CALVIN TRIES NEW TACK TO TERMINATE WARNACO CK JEANSWEAR LICENSE

Byline: Vicki M. Young

NEW YORK — Calvin Klein Inc. is trying to take its name back — again.
Just six days before the start of the blockbuster federal court jury trial on a trademark infringement suit between two high-powered apparel adversaries, Calvin Klein Inc. has unilaterally terminated Warnaco’s Calvin Klein jeanswear license.
CKI on Tuesday ended the CKI Jeanswear license operated by two Warnaco subsidiaries. In letters sent to Warnaco and the CKI subsidiaries, CKJ Holdings Inc. and Calvin Klein Jeanswear Co., CKI wrote that upon Tuesday’s termination, “all rights of CKJ Holdings as licensee ‘terminate and automatically revert’ to CKI….CKJ Holdings is to discontinue all use of the Calvin Klein licensed marks and deliver to CKI or destroy all materials used in connection with the licensed marks or products which bear the licensed marks.” CKI concurrently filed court papers, termed a declaratory judgment, in state court in Manhattan asking the court to declare that CKI has the right to end the license.
CKI said in the letters that it was ending the license because of Warnaco’s alleged breach of a financial covenant. According to CKI, a provision in the jeanswear license requires that CKJ Holdings doesn’t exceed a 5-to-1 debt-equity ratio at the end of any fiscal quarter. Since Warnaco is CKJ’s parent, CKI is relying on Warnaco’s financial information as the basis for its termination of the license. According to CKI, it is also ending a related store license agreement between CKI and Outlet Holdings Inc.
Stanley Silverstein, general counsel for Warnaco, told WWD: “On Jan. 9, Calvin Klein Inc. sought to amend the existing action to raise these claims and was rebuffed by the federal court. They have now filed an action in state court alleging the same claims that were rejected by the court. We will defend this action with our usual vigor.”
For the quarter ended Sept. 30, CKI said that “Warnaco Group’s total debt as reflected in the financial statement’s presentation of Warnaco Group’s liabilities, including accounts payable and trade credit facility debt, exceeds Warnaco Group’s net worth by more than a 5-to-1 margin.”
As reported, CKI and Warnaco — as well as the companies’ chief executive officers Calvin Klein and Linda Wachner — are readying for Monday’s trial on the trademark infringement issue raised in the CKI lawsuit against Warnaco in May 2000, in which CKI sought to take back its jeanswear license. Next week’s trial also includes Warnaco’s counterclaims filed against CKI a month later, one of which involves a defamation action against the designer individually.
The Warnaco jeanswear license was a major sticking point when CKI was being shopped in financial and apparel circles last year.
At least one legal source cast doubt on whether CKI would achieve its goal. Joseph Dreitler, a partner in the intellectual property practice at Jones, Day, Reavis & Pogue in Ohio, said, “I have not seen the license, but this is clearly a food fight. CKI would like the [state court] judge to terminate the license. I don’t think it’s going to work that way. Unless Warnaco is not paying bills when they’re due, a judge will be reluctant to end a 40-year license negotiated in good faith.”
Of course, there’s also the upcoming federal trademark infringement trial, and the consideration of its possible impact on the state court action.
According to Dreitler: “You can expect CKI to [charge] in the trademark infringement trial that because of the way Warnaco is running the operation, there’s been a diminishing of the value of the brand. At some point, Warnaco’s financial status will come into play. A lot will depend on what is put into evidence. There could be an impact on the state court matter by the federal court trial. If CKI wins, the state court matter is irrelevant. If Warnaco wins, it could be interesting to see what specific issues are put to the jury that it will have to determine.”
Warnaco’s unaudited financial statements for the quarter ended Sept. 30 list long-term debt of $1.79 billion and shareholders’ equity of $348 million, a ratio of 5.15. By contrast, in the period ending at the end of June, debt was $1.35 billion, nearly $440 million less, while equity was listed as $480.3 million, giving the company a debt-to-equity ratio of 2.82.
Warnaco restructured its debt back in July when it reached an agreement with a group of banks — including The Bank of Nova Scotia, Salomon Smith Barney Inc., Citibank N.A., Morgan Guaranty Trust Co. of N.Y., Commerzbank A.G. and Societe Generale — to extend its credit facilities, providing an additional $500 million trade credit facility and $600 million bridge loan. While existing credit facilities were set to expire in July and October of last year, the new arrangements aren’t set to mature until August 2002.
While Warnaco noted that, once closed, the transactions would mean that the company “will have no material debt maturing prior to August 2002,” it moved the company’s debt numbers higher. Even before the extension of the existing credit facility, one analyst told WWD that the “gap in the debt-to-equity ratio is too big. The ratio is over 2 to 1.”
With that figure now more than 5-to-1, Warnaco had debt woes even before Calvin Klein’s termination action. The stock, which dropped nearly 27 percent to a 52-week low of $4.94 when news of the new credit facilities was accompanied by warnings of lower earnings and word of sharp cost-cutting, established another 52-week low on Dec. 20, when shares closed at $1.25. They’ve rebounded slightly since New Year’s Day and closed at $2.88 Tuesday.

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