<PAGE>
<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11707
------------------------
DESIGNER HOLDINGS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3818542
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
------------------------
1385 BROADWAY, 3RD FLOOR
NEW YORK, NEW YORK 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
212-556-9600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
COPIES OF ALL COMMUNICATIONS TO:
DESIGNER HOLDINGS LTD.
1385 BROADWAY, 3RD FLOOR
NEW YORK, NEW YORK 10018
212-556-9600
ATTENTION: JOHN J. JONES, ESQ., GENERAL COUNSEL
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
The number of shares outstanding of the registrant's Common Stock as of
November 10, 1997 is as follows: 32,139,334
________________________________________________________________________________
<PAGE>
<PAGE>
DESIGNER HOLDINGS LTD.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I -- Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996......... 3
Condensed Consolidated Statements of Operations For the Three and Nine Months Ended September
30, 1997 and 1996............................................................................ 4
Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 1997
and 1996..................................................................................... 5
Notes to Condensed Consolidated Financial Statements......................................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 10-13
Part II -- Other Information
Item 1. Legal Proceedings......................................................................... 14
Item 6. Exhibits and Reports on Form 8-K.......................................................... 14
Signature.............................................................................................. 15
</TABLE>
2
<PAGE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash......................................................................... $ 55,805 $ 41,395
Receivables, net............................................................. 107,625 109,407
Inventory.................................................................... 92,312 97,013
Deferred tax assets.......................................................... 12,042 11,998
Prepaid income taxes......................................................... 6,076 2,137
Prepaid expenses and other current assets.................................... 6,875 8,869
------------- ------------
Total current assets.................................................... 280,735 270,819
Property, plant and equipment, net................................................ 15,780 11,574
Prepaid royalties, net............................................................ 3,425 4,588
Intangible assets, net............................................................ 43,004 108,314
Deferred financing costs, net..................................................... 5,730 6,744
Other assets...................................................................... 7,399 4,920
------------- ------------
Total assets............................................................ $ 356,073 $406,959
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 28,300 $ 27,447
Accrued expenses............................................................. 21,488 24,007
------------- ------------
Total current liabilities............................................... 49,788 51,454
Licensing rights payable.......................................................... 48,614
Deferred tax liabilities.......................................................... 517 969
Company-obligated mandatorily redeemable convertible preferred securities of
Designer Finance Trust Holding solely convertible debentures.................... 120,000 120,000
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; authorized 75,000,000 shares; issued
and outstanding 32,139,334 and 32,159,334 shares, respectively.............. 321 321
Paid-in capital.............................................................. 148,842 148,236
Retained earnings............................................................ 36,732 37,365
------------- ------------
185,895 185,922
Less: Treasury stock, 20,000 shares at cost.................................. (127)
------------- ------------
Total stockholders' equity.............................................. 185,768 185,922
------------- ------------
Total liabilities and stockholders' equity........................................ $ 356,073 $406,959
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
<PAGE>
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues........................................... $138,194 $136,884 $365,049 $356,487
Cost of goods sold..................................... 91,486 84,396 229,780 220,917
-------- -------- -------- --------
Gross profit...................................... 46,708 52,488 135,269 135,570
Selling, general and administrative expenses........... 41,835 30,099 109,629 85,184
Restructuring and impairment charge.................... 14,714 14,714
-------- -------- -------- --------
Operating income (loss)........................... (9,841) 22,389 10,926 50,386
Interest expense, net.................................. 1,364 1,527 3,457 9,162
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.............................. (11,205) 20,862 7,469 41,224
Provision (benefit) for income taxes................... (461) 9,596 7,195 18,963
-------- -------- -------- --------
Income (loss) before extraordinary item........... (10,744) 11,266 274 22,261
Extraordinary loss on debt extinguishment, net of tax
benefit of $629 and $1,847, respectively............. 907 907 2,256
-------- -------- -------- --------
Net income (loss)................................. $(11,651) $ 11,266 $ (633) $ 20,005
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share before extraordinary
