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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 APRIL 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10857
THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(212) 661-1300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
COPIES OF ALL COMMUNICATIONS TO:
THE WARNACO GROUP, INC.
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: VICE PRESIDENT AND 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.
[X] Yes [ ] No
The number of shares outstanding of the registrant's Class A Common Stock as of
May 12, 2000 is as follows: 53,243,388.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
APRIL 1, JANUARY 1,
2000 2000
------------ ----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 2,023 $ 9,328
Accounts receivable less reserves of $21,513 and $32,872,
respectively 342,995 314,961
Marketable securities 700 72,921
Inventories 734,705 734,439
Other current assets 70,748 66,015
----------- -----------
Total current assets 1,151,171 1,197,664
Property, plant and equipment (net of accumulated depreciation
of $167,424 and $152,946, respectively) 346,195 326,352
----------- -----------
Other assets:
Excess of cost over net assets acquired - net 837,573 842,262
Other assets - net 338,375 337,997
Deferred income taxes 68,737 58,710
----------- -----------
Total other assets 1,244,685 1,238,969
----------- -----------
$ 2,742,051 $ 2,762,985
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 11,554 $ 11,052
Short-term debt 160,966 133,752
Accounts payable 547,425 599,768
Accrued liabilities 109,550 111,262
Accrued income tax payable 16,700 16,217
Deferred income taxes 7,468 7,468
----------- -----------
Total current liabilities 853,663 879,519
----------- -----------
Long-term debt 1,179,264 1,187,951
----------- -----------
Other long-term liabilities 54,945 29,295
----------- -----------
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities ($120,000 -- par value) of Designer Finance Trust Holding
Solely Convertible Debentures 103,025 102,904
----------- -----------
Stockholders' equity:
Common stock: $.01 par value 654 654
Additional paid-in capital 961,368 961,368
Accumulated other comprehensive income (loss) (12,902) 24,877
Deficit (75,212) (99,461)
Treasury stock, at cost (313,138) (313,138)
Unearned stock compensation (9,616) (10,984)
----------- -----------
Total stockholders' equity 551,154 563,316
----------- -----------
$ 2,742,051 $ 2,762,985
=========== ===========
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
-2-
THE WARNACO GROUP, INC
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
--------------------------
APRIL 1, APRIL 3,
2000 1999
---------- ----------
(UNAUDITED)
Net revenues $ 606,988 $ 444,103
Cost of goods sold 425,418 290,014
--------- ---------
Gross profit 181,570 154,089
Selling, general and administrative expenses 138,238 101,874
Other operating expenses 6,547 -
--------- ---------
Operating income 36,785 52,215
Investment income (42,782) --
Interest expense 33,852 16,833
--------- ---------
Income before provision for income taxes 45,715 35,382
Provision for income taxes 17,143 12,490
--------- ---------
Net income $ 28,572 $ 22,892
========= =========
Basic earnings per common share $ 0.54 $ 0.39
========= =========
Diluted earnings per common share $ 0.53 $ 0.39
========= =========
Cash dividends declared per share of common stock $ 0.09 $ 0.09
========= =========
Shares used in computing earnings per share:
Basic 52,787 58,092
========= =========
Diluted 53,425 59,354
========= =========
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
-3-
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
-------------------------
APRIL 1, APRIL 3,
2000 1999
--------- ---------
(UNAUDITED)
Cash flow from operating activities:
Net income $ 28,572 $ 22,892
Adjustments to reconcile net income
to net cash from operating activities:
Pre-tax gain on sale of investment (42,782) -
Depreciation and amortization 23,055 13,785
Amortization of unearned stock compensation 1,368 1,431
Deferred income taxes 14,390 11,442
Change in operating assets and liabilities:
Accounts receivable (28,034) (62,801)
Inventories (266) (73,691)
Other current assets (3,861) (9,662)
Accounts payable and accrued liabilities (55,346) (30,529)
Accrued income taxes 483 119
--------- ---------
Net cash from operating activities (62,421) (127,014)
--------- ---------
Cash flow from investing activities:
Disposals of fixed assets 367 -
Purchase of property, plant & equipment (34,850) (1,765)
Proceeds from sale of marketable securities 50,357 -
Increase in intangible and other assets (3,997) (10,223)
--------- ---------
Net cash from investing activities 11,877 (11,988)
--------- ---------
Cash flow from financing activities:
Net borrowing under credit facilities 24,748 197,604
Proceeds from the exercise of stock options - 63
Proceeds from termination of interest rate swaps 26,076 -
Purchase of treasury shares - (38,917)
Repayments of debt (3,913) (3,500)
Cash dividends paid (4,791) (5,304)
Other (174) (453)
--------- ---------
Net cash from financing activities 41,946 149,493
--------- ---------
Effect on cash due to currency translation 1,293 (3,922)
--------- ---------
Increase (decrease) in cash (7,305) 6,569
Cash at beginning of period 9,328 9,495
--------- ---------
Cash at end of period $ 2,023 $ 16,064
========= =========
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
-4-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim financial
information. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, the accompanying
consolidated condensed financial statements contain all adjustments (all of
which were of a normal recurring nature) necessary to present fairly the
financial position of the Company as of April 1, 2000 as well as its results of
operations and cash flows for the periods ended April 1, 2000 and April 3, 1999.
