736
|
|
|
|
172,736
|
|
Thailand
|
|
|
131,356
|
|
|
|
3,122
|
|
|
|
134,478
|
|
Argentina
|
|
|
102,434
|
|
|
|
|
|
|
|
102,434
|
|
Belgium
|
|
|
|
|
|
|
101,934
|
|
|
|
101,934
|
|
10 other countries
|
|
|
|
|
|
|
131,037
|
|
|
|
131,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-U.S. facilities
|
|
|
3,434,409
|
|
|
|
2,145,547
|
|
|
|
5,579,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
16,950,581
|
|
|
|
6,569,679
|
|
|
|
23,520,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes vacant land. |
The following table summarizes the facility space primarily used
by our segments as of December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Owned
|
|
|
Leased
|
|
|
|
|
Facilities by Segment(1)
|
|
Facilities
|
|
|
Square Feet
|
|
|
Square Feet
|
|
|
Total
|
|
|
Innerwear
|
|
|
77
|
|
|
|
6,686,834
|
|
|
|
3,531,397
|
|
|
|
10,218,231
|
|
Outerwear
|
|
|
25
|
|
|
|
6,136,558
|
|
|
|
637,650
|
|
|
|
6,774,208
|
|
Hosiery
|
|
|
6
|
|
|
|
1,733,940
|
|
|
|
149,934
|
|
|
|
1,883,874
|
|
International
|
|
|
28
|
|
|
|
558,916
|
|
|
|
1,031,831
|
|
|
|
1,590,747
|
|
Other(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
136
|
|
|
|
15,116,248
|
|
|
|
5,350,812
|
|
|
|
20,467,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes vacant land, our outlet stores, property held for sale,
sourcing offices not associated with a particular segment, and
office buildings housing corporate functions. |
|
(2) |
|
Our other segment is comprised of sales of nonfinished products
such as fabric and certain other materials in the United States,
Asia and Latin America in order to maintain asset utilization at
certain manufacturing facilities used by one or more of the
innerwear, outerwear, hosiery or international segments. No
facilities are used primarily by our other segment. |
Legal
Proceedings
Although we are subject to various claims and legal actions that
occur from time to time in the ordinary course of our business,
we are not party to any pending legal proceedings that we
believe could have a material adverse effect on our business,
results of operations or financial condition.
85
MANAGEMENT
AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The chart below lists our directors and executive officers and
is followed by biographic information about them. No family
relationship exists between any director or executive officer.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Positions
|
|
Lee A. Chaden
|
|
|
65
|
|
|
Executive Chairman and Director
|
Richard A. Noll
|
|
|
49
|
|
|
Chief Executive Officer and
Director
|
E. Lee Wyatt Jr.
|
|
|
54
|
|
|
Executive Vice President, Chief
Financial Officer
|
Gerald W. Evans Jr.
|
|
|
47
|
|
|
Executive Vice President, Chief
Supply Chain Officer
|
Kevin D. Hall
|
|
|
48
|
|
|
Executive Vice President, Chief
Marketing Officer
|
Joia M. Johnson
|
|
|
47
|
|
|
Executive Vice President, General
Counsel and Corporate Secretary
|
Joan P. McReynolds
|
|
|
56
|
|
|
Executive Vice President, Chief
Customer Officer
|
Kevin W. Oliver
|
|
|
49
|
|
|
Executive Vice President, Human
Resources
|
Harry A. Cockrell(2)(3)
|
|
|
57
|
|
|
Director
|
Charles W. Coker(2)(3)
|
|
|
73
|
|
|
Director
|
Bobby J. Griffin(1)
|
|
|
58
|
|
|
Director
|
James C. Johnson(2)(3)
|
|
|
54
|
|
|
Director
|
Jessica T. Mathews(1)
|
|
|
60
|
|
|
Director
|
J. Patrick Mulcahy(1)
|
|
|
63
|
|
|
Director
|
Alice M. Peterson(1)
|
|
|
54
|
|
|
Director
|
Andrew J. Schindler(2)(3)
|
|
|
62
|
|
|
Director
|
|
|
|
(1) |
|
Member of the Audit Committee |
|
(2) |
|
Member of the Compensation and Benefits Committee |
|
(3) |
|
Member of the Governance and Nominating Committee |
Lee A. Chaden has served as our Executive Chairman since
April 2006 and a director since our formation in September 2005.
From May 2003 until the completion of the spin off in September
2006, he also served as an Executive Vice President of Sara Lee.
From May 2004 until April 2006, Mr. Chaden served as Chief
Executive Officer of Sara Lee Branded Apparel. He has also
served at the Sara Lee corporate level as Executive Vice
President Global Marketing and Sales from May 2003
to May 2004 and Senior Vice President Human
Resources from 2001 to May 2003. Mr. Chaden joined Sara Lee
in 1991 as President of the U.S. and Westfar divisions of
Playtex Apparel, Inc., which Sara Lee acquired that year. While
employed by Sara Lee, Mr. Chaden also served as President
and Chief Executive Officer of Sara Lee Intimates, Vice
President of Sara Lee Corporation, Senior Vice President of Sara
Lee Corporation and Chief Executive Officer of Sara Lee Branded
Apparel Europe. Mr. Chaden currently serves on
the Board of Directors of Stora Enso Corporation.
Richard A. Noll has served as our Chief Executive Officer
since April 2006 and a director since our formation in September
2005. From December 2002 until the completion of the spin off in
September 2006, he also served as a Senior Vice President of
Sara Lee. From July 2005 to April 2006, Mr. Noll served as
President and Chief Operating Officer of Sara Lee Branded
Apparel. Mr. Noll served as Chief Executive Officer of the
Sara Lee Bakery Group from July 2003 to July 2005 and as the
Chief Operating Officer of the Sara Lee Bakery Group from July
2002 to July 2003. From July 2001 to July 2002, Mr. Noll
was Chief Executive Officer of Sara Lee Legwear, Sara Lee Direct
and Sara Lee Mexico. Mr. Noll joined Sara Lee in 1992 and
held a number of management positions with increasing
responsibilities while employed by Sara Lee.
86
E. Lee Wyatt Jr. has served as our Executive Vice
President, Chief Financial Officer since the completion of the
spin off in September 2006. From September 2005 until the
completion of the spin off, Mr. Wyatt served as a Vice
President of Sara Lee and as Chief Financial Officer of Sara Lee
Branded Apparel. Prior to joining Sara Lee, Mr. Wyatt was
Executive Vice President, Chief Financial Officer and Treasurer
of Sonic Automotive, Inc. from April 2003 to September 2005, and
Vice President of Administration and Chief Financial Officer of
Sealy Corporation from September 1998 to February 2003.
Gerald W. Evans Jr. has served as our Executive Vice
President, Chief Supply Chain Officer since the completion of
the spin off in September 2006. From July 2005 until the
completion of the spin off, Mr. Evans served as a Vice
President of Sara Lee and as Chief Supply Chain Officer of Sara
Lee Branded Apparel. Prior to July 2005, Mr. Evans served
as President and Chief Executive Officer of Sara Lee Sportswear
and Underwear from March 2003 until June 2005 and as President
and Chief Executive Officer of Sara Lee Sportswear from March
1999 to February 2003.
Kevin D. Hall has served as our Executive Vice President,
Chief Marketing Officer since June 2006. From June 2005 until
June 2006, Mr. Hall served on the advisory board of, and
was a consultant to, Affinova, Inc., a marketing research
and strategy firm. From August 2001 until June 2005,
Mr. Hall served as Senior Vice President of Marketing for
Fidelity Investments Tax-Exempt Retirement Services Company, a
provider of 401(k), 403(b) and other defined contribution
retirement plans and services. From June 1985 to August 2001,
Mr. Hall served in various marketing positions with The
Procter & Gamble Company, most recently as general
manager of the Vidal Sassoon business worldwide.
Joia M. Johnson has served as our Executive Vice
President, General Counsel and Corporate Secretary since January
2007. From May 2000 until January 2007, Ms. Johnson served
as Executive Vice President, General Counsel and Secretary of
RARE Hospitality International, Inc., or RARE
Hospitality, an owner, operator and franchisor of
restaurants, including LongHorn Steakhouse, The Capital Grille
restaurants and Bugaboo Creek Steak House. From July 1999 until
May 2000, she served as Vice President, General Counsel and
Secretary of RARE Hospitality, and served as its Vice President
and General Counsel from May 1999 until July 1999. From January
1989 until May 1999, Ms. Johnson served as Vice President,
General Counsel and Secretary of H.J. Russell &
Company, a real estate development, construction and property
management firm. For six years during her employment with H.J.
Russell & Company, Ms. Johnson served as
Corporate Counsel for Concessions International, Inc., an
airport food and beverage concessionaire and affiliate of
H.J. Russell & Company.
Joan P. McReynolds has served our Executive Vice
President, Chief Customer Officer since the completion of the
spin off in September 2006. From August 2004 until the
completion of the spin off, Ms. McReynolds served as Chief
Customer Officer of Sara Lee Branded Apparel. From May 2003 to
July 2004, Ms. McReynolds served as Chief Customer Officer
for the food, drug and mass channels of customer management for
Sara Lee Branded Apparel. Prior to that, Ms. McReynolds
served as Vice President of sales for Sara Lee Hosiery from
January 1997 to April 2003.
Kevin W. Oliver has served as our Executive Vice
President, Human Resources since the completion of the spin off
in September 2006. From January 2006 until the completion of the
spin off, Mr. Oliver served as a Vice President of Sara Lee
and as Senior Vice President, Human Resources of Sara Lee
Branded Apparel. From February 2005 to December 2005,
Mr. Oliver served as Senior Vice President, Human Resources
for Sara Lee Food and Beverage and from August 2001 to January
2005 as Vice President, Human Resources for the Sara Lee Bakery
Group.
Harry A. Cockrell has served as a member of our board of
directors since the completion of the spin off in September
2006. Mr. Cockrell has been serving as shareholder and
director of Pathfinder Investment Holdings Corporation, a
privately owned investment company which invests in and manages
hotels and resorts in the Philippines, since 1999, and of PTG
Investment Holdings Corporation and Pacific Tiger Group Limited
since 1999 and 2005, respectively, each of which is a privately
owned investment company which invests in diversified interests
in the Asia Pacific Region. From 1994 to 2003 Mr. Cockrell
served as a member of the Investment Committee of The Asian
Infrastructure Fund, an equity fund focused on investments in
Asian
87
utility markets and from 1992 to 1998, Mr. Cockrell served
as a director of Jardine Fleming Asian Realty Inc., an
investment company focused mainly on Asian property projects.
Charles W. Coker has served as a member of our board of
directors since the completion of the spin off in September
2006. Mr. Coker served as Chairman of the Board of Sonoco
Products Company from 1990 to May 2005. Mr. Coker also
served as Chief Executive Officer of Sonoco Products from 1990
to 1998, as President from 1970 to 1990, and was reappointed
President from 1994 to 1996, while maintaining the title and
responsibility of Chairman and Chief Executive Officer.
Bobby J. Griffin has served as a member of our board of
directors since the completion of the spin off in September
2006. From March 2005 to March 2007, Mr. Griffin served as
President, International Operations of Ryder System, Inc.
Beginning in 1986, Mr. Griffin served in various other
management positions with Ryder System, Inc., including as
Executive Vice President, International Operations from 2003 to
March 2005 and Executive Vice President, Global Supply Chain
Operations from 2001 to 2003.
James C. Johnson has served as a member of our board of
directors since the completion of the spin off in September
2006. Since July 2004, Mr. Johnson has served as Vice
President, Corporate Secretary and Assistant General Counsel of
The Boeing Company. Prior to July 2004, Mr. Johnson served
in various positions with The Boeing Company beginning in 1998,
including as Senior Vice President, Corporate Secretary and
Assistant General Counsel from September 2002 until a management
reorganization in July 2004 and as Vice President, Corporate
Secretary and Assistant General Counsel from July 2001 until
September 2002. Mr. Johnson currently serves on the board
of directors of Ameren Corporation.
Jessica T. Mathews has served as a member of our board of
directors since October 2006. She has been serving as president
of the Carnegie Endowment for International Peace since 1997.
She was a senior fellow at the Council on Foreign Relations from
1993 to 1997, and in 1993 also served as deputy to the
Undersecretary of State for Global Affairs. From 1982 to 1993,
she was founding vice president and director of research of the
World Resources Institute, a center for policy research on
environmental and natural-resource management issues. She served
on the editorial board of the Washington Post from 1980 to 1982.
Ms. Mathews is a member of the Council on Foreign Relations
and the Trilateral Commission.
J. Patrick Mulcahy has served as a member of our board of
directors since the completion of the spin off in September
2006. From January 2005 to the present, Mr. Mulcahy has
served as Vice Chairman of Energizer Holdings, Inc. From 2000 to
January 2005, Mr. Mulcahy served as Chief Executive Officer
of Energizer Holdings, Inc. From 1967 to 2000, Mr. Mulcahy
served in a number of management positions with Ralston Purina
Company, including as Co-Chief Executive Officer from 1997 to
1999. In addition to serving on the board of directors of
Energizer Holdings, Inc., Mr. Mulcahy also currently serves
on the board of directors of Solutia Inc.
Alice M. Peterson has served as a member of our board of
directors since August 2006. Ms. Peterson is President of
Syrus Global, a provider of ethics and compliance solutions.
Ms. Peterson served as a director of TBC Corporation, a
marketer of private branded replacement tires, from July 2005 to
November 2005, when it was acquired by Sumitomo Corporation of
America. From 1998 to August 2004, she served as a director of
Fleming Companies. From December 2000 to December 2001,
Ms. Peterson served as president and general manager of RIM
Finance, LLC, a wholly owned subsidiary of Research In Motion,
Ltd., the maker of the
BlackBerrytm
handheld device. She previously served in executive positions at
Sears, Kraft Foods Inc. and Pepisco, Inc. Ms. Peterson is a
director of the general partner of Williams Partners L.P.
Andrew J. Schindler has served as a member of our board
of directors since the completion of the spin off in September
2006. From 1974 to 2005, Mr. Schindler served in various
management positions with R.J. Reynolds Tobacco Holdings,
Inc., including Chairman of Reynolds America Inc. from December
2004 to December 2005 and Chairman and Chief Executive Officer
from 1999 to 2004. Mr. Schindler currently serves on the
board of directors of Arvin Meritor, Inc. and Krispy Kreme
Doughnuts, Inc.
88
Corporate
Governance
Board
of Directors
Our board of directors has ten members. Two of the members are
also employees of our company: Mr. Chaden is our Executive
Chairman and Mr. Noll is our Chief Executive Officer. The
other eight of the members are non-employee directors. The
non-employee directors are expected to meet regularly without
any employee directors or other Hanesbrands employees present.
Prior to the spin off, our board of directors consisted of
Mr. Chaden, Mr. Noll and two representatives of Sara
Lee. Our board of directors met three times during the six
months ended December 30, 2006.
Commencing with the first annual meeting of stockholders, our
directors will be elected at the annual meeting of stockholders
and will serve until our next annual meeting of stockholders.
Our board of directors maintains three standing committees that
are comprised entirely of independent directors: the Audit
Committee, the Compensation and Benefits Committee and the
Governance and Nominating Committee.
Hanesbrands has not yet had an annual meeting of stockholders.
Hanesbrands intends to encourage the members of its board of
directors to attend our annual meetings of stockholders.
Security holders may send written communications to our board of
directors or to specified individual directors by sending such
communications care of the Corporate Secretarys Office,
Hanesbrands Inc., 1000 East Hanes Mill Road, Winston-Salem,
North Carolina 27105. Such communications will be reviewed by
our legal department and, depending on the content, will be:
|
|
|
|
|
forwarded to the addressees or distributed at the next scheduled
board meeting; or
|
|
|
|
if they relate to financial or accounting matters, forwarded to
the Audit Committee or discussed at the next scheduled Audit
Committee meeting; or
|
|
|
|
if they relate to the recommendation of the nomination of an
individual, forwarded to the Governance and Nominating Committee
or discussed at the next scheduled Governance and Nominating
Committee meeting; or
|
|
|
|
if they relate to the operations of Hanesbrands, forwarded to
the appropriate officers of Hanesbrands, and the response or
other handling reported to the board at the next scheduled board
meeting.
|
Audit
Committee
The Audit Committee, which has been established in accordance
with section 3(a)(58)(A) of the Exchange Act, currently is
comprised of Mr. Griffin, Ms. Mathews,
Mr. Mulcahy and Ms. Peterson; Ms. Peterson is its
chair. Each of the members of our Audit Committee is financially
literate, as required under applicable New York Stock Exchange
listing standards. In addition, the board of directors has
determined that each of Ms. Peterson and Mr. Mulcahy
possesses the experience and qualifications required of an
audit committee financial expert as defined by the
SEC, and is independent, as that term is used in
Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act.
The Audit Committee is responsible for oversight on matters
relating to corporate accounting and financial matters and our
financial reporting and disclosure practices. In addition, the
Audit Committee is responsible for reviewing our audited
financial statements with management and the independent
registered public accounting firm, recommending whether our
audited financial statements should be included in our
Form 10-K
and preparing a report to stockholders to be included in our
annual proxy statement.
The Audit Committee operates under a written charter adopted by
the board of directors, which sets forth the responsibilities
and powers delegated by the board to the Audit Committee. A copy
of the Audit Committee charter is available in the
Investors section of our website,
www.hanesbrands.com.
Compensation
and Benefits Committee
The Compensation and Benefits Committee currently is comprised
of Mr. Cockrell, Mr. Coker, Mr. Johnson and
Mr. Schindler; Mr. Coker is its chair. The
responsibilities of the Compensation and Benefits
89
Committee include establishing and overseeing overall
compensation programs and salaries for key executives,
evaluating the performance of key executives including the Chief
Executive Officer and also reviewing and approving their
salaries and approving and overseeing the administration of our
incentive plans. The Compensation and Benefits Committee is also
responsible for reviewing and approving employee benefit plans
applicable to our key executives, recommending whether our
compensation discussion and analysis should be included in our
Form 10-K
and annually preparing a report to stockholders.
The Compensation and Benefits Committee operates under a written
charter adopted by the board of directors, which sets forth the
responsibilities and powers of the Compensation and Benefits
Committee. This charter may be found on our website,
www.hanesbrands.com.
Governance
and Nominating Committee
The Governance and Nominating Committee currently is comprised
of Mr. Cockrell, Mr. Coker, Mr. Johnson and
Mr. Schindler; Mr. Johnson is its chair. The
responsibilities of the Governance and Nominating Committee
include assisting the board of directors in identifying
individuals qualified to become board members and recommending
to the board the nominees for election as directors at the next
annual meeting of stockholders. The Governance and Nominating
Committee also is responsible for assisting the board in
determining the compensation of the board and its committees, in
monitoring a process to assess board effectiveness, in
developing and implementing our Corporate Governance Guidelines
and in overseeing the evaluation of the board of directors and
management.
The Governance and Nominating Committee will identify nominees
for director positions from various sources. In assessing
potential director nominees, the Governance and Nominating
Committee will consider individuals who have demonstrated
exceptional ability and judgment and who will be most effective,
in conjunction with the other nominees and board members, in
collectively serving interests of the stockholders. The
Governance and Nominating Committee also will consider any
potential conflicts of interest. All director nominees must
possess a reputation for the highest personal and professional
ethics, integrity and values. In addition, nominees must also be
willing to devote sufficient time and effort in carrying out
their duties and responsibilities effectively, and should be
committed to serve on the board for an extended period of time.
The Governance and Nominating Committee operates under a written
charter adopted by the board of directors, which sets forth the
responsibilities and powers of the Governance and Nominating
Committee. This charter may be found on our website,
www.hanesbrands.com.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive
officers and directors, and persons who beneficially own more
than ten percent of a registered class of our equity securities,
to file reports of ownership and changes in ownership of these
securities with the SEC. Officers, directors and greater than
ten percent beneficial owners are required by applicable
regulations to furnish us with copies of all Section 16(a)
forms they file. Based solely upon a review of the forms
furnished to us during or with respect to the six months ended
December 30, 2006, all of our directors and officers
subject to the reporting requirements and each beneficial owner
of more than ten percent of our common stock satisfied all
applicable filing requirements under Section 16(a).
Code of
Ethics
A copy of our Global Business Standards, which serves as our
code of ethics, is available in the Investors
section of our website. Our Global Business Standards apply to
all directors and employees of our company and its subsidiaries.
Any waiver of applicable requirements in the Global Business
Standards that is granted to any of our directors, to our
principal executive officer, to any of our senior financial
officers (including our principal financial officer, principal
accounting officer or controller) or to any other person who is
an executive officer of Hanesbrands requires the approval of the
Audit Committee and waivers will be disclosed on our website,
www.hanesbrands.com in the Investors section, or in
a Current Report on
Form 8-K.
90
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
This compensation discussion and analysis section is intended to
provide information about our compensation objectives and
policies for our principal executive officer, our principal
financial officer and our three other most highly compensated
executive officers (we refer to these officers as our
named executive officers) that will place in context
the information contained in the tables that follow this
discussion. This section is organized as follows:
|
|
|
|
|
Introduction. This section provides a brief
introduction to our Compensation and Benefits Committee and our
compensation consultant and information about the participation
of our executives in establishing compensation.
|
|
|
|
Objectives of Our Compensation Program. In
this section, we describe our compensation philosophy, the
benchmarking activities we have undertaken and information about
our standard compensation policies.
|
|
|
|
Elements of Compensation. This section
includes a description of the types of compensation payable to
our executive officers both while they are employed by our
company and on a post-termination basis, why we have chosen to
pay each of these types of compensation and how we determine the
specific amounts of compensation payable to our executive
officers.
|
|
|
|
Share Ownership and Retention Guidelines. This
section includes a description of the share ownership and
retention guidelines applicable to our named executive officers.
|
|
|
|
Impact of Regulatory Requirements. This
section discusses the impact of Section 162(m) of the
Internal Revenue Code of 1986, as amended, or the Internal
Revenue Code, and various other regulatory requirements
that impact decisions regarding our executive compensation.
|
Introduction
We were a wholly-owned subsidiary of Sara Lee until
September 5, 2006, the date of our spin off from Sara Lee.
Prior to the spin off, our executive officers were employees of
Sara Lee and their compensation was determined by the
Compensation and Benefits Committee of the board of directors of
Sara Lee, or the Sara Lee Compensation
Committee. In connection with the spin off, our board of
directors formed a Compensation and Benefits Committee, which
currently is comprised of Mr. Cockrell, Mr. Coker,
Mr. Johnson and Mr. Schindler, with Mr. Coker
serving as its chair. Our board of directors determined that
each of these directors is a non-employee director within the
meaning of Section 16 of the Exchange Act, an outside
director within the meaning of Section 162(m) of the
Internal Revenue Code and an independent director under
applicable New York Stock Exchange listing standards.
The Compensation and Benefits Committee has the authority to
retain an outside independent executive compensation consultant
to assist in the evaluation of executive officer compensation
and in order to ensure the objectivity and appropriateness of
the actions of the Compensation and Benefits Committee. The
Compensation and Benefits Committee has the sole authority to
retain, at our expense, and terminate any such consultant,
including sole authority to approve such consultants fees
and other retention terms. Our compensation consultant, Frederic
W. Cook & Co., assists in the development of
compensation programs for our executive officers and our
non-employee directors by providing relevant market trend data,
regulatory oversight and corporate governance guidance. As part
of the Cook firms engagement, our management also has
access to its services in developing information to assist the
Compensation and Benefits Committee in fulfilling its
responsibilities.
At the direction of the Compensation and Benefits Committee, our
management has worked with the Cook firm to develop information
about the compensation of our executive officers for the
Compensation and Benefits Committee to use in making decisions
about executive compensation. Members of management and a
representative of the Cook firm have attended all meetings of
the Compensation and Benefits Committee
91
during the six months ended December 30, 2006. However, all
decisions regarding compensation of executive officers are made
solely by the Compensation and Benefits Committee. Executive
sessions of the Compensation and Benefits Committee were not
attended by any members of management or by any representative
of the Cook firm.
Objectives
of our Compensation Programs
We are committed to providing market competitive total
compensation packages in order to attract and motivate talented
employees. We believe in pay for performance and, as described
below, we link performance to pay throughout our organization in
order to create the appropriate level of incentives. We actively
manage our compensation structures and levels to adapt to
changes in the marketplace and the continuing evolution of our
company.
Our companys goal is to create a sustainable competitive
advantage by achieving higher productivity and lower costs than
our competitors. Our compensation objectives at all compensation
levels are designed to support this goal by:
|
|
|
|
|
strategically choosing favorable locations and labor markets;
|
|
|
|
linking pay to performance to create incentives to perform;
|
|
|
|
ensuring compensation levels and components are actively managed
according to the supply and demand of relevant markets; and
|
|
|
|
using equity compensation to align employees long-term
interests with those of the stockholders.
|
In order to accomplish these goals, we use the following
operating principles:
|
|
|
|
|
adherence to the highest legal and ethical standards;
|
|
|
|
simplicity in design, structure and process;
|
|
|
|
transparency and clarity in communicating our compensation
programs; and
|
|
|
|
flexibility in design, process and approach.
|
The
Development of Competitive Compensation Packages
As noted above, one objective of our compensation program is to
attract and motivate highly qualified and talented employees
through compensation packages that are appropriately competitive
with compensation packages offered by other companies in the
apparel and consumer products industries. To determine what
constitutes a competitive compensation package, the
Compensation and Benefits Committee generally targets total
compensation, cash compensation and long-term incentive
compensation, as well as the allocation among those elements of
compensation, for named executive officers at benchmarks
determined by median market rates of selected comparable
companies. For these purposes, the Compensation and Benefits
Committee determines market rates by considering two
sources: Peer Benchmark Companies and Validation Benchmark
Companies, which we refer to collectively as the Benchmark
Companies.
Peer Benchmark Companies. With the assistance
of the Cook firm, we have selected eight apparel companies as
our primary benchmarks, which we refer to collectively as the
Peer Benchmark Companies: VF Corp., Jones Apparel
Group Inc., Liz Claiborne Inc., Quiksilver Inc., Phillips-Van
Heusen Corp., Kellwood Inc., Warnaco Group Inc. and
Carters Inc. The Peer Benchmark Companies were selected
consistent with best practices based on industry classification
and revenue size.
Validation Benchmark Companies. Because we
identified a limited number of apparel companies we believed to
be appropriate as Peer Benchmark Companies, we selected for
purposes of validation an additional 12 companies with
revenue sizes similar to ours from the consumer durables and
apparel, food and beverage and household and personal product
groups, which we refer to collectively as the Validation
Benchmark Companies: Fortune Brands Inc.,
Black & Decker Corp., Newell Rubbermaid Inc.,
Brunswick Corp.,
92
Hormel Foods Corp., Mattel Inc., Hershey Co., Clorox Co.,
Jarden Corp., Stanley Works, Hasbro Inc. and Del Monte Foods Inc.
To illustrate our use of benchmarks, consider our equity
compensation policies. In making decisions regarding our equity
compensation policies, we consider potential
dilution (the number of shares used and available for
equity incentives as a percentage of fully diluted shares
outstanding). We selected a number of shares to be made
available for issuance under Hanesbrands Inc. Omnibus Incentive
Plan of 2006, or the Omnibus Incentive Plan, to
result in potential dilution consistent with the median for the
Benchmark Companies.
In addition to using benchmark data when making equity grants,
we also use this data when determining base salary levels as
discussed below.
Linking
Compensation to Performance
Our compensation program also seeks to link the compensation we
pay to our named executive officers to their performance. We
pursue this goal primarily through two elements of our
compensation package: equity compensation and non-equity based
compensation. Consistent with our operating policy of linking
compensation to performance, we generally provide only limited
perquisites to our named executive officers. In this respect, we
have eliminated or reduced many of the perquisites and similar
benefits that had been available to our executive officers prior
to the spin off. For example, we no longer pay country club fees
or provide financial advisory services. As another example, our
executives at the level of vice president and above were
previously provided with a company automobile for their use,
with most of the cost associated with the automobile being paid
by us. We have recently reduced the benefits under this program
by providing an automobile allowance program rather than an
automobile. The automobile allowance program consists of a
payment to our executives of an amount equal to 4% of their base
salary. We believe that these actions further reinforce a
linkage between compensation and performance.
Aligning
the Interests of our Named Executive Officers with
Stockholders
Our compensation program also seeks to align the interests of
our named executive officers with those of our stockholders,
which we accomplish through the equity compensation element of
our compensation package. We have a policy pursuant to which a
greater portion of the compensation paid to our named executive
officers is comprised of long-term incentive compensation as
compared to our other executives. To align the interests of our
named executive officers with the long-term interests of our
stockholders, we pay named executive officers a mix of stock
options and restricted stock units that vest over time.
In addition to the equity compensation element of our
compensation package, we will in 2007 have an annual incentive
program with payouts tied to the achievement of key financial
and operating metrics. Finally, to further align the interests
of employees with the interests of our stockholders and
strengthen the link between amounts earned and our
companys performance, under the Omnibus Incentive Plan the
Compensation and Benefits Committee may make retroactive
adjustments to, and the executive officer would be required to
reimburse us for, any cash or equity based incentive
compensation paid to the executive officer where such
compensation was predicated upon achieving certain financial
results that were substantially the subject of a restatement,
and as a result of the restatement it is determined that the
executive officer otherwise would not have been paid such
compensation, regardless of whether or not the restatement
resulted from the executive officers misconduct.
Elements
of Compensation
The Compensation and Benefits Committee has undertaken a
comprehensive review of the compensation arrangements for
executive officers that were put in place prior to the spin off.
Although the Compensation and Benefits Committee has made some
minor changes to the arrangements that were in existence at the
time
93
of the spin off, no significant changes have been made to such
arrangements. The compensation of our executives is comprised of
the following components:
Base
Salary
The base salaries for our named executive officers were
determined based on the scope of their responsibilities, taking
into account competitive market compensation paid by other
companies for similar positions. Generally, we believe that
executive base salaries should be targeted near the median of
the range of salaries for executives in similar positions and
with similar responsibilities at the Benchmark Companies. Base
salaries will be reviewed annually, and adjusted from time to
time to reflect individual responsibilities, performance and
experience, as well as market compensation levels.
As discussed below, in January 2007, the Compensation and
Benefits Committee, following a review of total compensation
opportunities for Hanesbrands executive officers and a
comparison of such opportunities to those available to executive
officers of the companies in Hanesbrands benchmarking
group, determined to increase the equity compensation component
of the total compensation opportunity of Richard A. Noll, our
Chief Executive Officer. The annual base salaries of
Hanesbrands executive officers remain unchanged, except
that Joan P. McReynolds annual base salary was increased
from $275,000 to $300,000 and Joia M. Johnsons base
salary was set at $330,000.
Annual
Bonus
Bonus compensation pursuant to the Hanesbrands Inc. Performance
Based Annual Incentive Plan, or the AIP, is designed
to incent performance based on objective performance measures.
Bonus opportunities exist at a target level, which for 2007
ranges from 85% to 150% of salary for our executive officers
(including our named executive officers), and a maximum level,
which for 2007 ranges from 128% to 225% of salary for these
officers. Annual targets under the AIP are linked to our
long-term financial targets. These targets are balanced with
shorter term key performance indicators that are expected to
change from year to year.
For 2007, the components that will be used to determine bonus
amounts under the AIP are net operating profit after taxes,
sales growth and key performance indicators. For each
participant in the AIP, including the named executive officers,
each of these three components is weighted from 0% to 80%. For
example, if sales growth is assigned a weight of 20% for a named
executive officer or other employee eligible to participate in
the AIP, that employee will be eligible to receive 20% of their
target bonus if sales increase by 2% over sales for the twelve
months ended December 30, 2006, and will be eligible to
receive 20% of their maximum bonus if sales increase by 4% over
such prior period sales. We define net operating profit after
taxes as operating profit, excluding certain actions, multiplied
by one minus our tax rate for the period. We disclose our
operating profit, excluding actions when we release our earnings
information for completed fiscal periods. For the
six months ended December 30, 2006, net operating
profit after taxes excluded plant closings, spin off and related
charges included in selling, general and administrative expenses
and gain on curtailment of postretirement benefits. Key
performance indicators for 2007 are workforce diversity, product
quality, customer service and inventory management.
For the six months ended December 30, 2006, the
Compensation and Benefits Committee determined to pay bonuses
pursuant to the AIP at 97% of the target level established for
an employee pursuant to the AIP, which target levels for our
executive officers ranged from 85% to 150%. The Compensation and
Benefits Committee made this determination based on the fact
that the change in our fiscal year end to the Saturday closest
to December 31 would create a transition period beginning
on July 2, 2006 and ending on December 30, 2006,
during which our company would be independent from Sara Lee for
less than four months. In making this determination, the
Compensation and Benefits Committee considered that payment of
bonuses at 97% of target levels results in bonus payments that
are consistent with the bonuses paid during the preceding four
years.
Long-Term
Incentive Program
The Omnibus Incentive Plan permits the issuance of long-term
incentive awards to our employees, non-employee directors and
employees of our subsidiaries to promote the interests of our
company and our stockholders. The Omnibus Incentive Plan is
designed to promote these interests by providing such employees
94
and eligible non-employee directors with a proprietary interest
in pursuing the long-term growth, profitability and financial
success of our company. Awards under the Omnibus Incentive Plan
may be made in the form of stock options, stock appreciation
rights, restricted stock, restricted stock units, deferred stock
units, performance shares and cash. During the six months ended
December 30, 2006, the only types of grants awarded to our
executive officers were stock options and restricted stock
units. We believe that awards of this type are consistent with
the types of awards made by the Benchmark Companies. The awards
made pursuant to the Omnibus Incentive Plan during the six
months ended December 30, 2006 are discussed below under
Discussion of Summary Compensation Table and Grants of
Plan-Based Awards Table.
Awards under the Omnibus Incentive Plan may be made subject to
the attainment of performance goals relating to one or more
business criteria within the meaning of Section 162(m) of
the Internal Revenue Code, including, but not limited to,
revenue; revenue growth; earnings before interest and taxes;
earnings before interest, taxes, depreciation and amortization;
earnings per share; operating income; pre-or after-tax income;
net operating profit after taxes; ratio of operating earnings to
capital spending; cash flow (before or after dividends); cash
flow per share (before or after dividends); net earnings; net
sales; sales growth; share price performance; return on assets
or net assets; return on equity; return on capital (including
return on total capital or return on invested capital); cash
flow return on investment; total stockholder return; improvement
in or attainment of expense levels; and improvement in or
attainment of working capital levels. Any performance criteria
selected by the Compensation and Benefits Committee may be used
to measure our performance as a whole or the performance of any
of our business units and may be measured relative to a peer
group or index. No awards to date under the Omnibus Incentive
Plan have been performance based.
In January 2007, the Compensation and Benefits Committee
determined that annual equity grants to our executive officers
and other employees eligible to receive equity awards under the
Omnibus Incentive Plan should be awarded on the second trading
day following the day on which we release our earnings
information for the prior fiscal year. Equity awards to
executive officers and other employees are generally approved as
a dollar amount, which on the grant date is converted into
restricted stock units and, in the case of certain executive
officers, options, in each case using the closing price of our
common stock on the date of grant to determine the number of
restricted stock units and options. The Compensation and
Benefits Committee believes that granting awards following the
release of earnings allows sufficient time for the market to
absorb the impact of earnings information before the trading
price of our common stock is used to determine the number of
restricted stock units and options that will be awarded, as well
as the exercise price of any options awarded.
In January 2007, the Compensation and Benefits Committee,
following a review of total compensation opportunities for
Hanesbrands executive officers and a comparison of such
opportunities to those available to executive officers of the
companies in Hanesbrands benchmarking group, determined to
increase the equity compensation component of the total
compensation opportunity of Richard A. Noll, our Chief Executive
Officer. Commencing in 2007, Mr. Noll will be awarded
restricted stock units and stock options pursuant to the Omnibus
Incentive Plan with an aggregate value equal to 575% of his
annual base salary. Mr. Noll previously received equity
compensation with a value equal to 300% of his annual base
salary. Based on the benchmarking, the Committee did not
increase the equity compensation component of the total
compensation opportunities of our other executive officers,
which remain as the following percentages of such executive
officers annual base salaries: 225%, for Lee A. Chaden;
200%, for each of E. Lee Wyatt Jr., Gerald W. Evans Jr.,
and Michael Flatow; and 150%, for each of Kevin D. Hall, Joia M.
Johnson, Joan P. McReynolds and Kevin W. Oliver.
Allocation
of Compensation Elements
In determining the total compensation opportunities for our
executive officers, we consider the total compensation
opportunities available to executive officers at the Benchmark
Companies. Once we have determined total compensation
opportunity levels, we then determine the portions of such
compensation that should be represented by base salary, annual
bonus and long-term compensation. After reviewing information
about the allocation among the elements of compensation at the
Benchmark Companies, the Compensation and Benefits Committee
approves an allocation among these elements for our executives
which is intended to
95
further the objectives of our compensation policy. For our named
executed officers, the percentage of total compensation
opportunity represented by these elements ranges from 30% base
salary, 25% annual bonus and 45% long-term equity incentive
compensation to, in the case of our Chief Executive Officer, 18%
base salary, 27% annual bonus and 55% long-term equity incentive
compensation.
Other
Compensation
Our executive officers are eligible to participate in certain
employee benefits plans and arrangements offered by our company.
These include the Hanesbrands Inc. Supplemental Employee
Retirement Plan, or the SERP, the Hanesbrands Inc.
Retirement Savings Plan, or the 401(k) Plan, the
Hanesbrands Inc. Executive Deferred Compensation Plan, or the
Executive Deferred Compensation Plan, the
Hanesbrands Inc. Executive Life Insurance Program, the
Hanesbrands Inc. Executive Disability Program and the
Hanesbrands Inc. Employee Stock Purchase Plan of 2006, or the
ESPP.
In addition to these plans, the Hanesbrands Inc. Pension and
Retirement Plan, or the Pension Plan, is a defined
benefit pension plan under which benefits have been frozen since
December 31, 2005, intended to be qualified under
Section 401(a) of the Internal Revenue Code, that provides
the benefits that had accrued for any of our employees,
including our executive officers, under the Sara Lee Corporation
Consolidated Pension and Retirement Plan as of December 31,
2005. Because the Pension Plan is frozen, no additional
employees will become eligible to participate in the Pension
Plan, and existing participants in the Pension Plan will not
accrue any additional benefits after December 31, 2005. The
Pension Plan and the SERP are described below under
Post-Termination Compensation.
The 401(k) Plan. Under the 401(k) Plan, our
executive officers and generally all full-time domestic exempt
and non-exempt salaried employees may contribute a portion of
their compensation to the plan on a pre-tax basis and receive a
matching employer contribution of up to a possible maximum of 4%
of their eligible compensation. In addition, exempt and
non-exempt salaried employees are eligible to receive an
employer contribution of up to an additional 4% of their
eligible compensation. Finally, employees who are exempt or
non-exempt salaried employees and who, on January 1, 2006,
had attained age 50 and completed 10 years of service
with Sara Lee are eligible to receive a non-matching employer
contribution of 10% of their eligible compensation if they are
not eligible for the transitional credits provided in the SERP
that are described below and if they were employed by us on
December 31, 2006. None of our named executive officers
will receive this 10% contribution, because with the exception
of Mr. Wyatt they were eligible for the transitional
credits. Mr. Wyatt was not eligible for either the
transitional credits or the 10% contribution as he did not meet
the length of service requirements.
The Executive Deferred Compensation
Plan. Under the Executive Deferred Compensation
Plan, a group of approximately 250 executives at the director
level and above, including our executive officers, may defer
receipt of cash and equity compensation. The amount of
compensation that may be deferred is determined in accordance
with the Executive Deferred Compensation Plan based on elections
by such participant. At the election of the executive, amounts
deferred under the Executive Deferred Compensation Plan will
earn a return equivalent to the return on an investment in an
interest-bearing account earning interest based on the Federal
Reserves published rate for five year constant maturity
Treasury notes at the beginning of the calendar year, which will
be 4.68% for 2007, or be invested in a stock equivalent account
and earn a return based on our stock price. Prior to
January 1, 2007, the interest rate payable with respect to
funds invested in the interest account was 4.775%. The amount
payable to participants will be payable either on the withdrawal
date elected by the participant or upon the occurrence of
certain events as provided under the Executive Deferred
Compensation Plan. A participant may designate one or more
beneficiaries to receive any portion of the obligations payable
in the event of death, however neither participants nor their
beneficiaries may transfer any right or interest in the
Executive Deferred Compensation Plan.
The Hanesbrands Inc. Executive Life Insurance
Program. The Hanesbrands Inc. Executive Life
Insurance Program provides life insurance coverage during active
employment for certain of our executives at the level of vice
president and above, including our executive officers, in an
amount equal to three times their
96
annual base salary. We also offer continuing coverage following
retirement equal to such executive officers annual base
salary immediately prior to retirement.
The Hanesbrands Inc. Executive Disability
Program. The Hanesbrands Inc. Executive
Disability Program provides disability coverage for a group of
approximately 110 employees at the level of vice president and
above, including our executive officers. If an executive officer
becomes totally disabled, the program will provide a monthly
disability benefit equal to 1/12 of the sum of (i) 75% of
the executive officers annual base salary up to an amount
not in excess of $500,000, and (ii) 50% of the three-year
average of the executive officers annual short-term
incentive bonus up to an amount not in excess of $250,000. The
maximum monthly disability benefit is $41,667 and is reduced by
any disability benefits that an executive officer is entitled to
receive under Social Security, workers compensation, a
state compulsory disability law or another plan of Hanesbrands
providing benefits for disability.
The ESPP. We implemented the ESPP in 2007. The
purpose of the ESPP is to provide an opportunity for eligible
employees and eligible employees of designated subsidiaries to
purchase a limited number of shares of our common stock at a
discount through voluntary automatic payroll deductions. The
ESPP is designed to attract, retain, and reward our employees
and to strengthen the mutuality of interest between our
employees and our stockholders. Our board of directors may at
any time amend, suspend or discontinue the ESPP, subject to any
stockholder approval needed to comply with the requirements of
the SEC, the Internal Revenue Code and the rules of the New York
Stock Exchange. The aggregate number of shares of our common
stock that may be issued under the ESPP will not exceed
2,442,000 shares (subject to mandatory adjustment in the
event of a stock split, stock dividend, recapitalization,
reorganization or similar transaction). The maximum amount
eligible for purchase of shares through the ESPP by any employee
in any year will be $25,000. An employee may contribute from his
or her cash earnings through payroll deductions during an
offering period and the accumulated deductions will be applied
to the purchase of shares on the first day of the next following
offering period. The ESPP will provide for consecutive offering
periods of three months each on a schedule determined by the
Compensation and Benefits Committee. The purchase price per
share will be at least 85% of the fair market value of our
shares immediately after the end of each offering period in
which an employee participates in the plan.
Perquisites. As discussed above, we have
limited the perquisites offered to our executive officers. In
this respect, we have eliminated or reduced many of the
perquisites and similar benefits that had been available to our
executive officers prior to the spin off. For example, we no
longer pay country club fees or provide financial advisory
services. As another example, our executives at the level of
vice president and above were previously provided with a company
automobile for their use, with most of the cost associated with
the automobile being paid by us. We have recently reduced the
benefits under this program by providing an automobile allowance
program rather than an automobile. The automobile allowance
program consists of a payment to our executives of an amount
equal to 4% of their base salary. In connection with the
transition from our former automobile program, all of our
executives who were participating in the former program,
including our named executive officers, were offered the
one-time opportunity to purchase the automobiles they had been
using under that program at the lesser of book value and fair
market value. If an executive purchased an automobile for a book
value that was less than the fair market value, the difference
is reflected in the Other Compensation column of the
Summary Compensation Table.
Post-Termination
Compensation
Our named executive officers are eligible to receive
post-termination compensation pursuant to the Pension Plan, our
SERP and pursuant to Severance/Change in Control Agreements, or
Severance Agreements. Each of these arrangements is
discussed below.
The Pension Plan. The Pension Plan is a
defined benefit pension plan under which benefits have been
frozen since December 31, 2005, intended to be qualified
under Section 401(a) of the Internal Revenue Code, that
provides the benefits that had accrued for any of our employees,
including our executive officers, under the Sara Lee Corporation
Consolidated Pension and Retirement Plan as of December 31,
2005. Because the
97
Pension Plan is frozen, no additional employees will become
eligible to participate in the Pension Plan, and existing
participants in the Pension Plan will not accrue any additional
benefits after December 31, 2005.
The SERP. The SERP is a nonqualified
supplemental retirement plan. Although, as described above, the
401(k) Plan provides for employer contributions to our executive
officers at the same percent of their eligible compensation as
provided for all employees who participate in the plan,
compensation and benefit limitations imposed on the 401(k) Plan
by the Internal Revenue Code generally prevent us from making
the full employer contributions contemplated by the 401(k) Plan
with respect to any employee whose compensation exceeds a
threshold set by Internal Revenue Code provisions, which
threshold is currently $220,000. Our executive officers are
among those employees whose compensation exceeds this threshold.
One of the primary purposes of the SERP is to provide to those
employees whose compensation exceeds this threshold benefits
that would be earned under the 401(k) Plan but for these
limitations. The SERP also provides benefits consisting of
(i) those supplemental retirement benefits that had been
accrued under the Sara Lee Corporation Supplemental Executive
Retirement Plan as of December 31, 2005 and
(ii) transitional defined contribution credits for one to
five years and ranging from 4% to 15% of eligible compensation
for certain executives. These transitional credits are being
provided to a broad group of executives in connection with our
transition from providing both a defined benefit plan (as
discussed above, the Pension Plan is frozen) and a defined
contribution plan to providing only defined contribution plans,
in order to mitigate the negative impact of that transition. The
determination of the credits to be provided to an executive was
based on the extent to which such executive was negatively
impacted by the transition, including their age and years of
service as of January 1, 2006.
Severance Agreements. In connection with our
spin off from Sara Lee, we entered into Severance Agreements
with the following executive officers: Lee A. Chaden, Richard A.
Noll, E. Lee Wyatt Jr., Gerald W. Evans Jr., Michael
Flatow, Kevin D. Hall, Joan P. McReynolds and Kevin W. Oliver,
and we subsequently entered into a Severance Agreement with
Joia M. Johnson. The Severance Agreements provide our
executive officers with severance benefits upon the involuntary
termination of their employment. The Severance Agreements also
contain change in control benefits for our executive officers to
help keep them focused on their work responsibilities during the
uncertainty that accompanies a change in control, to provide
benefits for a period of time after a change in control
transaction and to help us attract and retain key talent.
Generally, the agreements provide for severance pay and
continuation of certain benefits if the executive officers
employment is terminated involuntarily (for a reason other than
cause as defined in the agreement) within two years
following a change in control, or within three months prior to a
change in control. The definition of involuntary
termination under the Severance Agreements includes a
voluntary termination by the executive officer following a
change in control for good reason. Compensation that
could potentially be paid to our named executive officers
pursuant to the Severance Agreements is described below in
Potential Payments upon Termination or Change
in Control. Each agreement is effective for an unlimited
term, unless we give at least 18 months prior written
notice that the agreement will not be renewed. In addition, if a
change in control (as defined in the Severance Agreements)
occurs during the term of the agreement, the agreement will
automatically continue for two years after the end of the month
in which the change in control occurs.
Share
Ownership and Retention Guidelines
We believe that our executives should have a significant equity
interest in Hanesbrands. In order to promote such equity
ownership and further align the interests of our executives with
our stockholders, we adopted share retention and ownership
guidelines for our key executives. The stock ownership
requirements vary based upon the executives level and
range from a minimum of one times the executives base
salary (two times the executives base salary in the case
of executive officers) to a maximum of four times the
executives base salary, in the case of the Chief Executive
Officer. The Compensation and Benefits Committee reviewed these
guidelines during the six months ended December 30, 2006
and did not effect any changes.
Our key executives have a substantial portion of their incentive
compensation paid in the form of our common stock. In addition
to shares directly held by a key executive, shares held for such
executive in the ESPP, the 401(k) Plan and the Executive
Deferred Compensation Plan (including hypothetical share
equivalents held in that plan) will be counted for purposes of
determining whether the ownership requirements are met. Until
the stock ownership guidelines are met, an executive is required
to retain 50% of any shares received (on a net after tax basis)
under our equity-based compensation plans.
98
Under our insider trading policy, no director or employee of
Hanesbrands is permitted to engage in short sales or
sales against the box or trade in puts, calls or
other options on our securities. The purpose of this prohibition
is to avoid the appearance that any Hanesbrands director,
officer or employee is trading on inside information.
Impact
of Regulatory Requirements
The Internal Revenue Code contains a provision that limits the
tax deductibility of certain compensation paid to named
executive officers. This provision disallows the deductibility
of certain compensation in excess of $1.0 million per year
unless it is considered performance-based compensation under the
Internal Revenue Code. We have adopted policies and practices
designed to ensure the maximum tax deduction possible under
Section 162(m) of the Internal Revenue Code of our annual
bonus payments and stock option awards. However, we may forgo
any or all of the tax deduction if we believe it to be in the
best long-term interests of our stockholders. Although most
compensation paid to our named executive officers for the six
months ended December 30, 2006 is expected to be tax
deductible, we expect that approximately $60,000 and $560,000 of
the compensation payable to Mr. Noll and Mr. Chaden,
respectively, will not be deductible.
In making decisions about executive compensation, we also
consider the impact of other regulatory provisions, including
the provisions of Section 409A of the Internal Revenue Code
regarding non-qualified deferred compensation, the golden
parachute provisions of Section 280G of the Internal
Revenue Code. For example, we generally have structured the
Severance Agreements to avoid the application of the
golden parachute provisions of Section 409A of
the Internal Revenue Code. In making decisions about executive
compensation, we also consider how various elements of
compensation will impact our financial results. For example, we
consider the impact of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment,
which requires us to recognize the cost of employee services
received in exchange for awards of equity instruments based upon
the grant date fair value of those awards.
99
Summary
of Compensation
The following table sets forth certain information with respect
to compensation for the six months ended December 30, 2006
earned by or paid to our named executive officers. Because the
transition period covered by our most recent
Form 10-K
is a period of six months, the compensation reflected herein
does not reflect the compensation that would have been earned by
our named executive officers during a typical fiscal year
consisting of 52 or 53 weeks.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Deferred
|
|
|
|
|
|
|
|
Name and
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
All Other
|
|
|
Total
|
|
Principal Position
|
|
Year
|
|
($)(1)
|
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)(2)
|
|
|
Earnings(3)
|
|
|
Compensation(4)
|
|
|
Compensation
|
|
|
Richard A. Noll
|
|
Six months ended
|
|
$
|
400,000
|
|
|
$
|
636,203
|
|
|
$
|
508,415
|
|
|
$
|
993,412
|
|
|
$
|
26,477
|
|
|
$
|
464,980
|
|
|
$
|
3,029,488
|
|
Chief Executive Officer
|
|
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E. Lee Wyatt Jr
|
|
Six months ended
|
|
|
275,000
|
|
|
|
266,750
|
|
|
|
603,869
|
|
|
|
205,187
|
|
|
|
|
|
|
|
159,046
|
|
|
|
1,509,852
|
|
Executive Vice President, Chief
Financial Officer
|
|
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lee A. Chaden
|
|
Six months ended
|
|
|
329,600
|
|
|
|
479,568
|
|
|
|
1,241,602
|
(5)
|
|
|
1,241,603
|
(5)
|
|
|
|
(6)
|
|
|
430,112
|
|
|
|
3,722,485
|
|
Executive Chairman
|
|
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerald W. Evans Jr.
|
|
Six months ended
|
|
|
212,500
|
|
|
|
206,125
|
|
|
|
170,753
|
|
|
|
476,961
|
|
|
|
16,164
|
|
|
|
178,700
|
|
|
|
1,261,202
|
|
Executive Vice President, Chief
Supply Chain Officer
|
|
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Flatow(7)
|
|
Six months ended
|
|
|
212,500
|
|
|
|
206,125
|
|
|
|
170,753
|
|
|
|
201,728
|
|
|
|
42,118
|
|
|
|
193,508
|
|
|
|
1,026,732
|
|
Former Executive Vice President,
General Manager, Wholesale Americas
|
|
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts shown include deferrals to the 401(k) Plan and the
Executive Deferred Compensation Plan. |
|
(2) |
|
The dollar values shown reflect the compensation cost of the
awards, before reflecting forfeitures, over the requisite
service period, as described in FAS 123R. The assumptions
we used in valuing these awards are described in Note 3,
Stock-Based Compensation, to our Combined and
Consolidated Financial Statements included in this prospectus. |
|
(3) |
|
Neither the Executive Deferred Compensation Plan nor the SERP
provide for above-market or preferential earnings as
defined in applicable SEC rules. Increases in pension values are
determined for the period July 2, 2006 to December 30,
2006; because the defined benefit arrangements are frozen, the
values shown in this column represent solely the increase in the
actuarial value of pension benefits previously accrued as of
December 31, 2005. |
|
(4) |
|
Amounts reported in the Other Compensation column
include the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Gross
|
|
|
|
|
|
|
Personal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up On
|
|
|
|
|
|
|
Use of
|
|
|
Imputed
|
|
|
|
|
|
|
|
|
Contribu-
|
|
|
|
|
|
Personal
|
|
|
|
|
|
|
Company
|
|
|
Income on
|
|
|
Imputed
|
|
|
Life
|
|
|
tions to
|
|
|
Contribu-
|
|
|
Use of
|
|
|
|
|
|
|
Auto-
|
|
|
Automobile
|
|
|
Reloca-
|
|
|
Insurance
|
|
|
401(k)
|
|
|
tions to
|
|
|
Company
|
|
|
Miscella-
|
|
|
|
mobile(A)
|
|
|
Purchase(B)
|
|
|
tion Costs
|
|
|
Premiums(C)
|
|
|
Plan(D)
|
|
|
SERP(E)
|
|
|
Aircraft
|
|
|
neous(F)
|
|
|
Richard A. Noll
|
|
$
|
10,592
|
|
|
$
|
31,599
|
|
|
$
|
|
|
|
$
|
25,606
|
|
|
$
|
8,800
|
|
|
$
|
383,626
|
|
|
$
|
625
|
|
|
$
|
4,133
|
|
E. Lee Wyatt Jr.
|
|
|
11,468
|
|
|
|
16,113
|
|
|
|
16,811
|
|
|
|
33,372
|
|
|
|
9,133
|
|
|
|
70,811
|
|
|
|
|
|
|
|
1,337
|
|
Lee A. Chaden
|
|
|
8,101
|
|
|
|
12,272
|
|
|
|
|
|
|
|
18,547
|
|
|
|
8,800
|
|
|
|
377,509
|
|
|
|
625
|
|
|
|
4,258
|
|
Gerald W. Evans Jr.
|
|
|
7,228
|
|
|
|
4,896
|
|
|
|
|
|
|
|
7,552
|
|
|
|
10,390
|
|
|
|
148,278
|
|
|
|
|
|
|
|
356
|
|
Michael Flatow
|
|
|
4,971
|
|
|
|
8,900
|
|
|
|
|
|
|
|
6,527
|
|
|
|
10,379
|
|
|
|
161,038
|
|
|
|
|
|
|
|
1,694
|
|
|
|
|
(A) |
|
Represents the cost to us of providing a company automobile for
the use of the named executive officer, as well as the imputed
cost of the executives personal use of the automobile. |
100
|
|
|
(B) |
|
Represents the difference between the fair market value and the
book value of an automobile purchased by the named executive
officer, if the automobile was purchased for a book value that
was less than the fair market value. In connection with the
transition from our former automobile program, all of our
executives who were participating in the former program,
including our named executive officers, were offered the
one-time opportunity to purchase the automobiles they had been
using under that program at the lesser of book value and fair
market value. |
|
(C) |
|
Represents the premiums paid by us for an insurance policy on
the life of the executive officer. |
|
(D) |
|
Represents our contribution to the 401(k) Plan during the six
months ended December 30, 2006. Under the 401(k) Plan, our
employees may contribute a portion of their compensation to the
plan on a pre-tax basis and receive a matching employer
contribution of up to a possible maximum of 4% of their eligible
compensation. In addition, exempt and non-exempt salaried
employees are eligible to receive an employer contribution of up
to an additional 4% of their eligible compensation. |
|
(E) |
|
Represents our contribution to the SERP during the six months
ended December 30, 2006. One of the primary purposes of the
SERP is to provide to those employees whose compensation exceeds
a threshold established by the Internal Revenue Code benefits
that would be earned under the 401(k) Plan but for these
limitations. The SERP also provides benefits consisting of
(i) those supplemental retirement benefits that had been
accrued under the Sara Lee Corporation Supplemental Executive
Retirement Plan as of December 31, 2005 and
(ii) transitional defined contribution credits for one to
five years and ranging from 4% to 15% of eligible compensation
for certain executives, which transition credits were in the
amount of $240,735 for Mr. Noll, $0 for Mr. Wyatt,
$257,680 for Mr. Chaden, $99,527 for Mr. Evans and
$116,503 for Mr. Flatow during the six months ended
December 30, 2006. These transitional credits are being
provided to a broad group of executives in connection with our
transition from providing both a defined benefit plan and a
defined contribution plan to providing only defined contribution
plans, in order to mitigate the negative impact of that
transition. The credits will be provided for up to five years,
and range from 4% to 15% of eligible compensation. The
determination of the credits to be provided to an executive was
based on the extent to which such executive was negatively
impacted by the transition, including their age and years of
service as of January 1, 2006. |
|
(F) |
|
Includes financial advisory services (Mr. Noll and
Mr. Chaden), personal use of company aircraft
(Mr. Noll and Mr. Chaden), reimbursement of commercial
airfare for travel by the officers spouse (Mr. Wyatt,
Mr. Chaden, Mr. Evans, and Mr. Flatow), country
club dues (Mr. Chaden and Mr. Flatow) and airline club
dues (Mr. Chaden and Mr. Flatow). Although we have
eliminated financial advisory services and country club dues as
perquisites, Sara Lee offered such services to our executives
during the portion of the six months ended December 30,
2006 prior to the spin off on September 5, 2006. |
|
|
|
(5) |
|
Because Mr. Chaden is eligible for retirement status, the
value of the restricted stock units and stock options awarded to
him during the six months ended December 30, 2006 are
reported in full (rather than recognized over the vesting period
as is the case for other executives). |
|
(6) |
|
The value of the pension benefits previously accrued by
Mr. Chaden decreased by $6,173. |
|
(7) |
|
As previously disclosed, effective February 28, 2007,
Mr. Flatow resigned as Executive Vice President, General
Manager, Wholesale Americas. |
101
Grants of
Plan-Based Awards
The following table sets forth certain information with respect
to grants of plan-based awards for the six months ended
December 30, 2006 to the named executive officers.
