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DESIGNER HOLDINGS LTD.
1385 BROADWAY
NEW YORK, NY 10018
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INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14f-1 THEREUNDER
------------------------
This Information Statement is being mailed on or about October 2, 1997 to
the holders of record of shares of common stock, par value $0.01 per share (the
"Shares"), of Designer Holdings Ltd., a Delaware corporation (the "Company").
You are receiving this Information Statement in connection with the possible
election of persons designated by The Warnaco Group, Inc., a Delaware
corporation ("Parent"), to a majority of the seats on the Board of Directors of
the Company (the "Company Board of Directors"). Such designation is being made
pursuant to an Agreement and Plan of Merger, dated as of September 25, 1997 (the
"Merger Agreement"), among Parent, WAC Acquisition Corporation ("Sub") and the
Company, pursuant to which Sub will be merged with and into the Company (the
"Merger"), with the Company as the surviving corporation in the Merger.
In connection with the Merger, Parent has entered into a Stock Exchange
Agreement, dated as of September 25, 1997 (the "Stock Exchange Agreement"), with
New Rio, L.L.C. (the "Stockholder") and the members of Stockholder signatory
thereto. Pursuant to the Stock Exchange Agreement, the Stockholder has agreed to
exchange all of its Shares in exchange for shares of Class A Common Stock, par
value $0.01 per share ("Parent Class A Common Stock"), of Parent (the
"Exchange"), at the rate of .324 of a share of Parent Class A Common Stock for
each Share exchanged (the "Exchange Ratio"), which Exchange Ratio is also the
exchange ratio for purposes of the Merger. The Stockholder is the record owner
of 16,483,868 Shares, representing approximately 51.3% of the outstanding
Shares. Upon consummation of the Exchange, Parent is entitled to designate, at
its option, upon notice to the Company, up to that number of directors, rounded
up to the nearer whole number, as will make the percentage of the Company's
directors designated by Parent equal to the greater of (i) the majority of the
Company Board of Directors and (ii) the aggregate voting power of the Shares
held by Parent or any of its subsidiaries as a percentage of the total voting
power outstanding. Parent will determine for the approval of the Company Board
of Directors the classes into which such directors are placed, so long as such
placement does not violate or conflict with the Company's Certificate of
Incorporation or By-laws or the General Corporation Law of the State of
Delaware, and the Company will cause Parent's designees to be so placed.
In the event that Parent's designees are elected or appointed to the
Company Board of Directors, the Company Board of Directors will be required to
have, until the effective time of the Merger, at least one director who was a
director of the Company prior to the closing of the Exchange (the "Continuing
Director"); provided, however, that if no Continuing Director remains, the other
directors may designate an individual to fill such vacancy who will not be an
officer, director, employee or affiliate of Parent or any of its affiliates and
will otherwise be an "independent director" under the rules of the New York
Stock Exchange (such designee to be deemed to be a Continuing Director for
purposes of the Merger Agreement). In connection with the foregoing, the Company
will promptly either increase the size of the Company Board of Directors and/or
obtain the resignation of such number of its current directors as is necessary
to enable Parent's designees to be elected or appointed to the Company Board of
Directors as provided above, and will cause the appointment of
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Parent's designees to fill such vacancies or newly created directorships
effective upon the closing of the Exchange. Following the election or
appointment of Parent's designees and prior to the effective time of the Merger,
any termination or amendment of the Merger Agreement by the Company, any
extension by the Company of time for the performance of any of the obligations
or other acts of Parent or waiver or assertion of any of the Company's rights
pursuant to the Merger Agreement will require the concurrence of a majority of
the Continuing Directors. It is currently anticipated that Merril M. Halpern,
Peter Damon Brown and Arnold H. Simon will serve as the Continuing Directors.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action.
The following information is based on the Company's Proxy Statement dated
April 17, 1997, and, except as indicated, such information is given as of such
date.
The information contained in this Information Statement or incorporated by
reference herein concerning the Parent or Sub or their respective officers,
directors, representatives or affiliates or actions or events with respect to
any of them was provided by the Parent or the Sub, respectively, and the Company
takes no responsibility for such information. The principal executive offices of
the Parent and Sub are at 90 Park Avenue, New York, NY 10016.
