<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1996
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DESIGNER HOLDINGS LTD.
DESIGNER FINANCE TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 2339 13-3818542
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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1385 BROADWAY
NEW YORK, NEW YORK 10018
(212) 556-9600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN J. JONES, ESQ.
GENERAL COUNSEL
DESIGNER HOLDINGS LTD.
1385 BROADWAY, 3RD FLOOR
NEW YORK, NEW YORK 10018
(212) 556-9600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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VINCENT J. PISANO, ESQ. WILLIAM M. HARTNETT, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM CAHILL GORDON & REINDEL
919 THIRD AVENUE EIGHTY PINE STREET
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10005
TEL: (212) 735-3000 TEL: (212) 701-3000
FAX: (212) 735-2000 FAX: (212) 269-5420
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SECURITY PRICE REGISTRATION FEE
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Convertible Trust Originated Preferred Securities(SM)
of Designer Finance Trust.......................... 2,300,000(1) $50.00(2)(3) $115,000,000(2)(3) $39,656
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Convertible Subordinated Debentures of Designer
Holdings Ltd. ..................................... (4) -- -- --
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Common Stock, par value $.01, of Designer Holdings
Ltd. .............................................. (5) -- --
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Guarantee(6)......................................... -- -- -- --
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Total........................................ 100% $ $39,656
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(1) Includes 300,000 % Convertible Trust Originated Preferred Securities(SM)
(the "Convertible TOPrS(SM)" or "Preferred Securities") that may be issued
pursuant to exercise of the underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(c) of the Securities Act.
(3) Exclusive of accrued interest and distributions, if any.
(4) $115,000,000 in aggregate principal amount of % Convertible Subordinated
Debentures (the "Convertible Debentures") of Designer Holdings Ltd. (the
"Company") to be issued and sold to Designer Finance Trust (the "Trust") in
connection with the issuance by the Trust of the Preferred Securities. The
Convertible Debentures may be distributed, under certain circumstances, to
the holders of Preferred Securities for no additional consideration.
(5) Such shares of Common Stock are issuable upon conversion of the Preferred
Securities registered hereunder. This Registration Statement also covers
such shares as may be issuable pursuant to anti-dilution adjustments.
(6) Includes the rights of holders of the Preferred Securities under the
Guarantee and certain back-up undertakings consisting of obligations of the
Company to provide certain indemnities in respect of, and pay and be
responsible for certain expenses and debts of, the Trust as described in the
Registration Statement. No separate consideration will be received for the
Guarantee and the back-up undertakings.
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION -- SEPTEMBER 30, 1996
2,000,000 PREFERRED SECURITIES
DESIGNER FINANCE TRUST
% CONVERTIBLE TRUST ORIGINATED PREFERRED
SECURITIES(SM) ("CONVERTIBLE TOPRS(SM)")
(LIQUIDATION AMOUNT $50 PER PREFERRED SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY,
AND CONVERTIBLE INTO COMMON STOCK OF,
DESIGNER HOLDINGS LTD.
------------------------
The % Convertible Trust Originated Preferred Securities (the
"Convertible TOPrS(SM)" or "Preferred Securities") offered hereby represent
preferred undivided beneficial interests in the assets of Designer Finance
Trust, a statutory business trust formed under the laws of the State of Delaware
(the "Trust"). Designer Holdings Ltd., a Delaware corporation (the "Company"),
will directly or indirectly own all the common securities (the "Common
Securities" and, together with the Preferred Securities, the "Trust Securities")
representing undivided beneficial interests in the assets of the Trust. The
Trust exists for the sole purpose of issuing the Trust Securities and investing
the proceeds thereof in an equivalent amount of % Convertible Subordinated
Debentures due 2016 (the "Convertible Debentures") of the Company. Upon an event
of a default under the Declaration (as defined herein), the holders of Preferred
Securities will have a preference over the holders of the Common Securities with
respect to distributions and payments upon redemption, liquidation and
otherwise.
Each Preferred Security is convertible at the option of the holder thereof
into shares of common stock, par value $.01 per share (the "Common Stock"), at a
conversion rate of shares of Common Stock, for each Preferred
Security (equivalent to $ per share of Common Stock), subject to adjustment
in certain circumstances. The Common Stock is listed on the New York Stock
Exchange (the "NYSE") under the symbol "DSH." On September 27, 1996, the last
reported sale price of the Common Stock on the NYSE Composite Tape was $26 3/4.
The Trust and the Company will apply to have the Preferred Securities listed on
the NYSE. See "Underwriting."
(Continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS FOR CERTAIN
INFORMATION RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) COMMISSION(2) TRUST(3)(4)
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Per Preferred Security.................. $ (3) $
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Total(5)................................ $ (3) $
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(1) Plus accrued distributions, if any, from , 1996.
(2) The Trust and the Company have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Convertible Debentures, the Company has
agreed to pay to the Underwriters as compensation (the "Underwriters'
Compensation") for their arranging the investment therein of such proceeds
$ per Preferred Security (or $ in the aggregate). See
"Underwriting."
(4) Before deducting expenses of the offering payable by the Company, estimated
to be $ .
(5) The Trust and the Company have granted the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
300,000 additional Preferred Securities solely to cover over-allotments, if
any. If the option is exercised in full, the total Price to Public,
Underwriting Commission and Proceeds to Trust will be $ , $
and $ , respectively. See "Underwriting."
------------------------
The Preferred Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that delivery of the Preferred Securities will be made only in book-entry form
through the facilities of The Depository Trust Company, on or about
, 1996.
------------------------
MERRILL LYNCH & CO. MORGAN STANLEY & CO.
INCORPORATED
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The date of this Prospectus is , 1996.
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(SM)"Convertible Trust Originated Preferred Securities" and "Convertible TOPrS"
are service marks of Merrill Lynch & Co., Inc.
<PAGE> 3
(Continued from front cover)
Holders of the Preferred Securities are entitled to receive cumulative cash
distributions at an annual rate of % of the liquidation amount of $50 per
Preferred Security, accruing from the date of original issuance and payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of each
year, commencing December 31, 1996. See "Description of the Preferred
Securities -- Distributions." The payment of distributions out of moneys held by
the Trust and payments on liquidation of the Trust or the redemption of
Preferred Securities, as set forth below, are guaranteed by the Company (the
"Guarantee") to the extent described under "Description of the Guarantee." The
Guarantee covers payments of distributions and other payments on the Preferred
Securities only if and to the extent of the assets of the Trust available for
distribution to holders of Preferred Securities. The Guarantee, when taken
together with the Company's obligations under the Convertible Debentures and the
Indenture (as defined herein) and its obligations under the Declaration,
including its obligations to pay costs, expenses, debts and liabilities of the
Trust (other than with respect to the Trust Securities), provide a full and
unconditional guarantee of amounts due on the Preferred Securities. See "Risk
Factors -- Rights Under the Guarantee." The obligations of the Company under the
Guarantee are subordinate and junior in right of payment to all other
liabilities of the Company and pari passu with the most senior preferred stock
issued, from time to time, if any, by the Company. The obligations of the
Company under the Convertible Debentures are subordinate and junior in right of
payment to all present and future Senior Indebtedness (as defined herein) of the
Company, which aggregated approximately $57.0 million at June 30, 1996, and rank
pari passu with the Company's other general unsecured creditors. The obligations
of the Company under the Convertible Debentures are also effectively
subordinated to all existing and future indebtedness and other liabilities,
including trade payables, of the Company's subsidiaries. At June 30, 1996, the
indebtedness and other liabilities of such subsidiaries aggregated $109.5
million (including the $57.0 million referred to above). The Convertible
Debentures purchased by the Trust may be subsequently distributed pro rata to
holders of the Preferred Securities and Common Securities in connection with the
dissolution of the Trust upon the occurrence of certain events.
The distribution rate and the distribution payment dates and other payment
dates for the Preferred Securities will correspond to the interest rate and
interest payment dates and other payment dates on the Convertible Debentures,
which will be the sole assets of the Trust. As a result, if principal or
interest is not paid on the Convertible Debentures, no amounts will be paid on
the Preferred Securities. If the Company does not make principal or interest
payments on the Convertible Debentures, the Trust will not have sufficient funds
to make distributions on the Preferred Securities, in which event the Guarantee
will not apply to such distributions until the Trust has sufficient funds
available therefor.
The Company has the right to defer payments of interest on the Convertible
Debentures by extending the interest payment period on the Convertible
Debentures at any time for up to 20 consecutive quarters (each, an "Extension
Period") during which no interest shall be due and payable; provided, that no
such Extension Period may extend beyond the maturity date of the Convertible
Debentures. If interest payments are so deferred, distributions on the Preferred
Securities will also be deferred. During such Extension Period, distributions
will continue to accrue, compounded quarterly at the distribution rate (to the
extent permitted by applicable law), at an annual rate of % per annum
compounded quarterly, and during any Extension Period, holders of Preferred
Securities will be required to include deferred interest income in their gross
income for federal income tax purposes in advance of receipt of the cash
distributions with respect to such deferred interest payments. There could be
multiple Extension Periods of varying lengths throughout the term of the
Convertible Debentures. See "Risk Factors -- Option to Extend Interest Payment
Periods," "Description of the Convertible Debentures -- Option to Extend
Interest Payment Periods" and "United States Federal Income Taxation -- Original
Issue Discount."
The Convertible Debentures are redeemable by the Company, in whole or in
part, from time to time, on or after , 1999 at the redemption
prices specified herein or at any time in certain circumstances upon the
occurrence of a Tax Event (as defined herein). If the Company redeems
Convertible Debentures, the proceeds thereof will simultaneously be applied to
redeem Trust Securities having an aggregate liquidation amount equal to the
Convertible Debentures so redeemed at the applicable redemption price specified
herein, together with accrued and unpaid distributions to the date fixed for
redemption. See "Description of the
2
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Preferred Securities -- Mandatory Redemption." The Preferred Securities will be
redeemed upon maturity of the Convertible Debentures. The Convertible Debentures
mature on , 2016. In addition, upon the occurrence of a Special
Event (as defined herein), unless the Convertible Debentures are redeemed in the
limited circumstances described herein, the Trust shall be dissolved, with the
result that the Convertible Debentures will be distributed pro rata to the
holders of the Preferred Securities in lieu of any cash distribution. See
"Description of the Preferred Securities -- Special Event Redemption or
Distribution." In the case of the occurrence of a Special Event that is a Tax
Event, the Company will have the right in certain circumstances to redeem the
Convertible Debentures, which would result in the redemption by the Trust of
Trust Securities in the same amount on a pro rata basis. If the Convertible
Debentures are distributed to the holders of the Preferred Securities, the
Company will use its best efforts to have the Convertible Debentures listed on
the NYSE or on such other exchange as the Preferred Securities are then listed.
See "Description of the Preferred Securities -- Special Event Redemption or
Distribution" and "Description of the Convertible Debentures."
In the event of the involuntary or voluntary dissolution, winding up or
termination of the Trust, the holders of the Preferred Securities will be
entitled to receive for each Preferred Security a liquidation amount of $50 plus
accrued and unpaid distributions thereon (including interest, if any, thereon)
to the date of payment, unless, in connection with such dissolution, winding up
or termination of the Trust, the Convertible Debentures are distributed to the
holders of the Preferred Securities. See "Description of the Preferred
Securities -- Liquidation Distribution Upon Dissolution."
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AND OF THE COMMON STOCK OF DESIGNER HOLDINGS LTD. AT LEVELS ABOVE
THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
The logo form of the registered trademarks CALVIN KLEIN and CK/CALVIN KLEIN are
owned by The Calvin Klein Trademark Trust and are used under license from Calvin
Klein, Inc.
The logo form of the DKNY Jeans trademark is owned by Gabrielle Studio, Inc., is
licensed to Donna Karan Studio, a subsidiary of Donna Karan International Inc.,
and is used under sublicense from Donna Karan Studio. The Donna Karan New
York,(R) Donna Karan(R) and DKNY(R) trademarks are owned by Gabrielle Studio,
Inc. and are licensed to Donna Karan Studio.
3
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any agreement or other document are not necessarily complete; with respect to
each such agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by this reference.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (Commission File No.
1-11707), and in accordance therewith files periodic reports, proxy statements
and other information with the Commission relating to its business, financial
statements and other matters. The Registration Statement, as well as such
reports, proxy statements and other information, may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and should be
available for inspection and copying at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of
such material can be obtained at prescribed rates by writing to the Commission
Public Reference Section , 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov. The Common Stock of the Company is listed on the NYSE. The
reports, proxy statements and certain other information of the Company can be
inspected at the office of the NYSE, 20 Broad Street, New York, New York 10005.
No separate financial statements of the Trust have been included herein.
The Company does not consider that such financial statements would be material
to holders of Preferred Securities because (i) all of the voting securities of
the Trust will be owned, directly or indirectly, by the Company, a reporting
company under the Exchange Act, (ii) the Trust has no independent operations and
exists for the sole purpose of issuing securities representing undivided
beneficial interests in the assets of the Trust and investing the proceeds
thereof in the Convertible Debentures issued by the Company and (iii) the
obligations of the Trust under the Trust Securities are fully and
unconditionally guaranteed by the Company to the extent that the Trust has funds
available to meet such obligations. See "Designer Finance Trust," "Description
of the Guarantee" and "Description of the Convertible Debentures."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, increases in net revenues, the DKNY Jeans License (as herein
defined), the acquisition of the CK Outlets (as herein defined) and other
aspects of the business of the Company. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements, including
in particular the risks and uncertainties described under "Risk
Factors -- Ability to Achieve and Manage Future Growth." See also "Risk
Factors," "Unaudited Pro Forma Financial Information" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Prospective investors are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Except as
otherwise indicated, the information contained in this Prospectus assumes that
the Underwriters' overallotment option is not exercised. Unless the context
otherwise requires, (i) all information set forth herein assumes that CKI has
converted its 1,275,466 shares of non-voting common stock into 1,275,466 shares
of Common Stock (see "Business -- CKJ License"), (ii) the "Company" means
Designer Holdings Ltd. and its consolidated subsidiaries and (iii) the "Company"
prior to its formation in March 1995 means its predecessors Rio Sportswear, Inc.
("Rio Sportswear"), Jeanswear Holdings, Inc. ("Jeanswear") and the Predecessor
Companies (as defined herein).
THE COMPANY
GENERAL
Designer Holdings Ltd. (the "Company") develops, sources and markets
designer sportswear lines for men, juniors and women (including petites) under
the Calvin Klein Jeans, CK/Calvin Klein Jeans and CK/Calvin Klein Jeans Khakis
labels (collectively, the "Calvin Klein Jeans Labels"). The Company's products
target youthful, culturally conscious consumers and capitalize on the cachet and
image created by over 20 years of extensive image advertising for Calvin Klein,
one of the world's most influential designers. The Company collaborates with the
inhouse design teams of Calvin Klein, Inc. ("CKI") to create products
characterized by high quality and casual, contemporary fashion. Each of the
Company's lines combines both basic and fashion items in a broad range of casual
fabrications, including jeans, khakis, knit and woven tops and bottoms,
T-shirts, shorts, fleece shirts and pants, outerwear such as leather and denim
jackets, caps and related accessories. In the six months ended June 30, 1996,
the mens, juniors and womens (including petites) lines accounted for
approximately 41.6%, 35.8% and 22.3%, respectively, of net sales of Calvin Klein
Jeans Label products.
Since August 1994, the Company has experienced substantial growth in net
revenues for its Calvin Klein Jeans Label products. In 1993, net revenues from
the sale of Calvin Klein Jeans Label products by CKI were approximately $59
million. In 1994, the Company obtained the exclusive license from CKI for
certain types of sportswear (the "CKJ License"). In 1995, net revenues
(including royalties) of Calvin Klein Jeans Label products rose to $361.4
million. In the six months ended June 30, 1996, net revenues (including
royalties) of Calvin Klein Jeans Label products rose to $218.3 million, a 79.9%
increase from the $121.4 million in the comparable 1995 period.
The key initiatives implemented by the Company since obtaining the CKJ
License have included: (i) broadening its target market by re-engineering the
garments to provide a comfortable fit and flattering appearance for a greater
number of potential consumers, (ii) increasing the value offered to consumers by
lowering the price of its designer-quality products to "better" from "designer"
price points, (iii) targeting juniors, petites and childrens lines with a
specific marketing strategy and product offering, (iv) enlarging the core of
basic styles for each line and (v) establishing an inventory replenishment plan
to meet the requirements of retailers. Based on the Calvin Klein image and an
interpretation of current trends, the Company and the in-house design teams of
CKI produce a "fashion blueprint" for each line that includes both basic and
fashion items. Basic items, which vary only slightly from season to season and
are available on a replenishment basis throughout the year, accounted for
approximately 65% of net sales generated by Calvin Klein Jeans Label products in
the six months ended June 30, 1996. Fashion items are modified for current
trends in color, fabrication and styling to continually update the merchandise
assortment. Fashion items accounted for approximately 35% of net sales generated
by Calvin Klein Jeans Label products in the six months ended June 30, 1996. The
Company contracts through third parties for the manufacture of substantially all
of its products. In the six months ended June 30, 1996, approximately 82.5% of
the Company's products were produced in the United States. The Company believes
that its emphasis on
5
<PAGE> 7
domestic manufacturing allows it to respond quickly to changing sales and
fashion trends and that third party manufacturing permits it to avoid capacity
constraints and significant investment in capital assets.
The Company currently distributes products under the Calvin Klein Jeans
Labels to a broad range of department stores and specialty retailers. Because of
strong consumer demand for the Company's products and the trend among major
retailers to devote more selling space to a decreasing number of designer
brands, the Company expects that it will continue to grow through both the
addition of new locations and increased floor space. In an effort to enhance
visibility, increase dedicated selling space and increase sales per square foot
generated by the Calvin Klein Jeans Label products, the Company has developed a
program to place shops dedicated to Calvin Klein Jeans Label products within the
stores of its major retailing customers. As of September 30, 1996, the Company
had installed approximately 70 shops. The Company expects approximately 150
shops to be operating by the end of 1996. The Company also seeks to distribute
its products to those specialty retailers that have the ability to offer the
proper presentation of the Company's products.
In July 1996, the Company announced that it had entered into a letter of
intent with CKI to acquire most of the Calvin Klein outlet stores owned by CKI
(the "CK Outlets") located in the United States, with exclusive rights to open
additional CK Outlets in the United States, Canada and Mexico. See "Business --
Calvin Klein Outlets." The Company believes that the acquisition of the CK
Outlets will enhance its ability to dispose of excess inventory in a manner that
does not adversely affect its department and specialty store customers. The
Company expects to consummate the acquisition in the fourth quarter of 1996.
The Company's growth strategy is to continue to capitalize on the strength
of the image projected by Calvin Klein and the quality, fit and value of the
Company's products. The key elements of the Company's growth strategy include:
(i) selectively adding new accounts and further penetrating its existing
accounts by introducing lines into more store locations, (ii) expanding its
shop-in-shop program, (iii) continuing to deepen its product offerings by
introducing new items and classifications, (iv) expanding the distribution of
its products outside the United States and (v) improving operating efficiencies.
To provide a foundation for continued growth and to improve operating
efficiencies, the Company has substantially increased the capacity of its
distribution facilities and brought on-line an integrated management information
system. See "Risk Factors -- Ability to Achieve and Manage Future Growth" and
"Business -- Business Strategy."
DKNY JEANS LICENSE
On September 27, 1996, the Company entered into a 30-year licensing
agreement with a subsidiary of Donna Karan International Inc. ("Donna Karan
International") for the exclusive production, sale and distribution of mens,
womens and, with certain exceptions, childrens jeanswear under the DKNY Jeans
Label (the "DKNY Jeans Label"). Under the terms of the agreement (the "DKNY
Jeans License"), the Company will make an initial payment of $6 million to
reimburse Donna Karan International for certain costs related to the DKNY Jeans
Label and will make additional payments aggregating $54 million over a four-year
period. Following the transition of production, inventory and distribution on
June 1, 1997, the Company will pay annual royalties of 7% on worldwide net sales
of DKNY Jeans Label products, as well as an additional administrative fee of 2%
of international net sales. The Company will also pay a first installment on its
minimum guaranteed royalty obligations of $1.26 million upon obtaining the DKNY
Jeans License.
The Company believes Donna Karan International is one of the world's
leading fashion houses, with global recognition in the exclusive designer market
for the Donna Karan New York label and in the larger bridge market for the DKNY
label. The Company will seek to combine its own technical, production and
distribution capabilities with the distinctive image and high product quality
associated with the DKNY label. The Company's strategy for the DKNY Jeans Label
will include: (i) offering a broad collection of casual jeanswear that
complements the lifestyle of the core DKNY customer, (ii) maintaining the
exclusivity of the label by limiting distribution to "better" department stores
and larger specialty stores, (iii) developing worldwide distribution, (iv)
establishing DKNY Jeans shops within department stores and larger specialty
stores, including an estimated 200 shops in 1997, and (v) launching an extensive
advertising campaign in connection with the Fall 1997 season. See "Use of
Proceeds" and "Business -- DKNY Jeans License." See also "Risk
Factors -- Ability to Achieve and Manage Future Growth."
6
<PAGE> 8
COMPANY HISTORY
The Company began operations in 1984 by designing, sourcing and marketing
moderately priced sportswear bearing the Rio label and, in 1987, obtained an
exclusive license for womens jeanswear under the Bill Blass labels and began to
produce private label products for a limited number of retailing customers. As
of January 1, 1996, the Company licensed the Rio label and sublicensed the Bill
Blass labels to Commerce Clothing Company, LLC ("Commerce Clothing"), an
affiliate of one of its principal suppliers. See "Business -- Licensing
Operations."
In May 1996, the Company completed an initial public offering (the "IPO")
of 13,800,000 shares of Common Stock, of which 6,650,000 shares were sold by the
Company and 7,150,000 shares were sold by New Rio, L.L.C. (the "Principal
Stockholder"). The net proceeds to the Company from the IPO of approximately
$108.1 million were used primarily to repay a subordinated loan and to reduce
revolving credit and term loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company was incorporated in Delaware in March 1995. The Company's
principal executive offices are located at 1385 Broadway, Third Floor, New York,
New York 10018, and its telephone number is (212) 556-9600.
7
<PAGE> 9
THE OFFERING
The Issuer................. Designer Finance Trust (the "Trust"), a Delaware
statutory business
trust. The assets of the Trust will consist solely
of the Convertible Debentures of the Company.
Securities Offered......... 2,000,000 % Convertible Trust Originated
Preferred Securities(sm) (the "Preferred
Securities"). The Trust and the Company have
granted the Underwriters an option for 30 days to
purchase up to an additional 300,000 Preferred
Securities at the public offering price solely to
cover over-allotments, if any.
Distributions.............. Distributions on the Preferred Securities will
accrue from the date of original issuance of the
Preferred Securities and will be payable at the
annual rate of % of the liquidation amount of $50
per Preferred Security. Subject to the extension of
distribution payment periods described below,
distributions will be payable quarterly in arrears
on each March 31, June 30, September 30 and
December 31, commencing December 31, 1996. Because
distributions on the Preferred Securities
constitute interest for federal income tax
purposes, corporate holders thereof will not be
entitled to a dividends-received deduction.
Option to Extend
Distribution Payment
Periods.................. The ability of the Trust to pay distributions on
the Preferred Securities is solely dependent on its
receipt of interest payments from the Company on
the Convertible Debentures. The Company has the
right to defer interest payments from time to time
on the Convertible Debentures for successive
periods not exceeding 20 consecutive quarters for
each such Extension Period during which no interest
shall be due and payable; provided, that no such
Extension Period may extend beyond the maturity
date of the Convertible Debentures. As a
consequence of any such extension, quarterly
distributions on the Preferred Securities will be
deferred by the Trust (but will continue to accrue,
compounded quarterly at the distribution rate)
during any such Extension Period. The Company will
give written notice of its extension of an interest
payment to the Trust and the Company shall cause
the Trust to give such notice to the holders of the
Preferred Securities. See "Risk Factors -- Option
to Extend Interest Payment Periods," "Description
of the Preferred Securities -- Distributions" and
"Description of the Convertible
Debentures -- Option to Extend Interest Payment
Periods." If an extension of an interest payment
period occurs, the holders of the Preferred
Securities will continue to accrue income for
federal income tax purposes in advance of any
corresponding cash distribution. See "Description
of Preferred Securities -- Conversion Rights" and
"-- Mandatory Redemption." See "Risk
Factors -- Option to Extend Interest Payment
Periods" and "United States Federal Income
Taxation -- Original Issue Discount."
Rights Upon Extension of
Distribution Payment
Periods.................. During any Extension Period, interest on the
Convertible Debentures will compound quarterly and
quarterly distributions (compounded quarterly at
the distribution rate) will accrue on the Preferred
Securities, and the Company has agreed, among other
things, (a) not to declare or pay dividends on, or
make a distribution with respect to, or redeem or
8
<PAGE> 10
purchase or acquire, or make a liquidation payment
with respect to, any of its capital stock (other
than (i) purchases or acquisitions of shares of
Common Stock in connection with the satisfaction by
the Company of its obligations under any employee
benefit plans or the satisfaction by the Company of
its obligations pursuant to any contract or
security requiring the Company to purchase shares
of Common Stock, (ii) as a result of a
reclassification of the Company's capital stock or
the exchange or conversion of one class or series
of the Company's capital stock for another class or
series of the Company's capital stock or (iii) the
purchase of fractional interests in shares of the
Company's capital stock pursuant to the conversion
or exchange provisions of such capital stock or the
security being converted or exchanged (or make any
guarantee payments with respect to the foregoing)),
(b) not to make any payment of interest, principal
or premium, if any, on or repay, repurchase or
redeem any debt securities (including guarantees)
issued by the Company that rank pari passu with or
junior to the Convertible Debentures and (c) not to
make any guarantee payments with respect to the
foregoing (other than pursuant to the Guarantee).
See "Description of the Guarantee -- Certain
Covenants of the Company" and "Description of the
Convertible Debentures -- Option to Extend Interest
Payment Periods."
Conversion into Common
Stock.................... Each Preferred Security is convertible at the
option of the holder into shares of Common Stock,
at the rate of shares of Common Stock for each
Preferred Security (equivalent to a conversion
price of $ per share of Common Stock),
subject to adjustment in certain circumstances. The
last reported sale price of the Common Stock on the
NYSE Composite Tape on September 27, 1996 was
$26 3/4 per share. In connection with any conversion
of a Preferred Security, the Conversion Agent (as
defined herein) will exchange such Preferred
Security for the appropriate principal amount of
Convertible Debentures held by the Trust and
immediately convert such Convertible Debentures
into shares of Common Stock. No fractional shares
of Common Stock will be issued as a result of
conversion, but in lieu thereof such fractional
interest will be paid by the Company in cash. See
"Description of the Preferred
Securities -- Conversion Rights." In addition, no
additional shares of Common Stock will be issued
upon conversion of the Preferred Securities to
account for any accrued and unpaid distributions on
the Preferred Securities at the time of conversion,
provided, however, that any holder of Preferred
Securities who delivers such Preferred Securities
for conversion after receiving a notice of
redemption from the Property Trustee during an
Extension Period shall be entitled to receive all
accumulated and unpaid distributions to the date of
conversion. See "Description of the Covertible
Debentures -- Optional Redemption," "Description of
Preferred Securities -- Conversion Rights" and
"-- Mandatory Redemption."
Liquidation Amount......... In the event of the liquidation of the Trust,
holders will be entitled to receive $50 per
Preferred Security plus an amount equal to any
accrued and unpaid distributions thereon to the
date of payment, unless Convertible Debentures are
distributed to such holders. See "Description of
the Preferred Securities -- Liquidation
Distribution Upon Dissolution."
9
<PAGE> 11
Redemption................. The Convertible Debentures will be redeemable for
cash, at the option of the Company, in whole or in
part, from time to time, after , 1999, at
the redemption prices specified herein. Upon any
redemption of the Convertible Debentures, Trust
Securities will be redeemed on a pro rata basis
having an aggregate liquidation amount equal to the
aggregate principal amount of the Convertible
Debentures so redeemed at a redemption price
corresponding to the redemption price of the
Convertible Debentures plus accrued and unpaid
distributions thereon (the "Redemption Price"). The
Preferred Securities will not have a stated
maturity date, although they will be subject to
mandatory redemption upon the repayment of the
Convertible Debentures at their stated maturity
( , 2016), upon acceleration, earlier
redemption or otherwise. See "Description of the
Preferred Securities -- Mandatory Redemption."
Guarantee.................. The Company will irrevocably guarantee, on a
subordinated basis and to the extent set forth
herein, the payment in full of (i) any accrued and
unpaid distributions on the Preferred Securities to
the extent of funds of the Trust available
therefor, (ii) the amount payable upon redemption
of the Preferred Securities to the extent of funds
of the Trust available therefor and (iii)
generally, the liquidation amount of the Preferred
Securities to the extent of the assets of the Trust
available for distribution to holders of Preferred
Securities. The Guarantee will be unsecured and
will be (i) subordinate and junior in right of
payment to all other liabilities of the Company
except any liabilities that may be made pari passu
expressly by their terms, (ii) pari passu with the
most senior preferred stock issued from time to
time by the Company and with any guarantee now or
hereafter entered into by the Company in respect of
any preferred or preference stock or preferred
securities of any affiliate of the Company and
(iii) senior to the Common Stock. Upon the
liquidation, dissolution or winding up of the
Company, its obligations under the Guarantee will
rank junior to all of its other liabilities, except
as aforesaid, and, as a result, funds may not be
available for payment under the Guarantee. See
"Risk Factors -- Ranking of Subordinate Obligations
Under the Guarantee and Convertible Debentures" and
"Description of the Guarantee."
Voting Rights.............. Generally, holders of the Preferred Securities will
have limited voting rights. See "Description of the
Preferred Securities -- Voting Rights."
Tax Event or Investment
Company Event Redemption
or Distribution.......... Upon the occurrence of a Tax Event or an Investment
Company Event (each as defined herein), except in
certain limited circumstances, the Company will
cause the Issuer Trustees (as defined herein) to
liquidate the Trust and cause Convertible
Debentures to be distributed to the holders of the
Preferred Securities. In certain circumstances
involving a Tax Event, the Company will have the
right to redeem the Convertible Debentures, in
whole (but not in part), at 100% of the principal
amount plus accrued and unpaid interest, in lieu of
a distribution of the Convertible Debentures, in
which event the Trust Securities will be redeemed
at the Redemption Price. See "Description of the
Preferred Securities -- Special Event Redemption or
Distribution."
10
<PAGE> 12
Convertible Debentures..... The Convertible Debentures will mature on
, 2016 and will bear interest at the
rate of % per annum, payable quarterly in
arrears. The Convertible Debentures will have
provisions with respect to interest, redemption,
conversion into the Common Stock and certain other
terms substantially similar or analogous to those
of the Preferred Securities. Interest payment
periods may be extended from time to time by the
Company for successive periods not exceeding 20
consecutive quarters for each such period (during
which interest will continue to accrue and compound
quarterly). Prior to the termination of any
Extension Period, the Company may further extend
such Extension Period; provided, that such
Extension Period may not exceed 20 consecutive
quarters and may not extend beyond the maturity
date of the Convertible Debentures. Upon the
termination of any Extension Period and the payment
of all amounts then due, the Company may commence a
new Extension Period, subject to the preceding
sentence. No interest shall be due and payable
during an Extension Period. During an Extension
Period, the Company has agreed, among other things,
(a) not to declare or pay dividends on, or make a
distribution with respect to, or redeem or purchase
or acquire, or make a liquidation payment with
respect to, any of its capital stock (other than
(i) purchases or acquisitions of shares of Common
Stock in connection with the satisfaction by the
Company of its obligations under any employee
benefit plans or the satisfaction by the Company of
its obligations pursuant to any contract or
security requiring the Company to purchase shares
of Common Stock, (ii) as a result of a
reclassification of the Company's capital stock or
the exchange or conversion of one class or series
of the Company's capital stock for another class or
series of the Company's capital stock or (iii) the
purchase of fractional interests in shares of the
Company's capital stock pursuant to the conversion
or exchange provisions of such capital stock or the
security being converted or exchanged (or make any
guarantee payments with respect to the foregoing))
(b) not to make any payment of interest, principal
or premium, if any, on or repay, repurchase or
redeem any debt securities (including guarantees)
issued by the Company that rank pari passu with or
junior to the Convertible Debentures and (c) not to
make any guarantee payments with respect to the
foregoing (other than pursuant to the Guarantee).
The Convertible Debentures will be subordinate to
all Senior Indebtedness (as defined herein) of the
Company.
The Company's operations are conducted through its
subsidiaries, primarily, at this time, Calvin Klein
Jeanswear Company ("CKJC"). Therefore, all
indebtedness of the subsidiaries, including trade
payables, are effectively senior to the Convertible
Debentures and the Guarantee. In addition, because
the Company is a holding company, the ability of
the Company to pay interest and principal on the
Convertible Debentures, and therefore, for the
Trust to pay its obligations on the Preferred
Securities, will be dependent on the subsidiaries'
ability to pay dividends to the Company. As of June
30, 1996, the subsidiaries had approximately $109.5
million of liabilities outstanding that is
effectively senior to the Convertible Debentures.
See "Risk Factors -- Holding Company Structure,
Subordination and Restrictive Covenants,"
"-- Ranking of Subordinate Obligations Under the
Guarantee and Convertible Deben-
11
<PAGE> 13
tures," "Capitalization" and "Description of the
Convertible Debentures."
Form of Preferred
Securities................. The Preferred Securities will be represented by a
global certificate or certificates registered in
the name of Cede & Co., as nominee for DTC.
Beneficial interests in the Preferred Securities
will be evidenced by, and transfers thereof will be
effected only through, records maintained by the
participants in DTC. Except under the limited
circumstances described herein, Preferred
Securities in certificated form will not be issued
in exchange for the global certificate or
certificates. See "Description of the Preferred
Securities -- Book-Entry Only Issuance -- The
Depository Trust Company."
Use of Proceeds............ All of the proceeds from the sale of the Preferred
Securities will be invested by the Trust in the
Convertible Debentures. The Company intends to
apply the net proceeds from the Convertible
Debentures to repay term and revolving credit
indebtedness. The Company expects to reborrow under
its revolving credit facility to fund the costs of
obtaining the DKNY Jeans License and developing the
DKNY Jeans Label products business and for working
capital and other general corporate purposes. See
"Use of Proceeds" and "Business -- DKNY Jeans
License."
12
<PAGE> 14
SUMMARY HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES THE COMPANY
(COMBINED)(1) (CONSOLIDATED)
-------------------------------------------- --------------------------------------------------
EIGHT MONTHS FOUR MONTHS SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED 30,
------------------------------ AUGUST 25, DECEMBER DECEMBER 31, -----------------------
1991 1992 1993 1994 31, 1994(2) 1995 1995 1996
-------- -------- -------- ------------ ----------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues.............. $122,640 $145,040 $173,561 $ 93,969 $ 102,038 $ 462,122 $ 174,491 $ 219,603
Cost of goods sold........ 100,312 119,195 146,620 81,143 75,246 323,638 123,517 136,521
-------- -------- -------- ------- -------- -------- -------- --------
Gross profit.............. 22,328 25,845 26,941 12,826 26,792 138,484 50,974 83,082
Selling, general and
administrative
expenses................ 13,897 19,686 23,323 12,318 20,079 100,391 36,814 55,085
-------- -------- -------- ------- -------- -------- -------- --------
Operating income.......... 8,431 6,159 3,618 508 6,713 38,093 14,160 27,997
Interest expense.......... 1,445 1,339 1,808 1,142 2,557 16,160 5,689 7,635
-------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before
income taxes............ 6,986 4,820 1,810 (634) 4,156 21,933 8,471 20,362
Provision (benefit) for
income taxes............ 1,869 1,189 (331) (399) 2,239 10,870 4,500 9,367
-------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before
extraordinary item...... 5,117 3,631 2,141 (235) 1,917 11,063 3,971 10,995
Extraordinary loss on debt
extinguishment.......... -- -- -- -- -- -- -- 2,256
-------- -------- -------- ------- -------- -------- -------- --------
Net income (loss)......... $ 5,117 $ 3,631 $ 2,141 $ (235) $ 1,917 $ 11,063 $ 3,971 $ 8,739
======== ======== ======== ======= ======== ======== ======== ========
PER SHARE DATA:
Income per share before
extraordinary item...... $ 0.08 $ 0.46 0.16 $ 0.41
Net income per share...... $ 0.08 $ 0.46 $ 0.16 $ 0.33
Weighted average shares
outstanding............. 24,233,868 24,233,868 24,233,868 26,827,051
Ratio of earnings to fixed
charges(3).............. 5.25x 3.82x 1.82x -- 2.57 x 2.31x 2.44x 3.34x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------
ACTUAL AS ADJUSTED(4)
---------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................................................. $ 104,832 $
Total assets................................................................................. 278,982
Current debt................................................................................. 48,297
Long-term debt, less current portion......................................................... 8,750
Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Designer Finance
Trust Holding Solely Convertible Debentures................................................ --
Stockholders' equity......................................................................... 169,475
</TABLE>
- ---------------------
(1) The Predecessor Companies consisted of five separate entities commonly
controlled and managed by Mr. Arnold Simon, the President and Chief
Executive Officer of the Company, and Mr. Stephen Huang, a former business
associate of Mr. Simon. See note 1 to the audited combined financial
statements of the Predecessor Companies included elsewhere in this
Prospectus.
(2) Amounts include the results of operations from the sale of Calvin Klein
Jeans Label products beginning August 4, 1994, the date the Company obtained
the CKJ License.
(3) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges, and fixed
charges consist of interest, expensed or capitalized, amortization of debt
discount and expense and that portion (one-third) of rental expense that the
Company believes is representative of interest. There was a deficiency of
earnings to fixed charges of $634 for the eight months ended August 25,
1994. Had the closing of the offering of Preferred Securities made hereby
occurred on January 1, 1995, the pro forma ratio of earnings to fixed
charges for the year ended December 31, 1995 and the six months ended June
30, 1995 and 1996 would have been 3.07x, 3.08x and 4.19x, respectively.
(4) As adjusted for the sale of 2,000,000 Preferred Securities, the application
of the proceeds to the purchase of the Convertible Debentures and the
application by the Company of the estimated net proceeds of the Convertible
Debentures for the purposes set forth under "Use of Proceeds."
13
<PAGE> 15
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma statement of operations data has been adjusted to
reflect (i) the agreements by the Company, which became effective as of January
1, 1996, to grant to another company the right to produce and distribute
sportswear under the Bill Blass and Rio labels and children's apparel in the
United States under the Calvin Klein Jeans Labels, (ii) certain amendments to
the CKJ License and the related issuance to CKI of 1,275,466 shares of
non-voting common stock and (iii) the closing of the IPO on May 15, 1996 and
application of the estimated net proceeds to the Company therefrom as described
herein, as if such transactions occurred as of January 1, 1995. The pro forma
financial adjustments are based upon available information and certain
assumptions that management of the Company believes are reasonable. The
unaudited pro forma financial information is for informational purposes only and
may not necessarily be indicative of the results of operations of the Company
that actually would have occurred had such agreements, amendments and the IPO
been consummated on such dates. The following summary unaudited pro forma
financial information should be read in conjunction with "Capitalization,"
"Unaudited Pro Forma Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
and condensed consolidated financial statements of the Company and the combined
financial statements of the Predecessor Companies and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED ---------------------------
DECEMBER 31, 1995 1995 1996
----------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................................... $ 349,669 $ 123,734(1) $ 219,603
Cost of goods sold............................... 217,960 77,239 136,521
----------- ----------- -----------
Gross profit..................................... 131,709 46,495 83,082
Selling, general and administrative expenses..... 88,689 31,876 55,272
----------- ----------- -----------
Operating income................................. 43,020 14,619 27,810
Interest expense................................. 3,738 266 2,905
----------- ----------- -----------
Income before income taxes....................... 39,282 14,353 24,905
Provision for income taxes....................... 18,677 7,147 11,457
----------- ----------- -----------
Income before extraordinary item................. $ 20,605 $ 7,206 $ 13,448
=========== =========== ===========
Income per share before extraordinary item....... $ 0.64 $ 0.22 $ 0.42
Weighted average shares outstanding.............. 32,159,334 32,159,334 32,325,414
</TABLE>
- ---------------------
(1) Pro forma net revenues for the six months ended June 30, 1995 includes
royalty income of $1,233 attributable to the license and sublicense of the
Bill Blass and Rio labels. During the six months ended June 30, 1996, the
Company waived $1,161 of such royalty income.
14
<PAGE> 16
RISK FACTORS
Prospective purchasers of the Preferred Securities offered hereby should
consider carefully the factors set forth below, as well as other information set
forth in this Prospectus, in evaluating an investment in the Preferred
Securities.
SUBSTANTIAL COMPETITION; CHANGING CONSUMER PREFERENCES
The apparel industry is highly competitive. Certain of the Company's
competitors are significantly larger and more diversified than the Company and
have substantially greater resources. The apparel industry historically has been
subject to substantial cyclical variations, and a recession in the general
economy or uncertainties regarding future economic prospects that affect
consumer spending habits could have a material adverse effect on the Company's
results of operations. The Company believes that its success depends in large
part upon its ability to anticipate, gauge and respond to changing consumer
demands and fashion trends in a timely manner and upon the continued appeal to
consumers of the images projected by Calvin Klein and, in the future, Donna
Karan. Failure by the Company to identify and respond appropriately to changing
consumer demands and fashion trends or a decline in consumer demand for
designer-labeled products could adversely affect consumer acceptance of its
products and may have an adverse effect on the Company's business, financial
condition and results of operations. The Company believes that the DKNY Jeans
License recently entered into will permit it to diversify its products because
the DKNY Jeans Label products are expected to appeal to different target
consumers than those who typically purchase Calvin Klein Jeans Label products.
However, it is possible that the DKNY Jeans Label products and the Calvin Klein
Jeans Label products could compete with each other and limit the overall growth
of net revenues of the Company.
DEPENDENCE ON LICENSES
The Company's recent growth has depended upon the sale of Calvin Klein
Jeans Label products under the CKJ License. The Company's future growth will
depend upon continuing sales of Calvin Klein Jeans Label products as well as the
successful launch of DKNY Jeans Label products under the new DKNY Jeans License.
Each of the CKJ License and the DKNY Jeans License contain provisions that,
under certain circumstances, could permit the respective licensor to terminate
its license. Such provisions include, among other things, (i) a default in the
payment of certain amounts payable under the applicable license that continues
beyond the specified grace period and (ii) the failure to comply with the
covenants contained in the applicable license. The Company believes that it is
currently in compliance with all material provisions of the CKJ License and has
no reason to believe that any events are likely to occur that would permit CKI
to terminate the CKJ License. In addition, under each of the applicable
licenses, the respective licensor has retained the right to produce, distribute,
advertise and sell, and to authorize others to produce, distribute, advertise
and sell, certain garments (in the case of CKI, not of jeans-type construction)
that are similar to some of the Company's products. The Company believes that
any production, distribution, advertisement or sale of such garments by such
licensor or another authorized party would not have a material adverse effect on
the Company's business, financial condition and results of operations, although
there can be no assurance to that effect. See "Business -- CKJ License" and
"-- DKNY Jeans License."
ABILITY TO ACHIEVE AND MANAGE FUTURE GROWTH
In 1993, the year before the Company obtained the CKJ License, net revenues
from the sale of Calvin Klein Jeans Label products by CKI were approximately $59
million. Since the Company obtained the CKJ License in August 1994, net revenues
(including royalties) of Calvin Klein Jeans Label products increased
substantially and were $361.4 million in 1995 and $218.3 million in the six
months ended June 30, 1996. No assurance can be given that the rate of growth of
net sales will not decline or that the Company will be successful in increasing
net sales in the future. In addition, the Company only recently entered into the
DKNY Jeans License. The Company has not yet implemented its strategic business
plan for this transaction, and there can be no assurance that the Company will
be able to execute its business plan or that such plan will lead to increased
net revenues. Furthermore, the Company expects to incur approximately $15
million to begin merchandising, marketing and advertising the DKNY Jeans Label
products, a substantial portion of which is expected to be incurred in advance
of the receipt of any sales revenues. These advance payments
15
<PAGE> 17
could have an adverse effect on the results of operations of the Company for the
periods in which the costs are incurred. See "Use of Proceeds" and
"Business -- DKNY Jeans License."
In order to manage anticipated levels of demand for its products including
the successful implementation of operations of the DKNY Jeans License, the
Company will be required to continue to (i) expand its distribution
capabilities, (ii) develop its financial management systems and controls,
including inventory management, and (iii) attract and retain qualified
personnel, including middle management. In particular, the Company will need to
develop a management team for the merchandising, marketing and other operations
of the DKNY Jeans License. As sales increased significantly since January 1,
1995, the Company experienced difficulties in meeting the increased demands on
its distribution systems. The Company responded by expanding and improving its
distribution facilities and implementing improved management information
systems. The Company believes that its current distribution facilities and
management information systems are sufficient for its current level of
operations and, together with planned expansions and improvements, will be
sufficient for anticipated growth in demand for the Company's products. Any
disruption or slow down in the Company's order processing and fulfillment
systems could cause orders to be shipped late, and under industry practices,
retailers can cancel orders and refuse to receive goods on account of late
shipment. Such cancellation of orders and returns of refused goods can mean a
reduction of revenue, increased administrative and shipping costs, a further
burden on the Company's distribution capacity and added costs associated with
liquidating inventory out of season. There can be no assurance that the planned
expansions and improvements will be completed as planned or that when completed
the distribution facilities and systems will function as anticipated. In
addition, failure to continue to enhance operating control systems, or
unexpected difficulties encountered during expansion, could adversely affect the
Company's business, financial condition and results of operations. The Company
could also experience some delays in connection with the introduction of new
products, as such products, including DKNY Jeans Label products, are integrated
into the Company's operations.
DEPENDENCE ON KEY PERSONNEL
The continued success of the Company currently depends, to a significant
extent, on the abilities and continued service of a small group of key
management executives, in particular, Mr. Arnold Simon, President and Chief
Executive Officer of the Company. Mr. Simon's employment agreement with the
Company expires December 31, 1998. See "Management -- Employment Agreements."