item................................................. $(.33) $.35 $.01 $.78
------ ---- ------ ----
------ ---- ------ ----
Net income (loss) per share............................ $(.36) $.35 $(.02) $.70
------ ---- ------ ----
------ ---- ------ ----
Weighted average common shares outstanding............. 32,151,399 32,477,222 32,156,689 28,710,441
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
<PAGE>
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................................... $ (633) $ 20,005
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation......................................................................... 1,883 997
Amortization......................................................................... 1,812 2,270
Non-cash restructuring and impairment charge......................................... 13,392
Stock option grant................................................................... 606
Extraordinary item................................................................... 1,536 4,103
Deferred interest.................................................................... (1,653)
Deferred income taxes................................................................ (496) 11
Changes in assets and liabilities:
Receivables..................................................................... 48 2,444
Inventory....................................................................... 4,701 (21,468)
Prepaid income taxes............................................................ (3,939) --
Prepaid expenses and other current assets....................................... 2,333 (1,235)
Prepaid royalties............................................................... 1,500 1,500
Other assets.................................................................... (3,902) (2,806)
Accounts payable................................................................ 853 13,566
Accrued expenses................................................................ (1,480) (8,337)
Income taxes payable............................................................ (10,865)
--------- --------
Net cash provided by (used in) operating activities........................ 18,214 (1,468)
--------- --------
Cash flows from investing activities:
Reimbursement (acquisition) of DKNY Jeans license.................................... 6,000 (6,000)
Deposit.............................................................................. (6,750)
Repayment of deposit................................................................. 6,411
Payment for Calvin Klein Outlet Stores purchase...................................... (2,062)
Additions to property, plant and equipment........................................... (6,089) (5,206)
--------- --------
Net cash used in investing activities...................................... (2,490) (11,206)
--------- --------
Cash flows from financing activities:
Decrease in revolving credit loans................................................... (51,069)
Repayment of term loan............................................................... (11,250)
Repayment of subordinated debt....................................................... (30,000)
Proceeds from sale of common stock................................................... 119,640
Payment of debt retirement costs..................................................... (2,998)
Payment of stock issuance costs...................................................... (11,649)
Purchase of treasury stock........................................................... (127)
Payment of financing costs........................................................... (1,187)
--------- --------
Net cash (used in) provided by financing activities........................ (1,314) 12,674
--------- --------
Net increase in cash....................................................... 14,410
Cash, beginning of period................................................................. 41,395
--------- --------
Cash, end of period........................................................ $55,805 $ --
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
<PAGE>
DESIGNER HOLDINGS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ('SEC'). In the opinion of management, these statements include all
adjustments, all of which were of a normal recurring nature, except the
restructuring and impairment charge discussed in Note 3 below, considered
necessary for a fair presentation of financial position, results of operations
and cash flows. All significant intercompany balances and transactions have been
eliminated. Results of operations for interim periods are not necessarily
indicative of results for the full year.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's 1996 Form 10-K.
2. MERGER
On September 24, 1997, the Board of Directors of the Company approved a
merger of the Company with The Warnaco Group, Inc. ('Warnaco') (the 'Merger').
Pursuant to a merger agreement dated September 25, 1997, each stockholder of the
Company will receive 0.324 of a share of Warnaco common stock for each share of
the Company's common stock exchanged.
On October 14, 1997, pursuant to a stock exchange agreement, Warnaco
acquired from New Rio L.L.C. ('New Rio'), the Company's majority stockholder,
and a former member of New Rio, approximately 51.3% of the outstanding common
stock of the Company in exchange for newly issued common shares of Warnaco at
the exchange ratio set forth above.
The Merger is subject to the approval of the merger agreement by a majority
vote of the stockholders of the Company, and the approval of the shares of
Warnaco common stock to be issued in connection with the transaction by a
majority vote of the stockholders of Warnaco voting. Meetings of the
stockholders of each company are expected to be held on December 12, 1997 to
vote on these matters.