INFORMATION WITH RESPECT TO THE COMPANY
OUTSTANDING VOTING STOCK
As of September 25, 1997, there were 32,139,334 Shares issued and
outstanding. Each issued and outstanding Share has one vote.
PARENT'S DESIGNEES
The Parent has designated the following individuals to serve on the Company
Board of Directors. Each of such designees has consented to serve or continue to
serve as a Director of the Company. Set forth below are the name, age, present
principal occupation or employment and five-year employment history of each of
the Parent's designees at September 25, 1997.
MRS. LINDA J. WACHNER, 51, has been a director, President and Chief
Executive Officer of Parent since August 1987, and the Chairman of the Board of
Parent since August 1991. Mrs. Wachner was a director and President of Parent
from March 1986 to August 1987. Mrs. Wachner has been Chairman and Chief
Executive Officer of Authentic Fitness Corporation since May 1990. Mrs. Wachner
held various positions, including President and Chief Executive Officer, with
Max Factor and Company from December 1978 to October 1994. Mrs. Wachner also
serves as a director of Travelers Group Inc., the New York Stock Exchange, Inc.,
Applied Graphics Technologies, Inc. and Authentic Fitness Corporation and as a
member of The Board of Overseers of Memorial Sloan-Kettering Cancer Center.
MR. WILLIAM S. FINKELSTEIN, 48, has been Senior Vice President of Parent
since May 1992 and Chief Financial Officer and a director of Parent since May
1995. Mr. Finkelstein served as Vice President and Controller of Parent from
November 1988 until his appointment as Senior Vice President. Mr. Finkelstein
served as Vice President of Finance of Parent's Activewear and Olga Divisions
from March 1988 until his appointment as Controller of Parent. Mr. Finkelstein
served as Vice President and Controller of SPI Pharmaceuticals Inc. from
February 1986 to March 1988 and held various financial positions, including
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Assistant Corporate Controller with Max Factor and Company, between 1977 and
1985. Mr. Finkelstein also serves as a director of Authentic Fitness
Corporation.
MR. JOSEPH A. CALIFANO, Jr., 65, has been a director of Parent since March
1992. Mr. Califano is Chairman and President of The National Center on Addiction
and Substance Abuse at Columbia University. He is a Director of Authentic
Fitness Corporation, Automatic Data Processing, Inc., Chrysler Corporation,
Kmart Corporation, New York/New England Telephone Companies and Travelers Group
Inc. Mr. Califano is a Trustee of New York University and the Twentieth Century
Fund, a governor of New York Hospital and a director of the New York and
Presbyterian Hospitals, Inc. He serves a Chairman of the Board of the Institute
for Social and Economic Policy in the Middle East at the Kennedy School of
Government at Harvard University and as a member of the governing council of the
Institute of Medicine of the National Academy of Sciences. Mr. Califano served
as Secretary of the United States Department of Health, Education, and Welfare
from 1977 to 1979. He was Special Assistant for Domestic Affairs to the
president of the United States from 1965 to 1969. He is the author of nine
books.
MR. ANDREW G. GALEF, 64, has been a director of Parent since March 1986,
and served as Chairman of the Board of Directors of Parent until August 1991.
Mr. Galef has been Chairman and a principal of The Spectrum Group, Inc., a
private investment and management firm, since its incorporation in California in
1978. Mr. Galef has been the Chairman of the Board of MagneTek, Inc., an
electrical products manufacturer, since July 1984. Mr. Galef served as the
Chairman of the Board of Exide Corporation, a maker of industrial, commercial
and automotive batteries, from July 1982 until June 1989. Mr. Galef has served
as a director of Petco Animal Supplies, a retail animal food and supplies
company, since 1988. Mr. Galef served as the Chairman of the Board of Avaiall,
Inc., an aviation support and aircraft parts distribution company, and its
predecessor company, from 1979 to 1985.