Grants of
Plan-Based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Option
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Stock
|
|
|
Awards: Number
|
|
|
Exercise or
|
|
|
Grant Date Fair
|
|
|
|
|
|
|
Awards: Number of
|
|
|
of Securities
|
|
|
Base Price of
|
|
|
Value of Stock
|
|
|
|
|
|
|
Shares of Stock
|
|
|
Underlying
|
|
|
Option
|
|
|
and Option
|
|
Name
|
|
Grant Date
|
|
|
or Units
|
|
|
Options (#)
|
|
|
Awards ($/Sh)
|
|
|
Awards(1)
|
|
|
Richard A. Noll
|
|
|
9/26/2006
|
(2)
|
|
|
38,742
|
|
|
|
121,382
|
|
|
|
22.37
|
|
|
|
1,733,326
|
|
|
|
|
9/26/2006
|
(3)
|
|
|
53,643
|
|
|
|
162,602
|
|
|
|
22.37
|
|
|
|
2,399,997
|
|
|
|
|
9/26/2006
|
(4)
|
|
|
67,054
|
|
|
|
203,252
|
|
|
|
22.37
|
|
|
|
2,999,998
|
|
|
|
|
9/26/2006
|
(5)
|
|
|
|
|
|
|
71,011
|
|
|
|
22.37
|
|
|
|
375,648
|
|
E. Lee Wyatt Jr.
|
|
|
9/26/2006
|
(2)
|
|
|
24,586
|
|
|
|
77,031
|
|
|
|
22.37
|
|
|
|
1,099,990
|
|
|
|
|
9/26/2006
|
(3)
|
|
|
24,586
|
|
|
|
74,526
|
|
|
|
22.37
|
|
|
|
1,099,991
|
|
|
|
|
9/26/2006
|
(6)
|
|
|
89,405
|
|
|
|
|
|
|
|
22.37
|
|
|
|
1,999,990
|
|
Lee A. Chaden
|
|
|
9/26/2006
|
(3)
|
|
|
33,152
|
|
|
|
100,488
|
|
|
|
22.37
|
|
|
|
1,483,212
|
|
|
|
|
9/26/2006
|
(4)
|
|
|
22,351
|
|
|
|
67,751
|
|
|
|
22.37
|
|
|
|
999,994
|
|
Gerald W. Evans Jr.
|
|
|
9/26/2006
|
(2)
|
|
|
13,721
|
|
|
|
42,989
|
|
|
|
22.37
|
|
|
|
613,880
|
|
|
|
|
9/26/2006
|
(3)
|
|
|
18,999
|
|
|
|
57,588
|
|
|
|
22.37
|
|
|
|
850,007
|
|
|
|
|
9/26/2006
|
(4)
|
|
|
18,999
|
|
|
|
57,588
|
|
|
|
22.37
|
|
|
|
850,007
|
|
|
|
|
9/26/2006
|
(5)
|
|
|
|
|
|
|
52,029
|
|
|
|
22.37
|
|
|
|
275,233
|
|
Michael Flatow
|
|
|
9/26/2006
|
(2)
|
|
|
13,721
|
|
|
|
42,989
|
|
|
|
22.37
|
|
|
|
613,880
|
|
|
|
|
9/26/2006
|
(3)
|
|
|
18,999
|
|
|
|
57,588
|
|
|
|
22.37
|
|
|
|
850,007
|
|
|
|
|
9/26/2006
|
(4)
|
|
|
18,999
|
|
|
|
57,588
|
|
|
|
22.37
|
|
|
|
850,007
|
|
|
|
|
(1) |
|
The dollar values shown reflect the full compensation cost of
the awards as described in FAS 123R. |
|
(2) |
|
In anticipation of our spin off from Sara Lee, our employees
generally received only a partial award of Sara Lee equity for
the fiscal year ended July 1, 2006 in August 2005. This
award represents the remaining portion of the awards. The value
of this award was split evenly between stock options and RSUs.
The stock options vest ratably on August 31, 2007 and
August 31, 2008 and expire on the seventh anniversary of
the date of grant. The exercise price of the stock options is
100% of the fair market value of our common stock on the date of
grant. The RSUs vest ratably on August 31, 2007 and
August 31, 2008. See Fiscal 2006 Awards for a
discussion of these awards. |
|
(3) |
|
This award represents the annual award for calendar year 2006.
The value of this award was split evenly between stock options
and RSUs. The stock options vest ratably on the first, second
and third anniversaries of the date of grant and expire on the
seventh anniversary of the date of grant. The exercise price of
the stock options is 100% of the fair market value of our common
stock on the date of grant. The RSUs vest ratably on the first,
second and third anniversaries of the date of grant. See
2006 Annual Awards for a discussion of these awards. |
|
(4) |
|
This award was granted in connection with the completion of the
spin off. The value of this award was split evenly between stock
options and RSUs. The stock options vest ratably on the first,
second and third anniversaries of the date of grant and expire
on the seventh anniversary of the date of grant. The exercise
price of the stock options is 100% of the fair market value of
our common stock on the date of grant. The RSUs vest on the
third anniversary of the date of grant. See Other
Awards for a discussion of these awards. |
|
(5) |
|
Most Sara Lee stock options granted prior to August 2006 had a
shortened exercise period as a result of employees terminating
employment with the Sara Lee controlled group due to the spin
off. This award represents stock options awarded to our
employees who were active at the time of the spin off and not of
retirement age to replace this lost value. The stock options
were exercisable on the date of grant and expire on the fifth
anniversary of the date of grant. The exercise price of the
stock options is 100% of the fair |
102
|
|
|
|
|
market value of our common stock on the date of grant. See
Sara Lee Option Replacement Awards for a discussion
of these awards. |
|
(6) |
|
This award was granted in connection with the completion of the
spin off. This award consists entirely of RSUs which vest
ratably on the first and second anniversaries of the date of
grant. |
Discussion
of Summary Compensation Table and Grant of Plan-Based Awards
Table
The base salaries for our named executive officers in the six
months ended December 30, 2006 were determined based on the
scope of their responsibilities, taking into account competitive
market compensation paid by other companies for similar
positions, taking into account the fact that we expected the
spin off to occur. For the six months ended December 30,
2006, the Compensation and Benefits Committee determined to pay
bonuses pursuant to the AIP at 97% of the target level
established for an employee pursuant to the AIP, which for our
executive officers ranged from 85% to 150%. The Compensation and
Benefits Committee made this determination based on the fact
that the change in our fiscal year end to the Saturday closest
to December 31 would create a transition period beginning
on July 2, 2006 and ending on December 30, 2006,
during which our company would be independent from Sara Lee for
less than four months. In making this determination, the
Compensation and Benefits Committee considered that payment of
bonuses at 97% of target levels results in bonus payments that
are consistent with the bonuses paid during the preceding four
years.
During the six months ended December 30, 2006, consistent
with the objectives of the Omnibus Incentive Plan of providing
employees with a proprietary interest in our company and
aligning employee interest with that of our stockholders, we
made awards in connection with the spin off. All of these
awards, including the date on which the awards were granted,
were approved by the Sara Lee Compensation Committee prior to
the spin off. The timing of these awards, as established prior
to the spin off, was the 15th trading date following the
completion of the spin off, which we believe was a reasonable
time period to permit the development of an orderly market for
the trading of our common stock. These awards were made as
follows:
Fiscal 2006 Awards. In anticipation of the
spin off, our employees generally received only a partial award
of Sara Lee equity for the fiscal year ended July 1, 2006
in August 2005. On September 26, 2006, we granted the
remaining portion of the award in a combination of stock options
and RSUs that will vest ratably over a two-year period to our
employees. Generally, 50% of the value of the award to our
executive officers was made in the form of stock options and 50%
of the value of the award was made in the form of RSUs. The
number of stock options granted to each recipient was determined
based on a Black-Scholes option-pricing model. The exercise
price of the stock options is 100% of the fair market value of
our common stock on the grant date. The awards made to our named
executive officers are reflected in the Summary
Compensation Table and the Grants of Plan-Based
Award Table above.
Sara Lee Option Replacement Awards. Most Sara
Lee stock options granted prior to August 2006 had a shortened
exercise period as a result of employees terminating employment
with the Sara Lee controlled group due to the spin off. On
September 26, 2006, we granted stock options to our
employees who were active at the time of the spin off and not of
retirement age to replace this lost value. We did not grant
these stock options to employees who qualified for early
retirement under the Sara Lee pension program because their Sara
Lee stock options remain exercisable until the original
expiration date. The replacement options were exercisable upon
grant at an exercise price that is equal to 100% of the fair
market value of our common stock on the date of grant. The stock
options may be exercised for five years. The number of stock
options granted to each recipient was determined based on a
Black-Scholes option-pricing model calculation of the lost value
of the Sara Lee stock options, which determination was made as
of September 5, 2006 upon the completion of the spin off.
The awards made to our named executive officers are reflected in
the Summary Compensation Table and the Grants
of Plan-Based Award Table above.
Other Awards. On September 26, 2006, we
granted a number of stock options and RSUs in connection with
the completion of the spin off. For our executive officers, the
form of these awards was generally evenly split between stock
options, which vest ratably over a three-year period, and RSUs,
which vest on the third anniversary of their grant date. The
number of stock options granted to each recipient was determined
based on a Black-Scholes option-pricing model. The exercise
price of the stock options is 100% of the fair market
103
value of our common stock on the date of grant. The stock
options generally expire seven years after the date of grant.
The awards made to our named executive officers are reflected in
the Summary Compensation Table and the Grants
of Plan-Based Award Table above.
2006 Annual Awards. On September 26,
2006, we issued our 2006 annual equity awards. For executive
officers, the form of these awards was split evenly between
stock options and RSUs that vest ratably over a three-year
period. The number of stock options granted to each recipient
was determined based on a Black-Scholes option-pricing model.
The exercise price of the stock options is 100% of the fair
market value of our common stock on the grant date. The awards
made to our named executive officers are reflected in the
Summary Compensation Table and the Grants of
Plan-Based Award Table above.
Outstanding
Equity Awards
The following table sets forth certain information with respect
to outstanding equity awards at December 30, 2006 with
respect to the named executive officers.
Outstanding
Equity Awards at Fiscal Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Award
|
|
|
Stock Awards
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market Value of
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Stock That
|
|
|
Stock That
|
|
|
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not
|
|
|
Have Not
|
|
Name
|
|
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Date)
|
|
|
Vested (#)
|
|
|
Vested ($)(1)
|
|
|
Richard A. Noll
|
|
|
(2
|
)
|
|
|
|
|
|
|
121,382
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
38,742
|
|
|
|
915,086
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
162,602
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
53,643
|
|
|
|
1,267,048
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
203,252
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
67,054
|
|
|
|
1,583,815
|
|
|
|
|
(5
|
)
|
|
|
71,011
|
|
|
|
|
|
|
|
22.37
|
|
|
|
9/26/2011
|
|
|
|
|
|
|
|
|
|
E. Lee Wyatt Jr.
|
|
|
(2
|
)
|
|
|
|
|
|
|
77,031
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
24,586
|
|
|
|
580,721
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
74,526
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
24,586
|
|
|
|
580,721
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,405
|
|
|
|
2,111,746
|
|
Lee A. Chaden
|
|
|
(3
|
)
|
|
|
|
|
|
|
100,488
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
33,152
|
|
|
|
783,050
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
67,751
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
22,351
|
|
|
|
527,931
|
|
Gerald W. Evans Jr.
|
|
|
(2
|
)
|
|
|
|
|
|
|
42,989
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
13,721
|
|
|
|
324,090
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
57,588
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
18,999
|
|
|
|
448,756
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
57,588
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
18,999
|
|
|
|
448,756
|
|
|
|
|
(5
|
)
|
|
|
52,029
|
|
|
|
|
|
|
|
22.37
|
|
|
|
9/26/2011
|
|
|
|
|
|
|
|
|
|
Michael Flatow
|
|
|
(2
|
)
|
|
|
|
|
|
|
42,989
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
13,721
|
|
|
|
324,090
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
57,588
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
18,999
|
|
|
|
448,756
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
57,588
|
|
|
|
22.37
|
|
|
|
9/26/2013
|
|
|
|
18,999
|
|
|
|
448,756
|
|
|
|
|
(1) |
|
Calculated by multiplying $23.62, the closing market price of
our common stock on December 29, 2006, by the number of
RSUs which have not vested. |
|
(2) |
|
These awards were granted on September 26, 2006. The stock
options vest ratably on August 31, 2007 and August 31,
2008 and expire on the seventh anniversary of the date of grant.
The exercise price of the stock options is 100% of the fair
market value of our common stock on the date of grant. The RSUs
vest ratably on August 31, 2007 and August 31, 2008. |
|
(3) |
|
These awards were granted on September 26, 2006. The stock
options vest ratably on the first, second and third
anniversaries of the date of grant and expire on the seventh
anniversary of the date of grant. The exercise price of the
stock options is 100% of the fair market value of our common
stock on the date of grant. The RSUs vest ratably on the first,
second and third anniversaries of the date of grant. |
|
(4) |
|
These awards were granted on September 26, 2006. The stock
options vest ratably on the first, second and third
anniversaries of the date of grant and expire on the seventh
anniversary of the date of grant. The exercise price of the
stock options is 100% of the fair market value of our common
stock on the date of grant. The RSUs vest on the third
anniversary of the date of grant. |
104
|
|
|
(5) |
|
These awards were granted on September 26, 2006. The stock
options were exercisable on the date of grant and expire on the
fifth anniversary of the date of grant. The exercise price of
the stock options is 100% of the fair market value of our common
stock on the date of grant. |
|
(6) |
|
These awards were granted on September 26, 2006. This award
was granted in connection with the completion of the spin off.
This award consists entirely of RSUs which vest ratably on the
first and second anniversaries of the date of grant. |
Option
Exercises and Stock Vested
The following table sets forth certain information with respect
to option and stock exercises during the six months ended
December 30, 2006 with respect to the named executive
officers.
Option
Exercises and Stock Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
Value
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Realized
|
|
|
Shares
|
|
|
Value
|
|
|
|
Acquired
|
|
|
Upon
|
|
|
Acquired on
|
|
|
Realized
|
|
|
|
on Exercise
|
|
|
Exercise
|
|
|
Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
Richard A. Noll
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E. Lee Wyatt Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lee A. Chaden
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerald W. Evans Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Flatow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
Certain of our executive officers participate in the Pension
Plan and the SERP. The Pension Plan is a frozen defined benefit
pension plan, intended to be qualified under Section 401(a)
of the Internal Revenue Code, that provides the benefits that
had accrued for our employees, including our executive officers,
under the Sara Lee Corporation Consolidated Pension and
Retirement Plan as of December 31, 2005. The SERP is an
unfunded deferred compensation plan that, in part, will provide
the nonqualified supplemental pension benefits that had accrued
for certain of our employees, including our executive officers,
under the Sara Lee Corporation Supplemental Executive Retirement
Plan with respect to benefits accrued through December 31,
2005 that could not be provided under the Sara Lee Corporation
Consolidated Pension and Retirement Plan because of various
Internal Revenue Code limitations.
Normal retirement age is age 65 for purposes of both the
Pension Plan and the SERP. The normal form of benefits under the
Pension Plan is a life annuity for single participants and a
qualified joint and survivor annuity for married participants.
The normal form of benefits under the SERP is a lump sum.
Mr. Chaden and Mr. Flatow are eligible for early
retirement under the Pension Plan and the SERP; each of which
provides that participants who have attained at least
age 55 and completed at least ten years of service are
eligible for unreduced benefits at age 62, or benefits
reduced by 5/12 of one percent thereof for each month by which
the date of commencement of such benefit precedes the first day
of the month coincident with or next following the month in
which the participant attains age 62. Approximately 1% of
the benefits payable to Mr. Flatow pursuant to the Pension
Plan are computed under a different formula pursuant to which
unreduced benefits are not available until age 65.
105
The following table sets forth certain information with respect
to the value of pension benefits accumulated by our named
executive officers, as well as pension benefits paid to them
during the six months ended December 30, 2006.
Pension
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Present
|
|
|
Payments
|
|
|
|
|
Years
|
|
|
Value of
|
|
|
During
|
|
|
|
|
Credited
|
|
|
Accumulated
|
|
|
Last Fiscal
|
|
|
|
|
Service
|
|
|
Benefit
|
|
|
Year
|
Name
|
|
Plan Name
|
|
(#)
|
|
|
($)(1)
|
|
|
($)
|
|
Richard A. Noll
|
|
Hanesbrands Inc. Pension and
Retirement Plan
|
|
|
13.75
|
|
|
|
192,316
|
|
|
|
|
|
Hanesbrands Inc. Supplemental
Employee Retirement Plan
|
|
|
13.75
|
|
|
|
745,357
|
|
|
|
E. Lee Wyatt Jr.(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Lee A. Chaden(3)
|
|
Hanesbrands Inc. Pension and
Retirement Plan
|
|
|
13.50
|
|
|
|
511,439
|
|
|
|
Gerald W. Evans Jr.
|
|
Hanesbrands Inc. Pension and
Retirement Plan
|
|
|
22.50
|
|
|
|
195,245
|
|
|
|
|
|
Hanesbrands Inc. Supplemental
Employee Retirement Plan
|
|
|
22.50
|
|
|
|
378,404
|
|
|
|
Michael Flatow
|
|
Hanesbrands Inc. Pension and
Retirement Plan
|
|
|
19.17
|
|
|
|
539,704
|
|
|
|
|
|
Hanesbrands Inc. Supplemental
Employee Retirement Plan
|
|
|
19.17
|
|
|
|
941,488
|
|
|
|
|
|
|
(1) |
|
Present values are computed as of December 30, 2006 using
the FAS discount rate of 5.80% and the FAS healthy mortality
table (the sex-specific RP 2000 mortality table projected for
mortality improvement to 2015 with a white-collar adjustment).
These are the same assumptions that we use for financial
reporting purposes under generally accepted accounting
principles. The benefit is valued assuming the participant
commences the benefit as a life annuity at the earliest
unreduced age (age 65 or age 62 if eligible for
unreduced early retirement) and based upon the
participants service through December 31, 2005 (the
date on which service credits ceased). |
|
(2) |
|
Mr. Wyatt does not have any pension benefits because he was
not eligible to receive benefits prior to December 31, 2005. |
|
(3) |
|
Mr. Chaden does not have a SERP benefit because the
nonqualified benefits accrued by Mr. Chaden under Sara
Lees plan are funded with periodic payments made by Sara
Lee to trusts established on his behalf. |
106
Nonqualified
Deferred Compensation
The following table sets forth certain information with respect
to contributions to and withdrawals from nonqualified deferred
compensation plans by our named executive officers during the
six months ended December 30, 2006.
Nonqualified
Deferred Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
Registrant
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Contributions in
|
|
|
Contributions
|
|
|
Earnings
|
|
|
Withdrawals/
|
|
|
Balance at
|
|
|
|
Last FY
|
|
|
in Last FY
|
|
|
in Last FY
|
|
|
Distributions
|
|
|
Last FYE
|
|
Name
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)(3)(4)
|
|
|
($)
|
|
|
($)
|
|
|
Richard A. Noll
|
|
|
|
|
|
|
383,626
|
|
|
|
83,741
|
|
|
|
|
|
|
|
668,515
|
|
E. Lee Wyatt Jr.
|
|
|
228,783
|
|
|
|
70,811
|
|
|
|
55,453
|
|
|
|
|
|
|
|
481,876
|
|
Lee A. Chaden
|
|
|
|
|
|
|
377,509
|
|
|
|
132,635
|
|
|
|
|
|
|
|
828,739
|
|
Gerald W. Evans Jr.
|
|
|
|
|
|
|
148,278
|
|
|
|
229,059
|
|
|
|
197,762
|
|
|
|
2,253,145
|
|
Michael Flatow
|
|
|
|
|
|
|
161,038
|
|
|
|
42,687
|
|
|
|
|
|
|
|
306,263
|
|
|
|
|
(1) |
|
Entries include the participants deferrals of cash and
bonuses under the Executive Deferred Compensation Plan during
the six months ended December 30, 2006; all of these
amounts are included in the Summary Compensation Table in the
Salary or Bonus column as applicable.
Vested equity awards under the Omnibus Incentive Plan also are
eligible to be deferred under the Executive Deferred
Compensation Plan, but no such vested awards were deferred
during the six months ended December 30, 2006. |
|
(2) |
|
Represents our contribution to the SERP during the six months
ended December 30, 2006. One of the primary purposes of the
SERP is to provide to those employees whose compensation exceeds
a threshold established by the Internal Revenue Code benefits
that would be earned under the 401(k) Plan but for these
limitations. The SERP also provides benefits consisting of
(i) those supplemental retirement benefits that had been
accrued under the Sara Lee Corporation Supplemental Executive
Retirement Plan as of December 31, 2005 and
(ii) transitional defined contribution credits for one to
five years and ranging from 4% to 15% of eligible compensation
for certain executives, which transition credits were in the
amount of $240,735 for Mr. Noll, $0 for Mr. Wyatt,
$257,680 for Mr. Chaden, $99,527 for Mr. Evans and
$116,503 for Mr. Flatow during the six months ended
December 30, 2006. These transitional credits are being
provided to a broad group of executives in connection with our
transition from providing both a defined benefit plan and a
defined contribution plan to providing only defined contribution
plans, in order to mitigate the negative impact of that
transition. The credits will be provided for up to five years,
and range from 4% to 15% of eligible compensation. The
determination of the credits to be provided to an executive was
based on the extent to which such executive was negatively
impacted by the transition, including their age and years of
service as of January 1, 2006. All of these amounts are
included in the Summary Compensation Table in the All
Other Compensation column. |
|
(3) |
|
No portion of these earnings were included in the Summary
Compensation Table because neither the Executive Deferred
Compensation Plan nor the SERP provides for
above-market or preferential earnings as defined in
applicable SEC rules. |
|
(4) |
|
Entries include an adjustment for the one time dividend
associated with our spin off of from Sara Lee. Balances in the
plan were adjusted in the same manner as actual stockholders of
Sara Lee received a distribution of shares of our common stock
(in the ratio of one share of our common stock for every eight
shares of Sara Lee common stock). |
107
Potential
Payments upon Termination or Change in Control
The termination benefits provided to our executive officers upon
their voluntary termination of employment, or termination due to
death or total and permanent disability, do not discriminate in
scope, terms or operation in favor of our executive officers
compared to the benefits offered to all salaried employees. The
following describes the potential payments to executive officer
upon an involuntary severance or a termination of employment in
connection with a change in control. The information presented
in this section is computed assuming that the triggering event
took place on December 29, 2006, the last business day of
the six months ended December 30, 2006, and that the value
of a share of our common stock is the closing price per share of
our common stock as of December 29, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary Termination
|
|
|
Involuntary Termination
|
|
|
|
|
|
|
|
|
Retire-
|
|
|
For
|
|
|
Not for
|
|
|
Change
|
|
|
|
|
|
Resignation(1)
|
|
|
ment(1)
|
|
|
Cause(1)
|
|
|
Cause
|
|
|
in Control
|
|
|
Richard A. Noll
|
|
Severance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,600,000
|
(2)
|
|
$
|
6,000,000
|
(3)
|
|
|
Long-term incentive(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,374,994
|
|
|
|
Benefits and perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000
|
(5)
|
|
|
257,210
|
(6)
|
|
|
Tax
gross-up(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,334,024
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,616,000
|
|
|
$
|
13,966,228
|
|
E. Lee Wyatt Jr.
|
|
Severance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
550,000
|
(2)
|
|
$
|
2,200,000
|
(3)
|
|
|
Long-term incentive(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,462,635
|
|
|
|
Benefits and perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000
|
(5)
|
|
|
216,873
|
(6)
|
|
|
Tax
gross-up(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,644,906
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
566,000
|
|
|
$
|
7,524,414
|
|
Lee A. Chaden
|
|
Severance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,318,400
|
(2)
|
|
$
|
3,315,691
|
(3)
|
|
|
Long-term incentive(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,521,280
|
|
|
|
Benefits and perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000
|
(5)
|
|
|
138,535
|
(6)
|
|
|
Tax
gross-up(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,334,400
|
|
|
$
|
4,975,506
|
|
Gerald W. Evans Jr.
|
|
Severance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
850,000
|
(2)
|
|
$
|
1,700,000
|
(3)
|
|
|
Long-term incentive(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,419,309
|
|
|
|
Benefits and perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000
|
(5)
|
|
|
97,402
|
(6)
|
|
|
Tax
gross-up(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
866,000
|
|
|
$
|
3,216,711
|
|
Michael Flatow
|
|
Severance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
850,000
|
(2)
|
|
$
|
1,700,000
|
(3)
|
|
|
Long-term incentive(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,419,309
|
|
|
|
Benefits and perquisites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000
|
(5)
|
|
|
95,372
|
(6)
|
|
|
Tax
gross-up(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
866,000
|
|
|
$
|
3,214,681
|
|
|
|
|
(1) |
|
Generally, if an executive is terminated by us for cause, or if
an officer voluntarily resigns or retires, that officer will
receive no severance benefit. |
|
(2) |
|
Generally, if an executive officers employment is
terminated by us for any reason other than for cause, or if an
executive officer terminates his or her employment at our
request, we will pay that officer benefits for a period of 12 to
24 months depending on his or her position and combined
continuous length of service with Hanesbrands and with Sara Lee.
The monthly severance benefit that we would pay to each
executive officer is based on the executive officers base
salary (and, in limited cases, determined bonus), divided by 12.
To receive these payments, the executive officer must sign an
agreement that prohibits, among other things, the executive
officer from working for our competitors, soliciting business
from our customers, attempting to hire our employees and
disclosing our confidential information. The executive officer
also must agree to release any claims against us. Payments
terminate if the terminated executive officer becomes employed
by one of our competitors. The terminated executive officer also
would receive a pro-rated payment under any incentive plans
applicable to the fiscal year in which the termination occurs
based on actual full fiscal year performance. We have not
estimated a value for these incentive plan |
108
|
|
|
|
|
payments because the officer would be entitled to such payments
if employed by us on the last day of our fiscal year, regardless
of whether termination occurred. |
|
(3) |
|
Includes both involuntary company-initiated terminations of the
named executive officers employment and terminations by
the named executive officer due to good reason as
defined in the officers Severance Agreement. The executive
receives a lump sum payment, two times (or three times in the
case of Mr. Noll) his or her cash compensation, consisting
of base salary, the greater of their current target bonus or
their average actual bonus over the prior three years and the
matching contribution to the defined contribution plan in which
the executive officer is participating (the amount of the
contribution to the defined contribution plan is reflected in
Benefits and perquisites). To receive these
payments, the executive officer must sign an agreement that
prohibits, among other things, the executive officer from
working for our competitors, soliciting business from our
customers, attempting to hire our employees and disclosing our
confidential information. The executive officer also must agree
to release any claims against us. Payments terminate if the
terminated executive officer becomes employed by one of our
competitors. The terminated officer will also receive a
pro-rated portion of his or her annual bonus for the fiscal year
in which the termination occurs based upon actual performance as
of the date of termination. We have not estimated a value for
these payments because the officer would be entitled to such
payments if employed by us on the last day of our fiscal year,
regardless of whether termination occurred. The terminated
officer will also receive a pro-rata portion of his or her
long-term cash incentive plan payment for any performance period
that is at least 50% completed prior to the executive
officers termination date and the replacement of lost
savings and retirement benefits through the SERP. We have not
estimated the value for long-term cash incentive plan payments
because we have not currently implemented such a plan. |
|
(4) |
|
Upon a change in control, as defined in the Omnibus Incentive
Plan, all outstanding awards under the Omnibus Incentive Plan,
including those to named executive officers, fully vest upon a
change in control regardless of whether a termination of
employment occurs, unless provided otherwise with respect to a
particular award under the Omnibus Incentive Plan. None of the
RSUs we have granted to date provide otherwise. All of the
options we have granted to date, however, provide that
acceleration upon a change in control will only occur if a
termination of employment also occurs. Stock options are valued
based upon the spread (i.e., the difference between
the closing price of our common stock on December 29, 2006
and the exercise price of the stock options) on all unvested
stock options; RSUs are valued based upon the number of unvested
RSUs multiplied by the closing price of our common stock on
December 29, 2006. |
|
(5) |
|
Reflects outplacement services ($16,000 for each of the named
executive officers). The terminated executive officers
eligibility to participate in our medical, dental and executive
life insurance plans would continue for the same number of
months for which he or she is receiving severance payments.
However, these continued welfare benefits are available do not
discriminate in scope, terms or operation in favor of our
executive officers compared to the involuntary termination
benefits offered to all salaried employees. The terminated
executive officers participation in all other benefit
plans would cease as of the date of termination of employment. |
|
(6) |
|
Reflects health and welfare benefits continuation ($145,210 for
Mr. Noll, $84,488 for Mr. Wyatt, $69,799 for
Mr. Chaden, $47,402 for Mr. Evans and $45,372 for
Mr. Flatow), three years of scheduled contributions to our
defined contribution plans ($96,000 for Mr. Noll, $44,000
for Mr. Wyatt, $52,736 for Mr. Chaden, $34,000 for
Mr. Evans and $34,000 for Mr. Flatow), full vesting of
any unvested retirement amounts ($72,385 for Mr. Wyatt),
and outplacement services ($16,000 for each of the named
executive officers). Terminated executive officers continue to
be eligible to participate in our medical, dental and executive
insurance plans during the severance period of two years (three
years for Mr. Noll) following the executive officers
termination date. In computing the value of continued
participation in our medical, dental and executive insurance
plans, we have assumed that the current cost to us of providing
these plans will increase annually at a rate of 8%. |
|
(7) |
|
In the event that any payments made in connection with a change
in control would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code, we will make tax
equalization payments with respect to the executive
officers compensation for all federal, state and local
income and excise taxes, and any penalties and interest, but
only if the total payments made in connection with a change in
control exceed 330% of such executive officers base
amount (as determined under Section 280G(b) of the |
109
|
|
|
|
|
Internal Revenue Code). Otherwise, the payments made to such
executive officer in connection with a change in control that
are classified as parachute payments will be reduced so that the
value of the total payments to such executive officer is one
dollar ($1) less than the maximum amount such executive officer
may receive without becoming subject to the tax imposed by
Section 4999 of the Internal Revenue Code. |
Director
Compensation
Annual
Compensation
We compensate each non-employee director for service on our
board of directors as follows:
|
|
|
|
|
an annual cash retainer of $70,000, paid in quarterly
installments;
|
|
|
|
an additional annual cash retainer of $10,000 for the chair of
the Audit Committee (currently, Ms. Peterson), $5,000 for
the chair of the Compensation and Benefits Committee (currently,
Mr. Coker) and $5,000 for the chair of the Governance and
Nominating Committee (currently, Mr. Johnson);
|
|
|
|
an additional annual cash retainer of $5,000 for each member of
the Audit Committee other than the chair (currently,
Mr. Griffin, Ms. Mathews and Mr. Mulcahy);
|
|
|
|
an annual grant of $70,000 in restricted stock units, with a
one-year vesting schedule; these units will be converted at
vesting into deferred stock units payable in stock six months
after termination of service on our board of directors (as
discussed below, the amount of this annual grant was recently
increased to $95,000); and
|
|
|
|
reimbursement of customary expenses for attending board,
committee and stockholder meetings.
|
Directors who are also our employees receive no additional
compensation for serving as a director.
The following table further summarizes the compensation paid to
the non-employee directors for the six months ended
December 30, 2006.
Director
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
or Paid in
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Compensation
|
|
|
All Other
|
|
|
|
|
|
|
Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Alice M. Peterson
|
|
|
40,000
|
|
|
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,205
|
|
Bobby J. Griffin
|
|
|
37,500
|
|
|
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,705
|
|
J. Patrick Mulcahy
|
|
|
37,500
|
|
|
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,705
|
|
Charles W. Coker
|
|
|
37,500
|
|
|
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,705
|
|
James C Johnson
|
|
|
37,500
|
|
|
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,705
|
|
Harry A. Cockrell
|
|
|
35,000
|
|
|
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,205
|
|
Andrew J. Schindler
|
|
|
35,000
|
|
|
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,205
|
|
Jessica T. Mathews(3)
|
|
|
17,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,500
|
|
|
|
|
(1) |
|
For their service with us in 2006, we paid our directors an
amount equal to half of their annual cash retainer and a grant
of restricted stock units with one half the value of the annual
grant. |
|
(2) |
|
The dollar values shown reflect the compensation cost of the
awards, before reflecting forfeitures, over the requisite
service period, as described in FAS 123R. The aggregate
number of restricted stock units held by each non-employee
director (other than Ms. Mathews) is 1,565. |
|
(3) |
|
Ms. Mathews was elected to the Board effective
October 26, 2006; her annual retainer was pro rated
accordingly and she did not receive an award of restricted stock
units. |
110
After reviewing information about the compensation paid to
directors at the Benchmark Companies, the Compensation and
Benefits Committee determined to increase the equity portion of
annual director compensation from $70,000 to $95,000. We expect
that the Compensation and Benefits Committee will conduct a
similar review each year and may alter either the cash or equity
portion of director compensation following any such review.
The Compensation and Benefits Committee also determined that the
equity awards to the non-employee directors would continue to
consist of RSUs with a one-year vesting schedule, but that,
beginning with the 2008 annual grant, rather than converting to
deferred stock units payable in stock six months after
termination of service on our board of directors, they would be
payable upon vesting in shares of our common stock on a
one-for-one
basis. The Compensation and Benefits Committee considered this
appropriate in light of the stock ownership and retention
guidelines which it implemented for the non-employee directors
at the same time it implemented these changes in director
compensation.
Non-Employee
Director Deferred Compensation Plan
Under the Hanesbrands Inc. Non-Employee Director Deferred
Compensation Plan, or the Director Deferred Compensation
Plan, a nonqualified, unfunded deferred compensation plan,
our non-employee directors may defer all or a portion (not less
than 25 percent) of their annual retainer. At the election
of the director, amounts deferred under the Director Deferred
Compensation Plan will earn a return equivalent to the return on
an investment in an interest-bearing account earning interest
based on the Federal Reserves published rate for five year
constant maturity Treasury notes at the beginning of the
calendar year, or be invested in a stock equivalent account and
earn a return based on our stock price. Amounts deferred, plus
any dividend equivalents or interest, will be paid in cash or in
shares of our common stock as applicable. Any awards of
restricted stock or RSUs to non-employee directors that are
automatically deferred pursuant to the terms of the award are
deferred under the Director Deferred Compensation Plan. Amounts
deferred, plus any dividend equivalents or interest, will be
paid in cash or in shares of our common stock, as applicable,
with any shares of common stock being issued from the Omnibus
Incentive Plan. The amount payable to participants will be
payable either on the withdrawal date elected by the participant
or upon the occurrence of certain events as provided under the
Director Deferred Compensation Plan. A participant may designate
one or more beneficiaries to receive any portion of the
obligations payable in the event of death, however neither
participants nor their beneficiaries may transfer any right or
interest in the Director Deferred Compensation Plan.
Share
Ownership and Retention Guidelines
We believe that our directors who are not employees of
Hanesbrands should have a significant equity interest in our
company. Our non-employee directors receive a substantial
portion of their compensation in the form of equity-based
compensation and also may elect to receive all or a portion of
their annual cash retainer in the form of options to purchase
our common stock. In order to promote such equity ownership and
further align the interests of these directors with our
stockholders, we are adopting share retention and ownership
guidelines for these directors. A non-employee director may not
dispose of any shares of our common stock until such director
holds shares of common stock with a value equal to at least
three times the current annual equity retainer, and may then
only dispose of shares in excess of those with that value. In
addition to shares directly held by a non-employee director,
shares held for such director in the Director Deferred
Compensation Plan (including hypothetical share equivalents held
in that plan) will be counted for purposes of determining
whether the ownership requirements are met. A director will not
be deemed to be in violation of these guidelines if the value of
the shares held by such director declines after a disposition,
such that the value is no longer at least equal to three times
the value of the current annual equity retainer.
Under our insider trading policy, no director or employee of
Hanesbrands is permitted to engage in short sales or
sales against the box or trade in puts, calls or
other options on our securities. The purpose of this prohibition
is to avoid the appearance that any Hanesbrands director,
officer or employee is trading on inside information.
111
Compensation
Committee Interlocks and Insider Participation
The current members of the Compensation and Benefits Committee
are Charles W. Coker, Harry A. Cockrell, James C. Johnson and
Andrew J. Schindler, and no other directors served on the
Compensation and Benefits Committee during the six months ended
December 30, 2006. No interlocking relationship exists
between our board of directors or Compensation and Benefits
Committee and the board of directors or compensation committee
of any other company, nor has any interlocking relationship
existed in the past.
112
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain
Relationships and Related Transactions
Prior to the spin off, we were a wholly owned subsidiary of Sara
Lee. In connection with the spin off, we entered into a number
of agreements with Sara Lee. For a description of these
agreements, see The Spin Off. Effective upon the
completion of the spin off, Sara Lee ceased to be a related
party to us.
Director
Independence
Eight of the ten members of our board of directors, Harry A.
Cockrell, Charles W. Coker, Bobby J. Griffin, James C. Johnson,
Jessica T. Mathews, J. Patrick Mulcahy, Alice M. Peterson and
Andrew J. Schindler, are independent under New York Stock
Exchange listing standards. In order to assist our board in
making the independence determinations required by these
standards, the board has adopted categorical standards of
independence. These standards are contained in our Corporate
Governance Guidelines, which are available in the
Investors section of our website,
www.hanesbrands.com. Each of these directors is also independent
under the standards contained in our Corporate Governance
Guidelines. In determining board independence, the board did not
discuss, and was not aware of any, transactions, relationships
or arrangements that existed with respect to any of these
directors that were discussed under Item 13 of our most
recent
Form 10-K.
Our Audit Committees charter requires that, within one
year of our listing on the New York Stock Exchange, the Audit
Committee be composed of at least three members, who must be
independent directors meeting the requirements of the New York
Stock Exchange listing standards and the rules of the SEC. Each
of the members of our Audit Committee, Mr. Griffin,
Ms. Mathews, Mr. Mulcahy and Ms. Peterson, meets
the standards of independence applicable to audit committee
members under applicable SEC rules and New York Stock Exchange
listing standards.
Our Compensation and Benefits Committees charter requires
that, within one year of our listing on the New York Stock
Exchange, all of the members of the Compensation and Benefits
Committee must be independent directors who meet the
requirements of the New York Stock Exchange listing standards,
and that at least two of the directors appointed to serve on the
Compensation and Benefits Committee shall be non-employee
directors (within the meaning of
Rule 16b-3
promulgated under the Exchange Act) and outside
directors (within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended, and the
regulations thereunder). Each of the members of our Compensation
and Benefits Committee, Mr. Cockrell, Mr. Coker,
Mr. Johnson and Mr. Schindler, is a non-employee
director within the meaning of Section 16 of the Exchange
Act, an outside director within the meaning of
Section 162(m) of the Internal Revenue Code and an
independent director under applicable New York Stock Exchange
listing standards.
Our Governance and Nominating Committees charter requires
that, within one year of the Companys listing on the New
York Stock Exchange, all of the members of the Governance and
Nominating Committee shall be independent directors who meet the
requirements of the New York Stock Exchange listing standards.
Each of the members of our Governance and Nominating Committee,
Mr. Cockrell, Mr. Coker, Mr. Johnson and
Mr. Schindler, is an independent director under applicable
New York Stock Exchange listing standards.
113
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information, as of March 30,
2007 regarding beneficial ownership by (1) each person who
is known by us to beneficially own more than 5% of our common
stock, (2) each director and executive officer and
(3) all of our directors and executive officers as a group.
The address of each director and executive officer shown in the
table below is c/o Hanesbrands Inc., 1000 East Hanes Mill
Road, Winston-Salem, North Carolina 27105.
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
Percentage of
|
|
Name and Address of Beneficial Owner
|
|
of our Common Stock(1)
|
|
|
Class
|
|
|
Capital Research and Management
Company(2)
|
|
|
14,243,500
|
|
|
|
14.8
|
%
|
Lee A. Chaden(3)
|
|
|
2,425
|
|
|
|
*
|
|
Richard A. Noll(3)
|
|
|
74,554
|
|
|
|
*
|
|
E. Lee Wyatt Jr.(3)
|
|
|
822
|
|
|
|
*
|
|
Gerald W. Evans Jr.(3)(4)
|
|
|
54,504
|
|
|
|
*
|
|
Kevin D. Hall
|
|
|
|
|
|
|
|
|
Joia M. Johnson
|
|
|
|
|
|
|
|
|
Joan P. McReynolds
|
|
|
15,380
|
|
|
|
*
|
|
Kevin W. Oliver(3)(5)
|
|
|
13,273
|
|
|
|
*
|
|
Harry A. Cockrell
|
|
|
|
|
|
|
|
|
Charles W. Coker(6)
|
|
|
8,162
|
|
|
|
*
|
|
Bobby J. Griffin
|
|
|
|
|
|
|
|
|
James C. Johnson
|
|
|
|
|
|
|
|
|
Jessica T. Mathews
|
|
|
|
|
|
|
|
|
J. Patrick Mulcahy
|
|
|
|
|
|
|
|
|
Alice M. Peterson
|
|
|
|
|
|
|
|
|
Andrew J. Schindler
|
|
|
|
|
|
|
|
|
All directors and executive
officers as a group (15 persons)
|
|
|
169,120
|
|
|
|
*
|
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Beneficial ownership is determined under the rules and
regulations of the SEC, which provide that a person is deemed to
beneficially own all shares of common stock that such person has
the right to acquire within 60 days. Although shares that a
person has the right to acquire in 60 days are counted for
the purposes of determining that individuals beneficial
ownership, such shares generally are not deemed to be
outstanding for the purpose of computing the beneficial
ownership of any other person. Share numbers in this column
include shares of common stock subject to options exercisable
within 60 days of March 30, 2007 as follows: |
|
|
|
|
|
|
|
Number of
|
|
Name
|
|
Options
|
|
|
Gerald W. Evans Jr.
|
|
|
52,029
|
|
Joan P. McReynolds
|
|
|
14,501
|
|
Richard A. Noll
|
|
|
71,011
|
|
Kevin W. Oliver
|
|
|
11,930
|
|
All directors and executive
officers as a group
|
|
|
149,471
|
|
|
|
|
|
|
No restricted stock units held by any director or executive
officer are vested or will vest within 60 days of
March 30, 2007. No shares have been pledged as security by
any of our executive officers or directors. |
|
(2) |
|
Information in this table and footnote regarding this beneficial
owner is based on Amendment No. 1 filed February 12,
2007 to the Schedule 13G jointly filed by Capital Group
International, Inc. (CGI) and Capital Guardian Trust
Company (CGT) with the SEC. By virtue of
Rule 13d-3
under the Exchange Act, CGI may be deemed to beneficially own
14,243,500 shares of our common stock. CGT, a bank as
defined |
114
|
|
|
|
|
in Section 3(a)(6) of the Exchange Act, may be deemed to be
the beneficial owner of 11,669,040 shares of our common
stock as a result of its serving as the investment manager of
various institutional accounts. CGIs and CGTs
address is 11100 Santa Monica Blvd., Los Angeles, CA 90025. |
|
(3) |
|
Includes ownership through interests in the 401(k) Plan. |
|
(4) |
|
Mr. Evans owns one ordinary share of one of our
subsidiaries, HBI Manufacturing (Thailand) Ltd., which
represents less than one percent of the outstanding equity
interests in that entity. |
|
(5) |
|
Includes 150 shares of our common stock owned by
Mr. Olivers son, with respect to which
Mr. Oliver disclaims beneficial ownership. |
|
(6) |
|
Includes 6,402 shares of our common stock owned by
Mr. Cokers spouse, with respect to which
Mr. Coker disclaims beneficial ownership. |
Equity
Compensation Plan Information
The following table provides information about our equity
compensation plans as of December 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities to
|
|
|
Weighted Average
|
|
|
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Number of Securities
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Remaining Available for
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Future Issuance
|
|
|
Equity compensation plans approved
by security holders
|
|
|
4,494,893
|
|
|
$
|
22.37
|
|
|
|
11,052,107
|
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,494,893
|
|
|
$
|
22.37
|
|
|
|
11,052,107
|
|
115
THE SPIN
OFF
On September 5, 2006, Sara Lee distributed 100% of our
common stock to its stockholders of record as of August 18,
2006. As a result, we became an independent public company. In
order to govern our ongoing relationship with Sara Lee and to
provide mechanisms for an orderly transition, we and Sara Lee
entered into certain agreements which govern our relationship
and provide for the allocation of employee benefits, taxes and
other liabilities and obligations. The following is a summary of
the terms of the material agreements we entered into with Sara
Lee prior to the spin off. Copies of these agreements were filed
with the SEC on September 28, 2006 as exhibits to our
annual report on
Form 10-K
for the year ended July 1, 2006. You may obtain copies of
these agreements by contacting the SEC as described under
Where You Can Find More Information or by contacting
us at the address set forth under Summary
Company Information. When used in this section,
distribution date refers to September 5, 2006,
the date of the consummation of the spin off and
separation date refers to August 31, 2006, the
date on which Sara Lee transferred to us the assets and
liabilities it attributed to its branded apparel Americas/Asia
business.
Master
Separation Agreement
The master separation agreement governs the contribution of Sara
Lees branded apparel Americas/Asia business to us, the
subsequent distribution of shares of our common stock to Sara
Lee stockholders and other matters related to Sara Lees
relationship with us. To effect the contribution, Sara Lee
agreed to transfer all of the assets of the branded apparel
Americas/Asia business to us and we agreed to assume, perform
and fulfill all of the liabilities of the branded apparel
Americas/Asia division in accordance with their respective
terms, except for certain liabilities to be retained by Sara
Lee. All assets transferred are generally transferred on an
as is, where is basis.
Under the master separation agreement, we also agreed to use
reasonable best efforts to obtain any required consents,
substitutions or amendments required to novate or assign all
rights and obligations under any contracts to be transferred in
connection with the contribution. Sara Lees agreement to
consummate the distribution was subject to the satisfaction of a
number of conditions including the following:
|
|
|
|
|
the registration statement for our common stock being declared
effective by the SEC;
|
|
|
|
any actions and filings with regard to applicable securities and
blue sky laws of any state being taken and becoming effective or
accepted;
|
|
|
|
our common stock being accepted for listing on the New York
Stock Exchange, on official notice of distribution;
|
|
|
|
no legal restraint or prohibition preventing the consummation of
the contribution or distribution or any other transaction
related to the spin off being in effect;
|
|
|
|
Sara Lees receipt of a private letter ruling from the IRS
or an opinion of counsel to the effect, among other things, that
the spin off will qualify as a tax-free distribution for
U.S. federal income tax purposes under Section 355 of
the Internal Revenue Code and as part of a tax-free
reorganization under Section 368(a)(1)(D) of the Internal
Revenue Code;
|
|
|
|
the contribution becoming effective in accordance with the
master separation agreement and the ancillary agreements;
|
|
|
|
Sara Lee receiving a satisfactory solvency opinion with regards
to our company from an investment banking or valuation firm; and
|
|
|
|
our receipt of the proceeds of the borrowings under the Senior
Secured Credit Facility, the Second Lien Credit Facility and the
Bridge Loan Facility and distribution of $2.4 billion
to Sara Lee.
|
We and Sara Lee agreed to waive, and neither we nor Sara Lee
will be able to seek, consequential, special, indirect or
incidental damages or punitive damages.
116
Tax
Sharing Agreement
We also entered into a tax sharing agreement with Sara Lee. This
agreement (i) governs the allocation of U.S. federal,
state, local, and foreign tax liability between us and Sara Lee,
(ii) provides for restrictions and indemnities in
connection with the tax treatment of the distribution, and
(iii) addresses other tax-related matters.
Under the tax sharing agreement, Sara Lee generally is liable
for all U.S. federal, state, local, and foreign income
taxes attributable to us with respect to taxable periods ending
on or before September 5, 2006 and for certain income taxes
attributable to us with respect to taxable periods beginning
before September 5, 2006 ending after September 5,
2006. We have agreed to indemnify Sara Lee (and Sara Lee has
agreed to indemnify us) for any tax detriments arising from an
inter-group adjustment, but only to the extent we (or Sara Lee)
realize a corresponding tax benefit.
Within 180 days after Sara Lee files its final consolidated
tax return for the period that includes September 5, 2006,
Sara Lee is required to deliver to us a computation of the
amount of deferred taxes attributable to our United States and
Canadian operations that would be included on our balance sheet
as of September 6, 2006. If substituting the amount of
deferred taxes as finally determined for the amount of estimated
deferred taxes that were included on that balance sheet at the
time of the spin off causes a decrease in the net book value
reflected on that balance sheet, then Sara Lee will be required
to pay us the amount of such decrease. If such substitution
causes an increase in the net book value reflected on that
balance sheet, then we will be required to pay Sara Lee the
amount of such increase. For purposes of this computation, our
deferred taxes are the amount of deferred tax benefits
(including deferred tax consequences attributable to deductible
temporary differences and carryforwards) that would be
recognized as assets on our balance sheet computed in accordance
with GAAP, but without regard to valuation allowances, less the
amount of deferred tax liabilities (including deferred tax
consequences attributable to deductible temporary differences)
that would be recognized as liabilities on our balance sheet
computed in accordance with GAAP, but without regard to
valuation allowances. Neither we nor Sara Lee will be required
to make any other payments to the other with respect to deferred
taxes.
The tax sharing agreement also provides that we are liable for
taxes incurred by Sara Lee that arise as a result of our taking
or failing to take certain actions that result in the
distribution failing to meet the requirements of a tax-free
distribution under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code. We therefore have agreed that, among
other things, we will not take any actions that would result in
any tax being imposed on the spin off, including, subject to
specified exceptions any of the following actions during the
two-year period following the spin off:
|
|
|
|
|
selling or acquiring from any person, any of our equity
securities;
|
|
|
|
disposing of assets that, in the aggregate, constitute more than
50% of our gross assets;
|
|
|
|
engaging in certain transactions with regard to our socks
business;
|
|
|
|
dissolving, liquidating or engaging in any merger,
consolidation, or other reorganization; or
|
|
|
|
taking any action that would cause Sara Lee to recognize gain
under any gain recognition agreement to which Sara Lee is a
party.
|
In addition, we have agreed not to engage in certain of the
actions described above, whether before or after the two-year
period following the spin off, if it is pursuant to an
arrangement negotiated (in whole or in part) prior to the first
anniversary of the spin off.
Notwithstanding the foregoing, we may engage in activities that
are prohibited by the tax sharing agreement if we provide Sara
Lee with an unqualified opinion of tax counsel or if Sara Lee
receives a supplemental private letter ruling from the IRS,
acceptable to Sara Lee, to the effect that these actions will
not affect the tax-free nature of the spin off.
117
Employee
Matters Agreement
We also entered into an employee matters agreement with Sara
Lee. This agreement allocates responsibility for employee
benefit matters on the date of and after the spin off, including
the treatment of existing welfare benefit plans, savings plans,
equity-based plans and deferred compensation plans as well as
our establishment of new plans. Under the employee matters
agreement, the 401(k) Plan assumed all liabilities from the Sara
Lee 401(k) Plan related to our current and former employees and
Sara Lee caused the accounts of our employees to be transferred
to the 401(k) Plan. The Pension Plan assumed all liabilities
from the Sara Lee Corporation Consolidated Pension and
Retirement Plan related to our current and former employees, and
Sara Lee caused the assets of these plans related to our current
and former employees to be transferred to the Pension Plan.
We have also agreed to assume the liabilities for, and Sara Lee
will transfer the assets of Sara Lees retirement plans
related to pension benefits accrued by our current and former
employees covered under Sara Lees Canadian retirement
plan, obligations under Sara Lees nonqualified deferred
compensation plan, and assume certain other defined contribution
plans and defined pension plan. We also agreed to assume medical
liabilities related to our employees under Sara Lees
employee healthcare plan.
Master
Transition Services Agreement
In connection with the spin off, we also entered into a master
transition services agreement with Sara Lee. Under the master
transition services agreement we and Sara Lee agreed to provide
each other with specified support services related to among
others:
|
|
|
|
|
human resources and financial shared services for a period of
seven months with one
90-day
renewal term;
|
|
|
|
tax-shared services for a period of one year with one
15-month
renewal term; and
|
|
|
|
information technology services for a period ranging from six
months with no renewal term to one year with indefinite renewal
terms based on the service provided.
|
Each of these services is provided for a fee, which differs
depending upon the service.
Real
Estate Matters Agreement
Along with each of the other agreements relating to the spin
off, we entered into a real estate matters agreement with Sara
Lee. This agreement governs the manner in which Sara Lee will
transfer to or share with us various leased and owned properties
associated with the branded apparel business. The real estate
matters agreement describes the property to be transferred or
shared with us for each type of transaction (e.g., conveyance,
assignments and subleases) and includes the standard forms of
the proposed transfer documents (e.g., forms of conveyance and
assignment) as exhibits. Under the agreement, we have agreed to
accept the transfer of all of the properties allocated to us,
even if such properties have been damaged by a casualty or other
change in condition. We also have agreed to pay all costs and
expenses required to effect the transfers (including landlord
consent fees, landlord attorneys fees, title insurance
fees and transfer taxes).
Indemnification
and Insurance Matters Agreement
We also have entered into an indemnification and insurance
matters agreement with Sara Lee. This agreement provides general
indemnification provisions pursuant to which we have agreed to
indemnify Sara Lee and its affiliates, agents, successors and
assigns from all liabilities (other than liabilities related to
tax, which are solely covered by the tax sharing agreement)
arising from:
|
|
|
|
|
our failure to pay, perform or otherwise promptly discharge any
of our liabilities;
|
|
|
|
our business;
|
|
|
|
any breach by us of the master separation agreement or any of
the ancillary agreements; and
|
118
|
|
|
|
|
any untrue statement of a material fact or any omission to state
a material fact required to be stated with respect to the
information contained in our registration statement on
Form 10 or our information statement that was distributed
to Sara Lee stockholders.
|
Sara Lee has agreed to indemnify us and our affiliates, agents,
successors and assigns from all liabilities (other than
liabilities related to tax, which are solely covered by the tax
sharing agreement) arising from:
|
|
|
|
|
its failure to pay, perform or otherwise promptly discharge any
of its liabilities;
|
|
|
|
Sara Lees business;
|
|
|
|
any breach by Sara Lee of the master separation agreement or any
of the ancillary agreements; and
|
|
|
|
with regard to sections relating to Sara Lee, any untrue
statement of a material fact or any omission to state a material
fact required to be stated with respect to the information
contained in our registration statement on Form 10 or our
information statement that was distributed to Sara Lee
stockholders.
|
Further, under this agreement, we and Sara Lee have released
each other from any liabilities existing or alleged to have
existed on or before the date of the distribution. This
provision does not preclude us or Sara Lee from enforcing the
master separation agreement or any ancillary agreement we have
entered into with each other.
The indemnification and insurance matters agreement contains
provisions governing the recovery by and payment to us of
insurance proceeds related to our business and arising on or
prior to the date of the distribution and our insurance
coverage. We have agreed to reimburse Sara Lee, to the extent it
is required to pay, for amounts necessary to satisfy all
applicable self-insured retentions, fronted policies,
deductibles and retrospective premium adjustments and similar
amounts not covered by insurance policies in connection with our
liabilities.
Intellectual
Property Matters Agreement
We also entered into an intellectual property matters agreement
with Sara Lee. The intellectual property matters agreement
provides for the license by Sara Lee to us of certain software.
It also governs the wind-down of our use of certain of Sara
Lees trademarks (other than those transferred to us in
connection with the spin off).
119
DESCRIPTION
OF CERTAIN INDEBTEDNESS
In connection with the spin off, on September 5, 2006, we
entered into the $2.15 billion Senior Secured Credit
Facility which includes the $500 million Revolving
Loan Facility, that was undrawn at the time of the spin
off, the $450 million Second Lien Credit Facility and the
$500 million Bridge Loan Facility with various
financial institution lenders, including Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Morgan Stanley Senior
Funding, Inc., as the co-syndication agents and the joint lead
arrangers and joint bookrunners. Citicorp USA, Inc. is acting as
administrative agent and Citibank, N.A. is acting as collateral
agent for the Senior Secured Credit Facility and the Second Lien
Credit Facility. Morgan Stanley Senior Funding, Inc. acted as
the administrative agent for the Bridge Loan Facility. As a
result of this debt incurrence, the amount of interest expense
will increase significantly in periods after the spin off. We
paid $2.4 billion of the proceeds of these borrowings to
Sara Lee in connection with the consummation of the spin off. As
noted above, we repaid all amounts outstanding under the Bridge
Loan Facility with the proceeds of the offering of the
Notes in December 2006.
Senior
Secured Credit Facility
The Senior Secured Credit Facility provides for aggregate
borrowings of $2.15 billion, consisting of: (i) a
$250.0 million Term A loan facility (the Term A
Loan Facility); (ii) a $1.4 billion Term B
loan facility (the Term B Loan Facility); and
(iii) the $500.0 million Revolving Loan Facility
that was undrawn as of December 30, 2006. Any issuance of
commercial paper would reduce the amount available under the
Revolving Loan Facility. As of December 30, 2006,
$122.5 million of standby and trade letters of credit were
issued under this facility and $377.5 million was available
for borrowing.
The Senior Secured Credit Facility is guaranteed by
substantially all of our existing and future direct and indirect
U.S. subsidiaries, with certain customary or
agreed-upon
exceptions for certain subsidiaries. We and each of the
guarantors under the Senior Secured Credit Facility have granted
the lenders under the Senior Secured Credit Facility a valid and
perfected first priority (subject to certain customary
exceptions) lien and security interest in the following:
|
|
|
|
|
the equity interests of substantially all of our direct and
indirect U.S. subsidiaries and 65% of the voting securities
of certain foreign subsidiaries; and
|
|
|
|
substantially all present and future property and assets, real
and personal, tangible and intangible, of Hanesbrands and each
guarantor, except for certain enumerated interests, and all
proceeds and products of such property and assets.
|
The final maturity of the Term A Loan Facility is
September 5, 2012. The Term A Loan Facility will
amortize in an amount per annum equal to the following: year
1 5.00%; year 2 10.00%; year
3 15.00%; year 4 20.00%; year
5 25.00%; year 6 25.00%. The final
maturity of the Term B Loan Facility is September 5,
2013. The Term B Loan Facility will be repaid in equal
quarterly installments in an amount equal to 1% per annum,
with the balance due on the maturity date. The final maturity of
the Revolving Loan Facility is September 5, 2011. All
borrowings under the Revolving Loan Facility must be repaid
in full upon maturity. Outstanding borrowings under the Senior
Secured Credit Facility are prepayable without penalty.
At our option, borrowings under the Senior Secured Credit
Facility may be maintained from time to time as (a) Base
Rate loans, which shall bear interest at the higher of
(i) 1/2 of 1% in excess of the federal funds rate and
(ii) the rate published in the Wall Street Journal as the
prime rate (or equivalent), in each case in effect
from time to time, plus the applicable margin in effect from
time to time (which is currently 0.75%), or (b) LIBOR-based
loans, which shall bear interest at the LIBO Rate (as defined in
the Senior Secured Credit Facility and adjusted for maximum
reserves), as determined by the administrative agent for the
respective interest period plus the applicable margin in effect
from time to time (which is currently 1.75%).
In February 2007, we entered into an amendment to the Senior
Secured Credit Facility, pursuant to which the applicable margin
with respect to Term B Loan Facility was reduced from 2.25%
to 1.75% with respect to LIBOR-based loans and from 1.25% to
0.75% with respect to loans maintained as Base Rate loans. The
120
amendment also provides that in the event that, prior to
February 22, 2008, Hanesbrands: (i) incurs a new
tranche of replacement loans constituting obligations under the
Senior Secured Credit Facility having an effective interest rate
margin less than the applicable margin for loans pursuant to the
Term B Loan Facility (Term B Loans), the
proceeds of which are used to repay or return, in whole or in
part, principal of the outstanding Term B Loans,
(ii) consummates any other amendment to the Senior Secured
Credit Facility that reduces the applicable margin for the Term
B Loans, or (iii) incurs additional Term B loans having an
effective interest rate margin less than the applicable margin
for Term B Loans, the proceeds of which are used in whole or in
part to prepay or repay outstanding Term B Loans, then in any
such case, Hanesbrands will pay to the Administrative Agent, for
the ratable account of each Lender with outstanding Term B
Loans, a fee in an amount equal to 1.0% of the aggregate
principal amount of all Term B Loans being replaced on such date
immediately prior to the effectiveness of such transaction.
The Senior Secured Credit Facility requires us to comply with
customary affirmative, negative and financial covenants. The
Senior Secured Credit Facility requires that we maintain a
minimum interest coverage ratio and a maximum total debt to
earnings before income taxes, depreciation expense and
amortization, or EBITDA ratio. The interest coverage
covenant requires that the ratio of our EBITDA for the preceding
four fiscal quarters to our consolidated total interest expense
for such period shall not be less than 2 to 1 for each fiscal
quarter ending after December 15, 2006. The interest
coverage ratio will increase over time until it reaches 3.25 to
1 for fiscal quarters ending after October 15, 2009. The
total debt to EBITDA covenant requires that the ratio of our
total debt to our EBITDA for the preceding four fiscal quarters
will not be more than 5.5 to 1 for each fiscal quarter ending
after December 15, 2006. This ratio limit will decline over
time until it reaches 3 to 1 for fiscal quarters after
October 15, 2009. The method of calculating all of the
components used in the covenants is included in the Senior
Secured Credit Facility. As of December 30, 2006, we were
in compliance with all covenants.