In connection with the stock exchange on October 14, 1997, Arnold H. Simon,
President and Chief Executive Officer of the Company, terminated his employment
agreement dated January 1, 1996 with the Company pursuant to the provisions set
forth therein. As a result, Mr. Simon received compensation of approximately
$7,800, of which approximately $2,300 was offset against outstanding loans and
other amounts owed by Mr. Simon to the Company. In addition, the Company has
committed to pay an aggregate of $3,500 to those employees whose stock options
were canceled because their exercise price was equal to or greater than $11 per
share on October 14, 1997. New Rio has also agreed to provide payments in equal
amounts to such employees.
3. RESTRUCTURING AND IMPAIRMENT CHARGE
In August 1997, the Company announced that it would be conducting a full
review of its business to strengthen its long term operations, generate
efficiencies in transportation, distribution and production, and reduce selling,
general and administrative costs. In addition, the Company had been in
discussions with Bill Blass Ltd. to negotiate a new amendment to its Bill Blass
license, which was due to expire on December 31, 1997. In the third quarter,
these discussions were discontinued (see Note 8). As a result of the above, the
Company recorded a restructuring and impairment charge to operations of $14,714.
Approximately $13,000 of this charge relates to the discontinuation of the Bill
Blass license and consists of the write-down of impaired assets, including
goodwill of approximately $10,000 and receivables of approximately $1,700, and
other costs of terminating this business. The balance of the charge relates to
6
<PAGE>
<PAGE>
DESIGNER HOLDINGS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(i) a loss on the sublease of the Company's North Arlington facility, which
consists principally of the write-off of leasehold improvements that will not be
recovered from the sublease rentals, and (ii) the write-down of shop-in-shop
fixtures that do not meet the new design requirements of the Company's
shop-in-shops program. The sublease of the North Arlington facility eliminated a
distribution facility that did not meet the Company's distribution strategy.
4. NEW CREDIT FACILITY AND EXTRAORDINARY ITEM
On August 20, 1997, the Company entered into a new credit facility for an
aggregate commitment of $150,000 (the 'New Credit Facility'), consisting of a
revolving credit facility, which includes a $45,000 sub-limit for the issuance
of letters of credit, and an annual $40,000 sub-limit for acquisition financing.
The interest rates on the New Credit Facility will be at either the Prime Rate
or the Federal Funds Rate, plus an applicable margin, or LIBOR plus an
applicable margin. The New Credit Facility expires on August 20, 2002, the fifth
anniversary of the closing date thereof.
It is anticipated that the New Credit Facility will be terminated upon
completion of the Merger (see Note 2), and that the Company's financing
requirements would then be serviced through Warnaco's credit facilities.
Deferred financing costs related to completing the New Credit Facility
approximated $2,000 and are being amortized using the straight-line method over
the term of the underlying agreement. As a result of the New Credit Facility,
the Company recorded an extraordinary charge in the third quarter of 1997 for
the write-off of deferred financing costs related to a prior credit facility of
approximately $907, net of taxes.
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials.................................................. $ 1,264 $ 2,742
Work-in-process................................................ 2,288 2,616
Finished goods................................................. 88,760 91,655
------------- ------------
$92,312 $ 97,013
------------- ------------
------------- ------------
</TABLE>
6. DKNY LICENSE
On September 27, 1996, the Company entered into a 30-year licensing
agreement (the 'DKNY Jeans License') 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').
On March 5, 1997, the DKNY Jeans License was terminated by mutual consent
of the parties to the agreement. In connection with the termination, Donna Karan
International returned to the Company the initial license payment of $6,000 and
a prepaid royalty payment of $1,260. The Company also received approximately
$3,100 as reimbursement for costs and expenses incurred under the DKNY Jeans
License, including overhead costs, samples purchased and all previously
developed patterns, concepts, sales plans and other materials related to the
DKNY Jeans Label. Additionally, Donna Karan International assumed all fabric
commitments made by the Company in connection with the DKNY Jeans License and
released the Company from all obligations for future payments and services under
the agreement.