Mr. Simon, through his ownership interest in the Principal Stockholder, is also
the beneficial owner of a substantial portion of the Common Stock of the
Company. See "Principal Stockholders." The Company maintains a $10 million key
man life insurance policy on Mr. Simon, which has been assigned to The CIT
Group/Commercial Services, Inc. ("The CIT Group") pursuant to the terms of the
Credit Agreement (as defined in "Use of Proceeds"). There can be no assurance
that the Company will be able to retain the services of such executives, and the
loss of the services of Mr. Simon or certain other key executives could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
DEPENDENCE ON MANUFACTURERS
Substantially all the Company's products are manufactured by third parties.
The Company's three largest suppliers, Azteca Productions, Inc. ("Azteca"), Koos
Manufacturing, Inc. and Nemanco Inc., accounted for approximately 52% of the
Company's finished goods purchased during the six months ended June 30, 1996.
The Company is the principal customer of each of these suppliers, and the
Company's relationship with these suppliers dates back several years. The
Company believes that such relationships provide a significant competitive
advantage to the Company. Although the Company believes that it could find
alternative manufacturing sources, establishment of new manufacturing
relationships could involve various uncertainties and disruptions, and the loss
of a substantial portion of such manufacturing could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company continually explores the availability and feasibility of alternative
locations around the world to manufacture its products. The inability of a
manufacturer to ship products in a timely manner or to meet the Company's
quality standards could adversely affect the Company's ability to deliver
products in a timely manner. From time to
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<PAGE> 18
time, the Company has experienced delays in shipments from suppliers in the
ordinary course of operations, but none of such delays has had a material effect
on the Company's business, financial condition or results of operations. In
January 1996, the Company entered into an agreement with Commerce Clothing, an
affiliate of Azteca, granting the right to source and distribute Calvin Klein
Jeans Label products for children in the United States as well as the Bill Blass
and Rio label products.
The Company expects to enter into arrangements with both the principal
manufacturers named above and additional manufacturers for the manufacture of
DKNY Jeans Label products. The Company has not yet identified these new
manufacturers; however, it does not anticipate any significant problems. The
failure to enter into satisfactory manufacturing arrangements or the failure of
the manufacturers to deliver quality products in a timely manner could have an
adverse effect on the introduction of the DKNY Jeans Label products as well as
on the business, financial condition and result of operations of the Company.
During 1995 and the six months ended June 30, 1996, the Company imported
approximately 20% and 17.5%, respectively, of the Calvin Klein Jeans Label
products that it sold. Approximately 6% of the Company's Calvin Klein Jeans
Label products were sourced in China (including Hong Kong) in each such period.
There was no other country that accounted for more than 3% of such products. The
Company's imports are subject to bilateral textile agreements between the United
States and a number of foreign countries. Such agreements, which have been
negotiated under the framework established by the Arrangement Regarding
International Trade in Textiles, allow the United States to impose restraints at
any time on the importation of categories of merchandise that, under the terms
of the agreements, are not currently subject to specific limits. The Company
does not own the right to import finished garments into the United States, but
it relies on its contract manufacturers and its agents to obtain the necessary
quotas. In the past, to the extent that necessary import quotas have not been
available with respect to a particular source of supply, the Company has been
able to find an alternative source of supply. Accordingly, the availability of
quotas has not had a material effect upon the Company's business, financial
conditions or results of operations. The Company's continued ability to source
products that it imports may be adversely affected by a significant decrease in
available import quotas as well as any additional bilateral agreements and
unilateral trade restrictions.
CONTROL BY PRINCIPAL STOCKHOLDER
The Principal Stockholder currently owns of record approximately 52% of the
Common Stock of the Company. The Principal Stockholder is a limited liability
company and its operative agreement allows the holders of ownership interests
therein generally to cause the Principal Stockholder to exercise disposition
rights as directed by each such holder independently with respect to such
holder's allocable percentage of the shares of Common Stock of the Company.
Therefore, such persons may be deemed to be the beneficial owners of shares of
Common Stock of the Company. Through their ownership interests in the Principal
Stockholder, Charterhouse and Mr. Simon are deemed to own beneficially
approximately 25.0% and 26.1%, respectively, of the outstanding shares of Common
Stock. See "Principal Stockholders." Upon conversion of the Convertible
Debentures, the Principal Stockholder would own of record % and Charterhouse
and Mr. Simon would own beneficially approximately % and %, respectively, of
the outstanding Common Stock of the Company. The Principal Stockholder acting
alone, and Charterhouse and Mr. Simon, acting through the Principal Stockholder,
are able to elect a sufficient number of directors to control the Board of
Directors and take other corporate actions requiring stockholder approval, as
well as effectively control the direction and policies of the Company. In
addition, there can be no assurance that, in any transfer of a controlling
interest in the Company, any other holders of Common Stock will be allowed to
participate in any such transaction or will realize any premium with respect to
their shares of Common Stock. The foregoing may have the effect of discouraging
or preventing certain types of transactions involving an actual or potential
change of control of the Company.
RANKING OF SUBORDINATE OBLIGATIONS UNDER THE GUARANTEE AND CONVERTIBLE
DEBENTURES
The Company's obligations under the Guarantee are subordinate and junior in
right of payment to all liabilities of the Company and pari passu with the most
senior preferred stock issued, from time to time, if any, by the Company. The
obligations of the Company under the Convertible Debentures are subordinate and
17
<PAGE> 19
junior in right of payment to all present and future Senior Indebtedness of the
Company and pari passu with obligations to or rights of the Company's other
general unsecured creditors. No payment of principal of (including redemption
payments, if any), premium, if any, or interest on the Convertible Debentures
may be made if (i) any Senior Indebtedness of the Company is not paid when due
and any applicable grace period with respect to such default has ended with such
default not having been cured or waived or ceasing to exist, or (ii) the
maturity of any Senior Indebtedness has been accelerated because of a default.
As of June 30, 1996, Senior Indebtedness aggregated approximately $57 million.
In addition, because the Company's operations are conducted through its
subsidiaries and the subsidiaries have not guaranteed the payment of principal
of and interest on the Convertible Debentures, all liabilities of the
subsidiaries, including trade payables, are effectively senior to the
Convertible Debentures and the Guarantee. As of June 30, 1996, the subsidiaries
had indebtedness and other liabilities of approximately $109.5 million
(including the $57.0 million referred to above) outstanding. There are no terms
in the Preferred Securities, the Convertible Debentures or the Guarantee that
limit the Company's or any subsidiary's ability to incur additional
indebtedness, including indebtedness that ranks senior to the Convertible
Debentures and the Guarantee. See "Description of the Guarantee -- Status of the
Guarantee; Subordination" and "Description of the Convertible Debentures."
HOLDING COMPANY STRUCTURE, SUBORDINATION AND RESTRICTIVE COVENANTS
The ability of the Trust to pay amounts due on the Preferred Securities is
wholly dependent upon the Company making payments on the Convertible Debentures.
Since the Company is a holding company whose operations are conducted through
its subsidiaries, the ability of the Company to pay interest and principal on
the Convertible Debentures, and therefore for the Trust to make distributions
and other payments on the Preferred Securities, will be dependent on the
subsidiaries' ability to pay dividends to the Company. Because the subsidiaries
do not guarantee the payment of principal of and interest on the Convertible
Debentures, claims of holders of the Preferred Securities effectively will be
subordinate to the claims of creditors of the subsidiaries, including trade
creditors. See "-- Ranking of Subordinate Obligations Under the Guarantee and
Convertible Debentures."
The ability of the Company's subsidiaries to pay dividends, as well as
repay debt, is restricted by the provisions of the Credit Agreement (as defined
herein) and is dependent on the Company's financial and operating performance,
which, in turn, is subject to prevailing economic conditions and to financial,
business and other factors beyond its control. There can be no assurance that
financial results that comply with the restrictive covenants and financial tests
in the Credit Agreement will be achieved. Although the payment of dividends and
other distributions by the Company's subsidiaries is currently prohibited by the
Credit Agreement, the Company plans to enter into an amendment with the lenders
under the Credit Agreement in order to pay the regularly scheduled distributions
relating to the Preferred Securities so long as there is no event of default
under the Credit Agreement. See "Use of Proceeds" and "Description of Certain
Indebtedness."
RIGHTS UNDER THE GUARANTEE
The Guarantee will be qualified as an indenture under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The Guarantee Trustee (as
defined herein) will act as indenture trustee under the Guarantee for the
purposes of compliance with the provisions of the Trust Indenture Act. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities.
The Guarantee guarantees to the holders of the Preferred Securities the
payment of (i) any accrued and unpaid distributions that are required to be paid
on the Preferred Securities, to the extent the Trust has funds available
therefor, (ii) the Redemption Price, including all accrued and unpaid
distributions with respect to Preferred Securities called for redemption by the
Trust, to the extent the Trust has funds available therefor, and (iii) upon a
voluntary or involuntary dissolution, winding-up or termination of the Trust
(other than in connection with the distribution of Convertible Debentures to the
holders of Preferred Securities or a redemption of all the Preferred
Securities), the lesser of (a) the aggregate of the liquidation amount and all
accrued and unpaid distributions on the Preferred Securities to the date of the
payment, to the extent the Trust has funds available therefor, or (b) the amount
of assets of the Trust remaining available for distribution to holders of the
Preferred Securities in liquidation of the Trust. The holders of a majority in
liquidation
18
<PAGE> 20
amount of the Preferred Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Guarantee
Trustee or to direct the exercise of any trust or power conferred upon the
Guarantee Trustee under the Guarantee. Notwithstanding the foregoing, if the
Company has failed to make a payment under the Guarantee, any holder of
Preferred Securities may directly institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first instituting
a legal proceeding against the Trust, the Guarantee Trustee or any other person
or entity. If the Company were to default on its obligation to pay amounts
payable on the Convertible Debentures, the Trust would lack available funds for
the payment of distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, holders of the Preferred Securities would rely on the enforcement by
(i) the Property Trustee of its rights as registered holder of the Convertible
Debentures against the Company pursuant to the terms of the Convertible
Debentures or (ii) such holder of its right against the Company under certain
circumstances to enforce payments on Convertible Debentures. See "-- Enforcement
of Certain Rights by Holders of Preferred Securities," "Description of the
Guarantee" and "Description of the Convertible Debentures." The Declaration
provides that each holder of Preferred Securities, by acceptance thereof, agrees
to the provisions of the Guarantee, including the subordination provisions
thereof, and the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Declaration Event of Default (as defined herein) occurs and is
continuing, then the holders of Preferred Securities would rely on the
enforcement by the Property Trustee of its rights as a holder of the Convertible
Debentures against the Company. In addition, the holders of a majority in
liquidation amount of the Preferred Securities will have the right to direct the
time, method, and place of conducting any proceeding for any remedy available to
the Property Trustee or to direct the exercise of any trust or power conferred
upon the Property Trustee under the Declaration, including the right to direct
the Property Trustee to exercise the remedies available to it as a holder of the
Convertible Debentures. If the Property Trustee fails to enforce its rights
under the Convertible Debentures, any holder of Preferred Securities may
directly institute a legal proceeding against the Company to enforce the
Property Trustee's rights under the Convertible Debentures without first
instituting any legal proceeding against the Property Trustee or any other
person or entity. Notwithstanding the foregoing, if a Declaration Event of
Default has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal on the Convertible
Debentures on the date such interest or principal is otherwise payable (or in
the case of redemption, on the redemption date), then a holder of Preferred
Securities may directly institute a proceeding for enforcement of payment to
such holder of the principal of or interest on the Convertible Debentures having
a principal amount equal to the aggregate liquidation amount of the Preferred
Securities of such holder (a "Direct Action") on or after the respective due
date specified in the Convertible Debentures. In connection with such Direct
Action, the Company will be subrogated to the rights of such holder of Preferred
Securities under the Declaration to the extent of any payment made by the
Company to such holder of Preferred Securities in such Direct Action. The
holders of Preferred Securities will not be able to exercise directly any other
remedy available to the holders of the Convertible Debentures. The Indenture
provides that the Indenture Trustee (as defined herein) shall give holders of
the Convertible Debentures notice of all uncured defaults or events of default
within 30 days after occurrence. However, except in the case of a default or an
event of default in payment on the Convertible Debentures, the Indenture Trustee
is protected in withholding such notice if its officers or directors in good
faith determine that withholding of such notice is in the interest of the
holders.
OPTION TO EXTEND INTEREST PAYMENT PERIODS
The Company has the right under the Indenture to defer payments of interest
on the Convertible Debentures by extending the interest payment period at any
time, and from time to time, on the Convertible Debentures. As a consequence of
such an extension, quarterly distributions on the Preferred Securities would be
deferred (but despite such deferral would continue to accrue interest thereon
compounded quarterly) by the Trust during any such extended interest payment
period. Such right to extend the interest payment period for the Convertible
Debentures is limited to a period not exceeding 20 consecutive quarters, during
which no interest shall be due and payable, provided, that no such Extension
Period may extend beyond the maturity
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<PAGE> 21
date of the Convertible Debentures. In the event that the Company exercises this
right to defer interest payments, the Company has agreed, among other things,
(a) not to declare or pay dividends on, or make a distribution with respect to,
or redeem or purchase or acquire, or make a liquidation payment with respect to,
any of its capital stock (other than (i) purchases or acquisitions of shares of
Common Stock in connection with the satisfaction by the Company of its
obligations under any employee benefit plans or the satisfaction by the Company
of its obligations pursuant to any contract or security requiring the Company to
purchase shares of Common Stock, (ii) as a result of a reclassification of the
Company's capital stock or the exchange or conversion of one class or series of
the Company's capital stock for another class or series of the Company's capital
stock or (iii) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged (or make any guarantee
payments with respect to the foregoing)), (b) not to make any payment of
interest, principal or premium, if any, on or repay, repurchase or redeem any
debt securities (including guarantees) issued by the Company that rank pari
passu with or junior to the Convertible Debentures and (c) not to make any
guarantee payments with respect to the foregoing (other than pursuant to the
Guarantee). Prior to the termination of any such extension period, the Company
may further extend the interest payment period; provided, that such Extension
Period, together with all such previous and further extensions thereof, may not
exceed 20 consecutive quarters or extend beyond the maturity date of the
Convertible Debenture. Upon the termination of any Extension Period and the
payment of all amounts then due, the Company may commence a new Extension
Period, subject to the above requirements. See "Description of the Preferred
Securities -- Distributions" and "Description of the Convertible
Debentures -- Option to Extend Interest Payment Periods."
Should the Company exercise its right to defer payments of interest by
extending the interest payment period, each holder of Preferred Securities will
continue to accrue income (as original issue discount ("OID")) in respect of the
deferred interest allocable to its Preferred Securities for federal income tax
purposes, which will be allocated but not distributed, to holders of record of
Preferred Securities. As a result, each such holder of Preferred Securities will
recognize income for federal income tax purposes in advance of the receipt of
cash and will not receive the cash from the Trust related to such income if such
holder disposes of its Preferred Securities prior to the record date for the
date on which distributions of such amounts are made. The Company has no current
intention of exercising its right to defer payments of interest by extending the
interest payment period on the Convertible Debentures. However, should the
Company determine to exercise such right in the future, the market price of the
Preferred Securities is likely to be affected. A holder that disposes of its
Preferred Securities during an Extension Period, therefore, might not receive
the same return on its investment as a holder that continues to hold its
Preferred Securities. In addition, as a result of the existence of the Company's
right to defer interest payments, the market price of the Preferred Securities
(which represent an undivided beneficial interest in the Convertible Debentures)
may be more volatile than other securities on which OID accrues that do not have
such rights. See "United States Federal Income Taxation -- Original Issue
Discount."
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
Upon the occurrence of a Special Event (as defined herein), the Trust shall
be dissolved, except in the limited circumstance described below, with the
result that the Convertible Debentures would be distributed to the holders of
the Trust Securities in connection with the liquidation of the Trust. In the
case of a Special Event that is a Tax Event, in certain circumstances, the
Company shall have the right to redeem the Convertible Debentures, in whole or
in part, in lieu of a distribution of the Convertible Debentures by the Trust,
in which event the Trust will redeem the Trust Securities on a pro rata basis to
the same extent as the Convertible Debentures are redeemed by the Company. See
"Description of the Preferred Securities -- Special Event Redemption or
Distribution."
Under current federal income tax law, a distribution of Convertible
Debentures upon the dissolution of the Trust would not be a taxable event to
holders of the Preferred Securities. Upon occurrence of a Special Event,
however, a dissolution of the Trust in which holders of the Preferred Securities
receive cash would be a taxable event to such holders. See "United States
Federal Income Taxation -- Receipt of Convertible Debentures or Cash Upon
Liquidation of the Trust."
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<PAGE> 22
There can be no assurance as to the market prices for the Preferred
Securities or the Convertible Debentures that may be distributed in exchange for
Preferred Securities if a dissolution or liquidation of the Trust were to occur.
Accordingly, the Preferred Securities that an investor may purchase, whether
pursuant to the offer made hereby or in the secondary market, or the Convertible
Debentures that a holder of Preferred Securities may receive on dissolution and
liquidation of the Trust, may trade at a discount to the price that the investor
paid to purchase the Preferred Securities offered hereby. Because holders of
Preferred Securities may receive Convertible Debentures upon the occurrence of a
Special Event, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Convertible Debentures and should
carefully review all the information regarding the Convertible Debentures
contained in this Prospectus. See "Description of the Preferred
Securities -- Special Event Redemption or Distribution."
PROPOSED TAX LEGISLATION
On March 19, 1996, the U.S. Treasury Department proposed certain tax law
changes (the "Proposed Legislation") that would, among other things, generally
deny corporate issuers a deduction for interest in respect of certain debt
obligations, with a maximum term of more than 20 years that are not shown as
indebtedness on the consolidated balance sheet of the issuer. On March 29, 1996,
Senate Finance Committee Chairman William V. Roth, Jr. and House Ways and Means
Committee Chairman Bill Archer issued a joint statement (the "Joint Statement")
indicating their intent that the Proposed Legislation, if adopted by either of
the tax-writing committees of Congress, would have an effective date that is no
earlier than the date of "appropriate Congressional action." Based upon the
Joint Statement, it is expected that if the Proposed Legislation were to be
enacted, such legislation would not apply to the Convertible Debentures because
they will be issued prior to the date of any "appropriate Congressional action."
Furthermore, even if the Proposed Legislation were enacted in its current form
with effective date provisions making it applicable to the Convertible
Debentures, it would not affect the Company's ability to deduct the interest
payable on the Convertible Debentures because their maximum term will not exceed
20 years. There can be no assurance, however, that any proposed legislation
enacted after the date hereof will not otherwise adversely affect the ability of
the Company to deduct the interest payable on the Convertible Debentures.
Accordingly, there can be no assurance that a Tax Event will not occur. See
"Description of the Preferred Securities -- Special Event Redemption or
Distribution."
LIMITED VOTING RIGHTS
Holders of Preferred Securities will have limited voting rights and will
not be entitled to vote to appoint, remove or replace, or to increase or
decrease the number of, Issuer Trustees, which voting rights are vested
exclusively in the holder of the Common Securities. See "Description of the
Preferred Securities -- Voting Rights."
TRADING CHARACTERISTICS OF PREFERRED SECURITIES
The Preferred Securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the underlying
Convertible Debentures. In addition, as a result of the Company's right to defer
interest payments, the market price of the Preferred Securities (which represent
an undivided interest in the assets of the Trust) may be more volatile than
other similar securities where the issuer does not have such right to defer
interest payments. A holder who disposes of his Preferred Securities between
record dates for payments of distributions thereon will be required to include
accrued but unpaid interest on the Convertible Debentures through the date of
disposition in income as ordinary income (i.e., OID) and to add such amount to
his adjusted tax basis in his pro rata share of the underlying Convertible
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which will include, in the form of OID, all accrued
but unpaid interest), a holder will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for federal income tax purposes. See "United States Federal Income
Taxation -- Original Issue Discount" and "-- Sales of Preferred Securities."
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<PAGE> 23
DESIGNER FINANCE TRUST
Designer Finance is a statutory business trust formed under the laws of the
State of Delaware pursuant to (i) a declaration of trust (the "Declaration")
executed by Designer Holdings Ltd., as sponsor of the Trust, and the trustees of
the Trust (the "Issuer Trustees") and (ii) a certificate of trust filed with the
Secretary of State of the State of Delaware. The Company will directly or
indirectly acquire Common Securities in an aggregate liquidation amount equal to
$10,000 of the total capital of the Trust. The Common Securities will rank pari
passu, and payment will be made thereon pro rata, with the Preferred Securities,
except that, upon the occurrence and during the continuance of an event of
default under the Declaration, the rights of the holders of the Common
Securities to payment in respect of distributions and payments upon liquidation,
redemption and otherwise will be subordinated to the rights of the holders of
the Preferred Securities. The assets of the Trust will consist principally of
the Convertible Debentures. The Trust exists for the exclusive purpose of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of the Trust, (ii) investing the gross proceeds of the Trust Securities
in the Convertible Debentures and (iii) engaging in only those other activities
necessary or incidental thereto.
Pursuant to the Declaration, the number of Issuer Trustees will initially
be four. Two of the Issuer Trustees (the "Regular Trustees") will be individuals
who are employees or officers of or who are affiliated with the Company. The
third trustee will be a financial institution that is unaffiliated with the
Company (the "Property Trustee"). The fourth trustee will be an entity that
maintains its principal place of business in the State of Delaware (the
"Delaware Trustee"). Initially, IBJ Schroder Bank & Trust Company, a New York
banking association, will act as Property Trustee and Delaware Trust Capital
Management, Inc., a Delaware banking corporation, will act as Delaware Trustee,
until, in each case, removed or replaced by the holder of the Common Securities.
IBJ Schroder Bank & Trust Company will also act as indenture trustee under the
Guarantee (the "Guarantee Trustee") and under the Indenture (the "Indenture
Trustee"). Initially, Merril M. Halpern, Chairman of the Board, and Arnold H.
Simon, Chief Executive Officer and President, will act as Regular Trustees. See
"Description of the Preferred Securities" and "Description of the Guarantee."
The Property Trustee will hold title to the Convertible Debentures for the
benefit of the holders of the Trust Securities and will have the power to
exercise all rights, powers and privileges under the Indenture as the holder of
the Convertible Debentures. In addition, the Property Trustee will maintain
exclusive control of a segregated non-interest bearing bank account (the
"Property Account") to hold all payments made in respect of the Convertible
Debentures for the benefit of the holders of the Trust Securities. The Guarantee
Trustee will hold the Guarantee for the benefit of the holders of the Preferred
Securities. The Company, as the holder of all the Common Securities, will have
the right to appoint, remove or replace any of the Issuer Trustees and to
increase or decrease the number of trustees, provided, that the number of
trustees shall be at least two. The Company will pay all fees and expenses
related to the Trust and the offering of the Preferred Securities. See
"Description of the Convertible Debentures."
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are as set forth in the
Declaration and the Delaware Business Trust Act, as amended (the "Trust Act").
See "Description of the Preferred Securities." The Declaration, the Indenture
and the Guarantee also incorporate by reference the terms of the Trust Indenture
Act.
The place of business and the telephone number of the Trust are the
principal executive offices and telephone number of the Company.
ACCOUNTING TREATMENT
The financial statements of the Trust will be reflected in the Company's
consolidated financial statements, with the Preferred Securities shown as
"Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of
Designer Finance Trust Holding Solely Convertible Debentures." See
"Capitalization."
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<PAGE> 24
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company commenced trading on the NYSE under the
symbol "DSH" on May 10, 1996. The following table sets forth, for the periods
indicated, the high and low closing sale prices of the Common Stock as reported
on the New York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR 1996
Second Quarter (beginning May 10).......................... $32 1/2 $22 7/8
Third Quarter (through September 27)....................... 27 16 1/2
</TABLE>
On September 27, 1996, the last reported sale price of the Common Stock on
the NYSE was $26 3/4.
DIVIDEND POLICY
The Company currently intends to retain its earnings for use in the
business and does not anticipate declaring and paying dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion. The Company is prohibited
(subject to certain limited exceptions) by the terms of its Credit Agreement
from paying dividends, and it may in the future enter into loan or other
agreements or issue debt securities or preferred stock that restrict the payment
of dividends. As a holding company, the ability of the Company to pay dividends
is dependent upon the receipt of dividends or other payments from its
subsidiaries. Although the payment of dividends and other distributions by the
Company's subsidiaries is currently prohibited by the Credit Agreement, the
Company plans to enter into an amendment with the lenders under Credit Agreement
in order to pay the regularly scheduled distributions relating to the Preferred
Securities so long as there is no event of default under the Credit Agreement.
See "Risk Factors -- Holding Company Structure, Subordination and Restrictive
Covenants," " -- Ranking of Subordinate Obligations Under the Guarantee and
Convertible Debentures" and "Description of Certain Indebtedness."
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<PAGE> 25
USE OF PROCEEDS
The proceeds from the sale of the Preferred Securities offered hereby will
be invested by the Trust in the Convertible Debentures. The Company intends to
apply the net proceeds (net of the Underwriters' Compensation and estimated
expenses) from the sale of the Convertible Debentures, estimated to be
approximately $ million ($ million if the Underwriters' over-allotment
option is exercised), as follows: (i) $12.5 million to repay in full the Term
Loan (as defined below) and (ii) the balance initially to repay a portion of the
borrowings under the Revolving Credit Facility (as defined below) portion of the
Credit Agreement. The Company expects to reborrow under the Revolving Credit
Facility to fund the costs of obtaining the DKNY Jeans License and developing
the DKNY Jeans Label products business and for working capital and other general
corporate purposes.
The initial costs of obtaining the DKNY Jeans License include $6 million as
an initial payment, $24 million payable on June 1, 1997 and a payment for
inventory existing at May 31, 1997, currently anticipated to range from $5 to
$10 million. Prior to initial shipments of DKNY Jeans Label products in June
1997, the Company expects to incur development costs of $15 million, including
$5 million on pre-launch advertising expenses and $10 million for merchandising,
marketing and other advertising and operational expenses. The Company will also
pay a first installment on its minimum guaranteed royalty obligations of $1.26
million upon obtaining the DKNY Jeans License and is also obligated to pay an
additional $15 million for advertising before the end of 1997 pursuant to such
license.
Amounts outstanding under the Credit Agreement, dated as of April 28, 1995,
as amended through March 29, 1996 (the "Credit Agreement"), among the Company,
the Principal Stockholder, Jeanswear, Rio Sportswear, the Predecessor Companies,
the lenders referred to therein and The CIT Group as agent, bear interest either
at the rate announced by The Chase Manhattan Bank from time to time as its prime
rate (the "Prime Rate") plus 1.25% or at a rate equal to LIBOR plus 2.75% at the
election of the Company, subject to certain limitations. The term loan portion
of the Credit Agreement (the "Term Loan") is payable in installments, with the
final installment due on March 31, 2000. The final maturity date for the
revolving credit facility portion (the "Revolving Credit Facility") of the
Credit Agreement is April 28, 2000, although the Revolving Credit Facility will
continue until April 28 of each succeeding calendar year unless terminated as
provided in the Credit Agreement. As of June 30, 1996, the Company had amounts
outstanding under the Credit Agreement of approximately $68.8 million, including
$11.8 million for open letters of credit. The outstanding borrowings of $57.0
million bear interest at a weighted average rate of 8.8% per annum. See
"Description of Certain Indebtedness."
On September 25, 1996, the Company received a commitment from The CIT Group
to enter into an amended and restated Credit Agreement (the "New Credit
Agreement") for an aggregate of $230 million (excluding the $12.5 million Term
Loan that is being repaid with the proceeds of the offering of Preferred
Securities made hereby), $100 million of which will be provided by The CIT
Group. The CIT Group has committed to use its best efforts to cause other
lenders to fund the remaining $130 million of the Credit Agreement; provided,
that The CIT Group's obligation is subject to such other lenders' commitment.
The New Credit Agreement will consist of a $230 million five year credit
facility (the "New Revolving Facility"), including a subfacility for the
issuance of letters of credit, and if executed prior to the closing of the
offering made hereby, a $12.5 million term loan maturing on March 31, 1999 and
amortizing in ten quarterly payments of $1.25 million. The borrowings under the
New Revolving Facility mature on the fifth anniversary of the closing date
thereof. Upon closing of the offering made hereby and the application of the
proceeds as described herein, the interest rates on the New Revolving Facility
will be reduced to the Prime Rate plus .5% or LIBOR plus 1.75%. The New Credit
Agreement will contain covenants and default and security provisions similar to
those in the existing Credit Agreement. See "Description of Certain
Indebtedness."
24
<PAGE> 26
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1996 and as adjusted to give effect to the issuance of the Preferred
Securities being offered hereby, the receipt by the Company of the net proceeds
of approximately $ million therefrom and the application of the estimated
net proceeds as described under "Use of Proceeds." This table should be read in
conjunction with "Selected Financial Information" and the condensed consolidated
financial statements of the Company and related notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Cash.................................................................... $ -- $
======== ========
Current debt:
Revolving credit loans................................................ $ 43,297
Current portion of long-term debt..................................... 5,000
-------- --------
Total current debt................................................. $ 48,297 $
======== ========
Long-term debt, less current portion.................................... $ 8,750 $
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of Designer Finance Trust Holding
Solely Convertible Debentures(1)...................................... --
Stockholders' equity:
Common Stock, par value $.01 per share, authorized
75,000,000 shares, issued and outstanding
32,159,334 shares(2)............................................... 321
Paid-in capital....................................................... 148,296
Retained earnings..................................................... 20,858
-------- --------
Total stockholders' equity......................................... 169,475
-------- --------
Total capitalization............................................... $178,225 $
======== ========
</TABLE>
- ------------------------
(1) As described herein, the sole assets of the Trust will be the %
Convertible Subordinated Debentures due 2016 of the Company with a principal
amount of approximately $100 million, and upon redemption of such debt, the
Preferred Securities will be mandatorily redeemable.
(2) Excludes (i) an aggregate of 2,463,200 shares of Common Stock reserved for
issuance upon exercise of options under the Company's 1996 Stock Option and
Incentive Plan and the 1996 Non-Employee Director Stock Option Plan
(including 1,575,000 shares subject to outstanding options as of June 30,
1996 with an exercise price of $18.00 per share) and (ii) the shares of
Common Stock reserved for issuance upon conversion of the Convertible
Debentures. See "Management -- Stock Option Plan" and "-- 1996 Non-Employee
Director Stock Option Plan."
25
<PAGE> 27
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information set forth below for the year
ended December 31, 1995 and the six months ended June 30, 1996 and 1995 gives
effect to (i) the agreements by the Company, which became effective as of
January 1, 1996, to grant to another company the right to produce and distribute
sportswear under the Bill Blass and the Rio labels, and children's apparel in
the United States under the Calvin Klein Jeans Labels (the "Agreements"), (ii)
certain amendments to the CKJ License and the related issuance to CKI of
1,275,466 shares of non-voting common stock (the "Amendments") and (iii) closing
of the IPO on May 15, 1996 and application of the estimated net proceeds to the
Company therefrom as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" as if they had been consummated on January 1, 1995. The unaudited pro
forma financial adjustments are based upon available information and certain
assumptions that management of the Company believes are reasonable. The
unaudited pro forma financial information is for informational purposes only and
may not necessarily be indicative of the results of operations of the Company
that actually would have occurred had the Agreements, the Amendments and the IPO
been consummated on such date. The following pro forma financial information
should be read in conjunction with "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated and condensed consolidated financial statements of the Company and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------
PRO FORMA FOR
THE
ADJUSTMENTS TO ADJUSTMENT AGREEMENTS,
REFLECT THE AGREEMENTS TO REFLECT AMENDMENTS AND
HISTORICAL AND AMENDMENTS THE IPO THE IPO
---------- ---------------------- ---------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues..................... $ 462,122 $ (112,453)(1) -- $ 349,669
Cost of goods sold............... 323,638 (105,678)(1) -- 217,960
---------- --------- ------- ----------
Gross profit..................... 138,484 (6,775) -- 131,709
Selling, general and
administrative (12,280)(2)
expenses....................... 100,391 505(3) $ 73(4) 88,689
---------- --------- ------- ----------
Operating income................. 38,093 5,000 (73) 43,020
Interest expense................. 16,160 -- (12,422)(4) 3,738
---------- --------- ------- ----------
Income before income taxes....... 21,933 5,000 12,349 39,282
Provision for income taxes....... 10,870 2,250(5) 5,557(5) 18,677
---------- --------- ------- ----------
Net income....................... $ 11,063 $ 2,750 $ 6,792(6) $ 20,605
========== ========= ======= ==========
Net income per share............. $ 0.46 $ 0.64
Weighted average shares
outstanding(7)................. 24,233,868 32,159,334
</TABLE>
see notes on page 28
26
<PAGE> 28
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------------------------------------------
ADJUSTMENT PRO FORMA FOR
ADJUSTMENT TO TO REFLECT THE AMENDMENTS
HISTORICAL REFLECT THE AMENDMENTS THE IPO AND THE IPO
---------- ---------------------- ---------- --------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues..................... $ 219,603 -- -- $ 219,603
Cost of goods sold............... 136,521 -- -- 136,521
---------- ----- ------ ----------
Gross profit..................... 83,082 -- -- 83,082
Selling, general and
administrative expenses........ 55,085 $ 150(3) $ 37(4) 55,272
---------- ----- ------ ----------
Operating income................. 27,997 (150) (37) 27,810
Interest expense................. 7,635 -- (4,730)(4) 2,905
---------- ----- ------ ----------
Income before income taxes....... 20,362 (150) 4,693 24,905
Provision for income taxes....... 9,367 (69)(5) 2,159(5) 11,457
---------- ----- ------ ----------
Income before extraordinary
item........................... $ 10,995 $ (81) $ 2,534(6) $ 13,448
========== ===== ====== ==========
Income per share before
extraordinary item............. $ 0.41 $ 0.42
Weighted average shares
outstanding(7)................. 26,827,051 32,325,414
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995
-----------------------------------------------------------------------
PRO FORMA FOR
THE
ADJUSTMENTS TO ADJUSTMENT AGREEMENTS,
REFLECT THE AGREEMENTS TO REFLECT AMENDMENTS AND
HISTORICAL AND AMENDMENTS THE IPO THE IPO
---------- ---------------------- ---------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues..................... $ 174,491 $ (50,757)(8) -- $ 123,734
Cost of goods sold............... 123,517 (46,278)(8) -- 77,239
---------- -------- ------ ----------
Gross profit..................... 50,974 (4,479) -- 46,495
Selling, general and
administrative (5,227)(2)
expenses....................... 36,814 253(3) $ 36(4) 31,876
---------- -------- ------ ----------
Operating income................. 14,160 495 (36) 14,619
Interest expense................. 5,689 -- (5,423)(4) 266
---------- -------- ------ ----------
Income before income taxes....... 8,471 495 5,387 14,353
Provision for income taxes....... 4,500 223(5) 2,424(5) 7,147
---------- -------- ------ ----------
Net income....................... $ 3,971 $ 272 $ 2,963(6) $ 7,206
========== ======== ====== ==========
Net income per share............. $ 0.16 $ 0.22
Weighted average shares
outstanding(7)................. 24,233,868 32,159,334
</TABLE>
see notes on following page
27
<PAGE> 29
Notes to Unaudited Pro Forma Financial Information:
(1) Adjustments to (i) eliminate sales and related cost of goods sold of Bill
Blass and Rio products of $100,729 and $93,502, respectively, and reflect
royalty income of $4,587, representing 5% of 1995 historical net sales of
the Bill Blass products and 4% of 1995 historical net sales of Rio products
pursuant to the provisions of the Agreements, and (ii) eliminate sales and
related cost of goods sold of Calvin Klein Jeans Label childrens apparel in
the United States of $17,311 and $12,176, respectively, and reflect minimum
royalty due in the initial year of the agreement of $1,000.
(2) Adjustment to eliminate selling, general and administrative expenses, which
were eliminated upon consummation of the Agreements.
(3) Adjustment to reflect amortization of $20,203 capitalized licensing rights
over forty years, the adjusted term of the CKJ License. The capitalized
licensing rights represent the Company's estimate of the fair value of the
1,275,466 shares of non-voting common stock issued to CKI in connection
with the Amendments.
(4) Adjustments to reflect (i) amortization of goodwill resulting from $1.1
million additional consideration that may be due for the purchase of the
Predecessor Companies and (ii) decrease in interest expense resulting from
the use of $108.1 million of net proceeds to repay indebtedness as
described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
(5) Adjustments to reflect federal and state income tax adjustments using an
effective tax rate of 45% for the 1995 periods and 46% for the 1996 period.
(6) No adjustment has been made to reflect the prepayment fee incurred in
connection with the repayment of the Subordinated Loan and the write-off of
related deferred financing costs of $2,256, net of applicable tax effects.
Such amount has been treated as an extraordinary loss in the condensed
consolidated financial statements for the six months ended June 30, 1996.
(7) The pro forma weighted average shares outstanding gives effect to (i) the
issuance to CKI of 1,275,466 shares of non-voting common stock in April
1996, which shares are convertible, at any time, into an equal number of
shares of Common Stock, and (ii) the sale by the Company of 6,650,000
shares of Common Stock pursuant to the IPO, as if such issuance and the IPO
were consummated on January 1, 1995.
(8) Adjustments to eliminate sales and related cost of goods sold of Bill Blass
and Rio products of $53,127 and $46,278, respectively, and reflect royalty
income of $2,370, representing 5% of 1995 historical net sales of the Bill
Blass products and 4% of 1995 historical net sales of Rio products pursuant
to the provisions of the Agreements. Sales of Calvin Klein Jeans Label
childrens apparel did not commence until July 1995, and, therefore, had no
pro forma effect on operations for the six months ended June 30, 1995.
28
<PAGE> 30
SELECTED FINANCIAL INFORMATION
The selected historical financial information has been derived from the
consolidated and the condensed consolidated financial statements of the Company
and the combined financial statements of the Predecessor Companies. The selected
historical financial information for each of the six months ended June 30, 1995
and 1996 and as of June 30, 1995 and 1996, reflect, in the opinion of management
of the Company, all adjustments (which include only normal recurring
adjustments) necessary for the fair presentation of the financial data for such
periods. The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results for the entire year or any other
interim period. The following selected financial information should be read in
conjunction with "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated and
condensed consolidated financial statements of the Company and the combined
financial statements of the Predecessor Companies and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES THE COMPANY
(COMBINED)(1) (CONSOLIDATED)
-------------------------------------------- ----------------------------------------------------
EIGHT MONTHS FOUR MONTHS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED JUNE 30,
------------------------------ AUGUST 25, DECEMBER 31, DECEMBER 31, -----------------------
1991 1992 1993 1994 1994(2) 1995(2) 1995 1996
-------- -------- -------- ------------ ------------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................. $122,640 $145,040 $173,561 $ 93,969 $ 102,038 $ 462,122 $ 174,491 $ 219,603
Cost of goods sold........... 100,312 119,195 146,620 81,143 75,246 323,638 123,517 136,521
-------- -------- -------- ------- -------- -------- -------- --------
Gross profit................. 22,328 25,845 26,941 12,826 26,792 138,484 50,974 83,082
Selling, general and
administrative expenses.... 13,897 19,686 23,323 12,318 20,079 100,391 36,814 55,085
-------- -------- -------- ------- -------- -------- -------- --------
Operating income............. 8,431 6,159 3,618 508 6,713 38,093 14,160 27,997
Interest expense............. 1,445 1,339 1,808 1,142 2,557 16,160 5,689 7,635
-------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before
income taxes............... 6,986 4,820 1,810 (634) 4,156 21,933 8,471 20,362
Provision (benefit) for
income taxes............... 1,869 1,189 (331) (399) 2,239 10,870 4,500 9,367
-------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before
extraordinary item......... 5,117 3,631 2,141 (235) 1,917 11,063 3,971 10,995
Extraordinary loss on debt
extinguishment............. -- -- -- -- -- -- -- 2,256
-------- -------- -------- ------- -------- -------- -------- --------
Net income (loss)............ $ 5,117 $ 3,631 $ 2,141 $ (235) $ 1,917 $ 11,063 $ 3,971 $ 8,739
======== ======== ======== ======= ======== ======== ======== ========
PER SHARE DATA:
Income per share before
extraordinary item......... $ 0.08 $ 0.46 $ 0.16 $ 0.41
Net income per share......... $ 0.08 $ 0.46 $ 0.16 $ 0.33
Weighted average shares
outstanding................ 24,233,868 24,233,868 24,233,868 26,827,051
Ratio of earnings to
fixed charges(3)........... 5.25x 3.82x 1.82x -- 2.57x 2.31x 2.44x 3.34x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF AS OF DECEMBER 31, AS OF
------------------------------ AUGUST 25, --------------------------- JUNE 30,
1991 1992 1993 1994 1994 1995 1996
-------- -------- -------- ------------ ------------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............. $ 8,054 $ 8,907 $ 9,248 $ 6,639 $ 27,070 $ 31,671 $ 104,832
Total assets................. 22,659 20,942 28,740 22,765 114,833 250,814 278,982
Current debt................. 4,035 329 5,271 2,400 7,528 102,016 48,297
Long-term debt, less current
portion.................... -- -- -- -- 52,255 50,403 8,750
Stockholders' equity......... 8,427 10,460 10,437 7,896 23,006 32,482 169,475
- -----------------------------
</TABLE>
- ---------------
(1) The Predecessor Companies consisted of five separate entities commonly
controlled and managed by Mr. Arnold Simon, the President and Chief
Executive Officer of the Company, and Mr. Stephen Huang, a former business
associate of Mr. Simon. See note 1 to the audited combined financial
statements of the Predecessor Companies included elsewhere in this
Prospectus.
(2) Amounts include the results of operations from the sale of Calvin Klein
Jeans Label products beginning August 4, 1994, the date the Company obtained
the CKJ License.
(3) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges, and fixed
charges consist of interest, expensed or capitalized, amortization of debt
discount and expense and that portion (one-third) of rental expense that the
Company believes is representative of interest. There was a deficiency of
earnings to fixed charges of $634 for the eight months ended August 25,
1994. Had the closing of the offering of Preferred Securities made hereby
occurred on January 1, 1995, the pro forma ratio of earnings to fixed
charges for the year ended December 31, 1995 and the six months ended June
30, 1995 and 1996 would have been 3.07x, 3.08x and 4.19x, respectively.
29
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the six months ended June 30, 1995 and 1996 and
the years ended December 31, 1993, 1994 and 1995. This discussion should be read
in conjunction with the consolidated and condensed consolidated financial
statements of the Company and the combined financial statements of the
Predecessor Companies and the related notes thereto and other financial
information included elsewhere in this Prospectus. For presentation purposes,
the results of operations of the Company for the year ended December 31, 1994
have been combined with the results of operations of the Predecessor Companies
for the same period.
GENERAL
On August 4, 1994, the Company obtained the CKJ License, under which it
develops, sources and markets designer sportswear lines for men, juniors and
women (including petites) under the Calvin Klein Jeans Labels. Each of the
Company's lines combines both basic and fashion items in a broad range of casual
fabrications, including jeans, khakis, knit and woven tops and bottoms,
T-shirts, shorts, fleece shirts and pants, outerwear such as leather and denim
jackets, caps and related accessories. The key initiatives implemented by the
Company since obtaining the CKJ License include: (i) broadening its target
market by re-engineering the garments to provide a comfortable fit and
flattering appearance for a greater number of potential consumers, (ii)
increasing the value offered to consumers by lowering the price of its
designer-quality products to "better" from "designer" price points, (iii)
targeting juniors, childrens and petites lines with a specific marketing
strategy and product offering, (iv) enlarging the core of basic styles for each
line and (v) in the latter part of 1995, establishing an inventory replenishment
plan to meet the requirements of retailers. See "Business -- Calvin Klein Jeans
Label Products," "-- Calvin Klein Jeans Label Divisions" and "-- Distribution."
On September 27, 1996, the Company entered into the DKNY Jeans License. The
cost of obtaining the DKNY Jeans License includes $6 million as an initial
payment, $24 million payable on June 1, 1997 and a payment for inventory
existing at May 31, 1997, currently anticipated to range from $5 to $10 million.
In addition, the Company will pay $10 million on June 1 of each of 1998, 1999
and 2000. Prior to initial shipments of DKNY Jeans Label products in June 1997,
the Company expects to incur development costs of $15 million, including $5
million on pre-launch advertising expenses and $10 million for merchandising,
marketing and other advertising and operational expenses. The Company will also
pay a first installment on its minimum guaranteed royalty obligations of $1.26
million upon obtaining the DKNY Jeans License and is also obligated to pay an
additional $15 million for advertising before the end of 1997 pursuant to such
license. See "-- Liquidity and Capital Resources."
Prior to January 1, 1996, the Company designed, sourced and marketed Bill
Blass and Rio products. As of January 1, 1996, the Company has licensed the Rio
label and sublicensed the Bill Blass labels to Commerce Clothing. For the years
ended 1993, 1994 and 1995, the Company had net revenues of the Bill Blass and
Rio products of $173.6 million, $137.3 million and $100.7 million, respectively.
As of January 1, 1996, the Company also entered into an agreement with Commerce
Clothing to produce, market and distribute childrens apparel under the Calvin
Klein Jeans Labels. The Company will receive combined revenues under these
agreements ranging from 4% to 5% of net sales of products sold thereunder, net
of royalties due to CKI and Bill Blass Ltd. As a result of the distribution
agreement with respect to childrens apparel under the Calvin Klein Jeans Labels,
the license of the Rio label and the sublicense of the Bill Blass labels, sales
during 1996 will not include any material amounts for the sale of such childrens
apparel or Rio products or any amount for the sale of Bill Blass products;
however, the Company will receive royalty income under such distribution
agreement, license and sublicense.
30
<PAGE> 32
The following table sets forth the net revenues from the sale of the
Company's Calvin Klein Jeans Label products by line and the income received
pursuant to the distribution agreement with respect to the sale of Calvin Klein
Jeans Label products in Canada for each of 1994 and 1995 and for the six months
ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE
31, 30,
-------------------- ---------------------
1994(1) 1995 1995 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mens............................. $30,106 $149,626 $ 61,166 $ 90,288
Juniors.......................... 11,745 111,374 34,024 77,737
Womens(2)........................ 16,845 82,291 26,074 48,314
Childrens(3)..................... -- 17,311 100 562
Royalty income................... -- 791 -- 1,394
------- -------- -------- --------
$58,696 $361,393 $121,364 $218,295
======= ======== ======== ========
</TABLE>
-------------------------------
(1) Reflects sales beginning August 4, 1994, the date the Company
obtained the CKJ License.
(2) Includes petites.