Parent has advised the Company that, to the best of its knowledge, none of
Parent's designees (i) is currently a director of, or holds any position with,
the Company, (ii) has a family relationship with any of the directors or
executive officers of the Company or (iii) beneficially owns any securities (or
rights to acquire any securities) of the Company. The Company has further been
advised by Parent, that, to the best of Parent's knowledge, none of Parent's
designees has been involved in any transactions, or has any business
relationships, with the Company or any of its directors, executive officers or
affiliates of the type required to be disclosed pursuant to Rule 14f-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
COMPANY BOARD OF DIRECTORS
The Company Board of Directors currently consists of five directors,
divided into three classes, with one vacancy in the term expiring in 2000. 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 exact number of
directors is determined from time to time by a majority of directors then in
office, but may not be less than five nor more than fifteen.
Set forth below are the name, age, present principal occupation or
employment and five-year employment history of each of the members of the
Company Board of Directors at September 25, 1997.
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DIRECTORS WHOSE TERMS EXPIRE IN 1998 (CLASS II DIRECTORS)
MR. PETER DAMON BROWN, 49, has been a director of the Company since July
1996. He has been President of South Beach Co., Inc., a consulting firm, since
1989, Vice President and Secretary of Gordon & Ferguson, an outerwear
manufacturer, since 1987 and Chief Executive Officer of Heather Hill Sportswear,
a manufacturer of moderately-priced mens and boys sportswear, since 1974. It is
currently anticipated that Mr. Brown will be a Continuing Director.
MS. DEBRA SIMON, 41, has been Executive Vice President and a director of
the Company since March 1994, and Vice President of Rio Sportswear since 1985.
Ms. Simon is married to Arnold H. Simon.
DIRECTORS WHOSE TERMS EXPIRE IN 1999 (CLASS III DIRECTORS)
MR. MERRIL M. HALPERN, 63, has been a director of the Company since March
1994. Since October 1984, Mr. Halpern has served as Chairman of the Board and
Chief Executive Officer 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 Insignia Financial Group,
Inc., Microwave Power Devices, Inc., and American Disposal Services, Inc. It is
currently anticipated that Mr. Halpern will be a Continuing Director.
MR. ARNOLD H. SIMON, 51, has been President of Rio Sportswear since 1984,
and Chief Executive Officer, President and a director of the Company since it
was founded in 1994. Mr. Simon is married to Debra Simon. It is currently
anticipated that Mr. Simon will be a Continuing Director.
DIRECTOR WHOSE TERM EXPIRES IN 2000 (CLASS I DIRECTOR)
MR. A. LAWRENCE FAGAN, 68, has been a director of the Company since March
1994. He has been President of Charterhouse Group since January 1997. Prior to
that time, he was 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 Group, he
held various corporate executive and investment banking positions. He is a
director of Microwave Power Devices, Inc. and American Disposal Services, Inc.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the name, age, present principal occupation or
employment and five-year employment history of each of the executive officers of
the Company, other than Mr. Halpern, Mr. Simon and Ms. Simon (whose information
is set forth above), at September 25, 1997.
MR. MAURICE DICKSON, 52, has been Executive Vice President and Chief
Financial Officer of the Company since September 1, 1995. From 1981 to 1995, Mr.
Dickson served as Chief Financial Officer of Ellen Tracy, Inc.
MR. DANIEL GLADSTONE, 41, 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
Calvin Klein Inc.'s ("CKI's") Womens Sportswear Division and CKI's Womens
Division. From 1992 to July 1994, Mr. Gladstone served as President of CKI's
Mens Division.
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MR. DAVID FIDLON, 55, has been Senior Vice President and Controller of the
Company since June 1995 and has been Chief Accounting Officer of the Company
since January 1996. Prior to joining the Company, Mr. Fidlon served as Director
of Compliance and Financial Reporting for Ellen Tracy, Inc. from July 1994 to
June 1995, and as Senior Manager and Audit Compliance Manager at Weidenbaum
Ryder & Co. Accountants & Auditors from 1989 to June 1994.
MR. JAMES BLOISE, 53, has been the Chief Operating Officer of the Company
since October 1996. Prior to that time, Mr. Bloise was the Senior Vice President
of Operations of Leslie Fay Companies, Inc.
MR. JOHN J. JONES, 30, has served as Vice President, General Counsel and
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 LLP, beginning in 1991.
