Amendment #1 to the Form 10

As filed with the Securities and Exchange Commission on June 30, 2006

File No. 001-32891

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


AMENDMENT NO. 1

TO

FORM 10

 


GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or 12(g) of

The Securities Exchange Act of 1934

Hanesbrands Inc.

 

Maryland   20-3552316

(State or other jurisdiction of incorporation

or organization)

  (I.R.S. Employer Identification No.)

1000 East Hanes Mill Road

Winston-Salem, North Carolina

  27105
(Address of principal executive offices)   (Zip Code)

(336) 519-4400

Registrant’s telephone number, including area code

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of each class to be so registered

  

Name of each exchange on which each class is to be registered

Common Stock, par value $0.01 per share    The New York Stock Exchange
Preferred Stock Purchase Rights    The New York Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act:

None

 



Hanesbrands Inc.

Cross-Reference Sheet Between the Information Statement and Items of Form 10

Information Included in the Information Statement that is Incorporated by Reference

into the Registration Statement on Form 10

 

Item No.   

Item Caption

  

Location in Information Statement

1.   

Business

   Summary; Risk Factors; Cautionary Statement Concerning Forward-Looking Statements; Description of Our Business; Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Agreements with Sara Lee
1A.   

Risk Factors

   Risk Factors; and Cautionary Statement Concerning Forward-Looking Statements
2.   

Financial Information

   Summary; Risk Factors; Capitalization; Selected Historical Financial Data; and Management’s Discussion and Analysis of Financial Condition and Results of Operations
3.   

Properties

   Description of Our Business—Properties
4.   

Security Ownership of Certain Beneficial Owners and Management

  

Management—Stock Ownership of Directors and Executive Officers; and Security Ownership of Certain Beneficial Owners

5.   

Directors and Executive Officers

   Management
6.   

Executive Compensation

   Management
7.   

Certain Relationships and Related Transactions

   Summary; Risk Factors; Management’s Discussion and Analysis of Financial Condition and Results of Operations; Management; Agreements with Sara Lee; and Certain Relationship and Related Transactions
8.   

Legal Proceedings

   Description of Our Business—Legal Proceedings
9.   

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

  

Summary; The Spin Off; Risk Factors; Dividend Policy; and Description of Our Capital Stock

10.   

Recent Sales of Unregistered Securities

   Not applicable
11.   

Description of Registrant’s Securities to be Registered

   Description of Our Capital Stock
12.   

Indemnification of Directors and Officers

   Indemnification of Directors and Officers
13.   

Financial Statements and Supplementary Data

   Summary; Selected Historical Financial Data; Management’s Discussion and Analysis of Financial Condition and Results of Operations; Unaudited Pro Forma Combined and Consolidated Financial Statements; and Index to Financial Statements
14.   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   Not applicable
15.   

Financial Statements and Exhibits

   Index to Financial Statements


SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the Form 10 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Winston-Salem, State of North Carolina, on June 30, 2006.

 

HANESBRANDS INC.
By:   /s/    Richard A. Noll
 

Name: Richard A. Noll

 

Title: Chief Executive Officer


EXHIBIT INDEX

 

Exhibit
Number
  

Exhibit Description

3.1    Form of Amended and Restated Certificate of Incorporation of the Registrant*
3.2    Form of Amended and Restated Bylaws of the Registrant*
3.3    Form of Rights Agreement between the Registrant and                     , Rights Agent*
4.1    Specimen Certificate for shares of common stock, par value $.01 per share, of the Registrant*
10.1    Form of Master Separation Agreement between the Registrant and Sara Lee Corporation*
10.2    Form of Tax Sharing Agreement between the Registrant and Sara Lee Corporation*
10.3    Form of Employee Matters Agreement between the Registrant and Sara Lee Corporation*
10.4    Form of Master Transition Services Agreement between the Registrant and Sara Lee Corporation*
10.5    Form of Real Estate Matters Agreement between the Registrant and Sara Lee Corporation*
10.6    Form of Indemnification and Insurance Matters Agreement between the Registrant and Sara Lee Corporation*
10.7    Form of Intellectual Property Matters Agreement between the Registrant and Sara Lee Corporation*
10.8    Form of Hanesbrands Inc. Retirement Savings Plan*
10.9    Form of Hanesbrands Inc. Supplemental Employee Retirement Plan*
10.10    Form of Hanesbrands Inc. Omnibus Incentive Plan of 2006*
10.11    Form of Hanesbrands Inc. Performance-Based Annual Incentive Plan*
10.12    Form of Hanesbrands Inc. Employee Stock Purchase Plan of 2006*
10.13    Form of Hanesbrands Inc. Executive Deferred Compensation Plan*
10.14    Form of Hanesbrands Inc. Non-Employee Director Deferred Compensation Plan*
10.15    Form of Hanesbrands Inc. Executive Long-Term Disability Plan*
10.16    Form of Hanesbrands Inc. Executive Life Insurance Plan*
10.17    Form of Severance Agreement*
21.1    List of Subsidiaries of the Registrant*
99.1    Preliminary Information Statement, dated as of June 30, 2006

* To be filed by amendment.


LOGO

                    , 2006

Dear Sara Lee Stockholder:

I am pleased to inform you that on                    , 2006, the Board of Directors of Sara Lee Corporation approved the spin off of Hanesbrands Inc., our wholly-owned subsidiary that operates our branded apparel business.

The spin off will separate the ownership and management of our business and that of Hanesbrands, which we think will better enable both companies to focus on their core businesses. Following the spin off, Sara Lee will become a more tightly focused company, focusing on its food, beverage and household products businesses. We are confident that the new Sara Lee will be well-positioned to achieve its long-term growth targets.

We will effect the spin off by distributing Hanesbrands’ common stock in a pro rata dividend to holders of our common stock as of                     . The dividend will represent 100% of the common stock of Hanesbrands outstanding at the time of the spin off. We expect to distribute shares of Hanesbrands on or about             .

Stockholder approval for the spin off is not required, and you are not required to take any action to participate in the spin off. You do not need to pay any consideration or surrender or exchange your shares of Sara Lee common stock. Following the spin off, Sara Lee common stock will continue to trade on the New York Stock Exchange under the symbol “SLE,” and Hanesbrands common stock will trade on the New York Stock Exchange under the symbol “HBI.”

We intend for the spin off to be tax free for stockholders. To that end, we intend to obtain a favorable ruling regarding the spin off from the Internal Revenue Service.

The enclosed information statement, which is being provided to all Sara Lee stockholders, describes the spin off in detail and contains important business and financial information about Hanesbrands.

I look forward to your continued support as a stockholder of both Sara Lee and Hanesbrands.

Sincerely,

Brenda C. Barnes

Chairman and Chief Executive Officer


LOGO

                    , 2006

Dear Hanesbrands Inc. Stockholder:

It is our pleasure to welcome you as a stockholder of our new company. Although we are a newly independent company, our product portfolio includes some of the most recognized apparel essentials brands in the United States, including Hanes, Champion, Playtex, Bali, Just My Size, barely there and Wonderbra. We design, manufacture, source and sell a broad range of products such as t-shirts, bras, panties, men’s underwear, kids’ underwear, socks, hosiery, casualwear and activewear. In fiscal 2005, we generated $4.7 billion in net sales and $359.5 million in income from operations. Our mission is to create value for you, our stockholders, and for our customers through effective supply chain management, competitive prices, high quality and service excellence. Our strong brands and dedicated employees will drive this value.

Our management team is excited about our spin off from Sara Lee Corporation, and is committed to realizing the potential that exists for us as an independent company focused on apparel essentials. We invite you to learn more about our company by reading the enclosed information statement and we look forward to updating you on our progress in realizing our vision and mission. We would like to thank you in advance for your support as a stockholder in our new company.

Sincerely,

 

Lee A. Chaden

Executive Chairman

  

Richard A. Noll

Chief Executive Officer

  

 

 

LOGO

Preliminary Information Statement dated as of 2006
Table of Contents

Subject to Completion, dated June 30, 2006

INFORMATION STATEMENT

Hanesbrands Inc.

Common Stock

(Par Value $0.01)

 


Sara Lee Corporation is furnishing this information statement to its stockholders in connection with the spin off of our company. In the spin off, Sara Lee will transfer to us the assets and businesses which Sara Lee attributes to its branded apparel business and distribute on a pro rata basis to its stockholders all of the outstanding shares of our common stock.

For each share of Sara Lee common stock held of record by you as of 5:00 p.m., New York City time, on                     , 2006, the record date for the distribution, you will receive                      of a share of our common stock. You will receive cash in lieu of any fractional shares of our common stock which you would have received after application of the above ratio. As discussed under “The Spin Off—Trading of Sara Lee Common Stock Between the Record Date and Distribution Date,” if you sell your shares of Sara Lee common stock in the “regular way” market after the record date and before the spin off, you also will be selling your right to receive shares of our common stock in connection with the spin off. We expect the shares of our common stock to be distributed by Sara Lee to you on or about                     , 2006. We refer to the date of the distribution as the “distribution date.”

At the time of the spin off, each share of our common stock will have attached to it one preferred stock purchase right, the principal terms of which are described under “Description of Our Capital Stock—Common Stock—Preferred Stock Purchase Rights.” Where appropriate, references in this information statement to our common stock include the associated rights.

 


No vote of Sara Lee’s stockholders is required, and therefore you are not being asked for a proxy in connection with the spin off. You do not need to pay any consideration, exchange or surrender your existing shares of Sara Lee common stock or take any other action to receive your shares of our common stock.

There is no current trading market for our common stock, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution, and we expect regular way trading of our common stock to begin on the first trading day following the completion of the spin off. We will apply to list our common stock on the New York Stock Exchange under the symbol “HBI.”

In reviewing this information statement, you should carefully consider the matters described under the caption “ Risk Factors” beginning on page 11.

 


Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

 


This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is                     , 2006


Table of Contents

TABLE OF CONTENTS

 

      Page

Summary

   1

Risk Factors

   11

Cautionary Statement Concerning Forward-Looking Statements

   24

The Spin Off

   26

Dividend Policy

   32

Capitalization

   33

Selected Historical Financial Data

   34

Unaudited Pro Forma Combined and Consolidated Financial Statements

   36

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   41

Description of Our Business

   69

Management

   85

Security Ownership of Certain Beneficial Owners

   104

Agreements With Sara Lee

   105

Description of Our Capital Stock

   113

Description of Certain Indebtedness

   122

Indemnification of Directors and Officers

   125

Certain Relationships and Related Transactions

   126

Independent Registered Public Accounting Firm

   127

Where You can Find More Information

   127

Index to Financial Statements

   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 information statement include the Hanes, Champion, C9 by Champion, Playtex, Bali, L’eggs, Just my Size, barely there, Wonderbra, Beefy-T, Outer Banks and Duofold marks, which may be registered in the United States and other jurisdictions. Each trademark, trade name or service mark of any other company appearing in this information statement is, to our knowledge, owned by such other company.

 

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SUMMARY

The following is a summary of material information discussed in this information statement. This summary may not contain all the details concerning the spin off or other information that may be important to you. To better understand the spin off and our business and financial position, you should carefully review this entire information statement. Unless the context otherwise requires, references in this information statement to “Hanesbrands,” “we,” “our” and “us” mean the Sara Lee Branded Apparel Americas and Asia business which will be contributed in the spin off to Hanesbrands Inc., a Maryland corporation, and its subsidiaries. References in this information statement to “Sara Lee” mean Sara Lee Corporation, a Maryland corporation, and its subsidiaries, unless the context otherwise requires.

We describe in this information statement the businesses to be transferred to us by Sara Lee in the spin off as if the transferred businesses were our business for all historical periods described. References in this information statement to our historical assets, liabilities, products, businesses or activities of our business are generally intended to refer to the historical assets, liabilities, products, businesses or activities of the transferred businesses as the businesses were conducted as part of Sara Lee and its subsidiaries prior to the spin off.

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, men’s 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.

 

     Industrywide
U.S. Retail Sales
(in billions)
2005
   Compound Annual Growth
Rate Between 2003 and
2005
    Hanesbrands 2005 U.S.
Market Position by
Sales

T-shirts

   $ 21.3    8.4 %   #1

Bras

     5.1    4.5     2

Fleece

     4.9    (2.7 )   1

Socks

     4.7    3.5     1

Men’s Underwear

     3.0    3.7     1

Panties

     3.0    3.1     2

Sheer Hosiery

     1.0    (16.7 )   1

Kids’ Underwear

     0.8    5.4     1

Source: The NPD Group/Consumer Panel TrackSM, rolling year-end, as of December 2005.

In fiscal 2005, we generated $4.7 billion in net sales and $359.5 million in income from operations. Our products are sold through multiple distribution channels. In fiscal 2005, 48% of our net sales were to mass merchants, 11% were to national chains, 6% were to department stores, 8% were direct to consumer, 8% were in our international segment and 19% 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 which 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, men’s underwear, kids’ underwear, socks and hosiery. Growth and sales in the apparel


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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 currently part of Sara Lee, and our assets and liabilities consist of those that Sara Lee attributes to its branded apparel business (excluding European and U.K. operations which have been or are in the process of being sold by Sara Lee). Following the spin off, we will be an independent, publicly traded company, and Sara Lee will not retain any ownership interest in us. In connection with the spin off, we and Sara Lee will enter into a number of agreements that will govern our relationship following the spin off, including agreements pursuant to which we will provide each other with services during a transition period and indemnify each other against certain liabilities arising from our respective businesses and from the spin off. For a more detailed description of these agreements, see “Agreements with Sara Lee.”

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 The NPD Group/Consumer Panel TrackSM, or “NPD,” our brands possess either the number one or number two market position in the United States in most of the product categories in which we compete. Our brands enjoy high awareness among consumers according to a 2006 brand equity analysis by Millward Brown Market Research. According to a 2005 survey of consumer brand awareness by Women’s Wear Daily, we own three of the top five most recognized apparel and accessory brands among women in the United States, with Hanes (number one), L’eggs (number three) and Hanes Her Way (number four) (now referred to as Hanes). According to NPD, our largest brand, Hanes, is the top selling apparel brand in the United States by units sold. 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 men’s 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. We are the largest seller of apparel essentials in the United States as measured by sales. As an example of the scale of our operations, we manufactured and sold over 400 million t-shirts (innerwear and outerwear) and almost half a billion pairs of socks in fiscal 2005. 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.

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 over 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

 

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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.

Significant Cash Flow Generation. Due to our strong brands and market position, our business has historically generated significant cash flow. In fiscal 2003, 2004 and 2005, we generated $416.7 million, $410.2 million and $446.8 million, respectively, of cash from operating activities net of cash used in investing activities. Our cash flow gives us the flexibility to create shareholder value by investing in our business, reducing debt and returning capital to our shareholders.

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 Lee’s 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 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 Chief Supply Chain Officer and Michael Flatow, our General Manager, Wholesale Americas, 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

Historically, we have operated as part of Sara Lee, sharing services and capital with Sara Lee’s food, beverage and household products businesses. Following our spin off from Sara Lee, we will become a more tightly focused apparel essentials company. As an independent publicly traded company, we believe we will be better positioned to compete in the apparel essentials industry and to invest in and grow our business. Our mission is to grow earnings and cash flow by integrating our operations, optimizing our supply chain, increasing our brand leadership and leveraging and strengthening our retail relationships. Specifically, we intend to focus on the following strategic initiatives:

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.

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 recently 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

 

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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 from third-party manufacturers product categories that do not meet these criteria. 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.

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 We’ve 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.

We were incorporated in Maryland on September 30, 2005. 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.

 

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Questions and Answers Relating to the Spin Off

The following is a brief summary of the terms of the spin off. Please see “The Spin Off” for a more detailed description of the matters described below.

 

Q: What is the spin off?

 

A: The spin off is the method through which Sara Lee will separate its existing businesses into two independent, publicly traded companies. In the spin off, Sara Lee will distribute to its stockholders all of the outstanding shares of our common stock. Following the spin off, we will be a separate company from Sara Lee, and Sara Lee will not retain any ownership interest in us. The number of shares of Sara Lee common stock you own will not change as a result of the spin off, although the value of shares of Sara Lee common stock may initially decline as a result of the spin off.

 

Q: What is being distributed in the spin off?

 

A: Approximately                      shares of our common stock will be distributed in the spin off. The shares of our common stock to be distributed by Sara Lee will constitute all of the issued and outstanding shares of our common stock immediately after the spin off. Each share of our common stock will have attached to it one preferred stock purchase right. For more information on the shares being distributed in the spin off, see “Description of Our Capital Stock—Common Stock” and “Description of Our Capital Stock—Certain Provisions of Maryland Law and of Our Charter and Bylaws That Could Have the Effect of Delaying, Deferring or Preventing a Change in Control—Rights Agreement.”

 

Q: What will I receive in the spin off?

 

A: Holders of Sara Lee common stock will receive a pro rata dividend of              of a share of our common stock for each share of Sara Lee common stock held by them on the record date and not subsequently sold in the “regular way” market. For more information on the shares being distributed in the spin off, see “Description of Our Capital Stock—Common Stock.”

 

Q: What is the reason for the spin off?

