<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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)
Delaware 13-3818542
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1385 Broadway, 3rd Floor
New York, New York 10018
(Address of principal executive offices)
212-556-9600
(Registrant's telephone number, including area code)
Copies of all communications to:
Designer Holdings Ltd.
1385 Broadway, 3rd floor
New York, New York 10018
212-556-9600
Attention: John J. Jones, Esq., General Counsel
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the registrant's Common Stock as of
August 12, 1997 is as follows: 32,159,334
<PAGE> 2
DESIGNER HOLDINGS LTD.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30,
1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Part II - Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 63,100 $ 41,395
Receivables, net 90,363 109,407
Inventory 98,334 97,013
Deferred tax assets 9,657 11,998
Prepaid income taxes 7,213 2,137
Prepaid expenses and other
current assets 15,512 8,869
-------- --------
Total current assets 284,179 270,819
Property, plant and equipment, net 14,234 11,574
Prepaid royalties, net 3,813 4,588
Intangible assets, net 53,343 108,314
Deferred refinancing costs, net 6,397 6,744
Other assets 6,833 4,920
-------- --------
Total assets $368,799 $406,959
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,579 $ 27,447
Accrued expenses 19,664 24,007
-------- --------
Total current liabilities 51,243 51,454
Licensing rights payable 48,614
Deferred tax liabilities 616 969
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 32,159,334 shares 321 321
Paid-in capital 148,236 148,236
Retained earnings 48,383 37,365
-------- --------
Total stockholders' equity 196,940 185,922
-------- --------
Total liabilities and
stockholders' equity $368,799 $406,959
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4
DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 104,347 $ 104,967 $ 226,855 $ 219,603
Cost of goods sold 62,763 65,700 138,294 136,521
----------- ----------- ----------- -----------
Gross profit 41,584 39,267 88,561 83,082
Selling, general and administrative
expenses 34,206 27,938 67,794 55,085
----------- ----------- ----------- -----------
Operating income 7,378 11,329 20,767 27,997
Interest expense, net 1,315 3,110 2,093 7,635
----------- ----------- ----------- -----------
Income before income taxes 6,063 8,219 18,674 20,362
Provision for income taxes 2,485 3,781 7,656 9,367
----------- ----------- ----------- -----------
Net income before
extraordinary item 3,578 4,438 11,018 10,995
Extraordinary loss on
debt extinguishment -- 2,256 -- 2,256
Net income $ 3,578 $ 2,182 $ 11,018 $ 8,739
=========== =========== =========== ===========
Net income per share before
extraordinary item $ .11 $ .15 $ .34 $ .41
=========== =========== =========== ===========
Net income per share $ .11 $ .07 $ .34 $ .33
=========== =========== =========== ===========
Weighted average common shares
outstanding 32,159,334 29,420,233 32,159,334 26,827,051
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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DESIGNER HOLDINGS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,018 $ 8,739
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 1,180 571
Amortization 1,016 1,438
Deferred interest (1,653)
Deferred income taxes 1,988 (3,572)
Extraordinary item 4,103
Changes in assets and liabilities:
Receivables 19,044 18,214
Inventory (1,321) (16,334)
Prepaid expenses (657) (2,964)
Prepaid royalties 1,000 1,000
Other assets (2,323) (1,294)
Accounts payable 4,132 6,387
Accrued expenses (2,281) (12,346)
Income taxes payable (5,076) (10,966)
-------- --------
Net cash provided by (used in) operating activities 27,720 (8,677)
-------- --------
Cash flows from investing activities:
Reimbursement of DKNY Jeans license payment 6,000
Deposit (6,750)
Repayment of deposit 764
Payment for Calvin Klein Outlet Stores purchase (2,062)
Additions to property, plant and equipment (3,839) (2,657)
-------- --------
Net cash used in investing activities (5,887) (2,657)
-------- --------
Cash flows from financing activities:
Decrease in revolving credit loans (53,719)
Repayment of term loan (10,000)
Repayment of subordinated debt (30,000)
Proceeds from sale of common stock 119,700
Payment of debt retirement costs (2,998)
Payment of stock issuance costs (11,649)
Payment of financing costs (128)
-------- --------
Net cash (used in) provided by financing activities (128) 11,334
-------- --------
Net increase in cash 21,705 --
Cash, beginning of period 41,395 --
-------- --------
Cash, end of period $ 63,100 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
DESIGNER HOLDINGS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. ORGANIZATION AND BASIS OF PRESENTATION:
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,
consisting only of normal recurring accruals, 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. INVENTORY:
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------- -------
<S> <C> <C>
Raw materials $ 1,517 $ 2,742
Work-in-process 2,436 2,616
Finished goods 94,381 91,655
------- -------
$98,334 $97,013
======= =======
</TABLE>
3. 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.