(3) As of January 1, 1996, the Company entered into an agreement
pursuant to which Commerce Clothing will produce, market and
distribute Calvin Klein Jeans Label childrens apparel in the
United States.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 84.5 79.8 70.0 70.8 62.2
----- ----- ----- ----- -----
Gross profit............................... 15.5 20.2 30.0 29.2 37.8
Selling, general and administrative
expenses................................. 13.4 16.5 21.7 21.1 25.1
----- ----- ----- ----- -----
Operating income........................... 2.1 3.7 8.3 8.1 12.7
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Revenues. Net revenues for the six months ended June 30, 1996 were
$219.6 million, which represented an increase of $45.1 million or 25.9% over net
revenues for the six months ended June 30, 1995 of $174.5 million. Net revenues
for the first half of 1996 included $205.8 million from the sale of Calvin Klein
Jeans and CK/Calvin Klein Jeans products, and $11.1 million from the sale of
CK/Calvin Klein Jeans Khakis products, a total increase of $96.9 million over
the first half of 1995. The increased level of net revenue generated by the sale
of Calvin Klein Jeans Label products was principally attributable to an increase
in the volume of products sold to a larger number of department stores and
specialty retail stores. The broadening of product distribution into an
increased number of doors was experienced across all of the lines in which
products are sold. Net revenue from the sale of the Rio and Bill Blass label
products during the six months ended June 30, 1995 was $53.1 million. The
Company did not have any revenues from the sale of Rio and Bill Blass label
products during the six months ended June 30, 1996 but instead earned royalty
income therefrom of $2.1 million. The 1995 comparable period reflected no
significant royalty income. The Company waived payment of approximately $1.2
million of royalty income due for the first quarter of 1996 under both Commerce
Clothing agreements.
Gross Profit. Gross profit was $83.1 million for the six months ended June
30, 1996, an increase of $32.1 million from gross profit for the six months
ended June 30, 1995 of $51.0 million. The gross profit percentage was 37.8% for
the first half of 1996, an increase from 29.2% for the first half of 1995. The
first half of 1996 gross profit percentage on the Calvin Klein Jeans Label
products was 37.8%, an increase of 1.6 percentage points over the gross profit
percentage for the 1995 first half of 36.2%, primarily due to overall operating
31
<PAGE> 33
efficiencies achieved through better sourcing of product, more efficient
distribution of product and more timely delivery to retailers. The overall gross
profit percentage was further improved due to the absence in the first half of
1996 of the lower gross profit margins from Rio and Bill Blass products, because
the license and sublicense agreement was executed for such products as of
January 1, 1996. The 1995 period contained a gross profit percentage of 13.2%
related to the sale of these products.
Selling, general and administrative. Selling, general and administrative
("SG&A") expenses were $55.1 million or 25.1% of net revenues for the first half
of 1996, an increase of $18.3 million from $36.8 million or 21.1% of net
revenues for the first half of 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 continued increased costs necessary to build the
infrastructure to support increased sales volume and future growth. SG&A
expenses as a percentage of net revenues also increased in the 1996 period as a
result of continued costs related to selling and marketing the Rio and Bill
Blass products, against which the Company will recognize royalty income in 1996
and future periods instead of net revenues, due to the Company's license and
sublicense agreement.
Interest expense. Interest expense was $7.6 million for the first half of
1996, compared to $5.7 million for the first half of 1995. This increase was a
result of the higher working capital requirements and increased borrowings under
the revolving credit facility associated with the higher sales volume achieved
during the first half of 1996 compared with that of the previous year, partially
offset by the interest savings yielded by the application of the net proceeds of
the IPO to repay existing indebtedness. See "-- Liquidity and Capital
Resources."
Provision for income taxes. The provision for income taxes was $9.4 million
or 46% of pre-tax income for the six months ended June 30, 1996, as compared to
$4.5 million or 53% of pre-tax income for the six months ended June 30, 1995.
The higher effective tax rate in the 1995 period 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 return of the Company until April 1995, when Rio became a subsidiary of the
Company.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Revenues. Net revenues for the year ended December 31, 1995 were $462.1
million, which represented an increase of $266.1 million or 135.8% over 1994 net
revenues of $196.0 million. Net revenues in 1995 included $361.4 million from
the sale of Calvin Klein Jeans Label products, an increase of $302.7 million
over net revenues for the period from August 4, 1994 (the date the Company
obtained the CKJ License) to December 31, 1994. The growth in revenues of the
Calvin Klein Jeans Label products during 1995 was principally attributable to an
increase in the volume of products sold from the distribution of such products
to a larger number of department stores and specialty retail stores. This
increased distribution was in large part due to the fact that the Company
broadened its target market by re-engineering the garments to provide greater
appeal to a greater number of potential consumers, lowered the price of its
designer-quality products to "better" from "designer" price points, targeted
juniors, petites and childrens lines with a specific marketing strategy and
product offering and enlarged the core of basic styles for each line. The
elements of the Company's strategy that contributed to the increase in volume
were implemented when the Company obtained the CKJ License in August 1994. Also
included in 1995 revenues is net royalty income of $.8 million from the sale of
Calvin Klein Jeans Label products by a distributor in Canada. There was no such
royalty income in 1994. In 1995, the net revenues from the sale of Bill Blass
and Rio products were $100.7 million, a decline of $36.6 million or 26.7% from
1994 net revenues of $137.3 million, was due to continuing increased competition
at the moderate price points and a continuing shift by retailers toward private
label products. In addition, in 1995, management further increased its focus on
sales of the Calvin Klein Jeans Label products.
Gross Profit. Gross profit was $138.5 million for 1995, an increase of
$98.9 million from 1994 gross profit of $39.6 million. The gross profit
percentage was 30.0% in 1995, an increase from 20.2% in 1994. The gross profit
percentage on the sale of the Calvin Klein Jeans Label products and related
royalty income for 1995 was 36.3%, an increase from 30.3% for 1994, reflecting
lower cost sourcing of such products, a shift in product mix
32
<PAGE> 34
toward more basic products versus fashion products and a reduction of the
quantity of products sold at off-price. The gross profit percentage for the Bill
Blass and Rio products for 1995 was 7.2%, a decrease from 15.9% in 1994. The
decline in the gross profit on the sale of Bill Blass and Rio products was due
to increased competition combined with pricing pressure from retailers and the
sale of remaining inventory at a loss of approximately $4.4 million in 1995.
Selling, General and Administrative. SG&A expenses were $100.4 million or
21.7% of net revenues in 1995, an increase of $68.0 million from $32.4 million
or 16.5% of net revenues in 1994. The overall increase in SG&A expense levels
was primarily a result of the higher level of advertising, design and royalty
expenses incurred in connection with the CKJ License, combined with a higher
volume of sales over 1994. The increase in SG&A expenses also reflects the
growth in the Company's management and the expense associated with building the
infrastructure necessary to support the sales growth the Company experienced
during 1995. Although the Company licensed the Rio label and sublicensed the
Bill Blass labels as of January 1, 1996, it retained responsibility for the
sales function and will continue to incur related costs.
Interest Expense. Interest expense in 1995 was $16.2 million as compared to
$3.7 million in 1994. The increase in the level of interest expense incurred was
the result of the full year of interest charges on loans incurred in connection
with the leveraged buyout of the Predecessor Companies by Rio Sportswear and
obtaining the CKJ License and acquiring related assets from CKI in August 1994,
an increase in the working capital necessary to support the higher level of
sales, and the incurrence of a Subordinated Loan that bears an effective
interest rate of 20%.
Provision (benefit) for income taxes. The provision for income taxes was
$10.9 million and $1.8 million for 1995 and 1994, respectively. The increase in
the provision for income taxes in 1995 was primarily attributable to increased
earnings. The Company's effective tax rate decreased to 49.6% in 1995 from 52.2%
in 1994, principally due to lower state tax rates.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net Revenues. Net revenues for the year ended December 31, 1994 were $196.0
million, an increase of $22.4 million or 12.9% over 1993 net revenues of $173.6
million. Net revenues in 1994 included $58.7 million from the sale of Calvin
Klein Jeans Label products for the period from August 4, 1994 (the date the
Company obtained the CKJ License) to December 31, 1994. The net revenues from
the sale of the Bill Blass and Rio products contributed $137.3 million to 1994
net revenues, a decrease of $36.3 million or 20.9% from 1993 net revenues of
$173.6 million. The decrease in Bill Blass and Rio sales was due to increased
competition at the moderate price points and a shift by retailers, such as J.C.
Penney, toward private label products, and the elimination of certain Bill Blass
and Rio product lines.
Gross Profit. Gross profit was $39.6 million for 1994, an increase of $12.7
million from 1993 gross profit of $26.9 million. The gross profit percentage was
20.2% in 1994, an increase from 15.5% in 1993. The sale of Calvin Klein Jeans
Label products contributed $17.8 million to 1994 gross profit, which represented
30.3% on its net revenues. The Bill Blass and Rio products contributed $21.9
million to 1994 gross profit, or 15.9% of net revenues, compared to 1993 gross
profit of $26.9 million, or 15.5% of its net revenues. The improvement reflected
in the gross profit percentage of the Bill Blass and Rio products was due to the
elimination of certain less profitable product lines.
Selling, General and Administrative. SG&A expenses were $32.4 million or
16.5% of net revenues in 1994, an increase of $9.1 million from $23.3 million or
13.4% of net revenues in 1993. The overall increase in SG&A expense levels was
primarily driven by the addition of the Calvin Klein Jeans Label products and
the associated increased cost of advertising, design and royalties.
Interest Expense. Interest expense for 1994 was $3.7 million as compared to
$1.8 million for 1993. The increase in the level of interest expense reflected
increased borrowings incurred in connection with the purchase of the ownership
interests in the Predecessor Companies by Rio Sportswear and obtaining the CKJ
License and acquiring related assets from CKI in August 1994.
33
<PAGE> 35
Provision (benefit) for income taxes. The provision for income taxes was
approximately $1.8 million in 1994 as compared to a benefit of approximately $.3
million in 1993. The benefit for income taxes in 1993 principally resulted from
S Corporation earnings included in the combined operating results of the
Predecessor Companies which are not subject to federal and state corporate
income taxes. In addition, in 1993, certain deferred tax liabilities of one of
the entities in the Predecessor Companies became the responsibility of a
stockholder as a result of that entity converting from a C Corporation to an S
Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary funding requirements are for financing (i) continued
business growth through investments in working capital (primarily receivables
and inventory), (ii) obtaining the DKNY Jeans License, (iii) paying related
initial start-up costs, and to finance (iv) growth of the DKNY Jeans Label
products business (see "Use of Proceeds"), (v) capital expenditures, (vi) costs
related to upgrading the distribution and management information systems, (vii)
costs related to the shops-in-shop programs and (viii) debt service.
On May 15, 1996, the Company closed the IPO. Of the total shares offered,
the Company sold 6,650,000 shares and the Principal Stockholder sold 7,150,000
shares. Net proceeds to the Company, after underwriting discounts and expenses,
were approximately $108.1 million. Net proceeds to the Company increased
liquidity by reducing indebtedness, including approximately $37.0 million to
repay a subordinated loan and a reduction in borrowings under the Revolving
Credit Facility and the Term Loan of approximately $71.1 million.
On April 28, 1995, the Company refinanced its outstanding credit
obligations with borrowings under a new $140 million Credit Agreement. The
Credit Agreement consists of a revolving credit facility of $115 million, and a
term loan of $25 million. Borrowings under the Revolving Credit Facility,
including the opening of letters of credit, are limited in the aggregate to
specified percentages of eligible factored receivables and inventory (as defined
in the Credit Agreement). The portion of the Revolving Credit Facility available
for the opening of letters of credit is limited to $45 million. The amount of
the revolving credit facility was increased to $125 million on September 15,
1995, to $135 million on November 8, 1995 and to $150 million on March 29, 1996.
Amounts outstanding under the Credit Agreement are collateralized by
substantially all the assets of the Company. The Credit Agreement contains
restrictive covenants that, among other things, prohibit the payment of
dividends or stock repurchases and restrict additional indebtedness, leases,
capital expenditures, investments and a sale of assets or merger of the Company
with another entity. The covenants also require the Company to meet certain
financial ratios and maintain minimum levels of net worth. See "Description of
Certain Indebtedness."
At June 30, 1996, the Company had amounts outstanding under the Credit
Agreement of approximately $68.8 million, comprised of approximately $43.3
million of revolving credit loans, $11.7 million for open letters of credit and
$13.8 million outstanding under the term loan.
On September 25, 1996, the Company received a commitment from The CIT Group
to enter into the New Credit Agreement for an aggregate of $230 million
(excluding a $12.5 million Term Loan that is being repaid with the proceeds of
the offering of Preferred Securities made hereby), $100 million of which will be
provided by The CIT Group. The CIT Group has committed to use its best efforts
to cause other lenders to fund the remaining $130 million of the Credit
Agreement; provided, that The CIT Group's obligation is subject to such other
lenders' commitment. The New Credit Agreement will consist of the $230 million
five year New Revolving Facility, including a subfacility for the issuance of
letters of credit, and if executed prior to the closing of the offering made
hereby, the $12.5 million Term Loan maturing on March 31, 1999 and amortizing in
ten quarterly payments of $1.25 million. The borrowings under the New Revolving
Facility will mature on the fifth anniversary of the closing date thereof. Upon
closing of the offering made hereby and the application of the proceeds as
described herein, the interest rates on the New Revolving Facility will be
reduced to the Prime Rate plus .5% or LIBOR plus 1.75%. The New Credit Agreement
will contain covenants and default and security provisions similar to those in
the existing Credit Agreement.
The Company entered into a factoring agreement dated August 24, 1994, with
CIT, the agent under the Credit Agreement. Pursuant to the terms of the
agreement, CIT purchases the Company's eligible accounts receivables and assumes
the credit risk only on those accounts for which it has given prior credit
approval in
34
<PAGE> 36
writing. The Company is also a party to an intercreditor agreement under which
the factor, as agent, is obligated to apply all monies, otherwise due to the
Company, against amounts outstanding under the Credit Agreement. The Company
borrows its daily cash requirements under the revolving credit facility and
therefore shows no cash balance as of December 31, 1995 and June 30, 1996.
The Company finances its operations primarily through cash flows generated
from operations and from daily borrowings under the Revolving Credit Facility.
In the past, the Company's borrowing requirements have been somewhat seasonal,
with peak working capital needs arising at the end of the second and beginning
of the third quarter of the fiscal year. The sales growth experienced during
1995 and the six months ended June 30, 1996 as a result of the addition of the
Calvin Klein Jeans Label products overshadowed the historical seasonal pattern
in that year.
During the six months ended June 30, 1996 and 1995, the Company used $8.7
million and $58.2 million, respectively, in operating activities. The higher use
of cash during the 1995 period was primarily driven by the build-up of inventory
and receivables, as the Company began to realize its growth strategy and
objectives. The first half of 1996 reflected more of a seasonal sales pattern.
However, with the introduction of the DKNY Jeans Label products, the Company
expects a higher use of cash in operations for 1997. In addition, during the six
months ended June 30, 1996, the Company constructed and installed approximately
"shops-in-shop" and expects approximately 150 such shops to be operating by
the end of 1996. The cost, which is included in net cash used in operating
activities, of constructing, equipping and installing the first shops did not
exceed $ in the aggregate. Net cash used in operating activities was $2.7
million, $14.8 million and $83.1 million for 1993, 1994 and 1995, respectively.
The increase in net cash used for operating activities during 1994 and 1995
resulted primarily from an increase in receivables and inventories as a result
of the increased sales growth resulting from the sale of Calvin Klein Jeans
Label products beginning in August 1994.
Net cash used in investing activities during the six months ended June 30,
1996 and 1995 was $2.7 million and $1.1 million, respectively. The increase in
cash used in investing activities consisted of capital expenditures primarily
for equipment for distribution facilities and leasehold improvements. Net cash
used in investing activities was $2.8 million in 1995 and $36.8 million in 1994,
respectively. Net cash used in investing activities for 1995 consisted of
capital expenditures. Net cash used in such investing activities for 1994
included $24.0 million for the purchase of the ownership interest in the
Predecessor Companies, $10.3 million for obtaining the CKJ License and related
assets and a $2.4 million loan to a stockholder.
Net cash provided by financing activities during the six months ended June
30, 1996 and 1995 was $11.3 million and $57.9 million, respectively. The first
half of 1995 reflected the proceeds of the Term Loan and the Subordinated Loan
which was used to repay then outstanding debt, as well as increased borrowings
under the Revolving Credit Facility. The first half of 1996 reflected the net
proceeds of the IPO and the application of such proceeds to repay the
Subordinated Loan and a portion of amounts outstanding under the Credit
Agreement. Net cash provided by financing activities was $2.8 million, $51.9
million and $84.5 million in 1993, 1994 and 1995, respectively. The net cash
provided in 1995 principally represented borrowings under the Revolving Credit
Facility and a subordinated loan, net of indebtedness repaid. In 1994, net cash
provided by financing activities principally represented $45.2 million of
proceeds from notes payable to Charterhouse and capital contributions by
Charterhouse of $20.0 million, which were used to purchase the ownership
interests of the Predecessor Companies and to obtain the CKJ License and acquire
related assets. The notes payable to Charterhouse bore interest at a fluctuating
annual rate equal to the rate publicly announced by Chemical Bank in New York as
its reference rate plus 3% per annum. The notes were repaid in full by the
Company with proceeds of the Term Loan and Subordinated Loan. See Note 11 to the
audited consolidated financial statements of the Company included elsewhere in
this Prospectus.
The Company is in the initial stages of planning a program for the
installation of DKNY Jeans Label shops-in-shop. The Company currently estimates
that it will have approximately 200 shops installed in the first full year of
operations.
The Company believes that its sources of financing, including the proceeds
from the offering of Preferred Securities made hereby and the borrowings
available under the $230 million New Revolving Facility of the
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<PAGE> 37
New Credit Agreement, are adequate to fund its current level of operations and
its expected growth through 1997.
SEASONALITY
The following table sets forth for the last eight quarters the net revenues
from the sale of the Company's Calvin Klein Jeans Label products by line and the
income received pursuant to the sublicense agreements with respect to the sale
of Calvin Klein Jeans Label products in Canada and for such childrens apparel in
the United States:
<TABLE>
<CAPTION>
1994 1995 1996
----------------- -------------------------------------- -------------------
THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mens................. $ 9,221 $20,885 $29,951 $31,215 $30,774 $ 57,686 $ 45,712 $ 44,576
Juniors.............. 2,745 9,000 10,861 23,163 32,552 44,798 41,136 36,601
Womens(1)............ 6,251 10,594 15,075 10,999 23,254 32,963 26,509 21,805
Childrens............ -- -- -- 100 7,695 9,516 248 314
Royalty income....... -- -- -- -- 459 332 564 830
------- ------- ------- ------- ------- -------- -------- --------
$18,217 $40,479 $55,887 $65,477 $94,734 $145,295 $114,169 $104,126
======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
- ---------------
(1) Includes petites
The Company's business is affected by general seasonal trends that are
characteristic of the apparel industry. In the Company's segment of the apparel
industry, sales typically are higher in the first and third quarters. Primarily
as a result of the significant growth that the Company has experienced, recent
quarterly sales trends have not reflected this seasonality. In 1996 and future
years, assuming the Company does not obtain additional significant designer
brands or licenses, the Company expects that its sales may reflect greater
seasonal trends as its growth rate moderates. Additionally, the difficulties in
distribution experienced by the Company in the second and third quarters of 1995
caused subsequent quarter sales to be higher than anticipated, as products
scheduled to be shipped were delayed. In order to remedy these difficulties, the
Company has expanded its distribution facilities and implemented upgraded
management information systems. No assurance can be given, however, that such
facilities and systems will continue to function as expected. See "Risk
Factors -- Ability to Achieve and Manage Future Growth,"
"Business -- Distribution" and " -- Management Information Systems."
INFLATION
The Company does not believe that inflation has had a significant effect on
its net revenues or its profitability. The Company believes that it will be able
to offset any such future effects by increasing prices or by instituting
improvements in efficiency.
NEW ACCOUNTING STANDARDS
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," ("SFAS No. 121") was issued and became effective January 1,
1996. SFAS No. 121 requires that in the event certain facts and circumstances
indicate an asset may be impaired, an evaluation of recoverability must be
performed to determine whether or not the carrying amount of the asset is
required to be written down. The Company does not expect the adoption of this
statement to have a material effect on its financial condition or results of
operations.
36
<PAGE> 38
BUSINESS
Designer Holdings Ltd. develops, sources and markets designer sportswear
lines for men, juniors and women (including petites) under the Calvin Klein
Jeans, CK/Calvin Klein Jeans and CK/Calvin Klein Jeans Khakis labels. The
Company's products target youthful, culturally conscious consumers and
capitalize on the cachet and image created by over 20 years of extensive image
advertising for Calvin Klein, one of the world's most influential designers. The
Company collaborates with the in-house design teams of Calvin Klein, Inc. to
create products characterized by high quality and casual, contemporary fashion.
Each of the Company's lines combines both basic and fashion items in a broad
range of casual fabrications, including jeans, khakis, knit and woven tops and
bottoms, T-shirts, shorts, fleece shirts and pants, outerwear such as leather
and denim jackets, caps and related accessories. In the six months ended June
30, 1996, the mens, juniors and womens (including petites) lines accounted for
approximately 41.6%, 35.8% and 22.3%, respectively, of net sales of Calvin Klein
Jeans Label products.
Since August 1994, the Company has experienced substantial growth in net
revenues for its Calvin Klein Jeans Label products. In 1993, net revenues from
the sale of Calvin Klein Jeans Label products by CKI were approximately $59
million. In 1994, the Company obtained the CKJ License. In 1995, net revenues
(including royalties) of Calvin Klein Jeans Label products rose to $361.4
million. In the six months ended June 30, 1996, net revenues (including
royalties) from Calvin Klein Jeans Label products (including royalties) rose to
$218.3 million, a 79.9% increase from the $121.4 million in net revenues from
the comparable 1995 period.
The Company believes that the quality and casual style of its Calvin Klein
Jeans Label products combined with the youthful image presented in its
advertising, provide the Company with the opportunity to experience further
sales growth by taking advantage of certain market trends. The Company believes
such trends include: (i) a move towards more "relaxed" dress including the
introduction of "casual days" in the workplace, (ii) demographic changes
indicating that the juniors market will be one of the fastest growing segments
of the industry, (iii) strong consumer demand for higher-end designer quality
merchandise and (iv) a shift by major retailers towards devoting more selling
space to a select group of designer brands.
Beginning in August 1994, the Company implemented a number of key
initiatives to increase market share and improve profitability of the Calvin
Klein Jeans Label products, including: (i) broadening its target market by
re-engineering the garments to provide a comfortable fit and flattering
appearance for a greater number of potential consumers, (ii) increasing the
value offered to consumers by lowering the price of its designer-quality
products to "better" from "designer" price points, (iii) targeting juniors,
petites and childrens lines with a specific marketing strategy and product
offering, (iv) expanding the core of basic styles for each line and (v)
establishing an inventory replenishment plan to meet the requirements of
retailers.
On September 27, 1996, the Company entered into the DKNY Jeans License with
a subsidiary of Donna Karan International for the exclusive production, sale and
distribution of mens, womens and, with certain exceptions, childrens jeanswear
under the DKNY Jeans Label. Under the terms of the DKNY Jeans License, the
Company will make an initial payment of $6 million to reimburse Donna Karan
International for certain costs related to the DKNY Jeans Label and will make
additional payments aggregating $54 million over a four year period. Following
the transition of production, inventory and distribution on June 1, 1997, the
Company will pay annual royalties of 7% on worldwide net sales of DKNY Jeans
Label products, as well as an additional administrative fee of 2% of
international net sales. The Company will also pay a first installment on its
minimum guaranteed royalty obligations of $1.26 million upon obtaining the Jeans
License and is also obligated to pay an additional $15 million for advertising
before the end of 1997 pursuant to such license. See "-- DKNY Jeans License."
37
<PAGE> 39
BUSINESS STRATEGY
Calvin Klein Jeans Label. The Company's growth strategy is to capitalize
on the strength of the image projected by Calvin Klein and the quality, fit and
value of the Company's products as well as the Company's expertise in marketing
and sourcing designer sportswear. The Company's strategy includes the following:
EXPAND ACCOUNT BASE AND NUMBER OF STORE LOCATIONS ON A SELECTIVE
BASIS. The Company currently distributes products under the Calvin Klein
Jeans Labels to a broad range of department stores and specialty retailers.
The Company believes that the strong demand for its Calvin Klein Jeans
Label products positions it to selectively add to its account base. Within
the Company's existing retailing customers, the Company believes it has
opportunity to increase the number of store locations that carry each of
its product lines, particularly its womens and juniors lines. At the same
time, the Company seeks those specialty retailers that have the ability to
offer the proper presentation of the Company's products.
EXPAND SHOP-IN-SHOP PROGRAM. The Company expects to increase the
retail presence of its Calvin Klein Jeans Label products through the
installation of "shop-in-shops," which are dedicated to Calvin Klein Jeans
Label products, in the stores of its department store customers. The
shop-in-shops create a specialized shopping environment that is consistent
with the Calvin Klein image. The shop-in-shops are designed to hold more of
the Company's merchandise than conventional department store displays and
will be approximately 750 square feet in size. The Company believes that
the shop-in-shops will enhance the consumer's shopping experience and will
build loyalty among consumers and the Company's retailing customers. As of
September 30, 1996, the Company had installed approximately 70 shops. The
Company expects approximately 150 shops to be operating by the end of 1996.
DEEPEN PRODUCT OFFERINGS. The Company continually evaluates consumer
demand for its products and will seek to complement its existing lines with
new products that fit well with the Calvin Klein image. During 1995, the
Company added leather and different textures of cotton to its product
offerings and in March 1996, it introduced khaki sportswear to all its
lines. The Company supported the introduction of the khaki products with an
extensive marketing campaign.
EXPAND GEOGRAPHICALLY THROUGH THIRD PARTY DISTRIBUTORS. The Company
believes that opportunities exist to continue to expand its market
geographically by entering into agreements to have its Calvin Klein Jeans
Label products distributed in various regions outside the United States.
Since the beginning of 1996, the Company has entered into a distribution
agreement for its Calvin Klein Jeans Label mens, womens and juniors lines
in Canada, and the Company is currently negotiating distribution agreements
with respect to childrens apparel and khaki products in Canada. The Company
is currently negotiating distribution agreements for Mexico, Central
America and South America.
IMPROVE OPERATING EFFICIENCIES. In order to provide infrastructure to
support its growth and to improve its operating profitability, the Company
recently completed the upgrading of its distribution and management
information systems. Upon full implementation and integration of these
systems, the Company believes it will have sufficient capacity in its
inventory management, distribution and management information systems to
effectively manage all reasonably anticipated levels of growth. The Company
also plans to improve its distribution capabilities by leasing a new
automated, 375,000 square foot distribution facility in North Arlington,
New Jersey that is expected to become operational during 1997. The Company
believes that the North Arlington facility will have the capacity to ship
approximately the same volume of products that can be shipped out of its
two currently operating distribution facilities. The addition of the
distribution capacity in North Arlington will permit the Company to
reevaluate its distribution plan to maximize operating efficiencies.
ACQUIRE ADDITIONAL LICENSES/BRANDS. The Company from time to time
evaluates the acquisition additional licenses and brand names in other
product categories. The terms of the DKNY Jeans License significantly limit
the ability of the Company to acquire new licenses or brand names for
jeanswear products over the next ten years. See "-- DKNY Jeans License."
DKNY Jeans Label. The Company believes Donna Karan International is one of
the world's leading fashion houses, with global recognition in the exclusive
designer market for the Donna Karan New York label and in the larger bridge
market for the DKNY label. The Company will seek to combine its own technical,
38
<PAGE> 40
production and distribution capabilities with the distinctive image and high
product quality associated with the DKNY label. The Company's strategy for the
DKNY Jeans Label will include: (i) offering a broad collection of casual
jeanswear that complements the lifestyle of the core DKNY customer, (ii)
maintaining the exclusivity of the label by limiting distribution to "better"
department stores and larger specialty stores, (iii) developing worldwide
distribution, (iv) establishing DKNY Jeans shops within department stores and
larger specialty stores, including an estimated 200 shops in the first full year
of operations, and (v) launching an extensive advertising campaign in connection
with the Fall 1997 season. To manage the DKNY Jeans Label business, the Company
intends to recruit, in the near future, a new executive as well as a separate
team of design, merchandising and marketing professionals. As part of its
business plan, the Company will collaborate closely with Donna Karan
International to ensure the consistency of the DKNY Jeans Label products with
the overall DKNY image. See "-- DKNY Jeans License."
CALVIN KLEIN JEANS LABEL PRODUCTS
The Company believes that the strength of the Calvin Klein image and the
design, fit, quality and value of the products are key elements in maintaining
and promoting consumer demand for the Calvin Klein Jeans Label products. Before
the Company obtained the CKJ License, Calvin Klein Jeans Label products were
targeted primarily to the 30 to 50 year-old age group and the apparel was
tailored to fit only a limited range of the consumer population. Since obtaining
the CKJ License, the Company has retailored the products to provide a
comfortable fit and flattering appearance for a greater number of potential
consumers. The Company now designs, tailors and targets the products to both
older and younger consumers, including the teen market, which has substantially
increased the potential market for Calvin Klein Jeans Label products. The
Company categorizes its products as either basic or fashion. The basic products,
which represented approximately 65% of net sales in the six months ended June
30, 1996, consist of items such as jeans, T-shirts, shorts, shirts, vests,
jackets, fleece shirts and pants and caps. The Company currently offers
approximately 60 styles of its basic products in each of its lines, and those
styles reflect little variation from season to season. The Company complements
its basic products with fashion products, which represented approximately 35% of
net sales in the six months ended June 30, 1996. Fashion items currently include
approximately 130 styles in the mens, womens and juniors lines, and the
assortment of fashion styles that are offered may be changed up to ten times per
year, with variations appropriate to the season and items that are updated for
current trends in color, fabrication or styling. For example, during the course
of 1995, the Company offered a total of approximately 65 basic styles and
approximately 600 fashion styles in its mens line. The Company uses the fashion
items to continually introduce variety into its merchandise assortment.
The in-house design staff at CKI designs the Company's Calvin Klein Jeans
Label products to meet the requests of the Company's merchandising team for
specific garments, fabrics and colors. The Company and CKI work together to
produce a "fashion blueprint" for each of four fashion seasons. The image,
colors and styles of the Company's Calvin Klein Jeans Label products are
intended to be consistent with the other sportswear sold by CKI and other
companies under the Calvin Klein brand name. The design goal is to capture looks
that are fresh and uncluttered. Products are made in a wide range of fabrics
that are given distinctive looks through a variety of finishes, many of which
are developed by the Company, and through an array of colors that are varied
over time. Special attention is given, among other things, to the feel of the
fabrics and the details of the trim. In addition, the Company has developed a
line of khaki products, which it began introducing during the fall of 1995 and
which became available in stores in March 1996.
Upon obtaining the CKJ License, the Company increased the value offered to
consumers by lowering the price of its designer-quality products to "better"
from "designer" price points. The following chart indicates the approximate
range of current retail prices at which certain Calvin Klein Jeans Label
products are sold:
<TABLE>
<CAPTION>
BASICS
------------------------------- FASHION
KNITS, INCLUDING -------------------------
JEANS T-SHIRTS BOTTOMS WOVEN TOPS
----------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Mens............................ $45 to $52 $20 to $32 $54 to $68 $48 to $68
Juniors......................... $45 to $52 $16 to $32 $48 to $72 $48 to $84
Womens.......................... $45 to $52 $16 to $32 $48 to $72 $48 to $84
</TABLE>
39
<PAGE> 41
CALVIN KLEIN JEANS LABEL DIVISIONS
The following chart sets forth the amount of net sales in the periods
presented for each of the Company's product lines:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
-------------------------- --------------------------
(DOLLARS IN THOUSANDS)
% OF % OF
NET SALES(1) NET SALES NET SALES(1) NET SALES
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Mens.................................. $149,626 41.5% $ 90,288 41.6%
Juniors............................... 111,374 30.9 77,737 35.8
Womens(2)............................. 82,291 22.8 48,314 22.3
Childrens(3).......................... 17,311 4.8 562 0.3
-------- ----- -------- -----
$360,602 100.0% $216,901 100.0%
======== ===== ======== =====
</TABLE>
--------------------
(1) Excludes amounts received as royalties.
(2) Includes petites.
(3) As of January 1, 1996, the Company entered into an agreement pursuant
to which Commerce Clothing will produce and distribute Calvin Klein
Jeans Label childrens apparel in the United States.
Mens. The Calvin Klein Jeans Label mens line contributed the greatest
amount to 1995 net sales and was carried in approximately 680 department store
locations and approximately 1,400 specialty retail stores as of December 31,
1995. As of September 30, 1996, the number of department store locations in
which the mens line was carried had increased to approximately 1,100. The
Company also seeks to distribute only to those specialty retailers that have the
ability to offer the proper presentation of the Company's products and has
increased the number of large specialty retailers that distribute its mens line
to approximately 1,200 as of September 30, 1996. The Company also distributes
this line through smaller specialty retailers. The Company currently dedicates a
staff of 9 to the sale of the mens line.
Juniors. In the third quarter of 1994, the Company began targeting
juniors. The Company believes the Calvin Klein image advertising and the style
of the Calvin Klein Jeans Label products have significant appeal to consumers in
this category. The Company further believes that juniors is one of the fastest
growing segments of the retail market and that, as a result, its retailing
customers are increasing the floor space dedicated to the Calvin Klein Jeans
Label juniors line. As of the end of 1995, the juniors line was carried in
approximately 840 department store locations and approximately 800 specialty
retail stores. As of September 30, 1996, the number of department stores and
large specialty retail stores carrying the juniors line had increased to 1,120
and 1,150, respectively. The Company also distributes this line through smaller
specialty retailers. The Company currently dedicates a staff of 12 to the sale
of the juniors line.
Womens. The Company believes the womens line, including petites, is
currently underrepresented in department store locations in comparison to the
Company's men's and juniors lines, and there is a significant opportunity for
growth. As of the end of 1995, such products were carried in approximately 800
department store locations. As of September 30, 1996, the number of department
store locations carrying the womens line had increased to 1,300, and the Company
had introduced the womens line to approximately 718 large specialty retail
stores. The Company also distributes this line through smaller specialty
retailers. The Company currently dedicates a staff of 9 to the sale of the
womens line.
Childrens. As of January 1, 1996, the Company entered into an agreement
pursuant to which a subsidiary of one of its principal suppliers will produce
and distribute Calvin Klein Jeans Label childrens apparel in the United States.
The Company continues to direct and oversee the sale of the products, and it
supervises the distributor's sales staff.
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PRODUCTION AND QUALITY CONTROL
The Company engages both foreign and domestic contractors to manufacture
its Calvin Klein Jeans Label products, and it owns and operates two production
facilities in the United States. In the six months ended June 30, 1996,
approximately 78% of the Company's products, as measured by finished goods
purchased, were produced by third-party vendors in the United States,
approximately 17.5% of the Company's products were produced by overseas vendors,
and approximately 4.5% of the Company's products were produced by the Company's
production facilities. The Company balances the relatively low cost of
production outside the United States with the relatively quick turnaround time
on orders produced domestically. By doing so, the Company hopes to achieve an
optimum balance of cost and timeliness of order fulfillment. Cost management has
enabled the Company to maintain the prices for its basic products at levels that
are attractive to consumers and that provide ample margins for both the Company
and its retailing customers. The Company believes that there is little
difference in the quality of the products produced domestically and outside the
United States, provided that adequate quality controls are in place. The Company
selects the fabrics and other materials and informs the manufacturers as to
where to obtain them. The Company buys finished goods from its manufacturers,
enabling the Company to avoid significant capital expenditures, work-in-process
inventories and the costs associated with maintaining a large production work
force. The Company believes that its relationships with its suppliers are good.
The loss of such suppliers could involve various uncertainties and disruptions,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Dependence on
Manufacturers." The Company retains sourcing agents in the international markets
to assist the Company in selecting and overseeing third-party contractors,
sourcing fabric, monitoring quota and other trade regulations, as well as
performing quality control functions. In addition, the Company recently employed
an executive to be in charge of sourcing to be based in the Company's newly
opened Hong Kong office in order to more effectively maintain control over
production, quality control and prices.
The Company's quality control program is designed to provide that all of
the Company's products meet the Company's standards. The Company maintains a
staff of 16 quality control personnel in the United States and eight sourcing
agents abroad. The Company develops and inspects prototypes of each product
prior to production, establishes fittings based on the prototype, inspects
samples and, through its employees or sourcing agents, inspects fabric prior to
cutting and several times during the production process. The Company or its
sourcing agents inspect the final product prior to shipment to the Company's
distribution facilities. With respect to products produced under licenses or
distribution agreements, the Company oversees the quality control programs of
its licensees and distributors and regularly inspects samples of their products.
DISTRIBUTION
The Company currently distributes its Calvin Klein Jeans Label products
through distribution facilities located in Secaucus, New Jersey and in New
Bedford, Massachusetts. The Secaucus facility, which is operated by an
independent contractor, contains approximately 200,000 square feet and under
normal operating conditions can ship up to 300,000 units per week. The New
Bedford facility, which is leased and operated by the Company, contains
approximately 370,000 square feet and under normal operating conditions can ship
up to 500,000 units per week. In order to improve capacity and operating
efficiency within these facilities, the Company is installing inventory shelves
at the Secaucus facility and conveyor systems at both the Secaucus and New
Bedford facilities. In addition, the Company plans to lease an automated 375,000
square foot distribution facility in North Arlington, New Jersey that is
expected to become operational in the second half of 1997. The Company believes
that the North Arlington facility will have the capacity to ship approximately
the same amount of products that can be shipped out of its two currently
operating distribution facilities. The addition of the distribution capacity in
North Arlington will permit the Company to reevaluate its distribution plans.
Under the Company's inventory replenishment program, the Company offers
retailers the ability to reorder basic items for immediate shipment. The Company
keeps an inventory of products covered by the program and accepts replenishment
orders through its EDI system (see "-- Management Information Systems"). The
Company typically fills replenishment orders within five days of receipt. While
the program
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<PAGE> 43
requires an increased investment in inventories, the Company believes its
ability to offer this flexibility to its retailing customers is a significant
competitive advantage and reduces the risk of mark-down allowances and returns.
Fashion items are shipped in pre-packaged containers, prepared by the
manufacturer, each containing a single type of item in a standard array of
sizes. In general, the Company does not ship individual fashion items to fill-in
the inventory of a retailing customer but rather offers to ship pre-packaged
containers of the next comparable fashion item. Shipping its fashion items in
this manner permits the Company both to distribute a greater volume of products
and to reduce its per unit distribution costs.
As sales increased significantly since January 1, 1995, the Company
experienced difficulties in meeting the increased demands on its distribution
systems. The Company responded by expanding and improving its distribution
facilities and implementing improved management information systems. The Company
believes that its current distribution facilities and management information
systems are sufficient for its current level of operations and, together with
planned expansions and improvements, will be sufficient for anticipated growth
in demand for the Calvin Klein Jeans Label products, but expects to
significantly expand such facilities and systems in order to meet the
operational and informational requirements of the DKNY License and the CK
Outlets operations. There can be no assurance, however, that the planned
expansions and improvements will be completed as planned or that when completed
the distribution facilities and systems will function as anticipated. See "Risk
Factors -- Ability to Achieve and Manage Future Growth."
MANAGEMENT INFORMATION SYSTEMS
The Company continues to upgrade its management information system in order
to maintain better control of its inventory and to provide management with
information that is both more current and more accurate than was available
previously. The Company's management information system provides, among other
things, comprehensive order processing, production, accounting and management
information for the marketing, manufacturing, importing and distribution
functions of the Company's business. The Company's distribution facilities and
administrative offices are linked by the computer system. The Company has
purchased and implemented a software program that enables the Company to track,
among other things, orders, manufacturing schedules, inventory, sales and
mark-downs of its products. In addition, to support the Company's replenishment
program, the Company has an electronic data interchange ("EDI") system, through
which certain customers' orders are automatically placed by the retailer with
the Company. The Company currently serves approximately 31 customers in its EDI
system. See "Risk Factors -- Ability to Achieve and Manage Future Growth."
CUSTOMERS
The Company's Calvin Klein Jeans Label products are sold through major
department stores and specialty retail stores. The Company seeks to maintain and
enhance the image of its Calvin Klein Jeans Label products by controlling the
distribution channels, based on criteria that include the image of the store,
availability of desirable locations within the store and the ability of the
retailing customer to display and promote the products. In addition to the
in-house sales force that is dedicated to the sale of the Company's Calvin Klein
Jeans Label products, the Company retains a small number of sales agents and
agencies who are assigned to specific geographic regions and are compensated on
a commission basis. Beginning mid-1996, the Company also started to retain
agents who will supervise the presentation of Calvin Klein Jeans Label products
by the Company's retailing customers, provide detailed product information to
the sales people employed by its retailing customers and advise the Company
concerning the consumer demand experienced by its retailing customers. As of
September 30, 1996, the Company had retained 30 such agents.
The Company's department store customers include major United States
retailers, certain of which are under common ownership. When considered together
as a group under common ownership, sales to the department store customers owned
by Federated Department Stores Inc. and May Department Stores Co. accounted for
approximately 15.8% and 8.3%, respectively, of 1995 gross sales of Calvin Klein
Jeans Label products. The ten largest purchasers of Calvin Klein Jeans Label
products represented approximately 53% of
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<PAGE> 44
the Company's net revenues in fiscal 1995. While the Company believes that
purchasing decisions in many cases are made independently by each department
store customer, there can be no assurance that purchasing decisions will not be
made on a centralized basis. A decision by the controlling owner of a group of
department stores to decrease the amount of product purchased from the Company
or to cease carrying the Company's products could adversely affect the Company.
ADVERTISING
The appeal to consumers of the Calvin Klein Jeans Label has been built up
over 20 years by the distinctive advertising for the variety of products that
are sold by CKI and other companies under the Calvin Klein brand name, including
couture apparel, sportswear, outerwear, intimate apparel for men and women,
fragrances, eyewear, accessories, hosiery and home furnishings. All the
advertising campaigns for all the Calvin Klein brand products are designed and
executed by CRK Advertising, the in-house advertising agency at CKI. The
advertising campaigns by CKI and its licensees are intended to be mutually
supportive, so that all the producers of Calvin Klein products should benefit
from each advertisement. For example, if the advertising for underwear or
fragrance products calls for the models to wear sportswear, they wear sportswear
designed by CKI, including Calvin Klein Jeans Label products.
Advertising for the Company's products includes outdoor advertising, print
media and television. The advertising strategy is to saturate the urban markets
in Atlanta, Chicago, Dallas, Los Angeles, New York City, San Francisco and
Washington, D.C. with images from the current advertising campaign by placing
the advertisements where the Company's products benefit from the cumulative
effect of multiple exposures, such as billboards, exterior bus panels, bus
shelters and kiosks. Advertising for Calvin Klein Jeans Label products appears
prominently in 24 fashion and special interest magazines such as Harpers'
Bazaar, Mademoiselle, Rolling Stone, Skateboarding, Spin, The New York Times
Magazine, Vanity Fair and Vogue. A significant portion of the 1996 advertising
budget has been allocated to television advertising. The Company supplements
this advertising strategy with promotional activities, such as sponsoring
concert tours and organizing product giveaways at sporting events.
Pursuant to the CKJ License, the Company must contribute not less than 3%
of gross sales of Calvin Klein Jeans Label products, net of discounts, to CKI
for advertising such products. During 1995, the Company incurred approximately
$11.3 million for advertising expenditures to CKI under the CKJ License
Agreement (as defined below). The CKJ License Agreement provides that amounts
not spent in one year are to be spent in the next. A portion of the payment made
to CKI for advertising in 1995 remains available to support the advertising
strategy in 1996. See also " -- DKNY Jeans License."
BACKLOG AND SEASONALITY
The Company generally receives orders for Calvin Klein Jeans Label products
approximately six to eight months prior to the time the products are delivered
to stores. The EDI system has significantly reduced the average order period,
the effect of which has been to decrease backlog in 1996 from comparable dates
in 1995 notwithstanding the growth in sales during this period. At June 30,
1996, the Company's backlog of orders for Calvin Klein Jeans Label products, all
of which are expected to be shipped during fiscal 1996, was approximately $107
million, compared to approximately $134 million at June 30, 1995. Backlog as of
any given date may not be indicative of backlog at a subsequent date because the
backlog depends upon, among other things, the timing of the "market weeks"
during which a significant percentage of the Company's orders for Calvin Klein
Jeans Label products are received. As a consequence, a comparison of backlog
from period to period is not necessarily meaningful and may not be indicative of
eventual shipments.
The Company's business is affected by general seasonal trends that are
characteristic of the apparel industry. In the Company's segment of the apparel
industry, sales typically are higher in the first and third quarters. Primarily
as a result of the significant growth that the Company experienced, recent
quarterly sales trends have not reflected this seasonality. In 1996 and future
years, assuming the Company does not obtain additional significant designer
brands or licenses, the Company expects that its sales may reflect greater
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<PAGE> 45
seasonal trends as its growth rate moderates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality."
CKJ LICENSE
Under the terms of the CKJ License, as amended through April 22, 1996, the
Company (through its wholly-owned subsidiary, Calvin Klein Jeanswear Company)
has been granted an exclusive license to use the registered trademarks Calvin
Klein and CK/Calvin Klein (the "Trademarks") in the form of the logos Calvin
Klein Jeans, CK/Calvin Klein Jeans and CK/Calvin Klein Jeans Khakis in
connection with the manufacture, distribution and sale at wholesale of the
following three categories of womens (including juniors and petites), mens and
childrens garments: (1) jeans made of denim, corduroy, twill and sheeting, (2)
shorts, overalls, shirts, jackets, coats and dresses of a jeans-type
construction made of denim, corduroy, twill, sheeting and chambray and (3)
casual woven shirts made of denim, chambray and other fabrics and knit tops and
bottoms, including fleece, sweat shirts and T-shirts. CKI has retained the right
to produce, distribute, advertise and sell, and to authorize others to produce,
distribute, advertise and sell, pants, shirts, knit tops, knit bottoms and other
items that may be similar to the items listed in clauses (2) and (3) above,
provided that such items are not made of a jeans-type construction. An amendment
in February 1995 added khaki pants, skirts, shorts and related items for an
original term of ten years (the "Khaki Collection"), and a second amendment
added caps, to the list of garments covered by the CKJ License on a
non-exclusive season to season basis. The Company is required to produce at
least two collections per year, a spring collection and a fall collection, and
to submit merchandise plans and design and product specifications to CKI for its
review and approval. In addition, CKI has the right to examine products produced
under the CKJ License during manufacture as part of its quality control program.