BOARD OF DIRECTORS AND COMMITTEES
The Company Board of Directors held nine meetings in fiscal year 1996. Each
director attended more than 75% of the total number of Board Meetings and
meetings of Board committees on which such Director served. The Company Board of
Directors currently has two standing committees: Audit and Compensation. The
membership and functions of the two standing committees of the Company Board of
Directors are as follows:
AUDIT COMMITTEE
The Audit Committee has responsibility for reviewing the financial controls
of the Company. The Audit Committee's responsibilities include (i) making
recommendations to the Company Board of Directors with respect to the Company's
financial statements and the appointment of independent auditors, (ii) reviewing
significant audit and accounting policies and practices of the Company, (iii)
meeting with the Company's independent public accountants concerning, among
other things, the scope of audits and reports and (iv) reviewing the performance
of overall accounting and financial controls of the Company. As a result of the
untimely death of Mr. Frederick W. Zuckerman on September 19, 1997, the sole
member of the Audit Committee is A. Lawrence Fagan. The Audit Committee met once
during the 1996 fiscal year.
COMPENSATION COMMITTEE
The Compensation Committee reviews the performance of certain executive
officers of the Company and recommends to the Company Board of Directors annual
salary and bonus amounts for those directors and officers. As a result of the
death of Mr. Zuckerman, the sole member of the Compensation Committee is Peter
Damon Brown. The Compensation Committee met once during the 1996 fiscal year.
COMPENSATION OF DIRECTORS
Directors of the Company who are not also employed by or otherwise
affiliated with the Company receive fees of $5,000 as annual compensation,
$5,000 for each regular and special meeting of the Company Board of Directors
attended and $3,000 for each committee meeting attended (if held on a different
day than meetings of the full Company 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
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eligible to receive stock options pursuant to the Company's 1996 Outside
Director Stock Option Plan. On July 16, 1996, Messrs. Brown and Zuckerman were
each granted options to purchase 5,000 Shares at $16 1/2 per share, the fair
market value of the Shares on that date, and on May 20, 1997, Messrs. Brown and
Zuckerman were each granted options to purchase 3,000 Shares at $9 1/8 per
share, the fair market value of the Shares on that date. The Company engaged Mr.
Brown as a consultant to provide management services to the Company for a period
of six months beginning on August 5, 1997. In connection with such engagement,
on August 5, 1997, the Company Board of Directors granted to Mr. Brown
non-qualified stock options to purchase 250,000 Shares under the Company's 1996
Stock Option and Incentive Plan, at an exercise price of $5 15/16 per share, the
fair market value of the Shares on that date, which options are fully vested,
and agreed to pay Mr. Brown $250,000 for such services.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information regarding
the annual and long-term compensation awarded or earned during the last two
fiscal years by those persons who were, for the fiscal years ended December 31,
1996 and 1995, respectively, the Chief Executive Officer and the four other most
highly compensated executive officers of the Company (the "Named Executive
Officers").
SUMMARY OF COMPENSATION OF CERTAIN EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------
AWARDS
-----------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
----------------------- OTHER ANNUAL STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) AWARDS($) (#) COMPENSATION($)
- --------------------------- ---- ---------- ---------- ------------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arnold H. Simon............ 1996 $1,500,000 $ 117,190 $172,206 N/A -- --
President and Chief 1995 $1,000,000 $3,350,000 -- -- --
Executive Officer
Maurice Dickson............ 1996 $ 450,000 $ 257,163 -- N/A 250,000 --
Executive Vice President 1995 $ 300,000 $ 50,000 -- -- --
and Chief Financial
Officer
Daniel J. Gladstone........ 1996 $ 450,000 $ 550,000 -- N/A 200,000 --
Executive Vice President 1995 $ 350,000 $1,208,862 -- -- --
and President, Calvin
Klein Jeanswear Company
Debra Simon................ 1996 $ 450,000 $ 90,000 -- N/A -- --
Executive Vice President 1995 $ 400,000 $ 50,000 -- -- --
David Fidlon............... 1996 $ 225,000 $ 154,298 -- N/A 150,000 --
Senior Vice President, 1995 $ 150,000 -- -- -- --
Controller and Chief
Accounting Officer
</TABLE>
- ---------------
(1) Pursuant to his employment agreement, Mr. Simon receives certain benefits,
including life and disability insurance and reimbursement for certain legal
fees. While each of the four other 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 by the Company since September 1995. The
amounts shown in these columns for 1995 were the annual salary and bonus
provided 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 for 1995 were the annual salary and bonus that the
Company agreed to pay to Mr. Fidlon. For 1995, Mr. Fidlon's total
compensation was $81,693.