The Senior Secured Credit Facility contains customary events of
default, including nonpayment of principal when due; nonpayment
of interest, fees or other amounts after stated grace period;
inaccuracy of representations and warranties; violations of
covenants; certain bankruptcies and liquidations; any
cross-default of more than $50 million; certain judgments
of more than $50 million; certain events related to the
Employee Retirement Income Security Act of 1974, as amended, or
ERISA, and a change in control (as defined in the
Senior Secured Credit Facility).
Second
Lien Credit Facility
The Second Lien Credit Facility provides for aggregate
borrowings of $450 million by Hanesbrands
wholly-owned subsidiary, HBI Branded Apparel Limited, Inc. The
Second Lien Credit Facility is unconditionally guaranteed by
Hanesbrands and each entity guaranteeing the Senior Secured
Credit Facility, subject to the same exceptions and exclusions
provided in the Senior Secured Credit Facility. The Second Lien
Credit Facility and the guarantees in respect thereof are
secured on a second-priority basis (subordinate only to the
Senior Secured Credit Facility and any permitted additions
thereto or refinancings thereof) by substantially all of the
assets that secure the Senior Secured Credit Facility (subject
to the same exceptions).
Loans under the Second Lien Credit Facility will bear interest
in the same manner as those under the Senior Secured Credit
Facility, subject to a margin of 2.75% for Base Rate loans and
3.75% for LIBOR based loans.
The Second Lien Credit Facility requires us to comply with
customary affirmative, negative and financial covenants. The
Second Lien Credit Facility requires that we maintain a minimum
interest coverage ratio and a maximum total debt to EBITDA
ratio. The interest coverage covenant requires that the ratio of
our EBITDA for the preceding four fiscal quarters to our
consolidated total interest expense for such period shall not be
less than 1.5 to 1 for each fiscal quarter ending after
December 15, 2006. The interest coverage ratio will
increase over time until it reaches 2.5 to 1 for fiscal quarters
ending after April 15, 2009. The total debt to EBITDA
covenant requires that the ratio of our total debt to our EBITDA
for the preceding four fiscal quarters will not be more than 6
to 1 for each fiscal quarter ending after December 15,
2006. This ratio will decline over time until it reaches 3.75 to
1 for fiscal quarters ending after October 15, 2009. The
method of calculating all of
121
the components used in the covenants is included in the Second
Lien Credit Facility. As of December 30, 2006, we were in
compliance with all covenants.
The Second Lien Credit Facility contains customary events of
default, including nonpayment of principal when due; nonpayment
of interest, fees or other amounts after stated grace period;
inaccuracy of representations and warranties; violations of
covenants; certain bankruptcies and liquidations; any
cross-default of more than $60 million; certain judgments
of more than $60 million; certain ERISA-related events; and
a change in control (as defined in the Second Lien Credit
Facility).
The Second Lien Credit Facility matures on March 5, 2014,
may not be prepaid prior to September 5, 2007, and includes
premiums for prepayment of the loan prior to September 5,
2009 based on the timing of the prepayment. The Second Lien
Credit Facility will not amortize and will be repaid in full on
its maturity date.
Bridge
Loan Facility
Prior to its repayment in full, the Bridge Loan Facility
provided for a borrowing of $500 million and was
unconditionally guaranteed by each entity guaranteeing the
Senior Secured Credit Facility. The Bridge Loan Facility
was unsecured and was scheduled to mature on September 5,
2007. If the Bridge Loan Facility had not been repaid prior to
or at maturity, the outstanding principal amount of the facility
was to roll over into a rollover loan in the same amount that
was to mature on September 5, 2014. Lenders that extended
rollover loans to us would have been entitled to request that we
issue exchange notes to them in exchange for the
rollover loans, and also to request that we register such notes
upon request. In December 2006, the proceeds from the issuance
of the Notes were used to repay the entire outstanding principal
of the Bridge Loan Facility. In connection with the
issuance of the Notes, we recognized a $6 million loss on
early extinguishment of debt for unamortized finance fees on our
Bridge Loan Facility.
122
THE
EXCHANGE OFFER
Purpose
and Effect of the Exchange Offer
We, the subsidiary guarantors and the initial purchasers entered
into a registration rights agreement in connection with the
issuance of the Notes on December 14, 2006. Under the
registration rights agreement, we have agreed that we will:
|
|
|
|
|
use commercially reasonable efforts to file a registration
statement with the SEC with respect to the offer to exchange all
of the outstanding Notes for new notes having terms
substantially identical in all material respects to the
outstanding notes except that they will not contain terms with
respect to transfer restrictions;
|
|
|
|
use commercially reasonable efforts to cause the registration
statement to be declared effective under the Securities Act;
|
|
|
|
promptly after the effectiveness of the registration statement,
offer the Exchange Notes in exchange for surrender of the Notes;
|
|
|
|
keep the exchange offer open for at least 20 business days
after the date notice of the exchange offer is mailed to the
holders of the outstanding notes;
|
|
|
|
consummate the exchange offer not later than 40 business days
after the date on which the registration statement is declared
effective; and
|
|
|
|
file a shelf registration statement for the resale of the Notes
if we cannot effect an exchange offer and in certain other
circumstances.
|
We will pay additional interest on the Notes for the periods
described below if:
|
|
|
|
|
if obligated to file a shelf registration statement, a shelf
registration statement is not declared effective on or prior to
the date that is nine months after the Notes issue
date; or
|
|
|
|
the exchange offer is not consummated on or prior to the date
that is nine months after the Notes issue date.
|
Where there is a registration default, the rate of the
additional interest will be 0.25% per annum for the first
90-day
period immediately following the occurrence of a registration
default, and such rate will increase by an additional
0.25% per annum with respect to each subsequent
90-day
period until all registration defaults have been cured, up to a
maximum additional interest rate of 1.00% per annum. We
will pay such additional interest on regular interest payment
dates. Such additional interest will be in addition to any other
interest payable from time to time with respect to the
outstanding notes and the exchange notes.
Terms of
the Exchange Offer
Upon the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal, we will accept any
and all outstanding Notes validly tendered and not withdrawn
prior to 5:00 p.m., New York City time, on the expiration
date of the exchange offer. We will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal
amount of Notes accepted in the exchange offer. Any holder may
tender some or all of its outstanding Notes pursuant to the
exchange offer. However, outstanding Notes may be tendered only
in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the
form and terms of the Notes except that:
|
|
|
|
|
the Exchange Notes bear a Series B designation and a
different CUSIP Number from the Notes;
|
|
|
|
the Exchange Notes have been registered under the Securities Act
and hence will not bear legends restricting the transfer
thereof; and
|
|
|
|
the holders of the Exchange Notes will not be entitled to
certain rights under the registration rights agreement,
including the provisions providing for an increase in the
interest rate on the Notes in certain
|
123
|
|
|
|
|
circumstances relating to the timing of the exchange offer, all
of which rights will terminate when the exchange offer is
consummated.
|
The Exchange Notes will evidence the same debt as the Notes and
will be entitled to the benefits of the indenture relating to
the Notes.
As of the date of this prospectus, $500.0 million aggregate
principal amount of the Notes were outstanding. We have fixed
the close of business on May 10, 2007 as the record date
for the exchange offer for purposes of determining the persons
to whom this prospectus and the letter of transmittal will be
mailed initially.
Holders of Notes do not have any appraisal or dissenters
rights under the Maryland General Corporation Law or the
indenture relating to the Notes in connection with the exchange
offer. We intend to conduct the exchange offer in accordance
with the applicable requirements of the Exchange Act and the
rules and regulations of the SEC promulgated thereunder.
We will be deemed to have accepted validly tendered Notes when,
as and if we have given oral or written notice thereof to the
exchange agent. The exchange agent will act as agent for the
tendering holders for the purpose of receiving the Exchange
Notes from us.
If any tendered Notes are not accepted for exchange because of
an invalid tender, the occurrence of specified other events set
forth in this prospectus or otherwise, any unaccepted Notes will
be returned, without expense, to the tendering holder thereof
promptly following the expiration date of the exchange offer.
Holders who tender Notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the
instructions in the letter of transmittal, transfer taxes with
respect to the exchange of Notes pursuant to the exchange offer.
We will pay all charges and expenses, other than transfer taxes
in certain circumstances, in connection with the exchange offer.
See Fees and Expenses.
Expiration
Date; Extensions; Amendments
The term expiration date will mean 5:00 p.m.,
New York City time, on June 12, 2007, unless we, in our
sole discretion, extend the exchange offer, in which case the
term expiration date will mean the latest date and
time to which the exchange offer is extended.
In order to extend the exchange offer, we will make a press
release or other public announcement, notify the exchange agent
of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to
9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
We reserve the right, in our sole discretion, (1) to delay
accepting any Notes, to extend the exchange offer or to
terminate the exchange offer if any of the conditions set forth
below under Termination or Amendment of the
Exchange Offer have not been satisfied, by giving oral or
written notice of any delay, extension or termination to the
exchange agent or (2) to amend the terms of the exchange
offer in any manner. Such decision will also be communicated in
a press release or other public announcement prior to
9:00 a.m., New York City time on the next business day
following such decision. Any announcement of delay in
acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice thereof to
the registered holders.
Interest
on the Exchange Notes
The Exchange Notes will bear interest from their date of
issuance. Holders of Notes that are accepted for exchange will
receive, in cash, accrued interest thereon to, but not
including, the date of issuance of the Exchange Notes. Such
interest will be paid with the first interest payment on the
Exchange Notes on June 15, 2007. Interest on the Notes
accepted for exchange will cease to accrue upon issuance of the
Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each
June 15 and December 15, commencing on June 15, 2007.
124
Procedures
for Tendering
Only a holder of Notes may tender Notes in the exchange offer.
To tender in the exchange offer, a holder must complete, sign
and date the letter of transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by the letter of
transmittal or transmit an agents message in connection
with a book-entry transfer, and mail or otherwise deliver the
letter of transmittal or the facsimile, together with the Notes
and any other required documents, to the exchange agent prior to
5:00 p.m., New York City time, on the expiration date. To
be tendered effectively, the Notes, letter of transmittal or an
agents message and other required documents must be
completed and received by the exchange agent at the address set
forth below under Exchange Agent prior
to 5:00 p.m., New York City time, on the expiration date.
Delivery of the Notes may be made by book-entry transfer in
accordance with the procedures described below. Confirmation of
the book-entry transfer must be received by the exchange agent
prior to the expiration date.
The term agents message means a message,
transmitted by a book-entry transfer facility to, and received
by, the exchange agent forming a part of a confirmation of a
book-entry, which states that the book-entry transfer facility
has received an express acknowledgment from the participant in
the book-entry transfer facility tendering the Notes that the
participant has received and agrees: (1) to participate in
ATOP; (2) to be bound by the terms of the letter of
transmittal; and (3) that we may enforce the agreements
contained in the letter of transmittal against the participant.
To participate in the exchange offer, each holder will be
required to make the following representations to us:
|
|
|
|
|
Any Exchange Notes to be received by the holder will be acquired
in the ordinary course of its business.
|
|
|
|
At the time of the commencement of the exchange offer, the
holder has no arrangement or understanding with any person to
participate in the distribution, within the meaning of
Securities Act, of the Exchange Notes.
|
|
|
|
The holder is not an affiliate (as defined in Rule 405
promulgated under the Securities Act) of Hanesbrands or the
guarantors of the Exchange Notes or if the holder is an
affiliate, such holder will comply with the registration and
prospectus delivery requirements of the Securities Act, to the
extent applicable.
|
|
|
|
If the holder is not a broker-dealer, it is not engaged in, and
does not intend to engage in, the distribution of Exchange Notes.
|
|
|
|
If the holder is a broker-dealer, that it will receive Exchange
Notes for its own account in exchange for Notes that were
acquired as a result of market-making or other trading
activities and will deliver a prospectus in connection with any
resale of the Exchange Notes. We refer to these broker-dealers
as participating broker-dealers.
|
The tender by a holder and our acceptance thereof will
constitute an agreement between the holder and us in accordance
with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal or agents
message.
The method of delivery of Notes and the letter of transmittal
or agents message and all other required documents to the
exchange agent is at the election and sole risk of the holder.
As an alternative to delivery by mail, holders may wish to
consider overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the
exchange agent before the expiration date. No letter of
transmittal or Notes should be sent to us. Holders may request
their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transactions for
them.
Any beneficial owner whose Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact the registered holder
promptly and instruct the registered holder to tender on the
beneficial owners behalf. See Instructions to
Registered Holder
and/or
Book-Entry Transfer Facility Participant from Beneficial
Owner included with the letter of transmittal.
125
Signatures on a letter of transmittal or a notice of withdrawal,
as the case may be, must be guaranteed by a member of the
Medallion System unless the Notes tendered pursuant to the
letter of transmittal are tendered (1) by a registered
holder who has not completed the box entitled Special
Registration Instructions or Special Delivery
Instructions on the letter of transmittal or (2) for
the account of a member firm of the Medallion System. In the
event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed,
the guarantee must be by a member firm of the Medallion System.
If the letter of transmittal is signed by a person other than
the registered holder of any Notes, the Notes must be endorsed
or accompanied by a properly completed bond power, signed by the
registered holder as the registered holders name appears
on the Notes with the signature thereon guaranteed by a member
firm of the Medallion System.
If the letter of transmittal or any Notes or bond powers are
signed by trustees, executors, administrators, guardians,
attorneys-in-fact,
offices of corporations or others acting in a fiduciary or
representative capacity, the person signing should so indicate
when signing, and evidence satisfactory to us of its authority
to so act must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request
promptly after the date of this prospectus to establish accounts
with respect to the outstanding notes at DTC for the purpose of
facilitating the exchange offer, and subject to the
establishment thereof, any financial institution that is a
participant in DTCs system may make book-entry delivery of
Notes by causing DTC to transfer the Notes into the exchange
agents account with respect to the Notes in accordance
with DTCs procedures for the transfer. Although delivery
of the Notes may be effected through book-entry transfer into
the exchange agents account at DTC, unless an agents
message is received by the exchange agent in compliance with
ATOP, an appropriate letter of transmittal properly completed
and duly executed with any required signature guarantee and all
other required documents must in each case be transmitted to and
received or confirmed by the exchange agent at its address set
forth below on or prior to the expiration date, or, if the
guaranteed delivery procedures described below are complied
with, within the time period provided under the procedures.
Delivery of documents to DTC does not constitute delivery to the
exchange agent.
All questions as to the validity, form, eligibility, including
time of receipt, acceptance of tendered Notes and withdrawal of
tendered outstanding notes will be determined by us in our sole
discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all Notes not
properly tendered or any Notes our acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the
right in our sole discretion to waive any defects,
irregularities or conditions of tender as to particular Notes,
provided however that, to the extent such waiver includes any
condition to tender, we will waive such condition as to all
tendering holders. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in
the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in
connection with tenders of Notes must be cured within the time
we determine. Although we intend to notify holders of defects or
irregularities with respect to tenders of Notes, neither we, the
exchange agent nor any other person will incur any liability for
failure to give the notification. Tenders of Notes will not be
deemed to have been made until the defects or irregularities
have been cured or waived. Any Notes received by the exchange
agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned
by the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, promptly following the
expiration date.
Guaranteed
Delivery Procedures
Holders who wish to tender their Notes and (1) whose Notes
are not immediately available, (2) who cannot deliver their
Notes, the letter of transmittal or any other required documents
to the exchange agent or (3) who cannot complete the
procedures for book-entry transfer, prior to the expiration
date, may effect a tender if:
(A) the tender is made through a member firm of the
Medallion System;
126
(B) prior to the expiration date, the exchange agent
receives from a member firm of the Medallion System a properly
completed and duly executed Notice of Guaranteed Delivery by
facsimile transmission, mail or hand delivery setting forth the
name and address of the holder, the certificate number(s) of the
Notes and the principal amount of Notes tendered, stating that
the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the expiration
date, the letter of transmittal or facsimile thereof together
with the certificate(s) representing the Notes or a confirmation
of book-entry transfer of the Notes into the exchange
agents account at DTC, and any other documents required by
the letter of transmittal will be deposited by the member firm
of the Medallion System with the exchange agent; and
(C) the properly completed and executed letter of
transmittal of facsimile thereof, as well as the certificate(s)
representing all tendered Notes in proper form for transfer or a
confirmation of book-entry transfer of the Notes into the
exchange agents account at DTC, and all other documents
required by the letter of transmittal are received by the
exchange agent within three New York Stock Exchange trading days
after the expiration date.
Upon request to the exchange agent, a Notice of Guaranteed
Delivery will be sent to holders who wish to tender their Notes
according to the guaranteed delivery procedures set forth above.
Withdrawal
of Tenders
Except as otherwise provided in this prospectus, tenders of
Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the expiration date.
To withdraw a tender of Notes in the exchange offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal
must be received by the exchange agent at its address set forth
in this prospectus prior to 5:00 p.m., New York City time,
on the expiration date of the exchange offer. Any notice of
withdrawal must:
(1) specify the name of the person having deposited the
Notes to be withdrawn;
(2) identify the Notes to be withdrawn, including the
certificate number(s) and principal amount of the Notes, or, in
the case of Notes transferred by book-entry transfer, the name
and number of the account at DTC to be credited;
(3) be signed by the holder in the same manner as the
original signature on the letter of transmittal by which the
Notes were tendered, including any required signature
guarantees, or be accompanied by documents of transfer
sufficient to have the trustee with respect to the Notes
register the transfer of the Notes into the name of the person
withdrawing the tender; and
(4) specify the name in which any Notes are to be
registered, if different from that of the person depositing the
Notes to be withdrawn.
All questions as to the validity, form and eligibility,
including time of receipt, of the notices will be determined by
us, which determination will be final and binding on all
parties. Any Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the exchange offer and no
Exchange Notes will be issued with respect thereto unless the
Notes so withdrawn are validly retendered. Any Notes which have
been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to the holder
promptly after withdrawal, rejection of tender or termination of
the exchange offer. Properly withdrawn Notes may be retendered
by following one of the procedures described above under
Procedures for Tendering at any time
prior to the expiration date.
127
Termination
or Amendment of the Exchange Offer
Notwithstanding any other term of the exchange offer, we will
not be required to accept for exchange, or exchange Exchange
Notes for, any Notes, and may, prior to the expiration of the
exchange offer, terminate or amend the exchange offer as
provided in this prospectus before the acceptance of the Notes,
if:
(1) any action or proceeding is instituted or threatened in
any court or by or before any governmental agency with respect
to the exchange offer which we, in our sole judgment, believe
might materially impair our ability to proceed with the exchange
offer or any material adverse development has occurred in any
existing action or proceeding with respect to us or any of our
subsidiaries; or
(2) any law, statute, rule, regulation or interpretation by
the Staff of the SEC is proposed, adopted or enacted, which we,
in our sole judgment, believe might materially impair our
ability to proceed with the exchange offer or materially impair
the contemplated benefits of the exchange offer to us; or
(3) any governmental approval has not been obtained, which
approval we, in our sole judgment, believe to be necessary for
the consummation of the exchange offer as contemplated by this
prospectus.
If we determine in our reasonable discretion that any of the
events described above has occurred, we may (1) refuse to
accept any Notes and return all tendered Notes to the tendering
holders, (2) extend the exchange offer and retain all Notes
tendered prior to the expiration of the exchange offer, subject,
however, to the rights of holders to withdraw the Notes (see
Withdrawal of Tenders) or
(3) accept all properly tendered Notes which have not been
withdrawn.
Exchange
Agent
Branch Banking & Trust Company has been appointed to
serve as exchange agent in connection with the exchange offer.
The exchange agent and its affiliates have in the past provided,
or are currently providing, banking, trust and other services to
us. Questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of
transmittal and requests for Notice of Guaranteed Delivery
should be directed to the exchange agent addressed as follows:
|
|
|
By Overnight Courier, Hand
Delivery or Registered/Certified Mail:
|
|
Facsimile Transmission:
(252) 246-4303
|
|
|
|
Branch Banking & Trust
Company
223 West Nash Street
Wilson, North Carolina 27893
Attn: Corporate Trust
|
|
For information or to confirm
receipt of facsimile by telephone (call toll-free):
(800) 682-6902
|
Delivery
to an address other than set forth above will not constitute a
valid delivery.
Fees and
Expenses
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telecopy, telephone or in
person by our and our affiliates officers and regular
employees.
We have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the exchange offer.
We will, however, pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its
reasonable
out-of-pocket
expenses incurred in connection with these services.
We will pay the cash expenses to be incurred in connection with
the exchange offer. Such expenses include fees and expenses of
the exchange agent and trustee, accounting and legal fees and
printing costs, among others.
128
Accounting
Treatment
The Exchange Notes will be recorded at the same carrying value
as the Notes, which is face value, as reflected in our
accounting records on the date of exchange. Accordingly, we will
not recognize any gain or loss for accounting purposes as a
result of the exchange offer. The expenses of the exchange offer
will be deferred and charged to expense over the term of the
Exchange Notes.
Consequences
of Failure to Exchange
The Notes that are not exchanged for Exchange Notes pursuant to
the exchange offer will remain restricted securities.
Accordingly, the Notes may be resold only:
(1) to us upon redemption thereof or otherwise;
(2) so long as the Notes are eligible for resale pursuant
to Rule 144A, to a person inside the United States
whom the seller reasonably believes is a qualified institutional
buyer within the meaning of Rule 144A under the Securities
Act in a transaction meeting the requirements of Rule 144A,
in accordance with Rule 144 under the Securities Act, or
pursuant to another exemption from the registration requirements
of the Securities Act, which other exemption is based upon an
opinion of counsel reasonably acceptable to us;
(3) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the
Securities Act; or
(4) pursuant to an effective registration statement under
the Securities Act,
in each case in accordance with any applicable securities laws
of any state of the United States.
Resale of
the Exchange Notes
With respect to resales of Exchange Notes, based on
interpretations by the Staff of the SEC set forth in no-action
letters issued to third parties, we believe that a holder or
other person who receives Exchange Notes, whether or not the
person is the holder, other than a person that is our affiliate
within the meaning of Rule 405 under the Securities Act, in
exchange for Notes in the ordinary course of business and who is
not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in
the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further
registration under the Securities Act and without delivering to
the purchasers of the exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act.
However, if any holder acquires Exchange Notes in the exchange
offer for the purpose of distributing or participating in a
distribution of the Exchange Notes, the holder cannot rely on
the position of the Staff of the SEC expressed in the no-action
letters or any similar interpretive letters, and must comply
with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available.
Further, each broker-dealer that receives Exchange Notes for its
own account in exchange for Notes, where the Notes were acquired
by the broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of the Exchange Notes.
129
DESCRIPTION
OF THE EXCHANGE NOTES
The Notes were issued under an Indenture dated December 14,
2006, among Branch Banking & Trust Company as trustee
(the Trustee), Hanesbrands Inc., as issuer of the
Notes and the Initial Subsidiary Guarantors, as guarantors (the
Indenture). The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939.
The following is a summary of the material provisions of the
Indenture, but does not restate the Indenture in its entirety.
You can find the definitions of certain capitalized terms used
in the following summary under the subheading
Definitions. We urge you to read the
Indenture because it, and not this description, defines your
rights as Holders of the Notes. A copy of the proposed form of
Indenture is available upon request from HBI. For purposes of
this Description of the Exchange Notes, the term
HBI means Hanesbrands Inc. and its successors under
the Indenture, excluding its subsidiaries. We refer to each of
HBI and each Subsidiary Guarantor individually as an
Obligor and to HBI and all Subsidiary Guarantors
collectively as Obligors. Unless the context
otherwise requires, references in this Description of the
Exchange Notes to the Notes include the notes
issued to the initial purchasers in a private transaction that
was not subject to the registration requirements of the
Securities Act and the Exchange Notes, which have been
registered under the Securities Act.
General
The Notes are general senior unsecured obligations of HBI and
were initially issued in an aggregate principal amount of
$500.0 million. The Notes will mature on December 15,
2014. Subject to the covenants described below under
Covenants and applicable law, HBI may
issue additional Notes (Additional Notes) under the
Indenture. Any Notes that remain outstanding after completion of
the exchange offer, together with the Exchange Notes issued in
the exchange offer, and any Additional Notes would be treated as
a single class for all purposes under the Indenture.
Each Note will bear interest at a rate per annum, reset
semi-annually, equal to LIBOR plus 3.375%, as determined by the
calculation agent (the Calculation Agent), which
shall initially be the Trustee.
The amount of interest for each day that the Notes are
outstanding (the Daily Interest) will be calculated
by dividing the interest rate in effect for such day by 360 and
multiplying the result by the principal amount of the Notes. The
amount of interest to be paid on the Notes for each Interest
Period will be calculated by adding the Daily Interest amounts
for each day in the Interest Period.
All percentages resulting from any of the above calculations
will be rounded, if necessary, to the nearest one
hundred-thousandth of a percentage point, with five
one-millionths of a percentage point being rounded upwards
(e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or
.0987655)) and all dollar amounts used in or resulting from such
calculations will be rounded to the nearest cent (with one-half
cent being rounded upwards).
The interest rate on the Notes will in no event be higher than
the maximum rate permitted by applicable law.
Interest on the Notes will be payable semiannually on June 15
and December 15 of each year, commencing June 15, 2007.
Interest will be paid to Holders of record at the close of
business on the June 1 or December 1 immediately
preceding the interest payment date. Interest is computed on the
basis of a 360 day year of twelve 30 day months on a
U.S. corporate bond basis.
The Notes may be exchanged or transferred at the office or
agency of HBI. Initially, the corporate trust office of the
Trustee at 223 West Nash Street, Wilson, North Carolina
27893 will serve as such office. If you give HBI wire transfer
instructions, HBI will pay all principal, premium and interest
on your Notes in accordance with your instructions. If you do
not give HBI wire transfer instructions, payments of principal,
premium and interest will be made at the office or agency of the
paying agent which will initially be the Trustee (acting in such
capacity, the Paying Agent), unless HBI elects to
make interest payments by check mailed to the Holders.
130
The Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 of principal amount and
multiples of $1,000. See Book-Entry; Delivery
and Form. No service charge will be made for any
registration of transfer or exchange of Notes, but HBI may
require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection
therewith.
Optional
Redemption
At any time on or prior to December 15, 2008, HBI may
redeem up to 35% of the principal amount of the Notes with the
net cash proceeds of one or more sales of Capital Stock (other
than Disqualified Stock) of HBI at a redemption price equal to
the product of (x) the sum of (1) 100% and (2) a
percentage equal to the per annum rate of interest on the Notes
then applicable on the date on which the notice of redemption is
given and (y) the principal amount thereof, plus accrued
and unpaid interest to the redemption date; provided that
at least 65% of the aggregate principal amount of the Notes
originally issued under the Indenture remains outstanding after
each such redemption and notice of any such redemption is mailed
within 180 days of each such sale of Capital Stock.
HBI may redeem the Notes, in whole or in part, at any time on or
after December 15, 2008. The redemption price for the Notes
(expressed as a percentage of principal amount) will be as
follows, plus accrued and unpaid interest to the redemption
date, if redeemed during the
12-month
period commencing on December 15 of any year set forth below:
|
|
|
|
|
Redemption
|
Year
|
|
Price
|
|
2008
|
|
102.000%
|
2009
|
|
101.000%
|
2010 and there after
|
|
100.000%
|
At any time prior to December 15, 2008, HBI may also redeem
all or a part of the Notes upon not less than 30 nor more than
60 days prior notice mailed by first-class mail to
each Holders registered address, at a redemption price
equal to 100% of the principal amount of Notes redeemed plus the
Applicable Premium as of, and accrued and unpaid interest and
additional interest, if any, to the date of redemption (the
Redemption Date), subject to the rights of
Holders of Notes on the relevant record date to receive interest
due on the relevant interest payment date.
HBI will give not less than 30 days nor more than
60 days notice of any redemption. If less than all of
the Notes are to be redeemed, selection of the Notes for
redemption will be made by the Trustee:
|
|
|
|
|
in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are
listed, or
|
|
|
|
if the Notes are not listed on a national securities exchange,
by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate.
|
However, no Note of $1,000 in principal amount or less shall be
redeemed in part. If any Note is to be redeemed in part only,
the notice of redemption relating to such Note will state the
portion of the principal amount to be redeemed. A new Note in
principal amount equal to the unredeemed portion will be issued
upon cancellation of the original Note.
Guarantees
Payment of the principal of, premium, if any, and interest on
the Notes will be fully and unconditionally Guaranteed, jointly
and severally, on an unsecured unsubordinated basis by each
Restricted Subsidiary (other than HBI Playtex BATH LLC and those
that are a Foreign Subsidiary or an Immaterial Subsidiary)
existing on the Closing Date the equity interests of all of
which are 100% owned, directly or indirectly, by HBI. In
addition, each future Restricted Subsidiary (other than those
that are a Foreign Subsidiary or an Immaterial Subsidiary) will
Guarantee the payment of the principal of, premium if any, and
interest on the Notes.
131
The obligations of each Subsidiary Guarantor under its Note
Guarantee will be limited so as not to constitute a fraudulent
conveyance under applicable Federal or state laws. Each
Subsidiary Guarantor that makes a payment or distribution under
its Note Guarantee will be entitled to contribution from any
other Subsidiary Guarantor or HBI, as the case may be.
The Note Guarantee issued by any Subsidiary Guarantor will be
automatically and unconditionally released and discharged upon
(1) any sale, exchange or transfer to any Person (other
than an Affiliate of HBI) of all of the Capital Stock of such
Subsidiary Guarantor or (2) the designation of such
Subsidiary Guarantor as an Unrestricted Subsidiary, in each
case, in compliance with the terms of the Indenture.
Ranking
The Notes will:
|
|
|
|
|
be general senior unsecured obligations of HBI;
|
|
|
|
rank equal in right of payment with all existing and future
unsubordinated indebtedness of HBI;
|
|
|
|
rank senior in right of payment to all existing and future
subordinated indebtedness of HBI;
|
|
|
|
be effectively junior to all of the obligations, including trade
payables, of the Subsidiaries of HBI (other than Subsidiary
Guarantors); and
|
|
|
|
be effectively subordinated to all secured indebtedness of HBI
to the extent of the value of the assets securing such
indebtedness.
|
The Note Guarantees will:
|
|
|
|
|
be general senior unsecured obligations of the Subsidiary
Guarantors;
|
|
|
|
rank equal in right of payment with all existing and future
unsubordinated indebtedness of the Subsidiary Guarantors;
|
|
|
|
rank senior in right of payment to all existing and future
subordinated indebtedness of the Subsidiary Guarantors; and
|
|
|
|
be effectively subordinated to all secured indebtedness of the
Subsidiary Guarantors to the extent of the value of the assets
securing such indebtedness.
|
Assuming the offering had been completed as of December 30,
2006, (i) HBI and the Initial Subsidiary Guarantors would
have had $2.0 billion of consolidated indebtedness
outstanding, other than the Notes, all of which would have been
senior indebtedness and would have been secured indebtedness and
(ii) the Subsidiaries of HBI that are not Subsidiary
Guarantors would have had $121 million of consolidated
indebtedness and other liabilities outstanding. The Credit
Agreement and the Second Lien Credit Agreement are secured by
substantially all of the assets of HBI and its Subsidiaries
(other than Foreign Subsidiaries). The Notes will be effectively
subordinated to such indebtedness to the extent of such security
interests.
Sinking
Fund
There will be no sinking fund payments for the Notes.
Covenants
Overview
The Indenture contains covenants that limit HBIs and its
Restricted Subsidiaries ability, among other things, to:
|
|
|
|
|
incur additional debt and issue preferred stock;
|
|
|
|
pay dividends, acquire shares of capital stock, make payments on
subordinated debt or make investments;
|
132
|
|
|
|
|
place limitations on distributions from Restricted Subsidiaries;
|
|
|
|
issue or sell capital stock of Restricted Subsidiaries;
|
|
|
|
issue guarantees;
|
|
|
|
sell or exchange assets;
|
|
|
|
enter into transactions with shareholders and affiliates;
|
|
|
|
create liens;
|
|
|
|
engage in unrelated businesses; and
|
|
|
|
effect mergers.
|
In addition, if a Change of Control occurs, each Holder of Notes
will have the right to require HBI to repurchase all or a part
of the Holders Notes at a price equal to 101% of their
principal amount, plus any accrued interest to the date of
repurchase.
Changes
in Covenants when Notes Rated Investment
Grade
If on any date following the date of the Indenture:
(1) the Notes are rated Baa3 or better by Moodys and
BBB- or better by S&P (or, if either such entity ceases to
rate the Notes for reasons outside of the control of HBI, the
equivalent investment grade credit rating from any other
nationally recognized statistical rating
organization within the meaning of
Rule 15c3-1(c)(2)(vi)(F)
under the Exchange Act selected by HBI as a replacement
agency); and
(2) no Default or Event of Default shall have occurred and
be continuing,
then, beginning on that day and continuing at all times
thereafter regardless of any subsequent changes in the rating of
the Notes then, beginning on that day and subject to the
provisions of the following paragraph, the covenants
specifically listed under the following captions in this
prospectus will be suspended:
(1) Limitation on Indebtedness;
(2) Limitation on Restricted
Payments;
(3) Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries;
(4) Limitation on Transactions with
Shareholders and Affiliates;
(5) Limitation on Asset
Sales; and
(6) clause (3) of the covenant described below under
the caption Consolidation, Merger and Sale of
Assets.
During any period that the foregoing covenants have been
suspended, HBIs Board of Directors may not designate any
of its Subsidiaries as Unrestricted Subsidiaries.
Notwithstanding the foregoing, if the rating assigned by either
such rating agency should subsequently decline to below Baa3 or
BBB−, respectively, the foregoing covenants will be
reinstituted as of and from the date of such rating decline.
Calculations under the reinstated Limitation on Restricted
Payments or Limitation on Indebtedness
covenants will be made as if the Limitation on Restricted
Payments or Limitation on Indebtedness
covenant, as the case may be, had been in effect since the date
of the Indenture except that no Default will be deemed to have
occurred solely by reason of a Restricted Payment or incurrence
of Indebtedness made while such relevant covenant was suspended
and it being understood that no actions taken by (or omissions
of) HBI or any of its Restricted Subsidiaries during the
suspension period shall constitute a Default or an Event of
Default under the covenants listed in clauses (1) through
(6) above. There can be no assurance that the Notes will
ever achieve an investment grade rating or that any such rating
will be maintained.
133
Limitation
on Indebtedness
(a) HBI will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes,
the Note Guarantees and other Indebtedness existing on the
Closing Date) and HBI will not permit any of its Restricted
Subsidiaries to issue any Disqualified Stock; provided,
however, that HBI or any Subsidiary Guarantor may Incur
Indebtedness (including, without limitation, Acquired
Indebtedness) if, after giving effect to the Incurrence of such
Indebtedness and the receipt and application of the proceeds
therefrom, the Fixed Charge Coverage Ratio would be greater than
2.0:1.0.
Notwithstanding the foregoing, HBI and any Restricted Subsidiary
(except as specified below) may Incur each and all of the
following:
(1) the incurrence by HBI and any Subsidiary Guarantor of
additional Indebtedness and letters of credit under Credit
Facilities in an aggregate principal amount at any one time
outstanding under this clause (1) (with letters of credit being
deemed to have a principal amount equal to the maximum potential
liability of HBI and such Subsidiary Guarantor thereunder)
(together with refinancings thereof) not to exceed
$2.6 billion less any amount of such Indebtedness
permanently repaid with the Net Proceeds of Asset Sales as
provided under the Limitation on Asset Sales
covenant;
(2) Indebtedness owed to HBI or any Restricted Subsidiary;
provided that (x) any event which results in any
such Restricted Subsidiary ceasing to be a Restricted Subsidiary
or any subsequent transfer of such Indebtedness (other than to
HBI or another Restricted Subsidiary) shall be deemed, in each
case, to constitute an Incurrence of such Indebtedness not
permitted by this clause (2) and (y) if HBI or any
Subsidiary Guarantor is the obligor on such Indebtedness, such
Indebtedness must be expressly subordinated in right of payment
to the Notes, in the case of HBI, or the Note Guarantee, in the
case of a Subsidiary Guarantor;
(3) Indebtedness issued in exchange for, or the net
proceeds of which are used to refinance or refund, then
outstanding Indebtedness including the Notes (other than
Indebtedness outstanding under clauses (1), (2), (5), (6), (7),
(8), (9) and (13) and any refinancings thereof) in an
amount not to exceed the amount so refinanced or refunded (plus
premiums, accrued interest, fees and expenses); provided
that (a) Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is pari
passu with, or subordinated in right of payment to, the
Notes or a Note Guarantee shall only be permitted under this
clause (3) if (x) in case the Notes are refinanced in
part or the Indebtedness to be refinanced is pari passu
with the Notes or a Note Guarantee, such new Indebtedness,
by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is
pari passu with, or expressly subordinate in right of
payment to, the remaining Notes or the Note Guarantee, or
(y) in case the Indebtedness to be refinanced is
subordinated in right of payment to the Notes or a Note
Guarantee, such new Indebtedness, by its terms or by the terms
of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the Notes or the Note
Guarantee at least to the extent that the Indebtedness to be
refinanced is subordinated to the Notes or the Note Guarantee,
(b) such new Indebtedness, determined as of the date of
Incurrence of such new Indebtedness, does not mature prior to
the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at
least equal to the remaining Average Life of the Indebtedness to
be refinanced or refunded and (c) such new Indebtedness is
Incurred by HBI or a Subsidiary Guarantor or by the Restricted
Subsidiary that is the obligor on the Indebtedness to be
refinanced or refunded;
(4) Indebtedness of HBI, to the extent the net proceeds
thereof are (A) used to purchase Notes tendered in an Offer
to Purchase made as a result of a Change in Control or an
Optional Redemption or (B) promptly deposited to defease
the Notes as described under Defeasance
or Satisfaction and Discharge;
(5) Guarantees of Indebtedness of HBI or any Restricted
Subsidiary of HBI by any other Restricted Subsidiary of HBI;
provided the Guarantee of such Indebtedness is permitted
by and made in accordance with the Limitation on Issuance
of Guarantees by Restricted Subsidiaries covenant;
134
(6) Indebtedness arising from the honoring by a bank or
other financial institution of a check, draft or similar
instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary
course of business provided, however, that such
Indebtedness is extinguished within five business days of
Incurrence;
(7) Indebtedness (i) in respect of industrial revenue
bonds or other similar governmental or municipal bonds,
(ii) evidencing the deferred purchase price of newly
acquired property or incurred to finance the acquisition of
property, plant or equipment of HBI and its Restricted
Subsidiaries (pursuant to purchase money mortgages or otherwise,
whether owed to the seller or a third party) (provided
that, such Indebtedness is incurred within 365 days of
the acquisition of such property, plant or equipment) and
(iii) in respect of Capitalized Lease Obligations;
provided that, the aggregate amount of all Indebtedness
outstanding pursuant to this clause shall not at any time exceed
the greater of (x) $200.0 million and (y) 5.0% of
Total Assets;
(8) Indebtedness of Foreign Subsidiaries and Guarantees
thereof in an aggregate outstanding principal amount not to
exceed $225.0 million at any one time outstanding;
(9) Indebtedness of a Person existing at the time such
Person became a Restricted Subsidiary, but only if such
Indebtedness was not created or incurred in contemplation of
such Person becoming a Restricted Subsidiary;
(10) Indebtedness incurred in the ordinary course of
business in connection with cash pooling arrangements, cash
management and other Indebtedness incurred in the ordinary
course of business in respect of netting services, overdraft
protections and similar arrangements in each case in connection
with cash management and deposit accounts;
(11) Indebtedness incurred pursuant to a Permitted
Securitization and Standard Securitization Undertakings;
(12) Indebtedness consisting of (i) the financing of
insurance premiums or (ii) take or pay obligations in
supply agreements, in each case in the ordinary course of
business; and
(13) additional Indebtedness of HBI or any Subsidiary
Guarantor (in addition to Indebtedness permitted under
clauses (1) through (12) above) in an aggregate
principal amount outstanding at any time (together with
refinancings thereof) not to exceed $150.0 million.
(b) Notwithstanding any other provision of this
Limitation on Indebtedness covenant, the maximum
amount of Indebtedness that may be Incurred pursuant to this
Limitation on Indebtedness covenant will not be
deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the
exchange rates of currencies. The amount of any particular
Indebtedness incurred in a foreign currency will be calculated
based on the exchange rate for such currency vis-à-vis the
U.S. dollar on the date of such incurrence.
(c) For purposes of determining any particular amount of
Indebtedness under this Limitation on Indebtedness
covenant, (x) Indebtedness outstanding under the Credit
Agreement and the Second Lien Credit Agreement on the Closing
Date shall be treated as Incurred pursuant to clause (1) of
the second paragraph of part (a) of this Limitation
on Indebtedness covenant, (y) Guarantees, Liens or
obligations with respect to letters of credit supporting
Indebtedness otherwise included in the determination of such
particular amount shall not be included and (z) any Liens
granted pursuant to the equal and ratable provisions referred to
in the Limitation on Liens covenant shall not be
treated as Indebtedness. For purposes of determining compliance
with this Limitation on Indebtedness covenant, in
the event that an item of Indebtedness meets the criteria of
more than one of the types of Indebtedness described above
(other than Indebtedness referred to in clause (x) of
the preceding sentence), including under the first paragraph of
clause (a), HBI, in its sole discretion, may classify, and
from time to time may reclassify, such item of Indebtedness.
(d) The Obligors will not Incur any Indebtedness if such
Indebtedness is subordinate in right of payment to any other
Indebtedness unless such Indebtedness is also subordinate in
right of payment to the Notes (in the
135
case of HBI) or the Note Guarantees (in the case of any
Subsidiary Guarantor), in each case, to the same extent.
Limitation
on Restricted Payments
HBI will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(1) declare or pay any dividend or make any distribution on
or with respect to its Capital Stock (other than
(x) dividends or distributions payable solely in shares of
Capital Stock (other than Disqualified Stock) of HBI or in
options, warrants or other rights to acquire shares of such
Capital Stock and (y) pro rata dividends or distributions
on common stock of Restricted Subsidiaries held by minority
stockholders) held by Persons other than HBI or any of its
Restricted Subsidiaries;
(2) purchase, call for redemption or redeem, retire or
otherwise acquire for value any shares of Capital Stock
(including options, warrants or other rights to acquire such
shares of Capital Stock) of HBI or any Restricted Subsidiary;
(3) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or
other acquisition or retirement for value, of Indebtedness of
HBI that is expressly subordinated in right of payment to the
Notes or any Indebtedness of a Subsidiary Guarantor that is
expressly subordinated in right of payment to a Note
Guarantee; or
(4) make any Investment, other than a Permitted Investment,
in any Person;
(such payments or any other actions described in
clauses (1) through (4) above being collectively
Restricted Payments) if, at the time of, and after
giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and
be continuing,
(B) HBI could not Incur at least $1.00 of Indebtedness
under the first paragraph of part (a) of the
Limitation on Indebtedness covenant, or
(C) the aggregate amount of all Restricted Payments made
after the Closing Date would exceed the sum of:
(1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net
Income is a loss, minus 100% of the amount of such loss) less
the amount of any net reduction in Investments included pursuant
to clause (3) below that would otherwise be included in
Adjusted Consolidated Net Income, accrued on a cumulative basis
during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately preceding the
Closing Date and ending on the last day of the last fiscal
quarter preceding the Transaction Date for which reports have
been filed with the SEC or provided to the Trustee, plus
(2) the aggregate Net Cash Proceeds received by HBI after
the Closing Date as a capital contribution or from the issuance
and sale of its Capital Stock (other than Disqualified Stock) to
a Person who is not a Subsidiary of HBI, including the Net Cash
Proceeds received by HBI from any issuance or sale permitted by
the Indenture of convertible Indebtedness of HBI subsequent to
the Closing Date, but only upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock)
of HBI, or from the issuance to a Person who is not a Subsidiary
of HBI of any options, warrants or other rights to acquire
Capital Stock of HBI (in each case, exclusive of any
Disqualified Stock or any options, warrants or other rights that
are redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the Notes)
plus
(3) an amount equal to the net reduction in Investments in
any Person resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers
of assets, in each case, to HBI or any Restricted Subsidiary or
from the Net Cash Proceeds from the sale of any such Investment
(whether or not any such payment or proceeds are included in the
calculation of Adjusted Consolidated Net Income) or from
redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition
of Investments), not to exceed, in
136
each case, the aggregate amount of all Investments previously
made by HBI or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(1) the payment of any dividend or redemption of any
Capital Stock within 60 days after the related date of
declaration or call for redemption if, at said date of
declaration or call for redemption, such payment or redemption
would comply with the preceding paragraph;
(2) the redemption, repurchase, defeasance or other
acquisition or retirement for value of Indebtedness that is
subordinated in right of payment to the Notes or any Note
Guarantee with the proceeds of, or in exchange for, Indebtedness
Incurred under clause (3) of the second paragraph of part
(a) of the Limitation on Indebtedness covenant;
(3) the repurchase, redemption or other acquisition of
Capital Stock of HBI or a Restricted Subsidiary (or options,
warrants or other rights to acquire such Capital Stock) in
exchange for, or out of the proceeds of a capital contribution
or a substantially concurrent offering of, shares of Capital
Stock (other than Disqualified Stock) of HBI (or options,
warrants or other rights to acquire such Capital Stock);
provided that such new options, warrants or other rights
are not redeemable at the option of the holder, or required to
be redeemed, prior to the Stated Maturity of the Notes;
(4) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for
value of Indebtedness which is subordinated in right of payment
to the Notes or any Note Guarantee in exchange for, or out of
the proceeds of a capital contribution or a substantially
concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of HBI (or options, warrants or other rights
to acquire such Capital Stock); provided that such new
options, warrants or other rights are not redeemable at the
option of the holder, or required to be redeemed, prior to the
Stated Maturity of the Notes;
(5) payments or distributions, to dissenting stockholders
required by applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets of HBI that complies
with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the
property and assets of HBI;
(6) Investments acquired as a capital contribution to, or
in exchange for, or out of the proceeds of a substantially
concurrent offering of, Capital Stock (other than Disqualified
Stock) of HBI; 120
(7) the repurchase of Capital Stock deemed to occur upon
the exercise of options or warrants if such Capital Stock
represents all or a portion of the exercise price thereof or
payments in lieu of the issuance of fractional shares of Capital
Stock;
(8) Investments by any Foreign Subsidiary in any other
Foreign Subsidiary;
(9) the repurchase, redemption, retirement or otherwise
acquisition of Capital Stock required by the employee stock
ownership programs of HBI or required or permitted under
employee agreements;
(10) other Investments in an amount not to exceed
$120.0 million at any time outstanding; or
(11) Permitted Additional Restricted Payments;
provided that, in the case of clauses (2),
(4) and (11), no Default (of the type described in
clauses (1), (2), (9) or (10) under
Events of Default) or Event of Default
shall have occurred and be continuing or occur as a consequence
of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding
paragraph (other than the Restricted Payment referred to in
clause (2), (7) or (11) thereof or an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in
clause (3) or (4) thereof or an Investment acquired as
a capital contribution or in exchange for Capital Stock referred
to in clause (6) thereof) shall be included in calculating
whether the conditions of clause (C) of the first
paragraph of this Limitation on Restricted Payments
covenant have been met with respect to any subsequent Restricted
Payments, and the Net Cash Proceeds from any issuance of
137
Capital Stock referred to in clause (3), (4) or
(6) of the preceding paragraph shall not be included in
such calculation. In the event the proceeds of an issuance of
Capital Stock of HBI are used for the redemption, repurchase or
other acquisition of the Notes, or Indebtedness that is pari
passu with the Notes or any Note Guarantee, then the Net
Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this
Limitation on Restricted Payments covenant only to
the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
For purposes of determining compliance with this
Limitation on Restricted Payments covenant,
(x) (i) for a Restricted Payment or series of related
Restricted Payments involving in excess of $25.0 million,
the amount, if other than in cash, of any Restricted Payment
shall be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a
resolution of the Board of Directors or (ii) for a
Restricted Payment or series of related Restricted Payments
involving $25.0 million or less, the amount, if other than
in cash, of any Restricted Payment shall be determined in good
faith by the chief financial officer, whose determination shall
be conclusive and evidenced by a certificate to such effect and
(y) in the event that a Restricted Payment meets the
criteria of more than one of the types of Restricted Payments
described in the above clauses, including the first paragraph of
this Limitation on Restricted Payments covenant,
HBI, in its sole discretion, may order and classify, and from
time to time may reclassify, such Restricted Payment if it would
have been permitted at the time such Restricted Payment was made
and at the time of such reclassification.
Limitation
on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
HBI will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective
any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary (other than a Receivables
Subsidiary) to (1) pay dividends or make any other
distributions permitted by applicable law on any Capital Stock
of such Restricted Subsidiary owned by HBI or any other
Restricted Subsidiary, (2) repay any Indebtedness owed to
HBI or any other Restricted Subsidiary, (3) make loans or
advances to HBI or any other Restricted Subsidiary or
(4) transfer any of its property or assets to HBI or any
other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(1) existing on the Closing Date in the Credit Agreement,
the Indenture or any other agreements in effect on the Closing
Date, and any extensions, refinancings, renewals or replacements
of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or
replacements taken as a whole are no less favorable in any
material respect to the Holders than those encumbrances or
restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced;
(2) existing under or by reason of applicable law;
(3) that are customary non-assignment provisions in
contracts, agreements, leases, permits and licenses;
(4) that are purchase money obligations for property
acquired and Capitalized Lease Obligations that impose
restrictions on the property purchased or leased;
(5) existing with respect to any Person or the property or
assets of such Person acquired by HBI or any Restricted
Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or
restrictions are not applicable to any Person or the property or
assets of any Person other than such Person or the property or
assets of such Person so acquired and any extensions,
refinancings, renewals or replacements thereof; provided
that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements taken as a whole are no
less favorable in any material respect to the Holders than those
encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced;
138
(6) in the case of clause (4) of the first paragraph
of this Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries covenant:
(A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any
property or assets of HBI or any Restricted Subsidiary not
otherwise prohibited by the Indenture, or
(C) arising or agreed to in the normal course of business,
not relating to any Indebtedness, and that do not, individually
or in the aggregate, detract from the value of property or
assets of HBI or any Restricted Subsidiary in any manner
material to HBI or any Restricted Subsidiary;
(7) with respect to a Restricted Subsidiary and imposed
pursuant to an agreement that has been entered into for the sale
or disposition of all or substantially all of the Capital Stock
of, or property and assets of, such Restricted Subsidiary;
(8) relating to a Subsidiary Guarantor and contained in the
terms of any Indebtedness or any agreement pursuant to which
such Indebtedness was issued if:
(A) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by HBI in good
faith); and
(B) HBI determines that any such encumbrance or restriction
will not materially affect HBIs ability to make principal
or interest payments on the Notes;
(9) arising from customary provisions in joint venture
agreements and other similar agreements;
(10) existing in the documentation governing any Permitted
Securitization; or
(11) contained in any agreement governing Indebtedness
permitted under clause (8) of the second paragraph of part
(a) of the Limitation on Indebtedness covenant.
Nothing contained in this Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries
covenant shall prevent HBI or any Restricted Subsidiary from
(1) creating, incurring, assuming or suffering to exist any
Liens otherwise permitted in the Limitation on Liens
covenant or (2) restricting the sale or other disposition
of property or assets of HBI or any of its Restricted
Subsidiaries that secure Indebtedness of HBI or any of its
Restricted Subsidiaries.
Limitation
on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
HBI will not sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell, any shares
of Capital Stock of a Restricted Subsidiary (including options,
warrants or other rights to purchase shares of such Capital
Stock) except:
(1) to HBI or a Wholly Owned Restricted Subsidiary;
(2) issuances of directors qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign
Restricted Subsidiaries, to the extent required by applicable
law;
(3) if, immediately after giving effect to such issuance or
sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would
have been permitted to be made under the Limitation on
Restricted Payments covenant if made on the date of such
issuance or sale; or
(4) sales of Capital Stock (other than Disqualified Stock)
(including options, warrants or other rights to purchase shares
of such Capital Stock) of a Restricted Subsidiary, provided
that HBI or such Restricted Subsidiary either
(a) applies the Net Cash Proceeds of any such sale in
accordance with the Limitation on Asset Sales
covenant or (b) to the extent such sale is of preferred
stock, such sale is permitted under the Limitation on
Indebtedness covenant.
139
Limitation
on Issuance of Guarantees by Restricted
Subsidiaries
HBI will cause each Restricted Subsidiary other than a Foreign
Subsidiary or an Immaterial Subsidiary to execute and deliver a
supplemental indenture to the Indenture providing for a
Guarantee (a Subsidiary Guarantee) of payment of the
Notes by such Restricted Subsidiary.
HBI will not permit any Restricted Subsidiary which is not a
Subsidiary Guarantor, directly or indirectly, to Guarantee any
Indebtedness (Guaranteed Indebtedness) of HBI or any
other Restricted Subsidiary (other than a Foreign Subsidiary or
an Immaterial Subsidiary), unless (a) such Restricted
Subsidiary promptly executes and delivers a supplemental
indenture to the Indenture providing for a Guarantee (also a
Subsidiary Guarantee) of payment of the Notes by
such Restricted Subsidiary and (b) such Restricted
Subsidiary waives and will not in any manner whatsoever claim or
take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against HBI or any
other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee until the
Notes have been paid in full.
If the Guaranteed Indebtedness is (A) pari passu in
right of payment with the Notes or any Note Guarantee, then the
Guarantee of such Guaranteed Indebtedness shall be pari passu
in right of payment with, or subordinated to, the Subsidiary
Guarantee or (B) subordinated in right of payment to the
Notes or any Note Guarantee, then the Guarantee of such
Guaranteed Indebtedness shall be subordinated in right of
payment to the Subsidiary Guarantee at least to the extent that
the Guaranteed Indebtedness is subordinated to the Notes or the
Note Guarantee.
Notwithstanding the foregoing, any Subsidiary Guarantee by a
Restricted Subsidiary may provide by its terms that it shall be
automatically and unconditionally released and discharged upon:
(1) any sale, exchange or transfer, to any Person not an
Affiliate of HBI, of all or substantially all of HBIs and
each Restricted Subsidiarys Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary
(which sale, exchange or transfer is not prohibited by the
Indenture) or upon the designation of such Restricted Subsidiary
as an Unrestricted Subsidiary in accordance with the terms of
the Indenture; or
(2) the release or discharge of the Guarantee which
resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such
Guarantee.
Limitation
on Transactions with Shareholders and Affiliates
HBI will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any
transaction (including, without limitation, the purchase, sale,
lease or exchange of property or assets, or the rendering of any
service) with any holder (or any Affiliate of such holder) of 5%
or more of any class of Capital Stock of HBI or with any
Affiliate of HBI or any Restricted Subsidiary, except upon terms
no less favorable to HBI or such Restricted Subsidiary than
could be obtained, at the time of such transaction or, if such
transaction is pursuant to a written agreement, at the time of
the execution of the agreement providing therefor, in a
comparable arms-length transaction with a Person that is
not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(1) transactions (A) approved by a majority of the
disinterested members of the Board of Directors or (B) for
which HBI or a Restricted Subsidiary delivers to the Trustee a
written opinion of a nationally recognized investment banking,
accounting, valuation or appraisal firm stating that the
transaction is fair to HBI or such Restricted Subsidiary from a
financial point of view;
(2) any transaction solely between HBI and any of its
Restricted Subsidiaries or solely among Restricted Subsidiaries;
(3) the payment of reasonable regular fees to directors of
HBI who are not employees of HBI and indemnification
arrangements entered into by HBI consistent with past practices
of HBI;
(4) transactions with a Person that is an Affiliate of HBI
solely because HBI owns, directly or through a Restricted
Subsidiary, an Equity Interest in, or controls, such Person;
140
(5) transactions in connection with a Permitted
Securitization including Standard Securitization Undertakings;
(6) any sale of shares of Capital Stock (other than
Disqualified Stock) of HBI;
(7) any Permitted Investments or any Restricted Payments
not prohibited by the Limitation on Restricted
Payments covenant;
(8) any agreement as in effect or entered into as of the
Closing Date (as disclosed in this prospectus) or any amendment
thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto) and any replacement agreement
thereto so long as any such amendment or replacement agreement
is not more disadvantageous to the Holders in any material
respect than the original agreement as in effect on the Closing
Date; and
(9) any employment agreement, change in control/severance
agreement, employee benefit plan, officer or director
indemnification agreement or any similar arrangement entered
into by HBI or any of its Restricted Subsidiaries in the
ordinary course of business and payments pursuant thereto.
Notwithstanding the foregoing, any transaction or series of
related transactions covered by the first paragraph of this
Limitation on Transactions with Shareholders and
Affiliates covenant and not covered by clauses (2)
through (9) of this paragraph, (a) the aggregate
amount of which exceeds $50.0 million in value, must be
approved or determined to be fair in the manner provided for in
clause (1)(A) or (B) above and (b) the aggregate
amount of which exceeds $100.0 million in value, must be
determined to be fair in the manner provided for in
clause (1)(B) above.
Limitation
on Liens
HBI will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its
assets or properties of any character (including any shares of
Capital Stock or Indebtedness of any Restricted Subsidiary),
without making effective provision for all of the Notes and all
other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to
be secured by such Lien is subordinated in right of payment to
the Notes, prior to) the obligation or liability secured by such
Lien.
The foregoing limitation does not apply to:
(1) Liens existing on the Closing Date;
(2) Liens granted on or after the Closing Date on any
assets or Capital Stock of HBI or its Restricted Subsidiaries
created in favor of the Holders;
(3) Liens in connection with a Permitted Securitization;
(4) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred
under clause (3) of the second paragraph of part
(a) of the Limitation on Indebtedness covenant;
provided that such Liens do not extend to or cover any
property or assets of HBI or any Restricted Subsidiary other
than the property or assets securing the Indebtedness being
refinanced;
(5) Liens to secure Indebtedness permitted under
clause (1) of the second paragraph of part (a) of the
Limitation on Indebtedness covenant;
(6) Liens (including extensions and renewals thereof)
securing Indebtedness permitted under clause (7) of the
second paragraph of part (a) of the Limitation on
Indebtedness covenant; provided that, (i) such
Lien is granted within 365 days after such Indebtedness is
incurred, (ii) the Indebtedness secured thereby does not
exceed the lesser of the cost or the fair market value of the
applicable property, improvements or equipment at the time of
such acquisition (or construction) and (iii) such Lien
secures only the assets that are the subject of the Indebtedness
referred to in such clause;
(7) Liens on cash set aside at the time of the Incurrence
of any Indebtedness, or government securities purchased with
such cash, in either case, to the extent that such cash or
government securities
141
pre-fund the payment of interest on such Indebtedness and are
held in a collateral or escrow account or similar arrangement to
be applied for such purpose;
(8) Liens on any assets or properties of Foreign
Subsidiaries to secure Indebtedness permitted under
clause (8) of the second paragraph of part (a) of the
Limitation on Indebtedness covenant;
(9) Liens on (A) incurred premiums, dividends and
rebates which may become payable under insurance policies and
loss payments which reduce the incurred premiums on such
insurance policies and (B) rights which may arise under
State insurance guarantee funds relating to any such insurance
policy, in each case securing Indebtedness permitted to be
incurred pursuant to clause (12) of the second
paragraph of part (a) of the Limitation on
Indebtedness covenant;
(10) other Liens securing Indebtedness or other obligations
permitted under the Indenture and outstanding in an aggregate
principal amount not to exceed $90.0 million; or
(11) Permitted Liens.