7
<PAGE>
<PAGE>
DESIGNER HOLDINGS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
As a result of the termination, the intangible licensing rights and
licensing rights payable were removed from the accounts in the first quarter of
1997, resulting in the reversal of the interest discount amortized in 1996 of
$877. This reversal is included in interest expense, net in the condensed
consolidated statements of operations for the nine months ended September 30,
1997. Additionally, 1996 start-up costs of approximately $885 related to the
DKNY Jeans License were recovered. This recovery is included in selling, general
and administrative expenses in the condensed consolidated statements of
operations for the nine months ended September 30, 1997.
7. INCOME TAXES
The disproportionate level of income tax expense to pre-tax income in the
three and nine months ended September 30, 1997 is a result of the write-off of
$10,082 of non tax-deductible goodwill in the third quarter of 1997. Excluding
the effect of the goodwill write-off, the lower effective tax rate in 1997
(41%), compared to 1996 (46%), is principally attributable to lower state and
local income taxes.
8. COMMITMENTS AND CONTINGENCIES
RIO AND BILL BLASS LICENSES:
Rio Sportswear, a wholly owned subsidiary of the Company, is a party to a
licensing agreement with Bill Blass Ltd. which allows Rio Sportswear 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 'Bill Blass Agreement'). The Bill Blass Agreement requires
royalty fee payments based on percentages of sales, as defined, subject to a
minimum annual royalty fee payment of $1,000. The Bill Blass 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. The Bill Blass Agreement also contains annual minimum
net sales requirements that, if not maintained, would allow Bill Blass Ltd. to
terminate the Bill Blass Agreement.
In December 1995, Rio Sportswear entered into an agreement (the 'Sublicense
Agreement'), commencing January 1, 1996, and amended March 11, 1997, to (i)
sublicense its rights under the Bill Blass 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 (the 'Sublicensee').
Under the terms of the Sublicense Agreement, Rio Sportswear will earn a
royalty fee based on sales orders accepted by the manufacturer. The Sublicense
Agreement requires minimum annual royalty fee payments in addition to the
minimum royalties payable to Bill Blass of approximately $1,600. The initial
term of the agreement expires on December 31, 2008 and is renewable for five
additional ten-year periods.
The amount of the minimum annual royalty payments due under the Sublicense
Agreement is sufficient to recover the amount of goodwill included in intangible
assets applicable to the Rio and Bill Blass businesses. However, the minimum
royalty payments related to the Bill Blass business is dependent upon the
Company renewing the Bill Blass Agreement which expires on December 31, 1997.
During the third quarter of 1997, the Company informed Bill Blass Ltd. that it
would not renew the Bill Blass Agreement under its existing terms, and expressed
interest in exploring other terms that would be more profitable for the Company.
At the end of August 1997, these discussions were discontinued. Accordingly,
during the third quarter of 1997, the Company has written-off its goodwill
related to the Bill Blass Labels which, at September 30, 1997, aggregated
$10,082. This write-off is included in the restructuring and impairment charge.
With respect to the Rio Sublicense Agreement, the sublicensee
8
<PAGE>
<PAGE>
DESIGNER HOLDINGS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
has elected to curtail distribution of products sold under the Rio label in 1997
while fulfilling its obligation to make minimum royalty payments due under the
Sublicense Agreement.
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 were pending against the
major manufacturers of such jeanswear. The plaintiffs sought damages against all
defendants in unspecified amounts. The action was settled in October 1997 and
the results of such settlement did not have a material effect on the Company's
results of operations, cash flows, and financial position.
