<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-11707
DESIGNER HOLDINGS LTD.
(Exact name of registrant as specified in its charter)
Delaware 13-3818542
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1385 Broadway, 3rd Floor
New York, New York 10018
(Address of principal executive offices)
212-556-9600
(Registrant's telephone number, including area code)
Copies of all communications to:
Designer Holdings Ltd.
1385 Broadway, 3rd floor
New York, New York 10018
212-556-9600
Attention: John J. Jones, Esq., General Counsel
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
The number of shares outstanding of the registrant's Common Stock as of
May 13, 1996 is as follows: 32,159,334
<PAGE> 2
DESIGNER HOLDINGS LTD.
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page No.
--------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31,
1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31,
1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
Part II - Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Receivables, net $118,990 $118,400
Inventory 77,040 69,510
Deferred tax assets 12,981 8,065
Prepaid expenses and other
current assets 3,234 3,625
-------- --------
Total current assets 212,245 199,600
Property, plant and equipment, net 7,025 4,953
Prepaid royalties, net 5,755 6,084
Intangible assets, net 34,111 34,880
Other assets 5,625 5,297
-------- --------
Total assets $264,761 $250,814
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 5,000 $ 5,000
Revolving credit loans 109,282 97,016
Accounts payable 33,429 24,857
Accrued expenses 19,008 30,090
Income taxes payable 9,243 10,966
-------- --------
Total current liabilities 175,962 167,929
Long-term debt, less current portion 49,760 50,403
-------- --------
Total liabilities 225,722 218,332
-------- --------
Commitments and contingencies
Stockholder's equity:
Common stock, par value $.01 per share;
authorized 75,000,000 shares; issued
and outstanding 24,233,868 shares,
pursuant to the reorganization in March
1995 and the stock split in April 1996 242 242
Paid-in capital 20,121 20,121
Retained earnings 18,676 12,119
-------- --------
Total stockholder's equity 39,039 32,482
-------- --------
Total liabilities and
stockholder's equity $264,761 $250,814
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
Net revenues $ 114,636 $ 83,404
Cost of goods sold 70,821 58,416
----------- -----------
Gross profit 43,815 24,988
Selling, general and administrative expenses 27,147 16,697
----------- -----------
Operating income 16,668 8,291
Interest expense 4,525 1,795
----------- -----------
Income before income taxes 12,143 6,496
Provision for income taxes 5,586 3,451
----------- -----------
Net income $ 6,557 $ 3,045
=========== ===========
Net income per share $ .27 $ .13
=========== ===========
Weighted average common shares outstanding 24,233,868 24,233,868
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,557 $ 3,045
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation 163 98
Amortization 840 698
Deferred interest 607
Provision for receivables 4,061 540
Deferred income taxes ( 4,789)
Changes in assets and liabilities:
Receivables ( 4,651) 5,244
Inventory ( 7,530) ( 12,396)
Prepaid expenses and other current assets 17 ( 1,105)
Prepaid royalties 500 500
Other assets 27 ( 21)
Accounts payable 8,572 ( 9,059)
Accrued expenses ( 12,392) 7,916
Income taxes payable ( 1,723) 2,618
--------- ---------
Net cash used in operating activities ( 9,741) ( 1,922)
--------- ---------
Cash flows from investing activities:
Purchases of equipment ( 925) ( 279)
--------- ---------
Net cash used in investing activities ( 925) ( 279)
--------- ---------
Cash flows from financing activities:
Repayment of term loan ( 1,250)
Increase in revolving credit loans 12,266
Payment of stock issuance costs (350)
Advances from factor 885
--------- ---------
Net cash provided by financing activities 10,666 885
--------- ----------
Net decrease in cash -- ( 1,316)
Cash, beginning of period -- 1,432
--------- ---------
Cash, end of period $ -- $ 116
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
DESIGNER HOLDINGS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Designer Holdings Ltd. (the "Company") was incorporated on March 27, 1995 for
the purpose of consolidating the ownership interests of Rio Sportswear, Inc.
("Rio Sportswear") and Jeanswear Holdings, Inc., the holding company for Calvin
Klein Jeanswear Company. As of March 31, 1996, the Company was a wholly-owned
subsidiary of New Rio L.L.C. ("New Rio"), whose controlling equityholders are
Arnold H. Simon, President and Chief Executive Officer of the Company, and
Charterhouse Equity Partners II, L.P. All significant intercompany balances and
transactions have been eliminated.
The accompanying condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, these statements include all
adjustments, consisting only of normal recurring accruals, considered necessary
for a fair presentation of financial position, results of operations and cash
flows. Results of operations for interim periods are not necessarily indicative
of results for the full year.
The year-end condensed consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. The condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's registration statement on Form S-1, as amended (SEC
File No.33-2236), declared effective by the SEC on May 9, 1996.