Operating results for interim periods may not be indicative of results for the
full fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K/A for the fiscal year ended January 1, 2000. Certain amounts for prior
periods have been reclassified to be comparable with the current period
presentation.
Impact of New Accounting Standards: In March 2000, the Emerging Issues Task
Force issued Issue 00-7 "Accounting application of EITF Issue No. 96-13,
`Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock,' to Equity Derivative Transactions That
Require Net Cash Settlement If Certain Events Occur". This EITF will require the
Company to mark to market the Equity Forward Purchase Transaction Agreements
the ("Equity Agreements") entered into in the first quarter of fiscal 2000
unless the Company amends such agreements by December 31, 2000 to remove
provisions which require net cash settlement.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". In June 1999, the FASB issued SFAS 137
"Deferral of the effective date of FASB Statement No. 133" delaying the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000.
The Company is evaluating the application of the new statement and the impact
on the Company's consolidated financial position, liquidity, cash flows and
results of operations.
Long-term debt: As of April 1, 2000, the Company has excluded short-term
obligations totaling $483,008 from current liabilities because it intends to
refinance this obligation on a long-term basis. The Company has the ability to
consummate the refinancing by utilizing long-term commitments in place as of
April 1, 2000.
Other operating expense: In the first quarter of fiscal 2000, the Company
recorded severance costs of $6,547 related to cost saving initiatives and
programs involving 136 employees. The Company paid $3,894 in severance during
the first quarter and $2,653 was accrued at April 1, 2000 for remaining
severance obligations which are expected to be paid by the end of fiscal 2000.
NOTE 2 - EQUITY
As of April 1, 2000 and January 1, 2000, Class A common stock outstanding was
53,231,173 shares, net of 12,163,650 shares held in treasury and 53,229,388
shares, net of 12,163,650 held in treasury, respectively. The Company may
repurchase an additional 10.3 million shares under the existing stock repurchase
program.
-5-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
In connection with the Company's Stock Buyback Program, the Company entered into
Equity Agreements with two banks for terms of up to two and one-half years. The
Equity Agreements allow for the purchase by the Company of up to 5.2 million
shares of the Company's Common Stock. The Equity Agreements are required to be
settled by the Company, in a manner elected by the Company, on a physical
settlement, cash settlement or net share settlement basis within the duration
of the Equity Agreements. The Equity Agreements require net cash settlement in
an event of default, as defined. As of April 1, 2000, the banks had purchased
5.2 million shares under the Equity Agreements. As of April 1, 2000, the prices
at which the Company would effect physical settlement or settle in cash or in
net shares with the two banks under the Equity Agreements are $10.46 and $12.39.
Dividends on the shares outstanding under the Equity Agreements are reimbursed
to the Company. If these Equity Agreements were settled on a net cash basis at
April 1, 2000, the Company would be entitled to receive $2,000 based on
the closing price of the Company's stock.
NOTE 3 - RESTRUCTURING, SPECIAL CHARGES AND OTHER NON-RECURRING ITEMS
1998
As a result of a strategic review of the Company's businesses, manufacturing and
other facilities, product lines and styles and worldwide operations following
significant acquisitions in 1996 and 1997, in the fourth quarter of 1998 the
Company initiated the implementation of programs designed to streamline
operations and improve profitability. These programs resulted in charges
related to costs to exit certain product lines and styles, as well as facilities
and realignment of manufacturing and distribution activities, including charges
related to inventory write-downs and employee termination and severance
benefits. In the first quarter of fiscal 2000, the Company paid in cash the
remaining $337 reserve related to employee termination and severance.
NOTE 4 - FINANCIAL INSTRUMENTS
During 1998 and 1999, the Company invested $7,575 to acquire an interest in
InterWorld Corporation, a leading provider of E-Commerce software systems and
other applications for electronic commerce sites. In the first quarter of fiscal
2000 the Company sold its investment in InterWorld Corporation resulting in a
realized pre-tax gain of $42,782 ($25,862 net of taxes), which is recorded as
investment income.
In the first quarter of fiscal 2000, the Company received cash proceeds of
$26,076 from the termination of certain interest rate swaps. Three of these
swaps had converted variable rate borrowings of $610,000 to a fixed rate of
5.99% through September 2004 while a fourth swap had converted variable rate
borrowings of $75,000 to a fixed rate of 6.66% through September 2003. The
$26,076 gain from the termination of these swaps will be recognized in
interest income over the remaining life of the swaps.
The Company entered into five new interest rate swaps during the first quarter
of fiscal 2000 which convert variable rate borrowings of $637,000 to an
average fixed rate of 6.65% for periods ranging from nine to twelve months.