 

A: The following potential benefits were considered by Sara Lee’s board of directors in making the determination to approve the spin off:

 

    enabling investors to invest directly in our business;

 

    allowing both Sara Lee and us to focus on our respective core businesses;

 

    creating more effective management incentives; and

 

    providing our business with direct access to capital to further invest in our growth.

 

  For more information on the reasons for the spin off, see “The Spin Off—Reasons for the Spin Off.”

 

Q: What do I have to do to participate in the spin off?

 

A:

Nothing. If you are a holder of record of Sara Lee common stock on the record date for the spin off you will not be required to pay any cash or deliver any other consideration, including any shares of Sara Lee common stock, in order to receive shares of our common stock in the spin off. As discussed under “The Spin Off—Trading of Sara Lee Common Stock Between the Record Date and Distribution Date,” if you sell your shares of Sara Lee common stock in the “regular way” market after the record date and before the spin

 

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off, you also will be selling your right to receive shares of our common stock in connection with the spin off. You are not being asked to provide a proxy with respect to any of your shares of Sara Lee common stock in connection with the spin off.

 

Q: How will Sara Lee distribute shares of Hanesbrands common stock to me?

 

A: Holders of shares of Sara Lee common stock on the record date that do not subsequently sell their shares in the “regular way” market will receive shares of our common stock through the transfer agent’s book-entry registration system. These shares will not be in certificated form. As such, instead of a share certificate, Sara Lee stockholders will receive a statement from our transfer agent that details their ownership interest and the method by which they may access their account. For more information on requesting certificated shares and the mechanics of the spin off, see “The Spin Off—Manner of Effecting the Spin Off.”

 

Q: If I sell, on or before the distribution date, shares of Sara Lee common stock that I held on the record date, am I still entitled to receive shares of Hanesbrands common stock distributable with respect to the shares of Sara Lee common stock I sold?

 

A: Shortly before the record date for the spin off, Sara Lee’s common stock will begin to trade in two markets on the NYSE: a “regular way” market and an “ex-distribution” market. If you are a holder of record of shares of Sara Lee common stock as of the record date for the spin off and sell those shares in the “regular way” market after the record date for the spin off and before the spin off, you also will be selling the right to receive the shares of our common stock in connection with the spin off. Conversely, if you are a holder of record of shares of Sara Lee common stock as of the record date for the spin off and sell those shares in the “ex-distribution” market after the record date for the spin off and before the spin off, you will still receive the shares of our common stock in the spin off.

 

Q: How will fractional shares be treated in the spin off?

 

A: Sara Lee will not distribute fractional shares of our common stock in the spin off. The distribution agent will aggregate all of the fractional shares and sell them in the open market at then prevailing prices on behalf of our stockholders. You will then receive a cash payment in the amount of your proportionate share of the net sale proceeds, based on the average gross selling price per share of our common stock after making appropriate deductions for any required tax withholdings. For more information on fractional shares, see “The Spin Off—Treatment of Fractional Shares.”

 

Q: What is the distribution date for the spin off?

 

A: Shares of our common stock will be distributed by the distribution agent, on behalf of Sara Lee, on or about                     , 2006.

 

Q: What are the U.S. federal income tax consequences to me of the spin off?

 

A: Other than with respect to fractional shares of our common stock, no gain or loss will be recognized by, and no amount will be included in the income of, a holder of Sara Lee common stock upon the receipt of shares of our common stock pursuant to the spin off.

 

  If you receive cash in lieu of a fractional share of our common stock as part of the spin off, you will be treated as though you first received a distribution of the fractional share in the spin off and then sold it for the amount of such cash. You generally will recognize capital gain or loss, provided that the fractional share is considered to be held as a capital asset, measured by the difference between the cash you receive for such fractional share and your tax basis in that fractional share. Such capital gain or loss will be a long-term capital gain or loss if your holding period for such fractional share is more than one year on the distribution date.

 

  Please see “The Spin Off—Material U.S. Federal Income Tax Consequences of the Spin Off” for more detail.

 

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Q: Does Hanesbrands intend to pay cash dividends?

 

A: Effective upon the consummation of the distribution, we intend to adopt a policy of paying, subject to legally available funds, a modest quarterly cash dividend on outstanding shares of our common stock. Our board of directors is free to change our dividend policy at any time, including to increase, decrease or eliminate our dividend. For more information about our dividend policy, see “Dividend Policy.”

 

Q: Who will manage Hanesbrands after the spin off?

 

A: We benefit from a management team with an extensive background in both brand management in the consumer goods industry at Sara Lee as well as expertise in effectively executing product extensions and designing and building efficient manufacturing operations. Led by Lee Chaden, who will be our Executive Chairman after the spin off, and Richard Noll, who will be our Chief Executive Officer, our management team possesses deep knowledge of, and extensive experience in, our industry. For more information on our management, see “Management.”

 

Q: What will the relationship be between Sara Lee and Hanesbrands following the spin off?

 

A: After the spin off, Hanesbrands and Sara Lee will be independent, publicly traded companies, and Sara Lee will no longer have any ownership interest in us. We will, however, be parties to agreements that will define our ongoing relationship after the spin off. For example, under the terms of a master transition services agreement that we expect to enter into with Sara Lee prior to the consummation of the spin off, Hanesbrands and Sara Lee will provide to each other, for a fee, for a period of 12 months after the spin off, specified support services including human resources and payroll functions, financial and accounting functions and information technology. For more information on our relationship with Sara Lee after the spin off, see “Agreements with Sara Lee.”

 

Q: Who is the distribution agent for the spin off?

 

A:

 

Q: Where will Hanesbrands common stock trade?

 

A: Currently, there is no public market for our common stock. We will apply to have our common stock listed on the New York Stock Exchange under the symbol “HBI.”

 

  We anticipate that trading will commence on a when-issued basis shortly before the record date. In the context of a spin off, when-issued trading refers to trading in our stock commencing two days before the record date for the distribution and made conditionally because the securities of the spun off entity have not yet been distributed. When-issued trades generally settle within three trading days after the distribution date. On the first trading day following the distribution date, any when-issued trading in respect of our common stock will end and regular way trading will begin. Regular way trading refers to trading after the security has been distributed and typically involves a trade that settles on the third full day following the date of distribution. Shares of our common stock generally will be freely tradable after the spin off. We cannot predict the trading prices for our common stock before or after the distribution date.

 

  For more information on the trading market for our shares, see “The Spin Off—Listing and Trading of Our Common Stock.”

 

Q: Do I have appraisal rights?

 

A: No. Holders of Sara Lee common stock have no appraisal rights in connection with the spin off.

 

Q: Who is the transfer agent for your common stock?

 

A:

 

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SUMMARY FINANCIAL AND OTHER DATA

The following table presents summary historical and pro forma financial data, as well as other data. The statements of income data for each of the fiscal years in the three fiscal years ended July 2, 2005 have been derived from our audited Combined and Consolidated Financial Statements included elsewhere in this information statement. The statements of income data for the thirty-nine weeks ended April 2, 2005 and April 1, 2006 and the balance sheet data as of April 1, 2006 have been derived from our Unaudited Interim Condensed Combined and Consolidated Financial Statements included elsewhere in this information statement. The Unaudited Interim Condensed Combined and Consolidated Financial Statements are not necessarily indicative of the results to be expected for any other interim period or for fiscal 2006 as a whole. However, in the opinion of management, the unaudited interim financial statements include all adjustments (consisting of normal recurring accruals) that are necessary for the fair presentation of the results for the interim period. The historical financial data should be read in conjunction with our historical financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Combined and Consolidated Financial Statements” included elsewhere in this information statement.

The unaudited pro forma and pro forma as adjusted financial data have been derived from our historical financial statements and adjusted to give effect to the spin off and the related debt incurrence and the use of the proceeds therefrom. These adjustments are described under “Unaudited Pro Forma Combined and Consolidated Financial Statements.” Our historical and unaudited pro forma and pro forma as adjusted financial data are not necessarily indicative of our future performance or of what our financial position and results of operations would have been if we had operated as a separate, stand-alone entity during the periods shown.

 

     Years Ended     Thirty-nine Weeks Ended  
    

June 28,

2003

   

July 3,

2004

   

July 2,

2005

   

April 2,

2005

   

April 1,

2006

 
                       (unaudited)     (unaudited)  
     (in thousands, except per share data)  

Statements of Income Data:

          

Net sales

   $ 4,669,665     $ 4,632,741     $ 4,683,683     $ 3,528,333     $ 3,352,699  

Cost of sales

     3,010,383       3,092,026       3,223,571       2,428,997       2,248,828  
                                        

Gross profit

     1,659,282       1,540,715       1,460,112       1,099,336       1,103,871  

Selling, general and administrative expenses

     1,126,065       1,087,964       1,053,654       775,607       749,236  

Charges for (income from) exit activities

     (14,397 )     27,466       46,978       (815 )     945  
                                        

Income from operations

     547,614       425,285       359,480       324,544       353,690  

Interest expense

     44,245       37,411       35,244       18,458       19,295  

Interest income

     (46,631 )     (12,998 )     (21,280 )     (19,318 )     (7,783 )
                                        

Income before income taxes

     550,000       400,872       345,516       325,404       342,178  

Income tax expense (benefit)

     121,560       (48,680 )     127,007       97,911       78,970  
                                        

Net income

   $ 428,440     $ 449,552     $ 218,509     $ 227,493     $ 263,208  
                                        

Pro Forma:

          

Net income per share basic (1)

   $       $       $       $       $    

Net income per share diluted (2)

          

Other Data:

          

EBITDA (3)

   $ 656,269     $ 539,514     $ 477,371     $ 408,630     $ 436,014  

Cash flows from (used in):

          

Operating activities

     493,986       471,436       506,871       390,961       460,140  

Investing activities

     (77,296 )     (61,259 )     (60,080 )     (35,689 )     (71,416 )

Financing activities

     (233,082 )     (25,813 )     (41,377 )     (11,214 )     (1,015,812 )

 

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     April 1, 2006
         Actual        Pro Forma (4)    Pro Forma as
Adjusted (5)
     (in thousands)

Balance Sheet Data:

        

Cash and cash equivalents

   $ 455,895    $                 $             

Total assets

     4,205,112      

Noncurrent liabilities:

        

Noncurrent capital lease obligations

     3,951      

Noncurrent deferred tax liabilities

     7,171      

Other noncurrent liabilities

     43,477      

Total noncurrent liabilities

     54,599      

Total parent companies’ equity

     2,662,193      

(1) The number of shares used to compute basic earnings per share is                     , which is the number of shares of our common stock assumed to be outstanding on the distribution date, based on a distribution ratio of one share of our common stock for every      shares of Sara Lee common stock outstanding.

 

(2) The number of shares used to compute diluted earnings per share is based on the number of shares of our common stock assumed to be outstanding on the distribution date. Net income per share diluted also reflects the potential dilution that could occur if restricted stock units and options granted under equity-based compensation arrangements were exercised or converted into common stock.

 

(3) “EBITDA” represents net income before interest, income taxes and depreciation and amortization. EBITDA does not represent and should not be considered as an alternative to net income or net cash from operating activities, as determined by generally accepted accounting principles, or “GAAP,” and our calculation thereof may not be comparable to that reported by other companies. We present EBITDA because we understand that it is used by some investors and lenders to determine a company’s historical ability to service and/or incur indebtedness and to fund ongoing capital expenditures. This belief is based in part on our negotiations with our lenders, who have indicated that the amount of indebtedness we will be permitted to incur will be based, in part, on our EBITDA. EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

    EBITDA does not reflect our capital expenditures or future requirements for capital expenditures or contractual commitments;

 

    EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    EBITDA does not reflect the significant interest expense, or the cash requirement necessary to service interest or principal payments, on our debts;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

 

    Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

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   Because of these limitations, you should not consider EBITDA as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. The following is a reconciliation of net income to EBITDA for each of the applicable periods:

 

      Years Ended     Thirty-nine Weeks Ended  
    

June 28,

2003

   

July 3,

2004

   

July 2,

2005

   

April 2,

2005

   

April 1,

2006

 

Net income

   $ 428,440     $ 449,552     $ 218,509     $ 227,493     $ 263,208  

Interest expense

     44,245       37,411       35,244       18,458       19,295  

Interest income

     (46,631 )     (12,998 )     (21,280 )     (19,318 )     (7,783 )

Income tax expense (benefit)

     121,560       (48,680 )     127,007       97,911       78,970  

Depreciation

     101,420       105,517       108,791       77,888       75,797  

Amortization

     7,235       8,712       9,100       6,198       6,527  
                                        

Total EBITDA

   $ 656,269     $ 539,514     $ 477,371     $ 408,630     $ 436,014  
                                        

See our statements of income data set forth in our historical financial statements included elsewhere in this information statement.

(4) Assumes that the spin off occurred as of April 1, 2006.
(5) Assumes that the spin off and the related debt incurrence occurred as of April 1, 2006 and reflects the pro forma adjustments as described in the notes to our “Unaudited Pro Forma Combined and Consolidated Financial Statements,” as well as the incurrence of $            million of debt under a proposed new senior secured credit facility and $            million of debt under one or more series of senior notes with an estimated interest rate of     % and the payment to Sara Lee of $             of the proceeds.

 

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RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating our company and common stock. Any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our business, results of operations or financial condition.

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 industrywide 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 assure you 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 are currently 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. This process may also 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 have 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, which 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 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.

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 Fruit of the Loom, Inc., Warnaco Group Inc., VF Corporation and Maidenform Brands, Inc. in our

 

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innerwear business segment and Gildan Activewear, Inc., 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 Victoria’s 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 are generally 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, due in part to lower demand for some of our products in 2005 than forecasted, our total inventory reserve for fiscal 2005 was $116 million (which represented an increase of $25 million over fiscal 2004).

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 would have a material adverse effect on our business, results of operations and financial condition.

Sales of and demand for our products may decrease if we fail to keep pace with evolving consumer preferences and trends.

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 mark-down allowances to our customers or liquidate excess merchandise, any of which could have a material adverse effect on our net sales and profitability. In addition, from time to time, products fall out of favor with consumers and we must

 

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adjust our inventory and advertising and marketing expenses accordingly. For example, sales in the hosiery industry have declined each year since 1995. 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.

In fiscal 2005, our top ten customers accounted for 64% of our net sales and our top customer, Wal-Mart, accounted for 31% 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, 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.

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 are now 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.

If our customers experience financial difficulties, our business, results of operations and financial condition may be adversely affected.

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 customer’s 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.

 

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Changing international trade regulation and future quantitative limits, duties or tariffs may increase our costs or limit the amount of products that we can import from suppliers in a particular country.

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 in certain countries. International trade restrictions 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 changes in trade regulations, including those listed above, and the costs associated with such regulations could interrupt production in offshore facilities or delay receipt of our products in the United States and other markets, which would harm our business.

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.

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 $3.5 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.

 

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We are incurring substantial indebtedness in connection with the spin off, which will subject us to various restrictions and could decrease our profitability and otherwise adversely affect our business.

We are incurring substantial indebtedness in connection with the spin off and will have total debt of approximately $             after giving effect to such incurrence. We will be subject to significant financial and operating restrictions contained in the credit agreements, indentures and similar instruments governing our indebtedness after the spin off. These restrictions will 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, some of the credit agreements to which we will become subject will require us to maintain financial ratios. If we fail to comply with the covenant restrictions contained in these credit agreements, that failure could result in a default that accelerates the maturity of the indebtedness under such agreements.

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.

After giving effect to our significant debt incurrence, we may not have sufficient funding for our operations and capital requirements.

We expect to pay $             of the proceeds of the borrowings we are incurring in connection with the spin off to Sara Lee, and as a result, those proceeds will not be available for our business needs, such as funding working capital or the expansion of our operations. In addition, the restrictions contained in our credit agreements, indentures and similar instruments governing our debt obligations may 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;

 

    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 your ownership interest.

 

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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.

If we fail to meet our payment or other obligations under the senior secured credit facility, the lenders could foreclose on, and acquire control of, substantially all of our assets.

In connection with our incurrence of indebtedness under the senior secured credit facility, the lenders will receive 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 will have a lien on substantially all of our assets and the assets of our subsidiaries, with certain customary or agreed-upon 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, the lenders will be entitled to foreclose on substantially all of our assets and, at their option, liquidate these assets.

We have extensive foreign operations which subject us to the risk that external events may disrupt our supply chain, increase cost of sales or adversely affect our ability to deliver our products to our customers.

A significant portion of our products are now manufactured and sewn in Central America, the Caribbean Basin, Mexico and Asia. In addition, we are currently expanding our manufacturing operations in Central America, the Caribbean Basin and Asia. There are many potential events that could disrupt or otherwise adversely impact our foreign operations, 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, including as a result of dockworker or port strikes;

 

    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;

 

    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.

These and other events could interrupt production in offshore facilities, increase our cost of sales, disrupt merchandise deliveries, delay receipt of products into the United States or prevent us from sourcing our products at all. These events could also result in lost sales, cancellation charges or excessive markdowns.

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 15% of the apparel designed by us from a limited number of third-party suppliers and manufacturers. Our ability to meet our customers’ needs

 

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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 which 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.