2. INITIAL PUBLIC OFFERING AND STOCK SPLIT:
On May 9, 1996, the Company consummated an initial public offering of 13,800,000
shares of its common stock for $18.00 per share. Of the total shares offered,
the Company sold 6,650,000 shares and New Rio sold 7,150,000 shares. Net
proceeds to the Company, after underwriting discounts and expenses, were
approximately $109.0 million. Net proceeds to the Company will be used primarily
to reduce indebtedness, including approximately $37.0 million to retire a
subordinated loan, including approximately $3.0 million relating to a prepayment
penalty, and $72.0 million to reduce indebtedness under the credit agreement.
The prepayment penalty and the write-off of deferred financing costs associated
with the subordinated loan, which aggregates approximately $2.3 million net of
applicable tax effects, will be reported as an extraordinary loss in the second
quarter of 1996.
In contemplation of the initial public offering of the Company's common stock,
on April 22, 1996, the Company increased the number of shares of authorized
common stock to 75,000,000 shares, par value $.01 per share, and effected a
24,234-for-one stock split of its common stock. All share and per share amounts
included in the accompanying condensed consolidated financial statements of the
Company have been restated to reflect the foregoing.
6
<PAGE> 7
3. INVENTORY:
Inventory is stated at the lower of cost, determined by the average cost method,
or market, and consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Raw materials $ 1,310 $ 1,536
Work-in-process 3,017 4,091
Finished goods 72,713 63,883
------- -------
$77,040 $69,510
======= =======
</TABLE>
4. FINANCING:
The Company finances its operations under a credit agreement which provides for
borrowings under a revolving credit facility, and a term loan which may be
terminated by the Company or its lenders in the year 2000. On March 29, 1996,
the revolving credit facility was permanently increased from $115.0 million to
$150.0 million.
5. INCOME TAXES:
The higher effective tax rate in the 1995 quarter, compared to the 1996 quarter,
was principally attributable to a valuation allowance on net operating loss
benefits of Rio Sportswear. The results of operations of Rio Sportswear were not
included in the consolidated tax returns of the Company until April 1995, when
Rio Sportswear became a subsidiary of the Company.
6. COMMITMENTS AND CONTINGENCIES:
CKJ LICENSE AMENDMENTS:
On April 22, 1996, the exclusive license from Calvin Klein, Inc. ("CKI") for
certain types of sportswear (the "CKJ License") was amended to provide for,
among other things, the (I) modification of the term of the CKJ License from a
ten-year initial term with four ten-year renewal terms to a forty-year term with
one ten-year renewal term, (ii) modification of net sales thresholds, (iii)
extension of the term of the CKJ License for the khaki collection from ten years
to forty years, (iv) granting to the Company the non-exclusive right to sell
caps for the term of the CKJ License, (v) expansion of the geographical
territory for the khaki collection, (vi) addition of certain territories in
Central and South America to the CKJ License, and (vii) liberalization of
certain covenants. In addition, the minimum annual royalty fee payments of
$4,500 in 1995 will increase over the term of the CKJ License to $22,000 for
years 31 through 40.
As consideration for such amendments, the Company issued 1,275,466 share of
non-voting common stock to CKI. Such shares are convertible at any time upon
notice to the Company into an equal number of shares of voting common stock. CKI
has agreed to hold such shares for at least 18 months subsequent to May 9, 1996,
the effective date of the registration statement relating to the initial public
offering of the Company's common stock, although the Company has granted CKI
certain "piggyback" registration rights that can be exercised at any time after
the shares are converted into voting common stock. The value of the shares
issued to CKI of $20,203 will be recorded as capitalized licensing rights and
amortized over forty years, the adjusted term of the CKJ License. Had the
transaction been consummated at March 31, 1996, intangible assets, total assets
and stockholder's equity would have been $54,314, $284,964 and $59,242,
respectively.
7
<PAGE> 8
EMPLOYMENT AGREEMENT:
As of April 22, 1996, the Company entered into an employment agreement with Mr.
Simon, which became effective on May 9, 1996, the effective date of the
registration statement relating to the initial public offering of the Company's
common stock. The agreement, which expires on December 31, 1998, provides for
Mr. Simon to be President and Chief Executive Officer of the Company at an
annual base salary of not less than $1,500. The agreement also provides for an
annual cash bonus based on a percentage of adjusted earnings before interest,
taxes and certain non-cash charges (as defined). In addition, upon certain
events of termination and change in control of the Company, the agreement
provides that Mr. Simon will be entitled to certain payments, provided that the
maximum amount payable shall not exceed $9,000 in the aggregate.