-6-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 5 - ACQUISITIONS
AUTHENTIC FITNESS CORPORATION
In December 1999, the Company acquired all of the outstanding common stock of
Authentic Fitness Corporation ("Authentic Fitness") for $437,100, excluding debt
assumed of approximately $154,170 and other costs incurred in the acquisition of
$3,255. The acquisition (all of which was financed) was accounted for as a
purchase. Accordingly, the accompanying consolidated financial statements
include the results of operations for Authentic Fitness commencing on December
16, 1999. The preliminary allocation of the total purchase price, exclusive of
cash acquired of approximately $7,000, to the fair value of the net assets
acquired and liabilities assumed is summarized as follows:
Fair value of assets acquired...........................$ 674,256
Liabilities assumed..................................... (79,731)
---------
Purchase price -- net of cash balances..................$ 594,525
=========
Included in intangible and other assets for the Authentic Fitness acquisition is
$372,700 of goodwill which is being amortized over 40 years. The final
assessment of the purchase accounting will be completed during fiscal 2000.
The following summarized unaudited pro forma information combines financial
information of the Company with Authentic Fitness for the three months ended
April 1, 2000 and April 3, 1999, respectively, assuming the acquisition had
occurred as January 2, 1999. The unaudited pro-forma information does not
reflect any cost savings or other benefits anticipated by the Company's
management as a result of the acquisition. The unaudited pro-forma information
reflects interest expense on the additional financing of $437,100 incurred for
the acquisition and the amortization of goodwill using a 40-year life.
For the Three Months Ended
-----------------------------
April 1, April 3,
2000 1999
------------- -------------
Statement of Income Data:
Net revenues $607.0 $586.7
Net income $ 28.6 $ 29.9
======= =======
Basic earnings per common share $ 0.54 $ 0.52
======= =======
Diluted earnings per common share $ 0.53 $ 0.50
======= =======
The unaudited pro-forma combined information is not necessarily indicative of
the results of operations of the combined companies, had the acquisition
occurred on the dates specified above, nor is it indicative of future results of
operations for the combined companies at any future date or for any future
periods.
-7-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
A.B.S. CLOTHING COLLECTION, INC.
In September 1999, the Company acquired the outstanding common stock of A.B.S.
Clothing Collection, Inc. ("ABS"). ABS is a leading contemporary designer of
casual sportswear and dresses sold through better department and specialty
stores. The purchase price consisted of a cash payment of $29,500, shares of the
Company's common stock with a fair market value of $2,200 and a deferred cash
payment of $22,800 and other costs incurred in the acquisition of approximately
$1,208. The acquisition was accounted for as a purchase. The preliminary
allocation of the purchase price to the fair value of assets acquired and
liabilities assumed is summarized as follows:
Fair value of assets acquired $59,720
Liabilities assumed (4,012)
-------
Purchase price $55,708
=======
The acquisition did not have a material pro-forma impact on 1999 consolidated
earnings. Included in intangibles and other assets for the A.B.S. acquisition is
$54,068 of goodwill, which is being amortized over 20 years. The final
assessment of the purchase accounting will be completed during fiscal 2000.
NOTE 6 - INVENTORY
FOR THE THREE MONTHS ENDED
---------------------------------
APRIL 1, JANUARY 1,
2000 2000
------------- --------------
Finished goods $564,666 $563,583
Work in process 96,062 89,422
Raw materials 73,977 81,434
--------- ---------
$734,705 $734,439
========= =========
-8-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 7 - SUMMARIZED FINANCIAL INFORMATION - DESIGNER HOLDINGS LTD.
The following is summarized unaudited financial information of the Company's
wholly-owned subsidiary, Designer Holdings Ltd, as of April 1, 2000 and January
1, 2000 and for the three months ended April 1, 2000 and April 3, 1999,
respectively, which is presented as required by reason of the public preferred
securities issued by Designer Holdings. Designer Holdings, acquired by the
Company in the fourth quarter of 1997, develops, manufactures and markets
designer jeanswear and sportswear for men, women and juniors and holds a 40-year
extendable license from Calvin Klein, Inc. to develop, manufacture and market
designer jeanswear and jeans related sportswear collections in North, South and
Central America under the Calvin Klein Jeans(R), CK Calvin Klein Jeans(R), and
CK/Calvin Klein/Khakis(R) labels. In the first quarter fiscal 2000 the Company
paid in cash the remaining $209 reserve related to employee severance and other
related costs.
The information below is not indicative of the future operating results.
BALANCE SHEET SUMMARY:
APRIL 1, JANUARY 1,
2000 2000
------------ -------------
Current assets $183,336 $160,296
Noncurrent assets 497,505 549,090
Current liabilities 65,770 107,408
Noncurrent liabilities 33,761 29,168
Redeemable preferred securities 103,025 102,904
Stockholders' equity 478,285 469,906
INCOME STATEMENT SUMMARY: THREE MONTHS ENDED
--------------------------------
APRIL 1, APRIL 3,
2000 (a) 1999 (a)
------------ -------------
Net revenues $118,791 $119,750
Cost of goods sold 82,989 80,363
Net income 8,379 11,001
(a) Excludes net revenues of $20,230 and $15,640 for the three months of fiscal
2000 and 1999 respectively, reported as Retail Store division net revenues.