Limitation
on Sale and Leaseback Transactions
HBI will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Leaseback Transaction involving any of
its assets or properties whether now owned or hereafter
acquired; provided, however, that HBI or any
Restricted Subsidiary may enter into a Sale and Leaseback
Transaction if:
(a) the consideration received in such Sale and Leaseback
Transaction is at least equal to the fair market value of the
property so sold or otherwise transferred, as determined by a
resolution of the Board of Directors;
(b) HBI or such Restricted Subsidiary, as applicable, would
be permitted to grant a Lien to secure Indebtedness under the
Limitation on Liens covenant in the amount of the
Attributable Debt in respect of such Sale Leaseback Transaction;
(c) prior to and after giving effect to the Attributable
Debt in respect of such Sale and Leaseback Transaction, HBI and
such Restricted Subsidiary comply with the Limitation on
Indebtedness covenant; and
(d) HBI or such Restricted Subsidiary applies the proceeds
received from such sale in accordance with the Limitation
on Asset Sales covenant.
Limitation
on Asset Sales
HBI will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (1) the consideration
received by HBI or such Restricted Subsidiary is at least equal
to the fair market value of the assets sold or disposed of and
(2) at least 75% of the consideration received consists of
(a) cash or Temporary Cash Investments, (b) the
assumption of unsubordinated Indebtedness of HBI or any
Subsidiary Guarantor or Indebtedness of any other Restricted
Subsidiary (in each case, other than Indebtedness owed to HBI or
any Affiliate of HBI), provided that HBI, such Subsidiary
Guarantor or such other Restricted Subsidiary is irrevocably
released in writing from all liability under such Indebtedness,
or (c) Replacement Assets.
HBI will, or will cause the relevant Restricted Subsidiary to:
(1) within twelve months after the date of receipt of any
Net Cash Proceeds from an Asset Sale:
(A) apply an amount equal to such Net Cash Proceeds to
permanently repay Indebtedness under any Credit Facility or
other unsubordinated secured Indebtedness of HBI or any
Subsidiary Guarantor or Indebtedness of any other Restricted
Subsidiary, in each case, owing to a Person other than HBI or
any Affiliate of HBI (and to cause a corresponding permanent
reduction in commitments if such repaid Indebtedness was
outstanding under the revolving portion of a Credit Facility); or
142
(B) invest an equal amount, or the amount not so applied
pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after
the date of such agreement) in Replacement Assets, and
(2) apply (no later than the end of the
12-month
period referred to in clause (1)) any excess Net Cash
Proceeds (to the extent not applied pursuant to clause (1))
as provided in the following paragraphs of this Limitation
on Asset Sales covenant.
The amount of such excess Net Cash Proceeds required to be
applied (or to be committed to be applied) during such
12-month
period as set forth in clause (1) of the preceding sentence
and not applied as so required by the end of such period shall
constitute Excess Proceeds.
If, as of the first day of any calendar month, the aggregate
amount of Excess Proceeds not theretofore subject to an Offer to
Purchase pursuant to this Limitation on Asset Sales
covenant totals at least $50.0 million, HBI must commence,
not later than the last business day of such month, and
consummate an Offer to Purchase from the Holders (and, if
required by the terms of any Indebtedness that is pari passu
with the Notes (Pari Passu Indebtedness), from the
holders of such Pari Passu Indebtedness) on a pro rata basis an
aggregate principal amount of Notes (and Pari Passu
Indebtedness) equal to the Excess Proceeds on such date, at a
purchase price equal to 100% of their principal amount, plus, in
each case, accrued interest (if any) to the Payment Date. To the
extent that any Excess Proceeds remain after consummation of an
Offer to Purchase pursuant to this Limitation on Asset
Sales covenant, HBI may use those Excess Proceeds for any
purpose not otherwise prohibited by the Indenture and the amount
of Excess Proceeds shall be reset to zero.
Pending the final application of any Net Proceeds, HBI may
temporarily reduce revolving credit borrowings or otherwise
invest the Net Proceeds in any manner that is not prohibited by
the Indenture.
Limitation
on Business Activities
HBI will not, and will not permit any of its Restricted
Subsidiaries to, engage in any business other than Permitted
Businesses.
Payments
for Consent
HBI will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, pay or cause to be paid
any consideration to or for the benefit of any Holder for or as
an inducement to any consent, waiver or amendment of any of the
terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid and is paid to all Holders
that consent, waive or agree to amend in the time frame set
forth in the solicitation documents relating to such consent,
waiver or agreement.
Investments
in HBI Playtex BATH LLC
HBI will not, and will not permit any of its Subsidiaries to,
make any additional Investment in HBI Playtex BATH LLC or
transfer any of their respective assets to HBI Playtex BATH LLC.
Repurchase
of Notes upon a Change of Control
HBI must commence, within 30 days of the occurrence of a
Change of Control, and consummate an Offer to Purchase for all
Notes then outstanding, at a purchase price equal to 101% of
their principal amount, plus accrued interest (if any) to the
Payment Date.
There can be no assurance that HBI will have sufficient funds
available at the time of any Change of Control to make any debt
payment (including repurchases of Notes) required by the
foregoing covenant (as well as may be required by the terms of
any other securities or indebtedness of HBI which might be
outstanding at the time).
The above covenant requiring HBI to repurchase the Notes will,
unless consents are obtained, require HBI to repay all
indebtedness then outstanding which by its terms would prohibit
such Note repurchase, either prior to or concurrently with such
Note repurchase.
143
HBI will not be required to make an Offer to Purchase upon the
occurrence of a Change of Control if (a) a third party
makes an offer to purchase the Notes in the manner, at the times
and price and otherwise in compliance with the requirements of
the Indenture applicable to an Offer to Purchase for a Change of
Control and purchases all Notes validly tendered and not
withdrawn in such offer to purchase or (b) a notice of
redemption has been given pursuant to the provisions under the
caption Optional Redemption, unless and
until there is a default in payment of the applicable redemption
price.
SEC
Reports and Reports to Holders
Whether or not required by the SECs rules and regulations,
so long as any Notes are outstanding, HBI will furnish to the
Holders or cause the Trustee to furnish to the Holders, within
the time periods specified in the SECs rules and
regulations:
(1) all quarterly and annual reports that would be required
to be filed with the SEC on
Forms 10-Q
and 10-K if
HBI were required to file such reports; and
(2) all current reports that would be required to be filed
with the SEC on
Form 8-K
if HBI were required to file such reports.
All such reports will be prepared in all material respects in
accordance with the rules and regulations applicable to such
reports. Each annual report on
Form 10-K
will include a report on HBIs consolidated financial
statements by HBIs certified independent accountants.
In addition, following the consummation of the exchange offer
contemplated by the Registration Rights Agreement, HBI will file
a copy of each of the reports referred to in clauses (1)
and (2) above with the SEC for public availability within
the time periods specified in the rules and regulations
applicable to such reports (unless the SEC will not accept such
a filing) and will post the reports on its website within those
time periods.
If, at any time after consummation of the exchange offer
contemplated by the Registration Rights Agreement, HBI is no
longer subject to the periodic reporting requirements of the
Exchange Act for any reason, HBI will nevertheless continue
filing the reports specified in the preceding paragraphs of this
covenant with the SEC within the time periods specified above
unless the SEC will not accept such a filing. HBI will not take
any action for the purpose of causing the SEC not to accept any
such filings. If, notwithstanding the foregoing, the SEC will
not accept HBIs filings for any reason, HBI will post the
reports referred to in the preceding paragraphs on its website
within the time periods that would apply if HBI were required to
file those reports with the SEC.
In addition, HBI and the Subsidiary Guarantors agree that, for
so long as any Notes remain outstanding, if at any time they are
not required to file with the SEC the reports required by the
preceding paragraphs, they will furnish to the Holders and to
securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.
Events of
Default
The following events will be defined as Events of
Default in the Indenture:
(1) default for 30 days in the payment when due of
interest on the Notes;
(2) default in the payment when due (at maturity, upon
redemption or otherwise) of the principal of, or premium, if
any, on the Notes;
(3) failure by HBI or any of its Restricted Subsidiaries to
comply with the provisions under the captions Repurchase
of Notes Upon a Change of Control or Consolidation,
Merger and Sale of Assets;
(4) failure by HBI or any of its Restricted Subsidiaries
for 30 days after notice to HBI by the trustee or the
Holders of at least 25% in aggregate principal amount of the
Notes then outstanding voting as a
144
single class to comply with the provisions under the captions
Limitation on Restricted Payments, Limitation
on Indebtedness or Limitation on Asset Sales;
(5) failure by HBI or any of its Restricted Subsidiaries
for 60 days after notice to HBI by the trustee or the
Holders of at least 25% in aggregate principal amount of the
Notes then outstanding voting as a single class to comply with
any of the other agreements in the Indenture;
(6) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by HBI or any
of its Restricted Subsidiaries (or the payment of which is
guaranteed by HBI or any of its Restricted Subsidiaries),
whether such Indebtedness or Guarantee now exists or is created
after the date of the Indenture, if that default:
(A) is caused by a failure to pay principal of, or interest
or premium, if any, on, such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on
the date of such default; or
(B) results in the acceleration of such Indebtedness prior
to its express maturity,
and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other
such Indebtedness or the maturity of which has been so
accelerated, aggregates $100.0 million or more;
(7) failure by HBI or any of its Restricted Subsidiaries to
pay final judgments entered by a court or courts of competent
jurisdiction aggregating in excess of $100.0 million, which
judgments are not paid, discharged or stayed for a period of
60 days;
(8) except as permitted by the Indenture, any Note
Guarantee is held in any judicial proceeding to be unenforceable
or invalid or ceases for any reason to be in full force and
effect or any Subsidiary Guarantor, or any Person acting on
behalf of any Subsidiary Guarantor denies or disaffirms its
obligations under its Note Guarantee;
(9) HBI or any of its Restricted Subsidiaries that would
constitute a Significant Subsidiary pursuant to or within the
meaning of Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it
in an involuntary case,
(C) consents to the appointment of a custodian of it or for
all or substantially all of its property, or
(D) makes a general assignment for the benefit of its
creditors; and
(10) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against HBI or any of its Restricted
Subsidiaries that is a Significant Subsidiary in an involuntary
case;
(B) appoints a custodian of HBI or any of its Restricted
Subsidiaries that is a Significant Subsidiary or for all or
substantially all of the property of HBI or any of its
Restricted Subsidiaries that is a Significant Subsidiary; or
(C) orders the liquidation of HBI or any of its Restricted
Subsidiaries that is a Significant Subsidiary;
and the order or decree remains unstayed and in effect for 60
consecutive days.
If an Event of Default (other than an Event of Default specified
in clause (9) or (10) above that occurs with respect
to HBI) occurs and is continuing under the Indenture, the
Trustee or the Holders of at least 25% in aggregate principal
amount of the Notes, then outstanding, by written notice to HBI
(and to the Trustee if such notice is given by the Holders),
may, and the Trustee at the request of such Holders shall,
declare the principal of, premium, if any, and accrued interest
on the Notes to be immediately due and payable. Upon a
145
declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In
the event of a declaration of acceleration because an Event of
Default set forth in clause (6) above has occurred and is
continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default
triggering such Event of Default pursuant to clause (6)
shall be remedied or cured by HBI or the relevant Restricted
Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in
clause (9) or (10) above occurs with respect to HBI,
the principal of, premium, if any, and accrued interest on the
Notes then outstanding shall automatically become and be
immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.
The Holders of at least a majority in principal amount of the
Notes by written notice to HBI and to the Trustee, may waive all
past defaults and rescind and annul a declaration of
acceleration and its consequences if (x) all existing
Events of Default, other than the nonpayment of the principal
of, premium, if any, and accrued interest on the Notes that have
become due solely by such declaration of acceleration, have been
cured or waived and (y) the rescission would not conflict
with any judgment or decree of a court of competent
jurisdiction. For information as to the waiver of defaults, see
Modification and Waiver.
The Holders of at least a majority in aggregate principal amount
of the Notes may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. However,
the Trustee may refuse to follow any direction that conflicts
with law or the Indenture, that may involve the Trustee in
personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of Holders of Notes not
joining in the giving of such direction and may take any other
action it deems proper that is not inconsistent with any such
direction received from Holders of Notes. A Holder may not
pursue any remedy with respect to the Indenture or the Notes
unless:
(1) the Holder gives the Trustee written notice of a
continuing Event of Default;
(2) the Holders of at least 25% in aggregate principal
amount of Notes make a written request to the Trustee to pursue
the remedy;
(3) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or
expense;
(4) the Trustee does not comply with the request within
60 days after receipt of the request and the offer of
indemnity; and
(5) during such
60-day
period, the Holders of a majority in aggregate principal amount
of the Notes do not give the Trustee a direction that is
inconsistent with the request.
However, such limitations do not apply to the right of any
Holder of a Note to receive payment of the principal of or
premium, if any, or interest on, such Note, or to bring suit for
the enforcement of any such payment, on or after the due date
expressed in the Notes, which right shall not be impaired or
affected without the consent of the Holder.
Officers of HBI must certify, on or before a date not more than
90 days after the end of each fiscal year, that HBI and its
Restricted Subsidiaries have fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment
of any such obligation, specifying each such default and the
nature and status thereof. HBI will also be obligated to notify
the Trustee of any default or defaults in the performance of any
covenants or agreements under the Indenture.
Consolidation,
Merger and Sale of Assets
HBI will not (1), directly or indirectly, consolidate or merge
with or into another Person (whether or not HBI is the surviving
corporation), or (2) sell, assign, convey, transfer, lease
or otherwise dispose of all or
146
substantially all of the property or assets of HBI and its
Restricted Subsidiaries taken as a whole, in one or more related
transactions, to another Person, unless:
(1) it shall be the continuing Person, or the Person (if
other than it) formed by such consolidation or into which it is
merged or that acquired or leased such property and assets (the
Surviving Person) shall be a corporation, limited
partnership, limited liability company or other entity organized
and validly existing under the laws of the United States of
America or any jurisdiction thereof and shall expressly assume,
by a supplemental indenture, executed and delivered to the
Trustee, all of HBIs obligations under the Indenture, the
Notes and the Registration Rights Agreement; provided,
however, that if the Surviving Person is not a corporation,
a corporation that has no material assets or liabilities other
than the Notes shall become a co-issuer of the Notes pursuant to
a supplemental indenture duly executed by the Trustee;
(2) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be
continuing;
(3) immediately after giving effect to such transaction on
a pro forma basis HBI (or the Surviving Person, if
applicable) could Incur at least $1.00 of Indebtedness under the
first paragraph of part (a) of the Limitation on
Indebtedness covenant or (b) HBIs (of the
Surviving Persons, if applicable) Fixed Charge Coverage
Ratio is greater than that of HBI prior to the consummation of
such transaction; and
(4) HBI will have delivered to the Trustee an
officers certificate (attaching the arithmetic
computations to demonstrate compliance with clause (3) of
this paragraph) and an opinion of counsel, each stating that
such transaction and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture
comply with the applicable provisions of the Indenture, that all
conditions precedent in the Indenture relating to such
transaction have been satisfied and that supplemental indenture
is enforceable;
provided, however, that clause (3) above does not
apply if, in the good faith determination of the Board of
Directors, whose determination shall be evidenced by a
resolution of the Board of Directors, the principal purpose of
such transaction is to change the state of incorporation of HBI
and any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations.
No Subsidiary Guarantor will consolidate with, merge with or
into, or sell, convey, transfer, lease or otherwise dispose of
all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any
Person to merge with or into it unless:
(1) it shall be the continuing Person, or the Person (if
other than it) formed by such consolidation or into which it is
merged or that acquired or leased such property and assets shall
expressly assume, by a supplemental indenture, executed and
delivered to the Trustee, all of such Subsidiary
Guarantors obligations under its Note Guarantee and the
Registration Rights Agreement;
(2) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be
continuing; and
(3) HBI will have delivered to the Trustee an
officers certificate and an opinion of counsel, each
stating that such transaction and such supplemental indenture
comply with the applicable provisions of the Indenture, that all
conditions precedent in the Indenture relating to such
transaction have been satisfied and that such supplemental
indenture is enforceable.
The foregoing requirements of this paragraph shall not apply to
a consolidation or merger of any Subsidiary Guarantor with and
into HBI or any other Subsidiary Guarantor, so long as HBI or
such Subsidiary Guarantor survives such consolidation or merger.
147
Defeasance
Defeasance
and Discharge
The Indenture provides that HBI will be deemed to have paid and
will be discharged from any and all obligations in respect of
the Notes on the day of the deposit referred to below, and the
provisions of the Indenture will no longer be in effect with
respect to the Notes (except for, among other matters, certain
obligations to register the transfer or exchange of the Notes,
to replace stolen, lost or mutilated Notes, to maintain paying
agencies and to hold monies for payment in trust) if, among
other things:
(A) HBI has deposited with the Trustee, in trust, money
and/or
U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes;
(B) HBI has delivered to the Trustee (1) either
(x) an opinion of counsel to the effect that Holders will
not recognize income, gain or loss for federal income tax
purposes as a result of HBIs exercise of its option under
this Defeasance provision and will be subject to
federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which opinion of
counsel must be based upon (and accompanied by a copy of) a
ruling of the Internal Revenue Service to the same effect unless
there has been a change in applicable federal income tax law
after the Closing Date such that a ruling is no longer required
or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the
aforementioned opinion of counsel and (2) an opinion of
counsel to the effect that the creation of the defeasance trust
does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust
fund will not be subject to the effect of Section 547 of
the United States Bankruptcy Code or Section 15 of the New
York Debtor and Creditor Law;
(C) immediately after giving effect to such deposit on a
pro forma basis, no Event of Default, or event that after
the giving of notice or lapse of time or both would become an
Event of Default, shall have occurred and be continuing on the
date of such deposit, and such deposit shall not result in a
breach or violation of, or constitute a default under, any other
agreement or instrument to which HBI or any of its Subsidiaries
is a party or by which HBI or any of its Subsidiaries is
bound; and
(D) if at such time the Notes are listed on a national
securities exchange, HBI has delivered to the Trustee an opinion
of counsel to the effect that the Notes will not be delisted as
a result of such deposit, defeasance and discharge.
Defeasance
of Certain Covenants and Certain Events of
Default.
The Indenture further provides that the provisions of the
Indenture will no longer be in effect with respect to
clause (3) of the first paragraph under
Consolidation, Merger and Sale of Assets
and all the covenants described herein under
Covenants, and clause (c) under
Events of Default with respect to such
clause (3) of the first paragraph under
Consolidation, Merger and Sale of
Assets, clauses (4) and (5) under Events
of Default with respect to such other covenants and
clauses (6) and (7) under Events of
Default shall be deemed not to be Events of Default upon,
among other things, the deposit with the Trustee, in trust, of
money and/or
U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(2), (C) and
(D) of the preceding paragraph and the delivery by HBI to
the Trustee of an opinion of counsel to the effect that, among
other things, the Holders will not recognize income, gain or
loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and
will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred.
148
Defeasance
and Certain Other Events of Default.
In the event that HBI exercises its option to omit compliance
with certain covenants and provisions of the Indenture with
respect to the Notes as described in the immediately preceding
paragraph and the Notes are declared due and payable because of
the occurrence of an Event of Default that remains applicable,
the amount of money
and/or
U.S. Government Obligations on deposit with the Trustee
will be sufficient to pay amounts due on the Notes at the time
of their Stated Maturity but may not be sufficient to pay
amounts due on the Notes at the time of the acceleration
resulting from such Event of Default. However, HBI will remain
liable for such payments and HBIs obligations or any
Subsidiary Guarantors Note Guarantee with respect to such
payments will remain in effect.
Satisfaction
and Discharge
The Indenture will be discharged and will cease to be of further
effect (except as to surviving rights of registration of
transfer or exchange of the Notes, as expressly provided for in
the Indenture) as to all Notes when:
(1) either:
(A) all of the Notes theretofore authenticated and
delivered (except lost, stolen or destroyed Notes which have
been replaced or paid and Notes for whose payment money has
theretofore been deposited in trust by HBI and thereafter repaid
to HBI) have been delivered to the Trustee for
cancellation or
(B) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable pursuant to an optional
redemption notice or otherwise or will become due and payable
within one year, and HBI has irrevocably deposited or caused to
be deposited with the Trustee funds in an amount sufficient to
pay and discharge the entire indebtedness on the Notes not
theretofore delivered to the trustee for cancellation, for
principal of, premium, if any, and interest on the Notes to the
date of deposit together with irrevocable instructions from HBI
directing the Trustee to apply such funds to the payment thereof
at maturity or redemption, as the case may be; and
(2) HBI has paid all other sums payable under the Indenture
by HBI.
The Trustee will acknowledge the satisfaction and discharge of
the Indenture if HBI has delivered to the Trustee an
officers certificate and an opinion of counsel stating
that all conditions precedent under the Indenture relating to
the satisfaction and discharge of the Indenture have been
complied with.
Modification
and Waiver
The Indenture may be amended, without the consent of any Holder,
to:
(1) cure any ambiguity, defect or inconsistency in the
Indenture;
(2) provide for uncertificated Notes in addition to or in
place of certificated Notes;
(3) conform the text of the indenture to any provisions of
this description of Notes to the extent that a portion of this
description of Notes was intended to be a verbatim recitation of
the Indenture or the Notes;
(4) provide for the issuance of additional Notes under the
Indenture to the extent otherwise so permitted under the terms
of the Indenture;
(5) comply with the provisions described under
Covenants Consolidation, Merger
and Sale of Assets or
Covenants Limitation on Issuance
of Guarantees by Restricted Subsidiaries;
(6) comply with any requirements of the SEC in connection
with the qualification of the Indenture under the Trust
Indenture Act;
(7) evidence and provide for the acceptance of appointment
by a successor Trustee;
149
(8) to add a Subsidiary Guarantor; or
(9) make any change that, in the good faith opinion of the
Board of Directors, does not materially and adversely affect the
rights of any Holder.
Modifications and amendments of the Indenture may be made by
HBI, the Subsidiary Guarantors and the Trustee with the consent
of the Holders of not less than a majority in aggregate
principal amount of the Notes; provided, however, that no
such modification or amendment may, without the consent of each
Holder affected thereby:
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Note;
(2) reduce the principal amount of, or premium, if any, or
interest on, any Note;
(3) change the optional redemption dates or optional
redemption prices of the Notes from that stated under the
caption Optional Redemption;
(4) change the place or currency of payment of principal
of, or premium, if any, or interest on, any Note;
(5) impair the right to institute suit for the enforcement
of any payment on or after the Stated Maturity (or, in the case
of a redemption, on or after the Redemption Date) of any
Note;
(6) waive a default in the payment of principal of,
premium, if any, or interest on the Notes (other than a
rescission of acceleration of the Notes to the extent that such
acceleration was initially instituted pursuant to a vote of the
Holders);
(7) amend, change or modify the obligation of HBI to make
and consummate an Offer to Purchase as described under the
caption Limitation on Asset Sales after the
obligation to make such an offer has arisen or the obligation of
HBI to make and consummate an Offer to Purchase as described
under the caption Repurchase of Notes upon a Change of
Control after a Change of Control has occurred,
(8) release any Subsidiary Guarantor from its Note
Guarantee, except as provided in the Indenture;
(9) amend or modify any of the provisions of the Indenture
in any manner which subordinates the Notes issued thereunder in
right of payment to any other Indebtedness of HBI or which
subordinates any Note Guarantee in right of payment to any other
Indebtedness of the Subsidiary Guarantor issuing any such Note
Guarantee; or
(10) reduce the percentage or aggregate principal amount of
Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for
waiver of certain defaults.
Governing
Law
The Indenture and the Notes will be governed by and construed in
accordance with the laws of the State of New York.
No
Personal Liability of Incorporators, Stockholders, Officers,
Directors, or Employees
No recourse for the payment of the principal of, premium, if
any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under
or upon any obligation, covenant or agreement of any Obligor in
the Indenture, or in any of the Notes or Note Guarantees or
because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer,
director, employee or controlling person of HBI or any
Subsidiary Guarantor or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such
liability. The waiver and release are part of the consideration
for the issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws.
150
Concerning
the Trustee
Except during the continuance of a Default, the Trustee will not
be liable, except for the performance of such duties as are
specifically set forth in the Indenture. If an Event of Default
has occurred and is continuing, the Trustee will use the same
degree of care and skill in its exercise of the rights and
powers vested in it under the Indenture as a prudent person
would exercise under the circumstances in the conduct of such
persons own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939,
as amended, incorporated by reference therein contain
limitations on the rights of the Trustee, should it become a
creditor of HBI or any Subsidiary Guarantor, to obtain payment
of claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or
otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
Book-Entry;
Delivery and Form
The Exchange Notes initially will be represented by one or more
global notes in registered form without interest coupons (the
Global Notes) in minimum denominations of $1,000 and
integral multiples of $1,000 in excess of $1,000.
The Global Notes will be deposited with the Trustee as custodian
for DTC and registered in the name of a nominee of DTC.
Ownership of beneficial interests in a Global Note will be
limited to persons who have accounts with DTC
(participants) or persons who hold interests through
participants. Ownership of beneficial interests in a Global Note
will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee
(with respect to interests of participants) and the records of
participants (with respect to interests of persons other than
participants).
So long as DTC, or its nominee, is the registered owner or
holder of a Global Note, DTC or such nominee, as the case may
be, will be considered the sole owner or holder of the Notes
represented by such Global Note for all purposes under the
Indenture and the Notes. No beneficial owner of an interest in a
Global Note will be able to transfer that interest except in
accordance with DTCs applicable procedures, in addition to
those provided for under the Indenture.
Payments of the principal of, and interest on, a Global Note
will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither HBI, the Trustee nor any
Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of
beneficial ownership interests in a Global Note or for
maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
HBI expects that DTC or its nominee, upon receipt of any payment
of principal or interest in respect of a Global Note, will
credit participants accounts with payments in amounts
proportionate to their respective beneficial interests in the
principal amount of such Global Note as shown on the records of
DTC or its nominee. HBI also expects that payments by
participants to owners of beneficial interests in such Global
Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the
names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the
ordinary way in accordance with DTC rules and will be settled in
same-day
funds.
HBI expects that DTC will take any action permitted to be taken
by a Holder of Notes (including the presentation of Notes for
exchange as described below) only at the direction of one or
more participants to whose account the DTC interests in a Global
Note is credited and only in respect of such portion of the
aggregate principal amount of Notes as to which such participant
or participants has or have given such direction. However, if
there is an Event of Default under the Notes, DTC will exchange
the applicable Global Note for Certificated Notes, which it will
distribute to its participants.
151
HBI understands that DTC is a limited purpose trust company
organized under the laws of the State of New York, a
banking organization within the meaning of New York
Banking Law, a member of the Federal Reserve System, a
clearing corporation within the meaning of the
Uniform Commercial Code and a Clearing Agency
registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of
securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates.
Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies and certain other
organizations that clear through or maintain a custodial
relationship with a participant, either directly or indirectly
(indirect participants).
Although DTC is expected to follow the foregoing procedures in
order to facilitate transfers of interests in a Global Note
among participants of DTC, DTC is under no obligation to perform
or continue to perform such procedures, and such procedures may
be discontinued at any time. Neither HBI nor the Trustee will
have any responsibility for the performance by DTC or its
participants or indirect participants of its obligations under
the rules and procedures governing its operations.
If DTC is at any time unwilling or unable to continue as a
depositary for the Global Notes and a successor depositary is
not appointed by HBI within 90 days, HBI will issue
Certificated Notes in exchange for the Global Notes. Holders of
an interest in a Global Note may receive Certificated Notes in
accordance with the DTCs rules and procedures in addition
to those provided for under the Indenture.
Definitions
Set forth below are defined terms used in the covenants and
other provisions of the Indenture. Reference is made to the
Indenture for other capitalized terms used in this
Description of the Notes for which no definition is
provided.
Acquired Indebtedness means Indebtedness of a
Person existing at the time such Person becomes a Restricted
Subsidiary or Indebtedness of a Restricted Subsidiary assumed in
connection with an Asset Acquisition by such Restricted
Subsidiary; provided such Indebtedness was not Incurred
in connection with or in contemplation of such Person becoming a
Restricted Subsidiary or such Asset Acquisition.
Adjusted Consolidated Net Income means, for
any period, the aggregate net income (or loss) of HBI and its
Restricted Subsidiaries for such period determined in conformity
with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without
duplication):
(1) the net income (or loss) of any Person that is not a
Restricted Subsidiary except to the extent that dividends or
similar distributions have been paid by such Person to HBI or a
Restricted Subsidiary;
(2) solely for purposes of calculating the amount of
Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the
Limitation on Restricted Payments covenant, the net
income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or
consolidated with HBI or any of its Restricted Subsidiaries or
all or substantially all of the property and assets of such
Person are acquired by HBI or any of its Restricted Subsidiaries;
(3) the net income of any Restricted Subsidiary to the
extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income
is at the time prohibited by the operation of the terms of its
charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such
Restricted Subsidiary;
(4) any gains or losses (on an after-tax basis)
attributable to asset dispositions;
(5) all extraordinary gains or extraordinary losses;
(6) the cumulative effect of a change in accounting
principles;
(7) any non-cash compensation expenses recorded from grants
of stock options, restricted stock, stock appreciation rights
and other equity equivalents to officers, directors and
employees, whether under FASB 123R or otherwise;
152
(8) any impairment charge or asset write off pursuant to
FASB No. 142 and No. 144 or any successor pronouncement;
(9) (a) net cash charges associated with or related to
any contemplated restructurings in an aggregate amount not to
exceed in any Fiscal Year, the Permitted Cash Restructuring
Charge Amount for such Fiscal Year and (b) net cash
restructuring charges associated with or related to the Spin Off
in an aggregate amount not to exceed, in any Fiscal Year, the
Permitted Cash Spin-Off Charge Amount for such Fiscal Year;
(10) all other non-cash charges, including all non-cash
charges associated with announced restructurings, whether
announced previously or in the future (such non-cash
restructuring charges being Non-Cash Restructuring
Charges); and
(11) income or loss attributable to discontinued operations
(including, without limitation, operations disposed of during
such period whether or not such operations were classified as
discontinued).
Affiliate means, as applied to any Person,
any other Person directly or indirectly controlling, controlled
by, or under direct or indirect common control with, such
Person. For purposes of this definition, control
(including, with correlative meanings, the terms
controlling, controlled by and
under common control with), as applied to any
Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
Applicable Premium means, with respect to any
Note on any redemption date, the greater of:
(1) 1.0% of the principal amount of the Note; or
(2) the excess of:
(a) the present value at such redemption date of
(i) the redemption price of the Note at December 15,
2008 (such redemption price being set forth in the table
appearing above under the caption Optional
Redemption), plus (ii) all required interest payments
due on the Note through December 15, 2008, (excluding
accrued but unpaid interest to the redemption date), computed
using a discount rate equal to the Treasury Rate as of such
redemption date plus 50 basis points; over
(b) the principal amount of the Note, if greater.
Asset Acquisition means (1) an
investment by HBI or any of its Restricted Subsidiaries in any
other Person pursuant to which such Person shall become a
Restricted Subsidiary or shall be merged into or consolidated
with HBI or any of its Restricted Subsidiaries or (2) an
acquisition by HBI or any of its Restricted Subsidiaries of the
property and assets of any Person other than HBI or any of its
Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person.
Asset Disposition means the sale or other
disposition by HBI or any of its Restricted Subsidiaries of
(1) all or substantially all of the Capital Stock of any
Restricted Subsidiary or (2) all or substantially all of
the assets that constitute a division or line of business of HBI
or any of its Restricted Subsidiaries.
Asset Sale means any sale, transfer or other
disposition (including by way of merger or consolidation or Sale
Leaseback Transaction) in one transaction or a series of related
transactions by HBI or any of its Restricted Subsidiaries to any
Person other than HBI or any of its Restricted Subsidiaries of:
(1) all or any of the Capital Stock of any Restricted
Subsidiary (other than sales of preferred stock that are
permitted under the Limitations on Indebtedness
covenant);
(2) all or substantially all of the property and assets of
a division or line of business of HBI or any of its Restricted
Subsidiaries; or
(3) any other property and assets (other than the Capital
Stock or other Investment in an Unrestricted Subsidiary) of HBI
or any of its Restricted Subsidiaries outside the ordinary
course of business of HBI or such Restricted Subsidiary, and
153
in each case, that is not governed by the provisions of the
Indenture applicable to mergers, consolidations and sales of
assets of HBI; provided that Asset Sale shall
not include:
(a) sales, transfers or other dispositions of assets
constituting a Permitted Investment or Restricted Payment
permitted to be made under the Limitation on Restricted
Payments covenant;
(b) sales, transfers or other dispositions of assets with a
fair market value not in excess of $25.0 million in any
transaction or series of related transactions;
(c) any sale, transfer, assignment or other disposition of
any property or equipment that has become damaged, worn out,
obsolete or otherwise unsuitable for use in connection with the
business of HBI or its Restricted Subsidiaries;
(d) the sale or discount of accounts receivable, but only
in connection with the compromise or collection thereof, or the
disposition of assets in connection with a foreclosure or
transfer in lieu of a foreclosure or other exercise of remedial
action;
(e) any exchange of like property similar to (but not
limited to) those allowable under Section 1031 of the
Internal Revenue Code; or
(f) sales or grants of licenses to use HBIs or any
Restricted Subsidiarys patents, trade secrets, know-how
and technology to the extent that such license does not prohibit
the licensor from using the patent, trade secret, know-how or
technology.
Attributable Debt in respect of a Sale and
Leaseback Transaction means, at the time of determination, the
present value of the obligation of the lessee for net rental
payments during the remaining term of the lease included in such
Sale and Leaseback Transaction, including any period for which
such lease has been extended or may, at the option of the
lessor, be extended. Such present value shall be calculated
using a discount rate equal to the rate of interest implicit in
such transaction, determined in accordance with GAAP;
provided, however, that if such sale and leaseback
transaction results in a Capital Lease Obligation, the amount of
Indebtedness represented thereby will be determined in
accordance with the definition of Capitalized Lease
Obligation.
Average Life means, at any date of
determination with respect to any debt security, the quotient
obtained by dividing (1) the sum of the products of
(a) the number of years from such date of determination to
the dates of each successive scheduled principal payment of such
debt security and (b) the amount of such principal payment
by (2) the sum of all such principal payments.
Bankruptcy Law means Title 11,
U.S. Code or any similar federal or state law for the
relief of debtors.
Board of Directors means, with respect to any
Person, the Board of Directors of such Person, any duly
authorized committee of such Board of Directors, or any Person
to which the Board of Directors has properly delegated authority
with respect to any particular matter. Unless otherwise
indicated, the Board of Directors refers to the
Board of Directors of HBI.
Capital Stock means, with respect to any
Person, any and all shares, interests, participations or other
equivalents (however designated, whether voting or non-voting)
in equity of such Person, whether outstanding on the Closing
Date or issued thereafter, including, without limitation, all
common stock and preferred stock.
Capitalized Lease means, as applied to any
Person, any lease of any property (whether real, personal or
mixed) of which the discounted present value of the rental
obligations of such Person as lessee, in conformity with GAAP,
is required to be capitalized on the balance sheet of such
Person.
Capitalized Lease Obligations means all
monetary obligations of any Person and its Subsidiaries under
any leasing or similar arrangement which, in accordance with
GAAP, should be classified as Capitalized Leases and the Stated
Maturity thereof shall be the date that the last payment of rent
or any other amount due under such Capitalized Lease prior to
the first date upon which such lease may be terminated by the
lessee without payment of a premium or penalty is due thereunder.
154
Change of Control means such time as:
(1) the adoption of a plan relating to the liquidation or
dissolution of HBI;
(2) a person or group (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act)
becomes the ultimate beneficial owner (as defined in
Rule 13d-3
under the Exchange Act) of more than 50% of the total voting
power of the Voting Stock of HBI on a fully diluted
basis; or
(3) during any period of 24 consecutive months, individuals
who at the beginning of such period constituted the Board of
Directors of HBI (together with any new directors whose election
to such Board or whose nomination for election by the
stockholders of HBI was approved by a vote of a majority of the
directors then still in office who were either directors at the
beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of HBI then in
office.
Closing Date means the date on which the
Notes were originally issued under the Indenture.
Commodity Agreement means any forward
contract, commodity swap agreement, commodity option agreement
or other similar agreement or arrangement.
Consolidated EBITDA means, for any period,
Adjusted Consolidated Net Income for such period plus, to the
extent such amount was deducted in calculating such Adjusted
Consolidated Net Income:
(1) Fixed Charges;
(2) amounts shown under the item Taxes on
HBIs income statement;
(3) depreciation expense;
(4) amortization expense;
(5)(a) non-cash compensation expense, or other non-cash expenses
or charges, arising from the sale of stock, the granting of
stock options, the granting of stock appreciation rights and
similar arrangements (including any repricing, amendment,
modification, substitution or change of any such stock, stock
option, stock appreciation rights or similar arrangements),
(b) any financial advisory fees, accounting fees, legal
fees and other similar advisory and consulting fees, cash
charges in respect of strategic market reviews, management
bonuses and early retirement of Indebtedness, and related
out-of-pocket
expenses incurred by HBI or any of its Restricted Subsidiaries
as a result of the Transaction, all determined in accordance
with GAAP, (c) to the extent non-recurring and not
capitalized, any financial advisory fees, accounting fees, legal
fees and similar advisory and consulting fees and related costs
and expenses of HBI and its Restricted Subsidiaries incurred as
a result of Asset Acquisitions, Investments, Asset Sales
permitted under the Indenture and the issuance of Capital Stock
or Indebtedness permitted hereunder, all determined in
accordance with GAAP and in each case eliminating any increase
or decrease in income resulting from non-cash accounting
adjustments made in connection with the related Asset
Acquisition, Investment or Asset Sale, (d) to the extent
the related loss is not added back pursuant to the definition of
Adjusted Consolidated Net Income, all proceeds of business
interruption insurance policies, (e) expenses incurred by
HBI or any Restricted Subsidiary to the extent reimbursed in
cash by a third party, and (f) extraordinary, unusual or
non-recurring cash charges not to exceed $10,000,000 in any
Fiscal Year; minus
(6) to the extent included in determining such Adjusted
Consolidated Net Income, the sum of (a) reversals (in whole
or in part) of any restructuring charges previously treated as
Non-Cash Restructuring Charges in any prior period, (b) all
non-cash items increasing Adjusted Consolidated Net Income,
other than (A) the accrual of revenue consistent with past
practice and (B) the reversal in such period of an accrual
of, or cash reserve for, cash expenses in a prior period, to the
extent such accrual or reserve did not increase EBITDA in a
prior period;
all as determined on a consolidated basis for HBI and its
Restricted Subsidiaries in conformity with GAAP; provided
that, if any Restricted Subsidiary is not a Wholly Owned
Restricted Subsidiary, Consolidated EBITDA shall be reduced (to
the extent not otherwise reduced in accordance with GAAP) by an
amount equal
155
to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by
(B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period
by HBI or any of its Restricted Subsidiaries.
Consolidated Interest Expense means, for any
period, the aggregate amount of interest in respect of
Indebtedness (including, without limitation, amortization of
original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in
accordance with the effective interest method of accounting; all
commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers acceptance
financing; the net costs associated with Interest Rate
Agreements; and Indebtedness that is Guaranteed or secured by
HBI or any of its Restricted Subsidiaries); imputed interest
with respect to Attributable Debt; and all but the principal
component of rentals in respect of Capitalized Lease Obligations
paid, in each case, accrued or scheduled to be paid or to be
accrued by HBI and its Restricted Subsidiaries during such
period; excluding, however, (1) any amount of such interest
of any Restricted Subsidiary if the net income of such
Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (3) of the
definition thereof (but only in the same proportion as the net
income of such Restricted Subsidiary is excluded from the
calculation of Adjusted Consolidated Net Income pursuant to
clause (3) of the definition thereof) and (2) any
premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes, all as
determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
Contingent Liability means any agreement,
undertaking or arrangement by which any Person guarantees,
endorses or otherwise becomes or is contingently liable upon (by
direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to, or otherwise to
invest in, a debtor, or otherwise to assure a creditor against
loss) the Indebtedness of any other Person (other than by
endorsements of instruments in the course of collection), or
guarantees the payment of dividends or other distributions upon
the capital securities of any other Person. The amount of any
Persons obligation under any Contingent Liability shall
(subject to any limitation with respect thereto) be deemed to be
the outstanding principal amount of the debt, obligation or
other liability guaranteed thereby.
Credit Agreement means that certain Credit
Agreement, dated as of September 5, 2006, among HBI as
borrower, the guarantors party thereto, the several banks and
other financial institutions or entities from time to time party
thereto as lenders, Citicorp USA, Inc., as administrative agent,
and Merrill Lynch. Pierce, Fenner & Smith Incorporated
and Morgan Stanley Senior Funding, Inc., as joint lead arrangers
and joint book runners.
Credit Facilities means, with respect to HBI
and its Restricted Subsidiaries, one or more debt facilities
(including the Credit Agreement and the Second Lien Credit
Agreement), commercial paper facilities, or indentures providing
for revolving credit loans, term, loans, notes or other
financings or letters of credit, or other credit facilities, in
each case, as amended, modified, renewed, refunded, replaced or
refinanced from time to time.
Currency Agreement means any foreign exchange
contract, currency swap agreement or other similar agreement or
arrangement.
Default means any event that is, or after
notice or passage of time or both would be, an Event of Default.
Determination Date, with respect to an
Interest Period, will be the second London Banking Day preceding
the first day of the Interest Period.
Disqualified Stock means any class or series
of Capital Stock of any Person that by its terms or otherwise is
(1) required to be redeemed prior to the date that is
91 days after the Stated Maturity of the Notes,
(2) redeemable at the option of the holder of such class or
series of Capital Stock at any time prior to the date that is
91 days after the Stated Maturity of the Notes or
(3) convertible into or exchangeable for Capital Stock
referred to in clause (1) or (2) above or Indebtedness
having a scheduled maturity prior to the date that is
91 days after the Stated Maturity of the Notes; provided
that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders
thereof the right to require such Person
156
to repurchase or redeem such Capital Stock upon the occurrence
of an asset sale or change of control
occurring prior to the date that is 91 days after the
Stated Maturity of the Notes shall not constitute Disqualified
Stock if the asset sale or change of
control provisions applicable to such Capital Stock are no
more favorable to the holders of such Capital Stock than the
provisions contained in Limitation on Asset Sales
and Repurchase of Notes upon a Change of Control
covenants and such Capital Stock specifically provides that such
Person will not repurchase or redeem any such stock pursuant to
such provision prior to HBIs repurchase of such Notes as
are required to be repurchased pursuant to the Limitation
on Asset Sales and Repurchase of Notes upon a Change
of Control covenants.
fair market value means the price that would
be paid in an arms-length transaction between an informed
and willing seller under no compulsion to sell and an informed
and willing buyer under no compulsion to buy, as determined in
good faith by (i) for a transaction or series of related
transactions in excess of $25.0 million, the Board of
Directors, whose determination shall be conclusive if evidenced
by a resolution of the Board of Directors or (ii) for a
transaction or series of related transactions involving
$25.0 million or less, by the chief financial officer,
whose determination shall be conclusive if evidenced by a
certificate to such effect.
Fiscal Year means any period of fifty-two or
fifty-three consecutive calendar weeks ending on the Saturday
nearest to the last day of December, with respect to all periods
beginning on or after July 2, 2006; references to a Fiscal
Year with a number corresponding to any calendar year (e.g., the
2007 Fiscal Year) refer to the Fiscal Year ending on
the Saturday nearest to the last day of December of such
calendar year; provided that in the event that the
Company gives notice to the Trustee that it intends to change
its Fiscal Year, Fiscal Year will mean any period of fifty-two
or fifty-three consecutive calendar weeks or twelve consecutive
calendar months ending on the date set forth in such notice,
provided, further, that the term Fiscal Year
2006 means the period from the date of the indenture to
December 30, 2006.
Fixed Charge Coverage Ratio means, for any
Person on any Transaction Date, the ratio of (1) the
aggregate amount of Consolidated EBITDA for the then most recent
four fiscal quarters prior to such Transaction Date for which
reports have been filed with the SEC or provided to the Trustee
(the Four Quarter Period) to (2) the aggregate
Fixed Charges during such Four Quarter Period. In making the
foregoing calculation:
(A) pro forma effect shall be given to any
Indebtedness Incurred or repaid during the period (the
Reference Period) commencing on the first day of the
Four Quarter Period and ending on the Transaction Date, in each
case, as if such Indebtedness had been Incurred or repaid on the
first day of such Reference Period;
(B) Consolidated Interest Expense attributable to interest
on any Indebtedness (whether existing or being Incurred)
computed on a pro forma basis and bearing a floating
interest rate shall be computed as if the rate in effect on the
Transaction Date (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate
Agreement has a remaining term in excess of 12 months or,
if shorter, at least equal to the remaining term of such
Indebtedness) had been the applicable rate for the entire period;
(C) pro forma effect shall be given to Asset
Dispositions and Asset Acquisitions (including giving pro forma
effect to the application of proceeds of any Asset Disposition)
that occur during such Reference Period as if they had occurred
and such proceeds had been applied on the first day of such
Reference Period; and
(D) pro forma effect shall be given to asset
dispositions and asset acquisitions (including giving pro
forma effect to the application of proceeds of any asset
disposition) that have been made by any Person that has become a
Restricted Subsidiary or has been merged with or into HBI or any
Restricted Subsidiary during such Reference Period and that
would have constituted Asset Dispositions or Asset Acquisitions
had such transactions occurred when such Person was a Restricted
Subsidiary as if such asset dispositions or asset acquisitions
were Asset Dispositions or Asset Acquisitions that occurred on
the first day of such Reference Period; provided that to
the extent that clause (C) or (D) of this
paragraph
157
requires that pro forma effect be given to an Asset
Acquisition or Asset Disposition, such pro forma
calculation shall be based upon the four full fiscal
quarters immediately preceding the Transaction Date of the
Person, or division or line of business of the Person, that is
acquired or disposed for which financial information is
available; and provided further, that such pro forma
calculation will take into account all adjustments required
by Article 11 of
Regulation S-X
to be reflected, any adjustments permitted by Article 11 of
Regulation S-X
that HBI, in its reasonable judgment, elects to make and any Pro
Forma Cost Savings arising from such transaction.
Fixed Charges means, with respect to any
Person for any period, the sum, without duplication, of:
(1) Consolidated Interest Expense plus
(2) the product of (x) the amount of all dividend
payments on any series of preferred stock of such Person or any
of its Restricted Subsidiaries (other than dividends payable
solely in Capital Stock of such Person or such Restricted
Subsidiary (other than Disqualified Stock) or to such Person or
a Restricted Subsidiary of such Person) paid, accrued or
scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective
consolidated federal, state and local income tax rate of such
Person, expressed as a decimal, as determined on a consolidated
basis in accordance with GAAP.
Foreign Subsidiary means any Restricted
Subsidiary of HBI that is an entity which is a controlled
foreign corporation under Section 957 of the Internal
Revenue Code.
GAAP means generally accepted accounting
principles in the United States of America as in effect as of
the Closing Date as determined by the Public Company Accounting
Oversight Board. All ratios and computations contained or
referred to in the Indenture shall be computed in conformity
with GAAP applied on a consistent basis, except that
calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the
Indenture shall be made without giving effect to (1) the
amortization of any expenses incurred in connection with the
offering of the Notes and (2) except as otherwise provided,
the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
Governmental Authority means the government
of the United States, any other nation or any political
subdivision thereof, whether state or local, and any agency,
authority, instrumentality, regulatory body, court, central bank
or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or
pertaining to government.
Guarantee means any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any
Indebtedness of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect,
contingent or otherwise, of such Person (1) to purchase or
pay (or advance or supply funds for the purchase or payment of)
such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arms-length
terms and are entered into in the normal course of business), to
take-or-pay,
or to maintain financial statement conditions or otherwise) or
(2) entered into for purposes of assuring in any other
manner the obligee of such Indebtedness of the payment thereof
or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term
Guarantee shall not include endorsements for
collection or deposit in the normal course of business. The term
Guarantee used as a verb has a corresponding meaning.
Hedging Obligations means, with respect to
any Person, all liabilities of such Person under foreign
exchange contracts, commodity hedging agreements, currency
exchange agreements, interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and all
other agreements or arrangements designed to protect such Person
against fluctuations in interest rates, currency exchange rates
or commodity prices.
Holder means a holder of any Notes.
158
Immaterial Subsidiary shall mean, at any
time, any Restricted Subsidiary of HBI that is designated by HBI
as an Immaterial Subsidiary if and for so long as
such Restricted Subsidiary, together with all other Immaterial
Subsidiaries, has (i) total assets at such time not
exceeding 5% of HBIs consolidated assets as of the most
recent fiscal quarter for which balance sheet information is
available and (ii) total revenues and operating profit for
the most recent
12-month
period for which income statement information is available not
exceeding 5% of HBIs consolidated revenues and operating
profit, respectively; provided that such Restricted
Subsidiary shall be an Immaterial Subsidiary only to the extent
that and for so long as all of the above requirements are
satisfied, provided, that a Restricted Subsidiary will
not be considered to be an Immaterial Subsidiary if it, directly
or indirectly, guarantees or otherwise provides credit support
for any Indebtedness of HBI.
Incur means, with respect to any
Indebtedness, to incur, create, issue, assume, Guarantee or
otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such
Indebtedness; provided that (1) any Indebtedness of
a Person existing at the time such Person becomes a Restricted
Subsidiary will be deemed to be incurred by such Restricted
Subsidiary at the time it becomes a Restricted Subsidiary and
(2) neither the accrual of interest nor the accretion of
original issue discount nor the payment of interest in the form
of additional Indebtedness (to the extent provided for when the
Indebtedness on which such interest is paid was originally
issued) shall be considered an Incurrence of Indebtedness.
Indebtedness means, with respect to any
Person at any date of determination (without duplication):
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments;
(3) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement
obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit)
securing obligations (other than obligations described in
(1) or (2) above or (5), (6) or (7) below)
entered into in the normal course of business of such Person to
the extent such letters of credit are not drawn upon or, if
drawn upon, to the extent such drawing is reimbursed no later
than the third business day following receipt by such Person of
a demand for reimbursement);
(4) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase
price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the
completion of such services, except Trade Payables;
(5) all Capitalized Lease Obligations and Attributable Debt;
(6) all Indebtedness of other Persons secured by a Lien on
any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market
value of such asset at such date of determination and
(B) the amount of such Indebtedness;
(7) all Indebtedness of other Persons Guaranteed by such
Person to the extent such Indebtedness is Guaranteed by such
Person;
(8) to the extent not otherwise included in this
definition, obligations under Commodity Agreements, Currency
Agreements and Interest Rate Agreements (other than Commodity
Agreements, Currency Agreements and Interest Rate Agreements
designed solely to protect HBI or its Restricted Subsidiaries
against fluctuations in commodity prices, foreign currency
exchange rates or interest rates and that do not increase the
Indebtedness of the obligor outstanding at any time other than
as a result of fluctuations in commodity prices, foreign
currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder); and
(9) all Disqualified Stock issued by such Person with the
amount of Indebtedness represented by such Disqualified Stock
being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price,
but excluding accrued dividends, if any.
159
The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional
obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, provided that:
(A) the amount outstanding at any time of any Indebtedness
issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as
determined in conformity with GAAP;
(B) money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment
of the interest on such Indebtedness shall not be deemed to be
Indebtedness so long as such money is held to secure
the payment of such interest; and
(C) Indebtedness shall not include:
(x) any liability for federal, state, local or other taxes;
(y) obligations in respect of performance, bid and surety
bonds and completion guarantees in respect of activities being
performed by, on behalf of or for the benefit of HBI or its
Restricted Subsidiaries; or
(z) agreements providing for indemnification, adjustment of
purchase price or similar obligations, or Guarantees or letters
of credit, surety bonds or performance bonds securing any
obligations of HBI or any of its Restricted Subsidiaries
pursuant to such agreements, in any case, Incurred in connection
with the disposition of any business, assets or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets
or Restricted Subsidiary for the purpose of financing such
acquisition), so long as the principal amount does not to exceed
the gross proceeds actually received by HBI or any Restricted
Subsidiary in connection with such disposition.
Initial Subsidiary Guarantors means each
Restricted Subsidiary of HBI (other than HBI Playtex BATH LLC
and those that are a Foreign Subsidiary or an Immaterial
Subsidiary) existing on the Closing Date.
Interest Period means the period commencing
on and including an interest payment date and ending on and
including the day immediately preceding the next succeeding
interest payment date, with the exception that the first
Interest Period shall commence on and include the date of the
Indenture and end on and include June 15, 2007.
Interest Rate Agreement means any interest
rate protection agreement, interest rate future agreement,
interest rate option agreement, interest rate swap agreement
(whether fixed to floating or floating to fixed), interest rate
cap agreement, interest rate collar agreement, interest rate
hedge agreement, option or future contract or other similar
agreement or arrangement.
Investment in any Person means any direct or
indirect advance, loan or other extension of credit (including,
without limitation, by way of Guarantee or similar arrangement,
but excluding advances to customers or suppliers in the ordinary
course of business that are, in conformity with GAAP, recorded
as accounts receivable, prepaid expenses or deposits on the
balance sheet of HBI or its Restricted Subsidiaries and
endorsements for collection or deposit arising in the ordinary
course of business) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person
and shall include (1) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary and (2) the
retention of the Capital Stock (or any other Investment) by HBI
or any of its Restricted Subsidiaries of (or in) any Person that
has ceased to be a Restricted Subsidiary, including without
limitation, by reason of any transaction permitted by
clause (3) or (4) of the Limitation on the
Issuance and Sale of Capital Stock of Restricted
Subsidiaries covenant. For purposes of the definition of
Unrestricted Subsidiary and the Limitation on
Restricted Payments covenant, (a) the amount of or a
reduction in an Investment shall be equal to the fair market
value thereof at the time such Investment is made or reduced and
(b) in the event HBI or a Restricted Subsidiary makes an
Investment by transferring assets to any Person and as part of
such transaction receives Net Cash Proceeds, the amount of such
Investment shall be
160
the fair market value of the assets less the amount of Net Cash
Proceeds so received, provided the Net Cash Proceeds are
applied in accordance with the Limitation on Asset
Sales covenant.
Leverage Ratio means, as of any date, the
ratio of
(a) Total Debt outstanding on the last day of the most
recently ended fiscal quarter for which reports have been filed
with the SEC or provided to the Trustee
to
(b) Consolidated EBITDA computed for the then most recent
four fiscal quarters prior to such date for which reports have
been filed with the SEC or provided to the Trustee;
provided that, for purposes of calculating the Leverage
Ratio with respect to the four consecutive fiscal quarter period
ending (i) December 30, 2006, Consolidated EBITDA
shall be actual Consolidated EBITDA for the fiscal quarter
ending on December 30, 2006 multiplied by four;
(ii) March 31, 2007, Consolidated EBITDA shall be
actual Consolidated EBITDA for the two fiscal quarter period
ending on March 31, 2007 multiplied by two; and
(iii) June 30, 2007, Consolidated EBITDA shall be
actual Consolidated EBITDA for the three fiscal quarter period
ending on June 30, 2007 multiplied by one and one-third.
LIBOR, with respect to an Interest Period,
will be the rate (expressed as a percentage per annum) for
deposits in United States dollars for a six-month period
beginning on the second London Banking Day after the
Determination Date that appears on Telerate Page 3750 as of
11:00 a.m., London time, on the Determination Date. If
Telerate Page 3750 does not include such a rate or is
unavailable on a Determination Date, the Calculation Agent will
request the principal London office of each of four major banks
in the London interbank market, as selected by the Calculation
Agent, to provide such banks offered quotation (expressed
as a percentage per annum), as of approximately 11:00 a.m.,
London time, on such Determination Date, to prime banks in the
London interbank market for deposits in a Representative Amount
in U.S. dollars for a six-month period beginning on the
second London Banking Day after the Determination Date. If at
least two such offered quotations are so provided, LIBOR for the
Interest Period will be the arithmetic mean of such quotations.
If fewer than two such quotations are so provided, the
Calculation Agent will request each of three major banks in New
York City, as selected by the Calculation Agent, to provide such
banks rate (expressed as a percentage per annum), as of
approximately 11:00 a.m., New York City time, on such
Determination Date, for loans in a Representative Amount in
United States dollars to leading European banks for a six-month
period beginning on the second London Banking Day after the
Determination Date. If at least two such rates are so provided,
LIBOR for the Interest Period will be the arithmetic mean of
such rates. If fewer than two such rates are so provided, then
LIBOR for the Interest Period will be LIBOR in effect with
respect to the immediately preceding Interest Period.
Lien means any mortgage, pledge, security
interest, encumbrance, lien or charge of any kind (including,
without limitation, any conditional sale or other title
retention agreement or lease in the nature thereof or any
agreement to give any security interest).
London Banking Day is any day in which
dealings in U.S. dollars are transacted or, with respect to
any future date, are expected to be transacted in the London
interbank market.
Material Adverse Effect means a material
adverse effect on (i) the business, financial condition,
operations, performance, or assets of HBI or HBI and its
Restricted Subsidiaries (other than a Receivables Subsidiary)
taken as a whole, (ii) the rights and remedies of any
Holder under the Indenture or the Registration Rights Agreement
or (iii) the ability of HBI or its Restricted Subsidiaries
to perform its obligations under the Indenture or the
Registration Rights Agreement.
Moodys means Moodys Investors
Service, Inc. and its successors and assigns.
Net Cash Proceeds means:
(a) with respect to any Asset Sale, the proceeds of such
Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the
extent corresponding to the principal, but not interest,
component thereof) when received in the form of cash or cash
equivalents and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of
161
(1) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers)
related to such Asset Sale;
(2) provisions for all taxes (whether or not such taxes
will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of
HBI and its Restricted Subsidiaries, taken as a whole;
(3) payments made to repay Indebtedness or any other
obligation outstanding at the time of such Asset Sale that
either (x) is secured by a Lien on the property or assets
sold or (y) is required to be paid as a result of such
sale; and
(4) appropriate amounts to be provided by HBI or any
Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset
Sale, all as determined in conformity with GAAP; and
(b) with respect to any issuance or sale of Capital Stock,
the proceeds of such issuance or sale in the form of cash or
cash equivalents, including payments in respect of deferred
payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in
the form of cash or cash equivalents and proceeds from the
conversion of other property received when converted to cash or
cash equivalents, net of attorneys fees, accountants
fees, underwriters or placement agents fees,
discounts or commissions and brokerage, consultant and other
fees incurred in connection with such issuance or sale and net
of taxes paid or payable as a result thereof.
Note Guarantee means any Guarantee of the
obligations of HBI under the Indenture and the Notes by any
Subsidiary Guarantor.
Offer to Purchase means an offer to purchase
Notes by HBI from the Holders commenced by mailing a notice to
the Trustee and each Holder stating:
(1) the provision of the Indenture pursuant to which the
offer is being made and that all Notes validly tendered will be
accepted for payment on a pro rata basis;
(2) the purchase price and the date of purchase, which
shall be a business day no earlier than 30 days nor later
than 60 days from the date such notice is mailed (the
Payment Date);
(3) that any Note not tendered will continue to accrue
interest pursuant to its terms;
(4) that, unless HBI defaults in the payment of the
purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after
the Payment Date;
(5) that Holders electing to have a Note purchased pursuant
to the Offer to Purchase will be required to surrender the Note,
together with the form entitled Option of the Holder to
Elect Purchase on the reverse side of the Note completed,
to the Paying Agent at the address specified in the notice prior
to the close of business on the business day immediately
preceding the Payment Date;
(6) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close
of business on the third business day immediately preceding the
Payment Date, a telegram, facsimile transmission or letter
setting forth the name of such Holder, the principal amount of
Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and
(7) that Holders whose Notes are being purchased only in
part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or integral multiples of $1,000.
On the Payment Date, HBI shall (a) accept for payment on a
pro rata basis Notes or portions thereof tendered pursuant to an
Offer to Purchase; (b) deposit with the Paying Agent money
sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (c) deliver, or cause to be
delivered, to the Trustee all Notes
162
or portions thereof so accepted together with an officers
certificate specifying the Notes or portions thereof accepted
for payment by HBI. The Paying Agent shall promptly mail to the
Holders of Notes so accepted payment in an amount equal to the
purchase price, and the Trustee shall promptly authenticate and
mail to such Holders a new Note equal in principal amount to any
unpurchased portion of the Note surrendered; provided
that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or integral multiples of $1,000.