LITIGATION:
In 1990, an action was filed against Rio Sportswear and certain other defendants
alleging, among other things, that Rio Sportswear infringed a patent held by the
plaintiffs relating to acid wash processes used in the manufacture of jeanswear
having a random fade effect. Similar suits are pending against the major
manufacturers of such jeanswear. The plaintiffs seek damages against all
defendants in unspecified amounts. No trial date has been set. Rio Sportswear
had received a proposal from plaintiffs offering to settle the litigation, which
was subsequently withdrawn, and Rio Sportswear made a counterproposal, which has
also been withdrawn. There can be no assurance that plaintiffs will make or
consider further settlement proposals with respect to the litigation. If the
parties are unable to reach a settlement, Rio Sportswear intends to contest the
action vigorously. The outcome of litigation is inherently unpredictable and, in
the event that no settlement is reached and Rio Sportswear is found to have
infringed the patent in suit, damages and attorney's fees could be assessed
against Rio Sportswear. No assurance can be given that such damages and fees
would not have a material adverse effect upon the Company's results of
operations or cash flows in the period in which the judgement is rendered;
however, the Company believes that any such damages and fees would not have a
material adverse effect upon the Company's financial position.
7. STOCK OPTION PLAN
The Company's Board of Directors and the sole voting stockholder have approved
the Designer Holdings Ltd. 1996 Stock Option and Incentive Plan ("the Stock
Plan"). Pursuant to the Stock Plan, executive officers, key employees and
consultants of the Company are eligible to receive awards of stock options,
stock appreciation rights, limited stock appreciation rights and restricted
stock. The Company has reserved 2,363,200 shares of common stock for issuance of
awards under the Stock Plan. In May 1996, options to purchase approximately
1,575,000 shares of common stock at an exercise price of $18.00 per share were
granted.
8
<PAGE> 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(In thousands, except share data)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
----- -----
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of goods sold 61.8 70.0
Gross profit 38.2 30.0
Selling, general and administrative expenses 23.7 20.0
Operating income 14.5% 10.0%
===== =====
</TABLE>
Net Revenues. Net revenues for the three months ended March 31, 1996 were $114.6
million, which represented an increase of $31.2 million or 37.4% over net
revenues for the three months ended March 31, 1995 of $83.4 million. Net
revenues in the 1996 quarter included $113.6 million from the sale of Calvin
Klein Jeans,CK/Calvin Klein Jeans and CK/Calvin Klein Jeans Khakis (collectively
"Calvin Klein Jeans Labels") products, an increase of $57.7 million over the
1995 quarter. The increased level of net revenues generated by the sales of
Calvin Klein Jeans Label products during the 1996 quarter, as compared to the
1995 quarter, was principally attributable to an increase in the volume of
products sold to a larger number of department stores and specialty retail
stores. This sales growth was experienced across all of the mens, juniors,
womens and petites lines in which the products are sold. The Company began
shipping Calvin Klein khaki pants, skirts, shorts and related items (the "Khaki
Collection") in March 1996, which accounted for $6.5 million of the Company's
net revenues during the 1996 quarter.
Effective January 1, 1996, the Company licensed its Rio label and sublicensed
its Bill Blass labels to Commerce Clothing Company, L.L.C. ("Commerce
Clothing"). The 1995 quarter reflected net revenues of $27.5 million from the
sales of these products. Effective January 1, 1996, the company also entered
into a distribution agreement with Commerce Clothing for Calvin Klein Jeans
Label childrens apparel in the United States. There was no such revenue recorded
during the 1995 quarter for this line as the Company did not begin selling this
line until the third quarter of 1995. During the three months ended March 31,
1996, the first quarter for which the terms of the agreement were effective, the
Company waived payment of the royalty income due under the agreement, which
would have been approximately $1.2 million.
Gross Profit. Gross profit was $43.8 million for the three months ended March
31, 1996, an increase of $18.8 million from the 1995 comparable quarter gross
profit of $25.0 million. The gross profit percentage was 38.2% for the 1996
quarter, an increase from 30% in the 1995 quarter. The overall improvement with
respect to gross profit percentage was due to the absence in the 1996 quarter of
gross profit generated by the sale of Rio and Bill Blass products, due to the
above-mentioned license agreement. The 1995 quarter contained a gross profit
percentage of 12.6% related to the sale of these products. The gross profit
percentage on the Calvin Klein Jeans Label products was 38.2% for the 1996
quarter, compared to 38.5% in the 1995 quarter. This decrease resulted because
the 1995 period marked the beginning of the first full year of sales of these
products, and the 1995 gross profit
9
<PAGE> 10
was minimally impacted by sales markdowns and allowances which increased as the
Company broadened its product distribution. In addition, the conversion to a new
management information system delayed shipments for several weeks in the early
part of 1996.
Selling, general and administrative. SG&A expenses were $27.1 million or 23.7%
of net revenues for the three months ended March 31, 1996, an increase of $10.4
million from $16.7 million or 20.0% for the three months ended March 31, 1995.