Shortly after the announcement of a proposed transaction between Designer
Holdings and Warnaco with respect to the Merger, three stockholders of the
Company, Jacob J. Spinner, Yaakov Glatter and Sherry Berman, as custodian for
Jordan Berman, filed lawsuits in the Delaware Court of Chancery challenging the
transaction. The named plaintiff in each of the actions purports to maintain
each individual action as a class action on behalf of Company stockholders. On
October 30, 1997 the Court of Chancery signed an order which consolidated the
three actions. Now captioned as, In re Designer Holdings Ltd. Shareholders
Litigation, Consolidated Civil Action 15942, the consolidated complaint
alleges that the directors of the Company breached their fiduciary duties to
Company stockholders in approving the transaction. The complaint further
alleges that the directors of the Company have a conflict of interest based on
the price at which they acquired the Company's shares they own and the price
at which the Company's shares were sold to the public in May 1996 relative to
the transaction price. The complaint also claims that Warnaco aided and abetted
the directors of the Company in breaching their fiduciary duties. The plaintiffs
seek injunctive relief to prohibit the Company from completing the Merger or,
in the alternative, monetary damages of an unspecified amount.
On November 13, 1997, the parties to this litigation reached an agreement
in principle to settle this litigation on the following terms, subject to
court approval:
1. the defendants permitted the plaintiffs' attorneys to review drafts
of the Joint Proxy Statement/Prospectus relating to the transaction
prior to mailing and have revised the disclosure therein in response
to their comments;
2. the defendants agreed that they would reduce the termination fee
payable to Warnaco in certain circumstances from $12.5 million to
$6.25 million; and
3. Charterhouse Equity Partners II, L.P., which beneficially owns
approximately 2.6 million Warnaco shares as a result of the exchange
of shares with New Rio, has agreed that during the 14-day period
following the date on which the Company's stockholders can sell the
Warnaco shares issued in the Merger, but in no event extending past
December 31, 1997, it will not sell, transfer or otherwise dispose of
any Warnaco shares, notwithstanding the existence of an effective
registration statement for the resale of any such shares, unless the
closing price for Warnaco shares on the NYSE Composite Transactions
Tape on any day within such 14-day period was more than 15% above or
below such closing price on the trading day immediately preceding the
effective time of the Merger.
Upon final approval of the settlement by the court, plaintiffs' counsel
will petition the court for an award of attorney's fees and expenses, which will
be paid by the Company. Plaintiffs' counsel has agreed to submit a request for,
and the defendants have agreed not to oppose, a request for court approval of
not more than $350,000 in attorney's fees and expenses.
The Company is a defendant in various other lawsuits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the Company's
results of operations, cash flows, and financial position.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ('SFAS 128'),
which simplifies existing computational guidelines, revises disclosure
requirements and increases the comparability of earnings per share data on an
international basis. The statement is effective for periods ending after
December 15, 1997 and requires restatement of all prior-period earnings per
share data presented. Earnings per share calculated under SFAS 128 would be the
same as reported earnings per share.
9
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
Certain statements contained herein are forward-looking statements that are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve known and unknown risks
and uncertainties which may cause the Company's actual results in future periods
or plans for future periods to differ materially from what is currently
anticipated. Those risks include, among others, general competitive factors and
a softening of retailer or consumer acceptance of the Company's products.
GENERAL
The results of operations for the nine months ended September 30, 1997
reflect net revenues generated and expenses incurred from the sale of Calvin
Klein Jeans, CK/Calvin Klein Jeans and CK/Calvin Klein Khakis products
(collectively, 'Calvin Klein Jeans Labels'), net revenues generated and expenses
incurred from the operation of Outlet Stores, Inc. (d/b/a CK Outlet Stores), and
royalty income.
On September 24, 1997, the Board of Directors of the Company approved a
merger of the Company with The Warnaco Group, Inc. ('Warnaco') (the 'Merger').
Pursuant to the merger agreement dated September 25, 1997, each stockholder of
the Company will receive 0.324 of a share of Warnaco common stock for each share
of the Company's common stock exchanged.
On October 14, 1997, pursuant to a stock exchange agreement, Warnaco
acquired from New Rio L.L.C., the Company's majority stockholder, and a former
member of New Rio L.L.C., approximately 51.3% of the outstanding common stock of
the Company in exchange for newly issued common shares of Warnaco at the
exchange ratio stipulated above.