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STOCK OPTION GRANTS
The following table shows the number of Shares underlying the stock options
granted in fiscal year 1996 to each of the Named Executive Officers, the
percentage of total options granted which each executive's stock option grant
represents, and the exercise price and expiration date of each option granted.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
AT ASSUMED
PERCENT OF ANNUAL RATES OF
TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED OPTION TERM
UNDERLYING IN FISCAL EXERCISE EXPIRATION ----------------
NAME OPTIONS YEAR PRICE(3) DATE 5%(1) 10%(2)
- --------------------------------------- ---------- ----------- -------- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Maurice Dickson........................ 250,000 15.9 $ 18 05/09/06 $ 0 $320,000
Daniel J. Gladstone.................... 200,000 12.7 $ 18 05/09/06 $ 0 $256,000
David Fidlon........................... 150,000 9.5 $ 18 05/09/06 $ 0 $192,000
</TABLE>
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(1) Represents the potential appreciation of the options, determined by assuming
an annual compounded rate of appreciation of 5% per year over the ten-year
term of the grants, as prescribed by applicable rules. The amount set forth
above is not intended to forecast future appreciation, if any, of the stock
price. There can be no assurance that the appreciation reflected in this
table will be achieved.
(2) Represents the potential appreciation of the options, determined by assuming
an annual compounded rate of appreciation of 10% per year over the ten-year
term of the grants, as prescribed by applicable rules. The amount set forth
above is not intended to forecast future appreciation, if any, of the stock
price. There can be no assurance that the appreciation reflected in this
table will be achieved.
(3) Because the exercise price of each of these options exceeds the value, at
the time of entering into the Merger Agreement, of .324 of a share of Parent
Class A Common Stock, these options (and any other options with an exercise
price in excess of such value) will be cancelled in connection with the
Merger.
STOCK OPTION EXERCISES
The following table shows the number and value of stock options exercised
by each of the Named Executive Officers during fiscal year 1996, the number of
all vested (exercisable) and unvested (not yet exercisable) stock options held
by each such officer at the end of fiscal year 1996, and the value of all such
options that were "in the money" (i.e., where the market price of the Shares was
greater than the exercise price of the options) at the end of fiscal year 1996.
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AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996(1)
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS(2)
OPTIONS AT END OF AT THE END OF
FISCAL YEAR 1996 FISCAL YEAR 1996
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Maurice Dickson......................................... 0/250,000 $0/0
Daniel J. Gladstone..................................... 66,667/133,333 $0/0
David Fidlon............................................ 0/150,000 $0/0
</TABLE>
- ---------------
(1) There were no options exercised during 1996.
(2) The fair market value (average of the high and low) of the underlying Shares
at December 31, 1996 was below the exercise price of all options.
EMPLOYMENT AGREEMENTS
Arnold Simon. The Company has an employment agreement with Mr. Simon (the
"Simon Employment Agreement"). The Simon Employment Agreement, which expires on
December 31, 1998, provides for Mr. Simon to be the 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 for his receipt of an
annual cash bonus with respect to 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 Mr. Simon will receive an annual cash bonus based on
specific increases in Adjusted EBITDA ranging from 2 1/2% to 4% of all Adjusted
EBITDA in the applicable year. The Simon Employment Agreement also provides that
Mr. Simon is entitled to certain other benefits, including life and disability
insurance, an automobile, financial consulting and an apartment. In addition,
Mr. Simon is 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 will be deemed to exist if, without his consent, (i) a
majority of Additional Board Members (as defined) consists 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
occurs (A) any liquidation of the Company or Calvin Klein Jeanswear Company, a
wholly owned subsidiary of the Company ("CKJC"), or the sale of substantially
all the assets of the Company and CKJC taken as a 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 Equity
Partners II, L.P. ("Charterhouse")), which is not an affiliate of the Company
shall own beneficially, 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 is 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
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respect to the 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, 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.