HBI will publicly announce the results of an Offer to Purchase
as soon as practicable after the Payment Date. The Trustee shall
act as the Paying Agent for an Offer to Purchase. HBI will
comply with
Rule 14e-1
under the Exchange Act and any other securities laws and
regulations thereunder, to the extent such laws and regulations
are applicable, in the event that HBI is required to repurchase
Notes pursuant to an Offer to Purchase. To the extent that the
provisions of any securities laws or regulations conflict with
the provisions of the Indenture relating to an Offer to
Purchase, HBI will comply with the applicable securities laws
and regulations and will not be deemed to have breached its
obligations under such provisions of the Indenture by virtue of
such conflict.
Permitted Additional Restricted Payment
means, for any Fiscal Year set forth below, Restricted Payments
made by HBI in the amount set forth opposite such Fiscal Year:
|
|
|
|
|
Fiscal Year
|
|
Cash Amount
|
|
|
2006
|
|
$
|
24.0 million
|
|
2007
|
|
$
|
30.0 million
|
|
2008
|
|
$
|
36.0 million
|
|
2009
|
|
$
|
42.0 million
|
|
2010 and thereafter
|
|
$
|
48.0 million
|
|
; provided, to the extent that the amount of Permitted
Additional Restricted Payments made by HBI during any Fiscal
Year is less than the aggregate amount permitted (including
after giving effect to this proviso) for such Fiscal Year, then
such unutilized amount may be carried forward and utilized by
HBI to make Permitted Additional Restricted Payments in any
succeeding Fiscal Year or Years and provided further
that, for Fiscal Year 2009 and each Fiscal Year thereafter,
the amounts set forth above in such Fiscal Years shall be
increased by an additional $120.0 million so long as both
before and after giving effect to such Restricted Payment, the
Leverage Ratio is less than 3.75:1.00.
Permitted Business means the business of HBI
and its Subsidiaries engaged in on the Closing Date and any
other activities that are reasonably related, supportive,
complementary, ancillary or incidental thereto or reasonable
extensions thereof.
Permitted Cash Restructuring Charge Amount
means, $120.0 million in the aggregate for Fiscal Year 2006
and all Fiscal Years ending after the Closing Date.
Permitted Cash Spin-Off Charge Amount means,
for any Fiscal Year set forth below, the amount set forth
opposite such Fiscal Year:
|
|
|
|
|
Fiscal Year
|
|
Cash Amount
|
|
|
2006
|
|
$
|
20.0 million
|
|
2007
|
|
$
|
55.0 million
|
|
Permitted Investment means:
(1) an Investment in HBI or a Subsidiary Guarantor or a
Person which will, upon the making of such Investment, become a
Restricted Subsidiary;
(2) Temporary Cash Investments;
(3) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be
treated as expenses in accordance with GAAP;
(4) stock, obligations or securities received in
satisfaction of judgments;
163
(5) an Investment in an Unrestricted Subsidiary consisting
solely of an Investment in another Unrestricted Subsidiary;
(6) Commodity Agreements, Interest Rate Agreements and
Currency Agreements intended to protect HBI or its Restricted
Subsidiaries against fluctuations in commodity prices, interest
rates or foreign currency exchange rates or manage interest rate
risk;
(7) loans and advances to employees and officers of HBI and
its Restricted Subsidiaries made in the ordinary course of
business for bona fide business purposes not to exceed
$12.0 million in the aggregate at any one time outstanding;
(8) Investments in securities of trade creditors or
customers received
(a) pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of such trade
creditors or customers, or
(b) in settlement of delinquent obligations of, and other
disputes with, customers, suppliers and others, in each case
arising in the ordinary course of business or otherwise in
satisfaction of a judgment;
(9) Investments made by HBI or its Restricted Subsidiaries
consisting of consideration received in connection with an Asset
Sale made in compliance with the Limitation on Asset
Sales covenant;
(10) Investments of a Person or any of its Subsidiaries
existing at the time such Person becomes a Restricted Subsidiary
of HBI or at the time such Person merges or consolidates with
HBI or any of its Restricted Subsidiaries, in either case, in
compliance with the Indenture; provided that such
Investments were not made by such Person in connection with, or
in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of HBI or such merger or consolidation;
(11) Investments in a Receivables Subsidiary or any
Investment by a Receivables Subsidiary in any other Person under
a Permitted Securitization; provided that any Investment
in a Receivables Subsidiary is in the form of a Purchase Money
Note, contribution of additional receivables and related assets
or any equity interests;
(12) Investments to the extent made in exchange for the
Issuance of Capital Stock (other than Disqualified Stock) of HBI;
(13) any Investment made within 60 days after the date
of the commitment to make the Investment, that when such
commitment was made, would have complied with the terms of the
Indenture;
(14) repurchases of the Notes; and
(15) other Investments made since the date of the Indenture
that do not exceed, at any one time outstanding,
$100.0 million.
Permitted Liens means:
(1) Liens in connection with a Permitted Securitization;
(2) Liens existing as of the Closing Date and disclosed in
Item 7.2.3(c) of the disclosure schedule to the Credit
Agreement securing Indebtedness existing as of the Closing Date
which is identified in Item 7.2.2(c) of the disclosure
schedule to the Credit Agreement and refinancings, refundings,
reallocations, renewals or extensions of such Indebtedness;
provided that, no such Lien shall encumber any additional
property (except for accessions to such property and the
products and proceeds thereof) and the amount of Indebtedness
secured by such Lien is not increased from that existing on the
Closing Date;
(3) Liens securing Indebtedness of the type permitted by
clause (7) of the covenant entitled Limitation on
Indebtedness that, (i) such Lien is granted within
270 days after such Indebtedness is incurred, (ii) the
Indebtedness secured thereby does not exceed the lesser of the
cost or the fair market
164
value of the applicable property, improvements or equipment at
the time of such acquisition (or construction) and
(iii) such Lien secures only the assets that are the
subject of the Indebtedness referred to in such clause;
(4) Liens securing Indebtedness permitted by under
clause (7) of the covenant entitled Limitation on
Indebtedness; provided that, such Liens existed
prior to such Person becoming a Restricted Subsidiary, were not
created in anticipation thereof and attach only to specific
tangible assets of such Person;
(5) Liens in favor of carriers, warehousemen, mechanics,
repairmen, materialmen, customs and revenue authorities and
landlords and other similar statutory Liens and Liens in favor
of suppliers (including sellers of goods pursuant to customary
reservations or retention of title, in each case) granted in the
ordinary course of business for amounts not overdue for a period
of more than 60 days or are being diligently contested in
good faith by appropriate proceedings and for which adequate
reserves in accordance with GAAP shall have been set aside on
its books or with respect to which the failure to make payment
could not reasonably be expected to have a Material Adverse
Effect;
(6) Liens incurred or deposits made in the ordinary course
of business in connection with workers compensation,
unemployment insurance or other forms of governmental insurance
or benefits, or to secure performance of tenders, statutory
obligations, bids, leases, trade contracts or other similar
obligations (other than for borrowed money) entered into in the
ordinary course of business or to secure obligations on surety
and appeal bonds or performance bonds, performance and
completion guarantees and other obligations of a like nature
(including those to secure health, safety and environmental
obligations) incurred in the ordinary course of business and
(ii) obligations in respect of letters of credit or bank
guarantees that have been posted to support payment of the items
set forth in the immediately preceding clause (i);
(7) judgment Liens that are being appealed in good faith or
with respect to which execution has been stayed or the payment
of which is covered in full (subject to a customary deductible)
by insurance maintained with responsible insurance companies and
which do not otherwise result in an Event of Default;
(8) easements,
rights-of-way,
covenants, conditions, building codes, restrictions,
reservations, minor defects or irregularities in title and other
similar encumbrances and matters that would be disavowed by a
full survey of real property not interfering in any material
respect with the value or use of the affected or encumbered real
property to which such Lien is attached;
(9) Liens securing Indebtedness permitted by
clause (8) of the covenant entitled Limitation on
Indebtedness;
(10) Liens arising solely by virtue of any statutory or
common law provision relating to bankers liens, rights of
set-off or similar rights and remedies as to deposit accounts or
other funds maintained with a creditor depository institution
and Liens attaching to commodity trading accounts or other
commodities brokerage accounts incurred in the ordinary course
of business;
(11)(i) licenses, sublicenses, leases or subleases granted to
third Persons in the ordinary course of business not interfering
in any material respect with the business of HBI or any of its
Restricted Subsidiaries, (ii) other agreements with respect
to the use and occupancy of real property entered into in the
ordinary course of business or in connection with an Asset Sale
permitted by the covenant entitled Limitation on Asset
Sales or (iii) the rights reserved or vested in any
Person by the terms of any lease, license, franchise, grant or
permit held by HBI or any of its Restricted Subsidiaries or by a
statutory provision, to terminate any such lease, license,
franchise, grant or permit, or to require annual or periodic
payments as a condition to the continuance thereof;
(12) Liens on the property of HBI or any of its Restricted
Subsidiaries securing (i) the non-delinquent performance of
bids, trade contracts (other than for borrowed money), leases,
licenses and
165
statutory obligations, (ii) Contingent Liabilities on
surety and appeal bonds, and (iii) other non-delinquent
obligations of a like nature; in each case, incurred in the
ordinary course of business;
(13) Liens on Receivables transferred to a Receivables
Subsidiary under a Permitted Securitization;
(14) Liens upon specific items or inventory or other goods
and proceeds of HBI or any of its Restricted Subsidiaries
securing such Persons obligations in respect of
bankers acceptances or documentary letters of credit
issued or created for the account of such Person to facilitate
the shipment or storage of such inventory or other goods;
(15) Liens (i) (A) on advances of cash or Cash
Equivalents in favor of the seller of any property to be
acquired as a Permitted Investment to be applied against the
purchase price for such Permitted Investment and
(B) consisting of an agreement involving an Asset Sale
permitted by the covenant entitled Limitation on Asset
Sales, in each case under this clause (i), solely to
the extent such Permitted Investment or Asset Sale, as the case
may be, would have been permitted on the date of the creation of
such Lien and (ii) on earnest money deposits of cash or
Cash Equivalents made by HBI or any of its Restricted
Subsidiaries in connection with any letter of intent or purchase
agreement permitted hereunder;
(16) Liens arising from precautionary Uniform Commercial
Code financing statement filings (or similar filings under other
applicable Law) regarding leases entered into by HBI or any of
its Restricted Subsidiaries in the ordinary course of business;
(17) Liens (i) arising out of conditional sale, title
retention, consignment or similar arrangements for sale of goods
(including under Article 2 of the UCC) and Liens that are
contractual rights of set-off relating to purchase orders and
other similar agreements entered into by HBI or any of its
Restricted Subsidiaries and (ii) relating to the
establishment of depository relations with banks not given in
connection with the issuance of Indebtedness and
(iii) relating to pooled deposit or sweep accounts of HBI
or any Restricted Subsidiary to permit satisfaction of overdraft
or similar obligations in each case in the ordinary course of
business and not prohibited by this Agreement;
(18) ground leases in respect of real property on which
facilities owned or leased by HBI or any of its Restricted
Subsidiaries are located or any Liens senior to any lease,
sub-lease or
other agreement under which HBI or any of its Restricted
Subsidiaries uses or occupies any real property;
(19) Liens constituting security given to a public or
private utility or any Governmental Authority as required in the
ordinary course of business;
(20) pledges or deposits of cash and Cash Equivalents
securing deductibles, self-insurance, co-payment, co-insurance,
retentions and similar obligations to providers of insurance in
the ordinary course of business;
(21) Liens on (A) incurred premiums, dividends and
rebates which may become payable under insurance policies and
loss payments which reduce the incurred premiums on such
insurance policies and (B) rights which may arise under
State insurance guarantee funds relating to any such insurance
policy, in each case securing Indebtedness permitted to be
incurred pursuant to clause (12)(i) of the covenant
entitled Limitation on Indebtedness; and
(22) Liens for taxes not at the time delinquent or
thereafter payable without penalty or being diligently contested
in good faith by appropriate proceedings and for which adequate
reserves in accordance with GAAP shall have been set aside on
its books or with respect to which the failure to make payment
could not reasonably be expected to have a Material Adverse
Effect.
Permitted Securitization means any sale,
transfer or other disposition by HBI or any of its Restricted
Subsidiaries of Receivables and related collateral, credit
support and similar rights and any other assets that are
customarily transferred in a securitization of receivables,
pursuant to one or more securitization programs, to a
Receivables Subsidiary or a Person who is not an Affiliate of
HBI; provided that (i) the consideration to be
received by HBI and its Restricted Subsidiaries other than a
Receivables Subsidiary for any such disposition
166
consists of cash, a promissory note or a customary contingent
right to receive cash in the nature of a hold-back
or similar contingent right, (ii) no Default shall have
occurred and be continuing or would result therefrom, and
(iii) the aggregate outstanding balance of the Indebtedness
in respect of all such programs at any point in time is not in
excess of $500.0 million.
Person means any individual, corporation,
partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, limited liability company or
government or other entity.
Pro Forma Cost Savings means with respect to
any acquisition or disposition transaction, cost savings
reasonably expected to be realized in connection with that
transaction, as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced
by a resolution of the Board of Directors, in consultation with
a nationally recognized accounting firm (regardless of whether
those cost savings could then be reflected in pro forma
financial statements under GAAP,
Regulation S-X
promulgated by the SEC or any other regulation or policy of the
SEC).
Purchase Money Note means a promissory note
evidencing a line of credit, or evidencing other Indebtedness
owed to HBI or any Restricted Subsidiary in connection with a
Permitted Securitization, which note shall be repaid from cash
available to the maker of such note, other than amounts required
to be established as reserves, amounts paid to investors in
respect of interest, principal and other amounts owing to such
investors and amounts paid in connection with the purchase of
newly generated accounts receivable.
Receivable shall mean a right to receive
payment arising from a sale or lease of goods or the performance
of services by a Person pursuant to an arrangement with another
Person pursuant to which such other Person is obligated to pay
for goods or services under terms that permit the purchase of
such goods and services on credit and shall include, in any
event, any items of property that would be classified as an
account, chattel paper, payment
intangible or instrument under the UCC and any
supporting obligations.
Receivables Subsidiary shall mean any Wholly
Owned Restricted Subsidiary of HBI (or another Person in which
HBI or any Restricted Subsidiary makes an Investment and to
which HBI or one or more of its Restricted Subsidiaries transfer
Receivables and related assets) which engages in no activities
other than in connection with the financing of Receivables and
which is designated by the Board of Directors of the applicable
Restricted Subsidiary (as provided below) as a Receivables
Subsidiary and which meets the following conditions:
(a) no portion of the Indebtedness or any other obligations
(contingent or otherwise) of which:
(i) is guaranteed by HBI or any Restricted Subsidiary (that
is not a Receivables Subsidiary);
(ii) is recourse to or obligates HBI or any Restricted
Subsidiary (that is not a Receivables Subsidiary); or
(iii) subjects any property or assets of HBI or any
Restricted Subsidiary (that is not a Receivables Subsidiary),
directly or indirectly, contingently or otherwise, to the
satisfaction thereof;
(b) with which neither HBI nor any Restricted Subsidiary
(that is not a Receivables Subsidiary) has any material
contract, agreement, arrangement or understanding (other than
Standard Securitization Undertakings); and
(c) to which neither HBI nor any Restricted Subsidiary
(that is not a Receivables Subsidiary) has any obligation to
maintain or preserve such entitys financial condition or
cause such entity to achieve certain levels of operating results.
Any such designation by the Board of Directors of the applicable
Restricted Subsidiary shall be evidenced by a certified copy of
the resolution of the Board of Directors of such Restricted
Subsidiary giving effect to such designation and an officers
certificate certifying, to the best of such officers
knowledge and belief, that such designation complies with the
foregoing conditions.
167
Registration Rights Agreement means the
registration rights agreement, dated as of the Closing Date,
among HBI, the Subsidiary Guarantors and the initial purchasers,
as the same may be amended or modified from time to time in
accordance with the terms thereof.
Replacement Assets means, on any date,
property or assets (other than current assets) of a nature or
type or that are used in a Permitted Business (or an Investment
in a Permitted Business).
Representative Amount means a principal
amount of not less than U.S.$1.0 million for a single
transaction in the relevant market at the relevant time.
Restricted Subsidiary means any Subsidiary of
HBI other than an Unrestricted Subsidiary.
S&P means Standard &
Poors Ratings Group, a division of The McGraw-Hill
Companies, and its successors.
Sale and Leaseback Transaction means a
transaction whereby a Person sells or otherwise transfers assets
or properties and then or thereafter leases such assets or
properties or any part thereof or any other assets or properties
which such Person intends to use for substantially the same
purpose or purposes as the assets or properties sold or
otherwise transferred.
SEC means the United States Securities and
Exchange Commission or any successor agency.
Second Lien Credit Agreement means that
certain Second Lien Credit Agreement, dated as of
September 5, 2006, among HBI Branded Apparel Limited, Inc.,
as borrower, the guarantors party thereto, the several banks and
other financial institutions or entities from time to time party
thereto as lenders, Citicorp USA, Inc., as administrative agent,
and Merrill Lynch. Pierce, Fenner & Smith Incorporated
and Morgan Stanley Senior Funding, Inc., as joint lead arrangers
and joint book runners.
Significant Subsidiary means, any Subsidiary
that would be a significant subsidiary as defined in
Article 1,
Rule 1-02
of
Regulation S-X,
promulgated pursuant to the Securities Act, as such regulation
is in effect on the date of the Indenture.
Spin-Off means the distribution of HBIs
common stock by Sara Lee Corporation to its stockholders.
Standard Securitization Undertakings shall
mean representations, warranties, covenants and indemnities
entered into by HBI or any Restricted Subsidiary which are
reasonably customary in a securitization of Receivables.
Stated Maturity means, (1) with respect
to any debt security, the date specified in such debt security
as the fixed date on which the final installment of principal of
such debt security is due and payable and (2) with respect
to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the
fixed date on which such installment is due and payable.
Subsidiary means, with respect to any Person,
any corporation, association or other business entity of which
more than 50% of the voting power of the outstanding Voting
Stock is owned, directly or indirectly, by such Person and one
or more other Subsidiaries of such Person.
Subsidiary Guarantor means any Initial
Subsidiary Guarantor and any other Restricted Subsidiary of HBI
which provides a Note Guarantee of HBIs obligations under
the Indenture and the Notes pursuant to the Limitation on
Issuance of Guarantees by Restricted Subsidiaries covenant.
Telerate Page 3750 means the display
designated as Page 3750 on the Moneyline
Telerate service (or such other page as may replace
Page 3750 on that service).
168
Temporary Cash Investment means any of the
following:
(a) any direct obligation of (or unconditionally guaranteed
by) the United States or a State thereof (or any agency or
political subdivision thereof, to the extent such obligations
are supported by the full faith and credit of the United States
or a State thereof) maturing not more than one year after such
time;
(b) commercial paper maturing not more than 270 days
from the date of issue, which is issued by (i) a
corporation (other than an Affiliate of HBI or any Subsidiary of
HBI) organized under the laws of any State of the United States
or of the District of Columbia and rated
A-1 or
higher by S&P or
P-1 or
higher by Moodys;
(c) any certificate of deposit, time deposit or bankers
acceptance, maturing not more than one year after its date of
issuance, which is issued by any bank organized under the laws
of the United States (or any State thereof) and which has
(A) a credit rating of A2 or higher from Moodys or A
or higher from S&P and (B) a combined capital and
surplus greater than $500.0 million;
(d) any repurchase agreement having a term of 30 days
or less entered into with any commercial banking institution
satisfying the criteria set forth in clause
(c) which (i) is secured by a fully perfected
security interest in any obligation of the type described in
clause (a), and (ii) has a market value at the time
such repurchase agreement is entered into of not less than 100%
of the repurchase obligation of such commercial banking
institution thereunder;
(e) with respect to any Foreign Subsidiary, non-Dollar
denominated (i) certificates of deposit of, bankers
acceptances of, or time deposits with, any commercial bank which
is organized and existing under the laws of the country in which
such Person maintains its chief executive office or principal
place of business or is organized provided such country
is a member of the Organization for Economic Cooperation and
Development, and which has a short-term commercial paper rating
from S&P of at least
A-1
or the equivalent thereof or from Moodys of at least
P-1
or the equivalent thereof (any such bank being an
Approved Foreign Bank) and maturing within
one year of the date of acquisition and (ii) equivalents of
demand deposit accounts which are maintained with an Approved
Foreign Bank; or
(f) readily marketable obligations issued or directly and
fully guaranteed or insured by the government or any agency or
instrumentality of any member nation of the European Union whose
legal tender is the Euro and which are denominated in Euros or
any other foreign currency comparable in credit quality and
tenor to those referred to above and customarily used by
corporations for cash management purposes in any jurisdiction
outside the United States to the extent reasonably required in
connection with any business conducted by any Foreign Subsidiary
organized in such jurisdiction, having (i) one of the three
highest ratings from either Moodys or S&P and
(ii) maturities of not more than one year from the date of
acquisition thereof; provided that the full faith and
credit of any such member nation of the European Union is
pledged in support thereof.
Total Assets means the total consolidated
assets of HBI and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as shown on the most
recent balance sheet of HBI filed with the SEC or delivered to
the Trustee.
Total Debt means, on any date, the
outstanding principal amount of all:
(1) obligations of such Person for borrowed money or
advances and all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments;
(2) monetary obligations, contingent or otherwise, relative
to the face amount of all letters of credit, whether or not
drawn, and bankers acceptances issued for the account of
such Person;
(3) all Capitalized Lease Obligations of such
Person; and
(4) the full outstanding balance of trade receivables,
notes or other instruments sold with full recourse (and the
portion thereof subject to potential recourse, if sold with
limited recourse), other than in
169
any such case any thereof sold solely for purposes of collection
of delinquent accounts and other than in connection with any
Permitted Securitization,
of HBI and its Subsidiaries (other than a Receivables
Subsidiary), in each case exclusive of intercompany Indebtedness
between HBI and its Subsidiaries and any Contingent Liability in
respect of any of the foregoing.
Trade Payables means, with respect to any
Person, any accounts payable or any other indebtedness or
monetary obligation to trade creditors created, assumed or
Guaranteed by such Person or any of its Subsidiaries arising in
the ordinary course of business in connection with the
acquisition of goods or services.
Transaction Date means, with respect to the
Incurrence of any Indebtedness, the date such Indebtedness is to
be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
Transaction means, collectively, (i) the
consummation of the Spin-Off, (ii) the payment by HBI to
Sara Lee Corporation of dividends and other payments in the
approximate amount of $2.4 billion, (iii) the transfer
of all the assets and certain associated liabilities of the
branded apparel Americas/Asia business of Sara Lee Corporation
to HBI and the sale to HBI of certain related trademarks and
other intellectual property, (iv) the entering into of the
documents governing the Credit Agreement and Second Lien Credit
Agreement and the making of the loans thereunder, (v) the
receipt by HBI of the proceeds from unsecured increasing rate
loans and the entering into of the related documents in an
aggregate amount of $500.0 million (the Bridge
Loans), (vi) the issuance of the Notes and the
redemption of the Bridge Loans, and (vii) the payment of
fees and expenses in connection and in accordance with the
foregoing.
Treasury Rate means, as of any redemption
date, the yield to maturity as of such redemption date of United
States Treasury securities with a constant maturity (as compiled
and published in the most recent Federal Reserve Statistical
Release H.15 (519) that has become publicly available at
least two business days prior to the redemption date (or, if
such Statistical Release is no longer published, any publicly
available source of similar market data)) most nearly equal to
the period from the redemption date to December 15, 2008;
provided, however, that if the period from the redemption
date to December 15, 2008, is less than one year, the
weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year will be
used.
Unrestricted Subsidiary means (1) any
Foreign Supply Chain Entity (as defined in the Credit Agreement)
listed on Item 1.1 of the Disclosure Schedule (as defined
in the Credit Agreement) to the Credit Agreement, as of the
Closing Date, (2) any Subsidiary of HBI that at the time of
determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and
(3) any Subsidiary of an Unrestricted Subsidiary. The Board
of Directors may designate any Restricted Subsidiary (including
any newly acquired or newly formed Subsidiary of HBI) to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital
Stock of, or owns or holds any Lien on any property of, HBI or
any Restricted Subsidiary; provided that (A) any
Guarantee by HBI or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be
deemed an Incurrence of such Indebtedness and an
Investment by HBI or such Restricted Subsidiary (or
both, if applicable) at the time of such designation;
(B) either (I) the Subsidiary to be so designated has
total assets of $1.0 million or less or (II) if such
Subsidiary has assets greater than $1.0 million, such
designation would be permitted under the Limitation on
Restricted Payments covenant; and (C) if applicable,
the Incurrence of Indebtedness and the Investment referred to in
clause (A) of this proviso would be permitted under
the Limitation on Indebtedness and Limitation
on Restricted Payments covenants. The Board of Directors
may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that (a) no Default or Event of
Default shall have occurred and be continuing at the time of or
after giving effect to such designation and (b) all Liens
and Indebtedness of such Unrestricted Subsidiary outstanding
immediately after such designation would, if Incurred at such
time, have been permitted to be Incurred (and shall be deemed to
have been Incurred) for all purposes of the Indenture. Any such
designation by the Board of Directors shall be evidenced to the
Trustee by promptly
170
filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an
officers certificate certifying that such designation
complied with the foregoing provisions.
U.S. Government Obligations means
securities that are (1) direct obligations of the United
States of America for the payment of which its full faith and
credit is pledged or (2) obligations of a Person controlled
or supervised by and acting as an agency or instrumentality of
the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation
by the United States of America, which, in either case, are not
callable or redeemable at the option of HBI thereof at any time
prior to the Stated Maturity of the Notes, and shall also
include a depository receipt issued by a bank or trust company
as custodian with respect to any such U.S. Government
Obligation or a specific payment of interest on or principal of
any such U.S. Government Obligation held by such custodian
for the account of the holder of a depository receipt;
provided that (except as required by law) such custodian
is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal
of the U.S. Government Obligation evidenced by such
depository receipt.
Voting Stock means with respect to any
Person, Capital Stock of any class or kind ordinarily having the
power to vote for the election of directors, managers or other
voting members of the governing body of such Person.
Wholly Owned of any specified Person, as of
any date, means the Capital Stock of such Person (other than
directors and foreign nationals qualifying shares)
that is at the time entitled to vote in the election of the
Board of Directors of such Person is owned by the referent
Person.
171
SUMMARY
OF MATERIAL U.S. FEDERAL INCOME TAX
CONSIDERATIONS
The following is a summary of certain U.S. federal income
tax considerations relating to the purchase, ownership and
disposition of the Exchange Notes but does not purport to be a
complete analysis of all the potential tax considerations. This
summary is based on the provisions of the Internal Revenue Code,
the Treasury regulations promulgated or proposed thereunder,
judicial authority, published administrative positions of the
IRS and other applicable authorities, all as in effect on the
date of this document, and all of which are subject to change,
possibly on a retroactive basis. We have not sought any ruling
from the IRS with respect to the statements made and the
conclusions reached in the following summary, and there can be
no assurance that the IRS will agree with our statements and
conclusions. This summary deals only with holders that that will
hold the Exchange Notes as capital assets within the
meaning of Section 1221 of the Internal Revenue Code
(generally, property held for investment). This summary does not
purport to deal with all aspects of U.S. federal income
taxation that might be relevant to particular holders in light
of their personal investment circumstances or status, nor does
it address tax considerations applicable to investors that may
be subject to special tax rules, such as certain financial
institutions, tax-exempt organizations, S corporations,
partnerships or other pass-through entities, insurance
companies, broker-dealers, dealers or traders in securities or
currencies, certain former citizens or residents of the U.S.,
and taxpayers subject to the alternative minimum tax. This
summary also does not discuss Exchange Notes held as part of a
hedge, straddle, synthetic security or conversion transaction,
constructive sale, or other integrated transaction, or
situations in which the functional currency of a
U.S. holder is not the U.S. dollar. Moreover, the
effect of any applicable estate, state, local or
non-U.S. tax
laws is not discussed.
THE FOLLOWING DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY
AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE.
INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE
U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS
AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE ESTATE TAX
LAWS OR THE LAWS OF ANY STATE, LOCAL OR
NON-U.S. TAXING
JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
General
The term U.S. holder means a beneficial owner
of an Exchange Note that is, for U.S. federal income tax
purposes:
|
|
|
|
|
an individual citizen or resident of the U.S., including an
alien individual who is a lawful permanent resident of the
United States or meets the substantial presence test
under Section 7701(b) of the Internal Revenue Code;
|
|
|
|
a corporation, or other entity taxable as a corporation for
U.S. federal income tax purposes, created or organized
under the laws of the U.S. or any state thereof (including
the District of Columbia);
|
|
|
|
an estate, the income of which is subject to U.S. federal
income taxation regardless of its source; or
|
|
|
|
a trust, if (i) a court within the U.S. is able to
exercise primary jurisdiction over its administration and one or
more U.S. persons within the meaning of the
Internal Revenue Code has the authority to control all of its
substantial decisions, or (ii) in the case of a trust that
was treated as a domestic trust under the law in effect before
1997, a valid election is in place under applicable Treasury
regulations to treat such trust as a domestic trust.
|
The term
non-U.S. holder
means a beneficial owner of a note that is not a
U.S. holder.
If an entity treated as a partnership for U.S. federal
income tax purposes holds the Exchange Notes, the tax treatment
of a partner generally will depend upon the status of the
partner and the activities of the partnership. A holder that is
a partner of a partnership purchasing the Exchange Notes should
consult with its own tax advisor about the U.S. federal
income tax consequences of purchasing, holding and disposing of
the Exchange Notes.
172
U.S. holders
Interest
All of the Exchange Notes bear interest at a floating rate that
is either a qualified floating rate or an objective rate under
the rules regarding original issue discount. Moreover, we do not
intend to issue the Exchange Notes at a discount that will
exceed a de minimis amount of original issue discount within the
meaning of Section 1273 of the Internal Revenue Code.
Accordingly, interest on an Exchange Note will generally be
includable in the gross income of a U.S. holder as ordinary
income at the time the interest is received or accrued, in
accordance with the U.S. holders regular method of
accounting for U.S. federal income tax purposes.
Additional
Interest
In certain circumstances (see Description of the Exchange
Notes Optional Redemption, and
Description of the Exchange Notes Repurchase
of Notes upon a Change in Control), we may be obligated to
pay amounts in excess of the floating rate interest or principal
on the Exchange Notes. It is possible that the IRS could assert
that the additional amounts which we would be obliged to pay are
contingent payments. In that case, the Exchange
Notes may be treated as contingent payment debt instruments for
U.S. federal income tax purposes, with the result that the
timing, amount of income included and the character of income
recognized may be different from the consequences discussed
herein. However, the Treasury regulations regarding debt
instruments that provide for one or more contingent payments
state that, for purposes of determining whether a debt
instrument is a contingent payment debt instrument,
contingencies which are remote or incidental as of the issue
date are ignored. We believe that as of the issue date the
likelihood of our paying additional amounts is remote and,
accordingly, we do not intend to treat the Exchange Notes as
contingent payment debt instruments. Such determination by us is
binding on all U.S. holders unless a U.S. holder
discloses its differing position in a statement attached to its
timely filed U.S. federal income tax return for the taxable
year during which a note was acquired. Our determination is not,
however, binding on the IRS, and if the IRS were to challenge
this determination, a U.S. holder might be required to
accrue income on its Exchange Notes in excess of the floating
rate interest and to treat as ordinary income rather than
capital gain any income realized on the taxable disposition of
an Exchange Note before the resolution of the contingencies. In
the event a contingency occurs, it would affect the amount and
timing of the income recognized by a U.S. holder. This
discussion assumes that the Exchange Notes will not be treated
as contingent payment debt instruments for U.S. federal
income tax purposes.
Exchange
Offer
The exchange of Notes for Exchange Notes in the exchange offer
will not constitute a taxable event to U.S. holders.
Consequently, a U.S. holder will not recognize gain upon
receipt of an Exchange Note, the U.S. holders tax
basis in the Exchange Note will be the same as its tax basis in
the corresponding Note immediately before the exchange, and the
U.S. holders holding period in the Exchange Note will
include the U.S. holders holding period in the Note
exchanged therefor.
Market
Discount and Bond Premium
A U.S. Holder who purchases an Exchange Note at a
market discount that exceeds a statutorily defined
de minimis amount will be subject to the market
discount rules of the Internal Revenue Code. A
U.S. Holder who purchases an Exchange Note at a premium,
(i.e., for an amount in excess of the amount payable at
maturity), will be subject to the bond premium amortization
rules of the Internal Revenue Code.
In general, market discount is the excess of a
notes issue price, within the meaning of Section 1273
of the Internal Revenue Code, over its purchase price. If a
U.S. Holder purchases an Exchange Note at a market
discount, any gain on sale of that Exchange Note
attributable to the U.S. Holders unrecognized accrued
market discount would generally be treated as ordinary income to
the U.S. Holder. In addition, a U.S. Holder who
acquires a debt instrument at a market discount may be required
to defer a portion of any interest expense that otherwise may be
deductible on any indebtedness incurred or maintained to
purchase or carry the debt
173
instrument until the U.S. Holder disposes of the debt
instrument in a taxable transaction. Instead of recognizing any
market discount upon a disposition of a note and being required
to defer any applicable interest expense, a U.S. Holder may
elect to include market discount in income currently as the
discount accrues. The current income inclusion election, once
made, applies to all market discount obligations acquired on or
after the first day of the first taxable year in which the
election applies, and may not be revoked without the consent of
the IRS.
In the event that an Exchange Note is treated as purchased at a
premium, that premium will be amortizable by a U.S. Holder
as an offset to interest income (with a corresponding reduction
in the U.S. Holders tax basis) on a consent yield
basis if the U.S. Holder elects to do so. This election
will also apply to all other debt instruments held by the
U.S. Holder during the year in which the election is made
and to all debt instruments acquired after that year.
Redemption
If a Change of Control occurs, holders of the Exchange Notes
will have the right to require us to repurchase all or any part
(equal to $1,000 or an integral multiple of $1,000 in excess
thereof) of their Exchange Notes. Applicable Treasury
regulations provide that the right of holders of the Exchange
Notes to require redemption of the Exchange Notes upon the
occurrence of a Change of Control will not affect the yield to
maturity of the Exchange Notes if the likelihood of the
occurrence, as of the date the Exchange Notes are issued, is
remote or incidental. We intend to take the position that the
likelihood of a repurchase as a result of a Change of Control is
remote or incidental under applicable Treasury regulations and,
thus, do not intend to treat this possibility as affecting the
yield to maturity of the Exchange Notes (for purposes of the
original issue discount provisions of the Internal Revenue Code).
We have the option to redeem all or a portion of the Exchange
Notes at certain times prior to the maturity date. Under
applicable Treasury regulations, we will be deemed to exercise
any option to redeem the Exchange Notes if the exercise of such
option would lower the yield of the debt instrument. We believe,
and intend to take the position for purposes of determining
yield and maturity (for purposes of the original issue discount
provisions of the Internal Revenue Code), that we will not be
treated as having exercised any option to redeem the Exchange
Notes under these rules.
Sale,
Exchange, Redemption, Retirement or Other Taxable Disposition of
the Exchange Notes
Upon the sale, exchange, redemption, retirement or other taxable
disposition of an Exchange Note, a U.S. holder generally
will recognize capital gain or loss equal to the difference
between (i) the amount realized on the sale, exchange,
redemption, retirement or other taxable disposition (not
including the amount allocable to accrued and unpaid interest)
and (ii) that holders adjusted tax basis in the
Exchange Note. The amount realized will be equal to the sum of
the amount of cash and the fair market value of any property
received in exchange for the Exchange Note. A
U.S. holders adjusted tax basis in an Exchange Note
generally will equal that holders cost reduced by any
principal payments received and any bond premium amortized by
such holder plus any market discount previously included in
income by the holder. The capital gain or loss will be long-term
capital gain or loss if the U.S. holders holding
period in the note is more than one year at the time of sale,
exchange, redemption or other taxable disposition. Subject to
limited exceptions, capital losses cannot be used to offset
ordinary income. The deductibility of capital losses is subject
to limitation.
A U.S. holder that sells an Exchange Note between interest
payment dates will be required to treat as ordinary interest
income an amount equal to interest that has accrued through the
date of sale and has not been previously included in income.
Information
Reporting and Backup Withholding Tax
In general, we must report certain information to the IRS with
respect to payments of principal, premium, if any, and interest
on an Exchange Note (including the payment of liquidated
damages) and payments of the proceeds of the sale or other
disposition of an Exchange Note to certain non-corporate
U.S. holders. The payor (which may be us or an intermediate
payor) will be required to withhold backup withholding tax at
the
174
applicable statutory rate if (i) the payee fails to furnish
a taxpayer identification number (TIN) to the payor
or establish an exemption from backup withholding, (ii) the
IRS notifies the payor that the TIN furnished by the payee is
incorrect, (iii) there has been a notified payee
underreporting with respect to interest or dividends described
in Section 3406(c) of the Internal Revenue Code or
(iv) the payee has not certified under penalties of perjury
that it has furnished a correct TIN and such U.S. holder is
not subject to backup withholding under the Internal Revenue
Code. Certain holders (including among others, corporations and
certain tax-exempt organizations) are generally not subject to
backup withholding. U.S. holders should consult their
personal tax advisor regarding their qualification for an
exemption from backup withholding and the procedures for
obtaining such exemption, if applicable. Backup withholding is
not an additional tax. Any amounts withheld under the backup
withholding rules from a payment to a U.S. holder will be
allowed as a credit against that holders U.S. federal
income tax liability and may entitle the holder to a refund,
provided that the required information is furnished in a timely
manner to the IRS.
Non-U.S. holders
Interest
Interest paid to a
non-U.S. holder
will not be subject to U.S. federal income or withholding
tax of 30% (or, if applicable, a lower rate under an applicable
income tax treaty) under the portfolio interest
exception of the Internal Revenue Code provided that:
|
|
|
|
|
such holder does not directly or indirectly, actually or
constructively, own 10% or more of the total combined voting
power of all of our classes of stock;
|
|
|
|
such holder is not a controlled foreign corporation that is
related to us through sufficient stock ownership and is not a
bank that received such interest on an extension of credit made
pursuant to a loan agreement entered into in the ordinary course
of its trade or business;
|
|
|
|
either (1) the
non-U.S. holder
certifies in a statement provided to us or our paying agent,
under penalties of perjury, that it is not a
U.S. person within the meaning of the Internal
Revenue Code and provides its name and address (generally by
completing IRS
Form W-8BEN),
(2) a securities clearing organization, bank or other
financial institution that holds customers securities in
the ordinary course of its trade or business and holds the
Exchange Notes on behalf of the
non-U.S. holder
certifies to us or our paying agent under penalties of perjury
that it, or the financial institution between it and the
non-U.S. holder,
has received from the
non-U.S. holder
a statement, under penalties of perjury, that such holder is not
a U.S. person and provides us or our paying
agent with a copy of such statement or (3) the
non-U.S. holder
holds its Exchange Notes directly through a qualified
intermediary and certain conditions are satisfied; and
|
|
|
|
the interest is not effectively connected with such
holders conduct of a trade or business within the U.S.
|
Even if the above conditions are not met, a
non-U.S. holder
may be entitled to an exemption from U.S. federal
withholding tax if the interest is effectively connected to a
U.S. trade or business as described below or to a reduction
in or an exemption from U.S. federal income and withholding
tax on interest under an income tax treaty between the U.S. and
the
non-U.S. holders
country of residence. To claim a reduction or exemption under an
income tax treaty, a
non-U.S. holder
must generally complete an IRS
Form W-8BEN
and claim the reduction or exemption on the form. In some cases,
a
non-U.S. holder
may instead be permitted to provide documentary evidence of its
claim to the intermediary, or a qualified intermediary may
already have some or all of the necessary evidence in its files.
The certification requirements described above may in some
circumstances require a
non-U.S. holder
that claims the benefit of an income tax treaty to also provide
its U.S. taxpayer identification number on IRS
Form W-8BEN.
175
Exchange
Offer
The exchange of Notes for Exchange Notes in the Exchange Offer
will not constitute a taxable event for U.S. federal income
tax purposes. See
U.S. holders Exchange
Offer.
Additional
Interest
We believe that the possibility of additional interest is remote
and, accordingly, we do not intend to treat the Exchange Notes
as contingent payment debt instruments for U.S. federal
income tax purposes. This discussion assumes that the Exchange
Notes will not be treated as contingent payment debt instruments
for U.S. federal income tax purposes. See
U.S. holders Additional
Interest.
Sale,
Exchange, Redemption or other Taxable Disposition of Exchange
Notes
A
non-U.S. holder
of an Exchange Note generally will not be subject to
U.S. federal income tax or withholding tax on any gain
realized on a sale, exchange, redemption or other taxable
disposition of the note (other than any amount representing
accrued but unpaid interest on the note, which is subject to the
rules discussed above under
Non-U.S. holders
Interest) unless (i) the gain is effectively
connected with a U.S. trade or business of the
non-U.S. holder
or (ii) in the case of a
non-U.S. holder
who is an individual, such holder is present in the
U.S. for a period or periods aggregating 183 days or
more during the taxable year of the disposition and certain
other requirements are met.
U.S. Trade
or Business
If interest or gain from a disposition of the Exchange Notes is
effectively connected with a
non-U.S. holders
conduct of a U.S. trade or business and, if an income tax
treaty applies and the
non-U.S. holder
maintains a U.S. permanent establishment to
which the interest or gain is attributable, the
non-U.S. holder
may be subject to U.S. federal income tax on the interest
or gain on a net basis in the same manner as if it were a
U.S. holder. If interest income received with respect to
the Exchange Notes is taxable on a net basis, the 30%
withholding tax described above will not apply (assuming an
appropriate certification is provided, generally IRS
Form W-8ECI).
A foreign corporation that is a holder of a note may also be
subject to a branch profits tax equal to 30% of its effectively
connected earnings and profits for the taxable year, subject to
certain adjustments, unless it qualifies for a lower rate under
an applicable income tax treaty. For this purpose, interest on a
note or gain realized on the disposition of a note will be
included in earnings and profits if the interest or gain is
effectively connected with the conduct by the foreign
corporation of a trade or business in the U.S.
Information
Reporting and Backup Withholding Tax
U.S. backup withholding tax generally will not apply to
payments on a note to a
non-U.S. holder
if the
non-U.S. holder
is exempt from withholding tax on interest as described above in
Non-U.S. holders
Interest. However, information reporting may still apply
with respect to interest payments.
Payment of proceeds made to a
non-U.S. holder
outside the U.S. from a disposition of Exchange Notes
effected through a
non-U.S. office
of a
non-U.S. broker
generally will not be subject to backup withholding and
information reporting. However, payment of proceeds from a
disposition of Exchange Notes by a
non-U.S. holder
effected through a
non-U.S. office
of a broker may be subject to information reporting (but
generally not backup withholding) if the broker is (i) a
U.S. person (within the meaning of the Internal Revenue
Code); (ii) a controlled foreign corporation for
U.S. federal income tax purposes; (iii) a foreign
person 50% or more of whose gross income is effectively
connected with a U.S. trade or business for a specified
three-year period; or (iv) a foreign partnership, if at any
time during its tax year, one or more of its partners are
U.S. persons, as defined in Treasury regulations, who in
the aggregate hold more than 50% of the income or capital
interest in the partnership or if, at any time during its tax
year, the foreign partnership is engaged in a U.S. trade or
business.
176
Payment of the proceeds from a disposition by a
non-U.S. holder
of a note made to or through the U.S. office of a broker is
generally subject to information reporting and backup
withholding unless the holder or beneficial owner certifies as
to its taxpayer identification number or otherwise establishes
an exemption from information reporting and backup withholding.
Non-U.S. holders
should consult their own tax advisors regarding application of
withholding and backup withholding in their particular
circumstance and the availability of and procedure for obtaining
an exemption from withholding and backup withholding under
current Treasury regulations. In this regard, the current
Treasury regulations provide that a certification may not be
relied on if we or our agent (or other payor) knows or has
reason to know that the certification may be false. Backup
withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from a payment to a
non-U.S. holder
will be allowed as a credit against the holders
U.S. federal income tax liability or may be refunded,
provided the required information is furnished in a timely
manner to the IRS.
177
PLAN OF
DISTRIBUTION
Each participating broker-dealer that receives Exchange Notes
for its own account pursuant to the exchange offer must
acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a
participating broker-dealer in connection with resales of
Exchange Notes received by it in exchange for Notes where such
Notes were acquired as a result of market-making activities or
other trading activities. We have agreed that for a period of
one year after the expiration date, we will make this
prospectus, as amended or supplemented, available to any
participating broker-dealer for use in connection with any such
resale.
We will not receive any proceeds from any sales of the Exchange
Notes by participating broker-dealers. Exchange Notes received
by participating broker-dealers for their own account pursuant
to the exchange offer may be sold from time to time in one or
more transactions in the
over-the-counter
market, in negotiated transactions, through the writing of
options on the Exchange Notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to
or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such
participating broker-dealer
and/or the
purchasers of any such Exchange Notes. Any participating
broker-dealer that resells the Exchange Notes that were received
by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such
Exchange Notes may be deemed to be an underwriter
within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by
delivering a prospectus, a participating broker-dealer will not
be deemed to admit that it is an underwriter within
the meaning of the Securities Act.
For a period of one year after the expiration date we will
promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any participating
broker-dealer that requests such documents in the letter of
transmittal.
Prior to the exchange offer, there has not been any public
market for the Notes. The Notes have not been registered under
the Securities Act and will be subject to restrictions on
transferability to the extent that they are not exchanged for
Exchange Notes by holders who are entitled to participate in
this exchange offer. The holders of Notes, other than any holder
that is our affiliate within the meaning of Rule 405 under
the Securities Act, who are not eligible to participate in the
exchange offer are entitled to certain registration rights, and
we may be required to file a shelf registration statement with
respect to their Notes. The Exchange Notes will constitute a new
issue of securities with no established trading market. We do
not intend to list the Exchange Notes on any national securities
exchange or to seek the admission thereof to trading in the
National Association of Securities Dealers Automated Quotation
System. Accordingly, no assurance can be given that an active
public or other market will develop for the Exchange Notes or as
to the liquidity of the trading market for the Exchange Notes.
If a trading market does not develop or is not maintained,
holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at
all. If a market for the Exchange Notes develops, any such
market may be discontinued at any time.
178
LEGAL
MATTERS
That the exchange notes are binding obligations of the issuer
and that the guarantees are binding obligations of the
guarantors organized in the State of Delaware and other legal
matters, including the tax-free nature of the exchange, will be
passed upon on our behalf by Kirkland & Ellis LLP, a
limited liability partnership that includes professional
corporations, Chicago, Illinois. That the guarantees are binding
obligations of the guarantor organized in the State of Colorado
will be passed upon on our behalf by Hogan & Hartson
LLP.
EXPERTS
The combined and consolidated financial statements of
Hanesbrands Inc. as of December 30, 2006, July 1, 2006, July 2,
2005 and July 3, 2004, and for the six months ended December 30,
2006 and for each of the three years in the period ended July 1,
2006, included in this Prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or
the SEC, a registration statement on
Form S-4
(Reg.
No. 333-142371)
with respect to the securities being offered hereby. This
prospectus does not contain all of the information contained in
the registration statement, including the exhibits and
schedules. You should refer to the registration statement,
including the exhibits and schedules, for further information
about us and the securities being offered hereby. Statements we
make in this prospectus about certain contracts or other
documents are not necessarily complete. When we make such
statements, we refer you to the copies of the contracts or
documents that are filed as exhibits to the registration
statement because those statements are qualified in all respects
by reference to those exhibits. As described below, the
registration statement, including exhibits and schedules is on
file at the offices of the SEC and may be inspected without
charge.
We file annual, quarterly and special reports, proxy statements
and other information with the SEC. You can inspect, read and
copy these reports, proxy statements and other information at
the public reference facilities the SEC maintains at 100 F
Street, N.E., Washington, D.C. 20549.
We make available free of charge at www.hanesbrands.com (in the
Investors section) copies of materials we file with,
or furnish to, the SEC. You can also obtain copies of these
materials at prescribed rates by writing to the Public Reference
Section of the SEC at 100 F Street, N.E., Washington, D.C.
20549. You can obtain information on the operation of the public
reference facilities by calling the SEC at
1-800-SEC-0330.
The SEC also maintains a website at www.sec.gov that makes
available reports, proxy statements and other information
regarding issuers that file electronically with it. By referring
to our website, www.hanesbrands.com, we do not incorporate our
website or its contents into this prospectus or the registration
statement of which this prospectus forms a part.
179
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Hanesbrands Inc.:
In our opinion, the accompanying combined and consolidated
financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of
Hanesbrands Inc. at December 30, 2006, July 1, 2006,
and July 2, 2005 and the results of its operations and its
cash flows for the six months ended December 30, 2006 and
each of the three years in the period ended July 1, 2006 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related combined
and consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Notes 15 and 16 to the combined and
consolidated financial statements, the Company changed the
manner in which it accounts for its defined benefit pension and
other postretirement plans effective December 30, 2006.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 21, 2007, except for
Note 24 as to which the date is
April 25, 2007
F-2
HANESBRANDS
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
Cost of sales
|
|
|
1,530,119
|
|
|
|
2,987,500
|
|
|
|
3,223,571
|
|
|
|
3,092,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
720,354
|
|
|
|
1,485,332
|
|
|
|
1,460,112
|
|
|
|
1,540,715
|
|
Selling, general and
administrative expenses
|
|
|
547,469
|
|
|
|
1,051,833
|
|
|
|
1,053,654
|
|
|
|
1,087,964
|
|
Gain on curtailment of
postretirement benefits
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
11,278
|
|
|
|
(101
|
)
|
|
|
46,978
|
|
|
|
27,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
190,074
|
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
425,285
|
|
Other expenses
|
|
|
7,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
70,753
|
|
|
|
17,280
|
|
|
|
13,964
|
|
|
|
24,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
111,920
|
|
|
|
416,320
|
|
|
|
345,516
|
|
|
|
400,872
|
|
Income tax expense (benefit)
|
|
|
37,781
|
|
|
|
93,827
|
|
|
|
127,007
|
|
|
|
(48,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
Diluted
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
96,309
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
Diluted
|
|
|
96,620
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
See accompanying notes to Combined and Consolidated Financial
Statements.
F-3
HANESBRANDS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
155,973
|
|
|
$
|
298,252
|
|
|
$
|
1,080,799
|
|
Trade accounts receivable less
allowances of $27,709 at December 30, 2006, $28,817 in
fiscal 2006, and $27,676 in fiscal 2005
|
|
|
488,629
|
|
|
|
536,241
|
|
|
|
595,247
|
|
Inventories
|
|
|
1,216,501
|
|
|
|
1,236,586
|
|
|
|
1,262,557
|
|
Deferred tax assets
|
|
|
136,178
|
|
|
|
102,498
|
|
|
|
30,745
|
|
Other current assets
|
|
|
73,899
|
|
|
|
48,765
|
|
|
|
59,800
|
|
Due from related entities
|
|
|
|
|
|
|
273,428
|
|
|
|
26,194
|
|
Notes receivable from parent
companies
|
|
|
|
|
|
|
1,111,167
|
|
|
|
90,551
|
|
Funding receivable with parent
companies
|
|
|
|
|
|
|
161,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,071,180
|
|
|
|
3,768,623
|
|
|
|
3,145,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, net
|
|
|
556,866
|
|
|
|
617,021
|
|
|
|
558,657
|
|
Trademarks and other identifiable
intangibles, net
|
|
|
137,181
|
|
|
|
136,364
|
|
|
|
145,786
|
|
Goodwill
|
|
|
281,525
|
|
|
|
278,655
|
|
|
|
278,781
|
|
Deferred tax assets
|
|
|
318,927
|
|
|
|
94,893
|
|
|
|
118,762
|
|
Other noncurrent assets
|
|
|
69,941
|
|
|
|
8,330
|
|
|
|
9,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,435,620
|
|
|
$
|
4,903,886
|
|
|
$
|
4,257,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders or Parent Companies Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
221,707
|
|
|
$
|
207,648
|
|
|
$
|
196,455
|
|
Bank overdraft.
|
|
|
834
|
|
|
|
275,385
|
|
|
|
|
|
Accrued liabilities and other
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and employee benefits
|
|
|
121,703
|
|
|
|
141,535
|
|
|
|
115,080
|
|
Advertising and promotion
|
|
|
72,436
|
|
|
|
61,839
|
|
|
|
62,855
|
|
Restructuring
|
|
|
17,029
|
|
|
|
21,938
|
|
|
|
51,677
|
|
Other
|
|
|
153,833
|
|
|
|
156,060
|
|
|
|
163,691
|
|
Notes payable to banks
|
|
|
14,264
|
|
|
|
3,471
|
|
|
|
83,303
|
|
Current portion of long-term debt
|
|
|
9,375
|
|
|
|
|
|
|
|
|
|
Due to related entities
|
|
|
|
|
|
|
43,115
|
|
|
|
59,943
|
|
Funding payable with parent
companies
|
|
|
|
|
|
|
|
|
|
|
317,184
|
|
Notes payable to parent companies
|
|
|
|
|
|
|
246,830
|
|
|
|
228,152
|
|
Notes payable to related entities
|
|
|
|
|
|
|
466,944
|
|
|
|
323,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
611,181
|
|
|
|
1,624,765
|
|
|
|
1,601,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,484,000
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefits
|
|
|
203,750
|
|
|
|
8,218
|
|
|
|
1,149
|
|
Other noncurrent liabilities
|
|
|
67,418
|
|
|
|
41,769
|
|
|
|
52,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,366,349
|
|
|
|
1,674,752
|
|
|
|
1,654,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders or parent
companies equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock (50,000,000
authorized shares; $.01 par value) Issued and
outstanding None
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (500,000,000
authorized shares; $.01 par value) Issued and
outstanding 96,312,458 at December 30, 2006
|
|
|
963
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
94,852
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
33,024
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
loss
|
|
|
(59,568
|
)
|
|
|
(8,384
|
)
|
|
|
(18,209
|
)
|
Parent companies equity
investment
|
|
|
|
|
|
|
3,237,518
|
|
|
|
2,620,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders or parent
companies equity
|
|
|
69,271
|
|
|
|
3,229,134
|
|
|
|
2,602,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders or parent companies equity
|
|
$
|
3,435,620
|
|
|
$
|
4,903,886
|
|
|
$
|
4,257,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Combined and Consolidated Financial
Statements.
F-4
HANESBRANDS
Six
months ended December 30, 2006 and years ended July 1,
2006, July 2, 2005 and July 3, 2004
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Parent
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Companies
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Equity
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Investment
|
|
|
Total
|
|
|
Balances at June 28,
2003
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(30,077
|
)
|
|
$
|
2,267,525
|
|
|
$
|
2,237,448
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449,552
|
|
|
|
449,552
|
|
Net transactions with parent
companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,661
|
|
|
|
112,661
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,680
|
)
|
|
|
|
|
|
|
(6,680
|
)
|
Net unrealized loss on qualifying
cash flow hedges, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,389
|
|
|
|
|
|
|
|
4,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at July 3,
2004
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(32,368
|
)
|
|
$
|
2,829,738
|
|
|
$
|
2,797,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,509
|
|
|
|
218,509
|
|
Net transactions with parent
companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(427,676
|
)
|
|
|
(427,676
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,187
|
|
|
|
|
|
|
|
15,187
|
|
Net unrealized loss on qualifying
cash flow hedges, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,028
|
)
|
|
|
|
|
|
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at July 2,
2005
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(18,209
|
)
|
|
$
|
2,620,571
|
|
|
$
|
2,602,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
322,493
|
|
|
|
322,493
|
|
Net transactions with parent
companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,454
|
|
|
|
294,454
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,518
|
|
|
|
|
|
|
|
13,518
|
|
Net unrealized loss on qualifying
cash flow hedges, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,693
|
)
|
|
|
|
|
|
|
(3,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at July 1,
2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8,384
|
)
|
|
$
|
3,237,518
|
|
|
$
|
3,229,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from July 2, 2006
through September 4, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,115
|
|
|
|
41,115
|
|
Net transactions with parent
companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(793,133
|
)
|
|
|
(793,133
|
)
|
Payments to Sara Lee Corporation in
connection with the spin off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,400,000
|
)
|
|
|
(2,400,000
|
)
|
Consummation of spin off
transaction on September 5, 2006, including distribution of
Hanesbrands Inc. common stock by Sara Lee Corporation
|
|
|
96,306
|
|
|
|
963
|
|
|
|
84,537
|
|
|
|
|
|
|
|
|
|
|
|
(85,500
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
10,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,176
|
|
Exercise of stock options
|
|
|
6
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
Net income from September 5,
2006 through December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,024
|
|
|
|
|
|
|
|
|
|
|
|
33,024
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,989
|
)
|
|
|
|
|
|
|
(5,989
|
)
|
Minimum pension and post-retirement
liability, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,677
|
)
|
|
|
|
|
|
|
(63,677
|
)
|
Adoption of SFAS 158, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,079
|
|
|
|
|
|
|
|
19,079
|
|
Net unrealized loss on qualifying
cash flow hedges, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 30,
2006
|
|
|
96,312
|
|
|
$
|
963
|
|
|
$
|
94,852
|
|
|
$
|
33,024
|
|
|
$
|
(59,568
|
)
|
|
$
|
|
|
|
$
|
69,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Combined and Consolidated Financial
Statements.
F-5
HANESBRANDS
Combined and Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
69,946
|
|
|
|
105,173
|
|
|
|
108,791
|
|
|
|
105,517
|
|
Amortization of intangibles
|
|
|
3,466
|
|
|
|
9,031
|
|
|
|
9,100
|
|
|
|
8,712
|
|
Impairment charges on intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,880
|
|
Restructuring
|
|
|
(812
|
)
|
|
|
(4,220
|
)
|
|
|
2,064
|
|
|
|
(1,548
|
)
|
Gain on curtailment of
postretirement benefits
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on early extinguishment of
debt
|
|
|
7,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs
|
|
|
2,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
15,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
3,485
|
|
|
|
(46,804
|
)
|
|
|
66,710
|
|
|
|
31,259
|
|
Other
|
|
|
1,693
|
|
|
|
1,456
|
|
|
|
1,942
|
|
|
|
4,842
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
22,004
|
|
|
|
59,403
|
|
|
|
(39,572
|
)
|
|
|
2,553
|
|
Inventories
|
|
|
23,191
|
|
|
|
69,215
|
|
|
|
58,924
|
|
|
|
(78,154
|
)
|
Other assets
|
|
|
(38,726
|
)
|
|
|
21,169
|
|
|
|
45,351
|
|
|
|
(1,727
|
)
|
Due to and from related entities
|
|
|
|
|
|
|
(5,048
|
)
|
|
|
19,972
|
|
|
|
(8,827
|
)
|
Accounts payable
|
|
|
17,546
|
|
|
|
(673
|
)
|
|
|
1,076
|
|
|
|
(12,005
|
)
|
Accrued liabilities and other
|
|
|
(36,689
|
)
|
|
|
(20,574
|
)
|
|
|
14,004
|
|
|
|
(37,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
136,079
|
|
|
|
510,621
|
|
|
|
506,871
|
|
|
|
471,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(29,764
|
)
|
|
|
(110,079
|
)
|
|
|
(67,135
|
)
|
|
|
(63,633
|
)
|
Acquisitions of business
|
|
|
(6,666
|
)
|
|
|
(2,436
|
)
|
|
|
(1,700
|
)
|
|
|
|
|
Proceeds from sales of assets
|
|
|
12,949
|
|
|
|
5,520
|
|
|
|
8,959
|
|
|
|
4,507
|
|
Other
|
|
|
450
|
|
|
|
(3,666
|
)
|
|
|
(204
|
)
|
|
|
(2,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(23,031
|
)
|
|
|
(110,661
|
)
|
|
|
(60,080
|
)
|
|
|
(61,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital lease
obligations
|
|
|
(3,088
|
)
|
|
|
(5,542
|
)
|
|
|
(5,442
|
)
|
|
|
(4,730
|
)
|
Borrowings on notes payable to banks
|
|
|
10,741
|
|
|
|
7,984
|
|
|
|
88,849
|
|
|
|
79,987
|
|
Repayments on notes payable to banks
|
|
|
(3,508
|
)
|
|
|
(93,073
|
)
|
|
|
(5,546
|
)
|
|
|
(79,987
|
)
|
Issuance of debt under credit
facilities
|
|
|
2,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of debt issuance
|
|
|
(50,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments to Sara Lee Corporation
|
|
|
(2,424,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of debt under credit
facilities
|
|
|
(106,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Floating Rate Senior
Notes
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of bridge loan facility
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options
exercised
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in bank
overdraft.
|
|
|
(274,551
|
)
|
|
|
275,385
|
|
|
|
|
|
|
|
|
|
Borrowings (repayments) on notes
payable to related entities
|
|
|
|
|
|
|
143,898
|
|
|
|
(113,359
|
)
|
|
|
(24,178
|
)
|
Net transactions with parent
companies
|
|
|
193,255
|
|
|
|
(1,251,962
|
)
|
|
|
4,499
|
|
|
|
(13,782
|
)
|
Net transactions with related
entities
|
|
|
(195,381
|
)
|
|
|
(259,026
|
)
|
|
|
(10,378
|
)
|
|
|
16,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(253,872
|
)
|
|
|
(1,182,336
|
)
|
|
|
(41,377
|
)
|
|
|
(25,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in foreign
exchange rates on cash
|
|
|
(1,455
|
)
|
|
|
(171
|
)
|
|
|
1,231
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
(142,279
|
)
|
|
|
(782,547
|
)
|
|
|
406,645
|
|
|
|
384,338
|
|
Cash and cash equivalents at
beginning of year
|
|
|
298,252
|
|
|
|
1,080,799
|
|
|
|
674,154
|
|
|
|
289,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
155,973
|
|
|
$
|
298,252
|
|
|
$
|
1,080,799
|
|
|
$
|
674,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Combined and Consolidated Financial
Statements.