The Company has exclusive use of the Trademarks for the collection, in the
United States, its territories and possessions, Canada, Mexico, Guatemala,
Belize, El Salvador, Honduras, Nicaragua, Costa Rica, Panama, certain
jurisdictions in the British West Indies, certain jurisdictions in the Greater
Antilles, Colombia, Ecuador, Brazil, Peru, Bolivia, Paraguay, Chile, Venezuela,
Guyana, Suriname and French Guyana. Additionally, upon termination of the
license between CKI and a third party licensee covering Argentina and Uruguay,
the Company has the right to add such countries to the list of jurisdictions
covered by the CKJ License. The CKJ License Agreement provides that CKI can
terminate the grant of the CKJ License with respect to Central and South America
if net sales are not at least $5 million and $10 million throughout Central and
South America, respectively, for any annual period beginning in 1997.
Additionally, CKI may terminate the grant of the CKJ License with respect to
South America if net sales are not at least $15 million for any period after
1998. CKI may also terminate the Company's right to sell the Khaki Collection if
the net sales of such items are less than $25 million in 1998.
The CKJ License has an initial term of forty years, expiring December 31,
2034, and is renewable for one additional ten-year period, commencing January 1,
2035 so long as the Company has net sales within the United States and Mexico of
at least $375 million and net sales within Canada of $35 million during the
twelve months ending June 30, 2034. The Company is required to make payments to
CKI equal to 3% of gross sales of Calvin Klein Jeans Label products (other than
the Khaki Collection), net of discounts, in exchange for advertising and
promotional support provided by CKI. The Company also must remit an aggregate of
$1.7 million to CKI, which amount will be used to advertise the Khaki Collection
in 1995 and 1996. In addition, in 1997, the Company must remit 5% of the gross
sales of the Khaki Collection to CKI for advertising and 3% of gross sales each
year thereafter. The Company is also required to make royalty payments to CKI
equal to 7% of the Company's net sales of Calvin Klein Jeans Label products. The
royalty payments for closeout articles (as defined) are 3 1/2% of net sales. The
CKJ License provides for minimum annual royalty payments for jurisdictions other
than Canada which increase from $4.4 million in the first year to $22 million
(but not less than 75% of the fees earned during the thirtieth year) in the
fortieth year. During the renewal period such minimum annual royalty payments
increase to the greater of $27 million or 75% of the fees earned in the fortieth
year. In connection with obtaining the CKJ License in August 1994, the Company
paid $9.5 million for which it receives a credit against the royalty payments of
$12.5 million at the rate of $2.0 million per year.
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<PAGE> 46
The CKJ License may be terminated by CKI upon the occurrence of certain
events, including but not limited to the following: (i) failure by the Company
to make payments due under the CKJ License, if such failure continues for a
period of ten days, (ii) decrease in the Company's consolidated net worth to
less than $10 million, (iii) increase in the Company's ratio of consolidated
debt/consolidated net worth to more than 5-to-1, (iv) default by CKJC in the
payment of debt exceeding $5 million, if such default remains uncured after the
relevant grace period and the creditor under such instrument exercises its
rights (whether termination, acceleration or otherwise), (v) default by the
Company in the payment of debt exceeding $5 million, if such default remains
uncured after the relevant grace period and the creditor under such instrument
exercises its rights (whether termination, acceleration or otherwise), (vi) any
other acceleration of debt of the Company exceeding $5 million, (vii) failure by
the Company to obtain minimum sales thresholds in the United States, Mexico and
Canada of at least $205 million in at least one of 2001, 2002, and 2003, $269
million in at least one of 2011, 2012 and 2013 or $344 million in at least one
of 2021, 2022 or 2023; provided that net sales for the subsequent annual period
or subsequent two annual periods does not represent (x) less than 75% of net
sales for the annual period in which such net sales threshold was met, and (y)
less than 90% of the minimum net sales threshold for the annual periods in any
such three year grouping, (viii) failure by the Company to perform any of its
other obligations under the CKJ License, if such failure remains uncured for
thirty days, or (ix) filing of a bankruptcy petition by or against the Company.
Notwithstanding the foregoing, if either the Company or CKJC enters into a
material debt instrument that provides for a default threshold of more than $5
million, the $5 million referred to above will be increased to such greater
amount.
The foregoing description of the CKJ License reflects certain amendments
thereto made on April 22, 1996. Among other things, these amendments (i)
modified the term of the license from a ten year initial term with four ten year
renewal terms to a forty year initial term with one ten year renewal term, (ii)
modified net sales thresholds, (iii) extended the term of the CKJ License for
the Khaki Collection from ten years to forty years, (iv) granted the Company the
non-exclusive right to sell caps for the term of the CKJ License, (v) expanded
the geographical territory for the Khaki Collection, (vi) added certain
territories in Central and South America to the License and (vii) liberalized
certain covenants. As consideration for such amendments, the Company issued
1,275,466 shares of nonvoting 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,
although the Company has granted CKI certain registration rights that can be
exercised at any time after the shares are converted into Common Stock.
During the term of the CKJ License, only CKJC is prohibited from engaging
in any business other than the manufacture, distribution and sale of the
products produced under the CKJ License. Neither the Company nor any of its
other subsidiaries is subject to such prohibition. The Company regularly
evaluates the possibility of acquiring additional licenses and brand names.
DKNY JEANS LICENSE
The Company has established wholly-owned subsidiaries to hold the DKNY
Jeans License and manage the DKNY Jeans Label operations. Under the terms of the
DKNY Jeans License, the Company has been granted an exclusive license to use the
trademark DKNY Jeans in connection with the manufacture, distribution and sale
at wholesale of the following three categories of womens (including juniors and
petites), mens and childrens garments: (1) jeans made of denim, twill, sheeting,
canvas, chambray, linen, corduroy and other fabrics presently associated with
jeanswear, (2) jeans skirts, jeans shorts, jeans overalls, jeans shirts, jeans
jackets, jeans coats and jeans dresses of a jeans-type construction made of
denim, twill, sheeting, canvas, linen, corduroy, chambray and other fabrics
presently associated with jeanswear, (3) casual woven shirts of a jeans-type
construction made of denim, chambray and other fabrics and knit tops and
bottoms, including fleece, sweat shirts and T-shirts with prominent logo
identification using "DKNY Jeans," in styles easily merchandised with jeanswear
and (4) baseball-style caps. Donna Karan International has retained the right to
use and to license to its affiliates and others the right to use, in connection
with such products, marks other than DKNY Jeans. However, such DKNY products may
not be sold as a separate collection, and must be of a higher quality and more
expensive fabrications, with a wholesale value of approximately thirty percent
higher than the current wholesale value of DKNY Jeans products. Also,
collections of such products sold under the name or mark Donna Karan or Donna
Karan New York (whether alone or together with any descriptive or
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<PAGE> 47
fanciful word or words) only may be targeted for the "designer" market segment
with wholesale values consistent with those of third party products targeted for
the "designer" market segment.
The Company is required to produce four collections per year, and to submit
merchandising plans and design and product specifications to Donna Karan
International for its review and approval. Donna Karan International has the
right to examine products produced under the DKNY Jeans License during
manufacture as part of its quality control program. In addition, Donna Karan
International has certain approval rights, including with respect to
distributors, contractors and customers and management of the DKNY Jeans Label
business.
The Company has the exclusive right to use the DKNY Jeans Label generally
throughout the world (other than childrens products in Europe and the Middle
East), provided that if, after five years, the Company has not exploited
distribution in any country in which other DKNY products are sold on a regular
basis, the distribution rights for that country may revert to Donna Karan
International. The DKNY Jeans License has a 30-year term, terminating on
December 31, 2026. In connection with the DKNY Jeans License, the Company will
make an initial payment of $6 million, and will pay an additional $54 million,
$24 million on June 1, 1997 and $10 million on June 1, in each of 1998, 1999 and
2000. These payments are not offset against future royalty payments.
The Company will pay Donna Karan International royalty payments equal to 7%
of the Company's total worldwide Net Sales (as defined) of DKNY Jeans Label
products. International sales are also subject to an administrative fee of 2%.
The royalty payments for Off-Price Articles (as defined) are 3.5% of net sales
thereof with an administrative fee of 1% for international sales of Off-Price
Articles; provided that a full royalty payment and administrative fee will apply
to sales of Off-Price Articles (other than sales to Donna Karan International
outlet stores) in excess of 3% of total net sales of DKNY Jeans Label products.
The Company shall pay annual guaranteed minimum royalties equal to 80% of
Projected Net Sales (as defined) multiplied by the 7% royalty rate, payable in
quarterly installments, with the initial quarterly guaranteed minimum royalty
installment of $1.26 million paid upon execution of the DKNY Jeans License.
Minimum annual royalty payments increase from $5.04 million in the first year to
$39.4 million in the thirtieth year.
The Company has agreed, pursuant to the DKNY Jeans License to use its best
efforts, subject to industry conditions and appropriate arrangements with
customers, to establish shops-in-shop in the United States within the first five
years of the term of the license.
The Company must also spend at least 3% of projected net sales of DKNY
Jeans Label products the creative services for consumer media and outdoor
advertising. Advertising will be created and placed by Donna Karan
International's in-house creative services department under a separate
advertising agreement. The Company will incur a $5 million pre-launch
advertising expense before the end of 1996 and pursuant to the DKNY Jeans
License, the Company expects to incur an additional $15 million in advertising
expenses before the end of 1997.
The DKNY Jeans License may be terminated by Donna Karan International upon
the occurrence of certain events, including but not limited to the following:
(i) failure to make payments when due, after expiration of applicable grace
period, (ii) discontinuing the DKNY Jeans Label operations in a material portion
of the world for more than 90 days; (iii) after the second annual period, (A)
net sales during any two consecutive annual periods are less than the amount
necessary to generate the guaranteed minimum royalty for each such annual period
but at least 80% of the minimum royalty sales for each such annual period, or
(B) net sales during any annual period are less than 80% of the minimum royalty
sales (as defined) for such annual period, or (C) net sales during any annual
period are less than 75% of the net sales during the immediately preceding
annual period and less than 90% of the minimum royalty sales for such annual
period (subject to, in the case of (A) (B) and (C), the right of the Company
under certain circumstances to submit a recovery plan and to implement such
plan), or (D) net sales during any three annual periods during any period of
five consecutive annual periods are less than the projected net sales for each
such annual period; (iv) the licensee defaults on any obligation secured by the
DKNY Jeans Label products and the secured party enforces its rights against such
products or the licensee defaults in any obligation of at least $5 million which
is
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<PAGE> 48
secured by DKNY Jeans Label products and the secured party accelerates such
obligation, subject to the rights of the licensee in the case of such
acceleration to dispute it in good faith and the entire amount of the obligation
is bonded or otherwise provided for; (v) the licensee fails to satisfy the
minimum advertising obligation (as defined) for any annual period, subject to
certain remedy rights, or for two consecutive Annual Periods; (vi) certain other
defaults related to the licensee operating no other business, confidentiality,
assignability, diversion of products or termination of the occupancy agreement
for showroom space by reason of default; (vii) the Company is acquired by,
merged into or consolidated with or a controlling equity position is issued or
transferred to, any person that is a major competitor of the DKNY brand or a
major retail customer of the licensee or the licensor's affiliates; (viii) the
Company enters into any licensing or similar arrangement covering jeanswear-type
products to be sold by the Company under the name or mark of any living fashion
designer prior to the beginning of the fifth annual period or any American
fashion designer prior to the end of the tenth annual period (excluding Donna
Karan, Calvin Klein and Bill Blass); (ix) failure by the licensee or the Company
to perform any of their other material obligations under the DKNY Jeans License,
if such failure remains uncured for 15 or, under certain circumstances, 90 days;
(x) default by the Company of its guarantee obligations with respect to the
licensee; and (xi) certain events of bankruptcy with respect to the licensee or
the Company.
CALVIN KLEIN OUTLETS
In July 1996, the Company announced that it had entered into a letter of
intent with CKI to acquire most of the Calvin Klein outlet stores owned by CKI
(the "CK Outlets") located in the United States, with exclusive rights to open
additional CK Outlets in the United States, Canada and Mexico. The Company
expects to consummate the acquisition in the fourth quarter of 1996. The Company
believes that the acquisition of the CK Outlets will enhance its ability to
dispose of excess inventory in a manner that does not adversely affect its
department and specialty store customers.
LICENSING OPERATIONS
Prior to obtaining the CKJ License, the Company produced and distributed
sportswear under the Bill Blass and Rio labels and produced sportswear for
various retailers under private labels. As of January 1, 1996, the Company
licensed the Rio label and sublicensed the Bill Blass labels to Commerce
Clothing. The Company continues to market the products produced under the
license and sublicense and will receive revenues of approximately 4.5% of net
sales of products under the Rio license and 5% of net sales of products under
the Bill Blass sublicense. In addition, Commerce Clothing pays to the Company
amounts equivalent to those the Company must pay under the license agreement
between the Company and Bill Blass.
The Company has entered into a sublicense agreement for Calvin Klein Jeans
Label products, other than khaki products and childrens apparel, for sale in
Canada. The Company also has entered into a sublicense agreement for Calvin
Klein Jeans Label childrens apparel in the United States. Under the sublicense
agreement for Canada, the Company will receive net revenues of approximately 7%
of net sales, and under the sublicense agreement for childrens apparel in the
United States, the Company will receive net revenues of approximately 4% of net
sales. Such amounts are in addition to a payment of 7% on net sales that the
sublicensee pays to the Company and that the Company remits to CKI pursuant to
the CKJ License. Under both agreements, the Company remains responsible for
working with CKI to develop the lines for presentation to the sublicensee, and
the sublicensee pays 3% of gross sales, net of discounts, as a fee for
advertising, which the Company remits to CKI. The Company is negotiating
sublicense agreements with respect to Calvin Klein Jeans Label khaki products
and childrens apparel for Canada. The Company also is currently negotiating
sublicense or distribution agreements for products in Mexico, Central America
and South America.
COMPETITION
The apparel industry in the United States is highly competitive. The
Company competes with numerous producers of sportswear, many of which are
significantly larger and have significantly greater financial resources than the
Company. The labels that the Company's Calvin Klein Jeans Label products compete
with include Guess?, Lee, Levis, Liz Claiborne, Nautica, Polo/Ralph Lauren and
Tommy Hilfiger, as well as certain other designer and non-designer lines. The
Company's ability to compete depends, in substantial part,
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<PAGE> 49
upon the endurance of the Calvin Klein image and upon the ability of the Company
to continue to offer high-quality garments at competitive prices.
Although the CKJ License grants the Company the exclusive right to sell
certain types of sportswear under the Calvin Klein Jeans Labels, the terms of
the CKJ License permit CKI to sell, or to grant a license to sell, other types
of apparel, including certain types of sportswear, under a Calvin Klein
trademark that could be similar to, and competitive with, the Calvin Klein Jeans
Label products sold by the Company. See "-- CKJ License." The DKNY Jeans License
prohibits the Company from entering into any licensing or similar arrangement
covering jeanswear-type products to be sold by the Company under the name or
mark of any living fashion designer for various periods.
IMPORT RESTRICTIONS
During 1995, the Company imported approximately 20% of the Calvin Klein
Jeans Label products that it sold. Such imports are subject to bilateral textile
agreements between the United States and a number of foreign countries. Such
agreements, which have been negotiated under the framework established by the
Arrangement Regarding International Trade in Textiles, allow the United States
to impose restraints at any time on the importation of categories of merchandise
that, under the terms of the agreements, are not currently subject to specified
limits. The Company does not own the right to import finished garments into the
United States, but it relies on its contract manufacturers and its agents to
obtain the necessary quotas. In the past, to the extent that necessary import
quotas have not been available with respect to a particular source of supply,
the Company has been able to find an alternative source of supply. Accordingly,
the availability of quotas has not had a material effect upon the Company's
business, financial condition or results of operations. The Company's continued
ability to source products that it imports may be adversely affected by a
significant decrease in available import quotas as well as any additional
bilateral agreements and unilateral trade restrictions.
EMPLOYEES
As of September 30, 1996, the Company and its subsidiaries employed
approximately 970 persons. Approximately 560 of such employees were covered by
collective bargaining agreements at the Company's New Bedford, Abbeville and
Nesquehoning facilities. The agreements for the Company's New Bedford and
Nesquehoning facilities will expire on May 31, 1997, and the agreement with
respect to the Abbeville facility will expire on June 30, 1997. The Company has
not experienced any work stoppage and management believes that its relations
with its employees are good.
PROPERTIES
The following table sets forth the Company's distribution and manufacturing
facilities as of September 30, 1996:
<TABLE>
<CAPTION>
APPROXIMATE
FLOOR SPACE
LOCATION USE (SQ. FT.)
- ------------------------------ -------------------------------------------------- -----------
<S> <C> <C>
New Bedford, MA............... Warehousing and distribution (leased) 370,000
Warehousing and distribution (operated under
Secaucus, NJ.................. contract) 200,000
Abbeville, SC................. Manufacturing (owned) 40,000
Nesquehoning, PA.............. Manufacturing (owned) 56,000
</TABLE>
The Company acquired its two manufacturing facilities located in Abbeville
and Nesquehoning in connection with obtaining the CKJ License. Since that time,
the Company has been able to improve operational efficiencies and reduce costs
at these facilities. The Company plans to lease a distribution facility in North
Arlington, New Jersey that is expected to be operational in the second half of
1997, and will contain approximately 375,000 square feet.
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<PAGE> 50
In addition to the facilities described above, the Company leases 42,000
square feet for its executive offices in New York, New York and rents an entire
floor for a showroom for its Calvin Klein Jeans Label products and for offices
in CKI's headquarters building in New York, New York.
LEGAL PROCEEDINGS
On October 15, 1990, an amended complaint (the "Complaint") was filed
against Rio Sportswear, a subsidiary of the Company, and certain other
defendants in the United States District Court for the Southern District of New
York under the caption Golden Trade, S.r.L. et. al. v. Jordache Enterprises,
Inc. et. al. The Complaint alleges, among other things, that the Company
infringed a patent held by Greater Texas and Golden Trade S.r.L. relating to
acid wash processes used in the manufacture of garments having a random fade
effect. Similar suits are pending against the major manufacturers of such jeans
wear. The Complaint seeks damages against all the defendants in unspecified
amounts. On November 27, 1990, the Company filed an answer denying the material
allegations of the Complaint and asserting affirmative defenses and
counterclaims. On December 1, 1995, a revised opinion and order was issued by
the court in which, among other things, the court granted certain of the
defendants' motions for summary judgment, and denied others of such motions. On
January 31, 1996, the case was assigned to a new judge. 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 was also 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 were reached and
Rio Sportswear were found to have infringed the patent in suit, damages and
attorneys' 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 in the period in which the judgment is
rendered; however, the Company believes that any such damages and fees would not
have a material adverse effect upon the Company's business or financial
condition.
The Company is involved from time to time in various routine legal and
administrative proceedings and threatened legal and administrative proceedings
incidental to the ordinary course of its business. The Company has been active
in pursuing actions against counterfeiters and diverters of its Calvin Klein
Jeans Label products. In the opinion of the Company's management, the resolution
of such matters will not have a material adverse effect on its business,
financial condition or results of operations.
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<PAGE> 51
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information as of September 1, 1996
concerning the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------
<S> <C> <C>
Merril M. Halpern............. 62 Chairman of the Board
Arnold H. Simon............... 50 Chief Executive Officer, President and
Director
Debra Simon................... 40 Executive Vice President and Director
A. Lawrence Fagan(1).......... 67 Director
Maurice Dickson............... 51 Executive Vice President and Chief Financial
Officer
Daniel J. Gladstone........... 40 Executive Vice President and President of
Calvin Klein Jeanswear Company
David Fidlon.................. 54 Senior Vice President, Controller and Chief
Accounting Officer
John J. Jones................. 29 Vice President, General Counsel and Secretary
Peter Brown................... 48 Director
Frederick W. Zuckerman(1)..... 62 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
Merril M. Halpern has been a director of the Company since March 1994.
Since October 1984, Mr. Halpern has served as Chairman of the Board of
Charterhouse Group International, Inc., a privately-owned investment firm
("Charterhouse Group"). From 1973 to October 1984, Mr. Halpern served as
President and Chief Executive Officer of Charterhouse Group. Mr. Halpern is also
a director of Dreyer's Grand Ice Cream, Inc., Del Monte Corporation, Insignia
Financial Group, Inc., Microwave Power Devices, Inc. and American Disposal
Services, Inc.
Arnold H. Simon has been President of Rio Sportswear since 1984 and Chief
Executive Officer, President and a director of the Company since it was founded.
Mr. Simon has an aggregate of 28 years of experience in the apparel industry.
Mr. Simon is married to Debra Simon.
Debra Simon has been Executive Vice President and a director of the Company
since March 1994 and Vice President of Rio Sportswear since 1985. Ms. Simon has
over 17 years of experience in the sale and merchandising of jeans and
sportswear. Ms. Simon is married to Arnold H. Simon.
A. Lawrence Fagan has been a director of the Company since March 1994. Mr.
Fagan has been Executive Vice President and Chief Operating Officer of
Charterhouse Group since 1985 and was Senior Vice President of Charterhouse
Group from 1983 to 1985. For 25 years prior to joining Charterhouse, he held
various corporate executive and investment banking positions. He is a director
of Microwave Power Devices, Inc. and American Disposal Services, Inc.
Maurice Dickson has been Executive Vice President and Chief Financial
Officer of the Company since September 1, 1995. Prior to that time, from 1981 to
1995, Mr. Dickson served as Chief Financial Officer of Ellen Tracy, Inc. Mr.
Dickson has an aggregate of 27 years of experience in the apparel industry.
Daniel J. Gladstone has been Executive Vice President of the Company since
April 1996 and President of Calvin Klein Jeanswear Company since July 1994.
Prior to that time, from 1990 to July 1994, he served as President of CKI's
Womens Sportswear Division and CKI's Womens Division and from 1992 to July 1994
he also served as President of CKI's Mens Division.
David Fidlon has been Senior Vice President and Controller of the Company
since June 1995 and was named Chief Accounting Officer on January 22, 1996.
Prior to joining the Company, Mr. Fidlon served as Director of Compliance and
Financial Reporting for Ellen Tracy, Inc. from June 1994 to June 1995, and as
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<PAGE> 52
Senior Manager and Audit Compliance Manager at Weidenbaum Ryder & Co.
Accountants & Auditors from 1989 to June 1994.
John J. Jones has served as Vice President, General Counsel and Corporate
Secretary of the Company since January 1996. Prior to that time, Mr. Jones was
engaged in the private practice of law at the law firm of Skadden, Arps, Slate,
Meagher & Flom beginning in 1991.
Peter Brown has been a director of the Company since July 1996. Mr. Brown
is also Chairman of the Board and Chief Executive Officer of Datamarine
International, a communications equipment manufacturer. He has been President of
South Beach, a consulting firm, since 1990 and Chief Executive Officer of
Heather Hill Sportswear, a manufacturer of moderately-priced mens and boys
sportswear, since 1974. Mr. Brown is also a principal in Denim Works, a chain of
fashion denim stores in Denver, Colorado.
Frederick W. Zuckerman has been a director of the Company since July 1996.
Mr. Zuckerman has been General Partner of Zuckerman, Firstenberg & Associates
LLC since 1995. Mr. Zuckerman was Vice President and Treasurer of IBM
Corporation from 1993 to 1995, from 1991 to 1993, he served as Senior Vice
President and Treasurer of RJR Nabisco, Inc., and from 1981 to 1990, he served
as Vice President and Treasurer of Chrysler Corporation. Mr. Zuckerman is also a
member of the Boards of Directors of Meditrust, Turner Construction Company, NVR
Corporation, Olympic Financial, Ltd., The Japan Equity Fund, The Singapore Fund
and Caere Corporation.
BOARD OF DIRECTORS
The Company has three classes of directors, which are elected for staggered
terms of three years. The initial terms of each class expire at the annual
meeting of stockholders in 1997 (Class I), 1998 (Class II) and 1999 (Class III),
respectively. Messrs. Fagan and Zuckerman are Class I directors, Mr. Brown and
Ms. Simon are Class II directors and Mr. Simon and Mr. Halpern are Class III
directors. Each director holds office until his or her successor is duly elected
and qualified or until his or her resignation or removal, if earlier.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee is responsible for recommending to
the Board of Directors the engagement of the independent auditors of the Company
and reviewing with the independent auditors the scope and results of the audits,
the internal accounting controls of the Company, audit practices and the
professional services furnished by the independent auditors. The Compensation
Committee is responsible for reviewing and approving all compensation
arrangements for officers of the Company, and is also be responsible for
administering the Stock Plan and the Director Plan (each as defined below).
The Delaware General Corporation Law provides that a Company may indemnify
its directors and officers as to certain liabilities. The Company's Certificate
of Incorporation and By-laws provide for the indemnification of its directors
and officers to the fullest extent permitted by law. The Company has directors
and officers liability insurance. The effect of such provisions is to indemnify,
to the fullest extent permitted by law, the directors and officers of the
Company against all costs, expenses and liabilities incurred by them in
connection with any action, suit or proceeding in which they are involved by
reason of their affiliation with the Company.
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<PAGE> 53
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded to, earned by
or paid to the Chief Executive Officer and the four most highly paid executive
officers other than the Chief Executive Officer, who served as executive
officers of the Company as of December 31, 1995 for services rendered in all
capacities to the Company and its subsidiaries during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
----------------------------------
YEAR SALARY BONUS
----- ---------- ----------
<S> <C> <C> <C>
Arnold H. Simon..................................... 1995 $1,000,000 $3,350,000
President and Chief Executive Officer 1994 1,544,958 --
1993 2,764,769 --
Maurice Dickson(2).................................. 1995 300,000 50,000
Executive Vice President and 1994
Chief Financial Officer 1993
Daniel J. Gladstone................................. 1995 350,000 1,208,862
Executive Vice President and 1994 141,475 249,185
President, CKJC 1993
Debra Simon......................................... 1995 400,000 50,000
Executive Vice President 1994 341,964
1993 587,886
David Fidlon(3)..................................... 1995 150,000
Senior Vice President, Controller 1994
and Chief Accounting Officer 1993
</TABLE>
- ---------------
(1) While each of the five named individuals received perquisites or other
personal benefits in the years shown, in accordance with applicable
regulations, the value of these benefits is not indicated since they did not
exceed in the aggregate the lesser of $50,000 or 10% of the individual's
salary and bonus in any year.
(2) Mr. Dickson has been employed with the Company since September 1995. The
amounts shown in these columns are the annual salary and bonus that are set
forth in Mr. Dickson's employment agreement with the Company. For 1995, Mr.
Dickson's total compensation was $99,230.
(3) Mr. Fidlon has been employed by the Company since June 1995. The amounts
shown in these columns are the annual salary and bonus that the Company has
agreed to pay to Mr. Fidlon. For 1995, Mr. Fidlon's total compensation was
$81,693.
EMPLOYMENT AGREEMENTS
Arnold Simon. The Company has an employment agreement with Arnold H. Simon
(the "Simon Employment Agreement"). The Simon Employment 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 $1.5
million. The Simon Employment Agreement also provides that he will receive an
annual cash bonus in 1996 equal to the difference between (i) 2% of all Adjusted
EBITDA (as defined) if such 1996 Adjusted EBITDA is between $50 million and $60
million or 3% of all Adjusted EBITDA if it exceeds $60 million and (ii) $2
million. With respect to 1997 and 1998, the Simon Employment Agreement provides
that he will receive an annual cash bonus based on specified increases in
Adjusted EBITDA ranging from 2 1/2% to 4% of all Adjusted EBITDA in the
applicable year. In addition, Mr. Simon will be entitled to participate in the
plans and programs maintained by the Company for its senior executives.
The Simon Employment Agreement may be terminated at any time by Mr. Simon
for "Good Reason," which shall be deemed to exist if, without his consent, among
other things, (i) a majority of Additional Board
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<PAGE> 54
Members (as defined) shall consist of persons whose election or appointment was
not approved in writing by Mr. Simon (other than those persons who are members
as of the date of the agreement); (ii) there shall occur (A) any liquidation of
the Company or of CKJC, or the sale of substantially all of the assets of the
Company and CKJC taken as whole or (B) any merger, consolidation or other
business combination of the Company or CKJC (each a "Transaction") or any
combination of such Transactions, other than a Transaction immediately after
which the stockholders of the Company who are stockholders immediately prior to
the Transaction continue to own beneficially, directly or indirectly, more than
80% of the then outstanding voting securities of the Company; or (iii) any
person or group (as such term is defined under the Exchange Act), or group of
related persons (other than Charterhouse) which is not an affiliate of the
Company currently shall beneficially own, directly or indirectly, more than 50%
of the then outstanding voting stock of the Company.
Upon termination by Mr. Simon for Good Reason or termination by the Company
without Cause (as defined), Mr. Simon will be entitled, in addition to any
accrued base salary and annual bonus earned but not yet paid, a lump sum payment
in an amount equal to the sum of (i) Mr. Simon's highest annual base salary
during the term multiplied by 2.99 (299%) and (ii) Mr. Simon's average annual
bonus paid or payable with respect to then immediately preceding three fiscal
years multiplied by 2.99 (299%); provided that the maximum amount payable shall
not exceed $9 million in the aggregate. Mr. Simon has the obligation to notify
the Company in writing of the reason for his proposed termination for Good
Reason, and the Company will have the right to correct certain acts or failures
described in such notice.
The Simon Employment Agreement also provides that the Company may terminate
Mr. Simon for Cause, at which time he will be entitled, among other things, to
his then existing base salary through the date of termination and any annual
bonus for the prior fiscal year not yet paid together with the pro rata portion
of the annual bonus for the calendar year in which termination occurs through
the date of termination. Mr. Simon has also agreed that if he voluntarily
terminates his employment other than for Good Reason, that he will not compete
with the Company for the lesser of the remaining term of the agreement or 24
months following the date of termination.
Maurice Dickson. Rio Sportswear and CKJC entered into an employment
agreement with Maurice Dickson (the "Dickson Employment Agreement"), effective
September 1, 1995. The Dickson Employment Agreement, which expires on August 15,
1997, unless renewed, provides for Mr. Dickson to be employed as Chief Financial
Officer of the Company and, commencing on January 1, 1996, to receive an annual
base salary of $400,000, an annual bonus based upon the Company's performance
and certain other benefits. The Dickson Employment Agreement will automatically
renew for additional one year periods unless the Company gives written notice of
non-renewal at least five months prior to the renewal date.
Daniel J. Gladstone. CKJC has an employment agreement with Daniel J.
Gladstone (the "Gladstone Employment Agreement") which expires on December 31,
1997, unless renewed. The Gladstone Employment Agreement provides for Mr.
Gladstone to be employed as President of CKJC and, commencing on January 1,
1996, to receive an annual base salary of $450,000, an annual bonus based on the
Company's performance and certain other benefits.
David Fidlon. Rio Sportswear and CKJC has an employment agreement with
David Fidlon (the "Fidlon Employment Agreement"), which expires on June 12,
1997. The Fidlon Employment Agreement provides for Mr. Fidlon to be employed as
Senior Vice President and Controller of the Company and, commencing on January
1, 1996, to receive an annual base salary of $225,000, annual bonus based upon
the Company's performance and certain other benefits. The Fidlon Employment
Agreement will automatically renew for additional one year periods unless the
Company gives written notice of non-renewal at least five months prior to the
renewal date.
Debra Simon. The Company has an employment agreement with Ms. Simon, which
expires on December 31, 1997, and provides for Ms. Simon to be employed as
Executive Vice President at an annual salary of $400,000 and a bonus at the
discretion of the Company. Ms. Simon's agreement will automatically renew for
additional one year periods unless the Company gives written notice of
non-renewal by the August 31 prior to the renewal year.
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<PAGE> 55
John J. Jones. The Company has an employment agreement with Mr. Jones,
which terminates on January 29, 1998, and provides for an annual salary of
$175,000 and a bonus at the discretion of the Company. Mr. Jones' agreement will
automatically renew for additional one year periods unless the Company gives
written notice of non-renewal by the August 29 prior to the renewal year.
DIRECTORS COMPENSATION
Directors of the Company who are not also employed by or otherwise
affiliated with the Company will receive fees of $5,000 as annual compensation,
$5,000 for each regular and special meeting attended of the Board of Directors
and $3,000 for each committee meeting attended (held on a different day from
meetings of the full Board of Directors). In addition, directors are reimbursed
for travel costs and other out-of-pocket expenses incurred in attending each
directors' and committee meeting. Outside directors are also eligible to receive
stock options pursuant to the Director Plan. See. " -- 1996 Non-Employee
Director Stock Option Plan." Subject to the approval of the stockholders of the
Company, on July 16, 1996, Messrs. Brown and Zuckerman were each granted options
to purchase 5,000 shares of Common Stock at $16 1/2 per share, the fair market
value of the shares on that date.
STOCK OPTION PLAN
The Company's Board of Directors and stockholders have approved the
Designer Holdings Ltd. 1996 Stock Option and Incentive Plan (the "Stock Plan").
The description in this Prospectus of the principal terms of the Stock Plan is a
summary, does not purport to be complete, and is qualified in its entirety by
the full text of the Stock Plan, a copy of which has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
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. Options granted under the Stock Plan may be "incentive stock options"
("ISOs"), within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or nonqualified stock options ("NQSOs"). Stock
appreciation rights ("SARs") may be granted simultaneously with the grant of an
option or (in the case of NQSOs), at any time during its term. Restricted stock
may be granted in addition to or in lieu of any other award granted under the
Stock Plan.
Under the Stock Plan, the Company has reserved 2,363,200 shares of Common
Stock for issuance of awards under the Stock Plan (subject to antidilution and
similar adjustments). Concurrently with the IPO, 1,575,000 shares subject to
options were granted at the initial public offering price of $18.00, including
options to purchase 250,000, 200,000 and 150,000 shares to Messrs. Dickson,
Gladstone and Fidlon, respectively.
The Stock Plan will be administered by the Compensation Committee (the
"Committee") appointed by the Board of Directors of the Company. Subject to the
provisions of the Stock Plan, the Committee will determine the type of award,
when and to whom awards will be granted, the number of shares covered by each
award and the terms, provisions and kind of consideration payable (if any), with
respect to awards. The Committee may interpret the Plan and may at any time
adopt such rules and regulations for the Stock Plan as it deems advisable. The
Committee may, additionally, cancel or suspend awards.
In determining the persons to whom awards shall be granted and the number
of shares covered by each award the Committee shall take into account the duties
of the respective persons, their present and potential contribution to the
success of the Company and such other factors as the Committee shall deem
relevant in connection with accomplishing the purposes of the Stock Plan.
An option may be granted on such terms and conditions as the Committee may
approve, and generally may be exercised for a period of up to 10 years from the
date of grant. Generally, ISOs will be granted with an exercise price equal to
the "Fair Market Value" (as defined in the Stock Plan) on the date of grant. In
the case of ISOs, certain limitations will apply with respect to the aggregate
value of option shares which can become exercisable for the first time during
any one calendar year, and certain additional limitations will apply to ISOs
granted to "Ten Percent Stockholders" (as defined in the Stock Plan). The
Committee may provide
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<PAGE> 56
for the payment of the option price in cash, by delivery of other Common Stock
having a Fair Market Value equal to such option price, by a combination thereof
or by such other manner as the Committee shall determine, including a cashless
exercise procedure through a broker-dealer. The Committee may, in its
discretion, make a loan to a grantee in an amount sufficient to pay the option
price payable by such grantee. Options granted under the Stock Plan will become
exercisable at such times and under such conditions as the Committee shall
determine, subject to acceleration of the exercisability of options in the event
of, among other things, a "Change in Control" (as defined in the Stock Plan).
Generally, stock options may not be exercised unless the grantee is employed by
the Company.
The Stock Plan also permits the Committee to grant SARs with respect to all
or any portion of the shares of Common Stock covered by options. SARs will be
exercisable only at such time or times and only to the extent that the related
option is exercisable and, if such option is an ISO, only if the Fair Market
Value per share of Common Stock exceeds the ISO purchase price.
Upon exercise of an SAR, a grantee will receive for each share for which an
SAR is exercised, an amount in cash or Common Stock, as determined by the
Committee, equal to the excess, if any of (i) the Fair Market Value of a share
of Common Stock on the date the SAR is exercised over (2) the exercise price per
share of the option to which the SAR relates.
When an SAR is exercised, the option to which it relates will cease to be
exercisable to the extent of the number of shares with respect to which the SAR
is exercised, but will be deemed to have been exercised for purposes of
determining the number of shares available for the future grant of awards under
the Stock Plan.
The Stock Plan further provides for the granting of restricted stock
awards, which are awards of Common Stock which may not be disposed of, except by
will or the laws of descent and distribution, for such period as the Committee
determines (the "restricted period"). The Committee may also impose such other
conditions and restrictions, if any, on the shares as it deems appropriate,
including the satisfaction of performance criteria. All restrictions affecting
the awarded shares lapse in the event of a Change in Control.
During the restricted period, the grantee will be entitled to receive
dividends with respect to, and to vote the shares awarded to him. If, during the
restricted period, the grantee's service with the Company terminates for any
reason, any shares remaining subject to restrictions will be forfeited. The
Committee has the authority to cancel any or all outstanding restrictions prior
to the end of the restricted period, including the cancellation of restrictions
in connection with certain types of termination of service.
The Board of Directors may at any time and from time to time suspend,
amend, modify or terminate the Stock Plan; provided however, that, to the extent
required by Rule 16b-3 promulgated under the Exchange Act or any other law,
regulation or stock exchange rule, no such change shall be effective without the
requisite approval of the Company's stockholders. In addition, no such change
may adversely affect any award previously granted, except with the written
consent of the grantee.
No awards may be granted under the Stock Plan after the tenth anniversary
of the approval of the Stock Plan.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company has adopted, subject to stockholder approval at the 1997 annual
meeting, the 1996 Non-Employer Director Stock Option Plan (the "Director Plan"),
which provides for the granting of nonqualified options to purchase shares of
Common Stock to any director of the Company who (i) first becomes a member of
the Board of Directors on or after July 16, 1996, (ii) is not an active employee
or officer of the Company or a subsidiary thereof and (iii) is not appointed or
designated to serve as a member of the Board of Directors by the Principal
Stockholder, Charterhouse, Mr. Simon or any of their respective affiliates
(each, an "Eligible Director"). The Director Plan is designed to provide a means
of giving Eligible Director an increased opportunity to acquire an investment in
the Company, thereby maintaining and strengthening their desire to remain with
or join the Company's Board of Directors and stimulating their efforts on the
Company's behalf.
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<PAGE> 57
The Director Plan authorizes the issuance of up to 100,000 shares of Common
Stock, subject to adjustments in certain circumstances. No options may be
granted 10 years from the effective date of the Director Plan.
Eligible Directors are eligible to receive options under the Director Plan
in accordance with the terms thereof. Each Eligible Director, on the initial
grant date (as defined in the Director Plan), will be granted NQSOs to purchase
5,000 shares of Common Stock. Each year, other than with respect to the year in
which an Eligible Director receives an initial grant of options, as of the first
business day following the annual meeting of stockholders, each Eligible
Director will receive a NQSO to purchase 3,000 shares of Common Stock. Upon the
exercise of an option, the purchase price paid by an Eligible Director will be
100% of the fair market value of such share at the time of the grant of the
option, or the par value of the share, whichever is greater.
The options to purchase shares of Common Stock described above will be
exercisable on or after the first anniversary of the date of grant. In addition,
options granted and not previously exercisable will become vested and fully
exercisable immediately upon an Eligible Director's death or disability or upon
a change in control (as defined in the Director Plan).
Each option will expire upon the tenth anniversary of the date of grant.
Subject to the number of shares authorized for issuance under the Director Plan
and the term of the Director Plan, the Director Plan shall continue in effect
without limit unless and until the Board of Directors otherwise determines.
If an Eligible Director terminates his or her service on the Board of
Directors for any reason, including disability, death, resignation, or failure
to stand for reelection, any exercisable option which has not expired may be
exercised with respect to the number of shares of Common Stock which were
exercisable on the date the Eligible Director terminated his or her service with
the Company at any time during the earlier of (i) the one-year period following
such date, or (ii) the remaining term of the option. Any unexpired but
unexercisable option shall terminate and become null and void as of the date the
Eligible Director terminates his or her service with the Company.
The Director Plan is administered by the Board of Directors or a duly
appointed committee thereof which has the full and final authority to interpret
the Director Plan and to adopt and amend such rules and regulations for the
administration of the Director Plan as the Board may deem desirable. In
addition, the Board of Directors has the right to amend or terminate the
Director Plan in certain circumstances; provided, however, that unless first
duly approved by the holders of Common Stock entitled to vote thereon, no
amendment or change may be made in the Director Plan: (i) to increase the number
of shares available for grant under the Director Plan; (ii) to reduce the
minimum exercise price at which any option may be exercised; (iii) to change the
requirements as to eligibility for participation under the Director Plan; (iv)
to change the number of options to be granted or the date on which such options
are to be granted; or (v) to increase the benefits accruing to participants
under the Director Plan.
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<PAGE> 58
CERTAIN TRANSACTIONS
On August 4, 1994, Mr. Simon contributed approximately 83% of his interests
in the Predecessor Companies to the Company in exchange for a 50% beneficial
equity interest in the Company through his interest in New Rio, L.L.C., the
Principal Stockholder. Mr. Simon also granted the Company an option to acquire
his remaining approximately 17% interest in the Predecessor Companies for $4.0
million. Mr. Simon's interests in the Predecessor Companies were contributed in
connection with the transaction in which Mr. Simon and Charterhouse (including
Chef Nominees Limited) each received a 50% equity interest in the Principal
Stockholder. Charterhouse contributed $20 million in cash in exchange for its
interest. Mr. Simon's contribution of his equity interest in the Predecessor
Companies was deemed by Mr. Simon and Charterhouse to be equal in value to
Charterhouse's cash contribution. In April 1995, the Company exercised its
option, and purchased Mr. Simon's remaining interests for approximately $1.3
million in cash and the cancellation of notes receivable from Mr. Simon on which
approximately $2.7 million principal and accrued interest was outstanding.
In 1994, the Company loaned an aggregate of $2.4 million to Mr. Simon and
Ms. Simon, including $850,000 in connection with the transactions described
above. Such loans, evidenced by promissory notes, bore interest at a fluctuating
annual rate equal to the rate publicly announced by Chemical Bank in New York as
its reference rate plus 3% per annum. The loans were secured by the retained 17%
interest in the Predecessor Companies. In April 1995, upon the exercise by the
Company of its option to acquire such interest, the notes were cancelled.
In 1994, Charterhouse loaned $45.2 million to the Company and received
notes payable in an equal amount. The notes payable to Charterhouse bore
interest at a fluctuating annual rate equal to the rate publicly announced by
Chemical Bank in New York as its reference rate plus 3% per annum. The notes
were repaid in full by the Company with proceeds of certain borrowings in May
1995. See Note 11 to the audited consolidated financial statements of the
Company included elsewhere in this Prospectus.
In connection with the repurchase of Mr. Huang's interests in the
Predecessor Companies in August 1994, the Company may be liable for an
additional purchase price of approximately $1.1 million (which is net of an
approximately $900,000 adjustment to such purchase price). See "The Company" and
Note 3 to the audited consolidated financial statements of the Company included
elsewhere in this Prospectus.
REGISTRATION RIGHTS AGREEMENTS
The Company has a registration rights agreement with the Principal
Stockholder and CKI (the "Registration Rights Agreement") providing for certain
registration rights with respect to shares of Common Stock owned by the
Principal Stockholder and CKI. Under the Registration Rights Agreement, through
their respective ownership interests in the Principal Stockholder, each of
Charterhouse and Mr. Simon will have independent rights to request not less than
two demand registrations, although under certain circumstances, the Company may
be required to effect additional demand registrations in connection with the
shares of Common Stock attributable to Charterhouse and Mr. Simon. The Principal
Stockholder will also have the right to require the Company to include shares of
Common Stock held by it on behalf of the holders of ownership interests in the
Principal Stockholder in certain other registrations of the Company's securities
initiated by the Company on its own behalf or on behalf of any other stockholder
of the Company. Holders of ownership interests in the Principal Stockholder may
exercise such rights independently but only through the Principal Stockholder.
After conversion of its non-voting common stock into Common Stock, CKI will also
have the right to include its shares in such other registrations. In addition,
CKI may pledge such shares to lenders and after expiration of the 180-day
"lock-up" period entered into in connection with the IPO, such lenders shall
have a one-time demand right following foreclosure on such shares; provided that
such lenders in good faith shall first have taken substantial steps to pursue
and obtain the collection of the obligations owed to them from CKI. Any such
request to have Common Stock registered under the Registration Rights Agreement
may be delayed by the Company for up to 120 days if the Company determines in
its reasonable judgment that the registration and offering would interfere with
any material financing, acquisition, corporate reorganization or other material
corporate transaction or development involving the Company. All fees, costs and
expenses of any registration under the Registration Rights Agreement, other than
underwriting discounts and any other expenses attributable to Common Stock sold
by the Principal Stockholder or CKI, will be paid by the Company.
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<PAGE> 59
PRINCIPAL STOCKHOLDERS
The following table sets forth as of September 30, 1996 the total number of
shares of Common Stock of the Company beneficially owned, and the percent so
owned, by (i) each director of the Company, (ii) each person who has an
ownership interest in the Principal Stockholder, (iii) each person known to the
Company to be the beneficial owner of more than five percent of the outstanding
Common Stock of the Company, (iv) each of the executive officers listed in the
Summary Compensation Table and (v) all directors and officers as a group. The
number of shares owned are those "beneficially owned," as determined under the
rules of the Securities and Exchange Commission, and such information is not
necessarily indicative of beneficial ownership for any other purpose. The
Principal Stockholder is a limited liability company and is the record owner of
the shares of Common Stock beneficially owned by the persons listed under its
heading below. Its operative agreement allows the holders of ownership interests
therein generally to cause the Principal Stockholder to exercise disposition
rights as directed by each such holder independently with respect to such
holder's allocable percentage of the shares of Common Stock of the Company.