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 six months ended June 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 six
months ended June 30, 1997.
4. CREDIT AGREEMENTS:
On April 16, 1997, the Company signed a commitment letter with a new lender for
an aggregate commitment of $200,000 (the "New Credit Facility") which will
consist 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 Company has recently reevaluated its financing needs
and has lowered the aggregate revolving credit facility requested to $150,000.
The borrowings under the New Credit Facility will expire on the fifth
anniversary of the closing date thereof. 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 Company expects to
close on this facility during the third quarter of 1997. The New Credit Facility
will replace the existing $150,000 facility.
6
<PAGE> 7
5. INCOME TAXES:
The lower effective tax rate in 1997 (41%), compared to 1996 (46%), is
principally attributable to lower state and local income taxes.
6. 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.
7. COMMITMENTS AND CONTINGENCIES:
RIO AND BILL BLASS LICENSES:
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 "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.
The Company is in discussions with Bill Blass Ltd. to negotiate a new agreement
for the continuation of the license. If negotiations are not successful, the
Bill Blass Agreement would expire on December 31, 1997, and the Company would
write down its goodwill related to the Bill Blass Labels which, at June 30,
1997, was approximately $10,315. With respect to the Rio license, the
sublicensee has elected to curtail distribution of products sold under the Rio
label in 1997. The Company has notified the sublicensee that it must fulfill its
commitment to minimum royalties 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 are pending against the major
manufacturers of such jeanswear. The plaintiffs seek damages against all
defendants in unspecified amounts. A trial is scheduled to begin in November
1997. The parties are currently discussing settlement. 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 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.
7
<PAGE> 8
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 financial statements of the
Company.
8
<PAGE> 9
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 six months ended June 30, 1997 reflect net
revenues generated and expenses incurred from the sale of Calvin Klein Jeans
Label products, net revenues generated and expenses incurred from the operation
of Outlet Stores, Inc. (d/b/a CK Outlet Stores), as well as royalty income
earned and certain contractual expenses incurred related to sales of (i) Rio
label and Bill Blass label products, which the Company licensed effective
January 1, 1996 to Commerce Clothing Company, L.L.C. ("Commerce Clothing "),
(ii) Calvin Klein Jeans Label childrens apparel, within the United States, for
which the Company entered into a sub-licensing agreement effective January 1,
1996 with Commerce Clothing and (iii) certain other licensing agreements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1997 1996 1997 1996
----- ----- ----- -----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 60.1 62.6 61.0 62.2
----- ----- ----- -----
Gross profit 39.9 37.4 39.0 37.8
Selling, general and administrative expenses 32.8 26.6 29.9 25.1
----- ----- ----- -----
Operating income 7.1% 10.8% 9.2% 12.7%
===== ===== ===== =====
</TABLE>
Net Revenues. Net revenues for the three months ended June 30, 1997 were
$104,347, a slight decrease as compared to net revenues for the three months
ended June 30, 1996 of $104,967. Net revenues in the 1997 quarter included
$82,075 from the sale of Calvin Klein Jeans and CK/Calvin Klein Jeans products,
and $10,297 from the sale of CK/Calvin Klein Khakis products (collectively
"Calvin Klein Jeans Labels"), totaling $92,372. This represents a net decrease
of $10,924 compared to net revenue of $103,296 generated from the sale of Calvin
Klein Jeans Label products during the three months ended June 30, 1996. This net
sales decrease is comprised of an increase in khaki net sales of $5,650, offset
by a decrease in jeanswear net sales of $16,574. The Company experienced sales
growth in the womens (including petites) line for the three months ended June
30, 1997, as compared to the prior year period, which was offset by a decline in
the mens and juniors lines, specifically in jeanswear sales, as the Company's
sales were impacted by (i) an oversupply of product and increased competition in
a weaker-than-expected retail apparel market, and (ii) the continued effect of
reduced jeanswear distribution to specialty stores which carried its mens line,
as a result of the Company's strategic decision to tighten the Company's product
distribution in order to reinforce the exclusive image of the Calvin Klein
Jeanswear brand which the Company believes would help to maintain increased
long-term profitability. The quarter ended June 30, 1996 included $2,065 of
sales to the CK Outlet Stores, which were acquired by the Company in November
1996.