As a result of the integration of Designer Holdings into the operations of
the Company, cost of goods sold and net income associated with these net
revenues cannot be separately identified.
-9-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
-------------------------------
APRIL 1, APRIL 3,
2000 1999
-------------- --------------
Cash paid for:
Interest, including $365 and $770 capitalized in the first
quarter of fiscal 2000 and 1999, respectively $34,723 $16,311
Income taxes, net of refunds received 2,374 3,800
NOTE 9 - EARNINGS PER SHARE
THREE MONTHS ENDED
----------------------------------
APRIL 1, APRIL 3,
2000 1999
--------------- ---------------
Numerator for basic and diluted earnings per share:
Net income $28,572 $22,892
======= =======
Denominator for basic earnings per share -- weighted
average shares 52,787 58,092
------- -------
Effect of dilutive securities:
Employee stock options 14 216
Restricted stock shares 430 445
Shares under equity agreements 194 601
-------- -------
Dilutive potential common shares 638 1,262
-------- -------
Denominator for diluted earnings per share -
weighted average adjusted shares 53,425 59,354
======== =======
Basic earnings per share $ 0.54 $ 0.39
======= =======
Diluted earnings per share $ 0.53 $ 0.39
======= =======
Options to purchase shares of common stock that were outstanding during the
three month period of fiscal 2000 and 1999 but were not included in the
computation of diluted earnings per share because the option exercise price was
greater than the average market price of the common shares are shown below.
APRIL 1, APRIL 3,
2000 1999
-------------- --------------
Number of shares under option 14,123,556 12,638,208
Range of exercise prices $13.13-$42.88 $25.50-$42.88
-10-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
Incremental shares issuable on the assumed conversion of the preferred
securities (1,653,177 shares) were not included in the computation of diluted
earnings per share for any of the periods presented, as the impact would have
been antidilutive.
NOTE 10 - BUSINESS SEGMENTS
The Company operates in three segments: Sportswear and Accessories, Intimate
Apparel, and Retail Stores.
The Sportswear and Accessories segment designs, manufactures, imports and
markets moderate to premium priced men's, women's, junior's and children's
sportswear and Jeanswear, men's accessories and men's, women's, junior's and
children's active apparel under the Chaps by Ralph Lauren'r', Calvin Klein'r',
Catalina'r', A.B.S. by Allen Schwartz'r', Speedo'r', Oscar de la Renta'r', Anne
Cole'r', Cole of California'r', Sandcastle'r', Sunset Beach'r', Ralph Lauren'r',
Polo Sport Ralph Lauren'r', Polo Sport-RLX'r' and White Stag'r' brand names.
The Intimate Apparel segment designs, manufactures and markets moderate to
premium priced intimate apparel for women under the Warner's'r', Olga'r', Calvin
Klein'r', Lejaby'r', Van Raalte'r', Fruit of the Loom'r', Weight Watchers'r' and
Bodyslimmers'r' brand names, and men's underwear under the Calvin Klein'r'
brand name.
The Retail Store segment which is comprised of both outlet as well as full-price
retail stores, principally sells the Company's products to the general public
through 142 stores under the Speedo Authentic Fitness'r' name as well as 124
Company outlet stores for the disposition of excess and irregular inventory. The
Company does not manufacture or source products exclusively for the outlet
stores.
Information by business segment is set forth below:
SPORTSWEAR
AND INTIMATE RETAIL
ACCESSORIES APPAREL STORES TOTAL
-------------- --------------- -------------- ---------------
Three months ended April 1, 2000:
- -----------------------------------------------
Net revenues $359,024 $199,899 $48,065 $606,988
Adjusted EBITDA 69,900 26,100 (9,100) 86,900
Depreciation 4,800 5,700 800 11,300
Adjusted EBIT 65,100 20,400 (9,900) 75,600
Three months ended April 3, 1999:
- -----------------------------------------------
Net revenues $208,262 $210,661 $25,180 $444,103
Adjusted EBITDA 33,800 47,700 700 82,200
Depreciation 2,200 4,400 600 7,200
Adjusted EBIT 31,600 43,300 100 75,000
-11-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
A reconciliation of total segment Adjusted EBIT to total consolidated income
before taxes and cumulative effect of a change in accounting principle for the
three months ended April 1, 2000 and April 3, 1999, respectively, is as follows:
THREE MONTHS ENDED
---------------------------------
APRIL 1, APRIL 3,
2000 1999
------------ --------------
Total adjusted EBIT for reportable segments $ 75,600 $75,000
General corporate expenses not allocated 20,513 16,185
Other operating expenses 6,547 -
Depreciation of Corporate assets and amortization 11,755 6,600
Investment income (42,782) -
Interest expense 33,852 16,833
------------- ------------
Income before provision for income taxes $ 45,715 $35,382
============= ============
NOTE 11 - COMPREHENSIVE INCOME
THREE MONTHS ENDED
-----------------------------------
APRIL 1, APRIL 3,
2000 1999
-------------- -------------
Net income $ 28,572 $22,892
-------------- -------------
Other comprehensive income (loss):
Foreign currency translation adjustments 1,293 (5,388)
Change in unrealized gains (64,635) 962
Income tax (expense)/benefit 25,563 (346)
---------------- --------------
Total other comprehensive (loss) (37,779) (4,772)
---------------- --------------
Comprehensive income (loss) $ (9,207) $18,120
================ ==============
-12-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
The components of accumulated other comprehensive income (loss) as of April 1,
2000 and January 1, 2000 are as follows:
APRIL 1, JANUARY 1,
2000 2000
----------------- ----------------
Foreign currency translation adjustments $(12,796) $(14,089)
Unrealized holding gains, net (106) 38,966
----------------- ----------------
Total accumulated other comprehensive income (loss) $(12,902) $24,877
================= ================
NOTE 12 - LEGAL PROCEEDINGS
Between October 12, and October 13, 1999, six putative class action complaints
were filed in Delaware Chancery Court against the Company, Authentic Fitness
Corporation and certain of their officers and directors in connection with the
Company's proposed acquisition of Authentic Fitness.