Therefore, such persons may be deemed to be the beneficial owners of shares of
Common Stock of the Company.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY OWNED
----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------------------------------------------ ---------- -------
<S> <C> <C>
NEW RIO, L.L.C.:
Charterhouse Equity Partners II, L.P. ................................ 8,033,800 25.0%
535 Madison Avenue
New York, NY 10022
Arnold H. Simon....................................................... 8,102,889 25.2%
1385 Broadway
New York, NY 10018
Martin L. Berman(3)................................................... 141,146 *
Steven E. Berman...................................................... 53,272 *
Phyllis West Berman................................................... 51,084 *
Trust for the benefit of Mark K. Berman and Allison A. Berman......... 157,445 *
Michael A. Covino..................................................... 225,374 *
Chef Nominees Limited................................................. 15,934 *
---------- -------
NEW RIO, L.L.C. TOTAL......................................... 17,930,944 52.1%
Calvin Klein, Inc.(1)................................................... 1,275,466 4.0%
205 West 39th Street
New York, NY 10018
Merril M. Halpern(4).................................................... -- --
Debra Simon(5).......................................................... -- --
A. Lawrence Fagan(4).................................................... -- --
Maurice Dickson......................................................... 9,500 *
Daniel J. Gladstone(6).................................................. 71,667 *
David Fidlon............................................................ 3,000 *
Peter Brown............................................................. -- --
Frederick W. Zuckerman.................................................. -- --
All current executive officers and directors
as a group (10 persons)(4)(6)......................................... 8,196,556 25.4%
</TABLE>
- ---------------
* Less than one percent.
(1) Assumes conversion of 1,275,466 shares of non-voting common stock into
1,275,466 shares of Common Stock.
(2) Includes 318,867 shares owned by AS Enterprises LLC, a company owned by Mr.
and Ms. Simon.
(3) Formerly a director of the Company.
(4) Messrs. Halpern and Fagan are executive officers of Charterhouse Group
International, Inc., which indirectly controls Charterhouse. Messrs. Halpern
and Fagan may be deemed to own beneficially the shares of Common Stock
beneficially owned by Charterhouse. Messrs. Halpern and Fagan disclaim all
such beneficial ownership.
(5) Ms. Simon is Mr. Simon's wife. See Mr. Simon's beneficial ownership above.
(6) Includes 66,667 shares issuable upon the exercise of options exercisable
within 60 days.
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<PAGE> 60
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the
Declaration. The Declaration will be qualified as an indenture under the Trust
Indenture Act. The Property Trustee, IBJ Schroder Bank & Trust Company, will act
as Indenture Trustee for the Preferred Securities under the Declaration for
purposes of compliance with the provisions of the Trust Indenture Act. The terms
of the Preferred Securities will include those stated in the Declaration and
those made part of the Declaration by the Trust Indenture Act. The following
summary of the material terms and provisions of the Preferred Securities is
subject to, and qualified in its entirety by reference to, the Declaration.
GENERAL
The Preferred Securities will be issued in fully registered form without
interest coupons. Bearer Preferred Securities will not be issued.
The Declaration authorizes the Regular Trustees to issue the Trust
Securities on behalf of the Trust. The Preferred Securities represent undivided
beneficial ownership interests in the assets of the Trust and entitle the
holders thereof to a preference in certain circumstances with respect to
distributions and amounts payable on redemption or liquidation over the Common
Securities, as well as other benefits as described in the Declaration.
All of the Common Securities will be owned, directly or indirectly, by the
Company. The Common Securities rank pari passu, and payments will be made
thereon on a pro rata basis, with the Preferred Securities, except that upon the
occurrence of a Declaration Event of Default, the rights of the holders of the
Common Securities to receive payment of periodic distributions and payments upon
liquidation, redemption and otherwise will be subordinated to the rights of the
holders of Preferred Securities. See "-- Subordination of Common Securities."
Title to the Convertible Debentures will be held by the Property Trustee for the
benefit of the holders of the Trust Securities. The Declaration does not permit
the issuance by the Trust of any securities other than the Trust Securities or
the incurrence of any indebtedness by the Trust. The payment of distributions
out of money held by the Trust, and payments upon redemption of the Preferred
Securities or liquidation of the Trust, are guaranteed by the Company to the
extent described under "Description of the Guarantee." The Guarantee will be
held by IBJ Schroder Bank & Trust Company, the Guarantee Trustee, for the
benefit of the holders of the Preferred Securities. The Guarantee does not cover
payment of distributions when the Trust does not have sufficient available funds
to pay such distributions. In such event, the remedy of a holder of Preferred
Securities is to (i) vote to direct the Property Trustee to enforce the Property
Trustee's rights under the Convertible Debentures or (ii) if the failure of the
Trust to pay distributions is attributable to the failure of the Company to pay
interest or principal on the Convertible Debentures, to institute a proceeding
directly against the Company for enforcement of payment to such holder of the
principal of or interest on the Convertible Debentures having a principal amount
equal to the aggregate liquidation amount of the Preferred Securities of such
holder on or after the respective due date specified in the Convertible
Debentures. See "-- Voting Rights."
DISTRIBUTIONS
Distributions on Preferred Securities will be fixed at a rate per annum
of % of the stated liquidation amount of $50 per Preferred Security.
Distributions in arrears for more than one quarter will bear interest thereon at
a rate per annum of % thereof compounded quarterly. The term "distribution"
as used herein includes any such interest (including any Additional Interest)
payable unless otherwise stated. The amount of distributions payable for any
period will be computed on the basis of a 360-day year of twelve 30-day months.
Distributions on the Preferred Securities will be cumulative, will accrue
from the date of initial issuance and will be payable quarterly in arrears on
each March 31, June 30, September 30 and December 31, commencing December 31,
1996, when, as and if available for payment, by the Property Trustee, except as
otherwise described below. The Company has the right under the Indenture to
defer interest payments from time to time on the Convertible Debentures for
successive periods not exceeding 20 consecutive quarterly interest periods
during which no interest shall be due and payable; provided, that no such
Extension Period
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<PAGE> 61
may extend beyond the maturity date of the Convertible Debentures. As a
consequence of such extension, quarterly distributions on the Preferred
Securities would be deferred (though such distributions would continue to accrue
with interest since interest would continue to accrue on the Convertible
Debentures) during any such extended interest payment period. In the event that
the Company exercises this right, then, during such period the Company has
agreed, among other things, (a) not to declare or pay dividends on, or make a
distribution with respect to, or redeem or purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchases or acquisitions of shares of Common Stock in connection with the
satisfaction by the Company of its obligations under any employee benefit plans
or the satisfaction by the Company of its obligations pursuant to any contract
or security requiring the Company to purchase shares of the Common Stock, (ii)
as a result of a reclassification of the Company's capital stock or the exchange
or conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock or (iii) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged (or make any guarantee payments with respect to the
foregoing)), (b) not to make any payment of interest, principal or premium, if
any, on or repay, repurchase or redeem any debt securities (including
guarantees) issued by the Company that rank pari passu with or junior to the
Convertible Debentures and (c) not to make any guarantee payments with respect
to the foregoing (other than pursuant to the Preferred Securities Guarantee).
Prior to the termination of any such Extension Period, the Company may further
extend such Extension Period; provided, that such Extension Period, together
with all previous and further extensions thereof, may not exceed 20 consecutive
quarters and that such Extension Period may not extend beyond the maturity date
of the Convertible Debentures. Upon the termination of any Extension Period and
the payment of all amounts then due, the Company may select a new Extension
Period, subject to the above requirements. Consequently, there could be multiple
Extension Periods of varying lengths throughout the term of the Convertible
Debentures. See "Description of the Convertible Debentures -- Interest" and
"Description of the Convertible Debentures -- Option to Extend Interest Payment
Periods." If distributions are deferred, the deferred distributions and accrued
interest thereon shall be paid to the holders of record of Preferred Securities
as they appear on the books and records of the Trust on the record date next
following the termination of such deferral period.
Distributions on the Preferred Securities will be made to the extent that
the Trust has funds available for the payment of such distributions in the
Property Account. Amounts available to the Trust for distribution to the holders
of the Preferred Securities will be limited to payments received by the Trust
from the Company for the Convertible Debentures. See "Description of the
Convertible Debentures." The payment of distributions out of funds held by the
Trust is guaranteed by the Company, as set forth under "Description of the
Guarantee."
Distributions on the Preferred Securities will be payable to the holders
thereof as they appear on the books and records of the Trust on the relevant
record dates, which will be fifteen days prior to the relevant payment dates.
Subject to any applicable laws and regulations and the provisions of the
Declaration, each such payment will be made as described under "-- Book-Entry
Only Issuance -- The Depository Trust Company" below. In the event that any date
on which distributions are payable on the Preferred Securities is not a Business
Day, payment of the distribution payable on such date will be made on the next
succeeding day which is a Business Day (without any distribution or other
payment in respect of any such delay) except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. A "Business Day" shall mean any day other than a day on which
banking institutions in The City of New York or in Wilmington, Delaware are
authorized or required by law to close.
CONVERSION RIGHTS
General. Preferred Securities will be convertible at any time prior to the
close of business on the Business Day immediately preceding the date of
repayment of such Preferred Securities, whether at maturity or upon redemption
(either at the option of the Company or pursuant to a Tax Event), at the option
of the holder thereof and in the manner described below, into shares of Common
Stock at an initial conversion rate
60
<PAGE> 62
of shares of Common Stock for each Preferred Security (equivalent to a
conversion price of $ per share of Common Stock), subject to adjustment
as described under "-- Conversion Price Adjustments" below. The Trust will
covenant in the Declaration not to convert Convertible Debentures held by it
except pursuant to a notice of conversion delivered to the Property Trustee, as
conversion agent (the "Conversion Agent") by a holder of Preferred Securities. A
holder of a Preferred Security wishing to exercise its conversion right shall
deliver an irrevocable conversion notice, together, if the Preferred Security is
a Certificated Security (as defined herein), with such Certificated Security, to
the Conversion Agent which shall, on behalf of such holder, exchange such
Preferred Security for a portion of the Convertible Debentures and immediately
convert such Convertible Debentures into Common Stock. Holders may obtain copies
of the required form of the conversion notice from the Conversion Agent.
Procedures for converting book-entry Preferred Securities into shares of Common
Stock will differ, as described under "-- Book-Entry Only Issuance -- The
Depository Trust Company."
Holders of Preferred Securities at the close of business on a distribution
record date will be entitled to receive the distribution payable on such
Preferred Securities on the corresponding distribution payment date
notwithstanding the conversion of such Preferred Securities following such
distribution record date but prior to such distribution payment date. Except as
provided in the immediately preceding sentence, neither the Trust nor the
Company will make, or be required to make, any payment, allowance or adjustment
for accumulated and unpaid distributions, whether or not in arrears, on
converted Preferred Securities; provided, however, that any holder of Preferred
Securities who delivers such Preferred Securities for conversion after receiving
a notice of redemption from the Property Trustee during an Extension Period
shall be entitled to receive all accumulated and unpaid distributions to the
date of conversion. See "Description of the Convertible Debentures -- Optional
Redemption," "Description of Preferred Securities -- Conversion Rights" and "--
Mandatory Redemption." The shares of Common Stock issued upon such conversion,
except to the extent that such shares of Common Stock are held of record on the
record date for any such distributions. Each conversion will be deemed to have
been effected immediately prior to the close of business on the day on which the
related conversion notice was received by the Conversion Agent.
No fractional shares of Common Stock will be issued as a result of
conversion, but in lieu thereof such fractional interest will be paid by the
Company in cash based on the last reported sale price of Common Stock on the
date such Preferred Securities are surrendered for conversion.
Conversion Price Adjustments -- General. The conversion price is subject
to adjustment in certain events, including (a) the issuance of shares of Common
Stock as a dividend or a distribution with respect to Common Stock, (b)
subdivisions, combinations and reclassification of Common Stock, (c) the
issuance to all holders of Common Stock of rights or warrants entitling them
(for a period not exceeding 45 days) to subscribe for shares of Common Stock at
less than the then Current Market Price (as defined below) of the Common Stock,
(d) the distribution to holders of Common Stock of evidences of indebtedness of
the Company, securities or capital stock, cash or assets (including securities,
but excluding those rights, warrants, dividends and distributions referred to
above and dividends and distributions paid exclusively in cash), (e) the payment
of dividends (and other distributions) on Common Stock paid exclusively in cash,
excluding cash dividends if the annualized per share amount thereof does not
exceed 15% of the current market price of Common Stock as of the trading day
immediately preceding the date of declaration of such dividend, and (f) payment
to holders of Common Stock in respect of a tender or exchange offer (other than
an odd-lot offer) by the Company for Common Stock at a price in excess of 110%
of the then Current Market Price of Common Stock as of the trading day next
succeeding the last date tenders or exchanges may be made pursuant to such
tender or exchange offer. "Current Market Price" means the average of the daily
closing prices for the five consecutive trading days selected by the Company
commencing not more than 20 trading days before, and ending not later than, the
earlier of the day in question or, if applicable, the day before the "ex" date
with respect to the issuance or distribution in question.
The Company from time to time may reduce the conversion price of the
Convertible Debentures (and thus the conversion price of the Preferred
Securities) by any amount selected by the Company for any period of at least 20
days, in which case the Company shall give at least 15 days' notice of such
reduction. The Company may, at its option, make such reductions in the
conversion price, in addition to those set forth above, as the Company's Board
of Directors deem advisable to avoid or diminish any income tax to holders of
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<PAGE> 63
Common Stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes. See
"United States Federal Income Taxation -- Adjustment of Conversion Price."
No adjustment of the conversion price will be made upon the issuance of any
shares of Common Stock pursuant to any present or future plan providing for the
reinvestment of dividends or interest payable on securities of the Company and
the investment of additional optional amounts in shares of Common Stock under
any such plan. No adjustment in the conversion price will be required unless
adjustment would require a change of at least percent ( %) in the price
then in effect; provided, however, that any adjustment that would not be
required to be made shall be carried forward and taken into account in any
subsequent adjustment. If any action would require adjustment of the conversion
price pursuant to more than one of the provisions described above, only one
adjustment shall be made and such adjustment shall be the amount of adjustment
that has the highest absolute value to the holder of the Preferred Securities.
Conversion Price Adjustments -- Merger, Consolidation or Sale of Assets of
the Company. In the event that the Company shall be a party to any transaction
(including, without limitation, and with certain exceptions, (a) a
recapitalization or reclassification of the Common Stock, (b) consolidation of
the Company with, or merger of the Company into, any other Person, or any merger
of another Person into the Company, (c) any sale, transfer or lease of all or
substantially all of the assets of the Company or (d) any compulsory share
exchange) pursuant to which the Common Stock is converted into the right to
receive other securities, cash or other property (each of the foregoing being
referred to as a "Transaction"), then the holders of Preferred Securities then
outstanding shall have the right to convert the Preferred Securities into the
kind and amount of securities, cash or other property receivable upon the
consummation of such Transaction by a holder of the number of shares of Common
Stock issuable upon conversion of such Preferred Securities immediately prior to
such Transaction.
In the case of a Transaction, each Preferred Security would become
convertible into the securities, cash or property receivable by a holder of the
number of shares of the Common Stock into which such Preferred Security was
convertible immediately prior to such Transaction. This change could
substantially lessen or eliminate the value of the conversion privilege
associated with the Preferred Securities in the future. For example, if the
Company were acquired in a cash merger, each Preferred Security would become
convertible solely into cash and would no longer be convertible into securities
whose value would vary depending on the future prospects of the Company and
other factors.
Conversion price adjustments or omissions in making such adjustments may,
under certain circumstances, be deemed to be distributions that could be taxable
as dividends to holders of Preferred Securities or to the holders of Common
Stock. See "United States Federal Income Taxation."
MANDATORY REDEMPTION
The Convertible Debentures will mature on , 2016 and may be
redeemed, in whole or in part, at any time after , 1999 or at any
time in certain circumstances upon the occurrence of a Tax Event. Upon the
repayment of the Convertible Debentures, whether at maturity or upon redemption
(either at the option of the Company or pursuant to a Tax Event), the proceeds
from such repayment shall simultaneously be applied to redeem Trust Securities
having an aggregate liquidation amount equal to the Convertible Debentures so
repaid or redeemed at the applicable Redemption Price, together with accrued and
unpaid distributions through the date of redemption; provided, that holders of
the Trust Securities shall be given not less than 30 nor more than 60 days'
notice of such redemption. See "-- Special Event Redemption or Distribution,"
"-- Redemption Procedures," "Description of the Convertible
Debentures -- General" and "Description of the Convertible
Debentures -- Optional Redemption".
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
If, at any time, a Tax Event or an Investment Company Event shall occur and
be continuing, the Trust shall, unless the Convertible Debentures are redeemed
in the limited circumstances described below, be dissolved with the result that,
after satisfaction of creditors,if any, of the Trust, Convertible Debentures
with an aggregate principal amount equal to the aggregate stated liquidation
amount of, with an interest rate
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<PAGE> 64
identical to the distribution rate of, and accrued and unpaid interest equal to
accrued and unpaid distributions on, and having the same record date for payment
as the Preferred Securities and the Common Securities outstanding at such time
would be distributed on a pro rata basis to the holders of the Preferred
Securities and the Common Securities in liquidation of such holders' interests
in the Trust, within 90 days following the occurrence of such Special Event;
provided, however, that in the case of the occurrence of a Tax Event, as a
condition of such dissolution and distribution, the Regular Trustees shall have
received an opinion of nationally recognized independent tax counsel experienced
in such matters (a "No Recognition Opinion"), which opinion may rely on
published revenue rulings of the Internal Revenue Service, to the effect that
the holders of the Preferred Securities will not recognize any income, gain or
loss for Federal income tax purposes as a result of such dissolution and
distribution of Convertible Debentures; and, provided, further, that if at the
time there is available to the Trust the opportunity to eliminate, within such
90-day period, the Special Event by taking some ministerial action, such as
filing a form or making an election, or pursuing some other similar reasonable
measure which in the sole judgment of the Company has or will cause no adverse
effect on the Trust, the Company or the holders of the Trust Securities and will
involve no material cost, the Trust will pursue such measure in lieu of
dissolution. Furthermore, if in the case of the occurrence of a Tax Event, (i)
the Regular Trustees have received an opinion (a "Redemption Tax Opinion") of
nationally recognized independent tax counsel experienced in such matters that,
as a result of a Tax Event, there is more than an insubstantial risk that the
Company would be precluded from deducting the interest on the Convertible
Debentures for Federal income tax purposes even if the Convertible Debentures
were distributed to the holders of Preferred Securities and Common Securities in
liquidation of such holders' interests in the Trust as described above or (ii)
the Regular Trustees shall have been informed by such tax counsel that a No
Recognition Opinion cannot be delivered to the Trust, the Company shall have the
right, upon not less than 30 nor more than 60 days' notice, to redeem the
Convertible Debentures, in whole (but not in part) for cash within 90 days
following the occurrence of such Tax Event, and promptly following such
redemption, the Preferred Securities and Common Securities will be redeemed by
the Trust at the Redemption Price; provided, however, that if at the time there
is available to the Company or the Trust the opportunity to eliminate, within
such 90-day period, the Tax Event by taking some ministerial action, such as
filing a form or making an election, or pursuing some other similar reasonable
measure which in the sole judgment of the Company has or will cause no adverse
effect on the Trust, the Company or the holders of the Trust Securities and will
involve no material costs, the Company or the Trust will pursue such measure in
lieu of redemption.
Because the Company is a holding company whose operations are conducted
through its subsidiaries, the ability of the Company to redeem the Convertible
Debentures, and, therefore for the Trust to redeem the Preferred Securities,
will be dependent on the subsidiaries' ability to pay dividends to the Company.
The Company's Credit Agreement imposes certain restrictions on the ability of
the Company and its subsidiaries to dividend funds. Therefore, any redemption of
the Convertible Debentures, and, therefore the Preferred Securities, will
require a waiver or amendment to the Credit Agreement prior to such redemption.
See "Risk Factors -- Holding Company Structure, Subordination and Restrictive
Covenants," "Risk Factors -- Ranking of Subordinate Obligations Under the
Guarantee and Convertible Debentures" and "Description of Certain Indebtedness."
"Tax Event" means that the Regular Trustees shall have received an opinion
of nationally recognized independent tax counsel experienced in such matters (a
"Dissolution Tax Opinion") to the effect that as a result of (a) any amendment
to, or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, (b) any amendment to, or change in, an
interpretation or application of any such laws or regulations by any legislative
body, court, governmental agency or regulatory authority (including the
enactment of any legislation and the publication of any judicial decision or
regulatory determination), (c) any interpretation or pronouncement that provides
for a position with respect to such laws or regulations that differs from the
theretofore generally accepted position or (d) any action taken by any
governmental agency or regulatory authority, which amendment or change is
enacted, promulgated, issued or announced or which interpretation or
pronouncement is issued or announced or which action is taken, in each case, on
or after the date of this Registration Statement (collectively, a "Change in Tax
Law"), there is more than an insubstantial risk that (i) the Trust is, or will
be within 90 days of the date thereof, subject to federal income tax with
respect to
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income accrued or received on the Convertible Debentures, (ii) the Trust is, or
will be within 90 days of the date thereof, subject to more than a de minimis
amount of other taxes, duties or other governmental charges or (iii) interest
payable by the Company to the Trust on the Convertible Debentures is not, or
within 90 days of the date thereof will not be, deductible by the Company for
Federal income tax purposes. Notwithstanding anything in the previous sentence
to the contrary, a Tax Event shall not include any Change in Tax Law that
requires the Company for federal income tax purposes to defer taking a deduction
for any original issue discount that accrues with respect to the Convertible
Debentures until the interest payment related to such OID is paid by the Company
in money; provided, that such Change in Tax Law does not create more than an
insubstantial risk that the Company will be prevented from taking a deduction
for OID accruing with respect to the Convertible Debentures at a date that is no
later than the date the interest payment related to such OID is actually paid by
the Company in money.
"Investment Company Event" means that the Regular Trustees shall have
received an opinion of nationally recognized independent counsel experienced in
practice under the Investment Company Act of 1940, as amended (the "1940 Act"),
that as a result of the occurrence of a change in law or regulation or a change
in interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
there is more than an insubstantial risk that the Trust is or will be considered
an "investment company" which is required to be registered under the 1940 Act,
which Change in 1940 Act Law becomes effective on or after the date hereof.
On the date fixed for any distribution of Convertible Debentures, upon
dissolution of the Trust, (i) the Preferred Securities and the Common Securities
will no longer be deemed to be outstanding and (ii) certificates representing
Trust Securities will be deemed to represent beneficial interests in the
Convertible Debentures having an aggregate principal amount equal to the stated
liquidation amount of, and bearing accrued and unpaid interest equal to accrued
and unpaid distributions on, such Trust Securities until such certificates are
presented to the Company or its agent for transfer or reissuance.
There can be no assurance as to the market price for the Convertible
Debentures which may be distributed in exchange for Trust Securities if a
dissolution and liquidation of the Trust were to occur. Accordingly, the
Convertible Debentures which the investor may subsequently receive on
dissolution and liquidation of the Trust may trade at a discount to the price of
the Trust Securities exchanged. If the Convertible Debentures are distributed to
the holders of the Preferred Securities, the Company will use its best efforts
to cause the Convertible Debentures to be listed on the NYSE or on any such
other national securities exchange or similar organization as the Preferred
Securities are then listed or quoted.
REDEMPTION PROCEDURES
The Trust may not redeem fewer than all of the outstanding Preferred
Securities unless all accrued and unpaid distributions have been paid on all
Preferred Securities for all quarterly distribution periods terminating on or
prior to the date of redemption.
In the event of any redemption in part, the Trust shall not be required to
(i) issue, register the transfer of or exchange any Preferred Security during a
period beginning at the opening of business 15 days before any selection for
redemption of Preferred Securities and ending at the close of business on the
earliest date in which the relevant notice of redemption is deemed to have been
given to all holders of Preferred Securities to be so redeemed and (ii) register
the transfer of or exchange any Preferred Securities so selected for redemption,
in whole or in part, except for the unredeemed portion of any Preferred
Securities being redeemed in part.
If the Trust gives a notice of redemption in respect of Preferred
Securities (which notice will be irrevocable), and if the Company has paid to
the Property Trustee a sufficient amount of cash in connection with the related
redemption or maturity of the Convertible Debentures, then, by 12:00 noon, New
York time, on the redemption date, the Trust will irrevocably deposit with DTC
funds sufficient to pay the amount payable on redemption of all book-entry
certificates and will give DTC irrevocable instructions and authority to pay
such amount in respect of Preferred Securities represented by the Global
Certificates (as defined herein) and will irrevocably deposit with the paying
agent for the Preferred Securities funds sufficient to pay
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such amount in respect of any Certificated Securities and will give such paying
agent irrevocable instructions and authority to pay such amount to the holders
of Certificated Securities upon surrender of their certificates. If notice of
redemption shall have been given and funds are deposited as required, then upon
the date of such deposit, all rights of holders of such Preferred Securities so
called for redemption will cease, except the right of the holders of such
Preferred Securities to receive the Redemption Price, but without interest on
such Redemption Price. In the event that any date fixed for redemption of
Preferred Securities is not a Business Day, then payment of the amount payable
on such date will be made on the next succeeding day which is a Business Day
(without any interest or other payment in respect of any such delay), except
that, if such Business Day falls in the next calendar year, such payment will be
made on the immediately preceding Business Day. In the event that payment of the
Redemption Price in respect of Preferred Securities is improperly withheld or
refused and not paid either by the Trust or by the Company pursuant to the
Guarantee described under "Description of the Guarantee", distributions on such
Preferred Securities will continue to accrue at the then applicable rate, from
the original redemption date to the date of payment, in which case the actual
payment date will be considered the date fixed for redemption for purposes of
calculating the amount payable upon redemption (other than for calculating any
premium).
In the event that fewer than all of the outstanding Preferred Securities
are to be redeemed, the Preferred Securities will be redeemed pro rata.
Subject to the foregoing and applicable law (including, without limitation,
United States Federal securities laws), the Company or its subsidiaries may at
any time and from time to time purchase outstanding Preferred Securities by
tender, in the open market or by private agreement.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the amount payable upon redemption of, the
Trust Securities, as applicable, shall be made pro rata based on the liquidation
amount of the Trust Securities; provided, however, that, if on any distribution
date or redemption date a Declaration Event of Default shall have occurred and
be continuing, no payment of any distribution on, or amount payable upon
redemption of, any Common Security, and no other payment on account of the
redemption, liquidation or other acquisition of Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid distributions on
all outstanding Preferred Securities for all distribution periods terminating on
or prior thereto, or in the case of payment of the amount payable upon
redemption of the Preferred Securities, the full amount of such amount in
respect of all outstanding Preferred Securities shall have been made or provided
for, and all funds available to the Property Trustee shall first be applied to
the payment in full in cash of all distributions on, or the amount payable upon
redemption of, Preferred Securities then due and payable.
In the case of any Declaration Event of Default, the holder of Common
Securities will be deemed to have waived any such Declaration Event of Default
until all such Declaration Events of Default with respect to the Preferred
Securities have been cured, waived or otherwise eliminated. Until any such
Declaration Events of Default with respect to the Preferred Securities have been
so cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the Preferred Securities and not the holder of the
Common Securities, and only the holders of the Preferred Securities will have
the right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary liquidation, dissolution,
winding-up or termination of the Trust (each a "Liquidation"), the then holders
of the Preferred Securities will be entitled to receive out of the assets of the
Trust, after satisfaction of liabilities to creditors, distributions in an
amount equal to the aggregate of the stated liquidation amount of $50 per
Preferred Security plus accrued and unpaid distributions thereon to the date of
payment (the "Liquidation Distribution"), unless, in connection with such
Liquidation, Convertible Debentures in an aggregate stated principal amount
equal to the aggregate stated liquidation amount of, with an interest rate
identical to the distribution rate of, and accrued and unpaid interest equal to
accrued and
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unpaid distributions on, the Preferred Securities have been distributed on a pro
rata basis to the holders of the Preferred Securities.
If, upon any such Liquidation Distribution, the Liquidation Distribution
can be paid only in part because the Trust has insufficient assets available to
pay in full the aggregate Liquidation Distribution, then the amounts payable
directly by the Trust on the Preferred Securities shall be paid on a pro rata
basis. The holders of the Common Securities will be entitled to receive
distributions upon any such dissolution pro rata with the holders of the
Preferred Securities, except that if a Declaration Event of Default has occurred
and is continuing, the Preferred Securities shall have a preference over the
Common Securities with regard to such distributions.
Pursuant to the Declaration, the Trust shall terminate (i) on September 30,
2021 the expiration of the term of the Trust, (ii) upon the bankruptcy of the
Company, (iii) upon the filing of a certificate of dissolution or the equivalent
with respect to the Company, the filing of a certificate of cancellation with
respect to the Trust after having obtained the consent of at least a majority in
liquidation amount of the Trust Securities, voting together as a single class,
to file such certificate of cancellation, or the revocation of the charter of
the Company and the expiration of 90 days after the date of revocation without a
reinstatement thereof, (iv) upon the distribution of all of the Convertible
Debentures upon the occurrence of a Special Event, (v) upon the entry of a
decree of a judicial dissolution of the Company or the Trust, or (vi) upon the
redemption of all the Trust Securities.
MERGER, CONSOLIDATION OR AMALGAMATION OF THE TRUST
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety, to any corporation or other entity, except as
described below. The Trust may, with the consent of a majority of the Regular
Trustees and without the consent of the holders of the Trust Securities, the
Property Trustee or the Delaware Trustee consolidate, amalgamate, merge with or
into, or be replaced by a trust organized as such under the laws of any State of
the United States; provided, that (i) if the Trust is not the survivor, such
successor entity either (x) expressly assumes all of the obligations of the
Trust under the Trust Securities or (y) substitutes for the Preferred Securities
other securities having substantially the same terms as the Securities (the
"Successor Securities"), so long as the Successor Securities rank the same as
the Securities rank with respect to distributions, assets and payments, (ii) the
Company expressly acknowledges a trustee of such successor entity possessing the
same powers and duties as the Property Trustee as the holder of the Convertible
Debentures, (iii) the Preferred Securities or any Successor Securities are
listed, or any Successor Securities will be listed upon notification of
issuance, on any national securities exchange or with another organization on
which the Preferred Securities are then listed or quoted, (iv) such merger,
consolidation, amalgamation or replacement does not cause the Preferred
Securities (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation or replacement does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect, (vi) such successor entity
has a purpose substantially identical to that of the Trust, (vii) the Company
guarantees the obligations of such successor entity under the Successor
Securities to the same extent as provided by the Guarantee, (viii) prior to such
merger, consolidation, amalgamation or replacement, the Company has received an
opinion of a nationally recognized independent counsel to the Trust reasonably
acceptable to the Property Trustee experienced in such matters to the effect
that: (A) such merger, consolidation, amalgamation or replacement will not
adversely affect the rights, preferences and privileges of the holders of the
Trust Securities (including any Successor Securities) in any material respect
(other than with respect to any dilution of the holders' interest in the new
entity), (B) following such merger, consolidation, amalgamation or replacement,
neither the Trust nor such successor entity will be required to register as an
investment company under the 1940 Act and (C) following such merger,
consolidation, amalgamation or replacement, the Trust (or such successor trust)
will be treated as a grantor trust for United States Federal income tax
purposes. Notwithstanding the foregoing, the Trust shall not, except with the
consent of holders of 100% in liquidation amount of the Common Securities,
consolidate, amalgamate, merge with or into, or be replaced by any other entity
or permit
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any other entity to consolidate, amalgamate, merge with or into, or replace it,
if such consolidation, amalgamation, merger or replacement would cause the Trust
or the successor entity to be classified as other than a grantor trust for
Federal income tax purposes.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Indenture Event of Default")
constitutes an event of default under the Declaration with respect to the Trust
Securities (a "Declaration Event of Default"); provided, that pursuant to the
Declaration, the holder of the Common Securities will be deemed to have waived
any Declaration Event of Default with respect to the Common Securities until all
Declaration Events of Default with respect to the Preferred Securities have been
cured, waived or otherwise eliminated. Until such Declaration Events of Default
with respect to the Preferred Securities have been so cured, waived or otherwise
eliminated, the Property Trustee will be deemed to be acting solely on behalf of
the holders of the Preferred Securities and only the holders of the Preferred
Securities will have the right to direct the Property Trustee with respect to
certain matters under the Declaration and, therefore, the Indenture.
If the Property Trustee fails to enforce its rights under the Convertible
Debentures after a holder of Preferred Securities has made a written request,
such holder of record of Preferred Securities may directly institute a legal
proceeding against the Company to enforce the Property Trustee's rights under
the Convertible Debentures without first instituting any legal proceeding
against the Property Trustee or any other person or entity. Notwithstanding the
foregoing, if a Declaration Event of Default has occurred and is continuing and
such event is attributable to the failure of the Company to pay interest or
principal on the Convertible Debentures on the date such interest or principal
is otherwise payable (or in the case of redemption, the redemption date), then a
holder of Preferred Securities may directly institute a proceeding for
enforcement of payment to such holder directly of the principal of or interest
on the Convertible Debentures having a principal amount equal to the aggregate
liquidation amount of the Preferred Securities of such holder on or after the
respective due date specified in the Convertible Debentures. In connection with
such Direct Action, the Company will be subrogated to the rights of such holder
of Preferred Securities under the Declaration to the extent of any payment made
by the Company to such holder of Preferred Securities in such Direct Action. The
holders of Preferred Securities will not be able to exercise directly any other
remedy available to the holders of the Convertible Debentures.
Upon the occurrence of a Declaration Event of Default, the Property Trustee
as the sole holder of the Convertible Debentures will have the right under the
Indenture to declare the principal of and interest on the Convertible Debentures
to be immediately due and payable. The Company and the Trust are each required
to file annually with the Property Trustee an officer's certificate as to its
compliance with all conditions and covenants under the Declaration.
VOTING RIGHTS
Except as described herein, under the Trust Act, the Trust Indenture Act
and under "Description of the Guarantee -- Amendments and Assignment," and as
otherwise required by law and the Declaration, the holders of the Preferred
Securities will have no voting rights.
Subject to the requirement of the Property Trustee obtaining a tax opinion
in certain circumstances set forth in the last sentence of this paragraph, the
holders of a majority in liquidation amount of the Preferred Securities have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Property Trustee, or direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee, as holder of the Convertible Debentures,
to (i) exercise the remedies available to it under the Indenture as a holder of
the Convertible Debentures, (ii) waive any past Indenture Event of Default that
is waiveable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Convertible Debentures shall be due
and payable or (iv) consent to any amendment, modification, or termination of
the Indenture or the Convertible Debentures where such consent shall be
required; provided, however, that where a consent or action under the Indenture
would require the consent or act of the holders of more than a majority of the
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aggregate principal amount of Convertible Debentures affected thereby, only the
holders of the percentage of the aggregate stated liquidation amount of the
Preferred Securities which is at least equal to the percentage required under
the Indenture may direct the Property Trustee to give such consent or take such
action. If the Property Trustee fails to enforce its rights under the
Convertible Debentures after a holder of record of Preferred Securities has made
a written request, such holder of record of Preferred Securities may directly
institute a legal proceeding directly against the Company to enforce the
Property Trustee's rights under the Convertible Debentures without first
instituting any legal proceeding against the Property Trustee or any other
person or entity. Notwithstanding the foregoing, if a Declaration Event of
Default has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal on the Convertible
Debentures on the date such interest or principal is otherwise payable (or in
the case of redemption on the redemption date), then a holder of Preferred
Securities may directly institute a proceeding for enforcement of payment to
such holder of the principal of or interest on the Convertible Debentures having
a principal amount equal to the aggregate liquidation amount of the Preferred
Securities of such holder on or after the respective due date specified in the
Convertible Debentures. The Property Trustee shall notify all holders of the
Preferred Securities of any notice of default received from the Indenture
Trustee with respect to the Convertible Debentures. Such notice shall state that
such Indenture Event of Default also constitutes a Declaration Event of Default.
The Property Trustee shall be under no obligation to take any of the actions
described in clause (i), (ii) or (iii) above unless the Property Trustee has
obtained an opinion of independent tax counsel to the effect that as a result of
such action, the Trust will not fail to be classified as a grantor trust for
federal income tax purposes and each holder will be treated as owning an
undivided beneficial interest in the Convertible Debentures.
In the event the consent of the Property Trustee, as the holder of the
Convertible Debentures, is required under the Indenture with respect to any
amendment, modification or termination of the Indenture, the Property Trustee
shall request the direction of the holders of the Trust Securities with respect
to such amendment, modification or termination and shall vote with respect to
such amendment, modification or termination as directed by a majority in
liquidation amount of the Trust Securities voting together as a single class;
provided, however, that where a consent under the Indenture would require the
consent of the holders of more than a majority of the aggregate principal amount
of the Convertible Debentures, the Property Trustee may only give such consent
at the direction of the holders of at least the same proportion in aggregate
stated liquidation amount of the Securities. The Property Trustee shall not take
any such action in accordance with the direction of the holders of the Trust
Securities unless the Property Trustee has obtained an opinion of tax counsel to
the effect that for the purposes of United States Federal income tax the Trust
will not be classified as other than a grantor trust.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Declaration Event of Default.
Any required approval or direction of holders of Preferred Securities may
be given at a separate meeting of holders of Preferred Securities convened for
such purpose, at a meeting of all of the holders of Trust Securities or pursuant
to written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
mailed to each holder of record of Preferred Securities. Each such notice will
include a statement setting forth the following information: (i) the date of
such meeting or the date by which such action is to be taken; (ii) a description
of any resolution proposed for adoption at such meeting on which such holders
are entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents. No vote or consent
of the holders of Preferred Securities will be required for the Trust to redeem
and cancel Preferred Securities or distribute Convertible Debentures in
accordance with the Declaration.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by the Company or any entity directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, the Company, shall not be entitled to vote or consent and shall,
for purposes of such vote or consent, be treated as if such Preferred Securities
were not outstanding.
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The procedures by which holders of Preferred Securities represented by the
Global Certificates may exercise their voting rights are described below. See
"-- Book-Entry Only Issuance -- The Depository Trust Company."
Holders of the Preferred Securities will have no right to appoint or remove
the Regular Trustees, who may be appointed, removed or replaced solely by the
Company as the holder of all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by the Regular
Trustees (and in certain circumstances the Property Trustee and the Delaware
Trustee), provided, that if any proposed amendment provides for, or the Regular
Trustees otherwise propose to effect, (i) any action that would adversely affect
the powers, preferences or special rights of the Trust Securities, whether by
way of amendment to the Declaration or otherwise or (ii) the dissolution,
winding-up or termination of the Trust other than pursuant to the terms of the
Declaration, then the holders of the Trust Securities voting together as a
single class will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of at
least a majority in liquidation amount of the Trust Securities affected thereby;
provided, that if any amendment or proposal referred to in clause (i) above
would adversely affect only the Preferred Securities or the Common Securities,
then only the affected class will be entitled to vote on such amendment or
proposal and such amendment or proposal shall not be effective except with the
approval of a majority in liquidation amount of such class of Securities.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust to
be classified for purposes of United States Federal income taxation as other
than a grantor trust, (ii) reduce or otherwise adversely affect the powers of
the Property Trustee or (iii) cause the Trust to be deemed an "investment
company" which is required to be registered under the 1940 Act.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITARY TRUST COMPANY
The Depositary Trust Company ("DTC") will act as securities depositary for
the Preferred Securities. The Preferred Securities will be issued only as
fully-registered securities registered in the name of Cede & Co. (DTC's
nominee). One or more fully-registered global Preferred Securities certificates,
representing the total aggregate number of Preferred Securities, will be issued
and will be deposited with DTC.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Preferred
Securities as represented by a global certificate.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Participants in DTC
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
Participants and by the NYSE, the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Commission.
Purchases of Preferred Securities within the DTC system must be made by or
through Participants, which will receive a credit for the Preferred Securities
on DTC's records. The ownership interest of each actual purchaser of Preferred
Securities ("Beneficial Owner") is in turn to be recorded on the Participants'
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and Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchases, but Beneficial Owners are expected to
receive written conformations providing details of the transactions, as well as
periodic statements of their holdings, from the Participants or Indirect
Participants through which the Beneficial Owners purchased Preferred Securities.
Transfers of ownership interests in the Preferred Securities are to be
accomplished by entries made on the books of Participants and Indirect
Participants acting on behalf of Beneficial Owners. Beneficial Owners will not
receive certificates representing their ownership interests in Preferred
Securities, except in the event that use of the book-entry system for the
Preferred Securities is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Preferred
Securities; DTC's records reflect only the identity of the Participants to whose
accounts such Preferred Securities are credited, which may or may not be the
Beneficial Owners. The Participants and Indirect Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Certificate, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the Preferred Securities represented thereby for all
purposes under the Declaration and the Preferred Securities. No beneficial owner
of an interest in a Global Certificate will be able to transfer that interest
except in accordance with DTC's applicable procedures, in addition to those
provided for under the Declaration.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Preferred Securities (including the presentation of
Preferred Securities for exchange as described below) only at the direction of
one or more Participants to whose account the DTC interests in the Global
Certificates are credited and only in respect of such portion of the aggregate
liquidation amount of Preferred Securities as to which such Participant or
Participants has or have given such direction. However, if there is an Event of
Default under the Preferred Securities, DTC will exchange the Global
Certificates for Certificated Securities, which it will distribute to its
Participants.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Redemption notices in respect of the Preferred Securities held in
book-entry form will be sent to Cede & Co. If less than all of the Preferred
Securities are being redeemed, DTC will determine the amount of the interest of
each Participant to be redeemed in accordance with its procedures.
Although voting with respect to the Preferred Securities is limited, in
those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to the Preferred Securities. Under its usual
procedures, DTC would mail an Omnibus Proxy to the Trust as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Participants to whose accounts the Preferred Securities
are credited on the record date (identified in a listing attached to the Omnibus
Proxy).
Distributions on the Preferred Securities held in book-entry form will be
made to DTC in immediately available funds. DTC's practice is to credit
Participants' accounts on the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has reason to believe that
it will not receive payments on such payment date. Payments by Participants and
Indirect Participants to Beneficial Owners will be governed by standing
instructions and customary practices and will be the responsibility of such
Participants and Indirect Participants and not of DTC, the Trust or the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of distributions to DTC is the responsibility of the
Trust, disbursement of such payments to Participants is the responsibility of
DTC, and disbursements of such payments to the Beneficial Owners is the
responsibility of Participants and Indirect Participants.
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Except as provided herein, a Beneficial Owner of an interest in a Global
Certificate will not be entitled to receive physical delivery of Preferred
Securities. Accordingly, each Beneficial Owner must rely on the procedures of
DTC to exercise any rights under the Preferred Securities.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interest in the Global Certificates among Participants of DTC, DTC
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company, the Issuer
nor the Trustee will have any responsibility for the performance by DTC or its
Participants or Indirect Participants under the rules and procedures governing
DTC. DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving notice to the Trust.
Under such circumstances, in the event that a successor securities depository is
not obtained, Preferred Security certificates are required to be printed and
delivered. Additionally, the Trust (with the consent of the Company) may decide
to discontinue use of the system of book-entry transfers through DTC (or a
successor depository). In that event, certificates for the Preferred Securities
will be printed and delivered. In each of the above circumstances, the Company
will appoint a paying agent with respect to the Preferred Securities.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Preferred
Securities as represented by a Global Certificate.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities represented by the Global
Certificates shall be made to DTC, which shall credit the relevant accounts at
DTC on the applicable distribution dates or, in the case of Certificated
Securities, such payments shall be made by check mailed to the address of the
holder entitled thereto as such address shall appear on the Register. The Paying
Agent shall initially be IBJ Schroder Bank & Trust Company. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to the
Issuer Trustees. In the event that IBJ Schroder Bank & Trust Company shall no
longer be the Paying Agent, the Trustee shall appoint a successor to act as
Paying Agent (which shall be a bank or trust company).
REGISTRAR, TRANSFER AGENT, PAYING AGENT AND CONVERSION AGENT
The Property Trustee will act as Registrar, Transfer Agent, Paying Agent
and Conversion Agent for the Preferred Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Trust, but upon payment (with the giving of such
indemnity as the Trust or the Company may require) in respect of any tax or
other government charges which may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of Preferred Securities after such Preferred Securities have been
called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Company and certain of its subsidiaries maintain deposit accounts and
conduct other banking transactions with the Property Trustee in the ordinary
course of their business. The Property Trustee, prior to the occurrence of a
default with respect to the Trust Securities, undertakes to perform only such
duties as are specifically set forth in the Declaration and, after default,
shall exercise the same degree of care as a prudent individual would exercise in
the conduct of his or her own affairs. Subject to such provisions, the Property
Trustee is under no obligation to exercise any of the powers vested in it by the
Declaration at the request of any holder of Preferred Securities, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The holders of Preferred Securities will not be
required to offer such indemnity in the event such holders, by exercising their
voting rights, direct the Property Trustee to take any action following a
Declaration Event of Default.
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GOVERNING LAW
The Declaration and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the 1940 Act or
characterized as other than a grantor trust for Federal income tax purposes so
that the Convertible Debentures will be treated as indebtedness of the Company
for Federal income tax purposes. In this connection, the Regular Trustees are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust or the Declaration that the Regular Trustees determine in
their discretion to be necessary or desirable for such purposes as long as such
action does not adversely affect the interests of the holders of the Preferred
Securities.
Holders of the Preferred Securities have no preemptive rights.
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DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee which
will be executed and delivered by the Company for the benefit of the holders
from time to time of Preferred Securities. The summary does not purport to be
complete and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the Guarantee. The Guarantee incorporates by
reference the terms of the Trust Indenture Act. The Guarantee will be qualified
under the Trust Indenture Act. IBJ Schroder Bank & Trust Company, as the
Guarantee Trustee, will hold the Guarantee for the benefit of the holders of the
Preferred Securities.