F-6
(1) Background
On February 10, 2005, Sara Lee Corporation (Sara
Lee) announced an overall transformation plan to drive
long-term growth and performance, which included spinning off
Sara Lees apparel business in the Americas and Asia (the
Branded Apparel Americas and Asia Business). In
connection with the spin off, Sara Lee incorporated Hanesbrands
Inc., a Maryland corporation (Hanesbrands and,
together with its consolidated subsidiaries, the
Company), to which it would transfer the assets and
liabilities related to the Branded Apparel Americas and Asia
Business. On August 31, 2006, Sara Lee transferred to the
Company substantially all the assets and liabilities, at
historical cost, comprising the Branded Apparel Americas and
Asia Business.
On September 5, 2006, as a condition to the distribution to
Sara Lees stockholders of all of the outstanding shares of
the common stock of Hanesbrands, the Company distributed to Sara
Lee a cash dividend payment of $1,950,000 and repaid a loan from
Sara Lee in the amount of $450,000, and Sara Lee distributed to
its stockholders all of the outstanding shares of
Hanesbrands common stock, with each stockholder receiving
one share of Hanesbrands common stock for each eight
shares of Sara Lees common stock that they held as of the
August 18, 2006 record date. As a result of such
distribution, Sara Lee ceased to own any equity interest in the
Company and the Company became an independent, separately
traded, publicly held company.
The Combined and Consolidated Financial Statements reflect the
consolidated operations of Hanesbrands Inc. and its subsidiaries
as a separate, stand-alone entity subsequent to
September 5, 2006, in addition to the historical operations
of the Branded Apparel Americas and Asia Business which were
operated as part of Sara Lee prior to the spin off. These
Combined and Consolidated Financial Statements do not include
Sara Lees European branded apparel operations or its
private label business in the U.K. which have historically been
operated and managed separately from the Branded Apparel
Americas and Asia Business and have been or will be disposed of
separately by Sara Lee. Under Sara Lees ownership, certain
of the Branded Apparel Americas and Asia Businesss
operations were divisions of Sara Lee and not separate legal
entities, while the Branded Apparel Americas and Asia
Businesss foreign operations were subsidiaries of Sara
Lee. Because a direct ownership relationship did not exist among
the various units comprising the Branded Apparel Americas and
Asia Business prior to the spin off on September 5, 2006,
Sara Lees parent companies equity investment is
shown in lieu of stockholders equity in the Combined and
Consolidated Financial Statements. Subsequent to the spin off on
September 5, 2006, the Company began accumulating its
retained earnings and recognized the par value and
paid-in-capital
in connection with the issuance of approximately
96,306 shares of common stock.
Prior to the spin off on September 5, 2006, the Branded
Apparel Americas and Asia Business utilized the services of Sara
Lee for certain functions. These services included providing
working capital, as well as certain legal, finance, internal
audit, financial reporting, tax advisory, insurance, global
information technology, environmental matters and human resource
services, including various corporate-wide employee benefit
programs. The cost of these services has been allocated to the
Company and included in the Combined and Consolidated Financial
Statements for periods prior to the spin off on
September 5, 2006. The allocations were determined on the
basis which Sara Lee and the Branded Apparel Americas and Asia
Business considered to be reasonable reflections of the
utilization of services provided by Sara Lee. A more detailed
discussion of the relationship with Sara Lee prior to the spin
off on September 5, 2006, including a description of the
costs which have been allocated to the Branded Apparel Americas
and Asia Business, as well as the method of allocation, is
included in Note 19 to the Combined and Consolidated
Financial Statements.
Management believes the assumptions underlying the Combined and
Consolidated Financial Statements for these periods are
reasonable. However, the Combined and Consolidated Financial
Statements included
F-7
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
herein for the period through September 5, 2006 do not
necessarily reflect the Branded Apparel Americas and Asia
Businesss operations, financial position and cash flows in
the future or what its results of operations, financial position
and cash flows would have been had the Branded Apparel Americas
and Asia Business been a stand-alone company during the periods
presented.
On October 26, 2006, our Board of Directors approved a
change in our fiscal year end from the Saturday closest to
June 30 to the Saturday closest to December 31. As a
result of this change, the Combined and Consolidated Financial
Statements include presentation of the transition period
beginning on July 2, 2006 and ending on December 30,
2006. Fiscal years 2006, 2005 and 2004 included 52, 52, and
53-weeks,
respectively. Unless otherwise stated, references to years
relate to fiscal years.
The following table presents certain financial information for
the six months ended December 30, 2006 and
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 30, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
(unaudited)
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
2,319,839
|
|
Cost of sales
|
|
|
1,530,119
|
|
|
|
1,556,860
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
720,354
|
|
|
|
762,979
|
|
Selling, general and
administrative expenses
|
|
|
547,469
|
|
|
|
505,866
|
|
Gain on curtailment of
postretirement benefits
|
|
|
(28,467
|
)
|
|
|
|
|
Restructuring
|
|
|
11,278
|
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
190,074
|
|
|
|
257,452
|
|
Other expenses
|
|
|
7,401
|
|
|
|
|
|
Interest expense, net
|
|
|
70,753
|
|
|
|
8,412
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
111,920
|
|
|
|
249,040
|
|
Income tax expense
|
|
|
37,781
|
|
|
|
60,424
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
188,616
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.77
|
|
|
$
|
1.96
|
|
Diluted
|
|
$
|
0.77
|
|
|
$
|
1.96
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
96,309
|
|
|
|
96,306
|
|
Diluted
|
|
|
96,620
|
|
|
|
96,306
|
|
(2) Summary
of Significant Accounting Policies
|
|
(a)
|
Combination
and Consolidation
|
The Combined and Consolidated Financial Statements include the
accounts of the Company, its controlled subsidiary companies
which in general are majority owned entities, and the accounts
of variable interest entities (VIEs) for which the Company is
deemed the primary beneficiary, as defined by the Financial
Accounting Standards Boards (FASB) Interpretation
No. 46, Consolidation of Variable Interest Entities
(FIN 46) and related interpretations. Excluded
from the accounts of the Company are Sara Lee entities which
maintained legal ownership of certain of the Companys
divisions (Parent Companies) until the spinoff on
F-8
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
September 5, 2006. The results of companies acquired or
disposed of during the year are included in the Combined and
Consolidated Financial Statements from the effective date of
acquisition, or up to the date of disposal. All intercompany
balances and transactions have been eliminated in consolidation.
In January 2003, the FASB issued FIN 46, which addresses
consolidation by business enterprises of VIEs that either:
(1) do not have sufficient equity investment at risk to
permit the entity to finance its activities without additional
subordinated financial support, or (2) have equity
investors that lack an essential characteristic of a controlling
financial interest. Throughout calendar 2003, the FASB released
numerous proposed and final FASB Staff Positions (FSPs)
regarding FIN 46, which both clarified and modified
FIN 46s provisions. In December 2003, the FASB issued
Interpretation No. 46
(FIN 46-R),
which replaced FIN 46.
FIN 46-R
retains many of the basic concepts introduced in FIN 46;
however, it also introduced a new scope exception for certain
types of entities that qualify as a business as
defined in
FIN 46-R,
revised the method of calculating expected losses and residual
returns for determination of the primary beneficiary, included
new guidance for assessing variable interests, and codified
certain FSPs on FIN 46. The Company adopted the provisions
of
FIN 46-R
in 2004.
The Company assessed its business relationship and the
underlying contracts with certain vendors, as well as all other
investments in businesses historically accounted for under the
equity method, and determined that consolidation of certain VIEs
was required.
In June 2002, the Company entered into a fixed supply contract
with a third party sewing operation. The Company evaluated the
contract, and although the Company had no equity interest in the
business, it was determined that it was the primary beneficiary
and beginning in 2004, the Company consolidated the business. In
the first quarter of fiscal 2006, the terms of the supply
contract changed and the operation no longer qualified for
consolidation as a VIE. Beginning in 2005, the Company
consolidated a second VIE, an Israeli manufacturer and supplier
of yarn. The Company has a 49% ownership interest in the Israeli
joint venture, however, based upon certain terms of the supply
contract, the Company has a disproportionate share of expected
losses and residual returns. The Company continues to
consolidate this VIE through the six months ended
December 30, 2006.
The effect of consolidating the above mentioned VIEs was the
inclusion of $10,632 of total assets and $8,290 of total
liabilities at December 30, 2006, $13,589 of total assets
and $8,666 of total liabilities at July 1, 2006, and
$21,396 of total assets and $13,219 of total liabilities at
July 2, 2005 on the Combined and Consolidated Balance
Sheets.
In relation to the Companys ownership of the Israeli joint
venture, the Company reported a minority interest of $5,574,
$4,935 and $8,100 in the Other noncurrent
liabilities line of the Combined and Consolidated Balance
Sheets at December 30, 2006, July 1, 2006 and
July 2, 2005, respectively.
The preparation of Combined and Consolidated Financial
Statements in conformity with U.S. generally accepted
accounting principles requires management to make use of
estimates and assumptions that affect the reported amount of
assets and liabilities, certain financial statement disclosures
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results may vary from these estimates.
F-9
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
(c)
|
Foreign
Currency Translation
|
Foreign currency-denominated assets and liabilities are
translated into U.S. dollars at exchange rates existing at
the respective balance sheet dates. Translation adjustments
resulting from fluctuations in exchange rates are recorded as a
separate component of other comprehensive loss within
stockholders or parent companies equity. The Company
translates the results of operations of its foreign operations
at the average exchange rates during the respective periods.
Gains and losses resulting from foreign currency transactions,
the amounts of which are not material for any of the periods
presented, are included in the Selling, general and
administrative expenses line of the Combined and
Consolidated Statements of Income.
|
|
(d)
|
Sales
Recognition and Incentives
|
The Company recognizes sales when title and risk of loss passes
to the customer. The Company records a sales reduction for
returns and allowances based upon historical return experience.
The Company earns royalty revenues through license agreements
with manufacturers of other consumer products that incorporate
certain of the Companys brands. The Company accrues
revenue earned under these contracts based upon reported sales
from the licensee. The Company offers a variety of sales
incentives to resellers and consumers of its products, and the
policies regarding the recognition and display of these
incentives within the Combined and Consolidated Statements of
Income are as follows:
Discounts,
Coupons, and Rebates
The Company recognizes the cost of these incentives at the later
of the date at which the related sale is recognized or the date
at which the incentive is offered. The cost of these incentives
is estimated using a number of factors, including historical
utilization and redemption rates. All cash incentives of this
type are included in the determination of net sales. The Company
includes incentives offered in the form of free products in the
determination of cost of sales.
Volume-Based
Incentives
These incentives typically involve rebates or refunds of cash
that are redeemable only if the reseller completes a specified
number of sales transactions. Under these incentive programs,
the Company estimates the anticipated rebate to be paid and
allocates a portion of the estimated cost of the rebate to each
underlying sales transaction with the customer. The Company
includes these amounts in the determination of net sales.
Cooperative
Advertising
Under these arrangements, the Company agrees to reimburse the
reseller for a portion of the costs incurred by the reseller to
advertise and promote certain of the Companys products.
The Company recognizes the cost of cooperative advertising
programs in the period in which the advertising and promotional
activity first takes place. The Company generally includes the
costs of these incentives in the determination of net sales,
unless certain criteria under EITF
01-09,
Accounting for Consideration Given by a Vendor to a
Customer, are met which would result in classification of
the costs in the Selling, general and administrative
expenses line of the Combined and Consolidated Statements
of Income.
F-10
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Fixtures
and Racks
Store fixtures and racks are periodically provided to resellers
to display Company products. The Company expenses the cost of
these fixtures and racks in the period in which they are
delivered to the resellers. The Company includes the costs of
these amounts in the determination of net sales.
Advertising costs, which include the development and production
of advertising materials and the communication of these
materials through various forms of media, are expensed in the
period the advertising first takes place. The Company recognized
advertising expense in the Selling, general and
administrative expenses caption in the Combined and
Consolidated Statements of Income of $99,786 in the six months
ended December 30, 2006, $190,934 in fiscal 2006, $179,980
in fiscal 2005 and $188,695 in fiscal 2004.
|
|
(f)
|
Shipping
and Handling Costs
|
Revenue received for shipping and handling costs is included in
net sales and was $11,711 in the six months ended
December 30, 2006, $20,405 in fiscal 2006, $14,504 in
fiscal 2005 and $14,418 in fiscal 2004. Shipping costs, that
comprise payments to third party shippers, and handling costs,
which consist of warehousing costs in the Companys various
distribution facilities, were $123,850 in the six months ended
December 30, 2006, $235,690 in fiscal 2006, $246,770 in
fiscal 2005 and $246,353 in fiscal 2004. The Company recognizes
shipping, handling and distribution costs in the Selling,
general and administrative expenses line of the Combined
and Consolidated Statements of Income.
The Company incurs expenses for printing catalogs for products
to aid in the Companys sales efforts. The Company
initially records these expenses as a prepaid item and charges
it against selling, general and administrative expenses over
time as the catalog is distributed into the stream of commerce.
Expenses are recognized at a rate that approximates historical
experience with regard to the timing and amount of sales
attributable to a catalog distribution.
|
|
(h)
|
Research
and Development
|
Research and development costs are expensed as incurred and are
included in the Selling, general and administrative
expenses line of the Combined and Consolidated Statements
of Income. Research and development expense was $23,460 in the
six months ended December 30, 2006, $54,571 in fiscal year
2006, $51,364 in fiscal year 2005, $53,120 in fiscal year 2004.
|
|
(i)
|
Cash
and Cash Equivalents
|
All highly liquid investments with a maturity of three months or
less at the time of purchase are considered to be cash
equivalents. Prior to the spin off from Sara Lee on
September 5, 2006, a significant portion of our cash and
cash equivalents were in the Companys bank accounts that
were part of Sara Lees global cash funding system. With
respect to accounts in the Sara Lee global cash funding system,
the bank had a right to offset the accounts of the Company
against the other Sara Lee accounts.
F-11
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
(j)
|
Accounts
Receivable Valuation
|
Accounts receivable are stated at their net realizable value.
The allowance for doubtful accounts reflects the Companys
best estimate of probable losses inherent in the receivables
portfolio determined on the basis of historical experience,
specific allowances for known troubled accounts and other
currently available information.
Inventories are stated at the lower of cost or market. Rebates,
discounts and other cash consideration received from a vendor
related to inventory purchases are reflected as reductions in
the cost of the related inventory item, and are therefore
reflected in cost of sales when the related inventory item is
sold. During the six months ended December 30, 2006, the
Company elected to convert all inventory valued by the
last-in,
first-out, or LIFO, method to the
first-in,
first-out, or FIFO, method. In accordance with the
Statement of Financial Accounting Standards (SFAS) No. 154,
Accounting Changes and Error Corrections (SFAS 154),
a change from the LIFO to FIFO method of inventory valuation
constitutes a change in accounting principle. Historically,
inventory valued under the LIFO method, which was 4% of total
inventories, would have the same value if measured under the
FIFO method. Therefore, the conversion has no retrospective
reporting impact.
Property is stated at historical cost and depreciation expense
is computed using the straight-line method over the lives of the
assets. Machinery and equipment is depreciated over periods
ranging from three to 25 years and buildings and building
improvements over periods of up to 40 years. A change in
the depreciable life is treated as a change in accounting
estimate and the accelerated depreciation is accounted for in
the period of change and future periods. Additions and
improvements that substantially extend the useful life of a
particular asset and interest costs incurred during the
construction period of major properties are capitalized. Repairs
and maintenance costs are expensed as incurred. Upon sale or
disposition of an asset, the cost and related accumulated
depreciation are removed from the accounts.
Property is tested for recoverability whenever events or changes
in circumstances indicate that its carrying value may not be
recoverable. Such events include significant adverse changes in
the business climate, several periods of operating or cash flow
losses, forecasted continuing losses or a current expectation
that an asset or an asset group will be disposed of before the
end of its useful life. Recoverability of property is evaluated
by a comparison of the carrying amount of an asset or asset
group to future net undiscounted cash flows expected to be
generated by the asset or asset group. If these comparisons
indicate that an asset is not recoverable, the impairment loss
recognized is the amount by which the carrying amount of the
asset exceeds the estimated fair value. When an impairment loss
is recognized for assets to be held and used, the adjusted
carrying amount of those assets is depreciated over its
remaining useful life. Restoration of a previously recognized
impairment loss is not permitted under U.S. generally
accepted accounting principles.
|
|
(m)
|
Trademarks
and Other Identifiable Intangible Assets
|
The primary identifiable intangible assets of the Company are
trademarks and computer software. Identifiable intangibles with
finite lives are amortized and those with indefinite lives are
not amortized. The estimated useful life of a finite-lived
intangible asset is based upon a number of factors, including
the effects of demand, competition, expected changes in
distribution channels and the level of maintenance expenditures
F-12
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
required to obtain future cash flows. Finite-lived trademarks
are being amortized over periods ranging from five to
30 years, while computer software is being amortized over
periods ranging from two to ten years.
Identifiable intangible assets that are subject to amortization
are evaluated for impairment using a process similar to that
used in evaluating elements of property. Identifiable intangible
assets not subject to amortization are assessed for impairment
at least annually and as triggering events occur. The impairment
test for identifiable intangible assets not subject to
amortization consists of comparing the fair value of the
intangible asset to its carrying amount. An impairment loss is
recognized for the amount by which the carrying value exceeds
the fair value of the asset. In assessing fair value, management
relies on a number of factors to discount anticipated future
cash flows including operating results, business plans and
present value techniques. Rates used to discount cash flows are
dependent upon interest rates and the cost of capital at a point
in time. There are inherent uncertainties related to these
factors and managements judgment in applying them to the
analysis of intangible asset impairment.
Goodwill is the amount by which the purchase price exceeds the
fair value of the assets acquired and liabilities assumed in a
business combination. When a business combination is completed,
the assets acquired and liabilities assumed are assigned to the
reporting unit or units of the Company given responsibility for
managing, controlling and generating returns on these assets and
liabilities. The Company has determined that the reporting units
are at the operating segment level. In many instances, all of
the acquired assets and assumed liabilities are assigned to a
single reporting unit and in these cases all of the goodwill is
assigned to the same reporting unit. In those situations in
which the acquired assets and liabilities are allocated to more
than one reporting unit, the goodwill to be assigned to each
reporting unit is determined in a manner similar to how the
amount of goodwill recognized in a business combination is
determined.
Goodwill is not amortized; however, it is assessed for
impairment at least annually and as triggering events occur. The
annual review is performed at the end of the second quarter of
each fiscal year. Recoverability of goodwill is evaluated using
a two-step process. The first step involves comparing the fair
value of a reporting unit to its carrying value. If the carrying
value of the reporting unit exceeds its fair value, the second
step of the process involves comparing the implied fair value to
the carrying value of the goodwill of that reporting unit. If
the carrying value of the goodwill of a reporting unit exceeds
the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to such excess.
In evaluating the recoverability of goodwill, it is necessary to
estimate the fair values of the reporting units. In making this
assessment, management relies on a number of factors to discount
anticipated future cash flows including operating results,
business plans and present value techniques. Rates used to
discount cash flows are dependent upon interest rates and the
cost of capital at a point in time. There are inherent
uncertainties related to these factors and managements
judgment in applying them to the analysis of goodwill impairment.
|
|
(o)
|
Stock-Based
Compensation
|
The employees of the Company participated in the stock-based
compensation plans of Sara Lee prior to the Companys spin
off on September 5, 2006. As a result of the spin off and
consistent with the terms of the awards under Sara Lees
plans, the outstanding Sara Lee stock options granted will
generally expire six months after the spin off date. In
connection with the spin off, vesting for all nonvested
service-based Sara Lee restricted stock units (RSUs)
was accelerated to the spin off date resulting in the
recognition of $5,447
F-13
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
of additional compensation expense for the six months ended
December 30, 2006. An insignificant number of
performance-based Sara Lee RSUs remained unvested through the
spin off date.
In connection with the spin off, the Company established the
Hanesbrands Inc. Omnibus Incentive Plan of 2006, the
(Hanesbrands OIP) to award stock options, stock
appreciation rights, restricted stock, restricted stock units,
deferred stock units, performance shares and cash to its
employees, non-employee directors and employees of its
subsidiaries to promote the interests of the Company and incent
performance and retention of employees.
On July 3, 2005, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment (SFAS No. 123(R))
using the modified prospective method. SFAS No. 123(R)
requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments based upon
the grant date fair value of those awards. Under the modified
prospective method of adopting SFAS No. 123(R), the
Company recognized compensation cost for all share-based
payments granted after July 3, 2005, plus any awards
granted to employees prior to July 3, 2005 that remained
unvested at that time. Under this method of adoption, no
restatement of prior periods is required. The cumulative effect
of adopting SFAS No. 123(R) was immaterial in fiscal
2006.
Prior to July 3, 2005, the Company recognized the cost of
employee services received in exchange for Sara Lee equity-based
instruments in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25). APB No. 25 required the
use of the intrinsic value method, which measures compensation
cost as the excess, if any, of the quoted market price of the
stock over the amount the employee must pay for the stock.
Compensation expense for substantially all equity-based awards
was measured under APB No. 25 on the date the awards were
granted. Under APB No. 25, no compensation expense has been
recognized for stock options, replacement stock options and
shares purchased by our employees under the Sara Lee Employee
Stock Purchase Plan (Sara Lee ESPP) during the years prior to
fiscal 2006. Compensation expense was recognized under APB
No. 25 for the cost of Sara Lee RSUs granted to employees
during the years prior to 2006.
During 2005 and 2004, had the cost of employee services received
in exchange for equity instruments been recognized based on the
grant-date fair value of those instruments in accordance with
the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-based Compensation
(SFAS 123), the Companys net income would have been
impacted as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2005
|
|
|
2004
|
|
|
Reported net income
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
Plus stock-based
employee compensation included in reported net income, net of
related tax effects
|
|
|
6,606
|
|
|
|
4,270
|
|
Less total stock-based
employee compensation expense determined under the fair-value
method for all awards, net of related tax effects
|
|
|
(10,854
|
)
|
|
|
(9,402
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
214,261
|
|
|
$
|
444,420
|
|
|
|
|
|
|
|
|
|
|
For the periods prior to the spin off on September 5, 2006,
income taxes were prepared on a separate return basis as if the
Company had been a group of separate legal entities. As a
result, actual tax transactions that would not have occurred had
the Company been a separate entity have been eliminated in the
preparation of Combined and Consolidated Financial Statements
for such periods. Until the Company entered into a tax
F-14
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
sharing agreement with Sara Lee in connection with the spin off,
there was no formal tax sharing agreement between the Company
and Sara Lee. The tax sharing agreement allocates
responsibilities between the Company and Sara Lee for taxes and
certain other tax matters. Under the tax sharing agreement, Sara
Lee generally is liable for all U.S. federal, state, local
and foreign income taxes attributable to the Company with
respect to taxable periods ending on or before September 5,
2006. Sara Lee also is liable for income taxes attributable to
the Company with respect to taxable periods beginning before
September 5, 2006 and ending after September 5, 2006,
but only to the extent those taxes are allocable to the portion
of the taxable period ending on September 5, 2006. The
Company is generally liable for all other taxes attributable to
it. Changes in the amounts payable or receivable by the Company
under the stipulations of this agreement may impact the
Companys financial position and cash flows in any period.
Within 180 days after Sara Lee files its final consolidated
tax return for the period that includes September 5, 2006,
Sara Lee is required to deliver to the Company a computation of
the amount of deferred taxes attributable to the Companys
United States and Canadian operations that would be included on
the Companys balance sheet as of September 6, 2006.
If substituting the amount of deferred taxes as finally
determined for the amount of estimated deferred taxes that were
included on that balance sheet at the time of the spin off
causes a decrease in the net book value reflected on that
balance sheet, then Sara Lee will be required to pay the Company
the amount of such decrease. If such substitution causes an
increase in the net book value reflected on that balance sheet,
then the Company will be required to pay Sara Lee the amount of
such increase. For purposes of this computation, the
Companys deferred taxes are the amount of deferred tax
benefits (including deferred tax consequences attributable to
deductible temporary differences and carryforwards) that would
be recognized as assets on the Companys balance sheet
computed in accordance with GAAP, but without regard to
valuation allowances, less the amount of deferred tax
liabilities (including deferred tax consequences attributable to
deductible temporary differences) that would be recognized as
liabilities on the Companys balance sheet computed in
accordance with GAAP, but without regard to valuation
allowances. Neither the Company nor Sara Lee will be required to
make any other payments to the other with respect to deferred
taxes.
Deferred taxes are recognized for the future tax effects of
temporary differences between financial and income tax reporting
using tax rates in effect for the years in which the differences
are expected to reverse. Given continuing losses in certain
jurisdictions in which the Company operates on a separate return
basis, a valuation allowance has been established for the
deferred tax assets in these specific locations. Net operating
loss carryforwards, charitable contribution carryforwards and
capital loss carryforwards have been determined in these
Combined and Consolidated Financial Statements as if the Company
had been a group of legal entities separate from Sara Lee, which
results in different carryforward amounts than those shown by
Sara Lee. Prior to the spin off, Sara Lee periodically estimated
the probable tax obligations using historical experience in tax
jurisdictions and informed judgments. There are inherent
uncertainties related to the interpretation of tax regulations
in the jurisdictions in which the Company transacts business.
The judgments and estimates made at a point in time may change
based on the outcome of tax audits, as well as changes to or
further interpretations of regulations. The Company adjusts its
income tax expense in the period in which these events occur. If
such changes take place, there is a risk that the tax rate may
increase or decrease in any period.
|
|
(q)
|
Financial
Instruments
|
The Company uses financial instruments, including forward
exchange, option and swap contracts, to manage its exposures to
movements in interest rates, foreign exchange rates and
commodity prices. The use of these financial instruments
modifies the exposure of these risks with the intent to reduce
the risk or cost to the
F-15
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Company. The Company does not use derivatives for trading
purposes and is not a party to leveraged derivative contracts.
The Company formally documents its hedge relationships,
including identifying the hedging instruments and the hedged
items, as well as its risk management objectives and strategies
for undertaking the hedge transaction. This process includes
linking derivatives that are designated as hedges of specific
assets, liabilities, firm commitments or forecasted
transactions. The Company also formally assesses, both at
inception and at least quarterly thereafter, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in either the fair value or cash
flows of the hedged item. If it is determined that a derivative
ceases to be a highly effective hedge, or if the anticipated
transaction is no longer likely to occur, the Company
discontinues hedge accounting, and any deferred gains or losses
are recorded in the Selling, general and administrative
expenses line of the Combined and Consolidated Financial
Statements.
Derivatives are recorded in the Combined and Consolidated
Balance Sheets at fair value in other assets and other
liabilities. The fair value is based upon either market quotes
for actively traded instruments or independent bids for
nonexchange traded instruments.
On the date the derivative is entered into, the Company
designates the type of derivative as a fair value hedge, cash
flow hedge, net investment hedge or a natural hedge, and
accounts for the derivative in accordance with its designation.
Natural
Hedge
A derivative used as a hedging instrument whose change in fair
value is recognized to act as an economic hedge against changes
in the values of the hedged item is designated a natural hedge.
For derivatives designated as natural hedges, changes in fair
value are reported in earnings in the Selling, general and
administrative expenses line of the Combined and
Consolidated Statements of Income. Forward exchange contracts
are recorded as natural hedges when the hedged item is a
recorded asset or liability that is revalued in each accounting
period, in accordance with SFAS No. 52, Foreign
Currency Translation.
Cash Flow
Hedge
A hedge of a forecasted transaction or of the variability of
cash flows to be received or paid related to a recognized asset
or liability is designated as a cash flow hedge. The effective
portion of the change in the fair value of a derivative that is
designated as a cash flow hedge is recorded in the
Accumulated other comprehensive loss line of the
Combined and Consolidated Balance Sheets. When the hedged item
affects the income statement, the gain or loss included in
accumulated other comprehensive income (loss) is reported on the
same line in the Combined and Consolidated Statements of Income
as the hedged item. In addition, both the fair value of changes
excluded from the Companys effectiveness assessments and
the ineffective portion of the changes in the fair value of
derivatives used as cash flow hedges are reported in the
Selling, general and administrative expenses line in
the Combined and Consolidated Statements of Income.
|
|
(r)
|
Business
Acquisitions
|
All business acquisitions have been accounted for under the
purchase method. Cash, the fair value of other assets
distributed, securities issued unconditionally, and amounts of
consideration that are determinable at the date of acquisition
are included in determining the cost of an acquired business.
F-16
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
In November 2006, the Company acquired an Asian sewing
production facility for $6,666 in cash and the assumption of
$3,560 of debt. Goodwill of $2,766 was recognized as a result of
the purchase price exceeding the fair value of the assets and
liabilities acquired.
In September 2005, the Company acquired a domestic yarn and
textile production company for $2,436 in cash and the assumption
of $84,000 of debt. The fair value of the assets acquired, net
of liabilities assumed, approximated the purchase price based
upon preliminary valuations and no goodwill was recognized as a
result of the transaction. In fiscal 2005, purchases from the
acquired business accounted for approximately 18% of the
Companys total cost of sales. Following the acquisition,
substantially all of the yarn and textiles produced by the
acquired business have been used in products produced by the
Company, and those that were not have been sold to third parties.
|
|
(s)
|
Recently
Issued Accounting Standards
|
Accounting
for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes: An Interpretation
of FASB Statement No. 109 (FIN No. 48). This
interpretation clarifies the accounting for uncertainty in
income taxes recognized in an entitys financial statements
in accordance with SFAS No. 109. FIN No. 48
prescribes a recognition threshold and measurement principles
for the financial statement recognition and measurement of tax
positions taken or expected to be taken on a tax return. This
interpretation is effective for fiscal years beginning after
December 15, 2006 and as such, the Company will adopt
FIN No. 48 in 2007. As a result of the implementation
of FIN No. 48 in 2007, the Company recognized no adjustment in
the liability for unrecognized income tax benefits.
Fair
Value Measurements
The FASB has issued FAS 157, Fair Value Measurements, or
SFAS 157, which provides guidance for using
fair value to measure assets and liabilities. The standard also
responds to investors requests for more information about
(1) the extent to which companies measure assets and
liabilities at fair value, (2) the information used to
measure fair value, and (3) the effect that fair-value
measurements have on earnings. SFAS 157 will apply whenever
another standard requires (or permits) assets or liabilities to
be measured at fair value. The standard does not expand the use
of fair value to any new circumstances. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company is currently evaluating
the impact of SFAS 157 on its results of operations and
financial position.
Pension
and Other Postretirement Benefits
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (an amendment of FASB Statements
No. 87, 88, 106, and 132R), or SFAS 158.
SFAS 158 requires an employer to recognize in its statement
of financial position an asset for a plans over funded
status, or a liability for a plans under funded status,
measure a plans assets and its obligations that determine
its funded status as of the end of the employers fiscal
year (with limited exceptions), and recognize changes in the
funded status of a defined benefit postretirement plan in the
year in which the changes occur. Those changes will be reported
in comprehensive loss and as a separate component of
stockholders equity. The Company adopted the provision to
recognize the funded status of a benefit plan and the disclosure
requirements during the six months ended December 30, 2006.
The requirement to measure plan assets and benefit obligations
as of the date of the employers fiscal year-end is
effective for fiscal years ending after December 15, 2008.
The Company plans to adopt the measurement date provision in
2007.
F-17
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Fair
Value Option for Financial Assets and Financial
Liabilities
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159 permits
companies to choose to measure many financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value and establishes
presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The
provisions of SFAS 159 become effective for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the impact that SFAS 159 will have on its
results of operations and financial position.
A revision to the balance sheet classification was made to the
fiscal 2006 and 2005 Combined and Consolidated Balance Sheets
for the allowance for product returns of $12,811 and $20,153 for
fiscal 2006 and 2005, respectively, which had previously been
included in accounts receivable but has been reclassified into
accrued liabilities. This revision had no impact on the
Companys previously reported net income or parent
companies equity.
(3) Stock-Based
Compensation
The Company established the Hanesbrands OIP to award stock
options, stock appreciation rights, restricted stock, restricted
stock units, deferred stock units, performance shares and cash
to its employees, non-employee directors and employees of its
subsidiaries to promote the interests of the Company and incent
performance and retention of employees.
On September 26, 2006, a number of awards were made to
employees and non-employee directors under the Hanesbrands OIP.
Two categories of these awards are intended to replace award
values that employees would have received under Sara Lee
incentive plans before the spin off. Three other categories of
these awards were to attract and retain certain employees,
including the Companys 2006 annual awards.
Stock
Options
The exercise price of each stock option equals the market price
of Hanesbrands stock on the date of grant. Options can
generally be exercised over a term of between five and seven
years. Options vest ratably over two to three years with the
exception of one category of award which vested immediately upon
grant. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model using
the following weighted average assumptions: weighted average
expected volatility of 30%; weighted average expected term of
3.7 years; expected dividend yield of 0%; and risk-free
interest rate ranging from 4.52% to 4.59%, with a weighted
average of 4.55%.
The Company uses the volatility of peer companies for a period
of time that is comparable to the expected life of the option to
determine volatility assumptions. The Company utilized the
simplified method outlined in SEC Staff Accounting
Bulletin No. 107 to estimate expected lives for
options granted during the period.
F-18
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
A summary of the changes in stock options outstanding to the
Companys employees under the Hanesbrands OIP during the
six months ended December 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Term
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
(Years)
|
|
|
Options outstanding at
July 1, 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Granted
|
|
|
2,955
|
|
|
|
22.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
6
|
|
|
|
22.37
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
December 30, 2006
|
|
|
2,949
|
|
|
$
|
22.37
|
|
|
$
|
3,686
|
|
|
|
5.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 30, 2006
|
|
|
1,117
|
|
|
$
|
22.37
|
|
|
$
|
1,397
|
|
|
|
4.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 1,123 options that vested during the six months ended
December 30, 2006. As of December 30, 2006, the
Company had unrecognized compensation expense related to stock
option awards of $9,211. The total intrinsic value of options
that were exercised during the six months ended
December 30, 2006 was $8. The weighted average fair value
of individual options granted during the six months ended
December 30, 2006 was $6.55.
Stock
Unit Awards
Restricted stock units (RSUs) of Hanesbrands stock are
granted to certain Company employees and non-employee directors
to incent performance and retention over periods ranging from
one to three years. Upon the achievement of defined goals, the
RSUs are converted into shares of the Companys common
stock on a
one-for-one
basis and issued to the grantees. All RSUs which have been
granted under the Hanesbrands OIP vest solely upon continued
future service to the Company. The cost of these awards is
determined using the fair value of the shares on the date of
grant, and compensation expense is recognized over the period
during which the grantees provide the requisite service to the
Company. A summary of the changes in the restricted stock unit
awards outstanding under the Hanesbrands OIP during the six
months ended December 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
|
|
|
Grant-Date
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Value
|
|
|
Term (Years)
|
|
|
Nonvested share units at
July 1, 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Granted
|
|
|
1,546
|
|
|
|
22.37
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested share units at
December 30, 2006
|
|
|
1,546
|
|
|
$
|
22.37
|
|
|
$
|
36,516
|
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable share units at
December 30, 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
As of December 30, 2006, the Company had unrecognized
compensation expense related to stock unit awards of $27,380.
F-19
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
For all share-based payments under the Hanesbrands OIP, during
the six months ended December 30, 2006 the Company
recognized total compensation expense of $10,176 and recognized
a deferred tax benefit of $3,842. The Company satisfies the
requirement for common shares for share-based payments to
employees pursuant to the Hanesbrands OIP by issuing newly
authorized shares.
The employees of the Company participated in the stock-based
compensation plans of Sara Lee prior to the Companys spin
off on September 5, 2006. As a result of the spin off and
consistent with the terms of the awards under Sara Lees
plans, the outstanding Sara Lee stock options granted will
generally expire six months after the spin off date. In
connection with the spin off, vesting for all nonvested
service-based Sara Lee RSUs was accelerated to the spin off date
resulting in the recognition of $5,447 of additional
compensation expense for the six months ended December 30,
2006. An insignificant number of performance-based Sara Lee RSUs
remained unvested through the spin off date.
(4) Restructuring
The reported results for the six months ended December 30,
2006 and years ended July 1, 2006, July 2, 2005 and
July 3, 2004 reflect amounts recognized for restructuring
actions, including the impact of certain actions that were
completed for amounts more favorable than previously estimated.
The impact of restructuring on income before income taxes is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Restructuring programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 30,
2006 Restructuring actions
|
|
$
|
33,289
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Fiscal year 2006 Restructuring
actions
|
|
|
(398
|
)
|
|
|
4,119
|
|
|
|
|
|
|
|
|
|
Fiscal year 2005 Restructuring
actions
|
|
|
(504
|
)
|
|
|
(2,700
|
)
|
|
|
54,012
|
|
|
|
|
|
Fiscal year 2004 Restructuring
actions
|
|
|
90
|
|
|
|
(963
|
)
|
|
|
(2,352
|
)
|
|
|
29,014
|
|
Business Reshaping
|
|
|
|
|
|
|
(557
|
)
|
|
|
(133
|
)
|
|
|
(1,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in income
before income taxes
|
|
$
|
32,477
|
|
|
$
|
(101
|
)
|
|
$
|
51,527
|
|
|
$
|
27,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates where the costs (income)
associated with these actions are recognized in the Combined and
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost of sales
|
|
$
|
21,199
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
4,549
|
|
|
|
|
|
Restructuring
|
|
|
11,278
|
|
|
|
(101
|
)
|
|
|
46,978
|
|
|
|
27,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in income
before income taxes
|
|
$
|
32,477
|
|
|
$
|
(101
|
)
|
|
$
|
51,527
|
|
|
$
|
27,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The impact of these costs (income) on the Companys
business segments is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Innerwear
|
|
$
|
8,063
|
|
|
$
|
(148
|
)
|
|
$
|
19,735
|
|
|
$
|
7,904
|
|
Outerwear
|
|
|
22,879
|
|
|
|
(416
|
)
|
|
|
17,437
|
|
|
|
5,684
|
|
Hosiery
|
|
|
2,228
|
|
|
|
(57
|
)
|
|
|
2,986
|
|
|
|
2,420
|
|
International
|
|
|
(23
|
)
|
|
|
(895
|
)
|
|
|
4,536
|
|
|
|
8,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in business
segment operating profit
|
|
|
33,147
|
|
|
|
(1,516
|
)
|
|
|
44,694
|
|
|
|
24,922
|
|
Decrease (increase) in general
corporate expenses
|
|
|
(670
|
)
|
|
|
1,415
|
|
|
|
6,833
|
|
|
|
2,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in operating
profit
|
|
$
|
32,477
|
|
|
$
|
(101
|
)
|
|
$
|
51,527
|
|
|
$
|
27,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended December 30, 2006 Restructuring
Actions
During the six months ended December 30, 2006, the Company,
in connection with its plans to migrate portions of its
manufacturing operations to lower-cost manufacturing facilities,
to improve alignment of sewing operations with the flow of
textiles and to consolidate production capacity, approved
various actions that will result in the closure of seven
facilities. The seven facilities include four textile and sewing
plants in the United States, Puerto Rico and Mexico and the
three distribution centers in the United States. All actions are
expected to be completed within a
12-month
period. The net impact of these actions was to reduce income
before income taxes by $33,289.
|
|
|
|
|
$12,090 of the net charge represents costs associated with the
planned termination of 2,989 employees for employee termination
and other benefits in accordance with benefit plans previously
communicated to the affected employee group. This charge is
reflected in the Restructuring line of the Combined
and Consolidated Statement of Income. As of December 30,
2006, 2,082 employees had been terminated and the severance
obligation remaining in accrued liabilities on the Combined and
Consolidated Balance Sheet was $5,334.
|
|
|
|
$21,199 of the net charge represents accelerated depreciation of
buildings and equipment for the period between the date on which
the action was approved and actual closure of the facilities.
This charge is reflected in the Cost of Sales line
of the Combined and Consolidated Statement of Income.
|
The following table summarizes the charges taken for the
restructuring activities approved during the six months ended
December 30, 2006 and the related status as of
December 30, 2006. Any accrued amounts remaining as of
December 30, 2006 represent those cash expenditures
necessary to satisfy remaining obligations, which will be paid
in the next year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
|
Restructuring
|
|
|
|
|
|
|
|
|
as of
|
|
|
|
Costs
|
|
|
Non-cash
|
|
|
Cash
|
|
|
December 30,
|
|
|
|
Recognized
|
|
|
Charges
|
|
|
Payments
|
|
|
2006
|
|
|
Employee termination and other
benefits
|
|
$
|
12,090
|
|
|
$
|
(15
|
)
|
|
$
|
(6,741
|
)
|
|
$
|
5,334
|
|
Accelerated depreciation
|
|
|
21,199
|
|
|
|
(21,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,289
|
|
|
$
|
(21,214
|
)
|
|
$
|
(6,741
|
)
|
|
$
|
5,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The following table summarizes planned and actual employee
terminations by location and business segment as of
December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Employees
|
|
Innerwear
|
|
|
Outerwear
|
|
|
Hosiery
|
|
|
Total
|
|
|
United States
|
|
|
714
|
|
|
|
263
|
|
|
|
143
|
|
|
|
1,120
|
|
Mexico
|
|
|
|
|
|
|
1,869
|
|
|
|
|
|
|
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
714
|
|
|
|
2,132
|
|
|
|
143
|
|
|
|
2,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actions completed
|
|
|
|
|
|
|
1,997
|
|
|
|
85
|
|
|
|
2,082
|
|
Actions remaining
|
|
|
714
|
|
|
|
135
|
|
|
|
58
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
714
|
|
|
|
2,132
|
|
|
|
143
|
|
|
|
2,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2006 Restructuring Actions
During 2006, the Company approved a series of actions to exit
certain defined business activities and to lower its cost
structure. Each of these actions is to be completed within a
12-month
period after being approved. The net impact of these actions was
to reduce income before income taxes by $4,119 in fiscal 2006.
The charge represents costs associated with terminating 460
employees and providing them with severance benefits in
accordance with benefits previously communicated to the affected
employee group. The specific locations of these employees are
summarized in a table contained in this note. This charge is
reflected in the Restructuring line of the Combined
and Consolidated Statement of Income. As of December 30,
2006, 355 employees had been terminated and the severance
obligation remaining in accrued liabilities on the Combined and
Consolidated Balance Sheet was $1,858.
The following table summarizes the charges taken for the
restructuring actions approved during 2006 and the related
status as of December 30, 2006. Any accrued amounts
remaining as of December 30, 2006 represent those cash
expenditures necessary to satisfy remaining obligations, which
will be primarily paid in the next year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
Restructuring as of
|
|
|
|
Restructuring
|
|
|
Non-Cash
|
|
|
Cash
|
|
|
December 30,
|
|
|
|
Recognized
|
|
|
Charges
|
|
|
Payments
|
|
|
2006
|
|
|
Employee termination and other
benefits
|
|
$
|
3,721
|
|
|
$
|
|
|
|
$
|
(1,863
|
)
|
|
$
|
1,858
|
|
The following table summarizes planned and actual employee
terminations by location and business segment as of
December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Employees
|
|
Innerwear
|
|
|
Outerwear
|
|
|
International
|
|
|
Corporate
|
|
|
Total
|
|
|
United States
|
|
|
170
|
|
|
|
70
|
|
|
|
|
|
|
|
44
|
|
|
|
284
|
|
Mexico
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
|
|
|
|
70
|
|
|
|
176
|
|
|
|
44
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actions completed
|
|
|
78
|
|
|
|
70
|
|
|
|
176
|
|
|
|
31
|
|
|
|
355
|
|
Actions remaining
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
|
|
|
|
70
|
|
|
|
176
|
|
|
|
44
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Fiscal
Year 2005 Restructuring Actions
During 2005, the Company approved a series of actions to exit
certain defined business activities and to lower its cost
structure. Each of these actions was to be completed within a
12-month
period after being approved. In 2005 these actions reduced
income before income taxes by $54,012.
During 2006, certain of these actions were completed for amounts
more favorable than originally estimated. As a result, costs
previously accrued were adjusted and resulted in an increase of
$2,700 to income before income taxes. The $2,700 consists of a
credit for employee termination benefits and resulted from
actual costs to settle the obligations being lower than
expected. The adjustment is reflected in the
Restructuring line of the Combined and Consolidated
Statement of Income.
During the six months ended December 30, 2006, certain of
these actions were completed for amounts more favorable than
originally estimated. As a result, costs previously accrued were
adjusted and resulted in an increase of $504 to income before
income taxes. The $504 consists of a credit for employee
termination benefits and resulted from actual costs to settle
obligations being lower than expected. The adjustment is
reflected in the Restructuring line of the Combined
and Consolidated Statement of Income.
After combining the amounts recognized in the six months ended
December 30, 2006, in fiscal year 2006, and fiscal year
2005, the restructuring actions completed by the Company under
these plans reduced income before income taxes by a total of
$50,808. This charge reflects the cost associated with
terminating 1,012 employees and providing them with severance
benefits in accordance with existing benefit plans or local
employment laws. The specific location of these employees is
summarized in a table contained in this note. This cumulative
charge is reflected in the Restructuring line in the
Combined and Consolidated Statements of Income for the six
months ended December 30, 2006, fiscal 2006 and fiscal
2005. As of the end of the six months ended December 30,
2006, all of the employees have been terminated and the
severance obligation remaining in accrued liabilities on the
Combined and Consolidated Balance Sheet was $8,027.
The following table summarizes the charges taken for the
restructuring actions approved during 2005 and the related
status as of December 30, 2006. Any accrued amounts
remaining as of December 30, 2006 represent those cash
expenditures necessary to satisfy remaining obligations, which
will be primarily paid in the next year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
Restructuring as of
|
|
|
|
Restructuring
|
|
|
Non-Cash
|
|
|
Cash
|
|
|
December 30,
|
|
|
|
Recognized
|
|
|
Charges
|
|
|
Payments
|
|
|
2006
|
|
|
Employee termination and other
benefits
|
|
$
|
43,418
|
|
|
$
|
|
|
|
$
|
(35,391
|
)
|
|
$
|
8,027
|
|
Noncancelable lease and other
contractual obligations
|
|
|
2,841
|
|
|
|
|
|
|
|
(2,841
|
)
|
|
|
|
|
Accelerated depreciation
|
|
|
4,549
|
|
|
|
(4,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,808
|
|
|
$
|
(4,549
|
)
|
|
$
|
(38,232
|
)
|
|
$
|
8,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The following table summarizes planned and actual employee
terminations by location and business segment: All actions were
completed as of December 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Employees
|
|
Innerwear
|
|
|
Outerwear
|
|
|
Hosiery
|
|
|
International
|
|
|
Corporate
|
|
|
Total
|
|
|
United States
|
|
|
198
|
|
|
|
84
|
|
|
|
69
|
|
|
|
|
|
|
|
336
|
|
|
|
687
|
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
186
|
|
Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198
|
|
|
|
84
|
|
|
|
69
|
|
|
|
325
|
|
|
|
336
|
|
|
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2004 Restructuring Actions
During 2004, the Company approved a series of actions to exit
certain defined business activities and lower its cost
structure. In 2004, these actions reduced income before income
taxes by $29,014.
During 2005 and 2006, certain of these actions were completed
for amounts more favorable than originally estimated. As a
result, during 2005 and 2006, costs previously accrued were
adjusted and resulted in an increase of $2,352 and $963 to
income before income taxes, respectively. The $2,352 and the
$963 are composed of credits for employee termination benefits
and resulted from the actual costs to settle termination
obligations being lower than expected and certain employees
originally targeted for termination not being severed as
originally planned. This adjustment is reflected in the
Restructuring line of the respective years Combined
and Consolidated Statements of Income.
During the six months ended December 30, 2006, certain of
the termination benefits required additional funding above the
original estimates, resulting in additional charges of $90 for
employee termination benefits. The adjustment is reflected in
the Restructuring line of the Combined and
Consolidated Statement of Income.
After combining the amounts recognized in the six months ended
December 30, 2006 and the fiscal years 2006, 2005, and
2004, the restructuring actions completed by the Company under
these action plans reduced income before income taxes by a total
of $25,789. This charge reflects the cost associated with
terminating 4,425 employees and providing them with severance
benefits in accordance with existing benefit plans or local
employment laws. The specific location of these employees is
summarized in a table contained in this note. This cumulative
charge is reflected in the Restructuring line in the
Combined and Consolidated Statements of Income for fiscal years
2006, 2005 and 2004. As of the end of the six months ended
December 30, 2006, all of the employees have been
terminated and the severance obligation remaining in accrued
liabilities on the Combined and Consolidated Balance Sheet was
$36.
The following table summarizes the cumulative charges taken for
the restructuring actions approved during 2004 and the related
status as of December 30, 2006. Any accrued amounts
remaining as of the end of 2006 represent those cash
expenditures necessary to satisfy remaining obligations, which
will be primarily paid in the next year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Cumulative
|
|
|
|
|
|
Restructuring as of
|
|
|
|
Restructuring
|
|
|
Cash
|
|
|
December 30,
|
|
|
|
Recognized
|
|
|
Payments
|
|
|
2006
|
|
|
Employee termination and other
benefits
|
|
$
|
25,789
|
|
|
$
|
(25,753
|
)
|
|
$
|
36
|
|
F-24
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The following table summarizes the employee terminations by
location and business segment. All actions were completed as of
December 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico
|
|
|
|
|
|
|
United
|
|
|
and
|
|
|
|
|
Number of Employees
|
|
States
|
|
|
Latin America
|
|
|
Total
|
|
|
Innerwear
|
|
|
319
|
|
|
|
950
|
|
|
|
1,269
|
|
Outerwear
|
|
|
46
|
|
|
|
2,549
|
|
|
|
2,595
|
|
Hosiery
|
|
|
185
|
|
|
|
|
|
|
|
185
|
|
International
|
|
|
|
|
|
|
353
|
|
|
|
353
|
|
Corporate
|
|
|
23
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
573
|
|
|
|
3,852
|
|
|
|
4,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Reshaping
Beginning in the second quarter of 2001, the Companys
management approved a series of actions to exit certain defined
business activities. The final series of actions was approved in
the second quarter of 2002. Each of these actions was to be
completed in a
12-month
period after being approved. All actions included in this
program have been completed.
During the six months ended December 30, 2006, cash
payments of $84 were made for obligations related to these
actions, resulting in an ending accrual balance of $1,774 at
December 30, 2006.
(5) Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Raw materials
|
|
$
|
111,503
|
|
|
$
|
104,728
|
|
|
$
|
93,813
|
|
Work in process
|
|
|
197,645
|
|
|
|
196,170
|
|
|
|
181,556
|
|
Finished goods
|
|
|
907,353
|
|
|
|
935,688
|
|
|
|
987,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,216,501
|
|
|
$
|
1,236,586
|
|
|
$
|
1,262,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
(6) Property,
Net
Property is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
22,234
|
|
|
$
|
29,023
|
|
|
$
|
22,033
|
|
Buildings and improvements
|
|
|
412,558
|
|
|
|
463,146
|
|
|
|
405,277
|
|
Machinery and equipment
|
|
|
1,154,329
|
|
|
|
1,124,517
|
|
|
|
1,138,428
|
|
Construction in progress
|
|
|
22,928
|
|
|
|
32,235
|
|
|
|
41,005
|
|
Capital leases
|
|
|
19,787
|
|
|
|
25,966
|
|
|
|
28,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,631,836
|
|
|
|
1,674,887
|
|
|
|
1,635,101
|
|
Less accumulated depreciation
|
|
|
1,074,970
|
|
|
|
1,057,866
|
|
|
|
1,076,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, net
|
|
$
|
556,866
|
|
|
$
|
617,021
|
|
|
$
|
558,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total depreciation expense recognized in the six months
ended December 30, 2006 and fiscal years ended 2006, 2005
and 2004, was $69,946, $105,173, $108,791 and $105,517,
respectively.
(7) Notes Payable
to Banks
The Company had the following short-term obligations at
December 30, 2006, July 1, 2006 and July 2, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
|
|
|
Interest
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
Rate
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
364-day
credit facility
|
|
|
3.16
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
81,972
|
|
Short term revolving facility in
China
|
|
|
5.02
|
%
|
|
|
6,554
|
|
|
|
3,471
|
|
|
|
|
|
Other
|
|
|
8.22
|
%
|
|
|
7,710
|
|
|
|
|
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,264
|
|
|
$
|
3,471
|
|
|
$
|
83,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended December 30, 2006, the Company
amended its short-term revolving facility arrangement with a
Chinese branch of a U.S. bank. The facility, renewable
annually, was initially in the amount of RMB 30 million and
was increased to RMB 56 million ($7,168) as of
December 30, 2006. Borrowings under the facility accrue
interest at the prevailing base lending rates published by the
Peoples Bank of China from time to time less 10%. As of
December 30, 2006, $6,554 was outstanding under this
facility with $614 of borrowing available. The Company was in
compliance with the covenants contained in this facility at
December 30, 2006.
The Company had other short-term obligations amounting to $7,710
which consisted of a short-term revolving facility arrangement
with an Indian branch of a U.S. bank amounting to INR
220 million ($4,991) of which $3,877 was outstanding at
December 30, 2006 which accrues interest at 10.5%, and
multiple short-term credit facilities and promissory notes
acquired as part of the Companys acquisition of a sewing
facility in Thailand, totaling THB 241 million ($6,774) of
which $3,833 was outstanding at December 30, 2006 which
accrues interest at an average rate of 5.9%.
Historically, the Company maintained a
364-day
short-term non-revolving credit facility under which the Company
could borrow up to 107 million Canadian dollars at a
floating rate of interest that was based upon
F-26
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
either the announced bankers acceptance lending rate plus 0.6%
or the Canadian prime lending rate. Under the agreement, the
Company had the option to borrow amounts for periods of time
less than 364 days. The facility expired at the end of the
364-day
period and the amount of the facility could not be increased
until the next renewal date. During fiscal 2004 and 2005 the
Company and the bank renewed the facility. At the end of fiscal
2005, the Company had borrowings under this facility of $81,972
at an interest rate of 3.16%. In 2006, the borrowings under this
agreement were repaid at the end of the year and the facility
was closed.
Total interest paid on notes payable was $308, $2,588, $4,041
and $3,945 in the six months ended December 30, 2006 and
fiscal years ended 2006, 2005 and 2004, respectively.
(8) Long-term
debt
In connection with the spin off on September 5, 2006, the
Company entered into a $2,150,000 senior secured credit facility
(the Senior Secured Credit Facility), a $450,000
senior secured second lien credit facility (the Second
Lien Credit Facility) and a $500,000 bridge loan facility
(the Bridge Loan Facility). The Bridge
Loan Facility was paid off in full through the issuance of
$500,000 of floating rate senior notes (the Floating Rate
Senior Notes) issued in December 2006. The outstanding
balances at December 30, 2006 are reported in the
Current portion of long-term debt and
Long-term debt lines of the Combined and
Consolidated Balance Sheet. The following paragraphs describe
these facilities.
Senior
Secured Credit Facility
The Senior Secured Credit Facility provides for aggregate
borrowings of $2,150,000, consisting of: (i) a $250,000
Term A loan facility (the Term A
Loan Facility); (ii) a $1,400,000 Term B loan
facility (the Term B Loan Facility); and
(iii) a $500,000 revolving loan facility (the
Revolving Loan Facility). The Senior Secured Credit
Facility is guaranteed by substantially all of Hanesbrands
U.S. subsidiaries and is secured by equity interests in
substantially all of Hanesbrands direct and indirect U.S.
subsidiaries and 65% of the voting securities of certain foreign
subsidiaries and substantially all present and future assets of
Hanesbrands and the guarantors. At the Companys option,
borrowings under the Senior Secured Credit Facility may be
maintained from time to time as (a) Base Rate loans, which
shall bear interest at the higher of (i) 1/2 of 1% in
excess of the federal funds rate and (ii) the rate
published in the Wall Street Journal as the prime
rate (or equivalent), in each case in effect from time to
time, plus the applicable margin in effect from time to time
(which is currently 0.75% for the Term A Loan Facility and
the Revolving Loan Facility and 1.25% for the Term B
Loan Facility), or (b) LIBOR based loans, which shall
bear interest at the LIBO Rate (as defined in the Senior Secured
Credit Facility and adjusted for maximum reserves), as
determined by the administrative agent for the respective
interest period plus the applicable margin in effect from time
to time (which is currently 1.75% for the Term A
Loan Facility and the Revolving Loan Facility and
2.25% for the Term B Loan Facility). The final maturity of
the Term A Loan Facility is September 5, 2012. The
Term A Loan Facility amortizes in an amount per annum equal
to the following: year 15.00%; year 210.00%; year
315.00%; year 420.00%; year 525.00%; year
625.00%. The final maturity of the Term B
Loan Facility is September 5, 2013. The Term B
Loan Facility is payable in equal quarterly installments in
an amount equal to 1% per annum, with the balance due on
the maturity date. The final maturity of the Revolving
Loan Facility is September 5, 2011. As of
December 30, 2006, the Company had $0 outstanding under the
Revolving Loan Facility, $122,549 of standby and trade
letters of credit issued and outstanding under this facility and
$377,451 of borrowing availability. At December 30, 2006,
the interest rates on the Term A Loan Facility and the Term
B
F-27
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Loan Facility were 7.13% and 7.63% respectively.
Outstanding borrowings under the Senior Secured Credit Facility
are prepayable without penalty.
The Senior Secured Credit Facility requires the Company to
comply with customary affirmative, negative, and financial
covenants, and includes customary events of default. As of
December 30, 2006, the Company was in compliance with all
covenants.
Second
Lien Credit Facility
The Second Lien Credit Facility provides for aggregate
borrowings of $450,000 by Hanesbrands wholly-owned
subsidiary, HBI Branded Apparel Limited, Inc. The Second Lien
Credit Facility is unconditionally guaranteed by Hanesbrands and
each entity guaranteeing the Senior Secured Credit Facility. The
Second Lien Credit Facility and the guarantees in respect
thereof are secured on a second-priority basis (subordinate only
to the Senior Secured Credit Facility and any permitted
additions thereto or refinancings thereof) by substantially all
of the assets that secure the Senior Secured Credit Facility.