On December 20, 1999, an Amended Class Action Complaint ("Amended Complaint")
was filed and on January 6, 2000 the court designated the Amended Complaint as
the operative complaint for a consolidated action captioned: In Re Authentic
Fitness Corporation Shareholders Litigation, C.A. No. 17464-NC (consolidated).
In the Amended Complaint (and all six complaints made virtually identical
claims), plaintiffs allege an unlawful scheme by certain of the defendants, in
breach of their fiduciary duties, to allow the Company to acquire Authentic
Fitness shares for inadequate consideration. Plaintiffs are seeking to have the
court declare the action a proper class action, to declare that the defendants
have breached their fiduciary duties to the class, and in the event the
transaction is consummated, recission thereof and damages awarded to the Class.
The Company believes the claims to be without merit and intends to vigorously
defend these actions.
The Company is not a party to any other litigation, other than routine
litigation incidental to the business of the Company, that individually or in
the aggregate is material to the business of the Company.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS.
STATEMENT OF OPERATIONS (SELECTED DATA)
THREE MONTHS ENDED
----------------------------------
APRIL 1, APRIL 3,
2000 1999
--------------- ----------------
(Amounts in millions of dollars)
(Unaudited)
Net revenues $ 607.0 $ 444.1
Cost of goods sold 425.4 290.0
--------------- ----------------
Gross profit 181.6 154.1
% of net revenues 29.9 % 34.7 %
Selling, general and administrative expenses 138.3 101.9
Other operating expense 6.5 -
--------------- ----------------
Operating income 36.8 52.2
% to net revenues 6.1 % 11.8 %
Investment income (42.7) -
Interest expense 33.8 16.8
Provision for income taxes 17.1 12.5
--------------- ----------------
Net income $ 28.6 $ 22.9
=============== ================
Net revenues increased $162.9 million or 36.7% to $607.0 million in the first
quarter of fiscal 2000 compared with $444.1 million in the first quarter of
fiscal 1999. Net revenues contributed by the 1999 acquisitions of Authentic
Fitness $(146.3) million, Chaps Canada $(3.2) million, and ABS $(11.6) million
amounted to $161.1 million. Discontinued brands accounted for a reduction in
net revenues of $2.2 million. In addition, the strength of the U.S. dollar
against the Euro accounted for a reduction of $3.8 million in net revenues.
Excluding the impact of all of these items, net revenues from continuing brands
increased approximately 2.0%.
SPORTSWEAR AND ACCESSORIES DIVISION. Net revenues increased $150.8 million
or 72.4% to $359.0 million in the first quarter of fiscal 2000 compared
with $208.3 million in the first quarter of fiscal 1999. Net revenues
contributed by the 1999 acquisitions of Authentic Fitness $(132.1) million,
Chaps Canada $(3.2) million and ABS $(11.6) million amounted to $146.9
million. Excluding acquisitions, net revenues increased $3.9 million or
1.9%. The increase in net revenue for continuing brands was generated by
the Chaps Division, which increased $3.9 million, and the CK Accessories
Division which increased $4.3 million. These increases were partially
offset in the Calvin Klein Jeans Division whose net revenues decreased by
$4.3 million primarily in its juniors business.
INTIMATE APPAREL DIVISION. Net revenues decreased $10.8 million or 5.1% to
$199.9 million in the first quarter of fiscal 2000 compared with $210.7
million in the first quarter of fiscal 1999. Discontinued brands accounted
for a reduction in net revenues of $2.2 million and the loss of three major
customers in 1999 (Uptons, Eaton's and Mercantile) accounted for a loss of
$8.0 million of net revenues. In addition, the strength of the U.S. dollar
against the Euro accounted for a reduction of $3.8 million in
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net revenues. Excluding the impact of all of these items, net revenues from
continuing brands increased 1.5%. Warner's and Olga decreased $9.4 million
primarily due to the loss the three major customers. Calvin Klein underwear
increased $3.5 million in the first quarter 1999. Lejaby net revenues
decreased $3.7 million due to the effect of the weakness of the Euro
against the U.S. dollar.