GENERAL
Pursuant to and to the extent set forth in the Guarantee, the Company will
irrevocably and unconditionally agree to pay in full to the holders of the
Preferred Securities (except to the extent paid by such Trust), as and when due,
regardless of any defense, right of set off or counterclaim which the Trust may
have or assert, the following payments (the "Guarantee Payments"), without
duplication: (i) any accrued and unpaid distributions that are required to be
paid on the Preferred Securities to the extent the Trust has funds available
therefor, (ii) the Redemption Price, with respect to any Preferred Securities
called for redemption by the Trust, to the extent the Trust has funds available
therefor and (iii) upon a voluntary or involuntary dissolution, winding-up or
termination of the Trust (other than in connection with the distribution of
Convertible Debentures to the holders of Preferred Securities or the redemption
of all the Preferred Securities), the lesser of (a) the aggregate of the
liquidation amount and all accrued and unpaid distributions on the Preferred
Securities to the date of payment to the extent the Trust has funds available
therefor and (b) the amount of assets of the Trust remaining available for
distribution to holders of Preferred Securities upon the liquidation of the
Trust. The holders of a majority in liquidation amount of the Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under the
Guarantee. Any holder of Preferred Securities may directly institute a legal
proceeding against the Company to enforce the obligations of the Guarantor under
the Guarantee without first instituting a legal proceeding against the Trust,
the Guarantee Trustee or any other person or entity. If the Company were to
default on its obligation to pay amounts payable on the Convertible Debentures,
the Trust would lack available funds for the payment of distributions or amounts
payable on redemption of the Preferred Securities or otherwise, and in such
event holders of the Preferred Securities would not be able to rely upon the
Guarantee for payment of such amounts. Instead, a holder of the Preferred
Securities would be required to rely on the enforcement (1) by the Property
Trustee of its rights, as registered holder of the Convertible Debentures,
against the Company pursuant to the terms of the Convertible Debentures or (2)
by such holder of Preferred Securities of its right against the Company to
enforce payments on Convertible Debentures. See "Description of the Convertible
Debentures." The Declaration provides that each holder of Preferred Securities,
by acceptance thereof, agrees to the provisions of the Guarantee, including the
subordination provisions thereof, and the Indenture.
The Guarantee will be a guarantee on a subordinated basis with respect to
the Preferred Securities from the time of issuance of such Preferred Securities
but will not apply to any payment of distributions or Redemption Price, or to
payments upon the dissolution, winding-up or termination of the Trust, except to
the extent the Trust shall have funds available therefor. If the Company does
not make interest payments on the Convertible Debentures, the Trust will not pay
distributions on the Preferred Securities and will not have funds available
therefor. See "Description of the Convertible Debentures." The Guarantee, when
taken together with the Company's obligations under the Convertible Debentures,
and the Indenture thereto and the Declaration, including its obligations to pay
costs, expenses, debts and liabilities of the Trust (other than with respect to
the Trust Securities) will provide a full and unconditional guarantee on a
subordinated basis by the Company of payments due on the Preferred Securities
issued by the Trust.
The Company has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities
(the "Common Securities Guarantee") to the same extent as the Guarantee, except
that upon the occurrence and during the continuation of a Declaration Event of
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Default, holders of Preferred Securities shall have priority over holders of
Common Securities with respect to distributions and payments on liquidation,
redemption or otherwise.
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company has covenanted that, so long as any Preferred
Securities remain outstanding, if (i) the Company has exercised its option to
defer interest payments on the Convertible Debentures by extending the interest
payment period and such extension shall be continuing, (ii) the Company shall be
in default with respect to its payment or other obligations under the Guarantee
or (iii) there shall have occurred and be continuing any event that, with the
giving of notice or the lapse of time or both, would constitute an Indenture
Event of Default, then the Company (a) shall not declare or pay dividends on,
make distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock, except for
dividends or distributions in shares of its capital stock of the same class on
which such dividend or distribution is being paid and conversions or exchanges
of common stock of one class into common stock of another class and except for a
redemption, purchase or other acquisition of shares of its capital stock made
for the purpose of an employee incentive plan or benefit plan of the Company or
any of its subsidiaries, (b) shall not make any payment of interest, principal
or premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu with or junior to the Convertible Debentures
(except by conversion into or exchange for shares of its capital stock), and (c)
shall not make any guarantee payments with respect to the foregoing.
As part of the Guarantee, the Company will agree that it will honor all
obligations described therein relating to the conversion of the Preferred
Securities into Common Stock as described in "Description of the Preferred
Securities -- Conversion Rights."
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of Preferred Securities (in which case no vote will be
required), the Guarantee may be amended only with the prior approval of the
holders of at least a majority in liquidation amount of all the outstanding
Preferred Securities. The manner of obtaining any such approval of holders of
the Preferred Securities will be as set forth under "Description of the
Preferred Securities -- Voting Rights." All guarantees and agreements contained
in the Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders of
the Preferred Securities then outstanding. Except in connection with any
permitted merger or consolidation of the Company with or into another entity or
any permitted sale, transfer or lease of the Company's assets to another entity
as described under "Description of the Convertible Debentures -- Consolidation,
Merger and Sale of Assets," the Company may not assign its rights or delegate
its obligations under the Guarantee without the prior approval of the holders of
at least a majority of the aggregate stated liquidation amount of the Preferred
Securities then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate as to each holder of Preferred Securities upon
(i) full payment of the Redemption Price of all Preferred Securities; or (ii)
upon distribution of the Convertible Debentures held by the Trust to the holders
of the Preferred Securities; or (iii) upon liquidation of the Trust and will
terminate completely upon full payment of the amounts payable in accordance with
the Declaration of the Trust; or (iv) upon the distribution of Common Stock to
such holder in respect of conversion of such holder's Preferred Securities into
Common Stock. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of Preferred Securities must
restore payment of any sum paid under such Preferred Securities or such
Guarantee.
STATUS OF THE GUARANTEE; SUBORDINATION
The Guarantee will constitute an unsecured obligation of the Company and
will rank (i) subordinate and junior to all other liabilities of the Company
except any liabilities that may be pari passu expressly by their
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terms, (ii) pari passu with the most senior preferred stock issued from time to
time by the Company and with any guarantee now or hereafter entered into by the
Company in respect of any preferred or preference stock or preferred securities
of any affiliate of the Company and (iii) senior to the Common Stock. The terms
of the Preferred Securities provide that each holder of Preferred Securities by
acceptance thereof agrees to the subordination provisions and other terms of the
Guarantee.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may directly institute a legal proceeding against
the Company to enforce its rights under a Guarantee without instituting a legal
proceeding against any other person or entity).
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee, undertakes to perform only such duties as are specifically set
forth in the Guarantee and, after default with respect to the Guarantee, shall
exercise the same degree of care as a prudent man would exercise in the conduct
of his own affairs. Subject to such provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of Preferred Securities unless it is offered reasonable
indemnity against the costs, expenses and liabilities that might be incurred
thereby.
GOVERNING LAW
The Guarantee will be governed by, and construed in accordance with, the
laws of the State of New York.
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DESCRIPTION OF THE CONVERTIBLE DEBENTURES
Set forth below is a description of the specific terms of the Convertible
Debentures in which the Trust will invest the proceeds from the issuance and
sale of the Trust Securities. The following description does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Indenture (the "Indenture") between the Company and IBJ Schroder Bank &
Trust Company, as trustee (the "Indenture Trustee"), a copy of which may be
obtained from the Company upon request. Certain capitalized terms used herein
are defined in the Indenture.
Under certain circumstances involving the dissolution of the Trust
following the occurrence of a Special Event, Convertible Debentures may be
distributed to the holders of the Trust Securities in liquidation of the Trust.
See "Description of the Preferred Securities -- Special Event Redemption or
Distribution."
If the Convertible Debentures are distributed to the holders of Preferred
Securities, the Company will use its best efforts to have the Convertible
Debentures listed on the NYSE or on such other national securities exchange or
similar organization on which the Preferred Securities are then listed or
quoted.
GENERAL
The Convertible Debentures will be issued as unsecured debt under the
Indenture. The Convertible Debentures will be limited in aggregate principal
amount to $ million ($ million if the Underwriters' over-allotment
option is exercised in full), such amount being the sum of the aggregate stated
liquidation amount of the Preferred Securities and the Common Securities.
The Convertible Debentures are not subject to a sinking fund provision. The
entire principal amount of the Convertible Debentures will become due and
payable, together with any accrued and unpaid interest thereon, including
Compounded Interest (as defined herein) and Additional Interest, if any, on
, 2016.
The Convertible Debentures, if distributed to holders of Preferred
Securities in liquidation of such holder's interest in the Trust, will initially
be issued in the same form as the Preferred Securities that such Convertible
Debentures replace. See " -- Book-Entry and Settlement". Under certain limited
circumstances, Convertible Debentures may be issued in certificated form in
exchange for a Global Security. In the event that Convertible Debentures are
issued in certificated form, such Convertible Debentures will be in
denominations of $50 and integral multiples thereof and may be transferred or
exchanged at the offices described below.
Payments on Convertible Debentures issued as a Global Security will be made
to DTC, a successor depositary or, in the event that no depositary is used, to a
Paying Agent for the Convertible Debentures. In the event Convertible Debentures
are issued in certificated form, principal and interest will be payable, the
transfer of the Convertible Debentures will be registrable and Convertible
Debentures will be exchangeable for Convertible Debentures of other
denominations of a like aggregate principal amount at the corporate trust office
of the Indenture Trustee in The City of New York; provided, that unless the
Convertible Debentures are held by the Trust or any successor permissible under
"Description of the Preferred Securities -- Merger, Consolidation or
Amalgamation of the Trust," payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto.
There are no covenants or provisions in the Indenture that afford holders
of Convertible Debentures protection in the event of a highly leveraged
transaction or other similar transaction involving the Company that may
adversely affect such holders.
INTEREST
Each Convertible Debenture will bear interest at the rate of % per annum
from the original date of issuance, payable quarterly in arrears on March 31,
June 30, September 30 and December 31 (each, an "Interest Payment Date"),
commencing December 31, 1996, to the person in whose name such Convertible
Debenture is registered, subject to certain exceptions, at the close of business
on the Business Day next
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preceding such Interest Payment Date. If any Convertible Debentures are held in
certificated form, the record date for each Interest Payment Date shall be 15
days prior to such Interest Payment Date.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. The amount of interest payable for
any period shorter than a full quarterly period for which interest is computed
will be computed on the basis of the actual number of days elapsed. In the event
that any date on which interest is payable on the Convertible Debentures is not
a Business Day, then payment of the interest payable on such date will be made
on the next succeeding day which is a Business Day (without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIODS
The Company shall have the right at any time during the term of the
Convertible Debentures to defer interest payments from time to time by extending
the interest payment period for successive periods not exceeding 20 consecutive
quarters for each such period; provided, no Extension Period may extend beyond
the maturity date of the Convertible Debentures. At the end of each Extension
Period, the Company shall pay all interest then accrued and unpaid (including
Additional Interest) together with interest thereon compounded quarterly at the
rate specified for the Convertible Debentures to the extent permitted by
applicable law ("Compounded Interest"); provided, that during any Extension
Period, the Company (i) shall not declare or pay dividends on has agreed, among
other things, (a) not to declare or pay dividends on, or make a distribution
with respect to, or redeem or purchase or acquire, or make a liquidation payment
with respect to, any of its capital stock (other than (i) purchases or
acquisitions of shares of Common Stock in connection with the satisfaction by
the Company of its obligations under any employee benefit plans or the
satisfaction by the Company of its obligations pursuant to any contract or
security requiring the Company to purchase shares of the Common Stock, (ii) as a
result of a reclassification of the Company's capital stock or the exchange or
conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock or (iii) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged (or make any guarantee payments with respect to the
foregoing)), (b) not to make any payment of interest, principal or premium, if
any, on or repay, repurchase or redeem any debt securities (including
guarantees) issued by the Company that rank pari passu with or junior to the
Convertible Debentures and (c)not to make any guarantee payments with respect to
the foregoing (other than pursuant to the Preferred Securities Guarantee). Prior
to the termination of any such Extension Period, the Company may further extend
such Extension Period; provided, that such Extension Period together with all
previous and further extensions thereof may not exceed 20 consecutive quarters
and may not extend beyond the maturity of the Convertible Debentures. Upon the
termination of any Extension Period and the payment of all amounts then due, the
Company may commence a new Extension Period, subject to the above requirements.
No interest shall be due and payable during an Extension Period. The Company has
no current intention of exercising its right to defer payments of interest by
extending the interest payment period on the Convertible Debentures. If the
Property Trustee shall be the sole holder of the Convertible Debentures, the
Company shall give the Regular Trustees and the Property Trustee notice of its
selection of such Extension Period at least one Business Day prior to the
earlier of (i) the date the distributions on the Preferred Securities are
payable or (ii) the date the Trust is required to give notice to the NYSE (or
any applicable self-regulatory organization) or to holders of the Preferred
Securities of the record date or the date such distribution is payable, but in
any event not less than ten Business Days prior to such record date. The Company
shall cause the Trust to give notice of the Company's selection of such
Extension Period to the holders of the Preferred Securities. If the Property
Trustee shall not be the sole holder of the Convertible Debentures, the Company
shall give the holders of the Convertible Debentures notice of its selection of
such Extension Period at least ten Business Days prior to the earlier of (i) the
Interest Payment Date or (ii) the date the Company is required to give notice to
the NYSE (or any applicable selfregulatory organization) or to holders of the
Convertible Debentures on the record or payment date of such related interest
payment, but in any event not less than two Business Days prior to such record
date.
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PROPOSED TAX LEGISLATION
On March 19, 1996, the U.S. Treasury Department proposed certain tax law
changes (the "Proposed Legislation") that would, among other things, generally
deny corporate issuers a deduction for interest in respect of certain debt
obligations, with a maximum term of more than 20 years that are not shown as
indebtedness on the consolidated balance sheet of the issuer. On March 29, 1996,
Senate Finance Committee Chairman William V. Roth, Jr. and House Ways and Means
Committee Chairman Bill Archer issued a joint statement (the "Joint Statement")
indicating their intent that the Proposed Legislation, if adopted by either of
the tax-writing committees of Congress, would have an effective date that is no
earlier than the date of "appropriate Congressional action." Based upon the
Joint Statement, it is expected that if the Proposed Legislation were to be
enacted, such legislation would not apply to the Convertible Debentures because
they will be issued prior to the date of any "appropriate Congressional action."
Furthermore, even if the Proposed Legislation were enacted in its current form
with effective date provisions making it applicable to the Convertible
Debentures, it would not affect the Company's ability to deduct the interest
payable on the Convertible Debentures because their maximum term will not exceed
20 years. There can be no assurance, however, that any proposed legislation
enacted after the date hereof will not otherwise adversely affect the ability of
the Company to deduct the interest payable on the Convertible Debentures.
Accordingly, there can be no assurance that a Tax Event will not occur. See
"Description of the Preferred Securities -- Special Event Redemption or
Distribution."
ADDITIONAL INTEREST
If the Trust would be required to pay any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding taxes) imposed
by the United States, or any other taxing authority, then, in any such case, the
Company will pay as additional interest ("Additional Interest") such amounts as
shall be required so that the net amounts received and retained by the Trust
after paying any such taxes, duties, assessments or governmental charges will be
not less than the amounts the Trust would have received had no such taxes,
duties, assessments or governmental charges been imposed.
CONVERSION OF THE CONVERTIBLE DEBENTURES
The Convertible Debentures will be convertible into Common Stock at the
option of the Holders of the Convertible Debentures at any time prior to the end
of business on the Business Day immediately preceding the date of repayment of
such Convertible Debentures, whether at maturity or upon redemption (either at
the option of the Company or pursuant to a Tax Event), at the initial conversion
price set forth on the cover page of this Registration Statement subject to the
conversion price adjustments described under "Description of the Preferred
Securities -- Conversion Rights." The Trust will covenant not to convert
convertible Debentures held by it except pursuant to a notice of conversion
delivered to the Conversion Agent (as defined herein) by a holder of Preferred
Securities. Upon surrender of a Preferred Security to the Conversion Agent for
conversion, the Trust will distribute $50 principal amount of the Convertible
Debentures to the Conversion Agent on behalf of the holder of the Preferred
Securities so converted whereupon the Conversion Agent will convert such
Convertible Debentures to Common Stock on behalf of such holder. The Company's
delivery to the holders of the Convertible Debentures (through the Conversion
Agent) of the fixed number of shares of Common Stock into which the Convertible
Debentures are convertible (together with the cash payment if any, in lieu of
fractional shares) will be deemed to satisfy the Company's obligation to pay the
principal amount of the Convertible Debentures so converted, and the accrued and
unpaid interest thereon attributable to the period from the last date to which
interest has been paid or duly provided for; provided, however, that if any
Convertible Debenture is converted after a record date for payment of interest,
the interest payable on the related interest payment date with respect to such
Convertible Debenture shall be paid to the Trust (which will distribute such
interest to the holder of such Convertible Debentures on the record date) or
other holder of Convertible Debentures, as the case may be, despite such
conversion; provided, further that if any Convertible Debentures are converted
after notice from the Property Trustee to the holders of the Preferred
Securities of redemption thereof, the Company shall be required to pay to the
Trust all accrued and unpaid interest, if any, on the Convertable Debentures
which amount shall be simultaneously distributed to the
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holders of the Preferred Securities that any holder of Preferred Securities who
delivers such Preferred Securities for conversion after receiving notice of
redemption of the Preferred Securities from the Property Trustee shall be
entitled to receive all accumulated and unpaid distributions to the date of
conversion. See " -- Optional Redemption," "Description of the Preferred
Securities -- Conversion Rights" and " -- Mandatory Redemption."
OPTIONAL REDEMPTION
The Company shall have the right to redeem the Convertible Debentures, in
whole or in part, at any time or from time to time after , 1999
upon not less than 30 nor more than 60 days' notice, at a redemption price equal
to % of the principal amount of the Convertible Debentures to be redeemed plus
any accrued and unpaid interest, including Additional Interest and Compounded
Interest, to the redemption date if redeemed on or before , and
at the following optional redemption prices (expressed as a percentage of the
principal amount of Convertible Debentures), if redeemed during the 12-month
period beginning :
<TABLE>
<CAPTION>
OPTIONAL
REDEMPTION
YEAR PRICE
---------------------------------------------------------------- ----------
<S> <C>
2000............................................................
2001............................................................
2002............................................................
2003............................................................
2004............................................................
2005............................................................
2006 and thereafter.............................................
</TABLE>
plus, in each case, accrued and unpaid interest, including Additional Interest
and Compounded Interest to the redemption date.
If a partial redemption of the Preferred Securities resulting from a
partial redemption of the Convertible Debentures would result in the delisting
of the Preferred Securities, the Company may only redeem Convertible Debentures
in whole.
SUBORDINATION
The Indenture provides that the Convertible Debentures are subordinate and
junior in right of payment to all existing and future Senior Indebtedness of the
Company. No payment of principal (including redemption payments, if any),
premium, if any, or interest on, the Convertible Debentures may be made if (i)
any Senior Indebtedness of the Company is not paid when due and any applicable
grace period with respect to such default has ended and such default has not
been cured or waived, or ceased to exist or (ii) the maturity of any Senior
Indebtedness of the Company has been accelerated because of a default. At June
30, 1996, Senior Indebtedness of the Company aggregated approximately $57.0
million. Upon any distribution of assets of the Company to creditors upon any
dissolution, winding up, liquidation or reorganization, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings, all
principal of, and premium, if any, and interest due or to become due on, all
Senior Indebtedness of the Company must be paid in full before the holders of
the Convertible Debentures are entitled to receive or retain any payment. Upon
satisfaction of all claims related to all Senior Indebtedness of the Company
then outstanding, the rights of the holders of the Preferred Securities will be
subrogated to the rights of the holders of Senior Indebtedness of the Company to
receive payments or distributions applicable to Senior Indebtedness until all
amounts owing on the Convertible Debentures are paid in full.
The term "Senior Indebtedness" shall mean in respect of the Company: (i)
the principal, premium, if any, and interest in respect of (A) indebtedness of
such obligor for money borrowed and (B) indebtedness
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evidenced by securities, debentures, bonds or other similar instruments issued
by such obligor, (ii) all capital lease obligations of such obligor, (iii) all
obligations of such obligor issued or assumed as the deferred purchase price of
property, all conditional sale obligations of such obligor and all obligations
of such obligor under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business), (iv) all
obligations of such obligor for the reimbursement of any letter of credit,
banker's acceptance, security purchase facility or similar credit transaction,
(v) all obligations of the type referred to in clauses (i) through (iv) above of
other persons for the payment of which such obligor is responsible or liable as
obligor, guarantor or otherwise, and (vi) all obligations of the type referred
to in clauses (i) through (v) above of other persons secured by any lien on any
property or asset of such obligor (whether or not such obligation is assumed by
such obligor), except for (1) any such indebtedness that is by its terms
subordinated to or pari passu with the Convertible Debentures and (2) any
indebtedness between or among such obligor or its affiliates, including all
other debt securities and guarantees in respect of those debt securities, issued
to (a) the Trust or a trustee of such trust and (b) any other trust, or a
trustee of such trust, partnership or other entity affiliated with the Company
that is a financing vehicle of the Company (a "financing entity") in connection
with the issuance by such financing entity of preferred securities or other
securities that rank pari passu with, or junior to, the Preferred Securities.
Such Senior Indebtedness shall continue to be Senior Indebtedness and be
entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any term of such Senior Indebtedness.
In addition, the Company's operations are conducted through its wholly
owned subsidiaries. At June 30, 1996 indebtedness and other subsidiaries
aggregated approximately $109.5 million (including the $57.0 million referred to
above) that is effectively senior to the Convertible Debentures. See
"Capitalization."
CERTAIN COVENANTS
In the Indenture, the Company has covenanted that, so long as any
Convertible Debentures are outstanding, if (i) there shall have occurred and be
continuing any event that with the giving of notice or the lapse of time or
both, would constitute an Indenture Event of Default, (ii) the Company shall be
in default with respect to its payment of any obligations under the Guarantee,
or (iii) the Company has exercised its option to defer interest payments on the
Convertible Debentures by extending the interest payment period and such period,
or any extension thereof, shall be continuing, then the Company (a) shall not
declare or pay dividends on, or make a distribution with respect to, or redeem
or purchase or acquire, or make a liquidation payment with respect to, any of
its capital stock (other than (i) purchases or acquisitions of shares of Common
Stock in connection with the satisfaction by the Company of its obligations
under any employee benefit plans or the satisfaction by the Company of its
obligations pursuant to any contract or security requiring the Company to
purchase shares of the Common Stock, (ii) as a result of a reclassification of
the Company's capital stock or the exchange or conversion of one class or series
of the Company's capital stock for another class or series of the Company's
capital stock or (iii) the purchase of fractional interests in shares of the
Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged (or make any
guarantee payments with respect to the foregoing), (b) the Company shall not
make any payment of interest, principal or premium, if any, on or repay,
repurchase or redeemed any debt securities (including guarantees) issued by
Designer that rank pari passu with or junior to the Convertible Debentures and
(c) Designer shall not make any guarantee payments with respect to the foregoing
(other than pursuant to the Preferred Securities Guarantee).
The Company will covenant (i) to directly or indirectly maintain 100%
ownership of the Common Securities of the Trust; provided, however, that any
permitted successor of the Company under the Indenture may succeed to the
Company's ownership of such Common Securities and (ii) to use its reasonable
efforts to cause the Trust (x) to remain a statutory business trust, except in
connection with the distribution of Convertible Debentures to the holders of
Trust Securities in liquidation of the Trust, the redemption of all of the Trust
Securities of the Trust, or certain mergers, consolidations or amalgamations,
each as permitted by the Declaration, and (y) to otherwise continue to be
classified as a grantor trust for United States Federal income tax purposes.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company will not consolidate with or merge
into any other corporation or convey, transfer or lease its assets substantially
as an entirety unless (a) if the Company is not the survivor, the successor is a
corporation organized in the United States and expressly assumes the due and
punctual payment of the principal of (and premium, if any) and interest on all
Convertible Debentures issued thereunder and the performance of every other
covenant of the Indenture on the part of the Company and (b) immediately
thereafter no event of default under the Indenture and no event which, after
notice or lapse of time, or both, would become an event of default under the
Indenture, shall have happened and be continuing. Upon any such consolidation,
merger, conveyance or transfer, the successor corporation shall succeed to and
be substituted for the Company under the Indenture and thereafter the
predecessor corporation shall be relieved of all obligations and covenants under
the Indenture and the Convertible Debentures.
BOOK-ENTRY AND SETTLEMENT
If distributed to holders of the Preferred Securities in connection with
the involuntary or voluntary dissolution, winding-up or liquidation of the Trust
as a result of the occurrence of a Special Event, the Convertible Debentures
will be issued in the same form as the Preferred Securities which such
Convertible Debentures replace. Any Global Certificate will be replaced by one
or more global certificates (each a "Global Security") registered in the name of
the depositary or its nominee. Except under the limited circumstances described
below, the Convertible Debentures represented by the Global Security will not be
exchangeable for, and will not otherwise be issuable as, Convertible Debentures
in definitive form. The Global Securities described above may not be transferred
except by the depositary to a nominee of the depositary or by a nominee of the
depositary to the depositary or another nominee of the depositary or to a
successor depositary or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in such a Global
Security.
Except as provided below, owners of beneficial interests in such a Global
Security will not be entitled to receive physical delivery of Convertible
Debentures in definitive form and will not be considered the holders thereof for
any purpose under the Indenture, and no Global Security representing Convertible
Debentures shall be exchangeable, except for another Global Security of like
denomination and tenor to be registered in the name of the depositary or its
nominee or to a successor depositary or its nominee. Accordingly, each
Beneficial Owner must rely on the procedures of DTC or if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest to exercise any rights of a holder under the Indenture.
THE DEPOSITARY
If Convertible Debentures are distributed to holders of Preferred
Securities in liquidation of such holders' interests in the Trust and a Global
Security is issued, DTC will act as securities depositary for the Convertible
Debentures represented by such Global Security. For a description of DTC and the
specific terms of the depositary arrangements, see "Description of the Preferred
Securities -- Book-Entry Only Issuance -- The Depository Trust Company". As of
the date of this Registration Statement, the description therein of DTC's
book-entry system and DTC's practices as they relate to purchases, transfers,
notices and payments with respect to the Convertible Preferred Securities apply
in all material respects to any debt obligations represented by one or more
Global Securities held by DTC. The Company may appoint a successor to DTC or any
successor depositary in the event DTC or such successor depositary is unable or
unwilling to continue as a depositary for the Global Securities.
None of the Company, the Trust, the Indenture Trustee, any paying agent and
any other agent of the Company or the Indenture Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Security
for such Convertible
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Debentures or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
DISCONTINUANCE OF THE DEPOSITARY'S SERVICES
A Global Security shall be exchangeable for Convertible Debentures
registered in the names of persons other than the Depositary or its nominee only
if (i) the Depositary notifies the Company that it is unwilling or unable to
continue as a depositary for such Global Security and no successor depositary
shall have been appointed, (ii) the Depositary, at any time, ceases to be a
clearing agency registered under the Exchange Act at which time the Depositary
is required to be so registered to act as such depositary and no successor
depositary shall have been appointed, (iii) the Company, in its sole discretion,
determines that such Global Security shall be so exchangeable or (iv) there
shall have occurred an Event of Default with respect to such Convertible
Debentures. Any Global Security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for Convertible Debentures registered in such
names as the Depositary shall direct. It is expected that such instructions will
be based upon directions received by the Depositary from its Participants with
respect to ownership of beneficial interests in such Global Security.
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Event of Default"
with respect to the Convertible Debentures: (i) failure for 30 days to pay
interest on the Convertible Debentures, including any Additional Interest and
Compounded Interest in respect thereof, when due provided that a valid extension
of an interest payment period will not constitute a default in the payment of
interest (including any Additional Interest and Compounded Interest) for this
purpose; or (ii) failure to pay principal of or premium, if any, on the
Convertible Debentures when due whether at maturity, upon redemption, by
declaration or otherwise; or (iii) failure to observe or perform any other
covenant contained in the Indenture for 90 days after notice to the Company by
the Trustee or by the holders of not less than 25% in aggregate outstanding
principal amount of the Convertible Debentures; or (iv) failure by the Company
to deliver shares of Common Stock upon an election by a holder of Preferred
Securities to convert such Preferred Securities; or (v) the dissolution, winding
up or termination of the Trust, except in connection with the distribution of
Convertible Debentures to the holders of Preferred Securities in liquidation of
the Trust upon the redemption of all outstanding Preferred Securities and in
connection with certain mergers, consolidations or amalgamations permitted by
the Declaration; or (vi) certain events in bankruptcy, insolvency or
reorganization of the Company.
The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Convertible Debentures may declare the
principal of and interest on the Convertible Debentures due and payable
immediately on the occurrence of an Event of Default; provided, however, that,
after such acceleration, but before a judgment or decree based on acceleration,
the holders of a majority in aggregate principal amount of outstanding
Convertible Debentures may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the nonpayment of accelerated
principal, have been cured or waived as provided in the Indenture. For
information as to waiver of defaults, see " -- Modifications and Amendments of
the Indenture."
Notwithstanding the foregoing, if an Indenture Event of Default has
occurred and is continuing and such event is attributable to the failure of the
Company to pay interest or principal on the Convertible Debentures on the date
such interest or principal is otherwise payable, the Company acknowledges that,
in such event, a holder of Preferred Securities may institute a Direct Action
for payment on or after the respective due date specified in the Convertible
Debentures. The Company may not amend the Indenture to remove the foregoing
right to bring a Direct Action without the prior written consent of all the
holders of Preferred Securities. Notwithstanding any payment made to such holder
of Convertible Preferred Securities by the Company in connection with a Direct
Action, the Company shall remain obligated to pay the principal of or interest
on the Convertible Debentures held by the Trust or the Property Trustee and the
Company shall be subrogated to the rights of the holder of such Preferred
Securities with respect to payments on the Preferred Securities to the extent of
any payments made by the Company to such holder in any Direct Action. The
holders of Preferred
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Securities will not be able to exercise directly any other remedy available to
the holders of the Convertible Debentures.
The Holders of not less than a majority in principal amount of the
outstanding Convertible Debentures may on behalf of the holders of all the
Convertible Debentures waive any past defaults except (a) a default in payment
of the principal of (or premium, if any) or interest, if any, on any Convertible
Debentures and (b) a default in respect of a covenant or provision of the
Indenture which cannot be amended or modified without the consent of the holder
of each Convertible Debenture; provided, however, that if the Convertible
Debentures are held by the Trust or a trustee of such Trust, such waiver or
modification to such waiver shall not be effective until the holders of a
majority in liquidation amount of Trust Securities shall have consented to such
waiver or modification to such waiver; provided, further, that if the consent of
the holder of each outstanding Convertible Debenture is required, such waiver
shall not be effective until each holder of the Trust Securities shall have
consented to such waiver.
A default under any other indebtedness of the Company or the Trust would
not constitute an Event of Default under the Convertible Debentures.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee in case an Event of Default shall occur and be continuing, the
Indenture Trustee will be under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any holders of
Convertible Debentures, unless such holders shall have offered to the Indenture
Trustee reasonable indemnity. Subject to such provisions for the indemnification
of the Indenture Trustee, the holders of a majority in aggregate principal
amount of the Convertible Debentures then outstanding will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Indenture Trustee, or exercising any trust or power conferred
on the Indenture Trustee with respect to such series.
No holder of any Convertible Debenture will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
(i) such holder shall have previously given to the Indenture Trustee written
notice of a continuing Event of Default, (ii) if the Trust is not the sole
holder of Convertible Debentures, the holders of at least 25% in aggregate
principal amount of the Convertible Debentures then outstanding shall also have
made written request, (iii) such holder has offered reasonable indemnity to the
Indenture Trustee to institute such proceeding as Indenture Trustee, (iv) the
Indenture Trustee shall have failed to institute such proceeding within 60 days
of such notice, and (v) the Indenture Trustee shall not have received from the
holders of a majority in aggregate principal amount of the outstanding
Convertible Debentures a direction inconsistent with such request. However, such
limitations do not apply to a suit instituted by a holder of a Convertible
Debenture for enforcement of payment of the principal of or interest on such
Convertible Debenture on or after the respective due dates expressed in such
Convertible Debenture.
The Company is required to file annually with the Indenture Trustee and the
Property Trustee a certificate as to whether or not the Company is in compliance
with all the conditions and covenants under the Indenture.
MODIFICATIONS AND AMENDMENTS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Indenture
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Convertible Debentures, to modify
the Indenture or the rights of the holders of Convertible Debentures; provided,
however, that no such modification may, without the consent of the holder of
each outstanding Convertible Debenture affected thereby, (i) extend the stated
maturity of the Convertible Debentures or reduce the principal amount thereof,
or reduce the rate or extend the time of payment of interest thereon, or reduce
any premium payable upon the redemption thereof, or adversely affect the right
to Convert Convertible Debentures or the subordination provisions of the
Indenture, or (ii) reduce the percentage in aggregate principal amount of
outstanding Convertible Debentures, the holders of which are required to consent
to any such supplemental indenture.
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In addition, the Company and the Indenture Trustee may execute, without the
consent of any holder of Convertible Debentures, any supplemental indenture to
cure any ambiguities, comply with the Trust Indenture Act and for certain other
customary purposes.
GOVERNING LAW
The Indenture and the Convertible Debentures will be governed by, and
construed in accordance with, the laws of the State of New York.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Indenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Convertible Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
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EFFECT OF OBLIGATIONS UNDER THE
CONVERTIBLE DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to issue
the Trust Securities evidencing undivided beneficial interests in the assets of
the Trust, and to invest the proceeds from such issuance and sale in the
Convertible Debentures.
As long as payments of interest and other payments are made when due on the
Convertible Debentures, such payments will be sufficient to cover distributions
and payments due on the Trust Securities because of the following factors: (i)
the aggregate principal amount of Convertible Debentures will be equal to the
sum of the aggregate stated liquidation amount of the Trust Securities; (ii) the
interest rate and the interest and other payment dates on the Convertible
Debentures will match the distribution rate and distribution and other payment
dates for the Preferred Securities; (iii) pursuant to the Indenture, the Company
shall pay all, and the Trust shall not be obligated to pay, directly or
indirectly, all costs, expenses, debt and obligations of the Trust other than
with respect to the Trust Securities; and (iv) the Declaration further provides
that the Issuer Trustees will not cause or permit the Trust to, among other
things, engage in any activity that is not consistent with the purposes of the
Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Preferred Securities (to the extent funds therefor are
available) are guaranteed by the Company as and to the extent set forth under
"Description of the Guarantee." If the Company does not make interest payments
on the Convertible Debentures purchased by the Trust, it is expected that the
Trust will not have sufficient funds to pay distributions on the Preferred
Securities. The Guarantee is a guarantee on a subordinated basis with respect to
the Preferred Securities from the time of its issuance but does not apply to any
payment of distributions unless and until the Trust has sufficient funds for the
payment of such distributions.
The Guarantee covers the payment of distributions and other payments on the
Preferred Securities only if and to the extent that the Company has made a
payment of interest or principal on the Convertible Debentures held by the Trust
as its sole asset. The Guarantee, when taken together with the Company's
obligations under the Convertible Debentures and the Indenture and its
obligations under the Declaration, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Trust Securities), will provide a full and unconditional guarantee of amounts on
the Preferred Securities.
If the Company fails to make interest or other payments on the Convertible
Debentures when due (taking account of any Extension Period), the Declaration
provides a mechanism whereby the holders of the Preferred Securities, using the
procedures described in "Description of the Preferred Securities -- Book-Entry
Only Issuance -- The Depository Trust Company" and "Description of the Preferred
Securities -- Voting Rights," may direct the Property Trustee to enforce its
rights under the Convertible Debentures. If the Property Trustee fails to
enforce its rights under the Convertible Debentures, any holder of Preferred
Securities may directly institute a legal proceeding against the Company to
enforce the Property Trustee's rights under the Convertible Debentures without
first instituting any legal proceeding against the Property Trustee or any other
person or entity. Notwithstanding the foregoing, if a Declaration Event of
Default has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal on the Convertible
Debentures on the date such interest or principal is otherwise payable (or in
the case of redemption, on the redemption date), then a holder of Preferred
Securities may institute a Direct Action for payment on or after the respective
due date specified in the Convertible Debentures. In connection with such Direct
Action, the Company will be subrogated to the rights of such holder of Preferred
Securities under the Declaration to the extent of any payment made by the
Company to such holder of Preferred Securities in such Direct Action. The
Company, under the Guarantee, acknowledges that the Guarantee Trustee shall
enforce the Guarantee on behalf of the holders of the Preferred Securities. If
the Company fails to make payments under the Guarantee, the Guarantee provides a
mechanism whereby the holders of the Preferred Securities may direct the
Guarantee Trustee to enforce its rights thereunder. If the Guarantee Trustee
fails to enforce the Guarantee, any holder of Preferred Securities may directly
institute a legal proceeding against the Company to enforce the Guarantee
Trustee's rights under the Guarantee without first instituting a legal
proceeding against the Trust, the Guarantee Trustee, or any other person or
entity.
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UNITED STATES FEDERAL INCOME TAXATION
GENERAL
The following is a summary of certain of the material United States Federal
income tax consequences of the purchase, ownership, disposition and conversion
of Preferred Securities. Unless otherwise stated, this summary deals only with
Preferred Securities held as capital assets by holders who purchase the
Preferred Securities upon original issuance. This summary addresses the United
States Federal income tax considerations to holders of Preferred Securities who
are citizens or residents of the United States, corporations, partnership or
other entities created or organized in or under the laws of the United States or
any political subdivision thereof or therein, or estates or trusts the income of
which is subject to United States Federal income taxation regardless of its
source or other holders who are otherwise subject to United States Federal
income taxation on a net income basis with respect to Preferred Securities
("U.S. Holders") and does not address the tax consequences to holders of
Preferred Securities who are not U.S. Holders. This summary does not deal with
special classes of holders such as banks, thrift institutions, real estate
investment trusts, regulated investment companies, insurance companies, dealers
in securities or currencies, tax-exempt investors, or persons that will hold the
Preferred Securities as other than a capital asset. This summary also does not
address tax consequences to persons that have a functional currency other than
the U.S. Dollar or the tax consequences to shareholders, partners or
beneficiaries of a holder of Preferred Securities. Further, it does not include
any description of any alternative minimum tax consequences or the tax laws of
any state or local government or of any foreign government that may be
applicable to the Preferred Securities. This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury regulations thereunder
and administrative and judicial interpretations thereof, as of the date hereof,
all of which are subject to change, possibly on a retroactive basis.
CLASSIFICATION OF THE CONVERTIBLE DEBENTURES
The Company intends to take the position that the Convertible Debentures
will be classified for United States Federal income tax purposes as indebtedness
of the Company under current law, and, by acceptance of a Preferred Security,
each holder covenants to treat the Convertible Debentures as indebtedness and
the Preferred Securities as evidence of an indirect beneficial ownership
interest in the Convertible Debentures. No assurance can be given, however, that
such position of the Company will not be challenged by the Internal Revenue
Service or, if challenged, that such a challenge would not be successful. The
remainder of this discussion assumes that the Convertible Dentures will be
classified as indebtedness of the Company for United States Federal income tax
purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Preferred Securities, Skadden, Arps,
Slate, Meagher & Flom, tax counsel to the Company and the Trust, will render its
opinion generally to the effect that, under then current law and assuming full
compliance with the terms of the Declaration and the Indenture (and certain
other documents), and based on certain facts and assumptions contained in such
opinion, the Trust will be classified for United States federal income tax
purposes as a grantor trust and not as an association taxable as a corporation.
Accordingly, for United States federal income tax purposes, each holder of
Preferred Securities generally will be considered the owner of an undivided
interest in the Convertible Debentures, and each holder will be required to
include in its gross income any OID accrued with respect to its allocable share
of those Convertible Debentures.
ORIGINAL ISSUE DISCOUNT
Because the Company has the option, under the terms of the Convertible
Debentures, to defer payments of interest by extending interest payment periods
for up to 20 quarters, all of the stated interest payments on the Convertible
Debentures will be treated as "original issue discount." Holders of debt
instruments issued with OID must include that discount in income on an economic
accrual basis before the receipt of cash attributable to the interest,
regardless of their method of tax accounting. Generally, all of a holder's
taxable
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interest income with respect to the Convertible Debentures will be accounted for
as OID, and actual distributions of stated interest will not be separately
reported as taxable income. The amount of OID that accrues in any month will
approximately equal the amount of the interest that accrues on the Convertible
Debentures in that month at the stated interest rate. In the event that the
interest payment period is extended, holders will continue to accrue OID
approximately equal to the amount of the interest payment due at the end of the
extended interest payment period on an economic accrual basis over the length of
the extended interest period.
RECEIPT OF CONVERTIBLE DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under certain circumstances, as described under the caption "Description of
the Preferred Securities -- Special Event Redemption or Distribution," the
Convertible Debentures may be distributed to holders in exchange for the
Preferred Securities and in liquidation of the Trust. Under current law, such a
distribution, for United States federal income tax purposes, would be treated as
a non-taxable event to each holder, and each holder would receive an aggregate
tax basis in the Convertible Debentures equal to such holder's aggregate tax
basis in its Preferred Securities. A holder's holding period in the Convertible
Debentures so received in liquidation of the Trust would include the period
during which the Preferred Securities were held by such holder.
Under certain circumstances described under "Description of the Preferred
Securities -- Special Event Redemption or Distribution," the Convertible
Debentures may be redeemed for cash and the proceeds of such redemption
distributed to holders in redemption of their Preferred Securities. Under
current law, such a redemption of the Convertible Debentures would, for United
States federal income tax purposes, constitute a taxable disposition of the
redeemed Preferred Securities, and a holder could recognize gain or loss as if
it sold such redeemed Preferred Securities for cash. See "-- Sales of Preferred
Securities."
SALES OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between its adjusted tax basis in the Preferred Securities and
the amount realized on the sale of such Preferred Securities. A holder's
adjusted tax basis in the Preferred Securities generally will be its initial
purchase price increased by OID previously includible in such holder's gross
income to the date of disposition and decreased by payments received on the
Preferred Securities. Such gain or loss generally will be a capital gain or loss
and generally will be a long-term capital gain or loss if the Preferred
Securities have been held for more than one year.
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Convertible Debentures. A holder who disposes of his Preferred Securities
between record dates for payments of distributions thereon will be required to
include accrued but unpaid interest on the Convertible Debentures through the
date of disposition in income as ordinary income and to add such amount to his
adjusted tax basis in his pro rata share of the underlying Convertible
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which will include, in the form of OID, all accrued
but unpaid interest) a holder will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
Because income on the Preferred Securities will constitute interest (in the
form of OID) for federal income tax purposes, corporate holders of Preferred
Securities will not be entitled to a dividends-received deduction with respect
to any income recognized with respect to the Preferred Securities.
CONVERSION OF PREFERRED SECURITIES
A holder generally will not recognize income, gain or loss upon the
conversion, through the Conversion Agent, of its Preferred Securities into
Common Stock. A holder will, however, recognize gain upon the receipt of cash in
lieu of a fractional share of Common Stock equal to the amount of cash received
less the holder's tax basis in such fractional share. A holder's tax basis in
the Common Stock received upon exchange and conversion should generally be equal
to the holder's tax basis in the Preferred Securities delivered to the
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Conversion Agent for exchange less the basis allocated to any fractional share
for which cash is received, and a holder's holding period in the Common Stock
received upon exchange and conversion should generally begin on the date the
holder acquired the Preferred Securities delivered to the Conversion Agent for
exchange.
ADJUSTMENT OF CONVERSION PRICE
Treasury Regulations promulgated under Section 305 of the Code would treat
holders of Preferred Securities as having received a constructive distribution
from the Company in the event the conversion ratio of the Convertible Debentures
were adjusted if (i) as a result of such adjustment, the proportionate interest
(measured by the quantum of Common Stock into or for which the Convertible
Debentures are convertible or exchangeable) of the holders of the Preferred
Securities in the assets or earnings and profits of the Company were increased,
and (ii) the adjustment was not made pursuant to a bona fide, reasonable
antidilution formula. An adjustment in the conversion ratio would not be
considered made pursuant to such a formula if the adjustment was made to
compensate for certain taxable distributions with respect to the Common Stock.
Thus, under certain circumstances, a reduction in the conversion price for the
holders may result in deemed dividend income to holders to the extent of the
current or accumulated earnings and profits of the Company. Holders of the
Preferred Securities would be required to include their allocable share of such
deemed dividend income in gross income but would not receive any cash related
thereto.
PROPOSED TAX LEGISLATION
On March 19, 1996, the U.S. Treasury Department proposed certain tax law
changes (the "Proposed Legislation") that would, among other things, generally
deny corporate issuers a deduction for interest in respect of certain debt
obligations with a maximum term of more than 20 years that are not shown as
indebtedness on the consolidated balance sheet of the issuer. On March 29, 1996,
Senate Finance Committee Chairman William V. Roth, Jr. and House Ways and Means
Committee Chairman Bill Archer issued a joint statement (the "Joint Statement")
indicating their intent that the Proposed Legislation, if adopted by either of
the tax-writing committees of Congress, would have an effective date that is no
earlier than the date of "appropriate Congressional action." Based upon the
Joint Statement, it is expected that if the Proposed Legislation were to be
enacted, such legislation would not apply to the Convertible Debentures because
they will be issued prior to the date of any "appropriate Congressional action."
Furthermore, even if the Proposed Legislation were enacted in its current form
with effective date provisions making it applicable to the Convertible
Debentures, it would not affect the Company's ability to deduct the interest
payable on the Convertible Debentures because their maximum term will not exceed
20 years.. There can be no assurance, however, that any proposed legislation
enacted after the date hereof will not otherwise adversely affect the ability of
the Company to deduct the interest payable on the Convertible Debentures.
Accordingly, there can be no assurance that a Tax Event will not occur. See
"Description of the Preferred Securities -- Special Event Redemption or
Distribution."
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, income on the Preferred Securities will be reported to holders
on Forms 1099, which forms should be mailed to holders of Preferred Securities
by January 31 following each calendar year.
Payments made on, and proceeds from the sale of, the Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification requirements. Any withheld amounts will be allowed
as a credit against the holder's United States Federal income tax, provided the
required information is provided to the Internal Revenue Service on a timely
basis.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
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<PAGE> 90
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Certificate of Incorporation provides that the Company may
issue up to 75,000,000 shares of Common Stock, 1,300,000 shares of non-voting
common stock and 15,000,000 shares of Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders, and do not
have preemptive rights. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors of the Company out of funds legally available therefor.
See "Dividend Policy." All outstanding shares of Common Stock are fully paid and
nonassessable. In the event of any liquidation, dissolution or winding-up of the
affairs of the Company, holders of Common Stock will be entitled to share
ratably in the assets of the Company remaining after payment or provision for
payment of all of the Company's debts and obligations and liquidation payments
to holders of outstanding shares of Preferred Stock.
Holders of non-voting common stock are not entitled to any voting rights
except as otherwise required by law, and do not have any preemptive rights. In
all other respects, the non-voting common stock is identical to the Common
Stock. The shares of non-voting common stock are convertible at any time, on a
one-for-one basis, into shares of Common Stock. Outstanding shares of non-voting
common stock will be convertible into an equal number of shares of Common Stock
at any time at the option of the Company prior to any vote of the non-voting
common stock required by law.