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 have approximately 50,000 employees worldwide, 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 have approximately 50,000 employees worldwide. 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, changes which would likely have a direct impact on our operating costs. We have approximately 35,500 employees outside of the United States. A significant increase in minimum wage or overtime rates in such countries 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 a strike, work stoppage or other labor action by these employees that could have an adverse effect on our business.

Fluctuations in foreign currency exchange rates could harm 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 consolidated financial statements due to the translation of operating results and financial position of our foreign subsidiaries. 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 will assume significant unfunded employee benefit liabilities for pension, postretirement and other retirement benefit qualified and nonqualified plans from Sara Lee in connection with the spin-off. These

 

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liabilities are expected to be approximately $348.6 million. Included in these liabilities are pension obligations which have not been reflected in our historical financial statements, because these obligations have historically been obligations of Sara Lee. The pension obligations we are assuming are projected to be approximately $266.0 million more than the corresponding pension assets we are acquiring, which will result in our pension plans being underfunded. 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 turn out to be inaccurate. A significant increase in our funding obligations could have a negative impact on our cash flows, liquidity and results of operations. See “Unaudited Pro Forma Combined and Consolidated Financial Statements.”

Due to restrictions imposed on us related to Sara Lee’s sale of its European branded apparel business, we are prohibited from selling our Wonderbra and Playtex intimate apparel products in the European Union, as well as certain other countries in Europe and South Africa.

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 European Union, or the “EU,” as well as Russia, South Africa, Switzerland and certain other nations in Europe (together with the EU, the “Covered Nations”). Due to the exclusive license, we are not permitted to sell Wonderbra and Playtex branded products in the Covered Nations and Sun Capital is not permitted to sell Wonderbra and Playtex branded products outside of the Covered Nations. We are also not permitted to distribute or sell certain apparel products, not including Hanes products, in the Covered Nations until February 2007. 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 the Covered Nations. In addition, any misuse of the Wonderbra and Playtex brands by Sun Capital could result in bad press 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. For more information on these sales restrictions see “Description of Our Business—Intellectual Property.”

The success of our business is tied to the strength and reputation of our brands, including brands which we license both to and from other parties. If other parties take actions that weaken, harm the reputation of, or cause confusion with our brands, or if the brands we are licensed to use violate the trademark rights of others, 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 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, or if any of our brands or trademarks are alleged to violate the rights of others or are deemed invalid or unenforceable, we could experience a significant downturn in that brand’s business, adversely affecting our sales and results of operations.

We also design, manufacture, source and sell a number of our products under trademarks that are licensed from third parties such as our Donna Karan hosiery and Polo Ralph Lauren men’s underwear. Since 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 brand’s 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 brand’s 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.

 

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We are subject to environmental regulation which can involve significant compliance costs and the failure to comply with such regulation could cause us to incur material fines, penalties or damages.

We are subject to various environmental and occupational health and safety laws and regulations in our operations in the United States and in other countries. Among other things, these laws and regulations impose standards and limitations on our air and wastewater emissions, our handling of wastes and our product and packaging content. While we strive to comply with environmental, health and safety requirements, we cannot assure you that we will at all times be in compliance with such requirements. If we fail to comply, we could incur material fines, penalties or damages, and suffer negative publicity. Also, future events, such as a change in or the enactment of new laws and regulations, a new release of hazardous substances on or from our properties or any associated offsite disposal location, or the future discovery of contamination from prior activities at any of our properties may give rise to compliance costs or liabilities that could have a material adverse effect on our business, results of operations and financial condition.

Risks Related to the Spin Off

The spin off could result in substantial tax liability.

Sara Lee has filed a private letter ruling request with the IRS to the effect that, among other things, 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 of 1986, as amended, or the “Code,” and as part of a tax-free reorganization under Section 368(a)(1)(D) of the 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. Receipt of the private letter ruling or an opinion of counsel to the effect that the spin off will qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code is a condition to completing the spin off. Sara Lee does not intend to postpone the spin off in the event it does not receive the private letter ruling prior to the effective date of the spin off, assuming that Sara Lee receives instead an opinion of counsel to the effect that the spin off will qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code. See “The Spin Off—Material U.S. Federal Income Tax Consequences of the Spin Off.”

Although a private letter ruling relating to the qualification of the spin off under Sections 355 and 368(a)(1)(D) of the Code is generally binding on the IRS, the continuing validity of such ruling will be subject to the accuracy of factual representations and assumptions made in the ruling request. Also, as part of the IRS’s general policy with respect to rulings on spin off transactions under Section 355 of the Code, any private letter ruling obtained by Sara Lee will be 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 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. Any opinion received by Sara Lee would not be binding on the IRS and would be subject to the accuracy of factual representations and assumptions made in connection with the opinion.

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 Lee’s 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 Lee’s stockholder’s 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 Lee’s stockholder’s pro rata share of Sara Lee’s 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 Lee’s stockholders and to Sara Lee would be substantial.

In the tax sharing agreement with Sara Lee, we will agree 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

 

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as a tax-free transaction to Sara Lee and to you under Sections 355 and 368(a)(1)(D) of the 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 Code. For a more detailed discussion, see “Agreements with Sara Lee—Tax Sharing Agreement.” Our indemnification obligations to Sara Lee and its affiliates are not limited in amount or subject to any cap. It is expected that the amount of any such taxes to Sara Lee would be substantial.

We have no operating history as an independent company upon which you can evaluate our performance.

Prior to the consummation of this distribution, we have operated as part of Sara Lee. Accordingly, we have 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), 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 and pro forma financial information is not necessarily indicative of our results as a separate company.

Our historical financial statements and Unaudited Pro Forma Combined and Consolidated Financial Statements have been created from Sara Lee’s financial statements using our historical results of operations and historical bases of assets and liabilities as part of Sara Lee. Accordingly, the historical financial information we have included in this information statement 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 the periods presented.

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 does not reflect many significant changes that will occur in our capital structure, funding and operations as a result of the spin off. While our historical results of operations include all costs of Sara Lee’s 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 will occur in our cost structure, financing and operations as a result of the spin off, including the substantial debt and pension liabilities that we will assume 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 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 have been repealed effective in fiscal 2007.

 

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We and Sara Lee will provide a number of services to each other pursuant to a master transition services agreement. When the master transition services agreement terminates, we will be required to replace Sara Lee’s 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 expect to enter into with Sara Lee prior to the spin off, we and Sara Lee will provide to each other, for a fee, specified support services related to human resources and payroll functions, financial and accounting functions and information technology for a period of up to 12 months following the spin off. 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.

We will agree to certain restrictions in order to comply with U.S. federal income tax requirements for a tax-free spin off and 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. United States 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 the tax sharing agreement with Sara Lee, we will agree 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 will agree not to: (1) 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 will, however, be 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 with 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.

Substantial sales of our common stock following the distribution may have an adverse impact on the trading price of our common stock.

Some of the Sara Lee’s stockholders who receive our shares of common stock may decide that their investment objectives do not include ownership of our shares, and may sell their shares of common stock

 

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following the distribution. In particular, certain Sara Lee stockholders that are institutional investors have investment parameters that depend on their portfolio companies maintaining a minimum market capitalization that we may not achieve after the distribution. Also, many employees of Sara Lee may be unwilling to continue to hold our common stock in their 401(k) or other retirement accounts because such employees will not be employed by us. For example, participants in the Sara Lee 401(k) Plan who fail to make an affirmative election to retain the shares of Hanesbrands common stock that they receive on the distribution date will have their entire holding of Hanesbrands common stock in their Sara Lee 401(k) Plan account liquidated shortly after the distribution date. In addition, participants in the Sara Lee 401(k) Plan who affirmatively elect to retain the shares of Hanesbrands common stock that they receive in their Sara Lee 401(k) Plan account will be required to liquidate those shares within one year after the distribution date. We cannot predict whether other stockholders will resell large numbers of our shares of common stock in the public market following the distribution or how quickly they may resell these shares. If our stockholders sell large numbers of our shares of common stock over a short period of time, or if investors anticipate large sales of our shares of common stock over a short period of time, this could adversely affect the trading price of our shares of common stock.

The terms of our spin off from Sara Lee, anti-takeover provisions of our charter and by-laws, 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 you may favor. An acquisition or issuance of our common stock could trigger the application of Section 355(e) of the Code. For a discussion of Section 355(e) of the Code, please see “The Spin Off—Material U.S. Federal Income Tax Consequences of the Spin Off.” Under the tax sharing agreement we will enter into with Sara Lee, we would be 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 you 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 can only 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, including issuances of equity securities, between us and any person who beneficially owns 10% or more of our common stock or an affiliate of such person, are prohibited for a five-year period unless exempted by the statute. After this five-year period, a combination of this type must be approved by two super-majority stockholder votes, unless some conditions are met or the business combination is exempted by our board of directors.

In addition, we expect to adopt a stockholder rights agreement which will provide 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 stockholders rights agreement could make it more difficult for a third-party to acquire our common stock without the approval of our board of directors.

 

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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.

See “Agreements with Sara Lee—Tax Sharing Agreement” and “Description of Our Capital Stock” for a more detailed description of these agreements and of these provisions of Maryland law, our charter and bylaws.

Until the distribution occurs Sara Lee has the sole discretion to change the terms of the spin off in ways which may be unfavorable to us.

Until the distribution occurs Sara Lee will have the sole and absolute discretion to determine and change the terms of, and whether to proceed with, the distribution, including the establishment of the record date and distribution date. These changes could be unfavorable to us. In addition, Sara Lee may decide at any time not to proceed with the spin off.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement and other materials we have filed or will file with the Securities and Exchange Commission, or the “SEC,” contain, or will contain, certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. 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 included under “The Spin Off,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Our Business” contain 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 centers 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;

 

    any 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;

 

    any 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 on our supply chain;

 

    any 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 which 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;

 

    rapid technological changes;

 

    future financial performance, including availability, terms and deployment of capital;

 

    the outcome of any pending or threatened litigation;

 

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    general economic conditions; and

 

    possible terrorists attacks and ongoing military action in the Middle East and other parts of the world.

These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this information statement. We expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any other change in events, conditions or circumstances on which any such statement is based.

 

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THE SPIN OFF

Background

Our business is currently part of Sara Lee and our assets and liabilities consist of those that Sara Lee attributes to its branded apparel business (excluding European and U.K. operations which have been or are in the process of being sold by Sara Lee). The board of directors of Sara Lee has determined to separate its branded apparel business segment from its other business segments by means of a spin off. To accomplish the spin off, Sara Lee is distributing all of its equity interests in our company, consisting of all of the outstanding shares of our common stock, to Sara Lee’s stockholders on a pro rata basis. Following the spin off, Sara Lee will cease to own any equity interest in our company, and we will be an independent, publicly traded company. No vote of Sara Lee’s stockholders is required or being sought in connection with the spin off, and Sara Lee’s stockholders have no appraisal rights in connection with the spin off.

Reasons for the Spin Off

Among other things, the board of directors of Sara Lee considered the following potential benefits in making its determination to approve the spin off:

 

    Enabling investors to invest directly in our business. Because our company and Sara Lee’s other business segments operate primarily in different industries, an equity investment in each company may appeal to investors with different goals, interests and concerns. Establishing separate equity securities will allow investors to make separate investment decisions with respect to our and Sara Lee’s respective businesses.

 

    Allowing us and Sara Lee to focus on our respective core businesses. Sara Lee is implementing a transformation plan in order to make Sara Lee and us more tightly focused companies—with Sara Lee focusing on its food, beverage and household products business and us focusing on the branded apparel business as an independent company. Sara Lee’s lines of business have financial and operational characteristics which are distinct from those of our business. The spin off will allow Sara Lee to adopt more focused strategies around its core businesses and will enable us to better focus on the growth and development of our business.

 

    Creating more effective management incentives. We and Sara Lee believe that the spin off will enable each of our companies to create more effective management incentive and retention programs. Following the spin off, stock-based compensation and other incentive awards held by employees of each of our companies will be tied more directly to the performance of the company for which the employees work.

 

    Direct access to capital. Historically, our working capital requirements and capital for general corporate purposes, including acquisitions and capital expenditures, have been satisfied as part of the corporate wide cash management policies of Sara Lee. We expect to have better and more direct access to the capital markets after the spin off as our investors will not be forced to understand and make investment decisions with respect to Sara Lee’s other businesses that are fundamentally different from our business. Sara Lee also will benefit since its investors will not need to understand and make investment decisions with respect to our business. In addition, we and Sara Lee will have the option to use our own respective equity as acquisition or financing currency should the appropriate strategic opportunities arise.

Neither we nor Sara Lee can assure you that, following the spin off, any of these benefits will be realized to the extent anticipated or at all.

Manner of Effecting the Spin Off

On the distribution date, Sara Lee will effect the spin off by distributing to holders of record of its common stock (or their designees) as of the record date a dividend of one share of our common stock for every              shares of Sara Lee common stock held by them on the record date and not subsequently sold in the “regular way” market.

 

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Prior to the spin off, Sara Lee will deliver all of the issued and outstanding shares of our common stock to the distribution agent. On or about                     , 2006, which we refer to as the “distribution date,” the distribution agent will effect delivery of the shares of our common stock issuable in the spin off through the transfer agent’s book-entry registration system by mailing to each record holder a statement of holdings detailing the record holder’s ownership interest in our company and the method by which the record holder may access its account and, if desired, trade its shares of our common stock. The statement of holdings also will detail the method by which stockholders may request to receive shares of our common stock in certificated form. Please note that if any stockholder of Sara Lee on the record date sells shares of Sara Lee common stock after the record date but on or before the distribution date, the buyer of those shares, and not the seller, will become entitled to receive the shares of our common stock issuable in respect of the shares sold. See “—Trading of Sara Lee Common Stock Between the Record Date and the Distribution Date” below for more information.

A delivery of a share of our common stock in connection with the distribution also will constitute the delivery of the preferred stock purchase right associated with the share. The existence of the preferred stock purchase rights may deter a potential acquiror from making a hostile takeover proposal or a tender offer. For a more detailed discussion of these rights, see “Description of Our Capital Stock—Certain Provisions of Maryland Law and of Our Charter and Bylaws That Could Have the Effect of Delaying, Deferring or Preventing a Change in Control—Rights Agreement.”

You are not being asked to take any action in connection with the spin off. You also are not being asked for a proxy or to surrender any of your shares of Sara Lee common stock for shares of our common stock. The number of outstanding shares of Sara Lee common stock will not change as a result of the spin off, although the value of shares of Sara Lee common stock will be affected.

Treatment of Fractional Shares

Fractional shares of our common stock will not be issued to Sara Lee stockholders as part of the distribution nor credited to book-entry accounts. Record stockholders of fewer than              shares of Sara Lee common stock on the record date, which would entitle them to receive less than one whole share of our common stock, will receive cash in lieu of fractional shares. The distribution agent will aggregate all of the fractional shares and sell them in the open market at then prevailing prices on behalf of these stockholders. These stockholders will receive cash payments in the amount of their proportionate share of the net sale proceeds from the sale of the aggregated fractional shares, based upon the average gross selling price per share of our common stock after making appropriate deductions for any required withholdings for U.S. federal income tax purposes. See “—Material U.S. Federal Income Tax Consequences of the Spin Off” for a discussion of the U.S. federal income tax treatment of the proceeds received from the sale of fractional shares. We will bear the cost of brokerage fees incurred in connection with these sales. We anticipate that these sales will occur as soon after the date of the spin off as practicable as determined by the distribution agent. None of Sara Lee, us or the distribution agent will guarantee any minimum sale price for the fractional shares. The distribution agent will have the sole discretion to select the broker-dealer(s) through which to sell the shares and to determine when, how and at what price to sell the shares. Further, neither the distribution agent nor the selected broker-dealer(s) will be our affiliate or an affiliate of Sara Lee.

Material U.S. Federal Income Tax Consequences of the Spin Off

The following is a summary of certain material U.S. federal income tax consequences to Sara Lee and the holders of Sara Lee common stock resulting from the spin off. This discussion is based upon the Code, existing and proposed Treasury Regulations promulgated thereunder, and current administrative rulings and court decisions, all as in effect as of the date of this information statement, and all of which are subject to change. Any such change, which may or may not be retroactive, could materially alter the tax consequences to Sara Lee or the holders of Sara Lee common stock as described in this information statement. This summary does not discuss all U.S. federal income tax considerations that may be relevant to you in light of your particular circumstances or to a stockholder that may be subject to special tax rules, including, without limitation:

 

    stockholders subject to the alternative minimum tax;

 

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    banks, insurance companies, or other financial institutions;

 

    tax-exempt organizations;

 

    dealers in securities or commodities;

 

    traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

 

    stockholders whose “functional currency” is not the U.S. dollar;

 

    stockholders holding their common stock through partnerships and other pass-through entities; and

 

    U.S. expatriates and non-U.S. persons.

In addition, the following discussion does not address the tax consequences of the spin off under state, local, or foreign tax laws, the tax consequences of transactions effectuated prior to or after the spin off (whether or not such transactions are undertaken in connection with the spin off), or the tax consequences to stockholders who received our common stock pursuant to the exercise of employee stock options, under an employee stock purchase plan, or otherwise as compensation.

This summary of the material U.S. federal income tax consequences is for general information only and is not tax advice. Accordingly, you are urged to consult your own tax advisors concerning the U.S. federal, state, and local, and non-U.S. tax consequences of the spin off to you.