RETAIL STORE DIVISION. Net revenues increased $22.9 million or 90.9% to
$48.1 million in the first quarter of fiscal 2000 compared with $25.2
million in the first quarter of fiscal 1999. The acquisition of Authentic
Fitness contributed $14.2 million to net revenues. Excluding net revenues
of Authentic Fitness net revenues increased $8.7 million or 35.1% due to
a significant effort made to liquidate excess inventory and improve cash
flow.
Gross profit increased $27.5 million or 17.8% to $181.6 million in the first
quarter of fiscal 2000 compared with $154.1 million in the first quarter of
fiscal 1999. Gross margin was 29.9% in the first quarter of fiscal 2000 compared
with 34.7% in the first quarter of fiscal 1999. The decrease in gross margin is
attributable to markdowns taken in the first quarter of fiscal 2000 to reduce
inventories and improve cash flow.
SPORTSWEAR AND ACCESSORIES DIVISION Gross profit increased $49.2 million or
75.3% to $114.5 million in the first quarter of fiscal 2000 compared with
$65.3 million in the first quarter 1999. Gross margins were 31.9% in the
first quarter fiscal 2000 compared with 31.4% in the first quarter fiscal
1999. The increase in gross margin is due to higher margins in the
Authentic Fitness brands partially offset by markdowns taken in the first
quarter fiscal 2000 primarily to reduce Calvin Klein juniors inventories
and improve cash flow.
INTIMATE APPAREL DIVISION. Gross profit decreased $29.2 million or 36.8% to
$50.2 million in the first quarter of fiscal 2000 compared with $79.4
million in the first quarter 1999. Gross margins were 25.1% in the first
quarter fiscal 2000 compared with 37.7% in the first quarter fiscal 1999.
The decrease in gross margin is due to markdowns taken in the first quarter
fiscal 2000 to reduce inventories and improve cash flow.
RETAIL STORE DIVISION. Gross profit increased $7.5 million or 79.8% to
$16.9 million in the first quarter of fiscal 2000 compared with $9.4
million in the first quarter fiscal 1999. Gross margins were 35.1% in the
first quarter fiscal 2000 compared with 37.3% in the first quarter fiscal
1999. The decrease in gross margin is due to markdowns taken in the first
quarter of fiscal 2000 to reduce inventories and improve cash flow,
partially offset by higher margins in the Authentic Fitness retail stores.
Selling, general and administrative expenses increased $36.4 million or 35.7% to
$138.2 million as compared to $101.9 million in first quarter fiscal 1999.
Selling, general and administrative expenses as a percentage of net revenue were
22.8% in the first quarter of fiscal 2000 compared with 22.9% in the first
quarter fiscal 1999. The decreased selling, general and administrative expenses
as a percent of net sales is due primarily to cost saving initiatives
implemented in the Company, partially offset by higher depreciation and
amortization expense related to additional goodwill for acquisitions and
depreciation for systems implemented in fiscal 1999.
OPERATING PROFIT
SPORTSWEAR AND ACCESSORIES DIVISION. Operating profit increased $33.5
million or 106.0% to $65.1 million in the first quarter of fiscal 2000
compared with $31.6 million in the first quarter of fiscal 1999. The
increase in operating profit primarily was due to the acquisition of
Authentic Fitness, Chaps Canada and ABS.
INTIMATE APPAREL DIVISION. Operating profit decreased $22.9 million or
52.9% to $20.4 million in the first quarter of fiscal 2000 compared with
$43.3 million in the first quarter of fiscal 1999. The decrease
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in operating profit primarily was due to markdowns taken and other costs
incurred in the first quarter of fiscal 2000 to reduce inventories and
improve cash flow.
RETAIL STORE DIVISION. Operating loss increased $10.0 million to ($9.9)
million in the first quarter of fiscal 2000 compared with $0.1 million in
the first quarter fiscal 1999. The decrease in operating profit was due to
markdowns taken and other costs incurred in the first quarter of fiscal
2000 to reduce inventories and improve cash flow.
OTHER OPERATING EXPENSE. The Company recorded severance costs in the first
quarter of fiscal 2000, of $6.5 million related to cost saving initiatives and
programs involving 136 employees. The Company paid $3.9 million in severance
during the first quarter and $2.6 million was accrued at April 1, 2000 for
remaining severance obligations which are expected to be paid by the end
of fiscal 2000.
The Company earned $42.7 million ($25.9 net of taxes) in the first quarter of
fiscal 2000 from the sale of its equity investment in InterWorld Corporation.
Interest expense increased $17.0 million to $33.8 million in the first quarter
of fiscal 2000 compared with $16.8 million in the first quarter of fiscal 1999.
The increase reflects the funding of the Company's 1999 acquisitions and stock
buyback program, which totaled more than $800 million.