Mr. Simon has informed the Company that upon consummation of the Exchange
he intends to terminate the Simon Employment Agreement for Good Reason. However,
in connection with the execution of the Merger Agreement and the Stock Exchange
Agreement, on September 25, 1997, Mr. Simon entered into an agreement with
Parent pursuant to which Mr. Simon will be employed as President and Chief
Executive Officer of the Company for a two-year term, effective upon
consummation of the Exchange.
Maurice Dickson. The Company has an employment agreement with Mr. Dickson
(the "Dickson Employment Agreement"). The Dickson Employment Agreement, which
expires on August 15, 1998, provides for Mr. Dickson to be employed as Chief
Financial Officer of the Company, and, commencing as of January 1, 1997, to
receive an annual base salary of $490,000, an annual bonus based upon on 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. The Company has an employment agreement with Mr.
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 Executive Vice President of
the Company and, commencing as of January 1, 1996, to receive an annual base
salary of $450,000, an annual bonus based upon the Company's performance, and
certain other benefits. Mr. Gladstone's agreement has been renewed for an
additional year on the same terms, except that his bonus criteria are to be
renegotiated and his salary for 1998 will be $495,000. If Mr. Gladstone does not
agree with the bonus calculation, he may voluntarily terminate his employment,
and in such case he is entitled to a severance payment in the amount of six
months' salary and benefits to be paid in accordance with the Company's normal
payroll practices.
Debra Simon. The Company has an employment agreement with Ms. Simon, which
expires on December 31, 1998, and provides for Ms. Simon to be employed as
Executive Vice President of the Company at an annual salary of $450,000 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(st) prior to the renewal year.
David Fidlon. The Company has an employment agreement with Mr. Fidlon (the
"Fidlon Employment Agreement") which expires on June 12, 1998. The Fidlon
Employment Agreement provides for Mr. Fidlon to be employed as Senior Vice
President and Controller of the Company and to receive an annual base salary,
commencing as of January 1, 1997, of $325,000, an 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.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during fiscal year 1996 were
Messrs. Brown and Zuckerman, neither of whom was an employee of the Company
during such period. The Company engaged Mr. Brown as a consultant to provide
management services to the Company for a period of six months beginning on
August 5, 1997. In connection with such engagement, on August 5, 1997, the
Company Board of Directors granted to Mr. Brown non-qualified stock options to
purchase 250,000 Shares under the Company's 1996 Stock Option and Incentive
Plan, at an exercise price of $5 15/16 per share, the fair market value of the
Shares on that date, which options are fully vested, and agreed to pay Mr. Brown
$250,000 for such services. See "Compensation of Directors."
1996 REPORT ON EXECUTIVE COMPENSATION
BY THE COMPENSATION COMMITTEE
COMPENSATION PHILOSOPHY
The Company's executive compensation program is designed to attract and
retain top quality executives and to provide them with both an incentive and
reward for superior performance. The program includes three principal
components -- base salary, cash bonus opportunities and stock options. Members
of the Compensation Committee are outside directors who are not employees of the
Company. The Compensation Committee believes that during 1996 no executive
officer of the Company received compensation in excess of competitive rates for
similarly situated executive officers. The Company's program is based on the
belief that the interests of the employees should be closely aligned with those
of the Company's stockholders. To support this philosophy, the following
principles provide a framework for the compensation program:
-- Offer compensation opportunities that attract the best talent to
the Company; motivate individuals to perform at their highest levels;
reward outstanding achievement; and retain the leadership and skills
necessary for building long-term stockholder value;
-- Maintain a portion of total compensation at risk, tied both to
meeting strategic objectives of the Company, as well as to meeting
individual performance objectives; and
-- Encourage individuals to manage from the perspective of owners of
the Company.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Compensation Committee recommends the total cash compensation of Mr.
Simon, which must be approved by the full Company Board of Directors. During
1996, Mr. Simon's compensation was determined based upon the salary and bonus
set forth in the Simon Employment Agreement, which includes a targeted level of
EBITDA. In determining the amount of each item of compensation, including the
perquisites set forth in the Simon Employment Agreement, the Board reviews
Company performance factors, including net revenues, operating earnings, net
income and net profit margin, and performance is measured in terms of both
qualitative and quantitative goals at the corporate level. The Compensation
Committee believes that Mr. Simon's contributions to the Company during 1996
amply justified his compensation.