Loans under the Second Lien Credit Facility bear interest in the
same manner as those under the Senior Secured Credit Facility,
subject to a margin of 2.75% for Base Rate loans and 3.75% for
LIBOR based loans. The Second Lien Credit Facility matures on
March 5, 2014, may not be prepaid prior to
September 5, 2007, and includes premiums for prepayment of
the loan prior to September 5, 2009 based upon timing of
the prepayments. The Second Lien Credit Facility will not
amortize and will be repaid in full on its maturity date. At
December 30, 2006 the interest rate on the Second Lien
Credit Facility was 9.13%. The Second Lien Credit Facility
requires the Company to comply with customary affirmative,
negative, and financial covenants, and includes customary events
of default. As of December 30, 2006, the Company was in
compliance with all covenants.
Bridge
Loan Facility
Prior to its repayment in full, the Bridge Loan Facility
provided for a borrowing of $500,000 and was unconditionally
guaranteed by each entity guaranteeing the Senior Secured Credit
Facility. The Bridge Loan Facility was unsecured and was
scheduled to mature on September 5, 2007. If the Bridge
Loan Facility had not been repaid prior to or at maturity, the
outstanding principal amount of the facility was to roll over
into a rollover loan in the same amount that was to mature on
September 5, 2014. Lenders that extended rollover loans to
the Company would have been entitled to request that the Company
issue exchange notes to them in exchange for the
rollover loans, and also to request that the Company register
such notes upon request. All amounts outstanding were repaid
through the issuance of Floating Rate Senior Notes as described
below.
Floating
Rate Senior Notes
On December 14, 2006, the Company issued $500,000 aggregate
principal amount of Floating Rate Senior Notes due 2014. The
Floating Rate Senior Notes are senior unsecured obligations that
rank equal in right of payment with all of the Companys
existing and future unsubordinated indebtedness. The Floating
Rate Senior Notes bear interest at an annual rate, reset
semi-annually, equal to the London Interbank Offered Rate, or
LIBOR, plus 3.375%. Interest is payable on the Floating Rate
Senior Notes on June 15 and December 15 of each year beginning
on June 15, 2007. The Floating Rate Senior Notes will
mature on December 15, 2014. The net proceeds from the sale
of the Floating Rate Senior Notes were approximately $492,000.
These proceeds, together with working capital, were used to
repay in full the $500,000 outstanding under the Bridge Loan
Facility. The Floating Rate Senior Notes are guaranteed by
substantially all of the Companys domestic subsidiaries.
The Floating Rate Senior Notes are redeemable on or after
December 15, 2008, subject to premiums based upon timing of the
prepayments.
F-28
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Future principal payments for all of the facilities described
above are as follows: $9,375 due in fiscal year 2007, $34,375
due in fiscal year 2008, $54,625 due in fiscal year 2009,
$67,125 due in fiscal year 2010, $57,375 due in fiscal year 2011
and $2,270,500 thereafter. Reflected in these future principal
payments was a $100,000 prepayment made during the six months
ended December 30, 2006. This prepayment relieved any
requirement for the Company to make mandatory payments on the
Term B Loan Facility through fiscal 2008.
During the six months ended December 30, 2006, the Company
incurred $50,248 in debt issuance costs in connection with the
issuance of the Senior Secured Credit Facility, the Second Lien
Facility, Bridge Loan Facility and the Floating Rate Senior
Notes. Debt issuance costs are amortized to interest expense
over the respective lives of the debt instruments, which range
from five to eight years. As of December 30, 2006, the net
carrying value was $40,568 which is included in other noncurrent
assets in the Combined and Consolidated Balance Sheet. The
Companys debt issuance cost amortization was $2,279 for
the six months ended December 30, 2006. During the six
months ended December 30, 2006, the Company recognized
$7,401 of losses on early extinguishment of debt which is
comprised of a $6,125 loss for unamortized debt issuance costs
on the Bridge Loan Facility in connection with the issuance
of the Floating Rate Senior Notes and a $1,276 loss related to
unamortized debt issuance costs on the Senior Secured Credit
Facility for the prepayment of $100,000 of principal in December
2006 As discussed above, the proceeds from the issuance of the
Floating Rate Senior Notes were used to repay the entire
outstanding principal of the Bridge Loan Facility.
Total cash paid for interest related to the long term debt
during the six months ended December 30, 2006 was $68,569.
(9) Comprehensive
Income (Loss)
SFAS No. 130, Reporting Comprehensive Income,
requires that all components of comprehensive income,
including net income, be reported in the financial statements in
the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from
transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including
foreign currency translation adjustments, minimum pension
liabilities and unrealized gains and losses on qualifying cash
flow hedges, shall be reported, net of their related tax effect,
to arrive at comprehensive income. The Companys
comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
Translation adjustments
|
|
|
(5,989
|
)
|
|
|
13,518
|
|
|
|
15,187
|
|
|
|
(6,680
|
)
|
Net unrealized income (loss) on
cash flow hedges, net of tax
|
|
|
(597
|
)
|
|
|
(3,693
|
)
|
|
|
(1,028
|
)
|
|
|
4,389
|
|
Minimum pension liability, net of
tax
|
|
|
(9,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
57,689
|
|
|
$
|
332,318
|
|
|
$
|
232,668
|
|
|
$
|
447,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balances reported in the above table are net of the federal,
state and foreign statutory tax rates, as applicable.
In connection with the spin off on September 5, 2006, the
Company assumed obligations relating to the Companys
current and former employees included within Sara Lee sponsored
pension and retirement plans, including $53,813 of additional
minimum pension liability that has not been reflected in
comprehensive income for the six months ended December 30,
2006 but is, however, included in accumulated other
comprehensive loss at December 30, 2006.
F-29
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
During the six months ended December 30, 2006, the Company
adopted one provision of SFAS 158 which requires a company
to report the unfunded positions of employee benefit plans on
the balance sheet while all other deferred charges are reported
as a component of accumulated other comprehensive income. The
impact of adopting the SFAS 158 provision was $19,079, net
of tax, which is not reflected in comprehensive income but is,
however, included in accumulated other comprehensive loss at
December 30, 2006.
The components of accumulated other comprehensive loss are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized
|
|
|
Pension
|
|
|
|
|
|
Accumulated
|
|
|
|
Cumulative
|
|
|
Income (Loss)
|
|
|
and
|
|
|
|
|
|
Other
|
|
|
|
Translation
|
|
|
on Cash Flow
|
|
|
Post-
|
|
|
Income
|
|
|
Comprehensive
|
|
|
|
Adjustment
|
|
|
Hedges
|
|
|
Retirement
|
|
|
Taxes
|
|
|
Loss
|
|
|
Balance at July 3, 2004
|
|
$
|
(33,600
|
)
|
|
$
|
1,883
|
|
|
$
|
|
|
|
$
|
(651
|
)
|
|
$
|
(32,368
|
)
|
Other comprehensive income (loss)
activity
|
|
|
15,187
|
|
|
|
(1,408
|
)
|
|
|
|
|
|
|
380
|
|
|
|
14,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 2, 2005
|
|
$
|
(18,413
|
)
|
|
$
|
475
|
|
|
$
|
|
|
|
$
|
(271
|
)
|
|
$
|
(18,209
|
)
|
Other comprehensive income (loss)
activity
|
|
|
13,518
|
|
|
|
(6,051
|
)
|
|
|
|
|
|
|
2,358
|
|
|
|
9,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2006
|
|
$
|
(4,895
|
)
|
|
$
|
(5,576
|
)
|
|
$
|
|
|
|
$
|
2,087
|
|
|
$
|
(8,384
|
)
|
Other comprehensive income (loss)
activity
|
|
|
(5,989
|
)
|
|
|
(1,050
|
)
|
|
|
(72,412
|
)
|
|
|
28,267
|
|
|
|
(51,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006
|
|
$
|
(10,884
|
)
|
|
$
|
(6,626
|
)
|
|
$
|
(72,412
|
)
|
|
$
|
30,354
|
|
|
$
|
(59,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10) Leases
The Company leases certain buildings, equipment and vehicles
under agreements that are classified as capital leases. The
building leases have original terms that range from ten to
15 years, while the equipment and vehicle leases generally
have terms of less than seven years.
The gross amount of plant and equipment and related accumulated
depreciation recorded under capital leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Buildings
|
|
$
|
7,624
|
|
|
$
|
7,624
|
|
|
$
|
8,258
|
|
Machinery and equipment
|
|
|
3,700
|
|
|
|
3,700
|
|
|
|
3,660
|
|
Vehicles
|
|
|
8,463
|
|
|
|
14,642
|
|
|
|
16,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,787
|
|
|
|
25,966
|
|
|
|
28,358
|
|
Less accumulated depreciation
|
|
|
17,883
|
|
|
|
21,439
|
|
|
|
20,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net capital leases
|
|
$
|
1,904
|
|
|
$
|
4,527
|
|
|
$
|
8,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for capital lease assets was $1,003 in the
six months ended December 30, 2006, $3,233 in fiscal 2006,
$4,467 in fiscal 2005 and $4,321 in fiscal 2004.
Rental expense under operating leases was $27,590 in the six
months ended December 30, 2006, $54,874 in fiscal 2006,
$52,055 in fiscal 2005 and $45,997 in fiscal 2004.
F-30
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one
year) and future minimum capital lease payments as of
December 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
1,290
|
|
|
$
|
32,440
|
|
|
|
2008
|
|
|
752
|
|
|
|
27,121
|
|
|
|
2009
|
|
|
533
|
|
|
|
22,531
|
|
|
|
2010
|
|
|
|
|
|
|
17,588
|
|
|
|
2011
|
|
|
|
|
|
|
12,606
|
|
|
|
Thereafter
|
|
|
|
|
|
|
15,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
2,575
|
|
|
$
|
127,385
|
|
|
|
Less amount representing interest
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum capital lease payments
|
|
|
2,236
|
|
|
|
|
|
|
|
Less current installments of obligations under capital leases
|
|
|
1,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases, excluding current installments
|
|
$
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11) Commitments
and Contingencies
The Company is a party to various pending legal proceedings,
claims and environmental actions by government agencies. In
accordance with SFAS No. 5, Accounting for
Contingencies, the Company records a provision with respect
to a claim, suit, investigation, or proceeding when it is
probable that a liability has been incurred and the amount of
the loss can reasonably be estimated. Any provisions are
reviewed at least quarterly and are adjusted to reflect the
impact and status of settlements, rulings, advice of counsel and
other information pertinent to the particular matter. The
recorded liabilities for these items were not material to the
Combined and Consolidated Financial Statements of the Company in
any of the years presented. Although the outcome of such items
cannot be determined with certainty, the Companys legal
counsel and management are of the opinion that the final outcome
of these matters will not have a material adverse impact on the
consolidated financial position, results of operations or
liquidity.
License
Agreements
The Company is party to several royalty-bearing license
agreements for use of third-party trademarks in certain of their
products. The license agreements typically require a minimum
guarantee to be paid either at the commencement of the
agreement, by a designated date during the term of the agreement
or by the end of the agreement period. When payments are made in
advance of when they are due, the Company records a prepayment
and amortizes the expense in the Cost of sales line
of the Combined and Consolidated Income Statements uniformly
over the guaranteed period. For guarantees required to be paid
at the completion of the agreement, royalties are expensed
through Cost of sales as the related sales are made.
Management has reviewed all license agreements and concluded
that these guarantees do not fall under Statement of Financial
Accounting Standards Interpretation No. 45
Guarantors Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of
Others, and accordingly, there are no liabilities recorded
at inception of the agreements.
F-31
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
For the six months ended December 30, 2006 and fiscal years
2006, 2005 and 2004, the Company incurred royalty expense of
approximately $16,401, $12,554, $10,571 and $9,570,
respectively. During the six months ended December 30,
2006, the Company incurred expense of $9,675 in connection with
the buy out of a license agreement and the settlement of certain
contractual terms relating to another license agreement. The
$9,675 was recorded in the Selling, general and
administrative expenses line of the Combined and
Consolidated Statement of Income.
Minimum amounts due under the license agreements are
approximately $6,294 in 2007, $320 in 2008, and $280 in 2009.
There are no minimum amounts due after fiscal year 2009.
(12) Intangible
Assets and Goodwill
The primary components of the Companys intangible assets
and the related accumulated amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Value
|
|
|
Six months ended December 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brand names
|
|
$
|
182,520
|
|
|
$
|
53,616
|
|
|
$
|
128,904
|
|
Computer software
|
|
|
33,091
|
|
|
|
24,814
|
|
|
|
8,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
215,611
|
|
|
$
|
78,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value of intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
137,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Value
|
|
|
Fiscal year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brand names
|
|
$
|
182,914
|
|
|
$
|
50,815
|
|
|
$
|
132,099
|
|
Computer software
|
|
|
26,963
|
|
|
|
24,368
|
|
|
|
2,595
|
|
Other intangibles
|
|
|
1,873
|
|
|
|
203
|
|
|
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
211,750
|
|
|
$
|
75,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value of intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
136,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Value
|
|
|
Fiscal year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brand names
|
|
$
|
89,457
|
|
|
$
|
26,457
|
|
|
$
|
63,000
|
|
Computer software
|
|
|
24,721
|
|
|
|
22,836
|
|
|
|
1,885
|
|
Other intangibles
|
|
|
1,873
|
|
|
|
16
|
|
|
|
1,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,051
|
|
|
$
|
49,309
|
|
|
|
66,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brand names not
subject to amortization
|
|
|
|
|
|
|
|
|
|
|
79,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value of intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
145,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortization expense for intangibles subject to amortization
was $3,466 in the six months ended December 30, 2006,
$9,031 in fiscal 2006, $9,100 in fiscal 2005, and $8,712 in
fiscal 2004. The estimated amortization expense for the next
five years, assuming no change in the estimated useful lives of
identifiable intangible assets or changes in foreign exchange
rates is as follows: $7,346 in 2007, $7,834 in 2008, $7,608 in
2009, $6,249 in 2010, and $5,146 in 2011.
No impairment charges were recognized in the six months ended
December 30, 2006, fiscal 2006 or fiscal 2005. However, as
a result of the annual impairment review, the Company concluded
that certain trademarks had lives that were no longer
indefinite. As a result of this conclusion, trademarks with a
net book value of $79,044 and $51,524 in fiscal 2006 and fiscal
2005 and, respectively, were moved from the indefinite lived
category and amortization was initiated over a 30 year
period.
Goodwill and the changes in those amounts during the period are
as follows:
|
|
|
|
|
|
|
|
|
Net book value at July 2, 2005
|
|
$
|
278,781
|
|
|
|
|
|
Foreign exchange
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value at July 1, 2006
|
|
$
|
278,655
|
|
|
|
|
|
Acquisition of business
|
|
|
2,766
|
|
|
|
|
|
Foreign exchange
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value at
December 30, 2006
|
|
$
|
281,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no impairment of goodwill in any of the periods
presented.
(13) Guarantees
Due to the historical relationship between Sara Lee and the
Company prior to the spin off on September 5, 2006, there
are various contracts under which Sara Lee has guaranteed
certain third-party obligations relating to the Companys
business. Typically, these obligations arise from third-party
credit facilities guaranteed by Sara Lee and as a result of
contracts entered into by the Companys entities and
authorized by Sara Lee, under which Sara Lee agrees to indemnify
a third-party against losses arising from a breach of
representations and covenants related to such matters as title
to assets sold, the collectibility of receivables, specified
environmental matters, lease obligations and certain tax
matters. In each of these circumstances, payment by Sara Lee is
F-33
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
conditioned on the other party making a claim pursuant to the
procedures specified in the contract, which procedures allow
Sara Lee to challenge the other partys claims. In
addition, Sara Lees obligations under these agreements may
be limited in terms of time
and/or
amount, and in some cases Sara Lee or the related entities may
have recourse against third-parties for certain payments made by
Sara Lee. It is not possible to predict the maximum potential
amount of future payments under certain of these agreements, due
to the conditional nature of Sara Lees obligations and the
unique facts and circumstances involved in each particular
agreement. Historically, payments made by Sara Lee under these
agreements have not been material, and no amounts are accrued
for these items on the Combined and Consolidated Balance Sheets.
As of December 30, 2006, these contracts included the
guarantee of credit limits with third-party banks, and
guarantees over supplier purchases. The Company had not
guaranteed or undertaken any obligation on behalf of Sara Lee or
any other related entities as of December 30, 2006.
(14) Financial
Instruments and Risk Management
In connection with the spin off from Sara Lee on
September 5, 2006, the Company incurred debt of $2,600,000
plus an unfunded revolver with capacity of $500,000, all of
which bears interest at floating rates. During the six months
ended December 30, 2006, the Company has executed certain
interest rate cash flow hedges in the form of swaps and caps in
order to mitigate the Companys exposure to variability in
cash flows for the future interest payments on a designated
portion of borrowings.
The Company records gains and losses on these derivative
instruments using hedge accounting. Under this accounting
method, gains and losses are deferred into accumulated other
comprehensive loss until the hedged transaction impacts the
Companys earnings. However, on a quarterly basis hedge
ineffectiveness will be measured and any resulting
ineffectiveness will be recorded as gain or losses in the
respective measurement period.
During the six months ended December 30, 2006, the Company
deferred losses of $2,743 into accumulated other comprehensive
loss. There was no gain or loss recorded in earnings as a result
of hedge ineffectiveness for the six months ended
December 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
Interest Rates
|
|
Interest Rate Swaps
|
|
|
Principal
|
|
Receive
|
|
|
Pay
|
|
|
|
3 year: Receive variable-pay fixed
|
|
|
|
$200,000
|
|
|
|
3-month LIBOR
|
|
|
|
5.18
|
%
|
|
4 year: Receive variable-pay fixed
|
|
|
|
100,000
|
|
|
|
3-month LIBOR
|
|
|
|
5.14
|
%
|
|
5 year: Receive variable-pay fixed
|
|
|
|
200,000
|
|
|
|
3-month LIBOR
|
|
|
|
5.15
|
%
|
|
|
(b)
|
Forward
Exchange, Option Contracts and Caps
|
The Company uses forward exchange and option contracts to reduce
the effect of fluctuating foreign currencies on short-term
foreign currency-denominated transactions, foreign
currency-denominated investments, other known foreign currency
exposures and to reduce the effect of fluctuating commodity
prices on raw materials purchased for production. Gains and
losses on these contracts are intended to offset losses and
gains on the hedged transaction in an effort to reduce the
earnings volatility resulting from fluctuating foreign currency
exchange rates and fluctuating commodity prices.
Cotton is the primary raw material the Company uses to
manufacture many of its products and is purchased at market
prices. In fiscal 2006, the Company started to use commodity
financial instruments to hedge the price of cotton, for which
there is a high correlation between the hedged item and the
hedged
F-34
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
instrument. The notional amounts outstanding under the futures
contracts were 0 and 38,700 bales of cotton at December 30,
2006 and July 1, 2006, respectively. The notional amounts
outstanding under the options contracts were 108,000 and 170,000
bales of cotton at December 30, 2006 and July 1, 2006,
respectively.
Historically, the principal currencies hedged by the Company
include the European euro, Mexican peso, Canadian dollar and
Japanese yen. The following table summarizes by major currency
the contractual amounts of the Companys foreign exchange
forward contracts in U.S. dollars. The bought amounts
represent the net U.S. dollar equivalent of commitments to
purchase foreign currencies, and the sold amounts represent the
net U.S. dollar equivalent of commitments to sell foreign
currencies. The foreign currency amounts have been translated
into a U.S. dollar equivalent value using the exchange rate
at the reporting date. Forward exchange contracts mature on the
anticipated cash requirement date of the hedged transaction,
generally within one year. There were no open foreign exchange
forward contracts at December 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Foreign currencybought
(sold):
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian dollar
|
|
$
|
(30,155
|
)
|
|
$
|
(36,413
|
)
|
|
$
|
(34,701
|
)
|
European euro
|
|
|
1,006
|
|
|
|
1,388
|
|
|
|
2,459
|
|
Japanese yen
|
|
|
(5,837
|
)
|
|
|
(17,078
|
)
|
|
|
(10,404
|
)
|
Mexican peso
|
|
|
|
|
|
|
(15,830
|
)
|
|
|
(13,799
|
)
|
Colombian peso
|
|
|
9,579
|
|
|
|
4,550
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(1,365
|
)
|
|
|
|
|
The Company held foreign exchange option contracts to reduce the
foreign exchange fluctuations on anticipated purchase
transactions. There were no open option contracts at
December 30, 2006. The following table summarizes the
notional amount of option contracts to sell foreign currency, in
U.S. dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Foreign currencysold:
|
|
|
|
|
|
|
|
|
|
|
|
|
European euro
|
|
$
|
11,066
|
|
|
$
|
12,285
|
|
|
$
|
1,302
|
|
Japanese yen
|
|
|
6,029
|
|
|
|
|
|
|
|
|
|
For the interest rate swaps and caps and all forward exchange
and option contracts, the following table summarizes the net
derivative gains or losses deferred into accumulated other
comprehensive loss and reclassified to earnings in the six
months ended December 30, 2006 and fiscal years 2006, 2005
and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net accumulated derivative gain
(loss) deferred at beginning of year
|
|
$
|
(5,576
|
)
|
|
$
|
475
|
|
|
$
|
1,883
|
|
|
$
|
(4,740
|
)
|
Deferral of net derivative gain
(loss) in accumulated other comprehensive loss
|
|
|
(2,604
|
)
|
|
|
(4,452
|
)
|
|
|
(1,620
|
)
|
|
|
3,585
|
|
Reclassification of net derivative
loss (gain) to income
|
|
|
1,554
|
|
|
|
(1,599
|
)
|
|
|
212
|
|
|
|
3,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accumulated derivative gain
(loss) at end of year
|
|
$
|
(6,626
|
)
|
|
$
|
(5,576
|
)
|
|
$
|
475
|
|
|
$
|
1,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The Company expects to reclassify into earnings during the next
12 months net loss from accumulated other comprehensive
loss of approximately $6,626 at the time the underlying hedged
transactions are realized. During the six months ended
December 30, 2006 and the years ended July 1, 2006,
July 2, 2005 and July 3, 2004 the Company recognized
expense of $0, $0, $554 and $306, respectively, for hedge
ineffectiveness related to cash flow hedges. Amounts reported
for hedge ineffectiveness are not included in accumulated other
comprehensive loss and therefore, not included in the above
table.
There were no derivative losses excluded from the assessment of
effectiveness or gains or losses resulting from the
disqualification of hedge accounting for the six months ended
December 30, 2006 and fiscal years 2006, 2005 and 2004.
The carrying amounts of cash and cash equivalents, trade
accounts receivable, notes receivable, accounts payable and long
term debt approximated fair value as of December 30, 2006,
July 1, 2006, and July 2, 2005. The fair value of long
term debt approximates the carrying value as all the credit
facilities are at floating rates. The carrying amounts of the
Companys notes payable to parent companies, notes payable
to banks, notes payable to related entities and funding
receivable/payable with parent companies approximated fair value
as of December 30, 2006, July 1, 2006, and
July 2, 2005, primarily due to the short-term nature of
these instruments. The fair values of the remaining financial
instruments recognized in the Combined and Consolidated Balance
Sheets of the Company at the respective year ends were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Currency swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56,258
|
|
Interest rate swaps
|
|
|
(2,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forwards and
options
|
|
|
|
|
|
|
1,168
|
|
|
|
348
|
|
|
|
1,434
|
|
Interest rate options
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forwards and options
|
|
|
1,597
|
|
|
|
(1,216
|
)
|
|
|
|
|
|
|
|
|
The fair value of the swaps is determined based upon externally
developed pricing models, using financial market data obtained
from swap dealers. The fair value of the forwards and options is
based upon quoted market prices obtained from third-party
institutions.
The Company has issued certain foreign currency-denominated debt
instruments to a related entity and utilizes currency swaps to
reduce the variability of functional currency cash flows related
to the foreign currency debt.
The Company records gains and losses on these derivative
instruments using
mark-to-market
accounting. Under this accounting method, the changes in the
market value of outstanding financial instruments are recognized
as gains or losses in the period of change. All derivatives
using
mark-to-market
accounting were settled in 2005.
F-36
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The fair value of currency swaps is determined based upon
externally developed pricing models, using financial data
obtained from swap dealers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Notional
|
|
|
Interest Rates(2)
|
|
Currency Swap
|
|
Principal(1)
|
|
|
Receive
|
|
|
Pay
|
|
|
2004: Receive variable
pay variable
|
|
$
|
247,875
|
|
|
|
2.5
|
|
|
|
1.7
|
|
|
|
|
(1) |
|
The notional principal is the amount used for the calculation of
interest payments that are exchanged over the life of the swap
transaction and is equal to the amount of foreign currency or
dollar principal exchanged at maturity, if applicable. |
|
(2) |
|
The weighted-average interest rates are at the balance sheet
date. |
|
|
(e)
|
Concentration
of Credit Risk
|
Trade accounts receivable due from customers that the Company
considers highly leveraged were $107,783 at December 30,
2006, $121,870 at July 1, 2006, $100,314 at July 2,
2005 and $79,598 at July 3, 2004. The financial position of
these businesses has been considered in determining allowances
for doubtful accounts.
(15) Defined
Benefit Pension Plans
Prior to the spin off from Sara Lee on September 5, 2006,
employees who met certain eligibility requirements participated
in defined benefit pension plans sponsored by Sara Lee. These
defined benefit pension plans included employees from a number
of domestic Sara Lee business units. All obligations pursuant to
these plans have historically been obligations of Sara Lee and
as such, were not included on the Companys historical
Combined and Consolidated Balance Sheets, prior to
September 5, 2006. The annual cost of the Sara Lee defined
benefit plans was allocated to all of the participating
businesses based upon a specific actuarial computation which was
followed consistently. In addition to participation in the Sara
Lee sponsored plans, the Company sponsors two noncontributory
defined benefit plans, the Playtex Apparel, Inc. Pension Plan
(the Playtex Plan) and the National Textiles, L.L.C.
Pension Plan (the National Textiles Plan), for
certain qualifying individuals.
On January 1, 2006, benefits under the Sara Lee Corporation
Consolidated Pension and Retirement Plan (the Sara Lee
Pension Plan) and the defined benefit portion of the Sara
Lee Supplemental Executive Retirement Plan were frozen. Further,
all Sara Lee retirement plans covering only Company employees
(such as the Playtex Apparel Pension Plan) were transferred to
the Company, and any Sara Lee retirement plans covering both
Sara Lee employees and Company employees (such as the Sara Lee
Corporation Consolidated Pension and Retirement Plan) were
legally partitioned such that the Companys employees have
been separated from the Sara Lee plans and the Company is
effectively the legal sponsor of a new partitioned plans.
Specifically, effective as of January 1, 2006, the Company
created the Hanesbrands Inc. Pension and Retirement Plan (the
Hanesbrands Pension Plan), a new frozen defined
benefit plan to receive assets and liabilities accrued under the
Sara Lee Pension Plan that are attributable to current and
former Company employees.
Total assets for the Hanesbrands Pension Plan remain within the
master trust of Sara Lee. A final transfer of assets from the
Sara Lee master trust to the trust funding the new Hanesbrands
Pension Plan will occur in fiscal 2007 once the allocation of
assets and liabilities has been completed in accordance with
governmental regulations. The fair value of plan assets included
in the annual valuations represents a best estimate based
F-37
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
upon a percentage allocation of total assets of the Sara Lee
trust and will be adjusted once the final transfer is made.
In connection with the spin off on September 5, 2006, the
Company assumed Sara Lees obligations under the Sara Lee
Corporation Consolidated Pension and Retirement Plan, the Sara
Lee Supplemental Executive Retirement Plan, the Sara Lee Canada
Pension Plans and certain other plans that related to the
Companys current and former employees. Prior to the spin
off the obligations were not included in the Companys
Combined and Consolidated Financial Statements. The obligations
and costs related to all of these plans, in addition to those
obligations and costs related to the Playtex Plan and the
National Textiles Plan, are included in the Companys
Combined and Consolidated Financial Statements as of
December 30, 2006.
On September 29, 2006, SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans was issued. The objectives of
SFAS 158 are for an employer to a) recognize the
overfunded status of a plan as an asset and the underfunded
status of a plan as a liability in the balance sheet and to
recognize changes in the funded status in comprehensive income
or loss, and b) measure the funded status of a plan as of
the date of its balance sheet date. Additional minimum pension
liabilities and related intangible assets are also derecognized
upon adoption of the new standard. SFAS 158 requires
initial application of the requirement to recognize the funded
status of a benefit plan and the related disclosure provisions
as of the end of fiscal years ending after December 15,
2006. SFAS 158 requires initial application of the
requirement to measure plan assets and benefit obligations as of
the balance sheet date as of the end of fiscal years ending
after December 15, 2008. The Company adopted part
(a) of the statement as of December 30, 2006. The
following table summarizes the effect of required changes in the
additional minimum pension liabilities (AML) as of
December 30, 2006 prior to the adoption of SFAS 158 as
well as the impact of the initial adoption of SFAS 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to AML
|
|
|
AML
|
|
|
Post AML,
|
|
|
FAS 158
|
|
|
Post AML,
|
|
|
|
and FAS 158
|
|
|
Adjustment
|
|
|
Pre FAS 158
|
|
|
Adjustment
|
|
|
Post FAS 158
|
|
|
Prepaid pension asset
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,356
|
|
|
$
|
1,356
|
|
Accrued pension liability
|
|
$
|
90,491
|
|
|
$
|
48,100
|
|
|
$
|
138,591
|
|
|
$
|
61,566
|
|
|
$
|
200,157
|
|
Intangible asset
|
|
$
|
|
|
|
$
|
436
|
|
|
$
|
436
|
|
|
$
|
(436
|
)
|
|
$
|
|
|
Accumulated other comprehensive
income, net of tax
|
|
$
|
|
|
|
$
|
(63,677
|
)
|
|
$
|
(63,677
|
)
|
|
$
|
(2,854
|
)
|
|
$
|
(66,531
|
)
|
Deferred tax asset
|
|
$
|
|
|
|
$
|
40,541
|
|
|
$
|
40,541
|
|
|
$
|
1,238
|
|
|
$
|
41,779
|
|
The annual expense incurred by the Company for these defined
benefit plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Participation in Sara Lee
sponsored defined benefit plans
|
|
$
|
725
|
|
|
$
|
30,835
|
|
|
$
|
46,675
|
|
|
$
|
67,340
|
|
Hanesbrands sponsored benefit plans
|
|
|
2,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Playtex Apparel, Inc. Pension Plan
|
|
|
(30
|
)
|
|
|
(234
|
)
|
|
|
9
|
|
|
|
753
|
|
National Textiles L.L.C. Pension
Plan
|
|
|
(425
|
)
|
|
|
(1,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension plan expense
|
|
$
|
2,452
|
|
|
$
|
29,542
|
|
|
$
|
46,684
|
|
|
$
|
68,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The components of net periodic benefit cost and other amounts
recognized in other comprehensive loss of the Companys
noncontributory defined benefit pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Service cost
|
|
$
|
384
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Interest cost
|
|
|
17,848
|
|
|
|
5,291
|
|
|
|
1,274
|
|
|
|
1,297
|
|
Expected return on assets
|
|
|
(17,011
|
)
|
|
|
(6,584
|
)
|
|
|
(1,510
|
)
|
|
|
(1,226
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition asset
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(1
|
)
|
|
|
|
|
|
|
232
|
|
|
|
232
|
|
Net actuarial loss
|
|
|
605
|
|
|
|
|
|
|
|
12
|
|
|
|
448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
1,727
|
|
|
$
|
(1,293
|
)
|
|
$
|
9
|
|
|
$
|
753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets
and Benefit Obligations Recognized in Other Comprehensive
Loss
|
|
|
|
|
Net loss
|
|
$
|
111,505
|
|
Prior service credit
|
|
|
(385
|
)
|
|
|
|
|
|
Total recognized in other
comprehensive loss
|
|
|
111,120
|
|
|
|
|
|
|
Total recognized in net periodic
benefit cost and other comprehensive loss
|
|
$
|
112,847
|
|
|
|
|
|
|
The estimated net loss and prior service cost for the defined
benefit pension plans that will be amortized from accumulated
other comprehensive loss into net periodic benefit cost over the
next fiscal year are $2,692 and $43, respectively.
F-39
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The funded status of the Companys defined benefit pension
plans at the respective year ends was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Projected benefit
obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
113,305
|
|
|
$
|
22,456
|
|
|
$
|
23,910
|
|
Assumption of obligations
|
|
|
745,550
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
378
|
|
|
|
|
|
|
|
1
|
|
Interest cost
|
|
|
16,781
|
|
|
|
5,292
|
|
|
|
1,274
|
|
Benefits paid
|
|
|
(18,427
|
)
|
|
|
(7,129
|
)
|
|
|
(1,635
|
)
|
Net transfer in due to acquisition
|
|
|
|
|
|
|
94,011
|
|
|
|
|
|
Plan amendments
|
|
|
401
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
27,543
|
|
|
|
(1,325
|
)
|
|
|
(1,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
885,531
|
|
|
|
113,305
|
|
|
|
22,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
101,507
|
|
|
|
19,443
|
|
|
|
20,026
|
|
Assumption of assets
|
|
|
531,322
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
20,831
|
|
|
|
3,544
|
|
|
|
1,051
|
|
Net transfer in due to acquisition
|
|
|
|
|
|
|
85,649
|
|
|
|
|
|
Employer contributions
|
|
|
51,497
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(18,427
|
)
|
|
|
(7,129
|
)
|
|
|
(1,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
686,730
|
|
|
|
101,507
|
|
|
|
19,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(198,801
|
)
|
|
$
|
(11,798
|
)
|
|
$
|
(3,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss
|
|
|
|
|
|
|
3,580
|
|
|
|
1,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts
recognized
|
|
|
|
|
|
$
|
(8,218
|
)
|
|
$
|
(1,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Companys Combined and
Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
1,355
|
|
|
$
|
|
|
|
$
|
|
|
Current liabilities
|
|
|
(2,441
|
)
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
(197,715
|
)
|
|
|
(11,798
|
)
|
|
|
(3,013
|
)
|
Accumulated other comprehensive
loss
|
|
|
(108,310
|
)
|
|
|
3,580
|
|
|
|
1,864
|
|
At December 30, 2006 the amounts recognized in accumulated
other comprehensive loss consists of:
|
|
|
|
|
Prior service cost
|
|
$
|
(385
|
)
|
Actuarial loss
|
|
|
(107,925
|
)
|
|
|
|
|
|
|
|
$
|
(108,310
|
)
|
|
|
|
|
|
F-40
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Accrued benefit costs related to the Companys defined
benefit pension plans are reported in the Other noncurrent
assets, Accrued liabilitiesPayroll and
employee benefits and Pension and postretirement
benefits lines of the Combined and Consolidated Balance
Sheets.
|
|
(a)
|
Measurement
Date and Assumptions
|
A September 30 measurement date was used to value plan
assets and obligations for the Companys defined benefit
pension plans for the six months ended December 30, 2006,
and a March 31 measurement date for all previous periods.
The weighted average actuarial assumptions used in measuring the
net periodic benefit cost and plan obligations for the periods
presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
December 30, 2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net periodic benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.77
|
%
|
|
|
5.60
|
%
|
|
|
5.50
|
%
|
|
|
5.50
|
%
|
Long-term rate of return on plan
assets
|
|
|
7.57
|
|
|
|
7.76
|
|
|
|
7.83
|
|
|
|
7.75
|
|
Rate of compensation increase
|
|
|
3.60
|
(1)
|
|
|
4.00
|
(1)
|
|
|
4.50
|
|
|
|
5.87
|
|
Plan obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.77
|
%
|
|
|
5.80
|
%
|
|
|
5.60
|
%
|
|
|
5.50
|
%
|
Rate of compensation increase
|
|
|
3.60
|
(1)
|
|
|
4.00
|
(1)
|
|
|
4.00
|
|
|
|
4.50
|
|
|
|
|
(1) |
|
The compensation increase assumption applies to the Canadian
plans and portions of the Hanesbrands nonqualified retirement
plans, as benefits under these plans are not frozen at
December 30, 2006 and July 1, 2006. |
|
|
(b)
|
Plan
Assets, Expected Benefit Payments, and Funding
|
The allocation of pension plan assets as of the respective
period end measurement dates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
63
|
%
|
|
|
61
|
%
|
|
|
58
|
%
|
|
|
61
|
%
|
Debt securities
|
|
|
32
|
|
|
|
38
|
|
|
|
31
|
|
|
|
33
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
Cash and other
|
|
|
5
|
|
|
|
1
|
|
|
|
7
|
|
|
|
2
|
|
The investment objectives for the pension plan assets are
designed to generate returns that will enable the pension plans
to meet their future obligations.
The Company plans to contribute a minimum of $33,000 to the
pension plans in fiscal 2007. Expected benefit payments to the
plans are as follows: $48,321 in fiscal 2007, $47,851 in fiscal
2008, $47,497 in fiscal 2009, $48,089 in fiscal 2010, $48,403 in
fiscal 2011 and $260,725 thereafter.
(16) Postretirement
Healthcare and Life Insurance Plans
Prior to the spin off from Sara Lee on September 5, 2006,
employees who met certain eligibility requirements participated
in post-retirement healthcare and life insurance sponsored by
Sara Lee. These plans included employees from a number of
domestic Sara Lee business units. All obligations pursuant to
these plans have historically been obligations of Sara Lee and
as such, were not included on the Companys
F-41
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
historical Condensed Combined and Consolidated Balance Sheets,
prior to September 5, 2006. The annual cost of the Sara Lee
defined benefit plans was allocated to all of the participating
businesses based upon a specific actuarial computation which was
followed consistently.
In connection with the spin off on September 5, 2006, the
Company assumed Sara Lees obligations under the Sara Lee
postretirement plans. The obligations and costs related to all
of these plans are included in the Companys Combined and
Consolidated Financial Statements as of September 30, 2006.
In December 2006, the Company changed the postretirement plan
benefits to (a) pass along a higher share of retiree
medical costs to all retirees effective February 1, 2007,
(b) eliminate company contributions toward premiums for
retiree medical coverage effective December 1, 2007,
(c) eliminate retiree medical coverage options for all
current and future retirees age 65 and older and
(d) eliminate future postretirement life benefits. The gain
on curtailment represents the unrecognized amounts associated
with prior plan amendments that were being amortized into income
over the remaining service period of the participants prior to
the December 2006 amendments. A postretirement benefit income of
$28,467 is recorded in the Combined and Consolidated Statement
of Income for the six months ended December 30, 2006. The
Company will record a final gain on curtailment of plan benefits
in December 2007.
On September 29, 2006, SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans was issued. The objectives of
SFAS 158 are for an employer to a) recognize the
overfunded status of a plan as an asset and the underfunded
status of a plan as a liability in the balance sheet and to
recognize changes in the funded status in comprehensive income
or loss, and b) measure the funded status of a plan as of
the date of its balance sheet date. Additional minimum pension
liabilities and related intangible assets are also derecognized
upon adoption of the new standard. SFAS 158 requires
initial application of the requirement to recognize the funded
status of a benefit plan and the related disclosure provisions
as of the end of fiscal years ending after December 15,
2006. SFAS 158 requires initial application of the
requirement to measure plan assets and benefit obligations as of
the balance sheet date as of the end of fiscal years ending
after December 15, 2008. The Company adopted part
(a) of the statement as of December 30, 2006. The
following table summarizes the effect of the initial adoption of
SFAS 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-FAS 158
|
|
|
FAS 158 Adjustment
|
|
|
Post FAS 158
|
|
|
Accrued Postretirement Liability
|
|
$
|
44,358
|
|
|
$
|
(35,897
|
)
|
|
$
|
8,461
|
|
Accumulated Other Comprehensive
Income, net of tax
|
|
$
|
|
|
|
$
|
21,933
|
|
|
$
|
21,933
|
|
Deferred Tax Liability
|
|
$
|
|
|
|
$
|
13,964
|
|
|
$
|
13,964
|
|
The postretirement plan expense incurred by the Company for
these postretirement plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Hanesbrands postretirement health
care and life insurance plans
|
|
$
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Participation in Sara Lee
sponsored postretirement and life insurance plans
|
|
|
214
|
|
|
|
6,188
|
|
|
|
7,794
|
|
|
|
6,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
451
|
|
|
|
6,188
|
|
|
|
7,794
|
|
|
|
6,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The components of the Companys postretirement health-care
and life insurance plans for the six months ended
December 30, 2006 was as follows:
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 30,
|
|
|
|
2006
|
|
|
Service costs
|
|
$
|
470
|
|
Interest cost
|
|
|
967
|
|
Expected return on assets
|
|
|
(2
|
)
|
Amortization of:
|
|
|
|
|
Transition asset
|
|
|
64
|
|
Prior service cost
|
|
|
(1,456
|
)
|
Net actuarial loss
|
|
|
194
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
237
|
|
|
|
|
|
|
Other Changes in Plan Assets
and Benefit Obligations Recognized in Other Comprehensive
Loss
|
|
|
|
|
Net loss
|
|
$
|
(10,206
|
)
|
Transition asset
|
|
|
79
|
|
Prior service credit
|
|
|
46,024
|
|
|
|
|
|
|
Total recognized gain in other
comprehensive loss
|
|
|
35,897
|
|
|
|
|
|
|
Total recognized in net periodic
benefit cost and other comprehensive loss
|
|
$
|
35,660
|
|
|
|
|
|
|
The Company will record postretirement benefit income related to
the plan in fiscal 2007, primarily representing the amortization
of negative prior service costs, which will be partially offset
by service costs, interest costs on the accumulated benefit
obligation and actuarial gains and losses accumulated in the
plan. The Company expects to record a final gain on curtailment
of plan benefits in December 2007 of approximately $35,897, the
entire remaining balance in other comprehensive income.
F-43
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The funded status of the Companys postretirement
health-care and life insurance plans at year end was as follows:
|
|
|
|
|
|
|
December 30, 2006
|
|
|
Projected benefit
obligation:
|
|
|
|
|
Beginning of year
|
|
$
|
50,793
|
|
Service cost
|
|
|
470
|
|
Interest cost
|
|
|
967
|
|
Benefits paid
|
|
|
(1,824
|
)
|
Plan curtailments
|
|
|
(2,127
|
)
|
Plan amendments
|
|
|
(40,920
|
)
|
Actuarial (gain) loss
|
|
|
1,288
|
|
|
|
|
|
|
End of year
|
|
|
8,647
|
|
|
|
|
|
|
Fair value of plan
assets:
|
|
|
|
|
Beginning of year
|
|
|
184
|
|
Actual return on plan assets
|
|
|
2
|
|
Employer contributions
|
|
|
1,824
|
|
Benefits paid
|
|
|
(1,824
|
)
|
|
|
|
|
|
End of year
|
|
|
186
|
|
|
|
|
|
|
Funded status and accrued
benefit cost recognized
|
|
$
|
(8,461
|
)
|
|
|
|
|
|
Amounts recognized in the
Companys Combined and Consolidated Balance Sheet consist
of:
|
|
|
|
|
Current liabilities
|
|
$
|
(2,426
|
)
|
Noncurrent liabilities
|
|
|
(6,035
|
)
|
|
|
|
|
|
|
|
$
|
(8,461
|
)
|
|
|
|
|
|
Amounts recognized in
accumulated other comprehensive loss consist of:
|
|
|
|
|
Prior service credit
|
|
|
46,024
|
|
Initial net asset
|
|
|
79
|
|
Actuarial loss
|
|
|
(10,206
|
)
|
|
|
|
|
|
Other comprehensive gain recognized
|
|
$
|
35,897
|
|
|
|
|
|
|
Accrued benefit costs related to the Companys
postretirement healthcare and life insurance plans are reported
in the Accrued liabilitiesPayroll and employee
benefits and Pension and postretirement
benefits lines of the Combined and Consolidated Balance
Sheets.
(a) Measurement
Date and Assumptions
A September 30 measurement date was used to value plan
assets and obligations for the Companys postretirement
healthcare and life insurance plans. The weighted average
actuarial assumptions used in measuring the net periodic benefit
cost and plan obligations for these plans at the measurement
date were as follows: discount rate of 5.58% for plan
obligations and net periodic benefit cost; and long term rate of
return on plan assets of 3.70%.
F-44
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The assumed health care cost trend rate for fiscal year 2007 is
8.5% for participants under the age of 65 years, and 9.5%
for participants over the age of 65 years, with an assumed
decrease of 1% each year thereafter until fiscal year 2011 when
the ultimate trend rate is expected to be maintained. Because a
final curtailment of plan benefits is expected to occur in
December 2007, a 1% increase or decrease in the assumed health
care cost trend rate would not be expected to have an impact on
the total service and interest cost components for the six
months ended December 30, 2006 or the postretirement
benefit obligation as of December 30, 2006.
(b) Contributions
and Benefit Payments
The Company expects to make a contribution of $3,278 in fiscal
2007. Expected benefit payments to the plans are as follows:
$3,278 in fiscal 2007, $615 in fiscal 2008, $628 in fiscal 2009,
$642 in fiscal 2010, $654 in fiscal 2011 and $3,426 thereafter.
(17) Income
Taxes
The provision for income tax computed by applying the
U.S. statutory rate to income before taxes as reconciled to
the actual provisions were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
30.4
|
%
|
|
|
23.4
|
%
|
|
|
(35.5
|
)%
|
|
|
4.2
|
%
|
Foreign
|
|
|
69.6
|
|
|
|
76.6
|
|
|
|
135.5
|
|
|
|
95.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense at U.S. statutory
rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Tax on remittance of foreign
earnings
|
|
|
8.1
|
|
|
|
3.3
|
|
|
|
14.5
|
|
|
|
4.7
|
|
Finalization of tax reviews and
audits
|
|
|
|
|
|
|
|
|
|
|
(5.8
|
)
|
|
|
(32.0
|
)
|
Foreign taxes less than
U.S. statutory rate
|
|
|
(11.6
|
)
|
|
|
(8.3
|
)
|
|
|
(7.7
|
)
|
|
|
(10.8
|
)
|
Taxes related to earnings
previously deemed permanently invested
|
|
|
|
|
|
|
|
|
|
|
9.1
|
|
|
|
|
|
Benefit of Puerto Rico foreign tax
credits
|
|
|
|
|
|
|
(4.5
|
)
|
|
|
(7.3
|
)
|
|
|
(8.2
|
)
|
Other, net
|
|
|
2.3
|
|
|
|
(3.0
|
)
|
|
|
(1.0
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes at effective worldwide tax
rates
|
|
|
33.8
|
%
|
|
|
22.5
|
%
|
|
|
36.8
|
%
|
|
|
(12.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Current and deferred tax provisions (benefits) were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Six Months ended
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
17,918
|
|
|
$
|
5,848
|
|
|
$
|
23,766
|
|
Foreign
|
|
|
14,711
|
|
|
|
(3,511
|
)
|
|
|
11,200
|
|
State
|
|
|
1,667
|
|
|
|
1,148
|
|
|
|
2,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,296
|
|
|
$
|
3,485
|
|
|
$
|
37,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 1,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
119,598
|
|
|
$
|
(27,103
|
)
|
|
$
|
92,495
|
|
Foreign
|
|
|
18,069
|
|
|
|
(1,911
|
)
|
|
|
16,158
|
|
State
|
|
|
2,964
|
|
|
|
(17,790
|
)
|
|
|
(14,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
140,631
|
|
|
$
|
(46,804
|
)
|
|
$
|
93,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 2,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
28,332
|
|
|
$
|
74,780
|
|
|
$
|
103,112
|
|
Foreign
|
|
|
30,655
|
|
|
|
(8,070
|
)
|
|
|
22,585
|
|
State
|
|
|
1,310
|
|
|
|
|
|
|
|
1,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,297
|
|
|
$
|
66,710
|
|
|
$
|
127,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 3,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(95,476
|
)
|
|
$
|
43,322
|
|
|
$
|
(52,154
|
)
|
Foreign
|
|
|
13,497
|
|
|
|
(12,063
|
)
|
|
|
1,434
|
|
State
|
|
|
2,040
|
|
|
|
|
|
|
|
2,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(79,939
|
)
|
|
$
|
31,259
|
|
|
$
|
(48,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash payments for income taxes
|
|
$
|
18,687
|
|
|
$
|
14,035
|
|
|
$
|
16,099
|
|
|
$
|
11,753
|
|
Cash payments above represent cash tax payments made by the
Company in foreign jurisdictions. During the periods presented,
tax payments made in the U.S. were made by Sara Lee on the
Companys behalf and were settled in the funding payable
with parent companies account.
F-46
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The deferred tax assets and liabilities at the respective
year-ends were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible reserves
|
|
$
|
11,598
|
|
|
$
|
14,580
|
|
|
$
|
14,424
|
|
Inventory
|
|
|
77,750
|
|
|
|
97,633
|
|
|
|
99,887
|
|
Property and equipment
|
|
|
11,807
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
161,690
|
|
|
|
|
|
|
|
|
|
Capital loss
|
|
|
|
|
|
|
23,149
|
|
|
|
248,118
|
|
Accrued expenses
|
|
|
63,640
|
|
|
|
39,871
|
|
|
|
36,468
|
|
Employee benefits
|
|
|
90,180
|
|
|
|
65,105
|
|
|
|
49,412
|
|
Charitable contributions
|
|
|
|
|
|
|
|
|
|
|
11,216
|
|
Net operating loss and other tax
carryforwards
|
|
|
42,579
|
|
|
|
37,641
|
|
|
|
40,913
|
|
Other
|
|
|
14,423
|
|
|
|
7,237
|
|
|
|
8,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
473,667
|
|
|
|
285,216
|
|
|
|
508,799
|
|
Less valuation allowances
|
|
|
(14,591
|
)
|
|
|
(47,127
|
)
|
|
|
(269,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
459,076
|
|
|
|
238,089
|
|
|
|
239,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaids
|
|
|
3,971
|
|
|
|
5,803
|
|
|
|
5,837
|
|
Property and equipment
|
|
|
|
|
|
|
2,601
|
|
|
|
12,283
|
|
Intangibles
|
|
|
|
|
|
|
30,604
|
|
|
|
29,029
|
|
Foreign dividends declared but not
received
|
|
|
|
|
|
|
8,828
|
|
|
|
50,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
3,971
|
|
|
|
47,836
|
|
|
|
97,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
455,105
|
|
|
$
|
190,253
|
|
|
$
|
141,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance for deferred tax assets as of
December 30, 2006, July 1, 2006, and July 2, 2005
was $14,591, $47,127, and $269,633, respectively. The net change
in the total valuation allowance for the six months ended
December 30, 2006 and fiscal years ended July 1, 2006
and July 2, 2005 was ($32,536), ($222,506), and $1,301,
respectively.
The valuation allowance relates in part to deferred tax assets
established under SFAS No. 109 for loss carryforwards
at December 30, 2006, July 1, 2006, and July 2,
2005, of $11,736, $21,123, and $18,116, respectively, and to
foreign goodwill of $2,855 at December 30, 2006, $2,855 at
July 1, 2006, and $3,399 at July 2, 2005.
In addition, a $248,118 valuation allowance existed for capital
losses resulting from the sale of U.S. apparel capital
assets in 2001 and 2003. Of these capital losses $224,969
expired unused at July 1, 2006.
During the six months ended December 30, 2006, deferred tax
assets and the related valuation allowance were reduced by
$23,149 for the remaining capital losses and $9,387 in foreign
net operating losses retained by Sara Lee.
Since Sara Lee retained the liabilities related to income tax
contingencies for all periods prior to the spin off, such
amounts have been reflected in the Parent companies
equity investment line of the Combined and Consolidated
Balance Sheets.
F-47
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Within 180 days after Sara Lee files its final consolidated
tax return for the period that includes September 5, 2006,
Sara Lee is required to deliver to the Company a computation of
the amount of deferred taxes attributable to the Companys
United States and Canadian operations that would be included on
the Companys balance sheet as of September 6, 2006.
If substituting the amount of deferred taxes as finally
determined for the amount of estimated deferred taxes that were
included on that balance sheet at the time of the spin off
causes a decrease in the net book value reflected on that
balance sheet, then Sara Lee will be required to pay the Company
the amount of such decrease. If such substitution causes an
increase in the net book value reflected on that balance sheet,
then the Company will be required to pay Sara Lee the amount of
such increase. For purposes of this computation, the
Companys deferred taxes are the amount of deferred tax
benefits (including deferred tax consequences attributable to
deductible temporary differences and carryforwards) that would
be recognized as assets on the Companys balance sheet
computed in accordance with GAAP, but without regard to
valuation allowances, less the amount of deferred tax
liabilities (including deferred tax consequences attributable to
deductible temporary differences) that would be recognized as
liabilities on the Companys balance sheet computed in
accordance with GAAP, but without regard to valuation
allowances. Neither the Company nor Sara Lee will be required to
make any other payments to the other with respect to deferred
taxes.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances.
At December 30, 2006, the Company has net operating loss
carryforwards of approximately $127,384 which will expire as
follows:
|
|
|
|
|
Years Ending:
|
|
|
|
|
December 29, 2007
|
|
$
|
3,541
|
|
January 3, 2009
|
|
|
1,570
|
|
January 2, 2010
|
|
|
660
|
|
January 1, 2011
|
|
|
64
|
|
December 31, 2011 and
thereafter
|
|
|
121,549
|
|
The Company recognized a $50,000 tax charge related to the
repatriation of the earnings of foreign subsidiaries to the
U.S. in 2005.
In addition, the Company recognized a $31,600 tax charge for
extraordinary dividends associated with the American Jobs
Creation Act of 2004 (Act). On October 22, 2004, the
President of the United States signed the Act which created a
temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends
received deduction for certain dividends from controlled foreign
corporations.
At December 30, 2006, applicable U.S. federal income
taxes and foreign withholding taxes have not been provided on
the accumulated earnings of foreign subsidiaries that are
expected to be permanently reinvested. If these earnings had not
been permanently reinvested, deferred taxes of approximately
$64,100 would have been recognized in the Combined and
Consolidated Financial Statements.
F-48
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
(18) Stockholders
Equity
The Company is authorized to issue up to 500,000 shares of
common stock, par value $0.01 per share, and up to
50,000 shares of preferred stock, par value $0.01 per
share, and permits the Companys board of directors,
without stockholder approval, to increase or decrease the
aggregate number of shares of stock or the number of shares of
stock of any class or series that the Company is authorized to
issue. At December 30, 2006, 96,312 shares of common
stock were issued and outstanding and no shares of preferred
stock were issued or outstanding. Included within the
50,000 shares of preferred stock, 500 shares are
designated Junior Participating Preferred Stock, Series A
(the Series A Preferred Stock) and reserved for
issuance upon the exercise of rights under the rights agreement
described below.
Preferred
Stock Purchase Rights
Pursuant to a stockholder rights agreement entered into by the
Company prior to the spin off, one preferred stock purchase
right will be distributed with and attached to each share of the
Companys common stock. Each right will entitle its holder,
under the circumstances described below, to purchase from the
Company one one-thousandth of a share of the Series A
Preferred Stock at an exercise price of $75 per right.
Initially, the rights will be associated with the Companys
common stock, and will be transferable with and only with the
transfer of the underlying share of common stock. Until a right
is exercised, its holder, as such, will have no rights as a
stockholder with respect to such rights, including, without
limitation, the right to vote or to receive dividends.
The rights will become exercisable and separately certificated
only upon the rights distribution date, which will occur upon
the earlier of: (i) ten days following a public
announcement by the Company that a person or group (an
acquiring person) has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of its
outstanding shares of common stock (the date of the announcement
being the stock acquisition date); or (ii) ten
business days (or later if so determined by our board of
directors) following the commencement of or public disclosure of
an intention to commence a tender offer or exchange offer by a
person if, after acquiring the maximum number of securities
sought pursuant to such offer, such person, or any affiliate or
associate of such person, would acquire, or obtain the right to
acquire, beneficial ownership of 15% or more of our outstanding
shares of the Companys common stock.
Upon the Companys public announcement that a person or
group has become an acquiring person, each holder of a right
(other than any acquiring person and certain related parties,
whose rights will have automatically become null and void) will
have the right to receive, upon exercise, common stock with a
value equal to two times the exercise price of the right. In the
event of certain business combinations, each holder of a right
(except rights which previously have been voided as described
above) will have the right to receive, upon exercise, common
stock of the acquiring company having a value equal to two times
the exercise price of the right.
The Company may redeem the rights in whole, but not in part, at
a price of $0.001 per right (subject to adjustment and payable
in cash, common stock or other consideration deemed appropriate
by the board of directors) at any time prior to the earlier of
the stock acquisition date and the rights expiration date.
Immediately upon the action of the board of directors
authorizing any redemption, the rights will terminate and the
holders of rights will only be entitled to receive the
redemption price. At any time after a person becomes an
acquiring person and prior to the earlier of (i) the time
any person, together with all affiliates and associates, becomes
the beneficial owner of 50% or more of the Companys
outstanding common stock and (ii) the occurrence of a
business combination, the board of directors may cause the
Company to exchange for all or part of the then-outstanding and
exercisable rights shares of its common stock at an exchange
ratio of one common share per right, adjusted to reflect any
stock split, stock dividend or similar transaction.
F-49
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
(19) Relationship
with Sara Lee and Related Entities
Effective upon the completion of the spin off on
September 5, 2006, Sara Lee ceased to be a related party to
the Company. The Company paid a dividend to Sara Lee of
$1,950,000 and repaid a loan in the amount of $450,000 which is
reflected in the Combined and Consolidated Statement of
Stockholders or Parent Companies Equity. An
additional payment of approximately $26,306 was paid to Sara Lee
in order to satisfy all outstanding payables from the Company to
Sara Lee and Sara Lee subsidiaries.
Prior to the spin off on September 5, 2006, the Company
participated in a number of Sara Lee administered programs such
as cash funding systems, insurance programs, employee benefit
programs and workers compensation programs. In connection
with the spin off from Sara Lee, the Company assumed $299,000 in
unfunded employee benefit liabilities for pension,
postretirement and other retirement benefit qualified and
nonqualified plans, and $37,554 of liabilities in connection
with property insurance, workers compensation, and other
programs.
Included in the historical information are costs of certain
services such as business insurance, medical insurance, and
employee benefit plans and allocations for certain centralized
administration costs for treasury, real estate, accounting,
auditing, tax, risk management, human resources and benefits
administration. Centralized administration costs were allocated
to the Company based upon a proportional cost allocation method.
These allocated costs are included in the Selling, general
and administrative expenses line of the Combined and
Consolidated Statement of Income and the Parent
companies equity investment line of the Combined and
Consolidated Balance Sheet. For the six months ended
December 30, 2006, the total amount allocated for
centralized administration costs by Sara Lee was $0.