The Company recorded $10,006 of net revenues from the CK Outlet Stores during
the three months ended June 30, 1997.
Royalty income earned during the three months ended June 30, 1997 was
approximately $1,969. The 1996 comparable quarter contained approximately $1,493
of royalty income. This increase is a result of additional sublicensing
arrangements in effect during the three months ended June 30, 1997 as compared
to the prior year quarter. The Company anticipates that royalty income will
continue to increase during the remainder of 1997, as
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<PAGE> 10
additional sublicensing arrangements, covering territories such as Latin America
and Mexico, continue to generate royalty earnings.
Net revenues for the six months ended June 30, 1997 were $226,855, which
represented an increase of $7,252 or 3.3% over net revenues for the six months
ended June 30, 1996 of $219,603. Net revenues for the first half of 1997
included $186,538 from the sale of Calvin Klein Jeans and CK/Calvin Klein Jeans
products, and $19,138 from the sale of CK/Calvin Klein Khakis products
(collectively "Calvin Klein Jeans Labels"), totaling $205,676. This represents a
net decrease of $11,225 compared to net revenue of $216,901 generated from the
sale of Calvin Klein Jeans Label products during the six months ended June 30,
1996. This net sales decrease is comprised of an increase in khaki net sales of
$8,086, offset by a decrease in jeanswear net sales of $19,311. The Company
experienced sales growth in the womens (including petites) line during the first
half of 1997, as compared to the prior year period, which was offset by a
decline in the mens and juniors lines, specifically in jeanswear sales, for the
reasons explained. The first half of 1996 included $3,395 of sales to the CK
Outlet Stores, which were acquired by the Company in November 1996.
The Company recorded $17,416 of net revenues generated by the CK Outlet Stores
during the six months ended June 30, 1997.
Royalty income earned during the six months ended June 30, 1997 was
approximately $3,763, as compared to approximately $2,135 of royalty income
earned during the first half of 1996. This increase is due to the
above-mentioned reasons.
The Company anticipates that net sales of Calvin Klein Jeans and CK/Calvin Klein
Jeans Label products for 1997 will be below levels achieved during 1996 due to
an industry oversupply of product, a slower-than-expected retail market and
increased competition in the jeanswear business, and that this trend will
continue into 1998.
Gross Profit. Gross profit was $41,584 for the three months ended June 30, 1997,
an increase of $2,317 from the 1996 comparable quarter gross profit of $39,267.
The gross profit percentage was 39.9% for the 1997 quarter, an increase from
37.4% in the 1996 quarter. The gross profit percentage on the sale of Calvin
Klein Jeans Label products was 39.7% for the 1997 quarter, compared to 37.3% in
the 1996 quarter. This increase in gross profit percentage is driven by (i) the
elimination from the 1997 second quarter of jeanswear sales to certain specialty
stores which were at a lower margin (ii) overall sourcing efficiencies,
including those generated by an internal sourcing agent located in Hong Kong,
which began during the first quarter of 1997, and (iii) higher royalty income
earned in the 1997 quarter compared to the 1996 quarter.
The CK Outlet Stores generated gross profit of approximately $3,912, or 39.1% of
related net sales, during the 1997 quarter.
Gross profit was $88,561 during the six months ended June 30, 1997, an increase
of $5,479 from the first half of 1996 gross profit of $83,082. Gross profit
percentage improved to 39.0% in the first half of 1997, compared to 37.8%
recorded for the first half of 1996. The gross profit percentage on the sale of
Calvin Klein Jeans Label products was 38.7% for the first half of 1997, compared
to 37.8% during the first half of 1996, which improvement was due to the
above-mentioned reasons.
The CK Outlet Stores generated gross profit of approximately $6,883, or 39.5% of
related net sales, during the first half of 1997.