PREFERRED STOCK
The Board of Directors, without further stockholder authorization, is
authorized to issue shares of Preferred Stock in one or more series and to
determine and fix the rights, preferences and privileges of each series,
including dividend rights and preferences over dividends on the Common Stock and
one or more series of the Preferred Stock, conversion rights, voting rights (in
addition to those provided by law), redemption rights and the terms of any
sinking fund therefor, and rights upon liquidation, dissolution or winding up,
including preferences over the Common Stock and one or more series of the
Preferred Stock. Although the Company has no present plans to issue any shares
of Preferred Stock, the issuance of shares of Preferred Stock, or the issuance
of rights to purchase such shares, may have the effect of delaying, deferring or
preventing a change in control of the Company or an unsolicited acquisition
proposal.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION, BY-LAWS AND
DELAWARE LAW
Classified Board of Directors. The Certificate of Incorporation of the
Company provides for the Board of Directors to be divided into three classes of
directors, as nearly equal in number as is reasonably possible, serving
staggered terms so that directors' initial terms will expire either at the 1997,
1998 or 1999 annual meeting of the stockholders. Starting with the 1997 annual
meeting of the stockholders, one class of directors will be elected each year
for a three-year term.
The Company believes that a classified board of directors will help to
assure the continuity and stability of the Board of Directors and the Company's
business strategies and policies as determined by the Board of Directors, since
a majority of the directors at any given time will have had prior experience as
directors of the Company. The Company believes that this, in turn, will permit
the Board of Directors to more effectively represent the interest of
stockholders. With a classified board of directors, at least two annual meetings
of stockholders, instead of one, will generally be required to effect a change
in the majority of the Board of Directors. As a result, a provision relating to
a classified Board of Directors may discourage proxy contests for the election
of directors or purchases of a substantial block of the Common Stock because its
provisions could operate to prevent obtaining control of the Board of Directors
in a relatively short period of time. The
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<PAGE> 91
classification provision could also have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
the Company. Under the Delaware General Corporation Law (the "DGCL"), a director
on a classified board may be removed by the stockholders of the corporation only
for cause.
Advance Notice Provisions for Stockholder Nominations of Directors and
Stockholder Proposals. The By-Laws of the Company establish an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Board of Directors or a committee thereof, of candidates for election as
directors (the "Nomination Procedure") and with regard to other matters to be
brought by stockholders before an annual meeting of stockholders of the Company
(the "Business Procedure").
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Board of Directors to
the Secretary of the Company. The requirements as to the form and timing of that
notice are specified in the By-Laws of the Company. If the Chairman of the Board
of Directors determines that a person was not nominated in accordance with the
Nomination Procedure, such person will not be eligible for election as a
director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Secretary of the Company. The requirements as to the form and timing of
that notice are specified in the By-Laws. If the Chairman of the Board of
Directors determines that the other business was not properly brought before
such meeting in accordance with the Business Procedure, such business will not
be conducted at such meeting.
Although the By-Laws of the Company do not give the Board of Directors any
power to approve or disapprove stockholder nominations for the election of
directors or of any business desired by stockholders to be conducted at an
annual meeting, the By-Laws of the Company (i) may have the effect of precluding
a nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if the proper procedures are not followed or (ii)
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
Section 203 of Delaware Law. The Company is a Delaware corporation and is
subject to Section 203 of DGCL. In general, Section 203 prevents an "interested
stockholder" (defined as a person who, together with affiliates and associates,
beneficially owns or if an affiliate or associate of the corporation did
beneficially own within the last three years 15% or more of a corporation's
outstanding voting stock) from engaging in a "business combination" (as defined)
with a Delaware corporation for three years following the time such person
became an interested stockholder unless (i) before such persons became an
interested stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination; (ii) upon consummation of the transaction
that resulted in the interested stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding shares
owned by persons who are both officers and directors of the corporation, and
shares held by certain employee stock ownership plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer); or
(iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of a least two-thirds of the outstanding voting stock of the
corporation not owned by the "interested stockholder." A "business combination"
generally includes mergers, stock or asset sales involving 10% or more of the
market value of the corporation's assets or stock, certain stock transactions
and certain other transactions resulting in a financial benefit to the
interested stockholders or an increase in their proportionate share of any class
or series of a corporation. The existence of Section 203 of the DGCL could have
the effect of discouraging an acquisition of the Company or stock purchasers in
furtherance of an acquisition.
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<PAGE> 92
Limitation on Directors' Liabilities and Indemnification. The Company's
Certificate of Incorporation and By-Laws provide that to the fullest extent
permitted by the DGCL as it currently exists, a director of the Company shall
not be liable to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director. Under the current DGCL, liability of a director
may not be limited (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of this provision of the Company's
Certificate of Incorporation is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of the fiduciary duty
of care as director (including breaches resulting from negligent or grossly
negligent behavior) except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of the Company
or any stockholder to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. In addition,
the Company's Certificate of Incorporation and By-Laws provides that the Company
shall indemnify its directors, officers, employees and agents to the fullest
extent permitted by DGCL.
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services is the transfer agent and registrar
for the Common Stock.
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<PAGE> 93
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summary does not purport to be complete and is qualified in
its entirety by reference to the provisions of the Credit Agreement, a copy of
which has been filed as exhibit to the Registration Statement of which this
Prospectus forms a part, and other related documents governing the Credit
Agreement. Capitalized terms used below and not defined have the meanings set
forth in the Credit Agreement.
On April 28, 1995, CKJC and Rio Sportswear, as Borrowers, and the Company,
New Rio, L.L.C. and Jeanswear, as Guarantors, entered into the Credit Agreement
with certain lenders and The CIT Group, as agent for the lenders, that provides
up to $140 million comprised of two senior secured credit facilities: the $25
million Term Loan Facility and the $115 million Revolving Credit Facility. On
March 29, 1996, pursuant to an amendment to the Credit Agreement, the Revolving
Credit Facility was increased to $150 million. The Revolving Credit Facility
provides for borrowings subject to the borrowing base formula described below
and the issuance of letters of credit up to $45 million. Pursuant to such
amendment, Rio Sportswear will no longer borrow revolving loans, but will
otherwise continue certain of its obligations under the Credit Agreement. The
Term Loan is payable in equal installments, with the final installment due on
March 31, 2000. The final maturity date for the Revolving Credit Facility is
April 28, 2000, although the Revolving Credit Facility will continue until April
28 of each succeeding calendar year unless terminated as provided in the Credit
Agreement.
The Term Loan and all loans made under the Revolving Credit Facility bear
interest either at the Chemical Bank of New York prime rate plus 1.25% or at a
rate equal to LIBOR plus 2.75%. The Borrowers pay a commitment fee of 1/2 of 1%
on the unused portion of the Revolving Credit Commitment.
The total amount of revolving loans and the stated amount of letters of
credit that may be outstanding under the Revolving Credit Facility is limited to
not more than the lesser of (a) $150 million and (b) the borrowing base, which
is equal to the difference between (i) the sum of (A) 95% of the net amount of
eligible accounts receivable of CKJC (including certain receivables purchased by
The CIT Group in its capacity as factor pursuant to a factoring arrangement with
CKJC), (B) the lesser of 60% of the value of eligible inventory of CKJC and $65
million and (C) an additional amount, if any, agreed to by CIT at any time in
its sole discretion and, (ii) without duplication, such reserves for any claims
against the collateral as The CIT Group in its sole discretion deems
appropriate. In addition, the Credit Agreement has a "clean-down" provision
requiring that, between December 1 and December 21 of each year, the Revolving
Credit Facility be reduced to $105 million for at least one Business Day.
In order to secure its obligations under the Credit Agreement, each of the
Borrowers (including Rio Sportswear), the Guarantors and certain of their
subsidiaries has granted to The CIT Group a continuing security interest in all
its tangible and intangible personal property and fixtures and has granted a
mortgage of its real property and Rio Sportswear has pledged to The CIT Group
each of the trademarks listed in the Trademark Security Agreement. Such pledge
does not encompass the Trademarks. In addition, each of New Rio, L.L.C., the
Company, Jeanswear, CKJC and Rio Sportswear has pledged the shares of its
subsidiaries and CKJC has pledged a demand note, in the principal amount of
approximately $2 million, payable to Rio Sportswear.
The Credit Agreement contains various covenants that restrict the ability
of New Rio, L.L.C. and the Borrowers (including their subsidiaries), among other
things, (i) to create liens or other encumbrances on their assets or revenues,
(ii) to incur additional indebtedness, (iii) to guarantee any indebtedness, (iv)
to engage in merger transactions or sale of assets, (v) to make investments,
(vi) to enter into any lease agreement, (vii) to make capital expenditures in
excess of certain specified amounts, (viii) to make dividend payments or other
distributions to their stockholders, (ix) to adjust any of the accounts
receivable or granting any discounts other than as permitted by the factoring
agreements, (x) to enter into any transaction with affiliates of New Rio, L.L.C.
other than upon terms no less favorable to New Rio, L.L.C. or its subsidiaries
than it would obtain in an arms' length transaction, (xi) to prepay
indebtedness, and (xii) to permit or cause any factoring agreement to terminate
unless certain specified conditions have been satisfied. In addition to the
foregoing, the Credit Agreement contains certain financial covenants including,
among other things, a minimum consolidated adjusted tangible net worth, a
minimum consolidated net worth, a minimum consolidated
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<PAGE> 94
ratio of EBIT to interest expense, a minimum consolidated current ratio and a
minimum consolidated fixed charge coverage ratio. For interest rate protection,
the Credit Agreement calls for the Company to enter into a hedging agreement in
an amount of at least $30 million. Upon termination of such hedging agreement,
the Company is required to enter into not less than four successive one year
hedging agreements.
Events of default under the Credit Agreement include those usual and
customary for a transaction of this type, including, among other things, (i) a
default in the payment of any principal payable on the loans under the Credit
Agreement, (ii) a default in the payment of any interest or other amounts
payable under the Credit Agreement which continues for more than five days,
(iii) the failure to comply with the covenants contained in the Credit Agreement
or related loan documents, (iv) a default by the Borrowers and the Guarantors
under any debt instrument in excess of $500,000 (after giving effect to any
applicable grace period), (v) the commencement of a bankruptcy, insolvency,
receivership or similar action by or against any Borrower or Guarantor, (vi) the
failure of the Lenders' lien on any collateral with an aggregate fair market
value in excess of $1 million to be perfected, enforceable or valid, (vii) one
or more judgments in an aggregate amount in excess of $500,000 (to the extent
not covered by insurance) rendered against the Borrowers or the Guarantors,
(viii) a change of control, which shall occur, if, among other things, (a)
Charterhouse Equity Partners II, L.P. and certain of its affiliates cease to own
at least 47% of the then outstanding voting rights of New Rio, L.L.C., (b) the
Company ceases to own and control all of the outstanding voting stock of the
Borrowers and Jeanswear, or (c) Mr. Simon ceases to be involved in the
day-to-day operations of New Rio, L.L.C., the Company and the Borrowers and a
successor reasonably acceptable to the Agent is not appointed within six months
of such cessation and (ix) a default under any license agreement if the effect
of such default is to permit Bill Blass or CKI to terminate its respective
license agreement or to exercise any remedies which could reasonably adversely
affect the ability of the Borrowers to perform their obligations under the
Credit Agreement. Upon the occurrence and continuance of an Event of Default
under the Credit Agreement, the lenders may terminate their commitments to make
loans and issue letters of credit thereunder, declare the then outstanding loans
due and payable and demand cash collateral in respect of outstanding letters of
credit.
At June 30, 1996, the Company had amounts outstanding under the Credit
Agreement of approximately $68.8 million consisting of $43.3 million of
borrowings outstanding under the Revolving Credit Facility, $11.7 million for
open letters of credit and $13.8 million outstanding under the Term Loan
Facility.
See "Use of Proceeds" for a description of The CIT Group's commitment to
finance the New Credit Agreement.
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<PAGE> 95
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Trust has agreed to sell to each of the
Underwriters named below, and each of the Underwriters has severally agreed to
purchase the number of Preferred Securities set forth opposite its name below.
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Preferred Securities
offered hereby if any of the Preferred Securities are purchased. In the event of
default by an Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the purchase commitments of the nondefaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
PREFERRED
UNDERWRITERS SECURITIES
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Morgan Stanley & Co. Incorporated........................................
------
Total.......................................................
======
</TABLE>
The Underwriters propose to offer the Preferred Securities in part directly
to the public at the initial public offering price, as set forth on the cover
page of this Prospectus, and in part to certain securities dealers at such price
less a concession not in excess of $. per Preferred Security. The Underwriters
may allow, and such dealers may reallow, a discount not in excess of $. per
Preferred Security to certain other brokers and dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Convertible Debentures of the Company,
the Underwriting Agreement provides that the Company will agree to pay as
compensation ("Underwriters' Compensation") to the Underwriters for the
Underwriters' arranging the investment therein of such proceeds, an amount in
New York Clearing House (same day) funds of $ per Preferred Security (or
$ in the aggregate) for the accounts of the several Underwriters.
The Trust, the Company, the Principal Stockholder and certain officers of
the Company have agreed that they will not, directly or indirectly, for a period
of days after the date of the Underwriting Agreement, except with the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, offer,
sell, or enter into any agreement to sell, or otherwise dispose of (a) any trust
certificates or other securities of the Trust (other than the Preferred
Securities offered hereby and the Common Securities), (b) any preferred stock or
any other security of the Company that is substantially similar to the Preferred
Securities, (c) any shares of any class of common stock of the Company, other
than (i) shares of Common Stock issuable upon conversion of the Preferred
Securities or pursuant to the exercise of options or warrants outstanding on the
date of the Underwriting Agreement; and (ii) the grant of stock options or other
stock-based awards (and the exercise thereof) to directors, officers and
employees of the Company; and (iii) shares of Common Stock to CKI upon the
conversion of the non-voting common stock owned by it.
The Trust and the Company will apply to have the Preferred Securities
listed on the NYSE under the symbol ["DSHPrA"]. Prior to this offering, there
has been no public market for the Preferred Securities. In order to meet one of
the requirements for listing the Preferred Securities on the NYSE, the
Underwriters will undertake to sell lots of 100 or more Preferred Securities to
a minimum of 400 beneficial holders.
The Company and the Trust have agreed to indemnify the Underwriters
against, or contribute to payments that the Underwriters may be required to make
in respect of, certain liabilities, including liabilities under the Securities
Act of 1933, as amended.
Certain of the Underwriters engage in transactions with, and, from time to
time, have performed services for, the Company and its subsidiaries in the
ordinary course of business.
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<PAGE> 96
LEGAL MATTERS
Certain legal matters with respect to the Preferred Securities, the
Convertible Debentures, the Common Stock issuable upon conversion thereof and
the Guarantee will be passed upon for the Company and the Trust by Skadden,
Arps, Slate, Meagher & Flom, New York, New York. Certain legal matters will be
passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership
including a professional corporation), New York, New York. Skadden, Arps, Slate,
Meagher & Flom has from time to time represented, and may continue to represent,
certain of the Underwriters. Mark N. Kaplan, a partner in the firm of Skadden,
Arps, Slate, Meagher & Flom, is trustee of a trust for the benefit of Mark K.
Berman and Allison A. Berman, which is one of the beneficial owners of the
Principal Stockholder.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1995 and
1994 and the consolidated statements of operations, changes in stockholder's
equity and cash flows for the year ended December 31, 1995 and the four months
ended December 31, 1994 and the combined statements of operations, changes in
stockholders' equity and cash flows of the Predecessor Companies for the eight
months ended August 25, 1994 included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The combined statements of operations, stockholders' equity and cash flows
of Rio Sportswear, Inc. and affiliated companies for the year ended December 31,
1993 and the related financial statement schedule for the year then ended
included in this Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
In 1994, the Company retained Coopers & Lybrand L.L.P. as accountants for
the Company after the Company's management, in consultation with the Board of
Directors, decided to replace Deloitte & Touche LLP. During 1993, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements (if not
resolved to the satisfaction of Deloitte & Touche LLP) would have caused it to
make reference to the subject matter of the disagreement in connection with
their report. The report of Deloitte & Touche LLP on the 1993 Predecessor
Companies' financial statements did not contain an adverse opinion or a
disclaimer of opinion and was not qualified as to uncertainty, audit scope or
accounting principles. Prior to the retention of Coopers & Lybrand L.L.P.,
neither the Company nor anyone on the Company's behalf consulted Coopers &
Lybrand L.L.P. regarding either the application of accounting principles related
to a specified transaction, completed or proposed, or the type of audit opinion
that might be rendered on the Company's financial statements.
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<PAGE> 97
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Reports of Independent Accountants.................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995............. F-4
Combined Statements of Operations for the year ended December 31, 1993 and the eight
months ended August 25, 1994, and Consolidated Statements of Operations for the four
months ended December 31, 1994 and the year ended December 31, 1995................. F-5
Combined Statements of Changes in Stockholder's Equity for the year ended December 31,
1993 and the eight months ended August 25, 1994, and Consolidated Statements of
Changes in Stockholder's Equity for the four months ended December 31, 1994 and the
year ended December 31, 1995........................................................ F-6
Combined Statements of Cash Flows for the year ended December 31, 1993 and the eight
months ended August 25, 1994, and Consolidated Statements of Cash Flows for the four
months ended December 31, 1994 and the year ended December 31, 1995................. F-7
Notes to Consolidated and Combined Financial Statements............................... F-8
Condensed Consolidated Balance Sheet as of June 30, 1996 (unaudited).................. F-21
Condensed Consolidated Statements of Operations for the six months ended June 30, 1996
and 1995 (unaudited)................................................................ F-22
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1996
and 1995 (unaudited)................................................................ F-23
Notes to Condensed Consolidated Financial Statements (unaudited)...................... F-24
</TABLE>
F-1
<PAGE> 98
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Designer Holdings Ltd.:
We have audited the consolidated balance sheets of Designer Holdings Ltd.
(the "Company") as of December 31, 1995 and 1994, the related consolidated
statements of operations, changes in stockholder's equity and cash flows for the
year ended December 31, 1995 and the four months ended December 31, 1994, and
the combined statements of operations, changes in stockholder's equity and cash
flows of the Predecessor Companies for the eight months ended August 25, 1994.
These financial statements are the responsibility of the Company's and the
Predecessor Companies' management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Designer
Holdings Ltd. as of December 31, 1995 and 1994, the consolidated results of
their operations and their cash flows for the year ended December 31, 1995 and
the four months ended December 31, 1994, and the combined results of operations
and cash flows of the Predecessor Companies for the eight months ended August
25, 1994, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
February 29, 1996, except for Note 1, the tenth
paragraph of Note 11, the thirteenth paragraph of
Note 13 and Note 16, for which the date is April 22, 1996.
F-2
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholder of
Rio Sportswear, Inc.
We have audited the combined statements of operations, stockholders' equity
and cash flows of Rio Sportswear, Inc. and affiliated companies (the
"Predecessor Companies") for the year ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined results of operations and cash flows of the Predecessor
Companies for the year ended December 31, 1993 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
April 1, 1994
F-3
<PAGE> 100
DESIGNER HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 1,432
Receivables, net..................................................... 27,128 $118,400
Inventory............................................................ 31,907 69,510
Deferred tax assets.................................................. 2,147 8,065
Prepaid expenses and other current assets............................ 3,142 3,625
-------- --------
Total current assets......................................... 65,756 199,600
Property, plant and equipment, net..................................... 2,871 4,953
Prepaid royalties, net................................................. 7,500 6,084
Intangible assets, net................................................. 37,881 34,880
Deferred financing costs, net.......................................... 3,946
Deferred tax assets.................................................... 795
Other assets........................................................... 825 556
-------- --------
Total assets................................................. $114,833 $250,814
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt.................................... $ 2,926 $ 5,000
Revolving credit loans............................................... 97,016
Due to factor........................................................ 4,602
Accounts payable..................................................... 15,323 24,857
Accrued expenses..................................................... 15,044 30,090
Income taxes payable................................................. 791 10,966
-------- --------
Total current liabilities.................................... 38,686 167,929
Long-term debt, less current portion................................... 52,255 50,403
Deferred tax liabilities............................................... 886
-------- --------
Total liabilities............................................ 91,827 218,332
-------- --------
Commitments and contingencies (Note 13)
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...................................................... 24,121 20,121
Retained earnings.................................................... 1,056 12,119
-------- --------
25,419 32,482
Less, Notes receivable from related party............................ (2,413)
-------- --------
Total stockholder's equity................................... 23,006 32,482
-------- --------
Total liabilities and stockholder's equity................... $114,833 $250,814
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 101
DESIGNER HOLDINGS LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
THE COMPANY
(COMBINED) (CONSOLIDATED)
----------------------------- -----------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 25, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues............................ $173,561 $ 93,969 $ 102,038 $ 462,122
Cost of goods sold...................... 146,620 81,143 75,246 323,638
-------- ------- ---------- ----------
Gross profit............................ 26,941 12,826 26,792 138,484
Selling, general and administrative
expenses.............................. 23,323 12,318 20,079 100,391
-------- ------- ---------- ----------
Operating income........................ 3,618 508 6,713 38,093
Interest expense........................ 1,808 1,142 2,557 16,160
-------- ------- ---------- ----------
Income (loss) before income taxes....... 1,810 (634) 4,156 21,933
Provision (benefit) for income taxes.... (331) (399) 2,239 10,870
-------- ------- ---------- ----------
Net income (loss)....................... $ 2,141 $ (235) $ 1,917 $ 11,063
======== ======= ========== ==========
Net income per share.................... $ .08 $ .46
========== ==========
Weighted average shares outstanding..... 24,233,868 24,233,868
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 102
DESIGNER HOLDINGS LTD.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
PREDECESSOR COMPANIES (COMBINED):
Balance, January 1, 1993...................................... $ 1,611 $ 4,200 $ 4,649
Capital contributions......................................... 15
Distributions to stockholders................................. (2,179)
Net income.................................................... 2,141
------- ------- -------
Balance, December 31, 1993.................................... 1,611 4,215 4,611
Distributions to stockholders................................. (8) (2,298)
Net loss...................................................... (235)
------- ------- -------
Balance, August 25, 1994...................................... 1,611 4,207 2,078
THE COMPANY (CONSOLIDATED):
Distributions to stockholder.................................. (16)
Purchase of certain equity interests in predecessor
companies................................................... (1,457) (2,923)
Initial capitalization of Jeanswear Holdings, Inc. ........... 20,002
Net income.................................................... 1,917
Retroactive effect of issuance and exchange of common stock
pursuant to reorganization, effective March 1995, and stock
split, effective April 1996 (Note 1)........................ (1,369) 1,369
------- ------- -------
Balance, December 31, 1994.................................... 242 24,121 1,056
Purchase of remaining interests in predecessor companies...... (4,000)
Net income.................................................... 11,063
------- ------- -------
Balance, December 31, 1995.................................... $ 242 $20,121 $ 12,119
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 103
DESIGNER HOLDINGS LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES THE COMPANY
(COMBINED) (CONSOLIDATED)
--------------------------- ---------------------------
YEAR EIGHT MONTHS FOUR MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, AUGUST 25, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ 2,141 $ (235) $ 1,917 $ 11,063
Adjustments to reconcile net income (loss) to cash provided
by
(used in) operating activities:
Depreciation............................................... 214 50 150 595
Amortization............................................... 6 1,480 3,426
Loss on disposal of fixed assets........................... 182
Deferred interest.......................................... 1,653
Provision for receivables.................................. (26) 7 891 12,300
Deferred income taxes...................................... (823) (224) (122) (7,599)
Changes in assets and liabilities:
Receivables.............................................. (542) (1,122) (23,530) (103,572)
Inventory................................................ (6,961) 6,752 (1,493) (37,603)
Prepaid expenses and other current assets................ (331) (103) 103 (611)
Prepaid royalties........................................ (9,500) 2,000
Other assets............................................. 129 161 (702) 158
Accounts payable......................................... 3,637 67 (4,886) 9,534
Accrued expenses......................................... 100 (515) 15,481 15,163
Income taxes payable..................................... (236) (115) 673 10,175
------- ------- -------- --------
Net cash provided by (used in) operating activities... (2,698) 4,729 (19,538) (83,136)
------- ------- -------- --------
Cash flows from investing activities:
Sale of equipment............................................ 21
Purchase of ownership interest of predecessor companies...... (24,000)
Acquisition of license agreement and related assets.......... (10,314)
Loan to related party........................................ (2,350)
Purchase of equipment........................................ (21) (84) (2,757)
------- ------- -------- --------
Net cash provided by (used in) investing activities... 21 (21) (36,748) (2,757)
------- ------- -------- --------
Cash flows from financing activities:
Capital contributions........................................ 15 20,002
Proceeds from (payment of) notes payable to related party.... (200) 45,181 (45,181)
Proceeds from note payable................................... 5,142
Advance from (payments to) factor............................ 4,602 (4,602)
Proceeds from senior subordinated notes...................... 30,000
Proceeds from term loan...................................... 25,000
Increase in revolving credit loans........................... 97,016
Payment of note payable to factor............................ (10,000) (10,000)
Distributions to stockholders/partners....................... (2,179) (2,306) (16) (1,495)
Payment of notes payable..................................... (2,871) (2,400)
Payment of term loan......................................... (1,250)
Financing costs paid......................................... (320) (5,027)
------- ------- -------- --------
Net cash provided by (used in) financing activities... 2,778 (5,177) 57,049 84,461
------- ------- -------- --------
Net increase (decrease) in cash....................... 101 (469) 763 (1,432)
Cash, beginning of period...................................... 1,037 1,138 669 1,432
------- ------- -------- --------
Cash, end of period................................... $ 1,138 $ 669 $ 1,432 $ --
======= ======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest......................................... $ 1,845 $ 996 $ 445 $ 16,448
======= ======= ======== ========
Cash paid for income taxes..................................... $ 796 $ 253 $ 2,079 $ 7,340
======= ======= ======== ========
Supplemental schedule of noncash investing and financing
activities:
The acquisition of license agreement and related assets and
the purchase of ownership interests in predecessor
companies included the following noncash amounts:
Fair value of net assets acquired........................ $ 61,735
Note payable issued to seller............................ (20,000)
Other liabilities created or assumed..................... (7,421)
--------
Cash paid.................................................. $ 34,314
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 104
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
Designer Holdings Ltd. ("Designer") (formerly, Denim Holdings Inc.) was
incorporated on March 27, 1995 for the purpose of consolidating the ownership
interests of Rio Sportswear, Inc. ("Rio Sportswear") and Jeanswear Holdings,
Inc. ("Jeanswear"), the holding company for Calvin Klein Jeanswear Company
("CKJC"). Designer is a wholly-owned subsidiary of New Rio L.L.C. ("New Rio"),
whose controlling equityholders are Arnold H. Simon and Charterhouse Equity
Partners II, L.P. ("CEP II").
The consolidated financial statements as of December 31, 1995 and 1994 and
for the year ended December 31, 1995 and the four months ended December 31, 1994
include the accounts of Designer and its subsidiaries, Rio Sportswear, Jeanswear
and CKJC and their respective subsidiaries (collectively, the "Company"). The
combined statements of operations, stockholders' equity and cash flows for the
year ended December 31, 1993 and the eight months ended August 25, 1994 include
the accounts of five separate entities commonly controlled and managed by Mr.
Simon and Stephen Huang (collectively, the "Predecessor Companies"). All
significant intercompany balances have been eliminated in consolidation.
The Company is principally engaged in developing, sourcing, producing and
marketing designer sportswear for men, women, juniors and petites under the
Calvin Klein Jeans Labels pursuant to a license agreement (the "CKJ License")
with Calvin Klein, Inc. ("CKI"). The principal markets for the Company's
products are a broad range of department stores and specialty retailers in the
United States.
In contemplation of a public offering of common stock, on April 22, 1996,
Designer increased the number 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
financial statements of the Company have been restated to reflect the foregoing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue from the sale of merchandise is recognized at the date of shipment
to the customer. Allowances for estimated returns, discounts and credits are
provided when a sale is recorded.
The Company earns royalty fees from the licensing of the Rio tradename and
the sublicensing of the Bill Blass tradename. The Company earns commissions as
an agent for the manufacturing of private-label apparel for certain of its
customers. Royalty income from the Rio and Bill Blass licensing rights is
recognized on the basis of net sales generated by the licensee and commission
income for acting as a manufacturing agent is recognized at the date merchandise
is shipped to the private-label customer.
Effective July 1, 1995, the Company also earns royalty fees from a
distribution arrangement for the manufacturing, marketing and distribution of
Calvin Klein Jeans Label products in Canada. Royalty fees are recognized as a
percentage of net sales generated by the distributor.
Cash and Cash Equivalents
The Company considers all highly-liquid temporary investments purchased
with a maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined by
the average cost method.
F-8
<PAGE> 105
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation of property, plant and equipment is
computed by the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized on a straight-line basis
over the shorter of their estimated useful lives or lease terms. The cost and
related accumulated depreciation or amortization of assets retired or sold are
removed from the respective accounts, and any resulting gain or loss is included
in the statement of operations.
Intangible Assets
Goodwill arising from the acquisition described in Note 3 is amortized on a
straight-line basis over fifteen years. Licensing rights resulting from
obtaining the CKJ License are also amortized on a straight-line basis over
fifteen years. The non-compete agreements entered into in connection with
obtaining the CKJ License are effective over the term of the CKJ License,
including renewals, and the related costs of the agreements are being amortized
on a straight-line basis over fifteen years. The Company periodically evaluates
the recoverability of its intangible assets and measures the amount of
impairment, if any, by assessing current and future levels of income and cash
flows as well as other factors, such as business trends and prospects and market
and economic conditions.
Deferred Financing Costs
Deferred financing costs relate to the Company's debt refinancing (see Note
11) and are being amortized using the interest method over the terms of the
underlying indebtedness of five and ten years. These costs are stated net of
accumulated amortization of $1,006 at December 31, 1995.
Income Taxes
The Company records deferred tax assets and liabilities for differences
between the financial statement and tax bases of assets and liabilities
("temporary differences") at enacted tax rates in effect for the year in which
the differences are expected to reverse. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. In addition, valuation allowances are established, when
necessary, to reduce deferred tax assets to the amounts expected to be realized.
Management Estimates
The financial statements are prepared in conformity with generally accepted
accounting principles, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates relate to sales returns,
discounts and allowances. Actual results could differ from those estimates.
Recently Issued Accounting Standards
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS No. 121"), was issued and is effective January 1, 1996.
SFAS No. 121 requires that in the event certain facts and circumstances indicate
an asset may be impaired, an evaluation of recoverability must be performed to
determine whether or not the carrying amount of the asset is required to be
written down. The Company does not expect the adoption of this statement to have
a material effect on its financial condition or results of operations.
F-9
<PAGE> 106
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. REORGANIZATION AND ACQUISITION
The formation of Designer and its acquisitions of Rio Sportswear and
Jeanswear has been accounted for as a reorganization of entities under common
control in a manner similar to a pooling of interests effective August 26, 1994.
New Rio and its wholly-owned subsidiary, Rio Sportswear, were formed in
July and August 1994, respectively, for the purpose of combining the business
activities of the Predecessor Companies which were jointly engaged in the
designing, sourcing, marketing and distribution of jeans and jeans-related
products under the Rio, Bill Blass and certain private label tradenames.
On August 4, 1994, Mr. Simon contributed a portion of his interests in the
Predecessor Companies to Rio Sportswear in exchange for a $20,000 preferential
equity interest in New Rio. Mr. Simon also granted an option, which was
exercised in April 1995, to Rio Sportswear to acquire his remaining residual
interests in the Predecessor Companies for $4,000. The consideration exchanged
comprised cash of $1,345 and the cancellation of notes receivable from Mr. Simon
amounting to $2,655. The transaction was accounted for as a redemption of equity
securities.
On August 25, 1994, CEP II loaned $24,849 to Rio Sportswear. The proceeds
of this loan were used to fund the purchase of the interests of Mr. Huang in the
Predecessor Companies for $24,000, excluding costs of the acquisition. This
transaction resulted in a change in control of the Predecessor Companies.
The contribution of Mr. Simon's interests in the Predecessor Companies and
the acquisition of Mr. Huang's interests have been accounted for in accordance
with the consensus reached by the Emerging Issues Task Force of the Financial
Accounting Standards Board in Issue 88-16, "Basis in Leveraged Buyout
Transactions" ("EITF 88-16"). Under the provisions of EITF 88-16, the interests
of Mr. Simon in the Predecessor Companies have been carried over to Rio
Sportswear at their historical cost bases. The purchase of Mr. Huang's interests
in the Predecessor Companies has been accounted for as a step acquisition,
accordingly, the purchase price has been allocated to the assets and liabilities
of the Predecessor Companies represented by Mr. Huang's interests based on their
estimated fair values at August 25, 1994. This allocation resulted in the
recognition of $21,283 in goodwill.
The final purchase price is subject to adjustment based upon an audit of
the combined balance sheet of the Predecessor Companies as of August 25, 1994.
Based on the audited balance sheet, the purchase price should be reduced by
approximately $903; however, the final determination is subject to review by Mr.
Huang and this review is not yet complete.
The purchase agreement also provides for contingent consideration of up to
$2,000 to be paid to Mr. Huang if net sales of Rio Sportswear, as defined, reach
certain levels in each of the next three years. In addition, $2,000 (net of any
payments as described in the prior sentence) may be due upon a public offering
of Rio Sportswear or an affiliate of Rio Sportswear. Such contingent
consideration, if paid, will increase goodwill.
At the time Rio Sportswear acquired the Predecessor Companies, CEP II
formed Jeanswear and its wholly-owned subsidiary, CKJC. On August 4, 1994, CKJC
entered into the CKJ License with CKI and purchased certain other assets from
Calvin Klein Sport, Inc. ("CKS") (see Note 4).
In connection with these acquisitions, Mr. Simon and CEP II entered into an
operating agreement to jointly control and operate the businesses of these
entities. Mr. Simon and CEP II also agreed to grant each other a right to
require the contribution of Jeanswear by CEP II to New Rio in exchange for a
$20,000 preferential equity interest in New Rio, pari passu with the existing
$20,000 preferential equity interest acquired by Mr. Simon in connection with
the transfer of his ownership interests in the Predecessor Companies to New Rio.
This right was exercised by both parties effective March 1995. As a result,
Jeanswear became a wholly-owned subsidiary of Designer.
F-10
<PAGE> 107
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. CALVIN KLEIN LICENSE
On August 4, 1994, CKJC entered into the CKJ License with CKI whereby CKJC
obtained the right to manufacture, market and distribute, among other things,
jeans, shirts, shorts, skirts, jackets and overalls under the Calvin Klein Jeans
labels. The CKJ License expires on December 31, 2004, with an option to renew
for four additional ten-year periods provided certain minimum sales levels are
achieved. As part of the transaction, the Company also advanced CKI $9,500 for
future royalties payable under the CKJ License, acquired on-hand inventory, was
required to acquire two manufacturing facilities, and entered into noncompete
agreements with CKI and two of its principal officers.
The total consideration for the transaction of $45,900, including costs of
approximately $5,400, was allocated to the individual assets acquired, including
identified intangibles, based upon their estimated fair values.
The royalty advance of $9,500 represents a prepayment for which the Company
will receive a $12,500 credit against future royalty payments in quarterly
installments of $500. The difference between the advance and the credit of
$3,000 is being amortized as a reduction of royalty expense in proportion to the
utilization of the credit under the agreement.
The above transaction was financed with (i) $20,000 in capital
contributions by CEP II; (ii) certain proceeds from a $20,332 loan from CEP II;
and, (iii) the issuance of a $20,000 note payable to CKS which was subsequently
assigned to a bank.
The acquisition costs incurred in connection with the transactions
described above and in Note 3 include $650 in investment advisory fees to a
related party. Such costs are included in accrued expenses at December 31, 1994
and were paid in 1995.
5. RECEIVABLES AND FACTORING AGREEMENTS
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Due from factor................................................. $24,062 $100,692
Trade receivables............................................... 4,318 21,220
Other receivables............................................... 444 10,484
------- --------
28,824 132,396
Less, allowances for sales returns, discounts, credits and
doubtful accounts............................................. (1,696) (13,996)
------- --------
$27,128 $118,400
======= ========
</TABLE>
Rio Sportswear and CKJC have factoring agreements with a financial
institution (the "Factor") that require the sale of all trade accounts
receivable to the Factor except for export sales, which are sold to the Factor
at the option of Rio Sportswear and CKJC. In addition, all related sales orders
must be submitted to the Factor for credit approval prior to shipment. The
Factor collects all cash remittances on receivables factored and assumes credit
risk on all approved sales. Factored receivables are reflected on the balance
sheet in the due from factor account. The Company holds no collateral with
respect to amounts due from Factor.
Prior to the debt refinancing on April 28, 1995 (see Note 11), the
agreements provided that, upon request, the Factor may advance funds to Rio
Sportswear and CKJC based upon specified levels of eligible accounts receivable
and inventory. Such advances were recorded as a reduction in the due from factor
account. In addition, Rio Sportswear and CKJC had letter of credit agreements
with the Factor pursuant to
F-11
<PAGE> 108
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
which the Factor would open letters of credit for the purchase of inventory in
its sole discretion. Drawdowns on these letters of credit were charged as an
advance under the factoring agreements.
In connection with the debt refinancing (see Note 11), all advances under
the factoring agreements were repaid, the letter of credit agreements were
terminated and the Factor and the Company agreed not to engage in any further
advances, borrowings or other financing transactions under the factoring
agreements. The Company, however, continues to factor its receivables with the
Factor and such factored receivables are included in the collateral to
borrowings outstanding under the new financing.
6. INVENTORY
The components of inventory are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Raw materials.................................................. $ 1,027 $ 1,536
Work-in-process................................................ 671 4,091
Finished goods................................................. 30,209 63,883
------- -------
$31,907 $69,510
======= =======
</TABLE>
Finished goods inventory includes in-transit amounts of $9,138 and $7,377
at December 31, 1994 and 1995, respectively.
7. NOTES RECEIVABLE FROM RELATED PARTY
During 1994, Rio Sportswear made $2,350 in loans to Mr. Simon, bearing
interest at the prime rate plus 3%. At December 31, 1994, notes receivable from
Mr. Simon include accrued interest of approximately $63. This interest was
forgiven in 1995 and no further interest was accrued. The loans were repaid in
connection with the purchase of the remaining interests in the Predecessor
Companies as described in Note 3. At December 31, 1994, the notes receivable
were treated as a reduction of stockholder's equity.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Land........................................................... $ 12 $ 12
Buildings...................................................... 1,400 1,400
Machinery and equipment........................................ 1,379 1,481
Computer equipment............................................. 143 1,146
Furniture, fixtures and office equipment....................... 520 1,039
Leasehold improvements......................................... 148 806
------ ------
3,602 5,884
Less, accumulated depreciation and amortization................ (731) (931)
------ ------
$ 2,871 $ 4,953
====== ======
</TABLE>
F-12
<PAGE> 109
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Goodwill......................................................... $21,805 $21,283
Licensing rights................................................. 9,736 9,736
Noncompete agreements............................................ 7,500 7,500
Other............................................................ 211
------- -------
39,041 38,730
Less, accumulated amortization................................... (1,160) (3,850)
------- -------
$37,881 $34,880
======= =======
</TABLE>
During 1995, the Company reduced goodwill by $522 to reflect the final
determination of certain purchase accounting adjustments.
10. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Accrued compensation............................................. $ 4,921 $ 5,995
Accrued royalties................................................ 3,228 13,382
Other............................................................ 6,895 10,713
------- -------
$15,044 $30,090
======= =======
</TABLE>
11. FINANCING
Borrowings outstanding under financing arrangements consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Revolving credit loans........................................... $97,016
=======
Long-term debt:
Notes payable to CEP II........................................ $45,181
Note payable to bank........................................... 10,000
Term loan...................................................... $23,750
Senior subordinated notes, including deferred interest......... 31,653
------- -------
55,181 55,403
Less, current portion............................................ (2,926) (5,000)
------- -------
$52,255 $50,403
======= =======
</TABLE>
In connection with the transactions described in Notes 3 and 4, CEP II
loaned the Company $45,181. These loans had a one-year term and bore interest at
the prime rate plus 3%. On May 1, 1995, the Company concluded a long-term
refinancing of its indebtedness to CEP II ($45,181) and a financial institution
($10,000). Interest expense under the CEP II indebtedness was $1,259 and $1,806
for the four months ended December 31, 1994 and the year ended December 31,
1995, respectively.
F-13
<PAGE> 110
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The new financing consists of a senior credit facility and a subordinated
loan. The senior credit facility involves several lenders and consists of (i) a
revolving credit facility which provides for the issuance of loans and letters
of credit up to $115,000, limited, in the aggregate, to specified percentages of
eligible factored receivables and inventory, as defined, and, with respect to
open letters of credit, limited to $45,000; and (ii) a term loan of $25,000.
This facility may be terminated by the Company or the lenders on April 28, 2000
or each anniversary thereafter.
Borrowings under the revolving credit facility are made under revolving
credit notes which mature upon termination of the agreement. However, the
agreement requires that customer remittances paid directly to the Factor be
assigned to the lenders and used to reduce the outstanding borrowings. The
agreement also contains a provision whereby borrowings under the revolving
credit facility require that there be no material adverse change in the
Company's business or condition. As a result, the revolving credit loans are
classified as current in the accompanying balance sheet. The Company expects to
maintain substantially all of these borrowings as outstanding over the next
year.
On September 15, 1995, the revolving credit facility was temporarily
increased by $10,000 and on November 8, 1995, it was further increased by
another $10,000, subject to the same limitations as previously described. These
increases expire on March 29, 1996.
At December 31, 1995, open letters of credit and open collection letters
amounted to $21,441.
The term loan is payable in quarterly principal installments of $1,250
commencing December 31, 1995 ($5,000 annually from 1996 through 1999) and a
final installment of $3,750 on March 31, 2000. The term loan agreement requires
prepayments of the latest installments based on excess cash flows as defined in
the agreement. If the term loan is refinanced prior to April 28, 1997, the
Company will be subject to a prepayment fee.
Borrowings outstanding under revolving credit loans and the term loan bear
interest at one month LIBOR plus 2.75% or the Chemical Bank of New York prime
rate plus 1.25%, adjustable monthly. Letters of credit bear applicable drawing
and maintenance fees. The weighted average interest rate on short term
borrowings outstanding at December 31, 1995 was 9.1%. The Company pays a
commitment fee of 1/2 of 1% on the unused portion of the revolving credit
commitment.
Under a subordinated loan agreement, Designer issued Senior Subordinated
Notes (the "Subordinated Loan") for $30,000. The Subordinated Loan bears a
current interest rate of 12%, payable in June and December of each year, and a
deferred interest rate of 8% for the first two years, increasing 1% per annum
each year thereafter, compounded annually, and payable upon maturity or
prepayment of any portion of the principal amount of the Subordinated Loan to
which the deferred interest relates. At December 31, 1995, deferred interest
amounted to approximately $1,653 and is included in the Subordinated Loan
account. The Subordinated Loan is payable in installments of $5,000 on April 28,
2002, $10,000 each on April 28, 2003 and 2004 and the remaining balance on April
28, 2005. Prepayments are subject to a prepayment fee during the first two years
of the loan. The Company intends to prepay the Subordinated Loan with the
estimated proceeds to the Company from the proposed initial public offering of
common stock described in Note 1. If the prepayment occurs prior to June 30,
1996, the Company will record an extraordinary charge consisting of the
prepayment fee of approximately $3,000 and the write-off of related deferred
financing costs. The Subordinated Loan is subordinate to amounts outstanding
under the senior credit facility.
Amounts outstanding under the senior credit facility are collateralized by
substantially all the assets of the Company. The senior credit facility and the
Subordinated Loan agreements contain restrictive covenants which, among other
requirements, prohibit the payment of dividends or stock repurchases and
restrict additional indebtedness, leases, capital expenditures, investments and
a sale of assets or merger of the Company with another entity. The covenants, as
amended March 8, 1996, also require the Company to meet certain financial ratios
and maintain minimum levels of net worth.
F-14
<PAGE> 111
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount for the revolving credit loans and the term loan
approximates fair value because the underlying instruments are variable rate
notes which reprice frequently. It is not practicable to estimate the fair value
of the Subordinated Loan based on the lack of available information for similar
instruments of privately-held entities.
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
THE COMPANY
(COMBINED) (CONSOLIDATED)
----------------------------- -----------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 25, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal....................... $ 317 $1,634 $ 13,329
State and local............... 175 $ (175) 727 5,140
----- ----- ------ -------
492 (175) 2,361 18,469
----- ----- ------ -------
Deferred:
Federal....................... (797) (207) (25) (5,628)
State and local............... (26) (17) (97) (1,971)
----- ----- ------ -------
(823) (224) (122) (7,599)
----- ----- ------ -------
Total................. $ (331) $ (399) $2,239 $ 10,870
===== ===== ====== =======
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Deferred tax assets, current:
Inventory basis adjustment....................................... $ 373 $ 946
Reserves and accrued expenses.................................... 1,774 7,119
------ ------
$2,147 $8,065
====== ======
Deferred tax assets, noncurrent:
Net operating loss carryforwards................................. $ 27 $ 826
Deferred interest................................................ 711
------ ------
$ 27 $1,537
====== ======
Deferred tax liabilities, noncurrent:
Depreciation of property, plant and equipment.................... $ (56) $ (96)
Amortization of intangible assets................................ (857) (646)
------ ------
$ (913) $ (742)
====== ======
</TABLE>
F-15
<PAGE> 112
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes differs from the amount computed
by applying the statutory Federal income tax rate to pre-tax income as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
THE COMPANY
(COMBINED) (CONSOLIDATED)
----------------------------- -----------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 25, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Tax provision (benefit) at
statutory Federal income tax
rate.......................... $ 615 $ (207) $1,455 $ 7,677
State income taxes, net of
Federal benefit............... 97 410 2,031
Nondeductible goodwill
amortization.................. 227 493
S corporation/partnership income
not subject to tax............ (373)
Income tax liability assumed by
stockholder upon conversion to
S Corporation status.......... (622)
Other........................... (48) (192) 147 669
----- ----- ------ -------
$ (331) $ (399) $2,239 $ 10,870
===== ===== ====== =======
</TABLE>
Prior to August 26, 1994, the results of operations reflect the Predecessor
Companies which included two S corporations and a partnership which were not
subject to Federal and state income taxes. One of these entities converted from
a C corporation to an S corporation in 1993. As a result, $622 of deferred taxes
payable became the responsibility of a stockholder and were treated as a
reduction of deferred tax expense.