COMPONENTS OF EXECUTIVE COMPENSATION
The components of executive compensation are as follows:
Salary. The annual base salaries of the executive officers of the Company
are based on the recommendation of Mr. Simon, with final approval by the
Compensation Committee. Salary increases are granted from time to time based on
individual performance, the financial performance of the Company, the
reasonableness of the compensation relative to the industry and the Company's
ability to pay such increases.
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<PAGE> 11
Cash Bonus. The annual cash bonus for certain executive officers is based
on annual performance goals. For 1996, the performance goals for Messrs. Simon,
Dickson and Fidlon were target levels of EBITDA. The performance goal for Mr.
Gladstone was a target level of sales. The annual cash bonus for other executive
officers is determined in an annual review by Mr. Simon and the Compensation
Committee and is based upon the financial performance of the Company, the
individual performance of such officers and the reasonableness of the
compensation relative to the industry. The determination of the bonuses of such
senior executives is based upon the recommendation of Mr. Simon, with final
approval by the Compensation Committee.
Stock Options. The Compensation Committee believes that stock options are
an appropriate vehicle to link employees' interests in the Company with those of
the Company's stockholders. Stock option awards are designed primarily to
provide strong incentives for superior longer-term performance and continued
employment with the Company. Because it is believed that corporate performance
is one of the principal factors influencing the market value of the Shares, the
granting of stock options to executive officers encourages them to work to
achieve consistent improvements in corporate performance. Options generally have
a life of ten years, vest over three years, and have an exercise price equal to
the fair market value of the Shares on the date of grant. Also, the
exercisability of stock options is conditioned upon the employee's continued
employment with the Company; thus, unexercised stock options are forfeited
within a designated period of time following the executive officer's leaving the
Company. The stock option awards granted to employees in 1996 were set by taking
into account an individual's level of responsibility and achievement. The
determination of stock option awards is based upon the recommendation of Mr.
Simon, with final approval by the Compensation Committee.
In determining the salary, bonus and stock options to pay and/or award to
executive officers, Mr. Simon and the Compensation Committee review certain
Company performance factors, including net revenues, operating earnings, net
income and net profit margin. Performance is measured in terms of both
quantitative and qualitative goals at the corporate, departmental and individual
levels, with equal weight placed on corporate, departmental and individual
goals. Cash bonuses and stock option grants are discretionary, based upon review
of such factors, except where bonuses are provided for in employment agreements
as stated above. Mr. Simon and the Compensation Committee consider an executive
officer's existing stock options in determining whether to award, and the size
of an award of, additional stock options.
Section 162(m) of the Internal Revenue Code. Section 162(m) of the
Internal Revenue Code generally disallows a tax deduction to public companies
for compensation in excess of $1 million paid to a Company's chief executive
officer and any one of the four other most highly paid executive officers during
its taxable year.
Qualifying performance-based compensation is not subject to the deduction
limit if certain requirements are met. The Section 162(m) limitation is not
applicable to Mr. Simon under the terms of his employment agreement. It does not
appear that the Section 162(m) limitation will have a significant impact on the
Company in the near term. However, the Compensation Committee plans to review
this matter periodically and take such actions as are necessary to comply with
Section 162(m) to avoid non-deductible compensation payments.
COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS OF
DESIGNER HOLDINGS LTD.
Peter Damon Brown
Frederick W. Zuckerman*
CHIEF EXECUTIVE OFFICER
Arnold H. Simon
- ---------------
*Passed away on September 19, 1997.
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PERFORMANCE GRAPH
The Performance Graph shown below compares the cumulative total shareholder
return on the Shares, based on the market price of the Shares, with the total
return of the S&P 500 Composite Stock Index and the S&P Textiles index. The
comparison of total return assumes that $100 was invested on May 9, 1996 (the
effective date of the Company's initial public offering) in the Shares, and in
each of the foregoing indices, and further assumes the reinvestment of
dividends. The stock price performance shown in the graph is not necessarily
indicative of future performance.
<TABLE>
<CAPTION>
Measurement Period S&P Textiles Designer Holdings
(Fiscal Year Covered) Index S&P 500 Ltd.