The Company anticipates that for the remainder of 1997, the gross profit
percentage will decrease from levels achieved during the first half of 1997. The
Company will be selling at a lower margin in order to decrease inventory levels
which have grown due to lower than anticipated sales caused by industry
oversupply, a slower than expected retail market and increased competition for
jeanswear products. During 1998, the Company expects its gross profit percentage
to increase over 1997 levels.
Selling, general and administrative. Selling, general and administrative
("SG&A") expenses were $34,206 or 32.8% of net revenues for the three months
ended June 30, 1997, an increase of $6,268 from $27,938 or 26.6% of net revenues
for the three months ended June 30, 1996. SG&A expenses related to the sale of
Calvin Klein Jeans Label products were $29,320, or 31.2% of related net revenues
for the 1997 quarter, compared with $27,237, or 26.2% of related net revenues
for the comparable 1996 quarter. The increased SG&A expenses related to the
Calvin Klein Jeans label products in the 1997 quarter, as compared to the 1996
quarter, are attributable to costs
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<PAGE> 11
associated with the installation and operation of the shop-in-shops in
department stores, increased distribution costs, and general increased costs
necessary to support the business.
The CK Outlet Stores incurred approximately $4,316 of SG&A expenses for the
three months ended June 30, 1997, which represented approximately 43.1% of net
sales contributed by that company. The Company anticipates that SG&A expenses
for the CK Outlet Stores will remain at this level in the foreseeable future, as
the Company opens additional CK Outlet Stores and incurs related start-up costs.
As the Company realizes sales growth from its investment, it anticipates that
its SG&A expenses related to the CK Outlet Stores, as a percentage of net sales,
will decrease.
Selling, general and administrative ("SG&A") expenses were $67,794 or 29.9% of
net revenues for the six months ended June 30, 1997, an increase of $12,709 from
$55,085 or 25.1% of net revenues for the six months ended June 30, 1996. SG&A
expenses related to the sale of Calvin Klein Jeans Label products were $59,996,
or 28.8% of net revenues for the first half of 1997, compared with $53,279, or
24.4% of net revenues for the comparable 1996 quarter. The increased SG&A
expenses related to the Calvin Klein Jeans label products in the first half of
1997, as compared to the 1996 comparable period, are attributable to the reasons
discussed above.
The CK Outlet Stores incurred approximately $7,517 of SG&A expenses for the six
months ended June 30, 1997, which represented approximately 43.2% of net sales
contributed by that company.
Offsetting the increase in SG&A expenses is $885 representing the recovery of
start-up costs related to the license agreement with Donna Karan International,
which costs were recorded during the fourth quarter of 1996. On March 5, 1997,
the license was terminated by mutual agreement and the Company was reimbursed
for all expenses incurred in connection with the start-up of that business.
The Company expects that during the second half of 1997, it will continue to
incur costs related to a shop-in-shop maintenance program, a retail store
specialist program and the introduction of a new shop-in-shop design. In an
effort to improve its business, the Company expects to implement a series of
cost-cutting measures, which include generating additional efficiencies within
the transportation, distribution and production areas, and expects to reduce
certain other SG&A expenses, including head count, to reflect the lower sales
levels and become more efficient. The Company believes that during 1998, SG&A
expenses in dollars will decrease over 1997 levels, due to certain cost-cutting
measures. However, it is expected that during 1998, SG&A expenses as a
percentage of net sales will increase over 1997 levels due to its anticipated
lower sales levels, as previously discussed.
Interest expense, net. Interest expense for the three months ended June 30, 1997
was $1,315, as compared to $3,110 for the three months ended June 30, 1996. This
decrease 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 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, and the absence of any borrowings under the
revolving credit facility during the three months ended June 30, 1997.
Interest expense for the six months ended June 30, 1997 was $2,093, as compared
to $7,635 for the six months ended June 30, 1996. This decrease in interest
expense is due to the reasons described above and the reversal of $877 of
imputed interest related to the non-interest bearing licensing rights payable
recorded pursuant to the license agreement with Donna Karan International. The
license agreement was terminated by mutual agreement on March 5, 1997.