Sara Lee has filed a private letter ruling request with the IRS to the effect that the spin off will qualify as a tax-free distribution under Section 355 and a tax-free reorganization under Section 368(a)(1)(D) of the Code. Receipt of the private letter ruling or an opinion of counsel to the effect that the spin off will qualify as a tax-free transaction under Section 355 and Section 368(a)(1)(D) of the Code is a condition to completing the spin off. Sara Lee does not intend to postpone the spin off in the event it does not receive the private letter ruling prior to the effective date of the spin off, assuming that Sara Lee receives instead an opinion of counsel to the effect that the spin off will qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code. Assuming receipt of such ruling or opinion, for U.S. federal income tax purposes, among other things:

 

    no gain or loss will be recognized by Sara Lee upon the distribution of shares of our common stock to holders of Sara Lee common stock pursuant to the spin off;

 

    other than with respect to fractional shares of our common stock, no gain or loss will be recognized by, and no amount will be included in the income of, a holder of Sara Lee common stock upon the receipt of shares of our common stock pursuant to the spin off;

 

    a Sara Lee stockholder who receives shares of our common stock in the spin off will have an aggregate adjusted basis in its shares of our common stock (including any fractional share in respect of which cash is received) and its shares of Sara Lee common stock immediately after the spin off equal to the aggregate adjusted basis of the stockholder’s Sara Lee common stock held prior to the spin off, which will be allocated in proportion to their relative fair market values; and

 

    the holding period of the shares of our common stock received in the spin off by a Sara Lee stockholder will include the holding period of its shares of Sara Lee common stock, provided that such shares of Sara Lee common stock were held as a capital asset on the distribution date.

United States Treasury Regulations also generally provide that if a Sara Lee stockholder holds different blocks of Sara Lee common stock (generally shares of Sara Lee common stock purchased or acquired on different dates or at different prices), the aggregate basis for each block of Sara Lee common stock purchased or acquired on the same date and at the same price will be allocated, to the greatest extent possible, between the shares of our common stock (including any fractional share) received in the spin off in respect of such block of Sara Lee common stock and such block of Sara Lee common stock, in proportion to their respective fair market values, and the holding period of the shares of our common stock (including any fractional share) received in

 

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the spin off in respect of such block of Sara Lee common stock will include the holding period of such block of Sara Lee common stock, provided that such block of Sara Lee common stock was held as a capital asset on the distribution date. If a Sara Lee stockholder is not able to identify which particular shares of our common stock (including any fractional share) are received in the spin off with respect to a particular block of Sara Lee common stock, for purposes of applying the rules described above, the stockholder may designate which shares of our common stock (including any fractional share) are received in the spin off in respect of a particular block of Sara Lee common stock, provided that such designation is consistent with the terms of the spin off. Holders of Sara Lee common stock are urged to consult their our tax advisors regarding the application of these rules to their particular circumstances.

If you receive cash in lieu of a fractional share of our common stock as part of the spin off, you will be treated as though you first received a distribution of the fractional share in the spin off and then sold it for the amount of such cash. You will generally recognize capital gain or loss, provided that the fractional share is considered to be held as a capital asset, measured by the difference between the cash you receive for such fractional share and your tax basis in that fractional share, as determined above. Such capital gain or loss will be a long-term capital gain or loss if your holding period (as determined above) for such fractional share of Sara Lee common stock is more than one year on the distribution date.

Although any private letter ruling relating to the qualification of the spin off under Sections 355 and 368(a)(1)(D) of the Code is generally binding on the IRS, the continuing validity of such ruling is subject to the accuracy of factual representations and assumptions made in connection with obtaining such private letter ruling. Further, as part of the IRS’s general ruling policy with respect to spin off transactions under Section 355 of the Code, any private letter ruling will be based upon representations by Sara Lee (rather than a determination by the IRS) that certain conditions which are necessary to obtain tax-free treatment under Section 355 of the Code have been satisfied. Any inaccuracy in these representations could invalidate the ruling. Any opinion received by Sara Lee would not be binding on the IRS and would be subject to the accuracy of factual representations and assumptions made in connection with the opinion.

If the spin off does not qualify for tax-free treatment, then Sara Lee will recognize taxable gain in an amount equal to the excess of the value of the shares of our common stock held by Sara Lee immediately prior to the spin off over Sara Lee’s tax basis in such shares of our common stock. In addition, a holder of Sara Lee’s common stock will be subject to tax as if the holder had received a taxable distribution in an amount equal to the fair market value of the shares of our common stock received in the spin off by such holder. See “Risk Factors—Risks Related to the Spin Off—The spin off could result in substantial tax liability.”

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 50% or greater change (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. United States 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 the tax sharing agreement with Sara Lee, we will agree that, among other things, we will not take any actions that would result in any tax being imposed on the spin off. Please see “Agreements with Sara Lee—Tax Sharing Agreement” for more detail.

 

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Treasury Regulations under Section 355 of the Code require that each Sara Lee stockholder who receives shares of our common stock pursuant to the spin off attach a statement to the U.S. federal income tax return that will be filed by the stockholder for the taxable year in which such stockholder receives the shares of our common stock in the spin off, which statement shows the applicability of Section 355 of the Code to the spin off. Sara Lee will provide each holder of Sara Lee common stock with the information necessary to comply with this requirement.

Results of the Spin Off

After the spin off, we will be an independent public company owning and operating what had previously been Sara Lee’s branded apparel business (excluding certain of Sara Lee’s branded apparel business operations in Europe and the U.K.). Immediately following the spin off, we expect to have outstanding approximately              shares of our common stock and approximately              holders of record of shares of our common stock, based upon the number of record holders of Sara Lee common stock on             .

The spin off will not affect the number of outstanding Sara Lee shares or any rights of Sara Lee stockholders, although it will affect the market value of the outstanding Sara Lee common stock.

Listing and Trading of Our Common Stock

As of the date of this information statement, there is no public market for our common stock. We will apply to have our common stock listed on the New York Stock Exchange under the symbol “HBI.” After the spin off, Sara Lee common stock will continue to be listed on the New York Stock Exchange under the symbol “SLE.”

There currently is no trading market for our common stock, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution, and we expect regular way trading of our common stock will begin on the first trading day after the completion of the spin off. Neither we nor Sara Lee can assure you as to the trading price of our common stock after the spin off or as to whether the combined trading prices of our common stock and Sara Lee’s common stock after the spin off will be less than, equal to or greater than the trading prices of Sara Lee’s common stock prior to the spin off. See “Risk Factors—Risks Related to the Spin Off.” The trading price of our common stock is likely to fluctuate significantly, particularly until an orderly market develops.

The shares of our common stock distributed to Sara Lee’s stockholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the spin off include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for federal securities law purposes. This may include some or all of our executive officers and directors. In addition, individuals who are affiliates of Sara Lee on the distribution date may be deemed to be affiliates of ours. Individuals who are our affiliates will be permitted to sell their shares of common stock received in the spin off only pursuant to an effective registration statement under the Securities Act of 1933, of the “Securities Act,” an appropriate exemption from registration, or pursuant to Rule 144 once 90 days have expired since the date that the registration statement of which this information statement is a part was declared effective. In general, under Rule 144, an affiliate who receives shares of our common stock in the distribution, for a period of at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:

 

    1% of the then-outstanding shares of common stock; and

 

    the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which the notice of the sale is filed with the Securities and Exchange Commission.

Sales under Rule 144 are also subject to provisions relating to notice, manner of sale, volume limitations and the availability of current public information about us.

 

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Trading of Sara Lee Common Stock Between the Record Date and Distribution Date

Shortly before the record date for the spin off, Sara Lee’s common stock will begin to trade in two markets on the NYSE: a “regular way” market and an “ex-distribution” market. Between this time and the consummation of the spin off, shares of Sara Lee common stock that are sold on the regular way market will include an entitlement to receive shares of our common stock distributable in the spin off. Conversely, shares sold in the “ex-distribution” market will not include an entitlement to receive shares of our common stock distributable in the spin off, as the entitlement will remain with the original holder. Therefore, if you own shares of Sara Lee common stock on the record date and thereafter sell those shares in the regular way market on or prior to the distribution date, you also will be selling the shares of our common stock that would have been distributed to you in the spin off with respect to the shares of Sara Lee common stock you sell. If you own shares of Sara Lee common stock on the record date and thereafter sell those shares in the “ex-distribution” market on or prior to the distribution date, you will still receive the shares of our common stock in the spin off. On the first trading day following the distribution date, shares of Sara Lee common stock will begin trading without any entitlement to receive shares of our common stock.

Material Changes to the Terms of the Spin Off

Sara Lee will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the date of the distribution. Hanesbrands does not intend to notify Sara Lee stockholders of any modifications to the terms of the spin off that, in the judgment of its board of directors, are not material. To the extent that the board of directors determines that any modifications by Sara Lee materially change the material terms of the distribution, we or Sara Lee will notify Sara Lee shareholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K, or circulating a supplement to the information statement.

Reasons for Furnishing this Information Statement

This information statement is being furnished solely to provide information about us and about the spin off to Sara Lee stockholders who will receive shares of our common stock in the spin off. It is not and should not be construed as an inducement or encouragement to buy or sell any of our securities or any securities of Sara Lee. We believe that the information contained in this information statement is accurate as of the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and neither we nor Sara Lee undertake any obligation to update the information except in the normal course of our respective public disclosure obligations and practices.

 

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DIVIDEND POLICY

We currently do not pay regular dividends on our outstanding stock. Effective upon the consummation of the distribution, we intend to adopt a policy of paying, subject to legally available funds, a modest quarterly cash dividend on outstanding shares of our common stock.

The declaration of any future dividends and, if declared, the amount of any such dividends, will be subject to our actual future earnings, capital requirements, regulatory restrictions, debt covenants, other contractual restrictions and to the discretion of our board of directors. Our board of directors may take into account such matters as general business conditions, our financial condition and results of operations, our capital requirements, our prospects and such other factors as our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our capitalization on a historical basis as of April 1, 2006, pro forma to give effect to the spin off and as adjusted to give effect to the incurrence of indebtedness and the use of the proceeds therefrom.

This table should be read in conjunction with “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined and Consolidated Financial Statements” and our Unaudited Interim Condensed Combined and Consolidated Financial Statements and corresponding notes included elsewhere in this information statement.

 

     April 1, 2006
     Actual    Pro Forma(1)    Pro Forma
as Adjusted(2)
     (in thousands)

Cash and cash equivalents

   $ 455,895    $             $         
                    

Debt, including current and long-term:

        

New senior secured credit facility:

        

Revolving credit facility

   $    $      $  

Term loan

          

Capital lease obligations

     7,342      

Notes payable to banks

     30,375      

New senior notes

          
                    

Total debt(3)

     37,717      

Debt payable to parent companies and related entities to be extinguished

     888,550      

Total parent companies’ equity

     2,662,193      
                    

Total capitalization

   $ 3,588,460    $      $  
                    

(1) Assumes that the spin off occurred as of April 1, 2006.
(2) Assumes that the spin off and the related debt incurrence occurred as of April 1, 2006 and reflects the pro forma adjustments as described in the notes to our “Unaudited Pro Forma Combined and Consolidated Statements,” as well as the incurrence of $            million of debt under a proposed new senior secured credit facility and $            million of debt under one or more series of senior notes with an estimated interest rate of     % and the payment to Sara Lee of $             of the proceeds of such debt incurrence.
(3) Excludes debt payable to parent companies and related entities to be extinguished.

 

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SELECTED HISTORICAL FINANCIAL DATA

 

The following table presents our selected historical and pro forma financial data. The statements of income data for each of the fiscal years in the three fiscal years ended July 2, 2005 and the balance sheet data as of June 28, 2003, July 3, 2004 and July 2, 2005 have been derived from our audited Combined and Consolidated Financial Statements included elsewhere in this information statement. The financial data as of April 1, 2006 and for the thirty-nine weeks ended April 2, 2005 and April 1, 2006 have been derived from our Unaudited Interim Condensed Combined and Consolidated Financial Statements included elsewhere in this information statement. The Unaudited Interim Condensed Combined and Consolidated Financial Statements are not necessarily indicative of the results to be expected for any other interim period or for fiscal 2006 as a whole. However, in the opinion of management, the unaudited interim financial statements include all adjustments (consisting of normal recurring accruals) that are necessary for the fair presentation of the results for the interim period. The financial data as of and for the years ended June 30, 2001 and June 29, 2002 have been derived from our financial statements not included in this information statement.

Our historical financial data are 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 the periods shown. The data should be read in conjunction with our historical financial statements, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Combined and Consolidated Financial Statements” included elsewhere in this information statement.

 

    Years Ended     Thirty-nine Weeks Ended  
    June 30,
2001(1)
    June 29,
2002
    June 28,
2003
    July 3,
2004
    July 2,
2005
    April 2, 2005     April 1, 2006  
    (dollars in thousands, except per share data)  
    (unaudited)     (unaudited)                       (unaudited)     (unaudited)  

Statements of Income Data:

             

Net sales

  $ 5,010,548     $ 4,920,840     $ 4,669,665     $ 4,632,741     $ 4,683,683     $ 3,528,333     $ 3,352,699  

Cost of sales

    3,337,522       3,278,506       3,010,383       3,092,026       3,223,571       2,428,997       2,248,828  
                                                       

Gross profit

    1,673,026       1,642,334       1,659,282       1,540,715       1,460,112       1,099,336       1,103,871  

Selling, general and administrative expenses

    1,299,844       1,146,549       1,126,065       1,087,964       1,053,654       775,607       749,236  

Charges for (income from) exit activities

    200,450       27,580       (14,397 )     27,466       46,978       (815 )     945  
                                                       

Income from operations

    172,732       468,205       547,614       425,285       359,480       324,544       353,690  

Interest expense

    13,711       2,509       44,245       37,411       35,244       18,458       19,295  

Interest income

    (4,712 )     (13,753 )     (46,631 )     (12,998 )     (21,280 )     (19,318 )     (7,783 )
                                                       

Income before income taxes

    163,733       479,449       550,000       400,872       345,516       325,404       342,178  

Income tax expense (benefit)

    12,885       139,488       121,560       (48,680 )     127,007       97,911       78,970  
                                                       

Net income

  $ 150,848     $ 339,961     $ 428,440     $ 449,552     $ 218,509     $ 227,493     $ 263,208  
                                                       

Pro Forma:

             

Net income per share basic (2)

             

Net income per share diluted (3)

             

Weighted average shares basic (2)

             

Weighted average shares diluted (3)

             

 

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    June 30,
2001
  June 29,
2002
  June 28,
2003
  July 3,
2004
  July 2,
2005
 

April 1,

2006

    (in thousands)
    (unaudited)   (unaudited)       (unaudited)

Balance Sheet Data:

           

Cash and cash equivalents

  $ 222,768   $ 106,250   $ 289,816   $ 674,154   $ 1,080,799   $ 455,895

Total assets

    4,093,700     4,064,730     3,915,573     4,402,758     4,237,154     4,205,112

Noncurrent liabilities:

           

Noncurrent capital lease obligations

    14,307     12,171     10,054     7,200     6,188     3,951

Noncurrent deferred tax liabilities

    6,732     10,140     6,599     —       7,171     7,171

Other noncurrent liabilities

    141,971     37,660     32,598     28,734     40,200     43,477

Total noncurrent liabilities

    163,010     59,971     49,251     35,934     53,559     54,599

Total parent companies’ equity

    1,724,851     1,762,824     2,237,448     2,797,370     2,602,362     2,662,193

(1) In fiscal 2001, we disposed of our Australian apparel business and certain Champion assets that were used in sales to college bookstores. The net sales and operating loss related to these operations, which are included in the fiscal 2001 reported results above, are $108.7 million and $(2.3) million, respectively.
(2) The number of shares used to compute basic earnings per share is                     , which is the number of shares of our common stock assumed to be outstanding on the distribution date, based on a distribution ratio of one share of our common stock for every      shares of Sara Lee common stock outstanding.

 

(3) The number of shares used to compute diluted earnings per share is based on the number of shares of our common stock assumed to be outstanding on the distribution date. Net income per share diluted also reflects the potential dilution that could occur if restricted stock units and options granted under equity-based compensation arrangements were exercised or converted into common stock.

 

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UNAUDITED PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

The Unaudited Pro Forma Combined and Consolidated Financial Statements consist of Unaudited Pro Forma Combined and Consolidated Statements of Income for the thirty-nine weeks ended April 1, 2006 and for the fiscal year ended July 2, 2005 and an Unaudited Pro Forma Combined and Consolidated Balance Sheet as of April 1, 2006. The Unaudited Pro Forma Combined and Consolidated Financial Statements should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our Combined and Consolidated Financial Statements and the corresponding notes, and our Unaudited Interim Condensed Combined and Consolidated Financial Statements and the corresponding notes included elsewhere in this information statement.

The Unaudited Pro Forma Combined and Consolidated Financial Statements included in this information statement have been derived from our historical financial statements included elsewhere in this information statement and do not necessarily reflect what our financial position and results of operations would have been if we had operated as a separate stand-alone entity during the periods shown.