In connection with the spin off, the Company entered into the
following agreements with Sara Lee:
|
|
|
|
|
Master Separation Agreement. This agreement governs the
contribution of Sara Lees branded apparel Americas/Asia
business to the Company, the subsequent distribution of shares
of Hanesbrands common stock to Sara Lee stockholders and
other matters related to Sara Lees relationship with the
Company. To effect the contribution, Sara Lee agreed to transfer
all of the assets of the branded apparel Americas/Asia business
to the Company and the Company agreed to assume, perform and
fulfill all of the liabilities of the branded apparel
Americas/Asia division in accordance with their respective
terms, except for certain liabilities to be retained by Sara Lee.
|
|
|
|
Tax Sharing Agreement. This agreement governs the
allocation of U.S. federal, state, local, and foreign tax
liability between the Company and Sara Lee, provides for
restrictions and indemnities in connection with the tax
treatment of the distribution, and addresses other tax-related
matters. This agreement also provides that the Company is liable
for taxes incurred by Sara Lee that arise as a result of the
Company taking or failing to take certain actions that result in
the distribution failing to meet the requirements of a tax-free
distribution under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code. The Company therefore has generally
agreed that, among other things, it will not take any actions
that would result in any tax being imposed on the spin off.
|
|
|
|
Employee Matters Agreement. This agreement allocates
responsibility for employee benefit matters on the date of and
after the spin off, including the treatment of existing welfare
benefit plans, savings plans, equity-based plans and deferred
compensation plans as well as the Companys establishment
of new plans.
|
|
|
|
Master Transition Services Agreement. Under this
agreement, the Company and Sara Lee agreed to provide each
other, for varying periods of time, with specified support
services related to among others,
|
F-50
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
human resources and financial shared services, tax-shared
services and information technology services. Each of these
services is provided for a fee, which differs depending upon the
service.
|
|
|
|
|
|
Real Estate Matters Agreement. This agreement governs the
manner in which Sara Lee will transfer to or share with the
Company various leased and owned properties associated with the
branded apparel business.
|
|
|
|
Indemnification and Insurance Matters Agreement. This
agreement provides general indemnification provisions pursuant
to which the Company and Sara Lee have agreed to indemnify each
other and their respective affiliates, agents, successors and
assigns from certain liabilities. This agreement also contains
provisions governing the recovery by and payment to the Company
of insurance proceeds related to its business and arising on or
prior to the date of the distribution and its insurance coverage.
|
|
|
|
Intellectual Property Matters Agreement. This agreement
provides for the license by Sara Lee to the Company of certain
software, and governs the wind-down of the Companys use of
certain of Sara Lees trademarks (other than those being
transferred to the Company in connection with the spin off).
|
During the periods presented prior to the spin off on
September 5, 2006, the Company participated in a number of
corporate-wide programs administered by Sara Lee. These programs
included participation in Sara Lees Global Cash Funding
System, insurance programs, employee benefit programs,
workers compensation programs, and tax planning services.
As part of the Companys participation in Sara Lees
Global Cash Funding System, Sara Lee provided all funding used
for working capital purposes or other investment needs. These
funding amounts are reflected in these financial statements and
described further below. Sara Lee has issued debt for general
corporate purposes and this debt and related interest have not
been allocated to these financial statements. The following is a
discussion of the relationship with Sara Lee, the services
provided and how they have been accounted for in the
Companys financial statements.
|
|
(a)
|
Amounts
due to or from Parent Companies and Related
Entities
|
The amounts due (to) from parent companies and related entities
were as follows:
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
Due from related entities
|
|
$
|
273,428
|
|
|
$
|
26,194
|
|
Funding receivable with parent
companies
|
|
|
161,686
|
|
|
|
|
|
Notes receivable from parent
companies
|
|
|
1,111,167
|
|
|
|
90,551
|
|
Due to related entities
|
|
|
(43,115
|
)
|
|
|
(59,943
|
)
|
Funding payable with parent
companies
|
|
|
|
|
|
|
(317,184
|
)
|
Notes payable to parent companies
|
|
|
(246,830
|
)
|
|
|
(228,152
|
)
|
Notes payable to related entities
|
|
|
(466,944
|
)
|
|
|
(323,046
|
)
|
|
|
|
|
|
|
|
|
|
Net amount due (to) from parent
companies and related entities
|
|
$
|
789,392
|
|
|
$
|
(811,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Allocation
of Corporate Costs
|
The costs of certain services that were provided by Sara Lee to
the Company during the periods presented have been reflected in
these financial statements, including charges for services such
as business insurance, medical insurance and employee benefit
plans and allocations for certain centralized administration
costs for treasury, real estate, accounting, auditing, tax, risk
management, human resources and benefits administration. These
allocations of centralized administration costs were determined
using a proportional cost allocation
F-51
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
method on bases that the Company and Sara Lee considered to be
reasonable, including relevant operating profit, fixed assets,
sales, and payroll. Allocated costs are included in the
Selling, general and administrative expenses line of
the Combined and Consolidated Income Statements and the
Parent companies equity investment line of the
Combined and Consolidated Balance Sheets. The total amount
allocated for centralized administration costs by Sara Lee in
the six months ended December 30, 2006 and the fiscal years
ended 2006, 2005 and 2004 was $0, $37,478, $34,213 and $32,568,
respectively. For the six months ended December 30, 2006,
there were no costs allocated as the Companys
infrastructure was in place and did not significantly benefit
from these services from Sara Lee. These costs represent
managements reasonable allocation of the costs incurred.
However, these amounts may not be representative of the costs
necessary for the Company to operate as a separate standalone
company. The Net transactions with parent companies
line item in the Combined and Consolidated Statements of Parent
Companies Equity primarily reflects dividends paid to
parent companies and costs paid by Sara Lee on behalf of the
Company.
|
|
(c)
|
Global
Cash Funding System
|
During the periods presented prior to the spin off on
September 5, 2006, the Company participated in Sara
Lees Global Cash Funding System. Sara Lee maintained a
separate program for domestic operating locations and foreign
locations.
Domestic Cash Funding SystemIn the Domestic Cash
Funding System, the Companys domestic operating locations
maintained a bank account with a specific bank as directed by
Sara Lee. These funding system bank accounts were linked
together and were globally managed by Sara Lee. The Company
recorded two types of transactions in the funding system bank
account as follows (1) cash collections from the
Companys operations were deposited into the account, and
(2) any cash borrowings or charges which were used to fund
operations were taken from the account. Cash collections
deposited into this account generally included all cash receipts
made by the operating locations. Cash borrowings made by the
Company from the Sara Lee cash concentration system were used to
fund operating expenses. Interest was not earned or paid on the
domestic cash funding system account. A portion of cash in the
Companys bank accounts during the periods presented was
part of the funding system utilized by Sara Lee where the bank
had a right of offset for the Company accounts against other
Sara Lee accounts.
For the periods presented prior to the spin off on
September 5, 2006, transactions between the Company and
Sara Lee consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
Payable (receivable) balance at
beginning of period
|
|
$
|
317,184
|
|
|
$
|
(55,379
|
)
|
Cash collections from operations
|
|
|
(2,225,050
|
)
|
|
|
(1,180,617
|
)
|
Cash borrowings and other payments
|
|
|
1,746,180
|
|
|
|
1,553,180
|
|
|
|
|
|
|
|
|
|
|
(Receivable) payable balance at
end of period
|
|
$
|
(161,686
|
)
|
|
$
|
317,184
|
|
|
|
|
|
|
|
|
|
|
Average balance during the period
|
|
$
|
77,749
|
|
|
$
|
130,902
|
|
|
|
|
|
|
|
|
|
|
The receivable or payable at the end of each period is reported
in the Funding receivable with parent companies or
Funding payable with parent companies line of the
Combined and Consolidated Balance Sheets. These amounts were
generally settled on a monthly basis, and therefore have been
shown in current assets or liabilities on the Combined and
Consolidated Balance Sheets. The Net transactions with
parent companies line on the Combined and Consolidated
Statements of Cash Flows primarily reflects the cash activity in
the funding (receivable) payable with parent and cash activity
in the Parent companies equity investment line
in the balance sheet.
F-52
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
Foreign Cash Pool SystemThe Company maintained a
bank account with a bank selected by Sara Lee in each foreign
operating location. Within each country, one Sara Lee entity is
designated as the cash pool leader and the individual bank
accounts that each subsidiary maintains were linked with the
countrys cash pool leader account. During each day, under
the cash pooling arrangement, each individual participant can
either deposit funds into the cash pool account from the
collection of receivables or withdraw funds from the account to
fund working capital or other cash needs of the business. At the
end of the day, the cash pool leader sweeps all cash balances in
the countrys cash pool accounts into the cash pool
leaders account, or funds any overdrawn accounts so that
each cash pool participant account has a zero balance at the end
of the day. The cash pool leader controls all funds in the
leaders account. As cash is swept into or out of a cash
pool account, an intercompany payable or receivable is
established between the cash pool leader and the participant.
The net receivable or payable balance in the intercompany
account earns interest or pays interest at the applicable
countrys market rate. The net interest income (expense)
recognized on the cash pool intercompany account by the Company
for the six months ended December 30, 2006 and fiscal years
ended 2006, 2005 and 2004 was ($60), ($1,092), $84 and $579,
respectively. At the end of the six months ended
December 30, 2006 and fiscal years ended 2006, 2005 and
2004, the Company reported the cash pool balances of $0, $1,109,
$14,458 and $42,913, respectively, in the Due from related
entities line and $0, $39,739, $40,740 and $49,970,
respectively, in the Due to related entities line of
the Combined and Consolidated Balance Sheets. Sara Lee and the
Company did not intend on repaying any of these outstanding
amounts upon completion of the spin off and therefore these
amounts are shown in current assets or liabilities on the
Combined and Consolidated Balance Sheet.
Certain of the Companys divisions had various short-term
loans to and from Sara Lee and other parent companies prior to
the spin off. The purpose of these loans was to provide funds
for certain working capital or other capital and operating
requirements of the business. These loans maintained fixed
interest rates ranging from 3.60% to 5.66%, 1.8% to 5.60%, and
1.32% to 5.60%, at July 1, 2006, July 2, 2005 and
July 3, 2004, respectively. The balances are reported in
the short-term Notes payable to parent companies
line and the short-term Notes receivable from parent
companies line in the Combined and Consolidated Balance
Sheets. Sara Lee and the Company did not intend on repaying
these outstanding amounts upon the completion of the spin off
and therefore have shown these amounts in current assets or
liabilities on the Combined and Consolidated Balance Sheets.
|
|
(e)
|
Other
Transactions with Sara Lee Related Entities
|
During all periods presented prior to the spin off on
September 5, 2006, the Companys entities engaged in
certain transactions with other Sara Lee businesses that are not
part of the Company, which included the purchase and sale of
certain inventory, the exchange of services, and royalty
arrangements involving the use of trademarks or other
intangibles.
Transactions with related entities are summarized in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Sales to related entities
|
|
$
|
5
|
|
|
$
|
1,630
|
|
|
$
|
1,999
|
|
|
$
|
1,365
|
|
Net royalty income
|
|
|
2,026
|
|
|
|
1,554
|
|
|
|
3,152
|
|
|
|
3,782
|
|
Net service expense
|
|
|
7
|
|
|
|
4,449
|
|
|
|
8,915
|
|
|
|
10,170
|
|
Interest expense
|
|
|
7,878
|
|
|
|
23,036
|
|
|
|
30,759
|
|
|
|
32,041
|
|
Interest income
|
|
|
4,926
|
|
|
|
5,807
|
|
|
|
16,275
|
|
|
|
6,795
|
|
F-53
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
The outstanding balances, excluding interest, resulting from
such transactions are reported in the Due to related
entities and the Due from related entities
lines of the Combined and Consolidated Balance Sheets. Interest
income and expense with related entities are reported in the
Interest expense, net line of the Combined and
Consolidated Statements of Income. The remaining balances
included in this line represent interest with third parties.
In addition to trade transactions, certain divisions within the
Company had outstanding loans payable to related entities during
the periods presented. The purpose of these loans was to provide
additional capital to support operating requirements. These
loans maintained fixed interest rates consistent with those
related to intercompany loans with parent companies. The
balances are reported in the Notes payable to related
entities line of the Combined and Consolidated Balance
Sheets.
(20) Business
Segment Information
During the six months ended December 30, 2006, the Company
changed its internal reporting structure such that operations
are managed and reported in five operating segments, each of
which is a reportable segment: Innerwear, Outerwear, Hosiery,
International and Other. These segments are organized
principally by product category and geographic location.
Management of each segment is responsible for the assets and
operations of these businesses. Prior to the six months ended
December 30, 2006, the Company managed and reported its
operations in four operating segments, each of which was a
reportable segment: Innerwear, Outerwear, Hosiery and
International.
The types of products and services from which each reportable
segment derives its revenues are as follows:
|
|
|
|
|
Innerwear sells basic branded products that are replenishment in
nature under the product categories of womens intimate
apparel, mens underwear, kids underwear, sock,
thermals and sleepwear.
|
|
|
|
Outerwear sells basic branded products that are seasonal in
nature under the product categories of casualwear and activewear.
|
|
|
|
Hosiery sells products in categories such as panty hose and knee
highs.
|
|
|
|
International relates to the Europe, Asia, Canada and Latin
America geographic locations which sell products that span
across the innerwear, outerwear and hosiery reportable segments.
|
|
|
|
Other is comprised of sales of non finished products such as
fabric and certain other materials in the United States, Asia
and Latin America in order to maintain asset utilization at
certain manufacturing facilities.
|
Prior to the six months ended December 30, 2006, the
Company evaluated segment operating performance based upon a
definition of segment operating profit that included
restructuring and related accelerated depreciation charges.
Beginning in the six months ended December 30, 2006, the
Company began evaluating the operating performance of its
segments based upon a new definition of segment operating
profit, which is defined as operating profit before general
corporate expenses, amortization of trademarks and other
identifiable intangibles and restructuring and related
accelerated depreciation charges. In connection with this
change, the Company no longer allocates goodwill and trademarks
and other identifiable intangibles to its operating segments for
the purposes of evaluating operating performance. Prior period
segment results have been conformed to the new measurements of
segment financial performance. The accounting policies of the
segments are consistent with those described in Note 2,
Summary of Significant Accounting Policies.
F-54
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net sales(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
1,295,868
|
|
|
$
|
2,627,101
|
|
|
$
|
2,703,637
|
|
|
$
|
2,668,876
|
|
Outerwear
|
|
|
616,298
|
|
|
|
1,140,703
|
|
|
|
1,198,286
|
|
|
|
1,141,677
|
|
Hosiery
|
|
|
144,066
|
|
|
|
290,125
|
|
|
|
338,468
|
|
|
|
382,728
|
|
International
|
|
|
197,729
|
|
|
|
398,157
|
|
|
|
399,989
|
|
|
|
410,889
|
|
Other
|
|
|
19,381
|
|
|
|
62,809
|
|
|
|
88,859
|
|
|
|
86,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales
|
|
|
2,273,342
|
|
|
|
4,518,895
|
|
|
|
4,729,239
|
|
|
|
4,691,058
|
|
Intersegment
|
|
|
(22,869
|
)
|
|
|
(46,063
|
)
|
|
|
(45,556
|
)
|
|
|
(58,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,250,473
|
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Segment operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
172,008
|
|
|
$
|
344,643
|
|
|
$
|
300,796
|
|
|
$
|
366,988
|
|
Outerwear
|
|
|
21,316
|
|
|
|
74,170
|
|
|
|
68,301
|
|
|
|
47,059
|
|
Hosiery
|
|
|
36,205
|
|
|
|
39,069
|
|
|
|
40,776
|
|
|
|
38,113
|
|
International
|
|
|
15,236
|
|
|
|
37,003
|
|
|
|
32,231
|
|
|
|
38,248
|
|
Other
|
|
|
(288
|
)
|
|
|
127
|
|
|
|
(174
|
)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
244,477
|
|
|
|
495,012
|
|
|
|
441,930
|
|
|
|
490,443
|
|
Items not included in segment
operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses
|
|
|
(46,927
|
)
|
|
|
(52,482
|
)
|
|
|
(21,823
|
)
|
|
|
(28,980
|
)
|
Amortization of trademarks and
other identifiable intangibles
|
|
|
(3,466
|
)
|
|
|
(9,031
|
)
|
|
|
(9,100
|
)
|
|
|
(8,712
|
)
|
Gain on curtailment of
postretirement benefits
|
|
|
28,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
(11,278
|
)
|
|
|
101
|
|
|
|
(46,978
|
)
|
|
|
(27,466
|
)
|
Accelerated depreciation
|
|
|
(21,199
|
)
|
|
|
|
|
|
|
(4,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
|
190,074
|
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
425,285
|
|
Other expenses
|
|
|
(7,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(70,753
|
)
|
|
|
(17,280
|
)
|
|
|
(13,964
|
)
|
|
|
(24,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
111,920
|
|
|
$
|
416,320
|
|
|
$
|
345,516
|
|
|
$
|
400,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
1,354,183
|
|
|
$
|
2,664,833
|
|
|
$
|
2,517,796
|
|
Outerwear
|
|
|
761,653
|
|
|
|
798,724
|
|
|
|
707,690
|
|
Hosiery
|
|
|
110,400
|
|
|
|
155,098
|
|
|
|
144,312
|
|
International
|
|
|
222,561
|
|
|
|
298,698
|
|
|
|
268,492
|
|
Other
|
|
|
21,798
|
|
|
|
43,367
|
|
|
|
44,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,470,595
|
|
|
|
3,960,720
|
|
|
|
3,683,127
|
|
Corporate(3)
|
|
|
965,025
|
|
|
|
943,166
|
|
|
|
574,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,435,620
|
|
|
$
|
4,903,886
|
|
|
|
4,257,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Depreciation expense for fixed
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
20,945
|
|
|
$
|
52,815
|
|
|
$
|
61,336
|
|
|
$
|
53,764
|
|
Outerwear
|
|
|
10,417
|
|
|
|
22,525
|
|
|
|
18,727
|
|
|
|
20,500
|
|
Hosiery
|
|
|
4,960
|
|
|
|
12,645
|
|
|
|
11,356
|
|
|
|
15,172
|
|
International
|
|
|
1,529
|
|
|
|
2,783
|
|
|
|
3,123
|
|
|
|
7,479
|
|
Other
|
|
|
2,287
|
|
|
|
4,143
|
|
|
|
2,857
|
|
|
|
2,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,138
|
|
|
|
94,911
|
|
|
|
97,399
|
|
|
|
99,898
|
|
Corporate
|
|
|
29,808
|
|
|
|
10,262
|
|
|
|
11,392
|
|
|
|
5,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense for
fixed assets
|
|
$
|
69,946
|
|
|
$
|
105,173
|
|
|
$
|
108,791
|
|
|
$
|
105,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Additions to long-lived
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
4,447
|
|
|
$
|
32,667
|
|
|
$
|
22,223
|
|
|
$
|
38,032
|
|
Outerwear
|
|
|
1,580
|
|
|
|
47,242
|
|
|
|
25,675
|
|
|
|
13,513
|
|
Hosiery
|
|
|
1,426
|
|
|
|
4,279
|
|
|
|
2,233
|
|
|
|
5,156
|
|
International
|
|
|
985
|
|
|
|
5,025
|
|
|
|
2,912
|
|
|
|
3,261
|
|
Other
|
|
|
189
|
|
|
|
659
|
|
|
|
365
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,627
|
|
|
|
89,872
|
|
|
|
53,408
|
|
|
|
60,041
|
|
Corporate
|
|
|
21,137
|
|
|
|
20,207
|
|
|
|
13,727
|
|
|
|
3,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions to long-lived
assets
|
|
$
|
29,764
|
|
|
$
|
110,079
|
|
|
$
|
67,135
|
|
|
$
|
63,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes sales between segments. Such sales are at transfer
prices that are at cost plus markup or at prices equivalent to
market value. |
|
(2) |
|
Intersegment sales included in the segments net sales are
as follows: |
F-56
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Innerwear
|
|
$
|
2,287
|
|
|
$
|
5,293
|
|
|
$
|
4,844
|
|
|
$
|
5,516
|
|
Outerwear
|
|
|
9,671
|
|
|
|
16,062
|
|
|
|
13,098
|
|
|
|
17,970
|
|
Hosiery
|
|
|
9,575
|
|
|
|
21,302
|
|
|
|
21,079
|
|
|
|
26,434
|
|
International
|
|
|
1,355
|
|
|
|
3,406
|
|
|
|
6,535
|
|
|
|
8,397
|
|
Other
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22,869
|
|
|
|
46,063
|
|
|
|
45,556
|
|
|
|
58,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Principally cash and equivalents, certain fixed assets, net
deferred tax assets, goodwill, trademarks and other identifiable
intangibles, and certain other noncurrent assets. |
Sales to Wal-Mart, Target and Kohls were substantially in
the Innerwear and Outerwear segments and represented 28%, 15%
and 6% of total sales in the six months ended December 30,
2006, respectively.
Worldwide sales by product category for Innerwear, Outerwear,
Hosiery and Other were $1,433,772, $668,595, $151,594 and
$19,381, respectively, in the six months ended December 30,
2006.
(21) Geographic
Area Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended or at
|
|
|
Years Ended or at
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Long-Lived
|
|
|
|
|
|
Long-Lived
|
|
|
|
|
|
Long-Lived
|
|
|
|
|
|
Long-Lived
|
|
|
|
Sales
|
|
|
Assets
|
|
|
Sales
|
|
|
Assets
|
|
|
Sales
|
|
|
Assets
|
|
|
Sales
|
|
|
Assets
|
|
|
United States
|
|
$
|
2,058,506
|
|
|
$
|
718,489
|
|
|
$
|
4,105,168
|
|
|
$
|
862,280
|
|
|
$
|
4,307,940
|
|
|
$
|
770,917
|
|
|
$
|
4,257,886
|
|
|
$
|
846,311
|
|
Mexico
|
|
|
38,920
|
|
|
|
19,194
|
|
|
|
77,516
|
|
|
|
35,376
|
|
|
|
79,352
|
|
|
|
42,897
|
|
|
|
97,848
|
|
|
|
45,745
|
|
Central America
|
|
|
23,793
|
|
|
|
104,420
|
|
|
|
3,185
|
|
|
|
49,166
|
|
|
|
4,511
|
|
|
|
98,168
|
|
|
|
4,304
|
|
|
|
101,015
|
|
Japan
|
|
|
43,707
|
|
|
|
16,302
|
|
|
|
85,898
|
|
|
|
4,979
|
|
|
|
91,337
|
|
|
|
6,202
|
|
|
|
85,129
|
|
|
|
7,126
|
|
Canada
|
|
|
57,898
|
|
|
|
6,008
|
|
|
|
118,798
|
|
|
|
6,828
|
|
|
|
113,782
|
|
|
|
7,496
|
|
|
|
109,228
|
|
|
|
7,904
|
|
Other
|
|
|
27,649
|
|
|
|
111,159
|
|
|
|
80,637
|
|
|
|
73,411
|
|
|
|
84,762
|
|
|
|
57,544
|
|
|
|
76,981
|
|
|
|
24,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,250,473
|
|
|
$
|
975,572
|
|
|
|
4,471,202
|
|
|
$
|
1,032,040
|
|
|
|
4,681,684
|
|
|
$
|
983,224
|
|
|
|
4,631,376
|
|
|
|
1,032,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party
|
|
|
|
|
|
|
|
|
|
|
1,630
|
|
|
|
|
|
|
|
1,999
|
|
|
|
|
|
|
|
1,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,250,473
|
|
|
|
|
|
|
$
|
4,472,832
|
|
|
|
|
|
|
$
|
4,683,683
|
|
|
|
|
|
|
|
4,632,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
(22) Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
Six month period ending
December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,118,968
|
|
|
$
|
1,131,505
|
|
|
|
*
|
|
|
|
*
|
|
|
$
|
2,250,473
|
|
Gross profit
|
|
|
365,631
|
|
|
|
354,723
|
|
|
|
|
|
|
|
|
|
|
|
720,354
|
|
Net income
|
|
|
50,345
|
|
|
|
23,794
|
|
|
|
|
|
|
|
|
|
|
|
74,139
|
|
Basic earnings per share
|
|
|
0.52
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
0.77
|
|
Diluted earnings per share
|
|
|
0.52
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
0.77
|
|
Fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,137,960
|
|
|
$
|
1,181,878
|
|
|
$
|
1,032,861
|
|
|
$
|
1,120,133
|
|
|
|
4,472,832
|
|
Gross profit
|
|
|
369,518
|
|
|
|
393,460
|
|
|
|
340,893
|
|
|
|
381,461
|
|
|
|
1,485,332
|
|
Net income
|
|
|
82,603
|
|
|
|
106,012
|
|
|
|
74,593
|
|
|
|
59,285
|
|
|
|
322,493
|
|
Basic earnings per share
|
|
|
0.86
|
|
|
|
1.10
|
|
|
|
0.77
|
|
|
|
0.62
|
|
|
|
3.35
|
|
Diluted earnings per share
|
|
|
0.86
|
|
|
|
1.10
|
|
|
|
0.77
|
|
|
|
0.62
|
|
|
|
3.35
|
|
Fiscal 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,217,359
|
|
|
$
|
1,239,144
|
|
|
$
|
1,071,830
|
|
|
$
|
1,155,350
|
|
|
|
4,683,683
|
|
Gross profit
|
|
|
388,128
|
|
|
|
382,432
|
|
|
|
328,776
|
|
|
|
360,776
|
|
|
|
1,460,112
|
|
Net income (loss)
|
|
|
101,406
|
|
|
|
100,921
|
|
|
|
25,166
|
|
|
|
(8,984
|
)
|
|
|
218,509
|
|
Basic earnings per share
|
|
|
1.05
|
|
|
|
1.05
|
|
|
|
0.26
|
|
|
|
(0.09
|
)
|
|
|
2.27
|
|
Diluted earnings per share
|
|
|
1.05
|
|
|
|
1.05
|
|
|
|
0.26
|
|
|
|
(0.09
|
)
|
|
|
2.27
|
|
Fiscal 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,181,892
|
|
|
$
|
1,146,289
|
|
|
$
|
1,084,327
|
|
|
$
|
1,220,233
|
|
|
|
4,632,741
|
|
Gross profit
|
|
|
395,054
|
|
|
|
377,737
|
|
|
|
368,891
|
|
|
|
399,033
|
|
|
|
1,540,715
|
|
Net income
|
|
|
84,705
|
|
|
|
79,227
|
|
|
|
82,644
|
|
|
|
202,976
|
|
|
|
449,552
|
|
Basic earnings per share
|
|
|
0.88
|
|
|
|
0.82
|
|
|
|
0.86
|
|
|
|
2.11
|
|
|
|
4.67
|
|
Diluted earnings per share
|
|
|
0.88
|
|
|
|
0.82
|
|
|
|
0.86
|
|
|
|
2.11
|
|
|
|
4.67
|
|
|
|
|
* |
|
The six months ended December 30, 2006 contains only first
and second quarter results as a result of changing our fiscal
year end to the Saturday closest to December 31. |
The amounts above include the impact of restructuring and
curtailment as described in notes 4 and 16,
respectively, to the Combined and Consolidated Financial
Statements.
(23) Subsequent
Event
On February 1, 2007, the Company announced that its Board
of Directors has granted authority for the repurchase of up to
10,000 shares of the Companys common stock. Share
repurchases will be made periodically in open-market
transactions, and are subject to market conditions, legal
requirements and other factors. Additionally, management has
been granted authority to establish a trading plan under
Rule 10b5-1
of the Securities Exchange Act of 1934 in connection with share
repurchases, which will allow the Company to repurchase shares
in the open market during periods in which the stock trading
window is otherwise closed for the Company and certain of its
officers and employees pursuant to the Companys insider
trading policy.
F-58
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
(24) Consolidating
Financial Information
In accordance with the indenture governing the Companys
$500 million Floating Rate Senior Notes issued on
December 14, 2006, certain of the Companys
subsidiaries have guaranteed the Companys obligations
under the Floating Rate Senior Notes. The following presents the
condensed consolidating financial information separately for:
|
|
|
|
(i)
|
Hanesbrands (on an unconsolidated basis), the issuer of the
guaranteed obligations;
|
|
|
(ii)
|
Divisional entities, on a combined basis, representing operating
divisions 100% owned by Hanesbrands;
|
|
|
(iii)
|
Guarantor subsidiaries, on a combined basis, as specified in the
indenture governing the Floating Rate Senior Notes;
|
|
|
(iv)
|
Non-guarantor subsidiaries, on a combined basis;
|
|
|
(v)
|
Consolidating entries and eliminations representing adjustments
to (a) eliminate intercompany transactions between or among
Hanesbrands, the guarantor subsidiaries and the non-guarantor
subsidiaries, (b) eliminate intercompany profit in
inventory, (c) eliminate the investments in our
subsidiaries and (d) record consolidating entries; and
|
|
|
(vi)
|
Hanesbrands Inc. on a consolidated basis.
|
As described in Note 1, a separate legal entity did not
exist for Hanesbrands Inc. prior to the spin off from Sara Lee
because a direct ownership relationship did not exist among the
various units comprising the Branded Apparel Americas and Asia
Business. In connection with the spin off from Sara Lee, each
guarantor subsidiary became a 100% owned direct or indirect
subsidiary of Hanesbrands Inc. as of September 5, 2006.
Therefore, a parent company entity is not presented for fiscal
periods prior to the spin-off.
The Floating Rate Senior Notes are fully and unconditionally
guaranteed on a joint and several basis by each guarantor
subsidiary. Each entity in the consolidating financial
information follows the same accounting policies as described in
the combined and consolidated financial statements, except for
the use by the Parent Company and guarantor subsidiaries of the
equity method of accounting to reflect ownership interests in
subsidiaries which are eliminated upon consolidation.
F-59
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet
|
|
|
|
|
|
|
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Company(1)
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
60,960
|
|
|
$
|
154
|
|
|
$
|
94,859
|
|
|
$
|
|
|
|
$
|
155,973
|
|
Trade accounts receivable
|
|
|
|
|
|
|
408,751
|
|
|
|
9,369
|
|
|
|
70,509
|
|
|
|
|
|
|
|
488,629
|
|
Inventories
|
|
|
|
|
|
|
959,274
|
|
|
|
128,773
|
|
|
|
226,188
|
|
|
|
(97,734
|
)
|
|
|
1,216,501
|
|
Deferred tax assets and other
current assets
|
|
|
|
|
|
|
55,481
|
|
|
|
142,183
|
|
|
|
27,329
|
|
|
|
(14,916
|
)
|
|
|
210,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
1,484,466
|
|
|
|
280,479
|
|
|
|
418,885
|
|
|
|
(112,650
|
)
|
|
|
2,071,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, net
|
|
|
|
|
|
|
298,755
|
|
|
|
96,147
|
|
|
|
161,964
|
|
|
|
|
|
|
|
556,866
|
|
Trademarks and other identifiable
intangibles, net
|
|
|
|
|
|
|
13,301
|
|
|
|
114,205
|
|
|
|
9,675
|
|
|
|
|
|
|
|
137,181
|
|
Goodwill
|
|
|
|
|
|
|
213,376
|
|
|
|
16,935
|
|
|
|
51,214
|
|
|
|
|
|
|
|
281,525
|
|
Investments in subsidiaries
|
|
|
69,271
|
|
|
|
|
|
|
|
175,594
|
|
|
|
266,347
|
|
|
|
(511,212
|
)
|
|
|
|
|
Deferred tax assets and other
noncurrent assets
|
|
|
|
|
|
|
144,281
|
|
|
|
233,608
|
|
|
|
245,879
|
|
|
|
(234,900
|
)
|
|
|
388,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
69,271
|
|
|
$
|
2,154,179
|
|
|
$
|
916,968
|
|
|
$
|
1,153,964
|
|
|
$
|
(858,762
|
)
|
|
$
|
3,435,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
162,281
|
|
|
$
|
20,109
|
|
|
$
|
44,855
|
|
|
$
|
(4,704
|
)
|
|
$
|
222,541
|
|
Accrued liabilities
|
|
|
|
|
|
|
189,243
|
|
|
|
29,784
|
|
|
|
292,788
|
|
|
|
(146,814
|
)
|
|
|
365,001
|
|
Notes payable to banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,264
|
|
|
|
|
|
|
|
14,264
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
9,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
360,899
|
|
|
|
49,893
|
|
|
|
351,907
|
|
|
|
(151,518
|
)
|
|
|
611,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
2,034,000
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
2,484,000
|
|
Other noncurrent liabilities
|
|
|
|
|
|
|
238,271
|
|
|
|
20,525
|
|
|
|
8,567
|
|
|
|
3,805
|
|
|
|
271,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
2,633,170
|
|
|
|
520,418
|
|
|
|
360,474
|
|
|
|
(147,713
|
)
|
|
|
3,366,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
69,271
|
|
|
|
(478,991
|
)
|
|
|
396,550
|
|
|
|
793,490
|
|
|
|
(711,049
|
)
|
|
|
69,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
69,271
|
|
|
$
|
2,154,179
|
|
|
$
|
916,968
|
|
|
$
|
1,153,964
|
|
|
$
|
(858,762
|
)
|
|
$
|
3,435,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Parent Company refers to Hanesbrands Inc. without its
subsidiaries or divisions. |
F-60
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
261,055
|
|
|
$
|
(268,239
|
)
|
|
$
|
305,436
|
|
|
$
|
|
|
|
$
|
298,252
|
|
Trade accounts receivable
|
|
|
455,823
|
|
|
|
17,603
|
|
|
|
62,815
|
|
|
|
|
|
|
|
536,241
|
|
Inventories
|
|
|
969,903
|
|
|
|
127,206
|
|
|
|
277,529
|
|
|
|
(138,052
|
)
|
|
|
1,236,586
|
|
Deferred tax assets and other
current assets
|
|
|
23,118
|
|
|
|
106,702
|
|
|
|
21,438
|
|
|
|
5
|
|
|
|
151,263
|
|
Due from related entities
|
|
|
43
|
|
|
|
|
|
|
|
1,034
|
|
|
|
272,351
|
|
|
|
273,428
|
|
Notes receivable from parent
companies
|
|
|
308,011
|
|
|
|
1,026,740
|
|
|
|
259,378
|
|
|
|
(482,962
|
)
|
|
|
1,111,167
|
|
Funding receivable with parent
companies
|
|
|
164,890
|
|
|
|
(2,548
|
)
|
|
|
(656
|
)
|
|
|
|
|
|
|
161,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,182,843
|
|
|
|
1,007,464
|
|
|
|
926,974
|
|
|
|
(348,658
|
)
|
|
|
3,768,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, net
|
|
|
345,600
|
|
|
|
117,417
|
|
|
|
154,004
|
|
|
|
|
|
|
|
617,021
|
|
Trademarks and other identifiable
intangibles, net
|
|
|
128,766
|
|
|
|
188
|
|
|
|
7,410
|
|
|
|
|
|
|
|
136,364
|
|
Goodwill
|
|
|
225,722
|
|
|
|
17,190
|
|
|
|
35,743
|
|
|
|
|
|
|
|
278,655
|
|
Investments in subsidiaries
|
|
|
|
|
|
|
154,646
|
|
|
|
268,096
|
|
|
|
(422,742
|
)
|
|
|
|
|
Deferred tax assets and other
noncurrent assets
|
|
|
11,084
|
|
|
|
79,646
|
|
|
|
17,235
|
|
|
|
(4,742
|
)
|
|
|
103,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,894,015
|
|
|
$
|
1,376,551
|
|
|
$
|
1,409,462
|
|
|
$
|
(776,142
|
)
|
|
$
|
4,903,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Parent Companies Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and bank
overdraft.
|
|
$
|
406,453
|
|
|
$
|
27,544
|
|
|
$
|
49,036
|
|
|
$
|
|
|
|
$
|
483,033
|
|
Accrued liabilities and other
|
|
|
253,627
|
|
|
|
52,854
|
|
|
|
77,496
|
|
|
|
(2,605
|
)
|
|
|
381,372
|
|
Notes payable to banks
|
|
|
|
|
|
|
|
|
|
|
3,471
|
|
|
|
|
|
|
|
3,471
|
|
Due to related entities
|
|
|
(67,824
|
)
|
|
|
|
|
|
|
59,841
|
|
|
|
51,098
|
|
|
|
43,115
|
|
Notes payable to parent companies
|
|
|
(118,990
|
)
|
|
|
982
|
|
|
|
351,194
|
|
|
|
13,644
|
|
|
|
246,830
|
|
Notes payable to related entities
|
|
|
119,012
|
|
|
|
321,841
|
|
|
|
26,091
|
|
|
|
|
|
|
|
466,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
592,278
|
|
|
|
403,221
|
|
|
|
567,129
|
|
|
|
62,137
|
|
|
|
1,624,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
20,561
|
|
|
|
11,493
|
|
|
|
12,998
|
|
|
|
4,935
|
|
|
|
49,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
612,839
|
|
|
|
414,714
|
|
|
|
580,127
|
|
|
|
67,072
|
|
|
|
1,674,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent companies equity
|
|
|
2,281,176
|
|
|
|
961,837
|
|
|
|
829,335
|
|
|
|
(843,214
|
)
|
|
|
3,229,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and parent
companies equity
|
|
$
|
2,894,015
|
|
|
$
|
1,376,551
|
|
|
$
|
1,409,462
|
|
|
$
|
(776,142
|
)
|
|
$
|
4,903,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-61
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet
|
|
|
|
July 2, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
(9,620
|
)
|
|
$
|
976,433
|
|
|
$
|
113,986
|
|
|
$
|
|
|
|
$
|
1,080,799
|
|
Trade accounts receivable
|
|
|
522,527
|
|
|
|
8,492
|
|
|
|
64,228
|
|
|
|
|
|
|
|
595,247
|
|
Inventories
|
|
|
1,184,905
|
|
|
|
103,949
|
|
|
|
294,752
|
|
|
|
(321,049
|
)
|
|
|
1,262,557
|
|
Deferred tax assets and other
current assets
|
|
|
39,088
|
|
|
|
33,792
|
|
|
|
17,660
|
|
|
|
5
|
|
|
|
90,545
|
|
Due from related entities
|
|
|
23
|
|
|
|
88
|
|
|
|
16,646
|
|
|
|
9,437
|
|
|
|
26,194
|
|
Notes receivable from parent
companies
|
|
|
132,044
|
|
|
|
(46,251
|
)
|
|
|
185,419
|
|
|
|
(180,661
|
)
|
|
|
90,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,868,967
|
|
|
|
1,076,503
|
|
|
|
692,691
|
|
|
|
(492,268
|
)
|
|
|
3,145,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, net
|
|
|
376,551
|
|
|
|
56,848
|
|
|
|
125,258
|
|
|
|
|
|
|
|
558,657
|
|
Trademarks and other identifiable
intangibles, net
|
|
|
131,146
|
|
|
|
18
|
|
|
|
14,622
|
|
|
|
|
|
|
|
145,786
|
|
Goodwill
|
|
|
225,722
|
|
|
|
17,189
|
|
|
|
35,870
|
|
|
|
|
|
|
|
278,781
|
|
Investments in subsidiaries
|
|
|
|
|
|
|
157,199
|
|
|
|
252,539
|
|
|
|
(409,738
|
)
|
|
|
|
|
Deferred tax assets and other
noncurrent assets
|
|
|
9,103
|
|
|
|
105,398
|
|
|
|
13,689
|
|
|
|
|
|
|
|
128,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,611,489
|
|
|
$
|
1,413,155
|
|
|
$
|
1,134,669
|
|
|
$
|
(902,006
|
)
|
|
$
|
4,257,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Parent Companies Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
143,138
|
|
|
$
|
8,843
|
|
|
$
|
44,474
|
|
|
$
|
|
|
|
$
|
196,455
|
|
Accrued liabilities and other
|
|
|
296,001
|
|
|
|
36,487
|
|
|
|
63,417
|
|
|
|
(2,602
|
)
|
|
|
393,303
|
|
Notes payable to banks
|
|
|
|
|
|
|
|
|
|
|
83,303
|
|
|
|
|
|
|
|
83,303
|
|
Due to related entities
|
|
|
(47,863
|
)
|
|
|
30
|
|
|
|
63,311
|
|
|
|
44,465
|
|
|
|
59,943
|
|
Funding payable with parent
companies
|
|
|
336,975
|
|
|
|
(16,509
|
)
|
|
|
656
|
|
|
|
(3,938
|
)
|
|
|
317,184
|
|
Notes payable to parent companies
|
|
|
39,455
|
|
|
|
786
|
|
|
|
143,609
|
|
|
|
44,302
|
|
|
|
228,152
|
|
Notes payable to related entities
|
|
|
|
|
|
|
323,046
|
|
|
|
|
|
|
|
|
|
|
|
323,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
767,706
|
|
|
|
352,683
|
|
|
|
398,770
|
|
|
|
82,227
|
|
|
|
1,601,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
28,719
|
|
|
|
4,874
|
|
|
|
19,966
|
|
|
|
|
|
|
|
53,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
796,425
|
|
|
|
357,557
|
|
|
|
418,736
|
|
|
|
82,227
|
|
|
|
1,654,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent companies equity
|
|
|
1,815,064
|
|
|
|
1,055,598
|
|
|
|
715,933
|
|
|
|
(984,233
|
)
|
|
|
2,602,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and parent
companies equity
|
|
$
|
2,611,489
|
|
|
$
|
1,413,155
|
|
|
$
|
1,134,669
|
|
|
$
|
(902,006
|
)
|
|
$
|
4,257,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statement of Income
|
|
|
|
|
|
|
Six Months Ended December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Company(1)
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
2,239,788
|
|
|
$
|
298,380
|
|
|
$
|
1,197,146
|
|
|
$
|
(1,484,841
|
)
|
|
$
|
2,250,473
|
|
Cost of sales
|
|
|
|
|
|
|
1,583,683
|
|
|
|
412,274
|
|
|
|
1,042,006
|
|
|
|
(1,507,844
|
)
|
|
|
1,530,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
656,105
|
|
|
|
(113,894
|
)
|
|
|
155,140
|
|
|
|
23,003
|
|
|
|
720,354
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
452,483
|
|
|
|
57,249
|
|
|
|
60,291
|
|
|
|
(22,554
|
)
|
|
|
547,469
|
|
Gain on curtailment of
postretirement benefits
|
|
|
|
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,467
|
)
|
Restructuring
|
|
|
|
|
|
|
2,970
|
|
|
|
2,036
|
|
|
|
6,272
|
|
|
|
|
|
|
|
11,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
|
|
|
|
229,119
|
|
|
|
(173,179
|
)
|
|
|
88,577
|
|
|
|
45,557
|
|
|
|
190,074
|
|
Other expenses
|
|
|
|
|
|
|
7,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,401
|
|
Equity in earnings (loss) of
subsidiaries
|
|
|
74,139
|
|
|
|
|
|
|
|
20,948
|
|
|
|
(219
|
)
|
|
|
(94,868
|
)
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
56,234
|
|
|
|
15,043
|
|
|
|
(524
|
)
|
|
|
|
|
|
|
70,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
74,139
|
|
|
|
165,484
|
|
|
|
(167,274
|
)
|
|
|
88,882
|
|
|
$
|
(49,311
|
)
|
|
|
111,920
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
32,265
|
|
|
|
5,516
|
|
|
|
|
|
|
|
37,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
74,139
|
|
|
$
|
165,484
|
|
|
$
|
(199,539
|
)
|
|
$
|
83,366
|
|
|
$
|
(49,311
|
)
|
|
$
|
74,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Parent Company refers to Hanesbrands Inc. without its
subsidiaries or divisions. |
F-63
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statement of Income
|
|
|
|
Year Ended July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales
|
|
$
|
4,645,494
|
|
|
$
|
947,083
|
|
|
$
|
2,453,589
|
|
|
$
|
(3,573,334
|
)
|
|
$
|
4,472,832
|
|
Cost of sales
|
|
|
3,687,964
|
|
|
|
791,992
|
|
|
|
2,075,249
|
|
|
|
(3,567,705
|
)
|
|
|
2,987,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
957,530
|
|
|
|
155,091
|
|
|
|
378,340
|
|
|
|
(5,629
|
)
|
|
|
1,485,332
|
|
Selling, general and
administrative expenses
|
|
|
774,972
|
|
|
|
162,128
|
|
|
|
113,508
|
|
|
|
1,225
|
|
|
|
1,051,833
|
|
Restructuring
|
|
|
701
|
|
|
|
(201
|
)
|
|
|
(601
|
)
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
181,857
|
|
|
|
(6,836
|
)
|
|
|
265,433
|
|
|
|
(6,854
|
)
|
|
|
433,600
|
|
Equity in earnings (loss) of
subsidiaries
|
|
|
|
|
|
|
47,447
|
|
|
|
79,770
|
|
|
|
(127,217
|
)
|
|
|
|
|
Interest expense, net
|
|
|
1,605
|
|
|
|
8,820
|
|
|
|
6,855
|
|
|
|
|
|
|
|
17,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
180,252
|
|
|
|
31,791
|
|
|
|
338,348
|
|
|
|
(134,071
|
)
|
|
|
416,320
|
|
Income tax expense
|
|
|
|
|
|
|
83,291
|
|
|
|
10,536
|
|
|
|
|
|
|
|
93,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
180,252
|
|
|
$
|
(51,500
|
)
|
|
$
|
327,812
|
|
|
$
|
(134,071
|
)
|
|
$
|
322,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statement of Income
|
|
|
|
Year Ended July 2, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales
|
|
$
|
4,926,503
|
|
|
$
|
753,516
|
|
|
$
|
2,273,019
|
|
|
$
|
(3,269,355
|
)
|
|
$
|
4,683,683
|
|
Cost of sales
|
|
|
3,917,590
|
|
|
|
482,605
|
|
|
|
1,917,714
|
|
|
|
(3,094,338
|
)
|
|
|
3,223,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,008,913
|
|
|
|
270,911
|
|
|
|
355,305
|
|
|
|
(175,017
|
)
|
|
|
1,460,112
|
|
Selling, general and
administrative expenses
|
|
|
800,140
|
|
|
|
146,791
|
|
|
|
102,635
|
|
|
|
4,088
|
|
|
|
1,053,654
|
|
Restructuring
|
|
|
42,307
|
|
|
|
4,770
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
46,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
166,466
|
|
|
|
119,350
|
|
|
|
252,769
|
|
|
|
(179,105
|
)
|
|
|
359,480
|
|
Equity in earnings (loss) of
subsidiaries
|
|
|
|
|
|
|
68,317
|
|
|
|
39,579
|
|
|
|
(107,896
|
)
|
|
|
|
|
Interest expense, net
|
|
|
11,950
|
|
|
|
6,442
|
|
|
|
(4,428
|
)
|
|
|
|
|
|
|
13,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before (loss) income taxes
|
|
|
154,516
|
|
|
|
181,225
|
|
|
|
296,776
|
|
|
|
(287,001
|
)
|
|
|
345,516
|
|
Income tax expense
|
|
|
|
|
|
|
115,816
|
|
|
|
11,191
|
|
|
|
|
|
|
|
127,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
154,516
|
|
|
$
|
65,409
|
|
|
$
|
285,585
|
|
|
$
|
(287,001
|
)
|
|
$
|
218,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-64
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statement of Income
|
|
|
|
Year Ended July 3, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales
|
|
$
|
4,789,499
|
|
|
$
|
800,735
|
|
|
$
|
2,372,452
|
|
|
$
|
(3,329,945
|
)
|
|
$
|
4,632,741
|
|
Cost of sales
|
|
|
3,813,957
|
|
|
|
526,395
|
|
|
|
2,013,778
|
|
|
|
(3,262,104
|
)
|
|
|
3,092,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
975,542
|
|
|
|
274,340
|
|
|
|
358,674
|
|
|
|
(67,841
|
)
|
|
|
1,540,715
|
|
Selling, general and
administrative expenses
|
|
|
851,158
|
|
|
|
174,844
|
|
|
|
64,837
|
|
|
|
(2,875
|
)
|
|
|
1,087,964
|
|
Restructuring
|
|
|
13,953
|
|
|
|
5,128
|
|
|
|
8,385
|
|
|
|
|
|
|
|
27,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
110,431
|
|
|
|
94,368
|
|
|
|
285,452
|
|
|
|
(64,966
|
)
|
|
|
425,285
|
|
Equity in earnings (loss) of
subsidiaries
|
|
|
|
|
|
|
63,149
|
|
|
|
33,379
|
|
|
|
(96,528
|
)
|
|
|
|
|
Interest expense, net
|
|
|
14,506
|
|
|
|
7,300
|
|
|
|
2,607
|
|
|
|
|
|
|
|
24,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
95,925
|
|
|
|
150,217
|
|
|
|
316,224
|
|
|
|
(161,494
|
)
|
|
|
400,872
|
|
Income tax (benefit)
|
|
|
|
|
|
|
(45,168
|
)
|
|
|
(3,512
|
)
|
|
|
|
|
|
|
(48,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
95,925
|
|
|
$
|
195,385
|
|
|
$
|
319,736
|
|
|
$
|
(161,494
|
)
|
|
$
|
449,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-65
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
|
|
|
Six Months Ended December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Parent
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Company(1)
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
|
|
|
$
|
246,008
|
|
|
$
|
(536,747
|
)
|
|
$
|
121,821
|
|
|
$
|
304,997
|
|
|
$
|
136,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
|
|
|
|
(14,077
|
)
|
|
|
(2,527
|
)
|
|
|
(13,160
|
)
|
|
|
|
|
|
|
(29,764
|
)
|
Acquisitions of business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,666
|
)
|
|
|
|
|
|
|
(6,666
|
)
|
Proceeds from sales of assets
|
|
|
|
|
|
|
1,269
|
|
|
|
4,123
|
|
|
|
7,557
|
|
|
|
|
|
|
|
12,949
|
|
Other
|
|
|
|
|
|
|
132,988
|
|
|
|
(114,692
|
)
|
|
|
(16,760
|
)
|
|
|
(1,086
|
)
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
|
|
|
|
120,180
|
|
|
|
(113,096
|
)
|
|
|
(29,029
|
)
|
|
|
(1,086
|
)
|
|
|
(23,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital lease
obligations
|
|
|
|
|
|
|
(3,046
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,088
|
)
|
Borrowings on notes payable to banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,741
|
|
|
|
|
|
|
|
10,741
|
|
Repayments on notes payable to banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,508
|
)
|
|
|
|
|
|
|
(3,508
|
)
|
Issuance of debt under credit
facilities
|
|
|
|
|
|
|
2,150,000
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
2,600,000
|
|
Cost of debt issuance
|
|
|
|
|
|
|
(41,958
|
)
|
|
|
(8,290
|
)
|
|
|
|
|
|
|
|
|
|
|
(50,248
|
)
|
Payments to Sara Lee Corporation
|
|
|
|
|
|
|
(1,974,606
|
)
|
|
|
(450,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,424,606
|
)
|
Repayment of debt under credit
facilities
|
|
|
|
|
|
|
(106,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106,625
|
)
|
Issuance of Floating Rate Senior
Notes
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Repayment of bridge loan facility
|
|
|
|
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500,000
|
)
|
Proceeds from stock options
exercised
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
Increase (decrease) in bank
overdraft.
|
|
|
|
|
|
|
|
|
|
|
(275,385
|
)
|
|
|
834
|
|
|
|
|
|
|
|
(274,551
|
)
|
Net transactions with parent
companies
|
|
|
|
|
|
|
(742,738
|
)
|
|
|
1,523,794
|
|
|
|
(283,890
|
)
|
|
|
(303,911
|
)
|
|
|
193,255
|
|
Net transactions with related
entities
|
|
|
|
|
|
|
152,551
|
|
|
|
(321,841
|
)
|
|
|
(26,091
|
)
|
|
|
|
|
|
|
(195,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
|
|
|
|
(566,283
|
)
|
|
|
918,236
|
|
|
|
(301,914
|
)
|
|
|
(303,911
|
)
|
|
|
(253,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in foreign
exchange rates on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,455
|
)
|
|
|
|
|
|
|
(1,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
|
|
|
|
(200,095
|
)
|
|
|
268,393
|
|
|
|
(210,577
|
)
|
|
|
|
|
|
|
(142,279
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
|
|
|
|
261,055
|
|
|
|
(268,239
|
)
|
|
|
305,436
|
|
|
|
|
|
|
|
298,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
|
|
|
$
|
60,960
|
|
|
$
|
154
|
|
|
$
|
94,859
|
|
|
$
|
|
|
|
$
|
155,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Parent Company refers to Hanesbrands Inc. without its
subsidiaries or divisions. |
F-66
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
Year Ended July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
1,014,001
|
|
|
$
|
(312,762
|
)
|
|
$
|
427,471
|
|
|
$
|
(618,089
|
)
|
|
$
|
510,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(60,878
|
)
|
|
|
(5,900
|
)
|
|
|
(43,301
|
)
|
|
|
|
|
|
|
(110,079
|
)
|
Acquisitions of business
|
|
|
|
|
|
|
(2,436
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,436
|
)
|
Proceeds from sales of assets
|
|
|
4,731
|
|
|
|
84
|
|
|
|
705
|
|
|
|
|
|
|
|
5,520
|
|
Other
|
|
|
(4,433
|
)
|
|
|
(4,636
|
)
|
|
|
1,741
|
|
|
|
3,662
|
|
|
|
(3,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(60,580
|
)
|
|
|
(12,888
|
)
|
|
|
(40,855
|
)
|
|
|
3,662
|
|
|
|
(110,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital
lease obligations
|
|
|
(5,227
|
)
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,542
|
)
|
Borrowings on notes payable to
banks
|
|
|
|
|
|
|
|
|
|
|
7,984
|
|
|
|
|
|
|
|
7,984
|
|
Repayments on notes payable to
banks
|
|
|
|
|
|
|
|
|
|
|
(93,073
|
)
|
|
|
|
|
|
|
(93,073
|
)
|
Increase in bank overdraft.
|
|
|
|
|
|
|
275,385
|
|
|
|
|
|
|
|
|
|
|
|
275,385
|
|
Borrowings on notes payable to
related entities
|
|
|
119,012
|
|
|
|
(1,205
|
)
|
|
|
26,091
|
|
|
|
|
|
|
|
143,898
|
|
Net transactions with parent
companies
|
|
|
(537,505
|
)
|
|
|
(1,192,887
|
)
|
|
|
(135,997
|
)
|
|
|
614,427
|
|
|
|
(1,251,962
|
)
|
Net transactions with related
entities
|
|
|
(259,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(682,746
|
)
|
|
|
(919,022
|
)
|
|
|
(194,995
|
)
|
|
|
614,427
|
|
|
|
(1,182,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in foreign
exchange rates on cash
|
|
|
|
|
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
270,675
|
|
|
|
(1,244,672
|
)
|
|
|
191,450
|
|
|
|
|
|
|
|
(782,547
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
(9,620
|
)
|
|
|
976,433
|
|
|
|
113,986
|
|
|
|
|
|
|
|
1,080,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
261,055
|
|
|
$
|
(268,239
|
)
|
|
$
|
305,436
|
|
|
$
|
|
|
|
$
|
298,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-67
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
Year Ended July 2, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
213,706
|
|
|
$
|
199,883
|
|
|
$
|
260,470
|
|
|
$
|
(167,188
|
)
|
|
$
|
506,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(44,044
|
)
|
|
|
(4,048
|
)
|
|
|
(19,043
|
)
|
|
|
|
|
|
|
(67,135
|
)
|
Acquisitions of business
|
|
|
|
|
|
|
|
|
|
|
(1,700
|
)
|
|
|
|
|
|
|
(1,700
|
)
|
Proceeds from sales of assets
|
|
|
8,358
|
|
|
|
169
|
|
|
|
432
|
|
|
|
|
|
|
|
8,959
|
|
Other
|
|
|
10,733
|
|
|
|
2,033
|
|
|
|
(12,970
|
)
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(24,953
|
)
|
|
|
(1,846
|
)
|
|
|
(33,281
|
)
|
|
|
|
|
|
|
(60,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital
lease obligations
|
|
|
(5,384
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,442
|
)
|
Borrowings on notes payable to
banks
|
|
|
|
|
|
|
|
|
|
|
88,849
|
|
|
|
|
|
|
|
88,849
|
|
Repayments on notes payable to
banks
|
|
|
|
|
|
|
|
|
|
|
(5,546
|
)
|
|
|
|
|
|
|
(5,546
|
)
|
Repayments on notes payable to
related entities
|
|
|
|
|
|
|
(113,341
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
(113,359
|
)
|
Net transactions with parent
companies
|
|
|
(53,191
|
)
|
|
|
265,818
|
|
|
|
(375,316
|
)
|
|
|
167,188
|
|
|
|
4,499
|
|
Net transactions with related
entities
|
|
|
(10,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(68,953
|
)
|
|
|
152,419
|
|
|
|
(292,031
|
)
|
|
|
167,188
|
|
|
|
(41,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in foreign
exchange rates on cash
|
|
|
|
|
|
|
|
|
|
|
1,231
|
|
|
|
|
|
|
|
1,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
119,800
|
|
|
|
350,456
|
|
|
|
(63,611
|
)
|
|
|
|
|
|
|
406,645
|
|
Cash and cash equivalents at
beginning of year
|
|
|
(129,420
|
)
|
|
|
625,977
|
|
|
|
177,597
|
|
|
|
|
|
|
|
674,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
(9,620
|
)
|
|
$
|
976,433
|
|
|
$
|
113,986
|
|
|
$
|
|
|
|
$
|
1,080,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-68
HANESBRANDS
Notes to Combined and Consolidated Financial
Statement (Continued)
Six months ended December 30, 2006 and years ended July 1, 2006,
July 2, 2005 and July 3, 2004
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
Year Ended July 3, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Divisional
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Entries and
|
|
|
|
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
(182,504
|
)
|
|
$
|
241,332
|
|
|
$
|
287,938
|
|
|
$
|
124,670
|
|
|
$
|
471,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(48,687
|
)
|
|
|
(9,062
|
)
|
|
|
(5,884
|
)
|
|
|
|
|
|
|
(63,633
|
)
|
Proceeds from sales of assets
|
|
|
1,854
|
|
|
|
5
|
|
|
|
2,648
|
|
|
|
|
|
|
|
4,507
|
|
Other
|
|
|
(7,648
|
)
|
|
|
38,347
|
|
|
|
115,736
|
|
|
|
(148,568
|
)
|
|
|
(2,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(54,481
|
)
|
|
|
29,290
|
|
|
|
112,500
|
|
|
|
(148,568
|
)
|
|
|
(61,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital
lease obligations
|
|
|
(4,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,730
|
)
|
Borrowings on notes payable to
banks
|
|
|
|
|
|
|
|
|
|
|
79,987
|
|
|
|
|
|
|
|
79,987
|
|
Repayments on notes payable to
banks
|
|
|
|
|
|
|
|
|
|
|
(79,987
|
)
|
|
|
|
|
|
|
(79,987
|
)
|
Repayments on notes payable to
related entities
|
|
|
|
|
|
|
(24,178
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,178
|
)
|
Net transactions with parent
companies
|
|
|
59,791
|
|
|
|
183,276
|
|
|
|
(280,747
|
)
|
|
|
23,898
|
|
|
|
(13,782
|
)
|
Net transactions with related
entities
|
|
|
16,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
71,938
|
|
|
|
159,098
|
|
|
|
(280,747
|
)
|
|
|
23,898
|
|
|
|
(25,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in foreign
exchange rates on cash
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
(165,047
|
)
|
|
|
429,720
|
|
|
|
119,665
|
|
|
|
|
|
|
|
384,338
|
|
Cash and cash equivalents at
beginning of year
|
|
|
35,627
|
|
|
|
196,257
|
|
|
|
57,932
|
|
|
|
|
|
|
|
289,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
(129,420
|
)
|
|
$
|
625,977
|
|
|
$
|
177,597
|
|
|
$
|
|
|
|
$
|
674,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-69
HANESBRANDS
Six
months ended December 30, 2006 and years ended July 1, 2006 and
July 2, 2005
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
costs and
|
|
|
|
|
|
|
|
|
at End
|
|
Description
|
|
of Year
|
|
|
Expenses
|
|
|
Deductions(1)
|
|
|
Other(2)
|
|
|
of Year
|
|
|
Allowance for trade accounts
receivable year-ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 30,
2006
|
|
|
28,817
|
|
|
|
19,508
|
|
|
|
(20,530
|
)
|
|
|
(86
|
)
|
|
|
27,709
|
|
Fiscal year ended July 1, 2006
|
|
|
27,676
|
|
|
|
56,883
|
|
|
|
(56,128
|
)
|
|
|
386
|
|
|
|
28,817
|
|
Fiscal year ended July 2, 2005
|
|
|
34,237
|
|
|
|
68,752
|
|
|
|
(76,369
|
)
|
|
|
1,056
|
|
|
|
27,676
|
|
|
|
|
(1) |
|
Represents accounts receivable write-offs. |
|
(2) |
|
Represents primarily currency translation adjustments. |
F-70
Offer to
Exchange
$500,000,000 of Floating Rate
Senior Notes due 2014, Series B
for any and all outstanding
$500,000,000 of Floating Rate Senior Notes due
2014
PROSPECTUS
We have not authorized anyone to give any information or
represent anything to you other than the information contained
in this prospectus. You must not rely on any unauthorized
information or representations.
May 11, 2007