The Merger is subject to the approval of the merger agreement by the
majority of the stockholders of the Company, and the approval of the issuance of
shares of Warnaco common stock in connection with the transaction by the
stockholders of Warnaco voting. Meetings of the stockholders of each company
will be held on December 12, 1997 to vote on these matters.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, a summary of the
statement of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER NINE MONTHS ENDED SEPTEMBER
30, 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues........................................... $ 138,194 $ 136,884 $ 365,049 $ 356,487
Cost of goods sold..................................... 91,486 84,396 229,780 220,917
------------- ------------- ------------- -------------
Gross profit........................................... 46,708 52,488 135,269 135,570
Selling, general and administrative expenses........... 41,835 30,099 109,629 85,184
Restructuring and impairment charge.................... 14,714 -- 14,714 --
------------- ------------- ------------- -------------
Operating income (loss)................................ $ (9,841) $ 22,389 $ 10,926 $ 50,386
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Net Revenues. Net revenues for the three months ended September 30, 1997
were $138,194, a slight increase as compared to net revenues for the three
months ended September 30, 1996 of $136,884. Net revenues in the 1997 quarter
included $118,555 from the sale of Calvin Klein Jeans label products. This
represents a net decrease of $15,943 compared to net revenue of $134,498
generated during the three months ended September 30, 1996. The net decrease in
sales during the three months ended September 30, 1997, as compared to the 1996
quarter, were impacted by sales discounts and allowances given during the third
quarter of 1997, which were necessary to reduce inventory levels, which had
grown due to increased competition in a weaker-than-expected retail apparel
market. Net sales were also impacted by the Company's actions to further curtail
distribution to certain specialty store chains and Central and South American
sales channels. This decision to tighten the Company's product distribution
channels was made to reinforce the exclusive image of the Calvin Klein Jeanswear
brand which the Company believes will help increase long-term profitability.
10
<PAGE>
<PAGE>
The Company recorded $17,411 of net revenues from the CK Outlet Stores
during the three months ended September 30, 1997. These stores were acquired by
the Company in November 1996 and therefore had no revenues in the comparable
1996 period.
Royalty income earned during the three months ended September 30, 1997 was
approximately $2,228. The 1996 comparable quarter contained approximately $2,386
of royalty income.
Net revenues for the nine months ended September 30, 1997 were $365,049,
which represented an increase of $8,562 or 2.4% over net revenues for the nine
months ended September 30, 1996 of $356,487. Net revenues for the first nine
months of 1997 included $324,231 from the sale of Calvin Klein Jeans label
products. This represents a net decrease of $27,168 compared to net revenue of
$351,399 during the nine months ended September 30, 1996. This net sales
decrease is attributable to the abovementioned reasons.
The Company recorded $34,827 of net revenues generated by the CK Outlet
Stores during the nine months ended September 30, 1997.
Royalty income earned during the nine months ended September 30, 1997 was
approximately $5,991, as compared to approximately $4,521 of royalty income
earned during the first nine months of 1996. This net increase is primarily due
to higher royalties generated from the Calvin Klein Jeans label childrens
apparel sublicense.
Gross Profit. Gross profit was $46,708 for the three months ended September
30, 1997, a decrease of $5,780 from the 1996 comparable quarter gross profit of
$52,488. The gross profit percentage was 33.8% for the 1997 quarter, a decrease
from 38.3% in the 1996 quarter. This decrease in gross profit percentage was
primarily caused by the reasons mentioned above within the Net Revenues
discussion.
Gross profit was $135,269 during the nine months ended September 30, 1997,
a decrease of $301 from the first nine months of 1996 gross profit of $135,570.
Gross profit percentage was 37.1% in the first nine months of 1997, compared to
38.0% recorded for the first nine months of 1996 which decline was due to the
factors which adversely impacted net revenues, as discussed above.
Selling, general and administrative. Selling, general and administrative
('SG&A') expenses were $41,835 or 30.3% of net revenues for the three months
ended September 30, 1997, an increase of $11,736 from $30,099 or 22.0% of net
revenues for the three months ended September 30, 1996. The increased SG&A
expenses are primarily related to the CK Outlet Stores, which incurred
approximately $6,150 in SG&A expenses during the 1997 period, as well as the
installation and operation of the shop-in-shops in department stores and various
other expenses required to maintain the business.