The Unaudited Pro Forma Combined and Consolidated Statements of Income reflect our combined and consolidated results as if the spin off and related transactions described below had occurred as of July 4, 2004, the beginning of the most recent fiscal year for which audited financial statements are available. The Unaudited Pro Forma Combined and Consolidated Balance Sheet reflects our combined and consolidated results as if the spin off and related transactions described below had occurred as of April 1, 2006.

The pro forma adjustments give effect to the following transactions:

 

    The contribution by Sara Lee to us of the assets and liabilities that comprise our business.

 

    The execution of our senior secured credit facility and the borrowing of approximately $     under that credit facility.

 

    The issuance of $     of senior notes with a maturity date of                  and an estimated interest rate of     %.

 

    The payment by us to Sara Lee of $             from the proceeds of such borrowings.

 

    The distribution of         shares of our common stock to holders of Sara Lee common stock.

 

    The estimated cost of $     million associated with the debt incurrence described above.

 

    Settlement of intercompany accounts.

The Unaudited Pro Forma Combined and Consolidated Financial Statements do not include certain non-recurring separation costs we expect to incur in connection with the spin off. Excluded are cash costs to be incurred in the first year estimated at $10 million related to legal, consulting and rebranding activities and noncash costs estimated at $34 million related to equity compensation arrangements including initial equity awards, stock options that will be granted to employees to replace the time value of Sara Lee options lost due to the spin off, and grants to new employees. This noncash equity compensation expense will generally be recognized over a period not to exceed three years. In addition, we expect non-recurring revenues of approximately $             million for transition services to be provided to Sara Lee, offset by non-recurring costs of approximately $             million for transition services to be provided by Sara Lee as determined in accordance with the separation agreements. See “Agreements with Sara Lee.” The historical service fees paid to Sara Lee for support services in fiscal 2005 and the thirty-nine weeks ended April 1, 2006 were $8.9 million and $4.7 million, respectively.

For the fiscal year ended July 2, 2005 and the thirty-nine weeks ended April 1, 2006, Sara Lee allocated to us general and administrative (including corporate) expenses in the amount of $34 million and $27 million, respectively. General and administrative expenses include costs related to human resources, legal, treasury, insurance, finance, internal audit, strategy, public affairs and other services. Effective with the spin off, we will assume responsibility for all of these functions and related costs. We expect our general and administrative expenses, in aggregate, to be approximately $40 million in fiscal 2006. No pro forma adjustments have been made to our financial statements to reflect the costs and expenses described in this paragraph.

 

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Hanesbrands Inc.

Unaudited Pro Forma Combined and Consolidated Statement of Income

Year Ended July 2, 2005

(dollars in thousands, except per share amounts)

 

     Historical     Pro Forma
Adjustments
    Pro Forma     Capital
Structure
Adjustments
    Pro Forma
As Adjusted
 

Net sales

   $ 4,683,683     $ —       $ 4,683,683     $            $         

Cost of sales

     3,223,571       —         3,223,571      
                                        

Gross profit

     1,460,112       —         1,460,112      

Selling, general and administrative expenses

     1,053,654       —         1,053,654      

Charges for (income from) exit activities

     46,978       —         46,978      
                                        

Income from operations

     359,480       —         359,480      

Interest expense

     35,244       (18,530 )(a)     16,714       (b )  

Interest income

     (21,280 )     16,275 (a)     (5,005 )    
                                        

Income before income taxes

     345,516       2,255       347,771      

Income tax expense

     127,007       (6,244 )(c)     129,350      
     —         8,587 (d)     —        
                                        

Net income

   $ 218,509     $ (88 )   $ 218,421     $       $    
                                        

Unaudited pro forma earnings per share:

          

Basic

           $   (e )

Diluted

               (f )

Weighted average shares used in calculating earnings per share:

          

Basic

               (e )
                

Diluted

               (f )
                

 

 

See accompanying notes to Unaudited Pro Forma Combined and Consolidated Financial Statements.

 

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Hanesbrands Inc.

Unaudited Pro Forma Combined and Consolidated Statement of Income

Thirty-nine Weeks Ended April 1, 2006

(dollars in thousands, except per share amounts)

 

     Historical     Pro Forma
Adjustments
    Pro Forma     Capital
Structure
Adjustments
    Pro
Forma
As
Adjusted
 

Net sales

   $ 3,352,699     $ —       $ 3,352,699     $            $         

Cost of sales

     2,248,828       —         2,248,828      
                                        

Gross profit

     1,103,871       —         1,103,871      

Selling, general and administrative expenses

     749,236       —         749,236      

Charges for (income from) exit activities

     945       —         945      
                                        

Income from operations

     353,690       —         353,690      

Interest expense

     19,295       (10,265 )(a)     9,030       (b )  

Interest income

     (7,783 )     5,538 (a)     (2,245 )    
                                        

Income before income taxes

     342,178       4,727       346,905      

Income tax expense

     78,970       (14,500 )(c)     68,085      
       3,615 (d)      
                                        

Net income

   $ 263,208     $ 15,612     $ 278,820     $       $    
                                        

Unaudited pro forma earnings per share:

          

Basic

           $   (e )

Diluted

               (f )

Weighted average shares used in calculating earnings per share:

          

Basic

               (e )
                

Diluted

               (f )
                

 

 

See accompanying notes to Unaudited Pro Forma Combined and Consolidated Financial Statements.

 

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Hanesbrands Inc.

Unaudited Pro Forma Combined and Consolidated Balance Sheet

April 1, 2006

(in thousands)

 

    Historical     Pro Forma
Adjustments
    Pro Forma     Capital
Structure
Adjustments
    Pro Forma
As Adjusted

Assets

         

Cash and cash equivalents

  $ 455,895     $   (g )   $       $             (g )   $             

Trade accounts receivable

    500,490       —         500,490      

Due from related entities

    229,375         (h)      

Inventories

    1,257,906       —         1,257,906      

Notes receivable from parent companies

    507,678         (h)      

Deferred tax assets

    33,026       (1,635 )(i)     31,391      

Other current assets

    45,607       —         45,607      
                                     

Total current assets

    3,029,977          

Property, net

    617,125       —         617,125      

Trademarks and other intangibles, net

    139,436       —         139,436      

Goodwill

    278,737       —         278,737      

Deferred tax assets

    134,463       50,641 (j)     168,308      
      (16,796 )(i)      

Other noncurrent assets

    5,374       4,458 (k)     19,322      
      9,490 (j)      
                                     

Total assets

  $ 4,205,112     $       $       $       $  
                                     

Liabilities and Parent Companies’ Equity

         

Accounts payable

  $ 188,573     $ —       $ 188,573     $       $  

Due to related entities

    36,472         (h)      

Accrued liabilities

    380,822       40,844 (j)     421,666      

Current portion of long-term debt

    —         —         —           (l)  

Notes payable to banks

    30,375       —         30,375      

Funding payable with parent companies

    195,479         (h)      

Notes payable to parent companies

    203,536         (h)      

Notes payable to related entities

    453,063         (h)      
                                     

Total current liabilities

    1,488,320          

Long-term debt

    —         —         —           (l)  

Deferred tax liabilities

    7,171       7,577 (k)     14,748      

Other noncurrent liabilities

    47,428       307,736 (j)     381,271      
      26,107 (k)      
                                     

Total liabilities

    1,542,919          

Parent companies’ equity investment

    2,677,678       (242,058 )(m)         (g)  
    —           (g)      
          (h)      

Common stock

    —         —         —        

Additional paid in capital

    —         —         —        

Accumulated other comprehensive loss

    (15,485 )     (94,048 )(j)     (109,533 )    
                                     

Total parent companies’ equity

    2,662,193          
                                     

Total liabilities and parent companies’ equity

  $ 4,205,112     $       $       $       $  
                                     

See accompanying notes to Unaudited Pro Forma Combined and Consolidated Financial Statements.

 

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Hanesbrands Inc.

Notes to Unaudited Pro Forma Combined and Consolidated Financial Statements

 

(a) Reflects the removal of historical interest expense and interest income on related party debt balances and cash management programs with Sara Lee. We will not participate in Sara Lee’s cash management programs after the spin off.

 

(b) Adjusted to reflect interest expense on borrowings under a new senior secured credit facility of $                , consisting of a senior secured term loan facility and a senior secured revolving credit facility at an assumed interest rate (including the amortization of lender fees) of         % as well as amounts due under one or more series of senior notes with an estimated interest rate of         %.

 

(c) Reflects the removal of the historical tax effect of contingencies and finalization of tax reviews and audits. The contingency adjustments for historic tax liabilities which remain with Sara Lee after the spin off totaled $26.1 million in fiscal 2005 and $14.5 million in fiscal 2006, and are related to issues of transfer pricing, loss utilization and valuation. In fiscal 2005 the IRS audits of fiscal 2001 and fiscal 2002 were finalized for $19.9 million less than originally anticipated.

 

(d) Adjusted to reflect the income tax effects of the pro forma adjustments at the applicable income tax rates.

 

(e) The number of shares used to compute basic earnings per share is                     , which is the number of shares of our common stock assumed to be outstanding on the distribution date, based on a distribution ratio of one share of our common stock for every      shares of Sara Lee common stock outstanding.

 

(f) The number of shares used to compute diluted earnings per share is based on the number of shares of our common stock assumed to be outstanding on the distribution date. Net income per share diluted also reflects the potential dilution that could occur if restricted stock units and options granted under equity-based compensation arrangements were exercised or converted into common stock.

 

(g) Reflects amounts paid to Sara Lee from cash and cash equivalents and proceeds of the debt described in note (l).

 

(h) Reflects the recapitalization of our net borrowings from Sara Lee and related entities.

 

(i) Reflects the removal of certain deferred tax assets related to net operating losses of $7.2 million and charitable contribution deductions of $11.2 million to be retained by Sara Lee after the spin off. Net deferred tax assets relating to U.S. capital losses, which are carried at zero due to a full valuation allowance, will also be retained by Sara Lee after the spin off.

 

(j) Reflects the assumption of unfunded employee benefit liabilities for pension, postretirement and other retirement benefit qualified and nonqualified plans from Sara Lee. As a result of the funded status of the plans, an additional minimum liability has been reflected in the pro forma adjustment with an offset to the “Accumulated other comprehensive loss” line.

 

(k) Adjusted to reflect our workers’ compensation, disability, general, product and automobile insurance liabilities that will be assumed by us at the spin off date.

 

(l) Reflects borrowings under a new senior secured credit facility of $                , consisting of a senior secured term loan facility and a senior secured revolving credit facility, as well as amounts due under one or more series of senior notes.

 

(m) Reflects the impact on parent companies’ equity investment of the adjustments described in the notes above, other than the adjustments described in notes (g) and (h).

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This section discusses our results of operations, financial condition and liquidity, risk management activities and significant accounting policies and critical estimates. This discussion should be read in conjunction with our historical financial statements and related notes thereto, “Unaudited Pro Forma Combined and Consolidated Financial Statements” and the other disclosures contained elsewhere in this information statement. Our fiscal year ends on the Saturday closest to June 30. Fiscal years 2003, 2004 and 2005 were 52-, 53- and 52-week years, respectively. All reported results for fiscal 2004 include the impact of the additional week.

Overview

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, men’s underwear, kids’ underwear, socks, hosiery, casualwear and activewear. Our operations are managed in four business segments: innerwear, outerwear, hosiery and international. We also incur costs in our corporate area that are not allocated to our business segments.

In February 2005, Sara Lee announced that it would spin off our company as part of a plan designed to improve Sara Lee’s performance and better position itself for the long term. We describe the businesses to be transferred to us by Sara Lee in the spin off as if the transferred businesses were our business for all historical periods presented. References to our historical assets, liabilities, products, businesses or activities of our business are generally intended to refer to the historical assets, liabilities, products, businesses or activities of the transferred businesses as the businesses were conducted as part of Sara Lee and its subsidiaries prior to the spin off.

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 national chain and department stores to warehouse clubs and mass-merchandise outlets. In fiscal 2005, 48% of our net sales were to mass merchants, 11% were to national chains, 6% were to department stores, 8% were direct to consumer, 8% were in our international segment and 19% were to other retail channels such as embellishers, specialty retailers, warehouse clubs and sporting goods stores. Our net sales in fiscal 2005 were $4.7 billion, up 1.1% from the prior fiscal year mainly as a result of volume gains.

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. In fiscal 2005, for example, our top ten customers accounted for 64% of our net sales and our top customer, Wal-Mart, accounted for over $1.4 billion of our net sales. Our largest customers in fiscal 2005 were Wal-Mart, Target and Kohl’s, which accounted for 31%, 11% and 5% 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 our operational structure.

 

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In addition to increasing operational efficiency, we are focused on growing our business through the continuous development of innovative products, breakthrough consumer marketing and promotion, customer partnerships, and expansion into new geographic markets such as China and India, where we recently opened sales offices and introduced Hanes branded products. We expect that improvements in product features, such as stretch in t-shirts and tagless garment labels, or in increased variety through new sizes or styles, such as half sizes and boy leg briefs, will enhance consumer appeal and category demand. In established markets, we are leveraging our brand power to drive sales through unique programs developed our relationships with key customers. An example of this strategy is C9 by Champion, a line of athletic performance apparel designed specifically for and marketed by Target.

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 comprises 7% of our sales, 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. For example, we have closed plant locations, reduced our workforce, and relocated some of our domestic manufacturing capacity to lower cost locations. 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 “Charges for (income from) exit activities” and “Selling, general and administrative expenses” lines of our statements of income. As a result of the exit activities taken since the beginning of fiscal 2004, our cost structure was reduced and efficiencies improved. Savings generated from these restructuring efforts that are reflected in the results for fiscal 2005 and for the thirty-nine weeks ended April 1, 2006 were $25.2 million and $57.3 million, respectively. For more information about the fiscal 2003, 2004 and 2005 restructuring activities, see Note 5, titled “Exit Activities” to our Combined and Consolidated Financial Statements included elsewhere in this information statement.

As further plans are developed and approved by management and our board of directors, we expect to recognize additional exit costs to eliminate duplicative functions within the organization and transition a significant portion of our manufacturing capacity to lower-cost locations. 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.

Description of Business Segments

Our operations are managed in four business segments: innerwear, outerwear, hosiery and international. Our innerwear, outerwear and hosiery segments principally sell products in the United States and our international segment exclusively sells products in foreign countries.

 

    Innerwear—The innerwear segment focuses on core apparel essentials, consisting of women’s intimate apparel, men’s underwear, kids’ underwear, socks, thermals and sleepwear. The innerwear segment manufactures and outsources underwear, intimate apparel and sock products in the United States and off-shore. Our fiscal 2005 net sales from our innerwear segment were $2.7 billion, representing approximately 58% of net sales.

 

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    Outerwear—The outerwear segment is composed of products sold in the casualwear and activewear markets. The outerwear segment manufactures and outsources casualwear and activewear products in the United States and off-shore. Our fiscal 2005 net sales from our outerwear segment were $1.3 billion, representing approximately 27% of net sales.

 

    Hosiery—The hosiery segment consists of women’s sheer hosiery. Our fiscal 2005 net sales from our hosiery segment were $353.5 million, representing approximately 7% of net sales. Consistent with a sustained decline in the hosiery industry due to changes in consumer preferences, our net sales from the hosiery segment have declined each year since fiscal 1995.

 

    International—The international segment is comprised of our innerwear, outerwear and hosiery products that we sell outside the United States. Fiscal 2005 net sales in our international segment were $354.5 million, representing approximately 8% of net sales and included sales in Asia, Canada and Latin America. Japan, Canada and Mexico are our largest international markets.

Components of Net Sales and Expense

Net sales

We generate net sales by selling apparel essentials such as t-shirts, bras, panties, men’s 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 who 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, or “SG&A expenses,” include selling, advertising, shipping, handling and distribution costs, rent on leased facilities, depreciation on owned facilities and equipment and other general and administrative expenses. Also included are allocations of corporate expenses and charges which consist of expenses for business insurance, medical insurance, employee benefit plan amounts and 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. SG&A expenses also include management payroll, benefits, travel, information systems, accounting, insurance and legal expenses.

Charges for (income from) exit activities

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 exit activities. When we decide to close facilities or reduce headcount we take estimated charges for such exit activities, including charges for exited noncancelable 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.

 

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Interest expense

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. In the future, we will no longer be able to borrow from Sara Lee. As part of the spin off, we will incur substantial debt in the form of a new senior secured credit facility and in the form of senior notes, $             of the proceeds of which will be paid to Sara Lee. As a result, our interest expense in future periods will be substantially higher than in historical periods.

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 have been repealed effective in fiscal 2007.

In particular, to service the substantial amount of debt we will incur in connection with 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.