Provision for income taxes. The provision for income taxes was $2,485 or 41.0%
of pre-tax income for the three months ended June 30, 1997, as compared to
$3,781 or 46.0% of pre-tax income for the three months ended June 30, 1996. The
provision for income taxes was $7,656 or 41.0% for the first half of 1997, as
compared to $9,367 or 46.0% for the first half of 1996. The lower effective tax
rate in 1997, as compared to 1996, is principally attributable to lower state
and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's infrastructure will be maintained through continued investments in
working capital (primarily receivables and inventory), capital expenditures,
costs related to continued upgrading of distribution and management information
systems and costs related to the shop-in-shop program (including the
introduction of a new shop-in-shop design concept in certain of it's
top-performing department store doors). In addition, the
11
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Company will require funds for the opening of additional CK Outlet Stores. The
Company expects to implement a series of improvements which would strengthen its
long-term operations, generate efficiencies in transportation, distribution and
production, and reduce other SG&A expenses, including headcount.
The Company's current credit agreement (the "Credit Agreement") provides the
Company with a revolving credit facility for the issuance of loans and letters
of credit up to $150,000, 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 At June 30, 1997, there were no
amounts outstanding under the Credit Agreement, except for $20,299 for open
letters of credit.
On April 16, 1997, the Company signed a commitment letter with a new lender for
a $200,000 credit facility (the "New Credit Facility"),as amended, for 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 Company has recently
reevaluated its financing needs and has lowered the aggregate revolving credit
facility requested to $150,000. The New Credit Facility will expire on the fifth
anniversary of the closing date thereof. 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 Company expects to
close on the New Credit Facility in the third quarter of 1997. The New Credit
Facility will replace the Company's existing $150,000 revolving credit facility.
The Company currently finances 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 six months ended June 30, 1997 and 1996, the Company generated cash
from operating activities of $27,720 and used cash in operating activities of
$8,677, respectively. The 1997 period reflects an improved working capital
position, primarily due to the lack of short-term bank debt and a cash balance
from the proceeds of the offering of Preferred Securities.
Net cash used in investing activities during the six months ended June 30, 1997
and 1996 was $5,887 and $2,657, respectively. The increase in investing
activities consisted primarily of capital expenditures for equipment for
distribution facilities and leasehold improvements, the final payment for the
purchase of the CK Outlet Stores and a deposit related to an acquisition
opportunity. As previously stated, the Company continues to pursue acquisitions.
In the first quarter of 1997, a refundable deposit was made in connection with
one such opportunity. However, there can be no assurance that this transaction
or any other transaction under consideration will materialize. These 1997
expenditures were offset by the reimbursement from Donna Karan International
Inc. of the initial license payment made in 1996 of $6,000.
During the six months ended June 30, 1997, the Company used approximately $128
in financing activities, which consisted of costs related to the issuance of the
Preferred Securities. Net cash provided by financing activities during the six
months ended June 30, 1996 was $11,334, 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.
The Company believes that its sources of financing, including the borrowings
available under the existing revolving credit facility or the New Credit
Facility , are adequate to fund its current level of operations and its expected
growth through 1998. The Company installed approximately 100 Calvin Klein Jeans
Label shop-in-shops during the first half of 1997, and currently plans to
install approximately 75-100 additional shop-in-shops, all at an estimated
aggregate cost of approximately $7,000. The Company also expects to incur
capital expenditures for opening additional CK Outlet Stores of approximately
$5,000 during 1997, as well as additional general 1997 capital expenditures of
approximately $5,000. Furthermore, the Company will require funds to complete
any future acquisitions. These costs will be funded from cash flows generated
from operations or from borrowings under a credit agreement.
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Incorporated by reference to Note 7 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
None.
(b). Reports on Form 8-K
None.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Designer Holdings Ltd.
Date: August 14, 1997 By: /s/ MAURICE DICKSON
------------------------------------
Maurice Dickson
Executive Vice President, Treasurer and
Chief Financial Officer
14
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<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 63,100 63,100
<SECURITIES> 0 0
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<ALLOWANCES> (16,044) (16,044)
<INVENTORY> 98,334 98,334
<CURRENT-ASSETS> 284,179 284,179
<PP&E> 17,807 17,807
<DEPRECIATION> (3,573) (3,573)
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<BONDS> 120,000 120,000
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<OTHER-SE> 196,619 196,619
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<SALES> 102,378 223,092
<TOTAL-REVENUES> 104,347 226,855
<CGS> 62,763 138,294
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<INCOME-TAX> 2,485 7,656
<INCOME-CONTINUING> 3,578 11,018
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