The provision for income taxes for the first quarter of fiscal 2000 reflects an
estimated full year effective tax rate of 37.5% compared to a full year
effective rate of 34.3% for fiscal 1999. The estimated full year effective
tax rate for fiscal 2000 is higher due to the increase in non-deductible
expenses resulting from the Company's 1999 acquisitions.
Net income for the first quarter fiscal 2000 was $28.6 million compared with net
income of $22.9 million in the first quarter of fiscal 1999.
CAPITAL RESOURCES AND LIQUIDITY.
The Company's liquidity requirements arise primarily from its debt service
requirements and the funding of its working capital needs, primarily inventory
and accounts receivable. The Company's borrowing requirements are seasonal, with
peak working capital needs generally arising during the first half of the fiscal
year. The Company typically generates nearly all of its operating cash flow in
the fourth quarter of the fiscal year reflecting third and fourth quarter
shipments and the sale of inventory built during the first six months of the
fiscal year.
Cash used in operations was $62.4 million in the first quarter of fiscal 2000
compared with cash used in operations of $127.0 million in the first quarter
of fiscal 1999. The substantial improvement in cash used by operating activities
of $64.6 million reflects the successful effort to liquidate inventory, which
improved by $73.4 million. The Company normally uses the greatest amount of cash
on working capital in the first quarter due to seasonal inventory requirements.
Cash provided by investing activities was $11.9 million for the first quarter of
fiscal 2000 compared with cash use of $(12.0) million in the first quarter of
fiscal 1999. The fiscal 2000 first quarter includes proceeds from the sale of
the Company's equity investment in InterWorld Corporation for $50.4 million.
Capital expenditures in the quarter were $34.9 million compared to $1.8 million
in the comparable 1999 period. The first quarter of fiscal 2000 includes amounts
for information systems implementations of $13.4 million and store fixture
programs of $12.0 million.
Cash provided by financing activities was $41.9 million in the first quarter of
fiscal 2000 compared with $149.5 million in the first quarter of fiscal 1999.
The increase in the Company's revolving credit balance during the first quarter
of fiscal 2000 of $24.7 million was substantially less than the $197.6 million
increase
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in the first quarter of fiscal 1999 due to the improvement in cash used by
operating activities as previously discussed. In addition, the Company received
$26.1 million in the first quarter 2000 from the termination of certain interest
rate swaps. The Company paid $38.9 million in the first quarter of 1999 for the
purchase of its shares in treasury. The Company paid $4.8 million of dividends
in the first quarter of fiscal 2000 compared to $5.3 million in the first
quarter of fiscal 1999.
The Company believes that funds available under its existing credit arrangements
and cash flow to be generated from future operations will be sufficient to meet
the working capital, share repurchase and capital expenditure needs of the
Company, including dividends and interest and principal payments on outstanding
debt obligations for the next twelve months and for the next several years.
NEW ACCOUNTING STANDARDS
In March 2000, the Emerging Issues Task Force issued Issue 00-7 "Accounting
application of EITF Issue No. 96-13, `Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,' to
Equity Derivative Transactions That Require Net Cash Settlement If Certain
Events Occur". This EITF will require the Company to mark to market the Equity
Forward Purchase Transaction Agreements entered into in the first quarter of
fiscal 2000 unless the Company amends such agreements by December 31, 2000 to
remove provisions which require net cash settlement.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". In June 1999, the FASB issued SFAS 137
"Deferral of the effective date of FASB Statement No. 133" delaying the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000.
The Company is evaluating the application of the new statement and the impact
on the Company's consolidated financial position, liquidity, cash flows and
results of operations.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes forward-looking statements within the meaning of Section
27A of Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended which represent the Company's expectations or
beliefs concerning future events that involve risks and uncertainties, including
those associated with the effect of national and regional economic conditions,
the overall level of consumer spending, the performance of the Company's
products within the prevailing retail environment, customer acceptance of both
new designs and newly-introduced product lines, and financial difficulties
encountered by customers. All statements other than statements of historical
facts included in this quarterly report, including, without limitation, the
statements under Management's Discussion and Analysis of Financial Condition,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates and
foreign currency exchange rates, and selectively uses financial instruments to
manage these risks. The Company does not enter into financial instruments for
speculation or for trading purposes.
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Interest Rate Risk
The Company is subject to market risk from exposure to changes in interest rates
based primarily on its financing activities. The Company enters into interest
rate swap agreements, which have the effect of converting the Company's variable
rate obligations to fixed rate obligations, to reduce the impact of interest
rate fluctuations on cash flow and interest expense. As of April 1, 2000,
approximately $643.5 million of interest-rate sensitive obligations were swapped
to achieve an average fixed rate of 6.65%, limiting the Company's risk to any
future shift in interest rates. As of April 1, 2000, the net fair value asset of
all financial instruments (primarily interest rate swap agreements) with
exposure to interest rate risk was approximately $0.2 million. As of
April 1, 2000, the Company had approximately $1,325.6 million of obligations
subject to variable interest rates in excess of such obligations that had been
swapped to achieve a fixed rate. A hypothetical 10% adverse change in interest
rates as of April 1, 2000 would have had a $2.2 million unfavorable impact on
the Company's pre-tax earnings and cash flow over the three-month period.