<S> <C> <C> <C>
5/9/96 100.00 100.00 100.00
12/31/96 117.38 114.77 89.58
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN INDEBTEDNESS OF MANAGEMENT
The Company advanced an aggregate of $1,961,436 to Mr. Simon as of August
31, 1997, in connection with his personal expenses. Mr. Simon has issued a
promissory note to the Company in connection with such advances, which note is
due and payable in full on December 31, 1997, and bears interest at 8.25%.
Accrued interest on the note through August 31, 1997 aggregated approximately
$195,639.
CERTAIN TRANSACTIONS WITH MANAGEMENT
The Company contracts for the services of temporary employees with Karlyn
Associates, a temporary recruiting agency located in New Jersey. The owner of
Karlyn is Mr. Dickson's wife. During 1996 the Company paid approximately
$298,000 to Karlyn for such services. The agency charges the Company rates which
are no greater than could be obtained in an arm's-length transaction.
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BENEFICIAL OWNERSHIP OF COMMON STOCK
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 25, 1997, the total number
of Shares beneficially owned, and the percentage so owned, by (i) each director
of the Company, (ii) each person who has an ownership interest in the
Stockholder, (iii) each person known to the Company to be the beneficial owner
of more than 5% of the outstanding Shares, (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
Stockholder is a limited liability company and is the record owner of the Shares
beneficially owned by the persons listed under its heading below. Its operative
agreement allows the holders of ownership interests therein generally to cause
the Stockholder to exercise disposition rights as directed by each such holder
independently with respect to such holder's allocable percentage of the Shares.
Therefore, such persons may be deemed to be the beneficial owners of Shares.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE
- --------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
NEW RIO, L.L.C.:
Charterhouse Equity Partners II, L.P.(2)........................... 8,033,800 25.0%
535 Madison Avenue
New York, NY 10022
Arnold H. Simon(1)................................................. 7,805,813 24.3%
1385 Broadway
New York, NY 10018
Martin L. Berman................................................... 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................................................ 16,483,868 51.3%
Calvin Klein, Inc.................................................. 1,275,466 4.0%
205 West 39th Street
New York, NY 10018
Merril M. Halpern(2)............................................... -- --
Debra Simon(3)..................................................... -- --
A. Lawrence Fagan(2)............................................... -- --
Maurice Dickson(4)................................................. 255,000 *
Daniel J. Gladstone(5)............................................. 205,000 *
David Fidlon(6).................................................... 153,000 *
James Bloise....................................................... 2,000 *
Peter Damon Brown(7)............................................... 263,000 *
Estate of Frederick W. Zuckerman(8)................................ 13,000 *
All executive officers and directors as a group (11
persons)(2)(9).................................................. 8,774,001 26.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 302,924 shares owned by AS Enterprises LLC, a company owned by
Arnold and Debra Simon.
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(2) Messrs. Halpern and Fagan are executive officers of Charterhouse Group,
which indirectly controls Charterhouse. Messrs. Halpern and Fagan may be
deemed to beneficially own the Shares beneficially owned by Charterhouse.
Messrs. Halpern and Fagan disclaim all such beneficial ownership.
(3) Ms. Simon is Mr. Simon's wife. See Mr. Simon's beneficial ownership above.
(4) Includes 250,000 Shares issuable upon exercise of options.
(5) Includes 200,000 Shares issuable upon exercise of options.
(6) Includes 150,000 Shares issuable upon exercise of options.
(7) Includes 258,000 Shares issuable upon exercise of options.
(8) Includes 8,000 Shares issuable upon exercise of options.
(9) Includes 937,466 Shares issuable upon exercise of options.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
officers to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of the Shares. Copies of all such
Section 16(a) reports are required to be furnished to the Company. These filing
requirements also apply to beneficial owners of more than 10% of the Shares. To
the Company's knowledge, based solely on review of the copies of Section 16(a)
reports furnished to the Company during the fiscal year ended December 31, 1996,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, all transactions were reported on a timely basis,
except that Messrs. Zuckerman and Brown, who became directors of the Company on
July 16, 1996, did not file an initial Form 3 until November 14 and 19, 1996,
respectively.
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