The increased expenses were primarily driven by the increased sales volume, and
the associated higher levels of advertising, design and royalty expenses
incurred in connection with the CKJ License, as well as other costs necessary to
build the infrastructure to support the increased sales volume. SG&A expenses as
a percentage of net revenues also increased partially because the 1996 quarter
included costs related to marketing Rio and Bill Blass products pursuant to the
Company's license and sublicense agreement, for which the Company will first
recognize royalty income commencing in the second quarter of 1996.
Interest expense. Interest expense for the three months ended March 31, 1996
quarter was $4.5 million, as compared to $1.8 million for the three months ended
March 31, 1995. This increase was attributable to the increased working capital
requirements and borrowings on the revolving credit facility that were necessary
to support the higher volume of sales. This increase was also reflective of the
difference in debt structure from quarter to quarter, as the 1996 quarter
contained debt which bore higher effective interest rates than the debt
outstanding in the comparable 1995 quarter.
Provision for income taxes. The provision for income taxes was $5.6 million or
46.1% of pre-tax income for the three months ended March 31, 1996, as compared
to $3.5 million or 53.1% of pre-tax income for the three months ended March 31,
1995. The higher effective tax rate in the 1995 quarter was principally
attributable to a valuation allowance on net operating loss benefits of Rio
Sportswear. The results of operations of Rio Sportswear were not included in the
consolidated tax returns of the Company until April 1995, when Rio became a
subsidiary of the Company.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary funding requirements are to finance continued business
growth through investments in working capital (primarily accounts receivable and
inventory), capital expenditures related to upgrading the distribution and
management information systems, costs related to the shop- in-shop program, and
debt service.
During the three months ended March 31, 1996 and 1995, the Company used $9.7
million and $1.9 million, respectively, in operating activities. The increase in
net cash used in operating activities in the 1996 quarter was primarily due to
the increased sales volume and the related increases in working capital
requirements, specifically inventory and accounts receivable, offset in part by
cash generated from earnings as adjusted for non-cash charges.
Net cash used in investing activities during the 1996 and 1995 quarters was $.9
million and $.3 million, respectively. The increase in investing activities
consisted of capital expenditures primarily for equipment for distribution
facilities and leasehold improvements.
Net cash provided by financing activities during the 1996 and 1995 quarters was
$10.7 million and $.9 million, respectively. The increase is primarily due to
increased borrowings under the revolving credit facility of $12.3 million.
10
<PAGE> 11
The Company finances its operations under a credit agreement, consisting of a
revolving credit facility, which was permanently increased from $115.0 million
to $150 million, and a term loan. At March 31, 1996, the Company had amounts
outstanding under the credit agreement of approximately $147.5 million,
comprised of approximately $109.3 million outstanding under the revolving credit
facility, approximately $15.7 million for open letters of credit and
approximately $22.5 million outstanding under the term loan.
On May 9, 1996 the Company consummated an initial public offering of 13,800,000
shares of its common stock for $18.00 per share. Of the total shares offered,
the Company sold 6,650,000 shares and New Rio L.L.C. sold 7,150,000 shares. Net
proceeds to the Company, after underwriting discounts and expenses, were
approximately $109.0 million. Net proceeds to the Company will increase
liquidity by reducing indebtedness, including approximately $37.0 million to
retire the subordinated loan and a reduction in the revolving credit and term
loans of approximately $72.0 million. The Company believes that the proceeds
from the initial public offering and funds available under its existing credit
agreement are adequate to fund its current level of operations and its expected
growth through 1997. The Company may need to seek additional financing if it
adds other designer brands or licenses, or makes significant acquisitions.
Additionally, the Company will need to seek additional financing to support
continued expansion in 1998 and later years.
11
<PAGE> 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Incorporated by reference to Note 6 to the Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
EX-27 Financial Data Schedule
(b). Reports on Form 8-K
None
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Designer Holdings Ltd.
Date: May 20, 1996 By: /s/ Maurice Dickson
-----------------------------------------
Maurice Dickson
Executive Vice President, Treasurer
and Chief Financial Officer
13
<PAGE> 14
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 118,990
<ALLOWANCES> 0
<INVENTORY> 77,040
<CURRENT-ASSETS> 212,245
<PP&E> 7,025
<DEPRECIATION> 0
<TOTAL-ASSETS> 264,761
<CURRENT-LIABILITIES> 175,962
<BONDS> 49,760
0
0
<COMMON> 242
<OTHER-SE> 38,797
<TOTAL-LIABILITY-AND-EQUITY> 264,761
<SALES> 0
<TOTAL-REVENUES> 114,636
<CGS> 70,821
<TOTAL-COSTS> 70,821
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,525
<INCOME-PRETAX> 12,143
<INCOME-TAX> 5,586
<INCOME-CONTINUING> 6,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,557
<EPS-PRIMARY> .27
<EPS-DILUTED> 0
</TABLE>