 

Combined and Consolidated Results of Operations—Thirty-nine Weeks Ended April 1, 2006 Compared with Thirty-nine Weeks Ended April 2, 2005

 

     Thirty-nine
Weeks Ended
April 2, 2005
    Thirty-nine
Weeks Ended
April 1, 2006
    Dollar
Change
   

Percent

Change

 
     (dollars in thousands)        

Net sales

   $ 3,528,333     $ 3,352,699     $ (175,634 )   (5.0 )%

Cost of sales

     2,428,997       2,248,828       (180,169 )   (7.4 )
                          

Gross profit

     1,099,336       1,103,871       4,535     0.4  

Selling, general and administrative expenses

     775,607       749,236       (26,371 )   (3.4 )

Charges for (income from) exit activities

     (815 )     945       1,760     NM  
                          

Income from operations

     324,544       353,690       29,146     9.0  

Interest expense

     18,458       19,295       837     4.5  

Interest income

     (19,318 )     (7,783 )     11,535     59.7  
                          

Income before income taxes

     325,404       342,178       16,774     5.2  

Income tax expense

     97,911       78,970       (18,941 )   (19.3 )
                          

Net income

   $ 227,493     $ 263,208     $ 35,715     15.7  
                          

 

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Net Sales

 

    

Thirty-nine
Weeks Ended

April 2, 2005

  

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
    Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 3,528,333    $ 3,352,699    $ (175,634 )   (5.0 )%

Net sales declined mainly due to a $125 million impact from the discontinuation of low-margin product lines in the innerwear, outerwear and international segments and a $44 million impact from lower sales of sheer hosiery. Other factors netting to $6 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. We also anticipate that we will continue to eliminate low-margin product lines but to a lesser extent than completed in this past year.

Cost of Sales

 

    

Thirty-nine
Weeks Ended

April 2, 2005

  

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
    Percent
Change
 
     (dollars in thousands)  

Cost of sales

   $ 2,428,997    $ 2,248,828    $ (180,169 )   (7.4 )%

Cost of sales declined primarily as a result of the decline in net sales. As a percent of net sales, gross margin increased from 31.2% in the thirty-nine weeks ended April 2, 2005 to 32.9% in the thirty-nine weeks ended April 1, 2006. The increase in the gross margin percentage was primarily due to a $118 million impact of lower cotton costs and lower costs for slow moving and obsolete inventories, and an $11 million impact from the benefits of prior restructuring actions, partially offset by a $65 million impact of lower selling prices and changes in product sales mix. While 2005 was benefited by lower cotton prices, we currently anticipate cotton costs to increase in future periods.

Selling, General and Administrative Expenses

 

    

Thirty-nine
Weeks Ended

April 2, 2005

  

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Selling, general and administrative expenses

   $ 775,607    $ 749,236    $ (26,371 )   (3.4 )%

SG&A expenses declined primarily due to a $29 million impact from a lower cost structure achieved through headcount reductions, reduced sales on variable distribution costs, and reduced media advertising and promotion expenses, partially offset by spin off related expenses during the thirty-nine weeks ended April 1, 2006 and a $12 million offsetting impact from higher bad debt recoveries during the thirty-nine weeks ended April 2, 2005. Measured as a percent of net sales, SG&A expenses increased from 22.0% during the thirty-nine weeks ended April 2, 2005 to 22.3% during the thirty-nine weeks ended April 1, 2006.

Charges for (Income from) Exit Activities

 

    

Thirty-nine
Weeks Ended

April 2, 2005

   

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
   Percent
Change
     (dollars in thousands)     

Charges for (income from) exit activities

   $ (815 )   $ 945    $ 1,760    NM

The thirty-nine weeks ended April 2, 2005 income from exit activities resulted from the impact of certain exit activities that were completed for amounts more favorable than originally estimated. The thirty-nine weeks ended April 1, 2006 charge for exit activities primarily represents the expense to terminate certain employees.

 

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Income from Operations

 

    

Thirty-nine
Weeks Ended

April 2, 2005

  

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
   Percent
Change
 
     (dollars in thousands)       

Income from operations

   $ 324,544    $ 353,690    $ 29,146    9.0 %

Income from operations changed period over period as a result of the items discussed above.

Interest Expense and Interest Income

 

    

Thirty-nine
Weeks Ended

April 2, 2005

   

Thirty-nine
Weeks Ended

April 1, 2006

    Dollar
Change
   Percent
Change
 
     (dollars in thousands)       

Interest expense

   $ 18,458     $ 19,295     $ 837    4.5 %

Interest income

     (19,318 )     (7,783 )     11,535    59.7  
                             

Net interest expense (income)

   $ (860 )   $ 11,512     $ 12,372    NM  
                             

Interest expense increased period over period as a result of increased average borrowings. Interest income decreased significantly as a result of lower average cash balances. After the spin off, our net interest expense will increase substantially as a result of our increased indebtedness.

Income Tax Expense

 

    

Thirty-nine
Weeks Ended

April 2, 2005

  

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Income tax expense

   $ 97,911    $ 78,970    $ (18,941 )   (19.3 )%

Our effective income tax rate decreased from 30.1% in the thirty-nine weeks ended April 2, 2005 to 23.1% in the thirty-nine weeks ended April 1, 2006. The change in the effective tax rate is attributable primarily to a $31.6 million charge in fiscal 2005 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 described in the reconciliation of our effective tax rate to the U.S. statutory rate in Note 11 titled “Income Taxes” to our Unaudited Interim Condensed Combined and Consolidated Financial Statements.

Net Income

 

    

Thirty-nine
Weeks Ended

April 2, 2005

  

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
   Percent
Change
 
     (dollars in thousands)       

Net income

   $ 227,493    $ 263,208    $ 35,715    15.7 %

Net income changed period over period as a result of the items discussed above.

 

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Table of Contents

Operating Results by Business Segment

 

     Thirty-nine
Weeks Ended
April 2, 2005
    Thirty-nine
Weeks Ended
April 1, 2006
    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales:

        

Innerwear

   $ 2,012,896     $ 1,957,146     $ (55,750 )   (2.8 )%

Outerwear

     1,012,667       930,916       (81,751 )   (8.1 )

Hosiery

     289,459       244,964       (44,495 )   (15.4 )

International

     258,716       293,819       35,103     13.6  
                          

Net sales

     3,573,738       3,426,845       (146,893 )   (4.1 )

Intersegment

     (45,405 )     (74,146 )     (28,741 )   (63.3 )
                          

Total net sales

   $ 3,528,333     $ 3,352,699     $ (175,634 )   (5.0 )
                          

Operating segment income:

        

Innerwear

   $ 209,844     $ 246,900     $ 37,056     17.7 %

Outerwear

     57,812       65,734       7,922     13.7  

Hosiery

     56,934       49,238       (7,696 )   (13.5 )

International

     21,881       20,783       (1,098 )   (5.0 )
                          

Total operating segment income

     346,471       382,655       36,184     10.4  

Items not included in operating segment income:

        

Amortization of trademarks and other intangibles

     (6,198 )     (6,527 )     (329 )   (5.3 )

General corporate expenses not allocated to the segments

     (15,729 )     (22,438 )     (6,709 )   (42.7 )
                          

Total income from operations

     324,544       353,690       29,146     9.0  

Net interest income (expense)

     860       (11,512 )     (12,372 )   NM  
                          

Income before income taxes

   $ 325,404     $ 342,178     $ 16,774     5.2  
                          

Innerwear

 

    

Thirty-nine
Weeks Ended

April 2, 2005

  

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 2,012,896    $ 1,957,146    $ (55,750 )   (2.8 )%

Operating segment income

     209,844      246,900      37,056     17.7  

Net sales in the innerwear segment decreased primarily due to a $51 million impact of our exit from certain sleepwear product lines and lower sock sales due to both lower shipment volumes and lower pricing. Going forward, we anticipate that we will continue to eliminate low-margin products lines but to a lesser extent than completed in this past year.

Gross margin in the innerwear segment increased from 33.8% during the thirty-nine weeks ended April 2, 2005 to 35.9% during the thirty-nine weeks ended April 1, 2006, reflecting a $44 million impact of lower charges for slow moving and obsolete underwear inventories, lower cotton costs and benefits from prior restructuring actions, partially offset by lower gross margins for socks due to lower pricing and mix.

The increase in innerwear operating segment income is primarily attributable to the increase in the gross margin percentage and a $12 million impact of lower SG&A expenses due to headcount reductions.

Outerwear

 

    

Thirty-nine
Weeks Ended

April 2, 2005

  

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 1,012,667    $ 930,916    $ (81,751 )   (8.1 )%

Operating segment income

     57,812      65,734      7,922     13.7  

 

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Table of Contents

Net sales in the outerwear segment decreased primarily due to the $58.4 million impact of our exit from certain lower-margin fleece product lines and a $56 million impact of lower sales of t-shirts and polo shirts to embellishers resulting from lower prices and an unfavorable sales mix, partially offset by a $32 million impact from higher C9 by Champion sales. Going forward, we anticipate that we will continue to eliminate low-margin product lines but a lesser extent than completed in this past year.

Gross margin in the outerwear segment increased from 18.7% in the thirty-nine weeks ended April 2, 2005 to 20.0% in the thirty-nine weeks ended April 1, 2006, reflecting a $13 million impact of lower cotton costs, benefits from prior restructuring actions, and the exit from certain lower-margin fleece product lines, partially offset by lower sales prices and an unfavorable sales mix of t-shirts and polo shirts sold to embellishers.

The increase in outerwear operating segment income is primarily attributable to lower cotton costs and a $4 million impact of lower SG&A expenses due to the benefits of restructuring actions.

Hosiery

 

    

Thirty-nine
Weeks Ended

April 2, 2005

  

Thirty-nine
Weeks Ended

April 1, 2006

   Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 289,459    $ 244,964    $ (44,495 )   (15.4 )%

Operating segment income

     56,934      49,238      (7,696 )   (13.5 )

Net sales in the hosiery segment decreased primarily due to the continued decline in U.S. sheer hosiery consumption. We expect this trend to continue as a result of shifts in consumer preferences.

Gross margin in the hosiery segment increased from 42.4% in the thirty-nine weeks ended April 2, 2005 to 44.4% in the thirty-nine weeks ended April 1, 2006, mainly due to an improved product sales mix and price.

The decrease in hosiery operating segment income is primarily due to lower sales.

International

 

    

Thirty-nine

Weeks Ended

April 2, 2005

  

Thirty-nine

Weeks Ended

April 1, 2006

   Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 258,716    $ 293,819    $ 35,103     13.6 %

Operating segment income

     21,881      20,783      (1,098 )   (5.0 )

Net sales in the international segment increased primarily due to the acquisition at the end of fiscal 2005 of a Hong Kong based sourcing business, partially offset by lower sales in Latin America, which were mainly due to a $12 million impact from our exit of certain product lines. The acquired business contributed $38 million of sales in the thirty-nine weeks ended April 1, 2006, most of which were sales to our other business segments. Changes in foreign exchange rates increased net sales by $7 million.

Gross margin in the international segment decreased from 41.5% in the thirty-nine weeks ended April 2, 2005 to 36.2% in the thirty-nine weeks ended April 1, 2006, largely due to a $15 million impact from lower margins of the Hong Kong sourcing business, particularly on sales to our other business segments.

The decrease in international operating segment income is primarily attributable to higher costs associated with exit activities. Changes in foreign exchange rates had a positive impact of $1 million.

General Corporate Expenses

General corporate expenses not allocated to the segments increased in the thirty-nine weeks ended April 1, 2006 over the prior year period as we incurred costs to prepare for the spin off.

 

48


Table of Contents

Combined and Consolidated Results of Operations—Fiscal 2005 Compared with Fiscal 2004

 

     Fiscal 2004     Fiscal 2005     Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 4,632,741     $ 4,683,683     $ 50,942     1.1 %

Cost of sales

     3,092,026       3,223,571       131,545     4.3  
                          

Gross profit

     1,540,715       1,460,112       (80,603 )   (5.2 )

Selling, general and administrative expenses

     1,087,964       1,053,654       (34,310 )   (3.2 )

Charges for (income from) exit activities

     27,466       46,978       19,512     71.0  
                          

Income from operations

     425,285       359,480       (65,805 )   (15.5 )

Interest expense

     37,411       35,244       (2,167 )   (5.8 )

Interest income

     (12,998 )     (21,280 )     (8,282 )   (63.7 )
                          

Income before income taxes

     400,872       345,516       (55,356 )   (13.8 )

Income tax expense (benefit)

     (48,680 )     127,007       175,687     NM  
                          

Net income

   $ 449,552     $ 218,509     $ (231,043 )   (51.4 )
                          

Net Sales

 

     Fiscal 2004    Fiscal 2005    Dollar
Change
   Percent
Change
 
     (dollars in thousands)       

Net sales

   $ 4,632,741    $ 4,683,683    $ 50,942    1.1 %

Net sales increased year over year primarily as a result of a $95 million impact from increases in net sales in the innerwear and outerwear segments. Approximately $102 million of this increase was due to increased sales of our Champion 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 $62 million impact from declines in the hosiery and international segments. The total impact of the 53rd week in fiscal 2004 was $77 million.

Cost of Sales

 

      Fiscal 2004    Fiscal 2005    Dollar
Change
   Percent
Change
 
     (dollars in thousands)       

Cost of sales

   $ 3,092,026    $ 3,223,571    $ 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

 

     Fiscal 2004    Fiscal 2005    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Selling, general and administrative expenses

   $ 1,087,964    $ 1,053,654    $ (34,310 )   (3.2 )%

SG&A 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 activities, offset in part by increases in total advertising and promotion costs. SG&A expenses in fiscal 2004 included a $7.5 million charge related to the discontinuation of the Lovable U.S. trademark, while SG&A 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, SG&A expenses declined from 23.5% in fiscal 2004 to 22.5% in fiscal 2005.

 

49


Table of Contents

Charges for (Income from) Exit Activities

 

     Fiscal 2004    Fiscal 2005    Dollar
Change
   Percent
Change
 
     (dollars in thousands)       

Charges for (income from) exit activities

   $ 27,466    $ 46,978    $ 19,512    71.0 %

The charge for exit activities 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 exit activities 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.

Income from Operations

 

     Fiscal 2004    Fiscal 2005    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Income from operations

   $ 425,285    $ 359,480    $ (65,805 )   (15.5 )%

Income from operations 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 and Interest Income

 

      Fiscal 2004     Fiscal 2005     Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Interest expense

   $ 37,411     $ 35,244     $ (2,167 )   (5.8 )%

Interest income

     (12,998 )     (21,280 )     (8,282 )   (63.7 )
                          

Net interest expense

   $ 24,413     $ 13,964     $ (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. After the spin off, our net interest expense will increase substantially as a result of our increased indebtedness.

Income Tax Expense (Benefit)

 

      Fiscal 2004     Fiscal 2005    Dollar
Change
   Percent
Change
     (dollars in thousands)     

Income tax expense (benefit)

   $ (48,680 )   $ 127,007    $ 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 a $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 Lee’s 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 19 titled “Income Taxes” to our Combined and Consolidated Financial Statements.

 

50


Table of Contents

Net Income

 

      Fiscal 2004    Fiscal 2005    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net income

   $ 449,552    $ 218,509    $ (231,043 )   (51.4 )%

Net income in fiscal 2005 was lower than in fiscal 2004 as a result of the decline in income from operations and the increase in income tax expense, as discussed above.

Operating Results by Business Segment—Fiscal 2005 Compared with Fiscal 2004

 

     Fiscal 2004     Fiscal 2005     Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales:

        

Innerwear

   $ 2,704,500     $ 2,740,653     $ 36,153     1.3 %

Outerwear

     1,243,108       1,300,812       57,704     4.6  

Hosiery

     401,052       353,540       (47,512 )   (11.8 )

International

     367,590       354,547       (13,043 )   (3.5 )
                          

Net sales

     4,716,250       4,749,552       33,302     0.7  

Intersegment

     (83,509 )     (65,869 )     17,640     21.1  
                          

Total net sales

   $ 4,632,741     $ 4,683,683     $ 50,942     1.1  
                          

Operating segment income:

        

Innerwear

   $ 334,111     $ 261,267     $ (72,844 )   (21.8 )

Outerwear

     52,356       61,310       8,954     17.1  

Hosiery

     53,929       52,954       (975 )   (1.8 )

International

     25,125       21,705       (3,420 )   (13.6 )
                          

Total operating segment income

     465,521       397,236       (68,285 )   (14.7 )

Items not included in operating segment income:

        

Amortization of trademarks and other intangibles

     (8,712 )     (9,100 )     (388 )   (4.5 )

General corporate expenses not allocated to the segments

     (31,524 )     (28,656 )     2,868     9.1  
                          

Total income from operations

     425,285       359,480       (65,805 )   (15.5 )

Net interest income (expense)

     (24,413 )     (13,964 )     10,449     42.8  
                          

Income before income taxes

   $ 400,872     $ 345,516     $ (55,356 )   (13.8 )
                          

 

Innerwear

 

     Fiscal 2004    Fiscal 2005    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 2,704,500    $ 2,740,653    $ 36,153     1.3 %

Operating segment income

     334,111      261,267      (72,844 )   (21.8 )

Net sales in the innerwear segment increased primarily due to a $40 million impact from volume increases in the sales of men’s underwear and socks. Net sales were adversely affected year over year by a $47 million impact of the 53rd week in fiscal 2004.

Gross margin in the innerwear segment declined from 36.1% in fiscal 2004 to 33.9% in fiscal 2005, reflecting a $60 million impact of higher raw material costs for cotton and charges for slow moving and obsolete underwear inventories.