As of December 31, 1995, the Company has a net operating loss carryforward
for Federal income tax purposes of approximately $1,922 which expires in 2010.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases showrooms, office facilities, warehouses, equipment and
automobiles under noncancelable operating leases. In addition to minimum rental
payments, these leases require payment of various expenses incidental to the use
of the property and, in some cases, provide for rent adjustments based upon
changes in the consumer price index. Rent expense under these leases
approximated $1,238, $871, $262 and $1,807 for the year ended December 31, 1993,
the eight months ended August 25, 1994, the four months ended December 31, 1994
and the year ended December 31, 1995, respectively. Included in rent expense in
1993 and the eight months ended August 25, 1994 is $840 and $560, respectively,
for office and warehouse facilities leased from a then owner of the Company.
F-16
<PAGE> 113
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments required under these leases in the aggregate
and for each of the next five years, exclusive of a lease currently under
renegotiation, are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996.............................................................. $2,616
1997.............................................................. 1,896
1998.............................................................. 1,009
1999.............................................................. 710
2000.............................................................. 476
Thereafter........................................................ 2,601
------
$9,308
======
</TABLE>
In April 1995, the Company executed, subject to the approval of the
Company's board of directors, a triple net ten-year lease for a warehouse to be
constructed and available for occupancy during 1997. The terms of this lease,
which are presently being renegotiated, provide for an initial annual base rent
of approximately $1,500, adjusted for increases in the consumer price index, and
contain two five-year renewal options.
License Agreements
CKJ License. CKJC has the CKJ License with CKI to use the Calvin Klein
Jeans Labels for jeans and jeans-related products in the United States, Canada,
Mexico, Guatemala, Belize, Honduras, Nicaragua, Costa Rica, Panama, Columbia,
Ecuador, Brazil, Peru, Bolivia, Paraguay and Chile. The CKJ License requires
royalty and advertising fee payments based on percentages of sales, as defined.
It also requires minimum annual royalty fee payments of approximately $4,500 in
1995 which increase to approximately $11,400 by 2004. Royalty and advertising
fees aggregated approximately $5,985 and $36,065 for the four months ended
December 31, 1994 and the year ended December 31, 1995, respectively, and are
included in selling, general and administrative expenses. The CKJ License
expires December 31, 2004, with an option to renew for four additional ten-year
periods providing certain minimum sales levels are achieved. It also contains
covenants which require Jeanswear to meet certain net worth and debt-to-net
worth levels.
Effective July 1, 1995, CKJC entered into a distribution agreement for the
sale of Calvin Klein Jeans Label products in Canada. The agreement provides for
royalty and advertising fee payments to CKJC based on percentages of sales of
the distributor, as defined. The agreement also requires minimum annual royalty
fee payments of approximately $1,800 in 1996 which increase to approximately
$3,000 in 1999. Royalty fees approximated $791, net of royalty fee payments due
CKI by CKJC, under this agreement from its inception (July 1, 1995) to December
31, 1995 and are included in net revenues. The initial term of this agreement is
through December 31, 1995 with an option to renew for four additional one-year
terms. The agreement has been renewed for 1996.
The Company also has entered into a distribution agreement for Calvin Klein
Jeans Label childrens apparel in the United States, effective January 1, 1996.
Under this agreement CKJC will receive royalty and advertising fees based on
percentages of sales of the distributor, as defined. The agreement will continue
through December 31, 2004 with an option to renew the agreement for four
additional ten year terms if CKJC has renewed the license agreement with CKI and
the distributor has met certain minimum net sales thresholds.
Bill Blass License. Rio Sportswear has a licensing agreement with Bill
Blass Ltd. to use the Bill Blass labels in connection with the manufacture,
distribution and sale of womens jeans and jeans-related skirts, dresses and
jackets in the Western Hemisphere. The agreement requires royalty fee payments
based on percentages of sales, as defined, subject to a minimum annual royalty
fee payment of $1,000. Royalty fees approximated $2,948, $1,800, $893 and $2,354
under this agreement for the year ended December 31, 1993,
F-17
<PAGE> 114
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the eight months ended August 25, 1994, the four months ended December 31, 1994
and the year ended December 31, 1995, respectively, and are included in selling,
general and administrative expenses. The agreement expires on December 31, 1997
and contains an option to renew for an additional three-year period and a
further option to renew for an additional ten-year period for which minimum
annual royalty fee payments during such ten-year period will increase to $1,500.
Bill Blass Sublicense and Rio License. In December 1995, Rio Sportswear
entered into an agreement, commencing January 1, 1996, to (i) sublicense its
rights under the Bill Blass licensing agreement, (ii) grant a license of its Rio
tradename for use on a full line of products, exclusive of certain womens shirts
and tops and childrenswear, and (iii) place the manufacture of its private label
business, all with a manufacturer affiliated with a primary supplier to the
Company. In connection with this agreement, Rio Sportswear sold its remaining
inventory of Bill Blass, Rio and private label products to the manufacturer and
incurred a loss in connection with the sale of approximately $4,400.
Under the terms of the agreement, Rio Sportswear will earn a royalty fee
based on sales orders accepted by the manufacturer. In addition, Rio Sportswear
will continue to market the products under the agreement and is required to pay
substantially all selling expenses, as stipulated in the agreement, including
the maintenance of a showroom and sales staff. The agreement requires minimum
annual royalty fee payments in addition to the minimum royalties payable to Bill
Blass, of approximately $667 for 1996 which increase to approximately $1,000 for
1998 and thereafter. The initial term of the agreement expires on December 31,
2005 and is renewable for five additional ten-year periods.
Multi-Employer Pension Plan
The Company contributes to a multi-employer defined benefit pension plan on
behalf of union employees of its two manufacturing facilities and a warehouse
and distribution facility. Contribution expense is determined in accordance with
the provisions of collective bargaining agreements and amounted to $85 and
$1,438 for the four months ended December 31, 1994 and the year ended December
31, 1995, respectively. Under the Employee Retirement Income Security Act, as
amended, an employer upon withdrawal from a multi-employer plan is required to
continue funding its proportionate share of the plan's unfunded vested benefits.
The plan administrator has not provided the Company with information regarding
its proportionate share of the plan's unfunded vested benefits (for withdrawal
liability purposes); however, the Company has no immediate intention of
withdrawing from the plan. Under the purchase agreement to the assets acquired
with the Calvin Klein license, the Company's obligation from any such withdrawal
is limited to $3,500 and CKI is responsible for any additional liability. In
1995, the Company acquired a lease on a warehouse and distribution facility from
CKI. Pursuant to this agreement, CKI indemnified the Company for any pension
withdrawal liability at a rate of 100% decreasing to 25% of such liability, in
annual decrements of 15%, in each of the first five years subsequent to the
acquisition of the lease. The remaining 25% indemnification will remain in
effect through the initial term of the lease which expires in June 1999.
Other Commitments
CKJC has employment agreements with certain employees which, in addition to
base salaries, provide incentive bonuses based upon net sales, as defined, in
excess of certain minimum amounts.
The Company has guaranteed to a fabric supplier the payment of up to $1,300
in trade accounts payable of two of its contractors.
Litigation
In 1990, an action was filed against Rio Sportswear and certain other
defendants alleging, among other things, that the Company infringed a patent
held by the plaintiffs relating to acid wash processes used in the
F-18
<PAGE> 115
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 were reached and
Rio Sportswear were found to have infringed the patent in suit, damages and
attorneys' 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
judgment 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.
The Company is subject to other legal proceedings for which the outcome, in
the opinion of management, is not expected to have a material adverse effect on
results of operations, financial position or cash flows.
14. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1993, one customer accounted for
approximately 18% of gross sales. For the eight months ended August 25, 1994,
three customers accounted for approximately 36% of gross sales. For the four
months ended December 31, 1994, one customer accounted for approximately 11% of
gross sales. For the year ended December 31, 1995, two customers accounted for
approximately 27% of gross sales.
15. STOCK OPTION AND INCENTIVE PLAN
The Company's Board of Directors has approved in principle the Designer
Holdings Ltd. 1996 Stock Option and Incentive Plan (the "Stock Plan"). The Stock
Plan is expected to be approved by the stockholders of the Company prior to the
initial public offering.
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. Under the Stock Plan, the Company has reserved 2,288,200 shares of Common
Stock for issuance of awards under the Stock Plan (subject to antidilution and
similar adjustments).
16. SUBSEQUENT EVENTS
CKJ License Amendments
On April 22, 1996, 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 initial 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 shares
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 following the effective
date of the proposed initial public offering of the Company's common stock,
although the Company
F-19
<PAGE> 116
DESIGNER HOLDINGS LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
has granted CKI certain "piggy-back" 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 December 31, 1995,
intangible assets, total assets and stockholder's equity would have been
$55,083, $271,017, and $52,685, respectively.
Employment Agreement
As of April 22, 1996, the Company entered into an employment agreement with
Mr. Simon, which becomes effective upon the closing of the proposed 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.
F-20
<PAGE> 117
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1996
----------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
ASSETS
Current assets:
Receivables, net........................................................ $100,186
Inventory............................................................... 85,844
Deferred tax assets..................................................... 12,701
Prepaid expenses and other current assets............................... 6,589
--------
Total current assets............................................ 205,320
Property, plant and equipment, net........................................ 8,242
Prepaid royalties, net.................................................... 5,363
Intangible assets, net.................................................... 55,839
Other assets.............................................................. 4,218
--------
Total assets.................................................... $278,982
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................................... $ 5,000
Revolving credit loans.................................................. 43,297
Accounts payable........................................................ 31,244
Accrued expenses........................................................ 20,947
Income taxes payable.................................................... --
--------
Total current liabilities....................................... 100,488
Long-term debt, less current portion...................................... 8,750
Deferred tax liabilities.................................................. 269
--------
Total liabilities............................................... 109,507
--------
Commitments and contingencies
Stockholder's equity:
Common stock, par value $.01 per share; authorized 75,000,000 shares;
issued and outstanding 32,159,334.................................... 321
Paid-in capital........................................................... 148,296
Retained earnings......................................................... 20,858
--------
Total stockholders' equity...................................... 169,475
--------
Total liabilities and stockholders' equity...................... $278,982
========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-21
<PAGE> 118
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net revenues................................................... $ 219,603 $ 174,491
Cost of goods sold............................................. 136,521 123,517
----------- -----------
Gross profit......................................... 83,082 50,974
Selling, general and administrative expenses................... 55,085 36,814
----------- -----------
Operating income..................................... 27,997 14,160
Interest expense............................................... 7,635 5,689
----------- -----------
Income before income taxes........................... 20,362 8,471
Provision for income taxes..................................... 9,367 4,500
----------- -----------
Income before extraordinary item............................... 10,995 3,971
Extraordinary loss on debt extinguishment...................... 2,256 --
----------- -----------
Net income........................................... $ 8,739 $ 3,971
=========== ===========
Income per share before extraordinary item..................... $ .41 $ .16
=========== ===========
Net income per share........................................... $ .33 $ .16
=========== ===========
Weighted average common shares outstanding..................... 26,827,051 24,233,868
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-22
<PAGE> 119
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 8,739 $ 3,971
Adjustments to reconcile net income to cash (used in) operating
activities:
Depreciation......................................................... 571 237
Amortization......................................................... 1,438 842
Loss on disposal of fixed assets..................................... -- 91
Deferred interest.................................................... (1,653) 400
Deferred income taxes................................................ (3,572) (1,609)
Extraordinary item................................................... 4,103 --
Changes in assets and liabilities:
Receivables....................................................... 18,214 (44,923)
Inventory......................................................... (16,334) (37,220)
Prepaid expenses.................................................. (2,964) (1,044)
Prepaid royalties................................................. 1,000 1,000
Other assets...................................................... (1,294) 177
Accounts payable.................................................. 6,387 2,521
Accrued expenses.................................................. (12,346) 16,352
Income taxes payable.............................................. (10,966) 1,011
-------- --------
Net cash (used in) operating activities...................... (8,677) (58,194)
-------- --------
Cash flows from investing activities:
Purchases of equipment............................................... (2,657) (1,138)
-------- --------
Net cash (used in) investing activities...................... (2,657) (1,138)
-------- --------
Cash flows from financing activities:
Payment of notes payable to related party............................ -- (45,181)
Payments to factor................................................... -- (4,602)
(Decrease) increase in revolving credit loans........................ (53,719) 69,210
(Repayment of) proceeds from term loan............................... (10,000) 25,000
(Repayment of) proceeds from subordinated debt....................... (30,000) 30,000
Payments of notes payable to factor.................................. -- (10,000)
Distributions to stockholders/partners............................... -- (1,495)
Financing costs paid................................................. -- (5,027)
Proceeds from sale of common stock................................... 119,700 --
Payment of debt retirement costs..................................... (2,998) --
Payment of stock issuance costs...................................... (11,649) --
-------- --------
Net cash provided by financing activities.................... 11,334 57,905
-------- --------
Net increase (decrease) in cash.............................. -- (1,427)
Cash, beginning of period.................................... -- 1,432
-------- --------
Cash, end of period.......................................... $ -- $ 5
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-23
<PAGE> 120
DESIGNER HOLDINGS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 June 30, 1996, 52.1% of the Company's outstanding
common stock was owned by 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 condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in the Prospectus.
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 $108.1 million. Net proceeds to the Company were 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 $71.1 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 aggregated approximately $2.3 million, net of
applicable tax effects, is 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.
F-24
<PAGE> 121
DESIGNER HOLDINGS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
JUNE 30,
1996
--------
<S> <C>
Raw materials...................................................... $ 645
Work-in-process.................................................... 3,132
Finished goods..................................................... 82,067
-------
$ 85,844
=======
</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 1995, compared to 1996, 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 shares
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 "piggy-back" 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.
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
F-25
<PAGE> 122
DESIGNER HOLDINGS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-26
<PAGE> 123
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE TRUST OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY OR THE TRUST SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................. 4
Forward-Looking Statements............ 4
Prospectus Summary.................... 5
Risk Factors.......................... 15
Designer Finance Trust................ 22
Accounting Treatment.................. 22
Price Range of Common Stock........... 23
Dividend Policy....................... 23
Use of Proceeds....................... 24
Capitalization........................ 25
Unaudited Pro Forma Financial
Information......................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 30
Business.............................. 37
Management............................ 50
Certain Transactions.................. 57
Principal Stockholders................ 58
Description of the Preferred
Securities.......................... 59
Description of the Guarantee.......... 73
Description of the Convertible
Debentures.......................... 76
Effect of Obligations Under the
Convertible Debentures and the
Guarantee........................... 85
United States Federal Income
Taxation............................ 86
Description of Capital Stock.......... 89
Description of Certain Indebtedness... 92
Underwriting.......................... 94
Legal Matters......................... 95
Experts............................... 95
Index of Financial Statements......... F-1
- ---------------------------------------------
- ---------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 PREFERRED SECURITIES
DESIGNER
FINANCE TRUST
% CONVERTIBLE TRUST
ORIGINATED PREFERRED
SECURITIES(SM) ("CONVERTIBLE TOPRS(SM)")
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY, AND
CONVERTIBLE INTO
COMMON STOCK OF,
DESIGNER HOLDINGS LTD.
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 124
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the registration fee for the Securities and
Exchange Commission, the filing fee for the National Association of Securities
Dealers, Inc., the listing fee for New York Stock Exchange and estimates of all
other expenses to be incurred in connection with the issuance and distribution
of the securities described in this Registration Statement, other than
underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee...................................................... $ 39,656
NASD filing fee...........................................................
NYSE Listing fee..........................................................
Blue sky fees and expenses................................................
Printing expenses.........................................................
Legal fees and expenses...................................................
Accounting fees and expenses..............................................
Transfer agent and registrar fees.........................................
Miscellaneous.............................................................
--------
Total........................................................... $
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Section 145 of the General Corporation Law of Delaware (the
"Delaware Corporation Law") Article VIII of the By-laws of the Registrant, a
copy of which is filed as Exhibit 3.2 to this Registration Statement, provides
that the Registrant shall indemnify any person in connection with the defense or
settlement of any threatened, pending or completed legal proceeding (other than
a legal proceeding by or in the right of the Registrant) by reason of the fact
that he is or was a director or officer of the Registrant or is or was a
director or officer of the Registrant serving at the request of the Registrant
as a director, officer, employee or agent of another corporation, partnership or
other enterprise against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with the defense or settlement of such legal proceedings if he acted in good
faith and in a manner that he reasonably believed to be in or not opposed to the
best interests of the Registrant, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe that his conduct was
unlawful. If the legal proceeding, however, is by or in the right of the
Registrant, the director or officer may be indemnified by the Registrant against
expenses (including attorney's fees) actually and reasonably incurred in
connection with the defense or settlement of such legal proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant and except that he may not be indemnified
in respect of any claim, issue or matter as to which he shall have been adjudged
to be liable to the Registrant unless a court determines otherwise.
Article VIII of the Registrant's By-laws allows the Registrant to maintain
director and officer liability insurance on behalf of any person who is or was a
director or officer of the Registrant or such person who serves or served as a
director, officer, agent or employee, at another corporation, partnership or
other enterprise at the request of the Registrant.
Pursuant to Section 102(b)(7) of the Delaware Corporation Law, Article
Sixth of the Certificate of Incorporation of the Registrant, a copy of which is
filed as Exhibit 3.1 to this Registration Statement, provides that no director
of the Registrant shall be personally liable to the Registrant or its
shareholders for monetary damages for any breach of his fiduciary duty as a
director; provided, however, that such clause shall not apply to any liability
of a director (1) for any breach of his duty of loyalty to the Registrant or its
stockholders, (2) for acts or omissions that are not in good faith or involve
intentional misconduct or a knowing violation of the law, (3) under Section 174
of the Delaware Corporation Law, or (4) for any transaction from which the
director derived an improper personal benefit.
II-1
<PAGE> 125
The Company has purchased an insurance policy covering indemnification of
directors and officers of the Registrant against certain liabilities arising
under the Securities Act that might be incurred by them in such capacities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On March 27, 1995, Designer sold 1,000 (which, pursuant to a stock split as
of April 22, 1996 currently equals 24,233,868) shares of Common Stock to the
Principal Stockholder for $40,000,000 in reliance on Section 4(2) of the
Securities Act of 1933. On April 22, 1996, Designer sold 1,275,466 shares of
non-voting common stock to Calvin Klein, Inc., in reliance on Section 4(2) of
the Securities Act of 1933. See "Business -- CKJ License."
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Purchase Agreement.
3.1 Certificate of Incorporation of the Registrant; incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No.
333-2236).
3.2 By-Laws of Registrant; incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
4.1 Specimen Certificate of Common Stock; incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (File No. 333-2236).
4.2 Certificate of Trust of Designer Finance Trust.
*4.3 Form of Amended and Restated Declaration of Trust of Designer Finance Trust among
Designer Holdings Ltd., as Sponsor, IBJ Schroder Bank & Trust Company, as Property
Trustee, Delaware Trust Company, as Delaware Trustee and Merril M. Halpern and
Arnold H. Simon, as Trustees.
*4.4 Form of Indenture between Designer Holdings Ltd. and IBJ Schroder Bank & Trust
Company, as Indenture Trustee.
4.5 Form of Preferred Security (included in Exhibit A-1 to Exhibit 4.3 above).
4.6 Form of Convertible Debenture (included in Exhibit A to Exhibit 4.4 above).
*4.7 Form of Preferred Securities Guarantee Agreement between Designer Holdings Ltd., as
Guarantor, and IBJ Schroder Bank & Trust Company, as Guarantee Trustee with respect
to the Preferred Securities of Designer Finance Trust.
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom.
*8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom.
10.1 Form of Registration Rights Agreement; incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (File No. 333-2236).
10.2 Financing Agreement dated as of April 28, 1995 (the "Credit Agreement") by and
among New Rio, L.L.C., Denim Holdings Inc., Jeanswear Holdings, Inc., Rio
Sportswear, Inc., Calvin Klein Jeanswear Company, the Lenders referred to therein
and The CIT Group/Commercial Services, Inc. as Agent; incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No.
333-2236).
10.3 Third Amendment to the Credit Agreement, dated as of March 29, 1996; incorporated
by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1
(File No. 333-2236).
10.4 Intentionally omitted.
10.5 Third Supplemental Funding Agreement to the Credit Agreement dated January 16,
1996; incorporated by reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (File No. 333-2236).
10.6 Factoring Agreement dated as of August 24, 1994 between Rio Sportswear, Inc. and
The CIT Group/BCC, Inc.; incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
</TABLE>
II-2
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<C> <S>
10.7 Letter Amendment dated as of August 24, 1994 to the Factoring Agreement between Rio
Sportswear, Inc. and The CIT Group/BCC, Inc.; incorporated by reference to Exhibit
10.7 to the Company's Registration Statement on Form S-1 (File No. 333-2236).
10.8 Factoring Agreement dated as of August 4, 1994 between Calvin Klein Jeanswear
Company and The CIT Group/BCC, Inc.; incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 (File No. 333-2236).
10.9 Intercreditor Agreement and Assignment of Factoring Proceeds dated as of April 28,
1995 between Rio Sportswear, Inc. and The CIT Group/Commercial Services, Inc.;
incorporated by reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.10 Intercreditor Agreement and Assignment of Factoring Proceeds dated as of April 28,
1995 between Calvin Klein Jeanswear Company and The CIT Group/Commercial Services,
Inc.; incorporated by reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File No. 333-2236).
10.11 Subordinated Loan Agreement dated as of April 28, 1995 by and among BIB Holdings
(Bermuda) Ltd., Denim Holdings, Inc., and New Rio, L.L.C.; incorporated by
reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1
(File No. 333-2236).
10.12 Asset Purchase Agreement dated as of July 8, 1994 among Calvin Klein Jeanswear
Company, Abbeville Acquisition Company, Kaijay Acquisition Company, Calvin Klein
Sport, Inc. and Kaijay Pants Co., Inc.; incorporated by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1 (File No. 333-2236).
10.13 License Agreement dated as of August 20, 1987 (the "Bill Blass License Agreement")
by and between Bill Blass, Ltd. and Rio Sportswear, Inc.; incorporated by reference
to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (File No.
333-2236).
10.14 Amendment to the Bill Blass License Agreement dated as of May 27, 1992;
incorporated by reference to Exhibit 10.14 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.15 Amendment to the Bill Blass License Agreement dated as of June 1, 1992;
incorporated by reference to Exhibit 10.15 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.16 Amendment to the Bill Blass License Agreement dated as of January 27, 1993;
incorporated by reference to Exhibit 10.16 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.17 Amendment to the Bill Blass License Agreement dated as of March 30, 1994;
incorporated by reference to Exhibit 10.17 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.18 Amendment to the Bill Blass License Agreement dated as of May 19, 1994;
incorporated by reference to Exhibit 10.18 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.19 Amendment to the Bill Blass License Agreement dated as of December 7,1994;
incorporated by reference to Exhibit 10.19 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.20 License Agreement dated as of August 4, 1994 (the "Calvin Klein License Agreement")
between Calvin Klein, Inc. and Calvin Klein Jeanswear Company; incorporated by
reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1
(File No. 333-2236).
10.21 Amendment to the Calvin Klein License Agreement dated as of December 7, 1994;
incorporated by reference to Exhibit 10.21 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.22 Amendment to the Calvin Klein License Agreement dated as of January 10, 1995;
incorporated by reference to Exhibit 10.22 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.23 Amendment to the Calvin Klein License Agreement dated as of February 28, 1995;
incorporated by reference to Exhibit 10.23 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.24 Agreement dated as of December 12, 1995 by and between Rio Sportswear, Inc. and
Commerce Clothing Company, LLC; incorporated by reference to Exhibit 10.24 to the
Company's Registration Statement on Form S-1 (File No. 333-2236).
</TABLE>
II-3
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<C> <S>
10.25 Distributorship Agreement dated as of February , 1996, between Calvin Klein
Jeanswear Company, Commerce Clothing Company LLC, and Calvin Klein, Inc.;
incorporated by reference to Exhibit 10.25 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.26 Designer Holdings Ltd. 1996 Stock Option and Incentive Plan; incorporated by
reference to Exhibit 10.26 to the Company's Registration Statement on Form S-1
(File No. 333- 2236).
10.27 Employment Agreement between New Rio Sportswear Inc., Calvin Klein Jeanswear
Company and Maurice Dickson, as amended; incorporated by reference to Exhibit 10.27
to the Company's Registration Statement on Form S-1 (File No. 333-2236).
10.28 Employment Agreement between Calvin Klein Jeanswear Company and Daniel J.
Gladstone, as amended; incorporated by reference to Exhibit 10.28 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
10.29 Agreement of Lease by and between Erika Realty Trust and Calvin Klein Jeanswear
Company; incorporated by reference to Exhibit 10.29 to the Company's Registration
Statement on Form S-1 (File No. 333-2236).
10.30 Distribution Agreement dated September 7, 1995 between Calvin Klein Jeanswear and
Floor Ready Company, L.L.C.; incorporated by reference to Exhibit 10.30 to the
Company's Registration Statement on Form S-1 (File No. 333-2236).
10.31 Distributorship Agreement dated as of June 26, 1995, between Calvin Klein Jeanswear
Company, Western Glove Works R.S., and Calvin Klein, Inc.; incorporated by
reference to Exhibit 10.31 to the Company's Registration Statement on Form S-1
(File No. 333-2236).
10.32 Lease Agreement dated as of April 28, 1995 between North Arlington Associates and
Rio Sportswear, Inc.; incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
10.33 Amendment to the Bill Blass License Agreement dated as of March 22, 1996;
incorporated by reference to Exhibit 10.33 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.34 Employment Agreement between Designer Holdings Ltd., Calvin Klein Jeanswear Company
and Arnold H. Simon; incorporated by reference to Exhibit 10.34 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
10.35 Employment Agreement between Designer Holdings Ltd., Calvin Klein Jeanswear Company
and Debra Simon; incorporated by reference to Exhibit 10.35 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
10.36 Employment Agreement between Calvin Klein Jeanswear Company and New Rio Sportswear,
Inc. and David Fidlon, as amended; incorporated by reference to Exhibit 10.36 to
the Company's Registration Statement on Form S-1 (File No. 333-2236).
10.37 Employment Agreement between Designer Holdings Ltd., Calvin Klein Jeanswear Company
and John J. Jones; incorporated by reference to Exhibit 10.37 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
10.38 Amendment to the Calvin Klein License Agreement dated as of April 22, 1996;
incorporated by reference to Exhibit 10.38 to the Company's Registration Statement
on Form S-1 (File No. 333-2236).
10.39 Amendment to the Lease Agreement between North Arlington Associates and Rio
Sportswear, Inc., dated as of February 22, 1996; incorporated by reference to
Exhibit 10.39 to the Company's Registration Statement on Form S-1 (File No.
333-2236).
10.40 Stock Acquisition Agreement dated as of April 22, 1996 between Designer Holdings
Ltd. and Calvin Klein Inc.; incorporated by reference to Exhibit 10.40 to the
Company's Registration Statement on Form S-1 (File No. 333-2236).
10.41 Employment Agreement between Calvin Klein Jeanswear Company, Rio Sportswear, Inc.
and Guy Kinberg; incorporated by reference to Exhibit 10.41 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
*10.42 Jeanswear License Agreement, dated as of September 27, 1996, between Donna Karan
Studio and the Registrant.
12.1 Computation of Ratio of Earnings to Fixed Charges
16.1 Letter of Deloitte & Touche LLP, re change in certifying accountant; incorporated
by reference to Exhibit 16.1 to the Company's Registration Statement on Form S-1
(File No. 333-2236).
</TABLE>
II-4
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<C> <S>
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Deloitte & Touche L.L.P.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibits 5.1 and 8.1).
24.1 Power of Attorney (set forth on signature page of the Registration Statement).
*25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of IBJ Schroder Bank & Trust Company, as Indenture Trustee under the
Indenture.
*25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of IBJ Schroder Bank & Trust Company, as Property Trustee under the
Amended and Restated Declaration of Trust.
*25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of IBJ Schroder Bank & Trust Company, as Guarantee Trustee under the
Guarantee.
</TABLE>
- ---------------
* To be filed by amendment.
Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on September 30, 1996.
DESIGNER HOLDINGS LTD.
By: /s/ MAURICE DICKSON
------------------------------------
Maurice Dickson
Treasurer and Chief Financial
Officer
Each person whose signature appears below constitutes and appoints and
hereby authorizes Arnold H. Simon and Maurice Dickson, severally, such person's
true and lawful attorneys-in-fact, with full power of substitution or
resubstitution, for such person and in his name, place and stead, in any and all
capacities, to sign on such person's behalf, individually and in each capacity
stated below, any and all amendments, including post-effective amendments to
this Registration Statement and to sign any and all additional registration
statements relating to the same offering of securities as this Registration
Statement that are filed pursuant to Rule 462(b) of the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as such person or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 30th day of September, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- ------------------------------------------
<S> <C>
/s/ ARNOLD H. President, Chief Executive
SIMON Officer and Director
- -----------------------------------------------
Arnold H. Simon
/s/ MAURICE Treasurer and Chief
DICKSON Financial Officer
- -----------------------------------------------
Maurice Dickson
/s/ DAVID Controller and Chief
FIDLON Accounting Officer
- -----------------------------------------------
David Fidlon
/s/ MERRIL M. Chairman of the
HALPERN Board of Directors
- -----------------------------------------------
Merril M. Halpern
/s/ DEBRA Executive Vice President
SIMON and Director
- -----------------------------------------------
Debra Simon
/s/ A. LAWRENCE Director
FAGAN
- -----------------------------------------------
A. Lawrence Fagan
/s/ PETER Director
BROWN
- -----------------------------------------------
Peter Brown
/s/ FREDERICK W. ZUCKERMAN Director
- -----------------------------------------------
Frederick W. Zuckerman
</TABLE>
II-6
<PAGE> 130
SIGNATURES
Pursuant to the requirements of the Securities Act, Designer Finance Trust
hereby certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the day of September,
1996.
DESIGNER FINANCE TRUST
By: /s/ MERRIL M. HALPERN
------------------------------------
Merril M. Halpern, as Trustee
By: /s/ ARNOLD H. SIMON
------------------------------------
Arnold H. Simon, as Trustee
II-7
<PAGE> 131
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of Designer Holdings Ltd.:
In connection with our audits of the consolidated financial statements of
Designer Holdings Ltd. as of December 31, 1995 and 1994 and for the year ended
December 31, 1995 and the four months ended December 31, 1994 and the combined
financial statements of the Predecessor Companies for the eight months ended
August 25, 1994, we have also audited the financial statement schedule listed in
Item 16 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 29, 1996, except
for Note 1, the tenth paragraph of Note 11,
the thirteenth paragraph of Note 13 and Note 16,
for which the date is April 22, 1996
S-1
<PAGE> 132
DESIGNER HOLDINGS LTD.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(A) PERIOD
- --------------------------------- ---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANIES (COMBINED)
Year ended December 31, 1993:
Allowance for doubtful
accounts, sales returns,
discounts and other
credits..................... $ 824 $ 26 $ 798
===== ======= ======= === =======
Eight months ended August 25,
1994:
Allowance for doubtful
accounts, sales returns,
discounts and other
credits..................... $ 798 $ 7 $ 805
===== ======= ======= === =======
THE COMPANY (CONSOLIDATED)
Four months ended December 31,
1994:
Allowance for doubtful
accounts, sales returns,
discounts and other
credits..................... $ 805 $ 891 $ 1,696
===== ======= ======= === =======
Year ended December 31, 1995:
Allowance for doubtful
accounts, sales returns,
discounts and other
credits..................... $1,696 $ 12,300 $ 13,996
===== ======= ======= === =======
</TABLE>
- ---------------
(A) Represents recoveries of accounts previously charged off.
S-2
<PAGE> 133
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- -------- -------------------------------------------------------------------------------------
<C> <S> <C>
*1.1 Form of Purchase Agreement...........................................
3.1 Certificate of Incorporation of the Registrant; incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (File No. 333-2236).........................................
3.2 By-Laws of Registrant; incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 (File No.
333-2236)............................................................
4.1 Specimen Certificate of Common Stock; incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File
No. 333-2236)........................................................
4.2 Certificate of Trust of Designer Finance Trust.......................
*4.3 Form of Amended and Restated Declaration of Trust of Designer Finance
Trust among Designer Holdings Ltd., as Sponsor, IBJ Schroder Bank &
Trust Company, as Property Trustee, Delaware Trust Company, as
Delaware Trustee and Merril M. Halpern and Arnold H. Simon, as
Trustees.............................................................
*4.4 Form of Indenture between Designer Holdings Ltd. and IBJ Schroder
Bank & Trust Company, as Indenture Trustee...........................
4.5 Form of Preferred Security (included in Exhibit A-1 to Exhibit 4.3
above)...............................................................
4.6 Form of Convertible Debenture (included in Exhibit A to Exhibit 4.4
above)...............................................................
*4.7 Form of Preferred Securities Guarantee Agreement between Designer
Holdings Ltd., as Guarantor, and IBJ Schroder Bank & Trust Company,
as Guarantee Trustee with respect to the Preferred Securities of
Designer Finance Trust...............................................
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom......................
*8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom......................
10.1 Form of Registration Rights Agreement; incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-1
(File No. 333-2236)..................................................
10.2 Financing Agreement dated as of April 28, 1995 (the "Credit
Agreement") by and among New Rio, L.L.C., Denim Holdings Inc.,
Jeanswear Holdings, Inc., Rio Sportswear, Inc., Calvin Klein
Jeanswear Company, the Lenders referred to therein and The CIT
Group/Commercial Services, Inc. as Agent; incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement on Form S-1
(File No. 333-2236)..................................................
10.3 Third Amendment to the Credit Agreement, dated as of March 29, 1996;
incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.4 Intentionally omitted................................................
10.5 Third Supplemental Funding Agreement to the Credit Agreement dated
January 16, 1996; incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File No. 333-2236).....
10.6 Factoring Agreement dated as of August 24, 1994 between Rio
Sportswear, Inc. and The CIT Group/BCC, Inc.; incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement on
Form S-1 (File No. 333-2236).........................................
10.7 Letter Amendment dated as of August 24, 1994 to the Factoring
Agreement between Rio Sportswear, Inc. and The CIT Group/BCC, Inc.;
incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.8 Factoring Agreement dated as of August 4, 1994 between Calvin Klein
Jeanswear Company and The CIT Group/BCC, Inc.; incorporated by
reference to Exhibit 10.8 to the Company's Registration Statement on
Form S-1 (File No. 333-2236).........................................
</TABLE>
<PAGE> 134
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- -------- -------------------------------------------------------------------------------------
<C> <S> <C>
10.9 Intercreditor Agreement and Assignment of Factoring Proceeds dated as
of April 28, 1995 between Rio Sportswear, Inc. and The CIT
Group/Commercial Services, Inc.; incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form S-1 (File No.
333-2236)............................................................
10.10 Intercreditor Agreement and Assignment of Factoring Proceeds dated as
of April 28, 1995 between Calvin Klein Jeanswear Company and The CIT
Group/Commercial Services, Inc.; incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1 (File No.
333-2236)............................................................
10.11 Subordinated Loan Agreement dated as of April 28, 1995 by and among
BIB Holdings (Bermuda) Ltd., Denim Holdings, Inc., and New Rio,
L.L.C.; incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.12 Asset Purchase Agreement dated as of July 8, 1994 among Calvin Klein
Jeanswear Company, Abbeville Acquisition Company, Kaijay Acquisition
Company, Calvin Klein Sport, Inc. and Kaijay Pants Co., Inc.;
incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.13 License Agreement dated as of August 20, 1987 (the "Bill Blass
License Agreement") by and between Bill Blass, Ltd. and Rio
Sportswear, Inc.; incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (File No. 333-2236).....
10.14 Amendment to the Bill Blass License Agreement dated as of May 27,
1992; incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.15 Amendment to the Bill Blass License Agreement dated as of June 1,
1992; incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.16 Amendment to the Bill Blass License Agreement dated as of January 27,
1993; incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.17 Amendment to the Bill Blass License Agreement dated as of March 30,
1994; incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.18 Amendment to the Bill Blass License Agreement dated as of May 19,
1994; incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.19 Amendment to the Bill Blass License Agreement dated as of December
7,1994; incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.20 License Agreement dated as of August 4, 1994 (the "Calvin Klein
License Agreement") between Calvin Klein, Inc. and Calvin Klein
Jeanswear Company; incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (File No. 333-2236).....
10.21 Amendment to the Calvin Klein License Agreement dated as of December
7, 1994; incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.22 Amendment to the Calvin Klein License Agreement dated as of January
10, 1995; incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.23 Amendment to the Calvin Klein License Agreement dated as of February
28, 1995; incorporated by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.24 Agreement dated as of December 12, 1995 by and between Rio
Sportswear, Inc. and Commerce Clothing Company, LLC; incorporated by
reference to Exhibit 10.24 to the Company's Registration Statement on
Form S-1 (File No. 333-2236).........................................
</TABLE>
<PAGE> 135
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- -------- -------------------------------------------------------------------------------------
<C> <S> <C>
10.25 Distributorship Agreement dated as of February , 1996, between
Calvin Klein Jeanswear Company, Commerce Clothing Company LLC, and
Calvin Klein, Inc.; incorporated by reference to Exhibit 10.25 to the
Company's Registration Statement on Form S-1 (File No. 333-2236).....
10.26 Designer Holdings Ltd. 1996 Stock Option and Incentive Plan;
incorporated by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1 (File No. 333- 2236)..............
10.27 Employment Agreement between New Rio Sportswear Inc., Calvin Klein
Jeanswear Company and Maurice Dickson, as amended; incorporated by
reference to Exhibit 10.27 to the Company's Registration Statement on
Form S-1 (File No. 333-2236).........................................
10.28 Employment Agreement between Calvin Klein Jeanswear Company and
Daniel J. Gladstone, as amended; incorporated by reference to Exhibit
10.28 to the Company's Registration Statement on Form S-1 (File No.
333-2236)............................................................
10.29 Agreement of Lease by and between Erika Realty Trust and Calvin Klein
Jeanswear Company; incorporated by reference to Exhibit 10.29 to the
Company's Registration Statement on Form S-1 (File No. 333-2236).....
10.30 Distribution Agreement dated September 7, 1995 between Calvin Klein
Jeanswear and Floor Ready Company, L.L.C.; incorporated by reference
to Exhibit 10.30 to the Company's Registration Statement on Form S-1
(File No. 333-2236)..................................................
10.31 Distributorship Agreement dated as of June 26, 1995, between Calvin
Klein Jeanswear Company, Western Glove Works R.S., and Calvin Klein,
Inc.; incorporated by reference to Exhibit 10.31 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
10.32 Lease Agreement dated as of April 28, 1995 between North Arlington
Associates and Rio Sportswear, Inc.; incorporated by reference to
Exhibit 10.32 to the Company's Registration Statement on Form S-1
(File No. 333-2236)..................................................
10.33 Amendment to the Bill Blass License Agreement dated as of March 22,
1996; incorporated by reference to Exhibit 10.33 to the Company's
Registration Statement on Form S-1 (File No. 333-2236).
10.34 Employment Agreement between Designer Holdings Ltd., Calvin Klein
Jeanswear Company and Arnold H. Simon; incorporated by reference to
Exhibit 10.34 to the Company's Registration Statement on Form S-1
(File No. 333-2236)..................................................
10.35 Employment Agreement between Designer Holdings Ltd., Calvin Klein
Jeanswear Company and Debra Simon; incorporated by reference to
Exhibit 10.35 to the Company's Registration Statement on Form S-1
(File No. 333-2236)..................................................
10.36 Employment Agreement between Calvin Klein Jeanswear Company and New
Rio Sportswear, Inc. and David Fidlon, as amended; incorporated by
reference to Exhibit 10.36 to the Company's Registration Statement on
Form S-1 (File No. 333-2236).........................................
10.37 Employment Agreement between Designer Holdings Ltd., Calvin Klein
Jeanswear Company and John J. Jones; incorporated by reference to
Exhibit 10.37 to the Company's Registration Statement on Form S-1
(File No. 333-2236)..................................................
10.38 Amendment to the Calvin Klein License Agreement dated as of April 22,
1996; incorporated by reference to Exhibit 10.38 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
10.39 Amendment to the Lease Agreement between North Arlington Associates
and Rio Sportswear, Inc., dated as of February 22, 1996; incorporated
by reference to Exhibit 10.39 to the Company's Registration Statement
on Form S-1 (File No. 333-2236)......................................
10.40 Stock Acquisition Agreement dated as of April 22, 1996 between
Designer Holdings Ltd. and Calvin Klein Inc.; incorporated by
reference to Exhibit 10.40 to the Company's Registration Statement on
Form S-1 (File No. 333-2236).........................................
</TABLE>
<PAGE> 136
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- -------- -------------------------------------------------------------------------------------
<C> <S> <C>
10.41 Employment Agreement between Calvin Klein Jeanswear Company, Rio
Sportswear, Inc. and Guy Kinberg; incorporated by reference to
Exhibit 10.41 to the Company's Registration Statement on Form S-1
(File No. 333-2236)..................................................
*10.42 Jeanswear License Agreement, dated as of September 27, 1996, between
Donna Karan Studio and the Registrant................................
12.1 Computation of Ratio of Earnings to Fixed Charges....................
16.1 Letter of Deloitte & Touche LLP, re change in certifying accountant;
incorporated by reference to Exhibit 16.1 to the Company's
Registration Statement on Form S-1 (File No. 333-2236)...............
*21.1 Subsidiaries of the Registrant.......................................
23.1 Consent of Coopers & Lybrand L.L.P...................................
23.2 Consent of Deloitte & Touche L.L.P...................................
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibits
5.1 and 8.1).........................................................
24.1 Power of Attorney (set forth on signature page of the Registration
Statement)...........................................................
*25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of IBJ Schroder Bank & Trust Company, as Indenture
Trustee under the Indenture..........................................
*25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of IBJ Schroder Bank & Trust Company, as Property
Trustee under the Amended and Restated Declaration of Trust..........
*25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of IBJ Schroder Bank & Trust Company, as Guarantee
Trustee under the Guarantee..........................................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
CERTIFICATE OF TRUST
The undersigned, the trustees of Designer Finance Trust, desiring to form
a business trust pursuant to Delaware Business Trust Act, 12 Del. C. Section
3810, hereby certify as follows:
(d) The name of the business trust being formed hereby (the "Trust") is
"Designer Finance Trust".
(e) The name and business address of the trustee of the Trust which has
its principal place of business in the State of Delaware is as
follows:
Delaware Trust Capital Management, Inc.
900 Market Street
Wilmington, DE 19801
Attention: Corporate Trust Department - H02M12
(f) This Certificate of Trust shall be effective as of the date of
filing.
Dated: September 26, 1996
/s/ Merril M. Halpern
---------------------------
Name: Merril M. Halpern
Title: Regular Trustee
/s/ Arnold H. Simon
---------------------------
Name: Arnold H. Simon
Title: Regular Trustee
DELAWARE TRUST CAPITAL MANAGEMENT, Inc.,
as Delaware Trustee
By: /s/ Richard Smith
---------------------------
Name: Richard Smith
<PAGE> 1
EXHIBIT 12.1
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
(COMBINED) THE COMPANY
---------------------------------------- (CONSOLIDATED)
EIGHT ------------------------------------------------
MONTHS FOUR MONTHS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED JUNE 30,
-------------------------- AUGUST 25, DECEMBER 31, DECEMBER 31, ------------------
1991 1992 1993 1994 1994 1995 1995 1996
------ ------ ------ ----------- ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings
Net income (loss)................. $5,117 $3,631 $2,141 $ (235) $1,917 $ 11,063 $ 3,971 $ 8,739
Add back:
Taxes......................... 1,869 1,189 (331) (399) 2,239 10,870 4,500 9367
Extraordinary item............ 2,256
------ ------ ------ ----------- ------ ------------ ------- -------
Earnings.......................... 6,986 4,820 1,810 (634) 4,156 21,933 8,471 20,362
Interest on indebtedness...... 1,445 1,339 1,808 1,142 2,557 15,154 5,437 7,635
Amortization of expense on
debt.. 1,006 252 473
Interest portion of rental
charges.. 199 373 413 290 87 602 207 580
------ ------ ------ ----------- ------ ------------ ------- -------
Earnings as adjusted.............. $8,630 $6,532 $4,031 $ 798 $6,800 $ 38,695 $14,367 $29,050
====== ====== ====== ========== ============ ============ ======= =======
Fixed charges:
Interest on indebtedness...... $1,445 $1,339 $1,808 $ 1,142 $2,557 $ 15,154 $ 5,437 $ 7,635
Amortization of expense on
debt........................ 1,006 252 473
Interest portion of rental
charges..................... 199 373 413 290 87 602 207 580
------ ------ ------ ----------- ------ ------------ ------- -------
Total Fixed Charges............... $1,644 $1,712 $2,221 $ 1,432 $2,644 16,762 5,896 8,688
====== ====== ====== ========== ============
Pro forma interest savings related
to Preferred Securities......... (4,225) (1,276) (1,824)
Pro forma incremental deferred
financing costs related to
Preferred Securities............ 64 46 63
Total fixed charges, pro forma.... $ 12,601 $ 4,666 $ 6,926
============ ======= =======
Ratio of earnings to fixed
charges......................... 5.25x 3.82x 1.82x 2.57x 2.31x 2.44x 3.34x
====== ====== ====== ============ ============ ======= =======
Deficiency of earnings to fixed
charges......................... $ 634
==========
Pro forma ratio of earnings to
fixed
charges......................... 3.07x 3.08x 4.19x
============ ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of Designer
Holdings Ltd. on Form S-1 of our reports dated February 29, 1996, except for
Note 1, the tenth paragraph of Note 11, the thirteenth paragraph of Note 13 and
Note 16, for which the date is April 22, 1996, on our audits of the consolidated
financial statements and financial statement schedule of Designer Holdings Ltd.
We also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
New York, New York
September 30, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Designer Holdings
Ltd. on Form S-1 of our report dated April 1, 1994 on the combined statements of
operations, stockholders' equity and cash flows of Rio Sportswear, Inc. and
affiliated companies for the year ended December 31, 1993, appearing in the
Prospectus, which is part of this Registration Statement and to the reference to
us under the heading "Experts" in such Prospectus.
Our audit of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Rio Sportswear, Inc.
and affiliated companies, listed in Item 16. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audit. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
New York, New York
September 30, 1996