SG&A expenses were $109,629 or 30.0% of net revenues for the nine months
ended September 30, 1997, an increase of $24,445 from $85,184 or 23.9% of net
revenues for the nine months ended September 30, 1996. The increased SG&A
expenses are primarily related to the CK Outlet Stores, which incurred
approximately $13,667 of SG&A expenses during this period, as well as the
installation and operation of shop-in-shops in department stores and various
other expenses required to maintain the business.
Restructuring and impairment Charge. In August 1997, the Company announced
that it would be conducting a full review of its business to strengthen its long
term operations, generate efficiencies in transportation, distribution and
production, and reduce selling, general and administrative costs. In addition,
the Company had been in discussions with Bill Blass Ltd. to negotiate a new
amendment to its Bill Blass license which was due to expire on December 31,
1997. In the third quarter, these discussions were discontinued (see Note 8). As
a result of the above, the Company recorded a restructuring and impairment
charge to operations of $14,714 ($12,815, net of an income tax benefit of
$1,899, or $.40 per share). Approximately $13,000 of this charge relates to the
discontinuation of the Bill Blass license and consists of the write-down of
impaired assets, including goodwill of approximately $10,000 and receivables of
approximately $1,700, and other costs of terminating this business.
Interest expense, net. Interest expense for the three months ended
September 30, 1997 was $1,364, as compared to $1,527 for the three months ended
September 30, 1996. Interest expense for the nine months ended September 30,
1997 was $3,457, as compared to $9,162 for the nine months ended September 30,
1996. This decrease in interest expense is due to the payment in full of amounts
outstanding under the revolving credit facility, the term loan and the senior
subordinated debt with the
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net proceeds of the initial public offering in May 1996 and the sale of the 6%
Convertible Trust Originated Preferred Securities (the 'Preferred Securities')
in November 1996.
Provision (benefit) for income taxes. The disproportionate level of income
tax expense to pre-tax income in the three and nine months ended September 30,
1997 is a result of the write-off of $10,082 of non tax-deductible goodwill in
the third quarter of 1997. Excluding the effect of the goodwill write-off, the
lower effective tax rate in 1997 (41%), compared to 1996 (46%), is principally
attributable to lower state and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
On August 20, 1997, the Company entered into a new $150,000 credit facility
(the 'New Credit Facility'), which provides the Company with a revolving credit
facility for the issuance of loans, which includes a $45,000 sub-limit for the
issuance of letters of credit and an annual $40,000 sub-limit for acquisition
financing. The interest rates on the New Credit Facility will be at either the
Prime Rate or the Federal Funds rate, plus an applicable margin, or LIBOR plus
an applicable margin. At September 30, 1997, there were no amounts outstanding
under the New Credit Facility, except for $15,992 for open letters of credit.
The New Credit Facility expires on August 20, 2002, the fifth anniversary of the
closing date thereof.
It is now anticipated that the New Credit Facility will be terminated upon
completion of the Merger (see Note 2), and that the Company's financing
requirements would then be serviced through Warnaco's credit facilities.
The Company has financed its operations primarily through cash flows
generated from operations and, prior to the November 6, 1996 offering of
Preferred Securities, from daily borrowings under its revolving credit facility.
During the nine months ended September 30, 1997, the Company generated cash from
operating activities of $18,214, a significant improvement compared to a net use
of cash in operating activities of $1,468 for the nine months ended September
30, 1996. The 1997 period reflects an improved working capital position,
primarily due to the liquidation of inventory previously mentioned.
Net cash used in investing activities during the nine months ended
September 30, 1997 and 1996 was $2,490 and $11,206, respectively. The 1997
period contains the reimbursement from Donna Karan International Inc. of the
initial license payment made in 1996 of $6,000, offset by capital expenditures
for equipment for distribution facilities and leasehold improvements, and the
final payment for the purchase of the CK Outlet Stores. The 1996 period contains
the acquisition payment for the DKNY Jeans license and capital expenditures.