 

51


Table of Contents

The decrease in innerwear operating segment income is primarily attributable to the following factors. First, we increased inventory reserves by $28 million for slow moving and obsolete underwear inventories in fiscal 2005 as compared to fiscal 2004. Second, charges for exit activities increased by $12 million compared to fiscal 2004. Third, operating segment income was adversely affected year over year by a $12 million impact of the 53rd week in fiscal 2004. The remaining increase in operating segment income was primarily the result of higher unit volume offset in part by higher media advertising and promotion.

Outerwear

 

     Fiscal 2004    Fiscal 2005    Dollar
Change
   Percent
Change
 
     (dollars in thousands)       

Net sales

   $ 1,243,108    $ 1,300,812    $ 57,704    4.6 %

Operating segment income

     52,356      61,310      8,954    17.1  

Net sales in the outerwear segment increased primarily due to $106 million in volume increases in sales of Champion 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 margin in the outerwear segment decreased from 20.9% 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.

The increase in outerwear operating segment income is attributable primarily to higher net sales, partially offset by a $12 million increase in charges for exit activities in fiscal 2005 as compared to fiscal 2004. Operating segment income also was adversely affected year over year by a $1 million impact of the 53rd week in fiscal 2004.

Hosiery

 

     Fiscal 2004    Fiscal 2005    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 401,052    $ 353,540    $ (47,512 )   (11.8 )%

Operating segment income

     53,929      52,954      (975 )   (1.8 )

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 L’eggs 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 margin in the hosiery segment decreased from 41.5% in fiscal 2004 to 40.7% in fiscal 2005. The decrease resulted primarily from $1 million in unfavorable product sales mix.

The decrease in hosiery operating segment income is attributable primarily to a decrease in sales, partially offset by a $16 million decrease in media advertising and promotion spending and SG&A expenses. Hosiery operating segment income was also adversely affected year over year by a $2 million impact of the 53rd week in fiscal 2004.

International

 

     Fiscal 2004    Fiscal 2005    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 367,590    $ 354,547    $ (13,043 )   (3.5 )%

Operating segment income

     25,125      21,705      (3,420 )   (13.6 )

 

52


Table of Contents

Net sales in the international segment decreased primarily as a result of an $18.6 million decrease in sales from Latin America and Asia, partially offset by an $11 million impact from changes in foreign currency 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 margin increased from 37.3% in fiscal 2004 to 39.8% 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 operating segment income is attributable primarily to the decrease in net sales and higher media advertising and promotion expenditures in fiscal 2005 as compared to fiscal 2004. These effects were offset in part by the improvement in gross margin and $3 million from changes in foreign currency exchange rates. International operating segment income also was affected adversely year over year by a $2 million impact of the 53rd week in fiscal 2004.

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.

Combined and Consolidated Results of Operations—Fiscal 2004 Compared with Fiscal 2003

 

     Fiscal 2003     Fiscal 2004     Dollar
Change
   

Percent

Change

 
     (dollars in thousands)        

Net sales

   $ 4,669,665     $ 4,632,741     $ (36,924 )   (0.8 )%

Cost of sales

     3,010,383       3,092,026       81,643     2.7  
                          

Gross profit

     1,659,282       1,540,715       (118,567 )   (7.1 )

Selling, general and administrative expenses

     1,126,065       1,087,964       (38,101 )   (3.4 )

Charges for (income from) exit activities

     (14,397 )     27,466       41,863     NM  
                          

Income from operations

     547,614       425,285       (122,329 )   (22.3 )

Interest expense

     44,245       37,411       (6,834 )   (15.4 )

Interest income

     (46,631 )     (12,998 )     33,633     72.1  
                          

Income before income taxes

     550,000       400,872       (149,128 )   (27.1 )

Income tax expense (benefit)

     121,560       (48,680 )     (170,240 )   NM  
                          

Net income

   $ 428,440     $ 449,552     $ 21,112     4.9  
                          

Net Sales

 

      Fiscal 2003    Fiscal 2004    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 4,669,665    $ 4,632,741    $ (36,924 )   (0.8 )%

Net sales decreased year over year primarily as a result of a $73 million decrease in net sales in the outerwear and hosiery segments. The decrease in the outerwear segment was primarily attributable to price declines while the decline in the hosiery segment was attributable primarily to lower unit volume. Net sales were positively affected by a $37 million increase in net sales in the innerwear and international operating segments. The total impact of the 53rd week in fiscal 2004 was a $77 million increase in sales.

Cost of Sales

 

      Fiscal 2003    Fiscal 2004    Dollar
Change
   Percent
Change
 
     (dollars in thousands)       

Cost of sales

   $ 3,010,383    $ 3,092,026    $ 81,643    2.7 %

 

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Table of Contents

Cost of sales increased year over year primarily as a result a $72 million impact of higher raw material costs for cotton and an unfavorable product sales mix. Our gross margin declined from 35.5% in fiscal 2003 to 33.3% in fiscal 2004.

Selling, General and Administrative Expenses

 

     Fiscal 2003    Fiscal 2004    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Selling, general and administrative expenses

   $ 1,126,065    $ 1,087,964    $ (38,101 )   (3.4 )%

SG&A expenses decreased year over year primarily as a result of decreases in SG&A expenses in our business segments. During fiscal 2004, SG&A expenses were favorably impacted by $48 million from lower charges related to the sales of receivables at a discount from the face value to a limited purpose subsidiary of Sara Lee and $21 million from reductions in media advertising and promotion expenditures. These favorable items were in part offset by an $8 million increase in selling and distribution expenses and a $7.5 million charge related to discontinuing the Lovable U.S. trademark. Measured as a percent of net sales, SG&A expenses decreased from 24.1% in fiscal 2003 to 23.5% in fiscal 2004.

Charges for (Income from) Exit Activities

 

     Fiscal 2003     Fiscal 2004    Dollar
Change
   Percent
Change
     (dollars in thousands)     

Charges for (income from) exit activities

   $ (14,397 )   $ 27,466    $ 41,863    NM

The income in fiscal 2003 is primarily attributable to the completion of a previously announced restructuring program for amounts less than originally estimated. The charge for exit activities in fiscal 2004 is primarily attributable to costs for severance actions related to the planned termination of 4,425 employees.

Income from Operations

 

     Fiscal 2003    Fiscal 2004    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Income from operations

   $ 547,614    $ 425,285    $ (122,329 )   (22.3 )%

Income from operations in fiscal 2004 was lower than in fiscal 2003 as a result of the decreases in net sales, increases in cost of sales and charges from exit activities, which were offset in part by decreased SG&A expenses, as discussed above.

Interest Expense and Interest Income

 

     Fiscal 2003     Fiscal 2004     Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Interest expense

   $ 44,245     $ 37,411     $ (6,834 )   (15.4 )%

Interest income

     (46,631 )     (12,998 )     33,633     72.1  
                          

Net interest expense (income)

   $ (2,386 )   $ 24,413     $ 26,799     NM  
                          

Interest expense declined year over year as a result of lower average borrowings from Sara Lee. Interest income was reduced as a result of lower average loans made to Sara Lee. After the spin off, our net interest expense will increase substantially as a result of our increased indebtedness.

 

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Income Tax Expense (Benefit)

 

     Fiscal 2003    Fiscal 2004     Dollar
Change
    Percent
Change
     (dollars in thousands)      

Income tax expense (benefit)

   $ 121,560    $ (48,680 )   $ (170,240 )   NM

Our effective income tax rate decreased from 22.1% in fiscal 2003 to a negative 12.1% in fiscal 2004. The decrease in our effective tax rate is attributable primarily to an income tax benefit of $128.1 million resulting from Sara Lee’s 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 19 titled “Income Taxes” to our Combined and Consolidated Financial Statements.

Net Income

 

     Fiscal 2003    Fiscal 2004    Dollar
Change
   Percent
Change
 
     (dollars in thousands)       

Net income

   $ 428,440    $ 449,552    $ 21,112    4.9 %

Net income in fiscal 2004 was higher than in fiscal 2003 primarily as a result of the income tax benefit offset to a large extent by lower operating income as discussed above.

Operating Results by Business Segment—Fiscal 2004 Compared with Fiscal 2003

 

     Fiscal 2003     Fiscal 2004     Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales:

        

Innerwear

   $ 2,681,039     $ 2,704,500     $ 23,461     0.9 %

Outerwear

     1,287,230       1,243,108       (44,122 )   (3.4 )

Hosiery

     430,069       401,052       (29,017 )   (6.7 )

International

     354,307       367,590       13,283     3.7  
                          

Net sales

     4,752,645       4,716,250       (36,395 )   (0.8 )

Intersegment

     (82,980 )     (83,509 )     (529 )   (0.6 )
                          

Total net sales

   $ 4,669,665     $ 4,632,741     $ (36,924 )   (0.8 )
                          

Operating segment income:

        

Innerwear

   $ 339,907     $ 334,111     $ (5,796 )   (1.7 )%

Outerwear

     132,086       52,356       (79,730 )   (60.4 )

Hosiery

     64,394       53,929       (10,465 )   (16.3 )

International

     33,610       25,125       (8,485 )   (25.2 )
                          

Total operating segment income

     569,997       465,521       (104,476 )   (18.3 )

Items not included in operating segment income:

        

Amortization of trademarks and other intangibles

     (7,235 )     (8,712 )     (1,477 )   (20.4 )

General corporate expenses not allocated to the segments

     (15,148 )     (31,524 )     (16,376 )   (108.1 )
                          

Total income from operations

     547,614       425,285       (122,329 )   (22.3 )

Net interest income (expense)

     2,386       (24,413 )     (26,799 )   NM  
                          

Income before income taxes

   $ 550,000     $ 400,872     $ (149,128 )   (27.1 )
                          

Innerwear

 

     Fiscal 2003    Fiscal 2004    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 2,681,039    $ 2,704,500    $ 23,461     0.9 %

Operating segment income

     339,907      334,111      (5,796 )   (1.7 )

 

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Net sales in the innerwear segment increased year over year primarily as a result of a $47 million impact of the 53rd week in fiscal 2004, partially offset by declines in net sales due to an unfavorable product mix.

Gross margin in the innerwear segment declined from 37.1% in fiscal 2003 to 36.1% in fiscal 2004, reflecting a $36 million impact from unfavorable changes in product sales mix and higher cotton costs.

The decrease in innerwear operating segment income is primarily attributable to two factors. We experienced lower gross margins, and charges for exit activities increased $13 million compared to fiscal 2003. Operating segment income was positively affected year over year by a $12 million impact of the 53rd week in fiscal 2004.

Outerwear

 

     Fiscal 2003    Fiscal 2004    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 1,287,230    $ 1,243,108    $ (44,122 )   (3.4 )%

Operating segment income

     132,086      52,356      (79,730 )   (60.4 )

Net sales in the outerwear segment decreased due primarily to a $44 million impact from price decreases in t-shirts and fleece products sold to third party embellishers due to competitive pressures. Net sales were positively affected year over year by a $18 million impact of the 53rd week in fiscal 2004.

Gross margin in the outerwear segment decreased from 26.7% in fiscal 2003 to 20.9% in fiscal 2004, primarily reflecting a $70 million impact of competitive pricing pressure in the embellishment channel and higher cotton costs.

The decrease in outerwear operating segment income is attributable primarily to the lower gross margins, offset in part by $24 million impact from lower media advertising and promotion and administrative expenses. Operating segment income was affected positively year over year by a $1 million impact of the 53rd week in fiscal 2004.

Hosiery

 

      Fiscal 2003    Fiscal 2004    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 430,069    $ 401,052    $ (29,017 )   (6.7 )%

Operating segment income

     64,394      53,929      (10,465 )   (16.3 )

Net sales in the hosiery segment decreased due primarily to $12 million in unit volume decreases and $15 million from unfavorable product sale price mix. Outside unit volumes in the hosiery segment decreased by 3% in fiscal 2004, with a 2% decline in L’eggs volume to mass merchants and food and drug stores and a 7% decline in Hanes volume to department stores. The 3% volume decrease was in line with the overall hosiery market decline. Net sales were positively affected year over year by a $6 million impact of the 53rd week in fiscal 2004.

Gross margin improved from 41.4% in fiscal 2003 to 41.5% in fiscal 2004. The increase resulted primarily from favorable product sales margin mix.

The decrease in hosiery operating segment income is attributable primarily to the decrease in net sales, offset in part by $7 million in lower media advertising and promotion spending and other SG&A expenses. Operating segment income was also affected positively year over year by a $2 million impact of the 53rd week in fiscal 2004.

 

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International

 

      Fiscal 2003    Fiscal 2004    Dollar
Change
    Percent
Change
 
     (dollars in thousands)        

Net sales

   $ 354,307    $ 367,590    $ 13,283     3.7 %

Operating segment income

     33,610      25,125      (8,485 )   (25.2 )

Net sales in the international segment increased primarily as a result of $25 million from changes in foreign currency exchange rates during fiscal 2004, offset in part by decreases in unit volume and an unfavorable product mix. Net sales were positively affected year over year by a $6 million impact of the 53rd week in fiscal 2004.

Gross margin decreased from 40.4% in fiscal 2003 to 37.3% in fiscal 2004. The decrease resulted primarily from margin declines in Latin America due to higher slow moving and obsolete inventories, partially offset by increases in Japan.

The decrease in international operating segment income is attributable primarily to a $16 million increase in charges for exit activities offset in part by $7 million from changes in foreign currency exchange rates. Operating segment income was also positively affected year over year by a $2 million impact of the 53rd week in fiscal 2004.

General Corporate Expenses

Total general corporate expenses increased in fiscal 2004 from fiscal 2003 primarily due to higher employee benefit costs.

Liquidity and Capital Resources

Trends and Uncertainties Affecting Liquidity

Following the spin off, our capital structure, long-term capital commitments and sources of liquidity will change significantly from our historical capital structure, long-term capital commitments and sources of liquidity described below. After the spin off, our primary source of liquidity will be cash provided from operating activities. We believe that the following will negatively impact liquidity:

 

    we will incur significant long-term debt;

 

    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, Mexico and Asia; and

 

    we will assume significant pension obligations from Sara Lee.

We are incurring substantial indebtedness in connection with the spin off and will have total debt of approximately $             after giving effect to such incurrence, as further described below under “Description of Certain Indebtedness.” We will pay $             of the proceeds from these borrowings to Sara Lee and, as a result, those proceeds will not be 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 expect to continue the restructuring efforts that we have undertaken over the last several years. The implementation of these efforts, which are designed to improve operating efficiencies and lower costs, has 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 exit costs to eliminate duplicative functions within the organization and transition a significant portion of our manufacturing capacity to lower-cost locations. We also expect to incur costs associated with the integration of our information technology systems across our company.

 

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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 will assume significant unfunded employee benefit liabilities for pension, postretirement and other retirement benefit qualified and nonqualified plans from Sara Lee in connection with the spin-off. These liabilities are expected to be approximately $348.6 million. Included in these liabilities are pension obligations which have not been reflected in our historical financial statements, because these obligations have historically been obligations of Sara Lee. The pension obligations we are assuming are projected to be approximately $266.0 million more than the corresponding pension assets we are acquiring. 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 turn out to be inaccurate. 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 increased to $460.1 million in the thirty-nine weeks ended April 1, 2006 from $391.0 million in the prior year period. The $69.1 million increase was primarily the result of more effective working capital utilization and higher earnings in the business. Net cash from operating activities was $506.9 million in fiscal 2005 as compared to $471.4 million in fiscal 2004. The increase of $35.5 million was primarily due to an increase in cash generated from more efficient usage of working capital, which was partially offset by lower profitability in the business. Net cash from operating activities decreased $22.6 million in fiscal 2004 versus fiscal 2003, primarily due to increased usage for working capital needs. In fiscal 2003, the amount of accounts receivable sold to a Sara Lee entity was reduced with a corresponding offset in due from related entity.

Net Cash Used in Investing Activities

Net cash used in investing activities increased to $71.4 million in the thirty-nine weeks ended April 1, 2006 from $35.7 million in the prior year period. The increase was primarily the result of higher purchases of property and equipment. Net cash used in investing activities was $60.1 million in fiscal 2005, compared to $61.3 million in fiscal 2004 and $77.3 million in fiscal 2003. For fiscal years 2003, 2004 and 2005, we expended $85.4 million, $63.6 million and $67.1 million, respectively, to fund purchases of property, plant and equipment and received proceeds from the sales of assets of $7.2 million, $4.5 million and $9.0 million, respectively.

Net Cash Used in Financing Activities

Net cash used in financing activities increased to $1.0 billion in the thirty-nine weeks ended April 1, 2006, from $11.2 million in the prior year period. This increase was primarily the result of net transactions with parent companies which included dividends that were paid to the parent companies. Net cash used in financing activities was $233.1 million in fiscal 2003, $25.8 million in fiscal 2004 and $41.4 million in fiscal 2005. During fiscal 2005, we repaid $113.4 million to Sara Lee-related entities and distributed $5.9 million in net transactions with parent companies and related entities while incurring $88.8 million in short-term borrowings from third-parties.