Foreign Exchange Risk
The Company has foreign currency exposures related to buying, selling and
financing in currencies other than the functional currency in which it operates.
These exposures are primarily concentrated in the Canadian dollar, Mexican peso,
Hong Kong dollar, British pound and the Euro. The Company enters into foreign
currency forward and option contracts to mitigate the risk of doing business in
foreign currencies. The Company hedges currency exposures of firm commitments
and anticipated transactions denominated in non-functional currencies to protect
against the possibility of diminished cash flow and adverse impacts on earnings.
As of April 1, 2000, the net fair value asset of financial instruments with
exposure to foreign currency risk was $0.3 million. The potential decrease in
fair value resulting from a hypothetical 10% adverse change in quoted foreign
currency exchange rates would be approximately $1.7 million.
Equity Price Risk
The Company is subject to market risk from changes in its stock price as a
result of the Equity Agreements. The Equity Agreements allow for the
purchase by the Company of up to 5.2 million shares of the Company's Common
Stock from two banks. The Equity Agreements are required to be settled by the
Company, in a manner elected by the Company, on a physical settlement, cash
settlement or net share settlement basis within the duration of the Equity
Agreements. The Equity Agreements require net cash settlement in an event of
default, as defined. As of April 1, 2000, the banks had purchased 5.2 million
shares under the Equity Agreements. As of April 1, 2000, the prices at which the
Company would effect physical settlement or settle in cash or in net shares with
the two banks under the Equity Agreements are $10.46 and $12.39. Dividends on
the shares outstanding under the Equity Agreements are reimbursed to the
Company. If these Equity Agreements were settled on a net cash basis at April 1,
2000, the Company would be entitled to receive $2.0 million based on the closing
price of the Company's stock. Assuming a hypothetical 10% adverse change in the
Company's stock price, the Company would be required to make a payment of $3.6
million if these Equity Agreements were settled on a net cash basis at April 1,
2000.
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ITEM 3. LEGAL PROCEEDINGS.
Between October 12, and October 13, 1999, six putative class action complaints
were filed in Delaware Chancery Court against the Company, Authentic Fitness
Corporation and certain of their officers and directors in connection with the
Company's proposed acquisition of Authentic Fitness.
On December 20, 1999, an Amended Class Action Complaint ("Amended Complaint")
was filed and on January 6, 2000 the court designated the Amended Complaint as
the operative complaint for a consolidated action captioned: In Re Authentic
Fitness Corporation Shareholders Litigation, C.A. No. 17464-NC (consolidated).
In the Amended Complaint (and all six complaints made virtually identical
claims), plaintiffs allege an unlawful scheme by certain of the defendants, in
breach of their fiduciary duties, to allow the Company to acquire Authentic
Fitness shares for inadequate consideration. Plaintiffs are seeking to have the
court declare the action a proper class action, to declare that the defendants
have breached their fiduciary duties to the class, and in the event the
transaction is consummated, recission thereof and damages awarded to the Class.
The Company believes the claims to be without merit and intends to vigorously
defend these actions.
The Company is not a party to any other litigation, other than routine
litigation incidental to the business of the Company, that individually or in
the aggregate is material to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of the Company held on May 4, 2000, the
shareholders voted on the following proposals:
PROPOSAL 1 -- Election of Directors
- ------------------------------------------------------
FOR WITHHOLD AUTHORITY
Nominee listed at left to vote for Nominee listed at left
---------------------------- --------------------------------------
Linda J. Wachner 43,485,158 1,968,122
Andrew G. Galef 43,503,346 1,949,934
Stuart D. Buchalter 43,500,702 1,952,578
PROPOSAL 2 -- Shareholder Proposal on Vendor Standards
- ------------------------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
2,803,484 27,299,325 1,522,648
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.37 -- Scotia Capital (U.S.A.) Inc. ("Party A"), The Warnaco Group,
Inc. ("Party B") Equity Forward Purchase Transaction.
10.38 -- SunTrust Bank ("Party A"), The Warnaco Group, Inc. ("Party B")
Equity Forward Purchase Transaction.
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed on January 18, 2000 relating to the merger of
A Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary
of Warnaco, and Authentic Fitness Corporation, a Delaware Corporation
("Authentic Fitness").
A report on Form 8-K/A was filed on February 29, 2000, relating to the merger of
A Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Warnaco, and Authentic Fitness Corporation, a Delaware corporation ("Authentic
Fitness").
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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.
THE WARNACO GROUP, INC.
Date: May 16, 2000 by: /s/ WILLIAM S. FINKELSTEIN
-----------------------------
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and Accounting
Officer
Date: May 16, 2000 By: /s/ STANLEY P. SILVERSTEIN
-----------------------------
Stanley P. Silverstein
Vice President, General Counsel
and Secretary
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STATEMENT OF DIFFERENCES
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Characters normally expressed as subscript shall be expressed as baseline
characters.