During the nine months ended September 30, 1997, the Company used
approximately $1,314 in financing activities, which primarily consisted of costs
related to the New Credit Facility. Net cash provided by financing activities
during the nine months ended September 30, 1996 amounted to $12,674, which
consisted primarily of the proceeds from the sale of common stock from the
Company's initial public offering offset by the payment of stock issuance costs,
repayments of the term loan, subordinated debt and related debt retirement
costs, and decreases in revolving credit loans.
In connection with the stock exchange on October 14, 1997, Arnold H. Simon,
President and Chief Executive Officer of the Company, terminated his employment
agreement dated January 1, 1996 with the Company pursuant to the provisions set
forth therein. As a result, Mr. Simon received compensation of approximately
$7,800, of which approximately $2,300 was offset against outstanding loans and
other amounts owed by Mr. Simon to the Company. In addition, the Company has
committed to pay an aggregate of $3,500 to those employees whose stock options
were canceled because their exercise price was equal to or greater than $11 per
share on October 14, 1997. New Rio has also agreed to provide payments in equal
amounts to such employees.
The Company, through Warnaco, expects to continue making improvements which
would strengthen its long-term operations, generate efficiencies in
transportation, distribution and production, and reduce other SG&A expenses,
including headcount. As a wholly owned subsidiary of Warnaco, it is expected
that the Company will have sources of financing sufficient to fund it's current
level of operations and expected growth through 1998 and future periods. The
Company installed approxi-
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mately 180 Calvin Klein Jeans Label shop-in-shops during the first nine months
of 1997, and currently plans to install several more, which costs are expected
to be funded from cash flows generated from operations or from borrowings under
the New Credit Agreement until the merger is completed, and from Warnaco's
sources of financing thereafter.
SEASONALITY
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 and lower
in the second and fourth quarters.
YEAR 2000 COMPLIANCE
The Company has developed its infrastructure through, among other things,
significant investments in its distribution and management information systems,
and has recently purchased software systems which support its operations. Due to
these recent investments, the Company anticipates that costs to be incurred for
year 2000 compliance will not have a material effect on the Company's results of
operations, cash flows and financial position. The Company also believes that
the year 2000 issue will not affect its customers and suppliers in a manner
which will have a material adverse effect on the Company.
13
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Incorporated by reference to Note 8 to the Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DESIGNER HOLDINGS LTD.
By: /s/ DAVID FIDLON
...................................
DAVID FIDLON
SENIOR VICE PRESIDENT, CONTROLLER
AND CHIEF ACCOUNTING OFFICER
Date: November 13, 1997
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-TYPE> 3-MOS 9-MOS
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 55,805 55,805
<SECURITIES> 0 0
<RECEIVABLES> 128,339 128,339
<ALLOWANCES> (20,714) (20,714)
<INVENTORY> 92,312 92,312
<CURRENT-ASSETS> 280,735 280,735
<PP&E> 20,056 20,056
<DEPRECIATION> (4,276) (4,276)
<TOTAL-ASSETS> 356,073 356,073
<CURRENT-LIABILITIES> 49,788 49,788
<BONDS> 120,000 120,000
0 0
0 0
<COMMON> 321 321
<OTHER-SE> 186,302 186,302
<TOTAL-LIABILITY-AND-EQUITY> 356,073 356,073
<SALES> 135,966 359,058
<TOTAL-REVENUES> 138,194 365,049
<CGS> 91,486 229,780
<TOTAL-COSTS> 91,486 229,780
<OTHER-EXPENSES> 56,549 124,343
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,364 3,457
<INCOME-PRETAX> (11,205) 7,469
<INCOME-TAX> (461) 7,195
<INCOME-CONTINUING> (10,744) 274
<DISCONTINUED> 0 0
<EXTRAORDINARY> 907 907
<CHANGES> 0 0
<NET-INCOME> (11,651) (633)
<EPS-PRIMARY> (.36) (.02)
<EPS-DILUTED> (.36) (.02)
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