Cash and Cash Equivalents

Cash and cash equivalents were $455.9 million at April 1, 2006 and decreased $624.9 million in the thirty-nine weeks ended April 1, 2006 from $1.1 billion at the prior year-end. This decrease was primarily the result of

 

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net transactions with parent companies. At the end of fiscal years 2003, 2004 and 2005, cash and cash equivalents were $289.8 million, $674.2 million and $1.1 billion, respectively. As part of Sara Lee, we have participated in Sara Lee’s cash pooling arrangements, under which positive and negative cash balances are netted within geographic regions. The recapitalization to be undertaken in conjunction with the spin off will result in a significant reduction in cash and cash equivalents. After the spin off, our primary source of liquidity will be cash provided from operating activities.

Amounts due to or from Parent Companies and Related Entities

Although we have a considerable amount of cash and cash equivalents on our balance sheet, a significant portion of this cash has been generated from our controlled foreign corporations and is located outside of the United States. Sara Lee’s policy is to determine at the end of each fiscal year the amount of cash to be repatriated to the United States and the amount to be permanently reinvested outside of the United States. As a result of decisions made in prior years to permanently reinvest earnings in foreign jurisdictions, our domestic operations borrow periodically from Sara Lee to meet funding requirements. In cases where our domestic operations have excess cash, the excess cash is swept into Sara Lee’s cash pooling accounts or lent to Sara Lee-related entities. Ultimately, the amounts owed to or due from Sara Lee and its related entities are driven by Sara Lee’s cash management policies and our operating requirements. These amounts have historically totaled as follows:

 

     June 28,
2003
   

July 3,

2004

   

July 2,

2005

    April 1,
2006
 
     (dollars in thousands)  

Due from related entities

   $ 57,646     $ 73,430     $ 26,194     $ 229,375  

Funding receivable with parent companies

     94,803       55,379       —         —    

Notes receivable from parent companies

     305,499       432,748       90,551       507,678  

Due to related entities

     (73,733 )     (97,592 )     (59,943 )     (36,472 )

Funding payable with parent companies

     —         —         (317,184 )     (195,479 )

Notes payable to parent companies

     (546,674 )     (478,295 )     (228,152 )     (203,536 )

Notes payable to related entities

     (398,168 )     (436,387 )     (323,046 )     (453,063 )
                                

Net amount due to parent companies and related entities

   $ (560,627 )   $ (450,717 )   $ (811,580 )   $ (151,497 )
                                

Changes in these balances are the result of operational funding needs and Sara Lee’s cash management requirements. These items are further described in Note 20, titled “Relationship with Sara Lee and Related Entities,” to our Combined and Consolidated Financial Statements. All amounts payable to or receivable from Sara Lee and its related entities will be extinguished as part of the spin off.

Notes Payable and Credit Facilities

In conjunction with the spin off, we plan to undertake a recapitalization which will include the incurrence of significant third party debt and payment of a portion of the proceeds to Sara Lee prior to the consummation of the spin off, including a new senior secured credit facility and new senior notes which are described in greater detail in “Description of Certain Indebtedness” below. As a result of this planned debt incurrence, the amount of interest expense will increase significantly after the spin off. The increase in interest expense will be due to the increases in debt levels and to the increases in interest rates depending on our credit rating, which remains to be determined. After the spin off, our primary source of liquidity will be cash provided from operating activities. We believe that our cash provided from operating activities, together with our available credit capacity, will enable us to comply with the terms of our new indebtedness and meet presently foreseeable financial requirements.

Notes payable to banks were $30.4 million at April 1, 2006, $83.3 million at the end of fiscal 2005, and zero at the end of fiscal 2004 and fiscal 2003. We did not use cash on hand to repay notes payable at April 1, 2006 and July 2, 2005 as we did at the end of fiscal 2004 and fiscal 2003.

 

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As of April 1, 2006, we had a $27.6 million loan outstanding under a non-revolving 364-day facility with a third party with maximum borrowing of 107 million Canadian dollars (approximately $95.6 million). This facility matures on May 31, 2006. The interest rate on borrowings is based on either the daily bankers acceptance rate plus 0.6% or the Canadian prime lending rate. Borrowings under the facility are currently guaranteed by Sara Lee.

In addition, we have a RMB 30 million (approximately $3.8 million) short term revolving facility arrangement with a Chinese branch of a U.S. bank. The facility is dated January 27, 2006 and is renewable annually. Borrowings under the facility accrue interest at the prevailing base lending rates published by the People’s Bank of China from time to time less 10% and are currently guaranteed by Sara Lee. As of April 1, 2006, $2.8 million was outstanding under this facility.

We are presently in compliance with the covenants contained in these facilities.

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, machinery and equipment, and prior to and during fiscal 2005, we participated in Sara Lee’s receivables sale program.

Leases

Minimum operating lease obligations are scheduled to be paid as follows: $38.8 million in fiscal 2006, $31.1 million in fiscal 2007, $24.0 million in fiscal 2008, $17.7 million in fiscal 2009, $13.6 million in fiscal 2010 and $26.5 million thereafter.

Sale of Accounts Receivable

Historically, we participated in a Sara Lee program to sell trade accounts receivable to a limited purpose subsidiary of Sara Lee. The subsidiary, a separate bankruptcy remote corporate entity, is consolidated in Sara Lee’s results of operations and statement of financial position. This subsidiary held trade accounts receivable that it purchased from the operating units and sold participating interests in those receivables to financial institutions, which in turn purchased and received ownership and security interests in those receivables. During fiscal 2005, Sara Lee terminated its receivable sale program and no receivables were sold under this program at the end of fiscal 2005. The amount of receivables sold under this program was $22.5 million at the end of fiscal 2003 and $22.3 million at the end of fiscal 2004. Changes in the balance of receivables sold are a component of net cash from operating activities (“(Increase) decrease in trade accounts receivable”) with an offset to a change in “Decrease (increase) in due to and from related entities” in our Combined and Consolidated Statements of Cash Flows. As collections reduced accounts receivable included in the pool, the operating units sold new receivables to the limited purpose subsidiary. The limited purpose subsidiary had the risk of credit loss on the sold receivables.

The proceeds from the sale of the receivables were equal to the face amount of the receivables less a discount. The discount was based on a floating rate and was accounted for as a cost of the receivable sale program. This cost has been included in “Selling, general and administrative expenses” in our Combined and Consolidated Statements of Income. The calculated discount rate for fiscal 2003, 2004 and 2005 was 1.6%, 1.2% and 1.2%, respectively, resulting in aggregated costs of $52.4 million, $5.0 million and $4.0 million in fiscal 2003, 2004, and 2005, respectively. We retained collection and administrative responsibilities for the participating interests in the defined pool.

 

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Future Contractual Obligations and Commitments

We do not have any material unconditional purchase obligations, as such term is defined by SFAS No. 47, “Disclosure of Long-Term Purchase Obligations.” The following tables contain information on our contractual obligations and commitments as of April 1, 2006 and July 2, 2005.

 

          Payments due by fiscal year
    

At April 1,

2006

  

Less than

1 year

   1-3 years    3-5 years   

More than

5 years

     (in thousands)

Obligations to be extinguished upon separation:

              

Due to related entities

   $ 36,472    $ 36,472    $ —      $ —      $ —  

Funding payable with parent companies

     195,479      195,479      —        —        —  

Notes payable to parent companies

     203,536      203,536      —        —        —  

Note payable to related entities

     453,063      453,063      —        —        —  

Interest on debt obligations

     2,417      2,417      —        —        —  
                                  
     890,967      890,967      —        —        —  

Obligations retained at separation (1):

              

Notes payable to banks

     30,375      30,375      —        —        —  

Interest on debt obligations

     437      437      —        —        —  

Operating lease obligations

     122,572      33,022      45,062      37,866      6,622

Capital lease obligations including related interest payments

     8,087      3,895      3,716      476      —  

Purchase obligations (2)

     523,382      396,991      112,202      10,789      3,400

Other long-term liabilities (3)

     86,223      68,219      9,621      8,383      —  
                                  
     771,076      532,939      170,601      57,514      10,022
                                  

Total

   $ 1,662,043    $ 1,423,906    $ 170,601    $ 57,514    $ 10,022
                                  

(1) In connection with the spin off, we will incur approximately $             of indebtedness under a senior secured credit facility that will bear interest at a floating rate based on a published market rate plus the applicable margin from the credit agreement and new senior notes that will bear interest at a fixed rate.
(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 obligations that did not exist as of April 1, 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 projected pension contribution of $54.5 million payable to Sara Lee in the fourth quarter of fiscal 2006. We have employee benefit obligations consisting of pensions and other postretirement benefits, including medical. Other than the projected fourth quarter 2006 pension contribution of $54.5 million, pension and postretirement obligations have been excluded from the table. A discussion of our pension and postretirement plans is included in Notes 17 and 18 to the Combined and Consolidated Financial Statements. Our obligations for employee health and property and casualty losses are also excluded from the table.

 

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          Payments due by fiscal year
     At July 2,
2005
   Less than
1 year
   1-3 years    3-5 years    More than
5 years
     (in thousands)

Obligations to be extinguished upon separation:

              

Due to related entities

   $ 59,943    $ 59,943    $ —      $ —      $ —  

Funding payable with parent companies

     317,184      317,184      —        —        —  

Notes payable to parent companies

     228,152      228,152      —        —        —  

Notes payable to related entities

     323,046      323,046      —        —        —  

Interest on debt obligations

     1,445      1,445      —        —        —  
                                  
     929,770      929,770      —        —        —  

Obligations retained at separation:

              

Notes payable to banks

     83,303      83,303      —        —        —  

Interest on debt obligations

     192      192      —        —        —  

Operating lease obligations

     151,704      38,844      55,103      31,270      26,487

Capital lease obligations including related interest payments

     12,144      5,411      5,625      1,108      —  

Purchase obligations (1)

     439,431      154,999      275,132      5,900      3,400

Other long-term liabilities (2)

     85,443      68,581      9,537      7,325      —  
                                  
     772,217      351,330      345,397      45,603      29,887
                                  

Total

   $ 1,701,987    $ 1,281,100    $ 345,397    $ 45,603    $ 29,887
                                  

(1) “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 obligations that did not exist as of July 2, 2005, as well as obligations for accounts payable and accrued liabilities recorded on the balance sheet.

 

(2) Represents the projected payment for long-term liabilities recorded on the balance sheet for deferred compensation, deferred income and the projected fiscal 2006 pension contribution of $54.5 million. We have employee benefit obligations consisting of pensions and other postretirement benefits including medical. Other than the projected fiscal 2006 pension contribution of $54.5 million, pension and postretirement obligations have been excluded from the table. A discussion of our pension and postretirement plans is included in Notes 17 and 18 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

The exact amount of contributions made to pension plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which Sara Lee operates and Sara Lee’s policy of charging its operating units for pension costs. In conjunction with the spin off, we will establish, adopt and maintain the Hanesbrands Inc. Pension and Retirement Plan, which will assume a portion of the underfunded liabilities of the pension plans sponsored by Sara Lee. In addition, we will assume sponsorship of certain other Sara Lee plans and will continue sponsorship of the Playtex Apparel Inc. Pension Plan. After the spin off, we will be required to make periodic pension contributions to the assumed plans, the Playtex Apparel Inc. Pension Plan

 

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and the Hanesbrands Inc. Pension and Retirement Plan. The levels of contribution will differ from historical levels of contributions to Sara Lee due to a number of factors, including the funded status of the plan as of the completion of the spin off, as well as our operation as a stand-alone company, financing costs, tax positions and jurisdictional funding requirements.

Guarantees

Due to our historical relationship with Sara Lee, there are several contracts under which Sara Lee has guaranteed certain third-party obligations for several of our entities. Typically, these obligations arise as a result of contracts entered into by our 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 assumed and certain tax matters. In each of these circumstances, payment by Sara Lee is conditioned on the other party making a claim pursuant to the procedures specified in the contract. These procedures allow Sara Lee to challenge the other party’s claims. In addition, Sara Lee’s 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 Lee’s 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 our Combined and Consolidated Balance Sheets.

As of July 2, 2005, these contracts included the guarantee of credit limits with third-party banks, and guarantees over supplier purchases. We had not guaranteed or undertaken any obligation on behalf of Sara Lee or any other related entities as of April 1, 2006.

Quantitative and Qualitative Disclosure About Market Risk

We are exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices. Historically, Sara Lee has maintained risk management control systems on our behalf to monitor the foreign exchange, interest rate and commodities risks and Sara Lee’s offsetting hedge position. Sara Lee’s risk management control system uses analytical techniques including market value, sensitivity analysis and value at risk estimations.

Foreign Exchange Risk

Our exposure to foreign exchange rates exists primarily with respect to the Canadian dollar, Mexican peso, and Japanese yen against the U.S. dollar. Following the spin off, we intend to continue Sara Lee’s policy of using foreign exchange forward and option contracts to hedge our 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. At the end of fiscal 2004 and fiscal 2005 and as of April 1, 2006, the potential change in fair value of these instruments, assuming a 10% change in the underlying currency price, was $6.1 million, $6.4 million and $6.3 million, respectively.

Interest Rates

Our historic interest rate exposure primarily relates 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.

We and Sara Lee have various notes receivable and notes payable between the parties that are reflected on the Combined and Consolidated Balance Sheet. We and Sara Lee have agreed that these notes receivable and payable will not be repaid at the distribution date and will be capitalized by the parties prior to the spin off. As

 

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part of the separation, we will issue approximately $             million of     % fixed rate long-term senior notes and incur approximately $             million of indebtedness under a senior secured credit facility that will bear interest at a floating rate based on a published market rate plus the applicable margin from the credit agreement. A substantial portion of the proceeds from the issuance of these debt instruments will be paid to Sara Lee prior to the spin off. A portion of the debt will have a fixed rate of interest and there can be no assurance that we will be able to refinance this indebtedness at the same or better rates upon maturity. We will be exposed to interest rate risk from the floating rate debt issuance and may or may not choose to hedge the interest rate on this floating rate debt. As a result, a 25 basis point movement in the interest rate charged on the floating rate debt that will be issued by us would result in a change in interest expense of $            .

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 also generally do not use commodity financial instruments to hedge other raw material commodity prices. At April 1, 2006, the potential change in fair value of cotton commodity derivative instruments, assuming a 10% change in the underlying commodity price, was $14.8 million.

Significant Accounting Policies and Critical Estimates

Our significant accounting policies are discussed in Note 3, titled “Summary of Significant Accounting Policies,” to our Combined and Consolidated Financial Statements. In most cases, the accounting policies we utilize are the only ones permissible under generally accepted accounting principles (GAAP). However, applying these policies requires significant judgments or a complex estimation process that can affect our results of operations and financial position. We base our estimates on our historical experience and other assumptions that we believe are reasonable. If actual amounts are ultimately different from our previous estimates, we include the revisions in our results of operations for the period in which the actual amounts become known.

Our accounting policies and estimates that can have a significant impact upon our operating results and financial position are as follows:

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 make adjustments based upon actual experience. Note 3(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 make 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 SG&A 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.

 

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Inventory Valuation

We carry inventory on our balance sheet at the estimated lower of cost or market. 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.

Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out, or “FIFO,” method for 95% of our inventories at July 2, 2005, and by the last-in, first-out, or “LIFO,” for the remainder. There was no difference between the FIFO and LIFO inventory valuation at July 2, 2005, July 3, 2004 or June 28, 2003. 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 writedowns 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 asset’s life. We estimate an asset’s 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. 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, current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset will be disposed of before the end of its useful life. We evaluate an asset’s recoverability by comparing the asset’s net carrying amount to the future net undiscounted cash flows we expect such asset will generate. If we determine that an asset is not recoverable, we recognize an impairment loss in the amount by which the asset’s carrying amount exceeds its estimated fair value.

When we recognize an impairment loss for an asset held for use, we depreciate the asset’s 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 July 2, 2005, the net book value of trademarks and other identifiable intangible assets was $145.8 million, of which we are amortizing $66.7 million. Effective with the second quarter of fiscal 2006, we reclassified the $79.0 million Playtex trademark as a finite lived asset rather than an indefinite life asset. As a result, we began amortizing the Playtex trademark over a period of 30 years. We anticipate that our amortization expense for the next year will be $9.4 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,

 

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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 asset’s carrying value exceeds its fair value.

We measure a trademark’s 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.

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 business’s 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 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 July 2, 2005, we had $278.8 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 review in the second quarter of each year.

In evaluating the recoverability of goodwill, we estimate the fair value of our reporting units. Reporting units are business components one level below the operating segment level for which discrete information is available and reviewed by segment management. 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 unit’s fair value to its carrying value. In the second step, if the reporting unit’s carrying value exceeds its fair value, we compare the goodwill’s implied fair value and its carrying value. If the goodwill’s carrying value exceeds its implied fair value, we recognize an impairment loss in an amount equal to such excess.

Self-Insurance Reserves

Prior to the spin off, we were insured through Sara Lee for property, worker’s compensation, and other casualty programs, subject to minimum claims thresholds. Because the Sara Lee programs cover a large number of participants in many domestic Sara Lee operating units in addition to us, Sara Lee charges an amount to cover premium costs to each operating unit. Following the spin off, we will obtain our own insurance coverage, the costs for which may be greater than the costs realized as a participant in Sara Lee’s programs.

 

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Income Taxes

Our income taxes are computed and reported on a separate return basis as if we were not part of Sara Lee. 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. Net operating loss carry forwards have been determined in our Combined a