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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 OF (I.R.S. EMPLOYER
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 November 7, 2000 is as follows: 52,873,637.
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EXPLANATORY NOTE
Part I Item 1. 'Financial Statements,' Part I Item 2, 'Management's
Discussion and Analysis of Results of Operations and Financial Condition,' and
Part I Item 3, 'Quantitative and Qualitative Disclosures About Market Risk' are
each hereby amended by deleting the Items in their entirety and replacing them
with the corresponding Items attached hereto and filed herewith.
The purpose of this amendment is to make certain changes to Financial
Statements (Part I Item 1), Management's Discussion and Analysis of Results of
Operations and Financial Condition ('MD&A') (Part I Item 2), and Quantitative
and Qualitative Disclosures about Market Risk (Part I Item 3) included in the
original Form 10-Q for the quarterly period ended September 30, 2000 (the
'Original Filing').
This report continues to speak as of the date of the Original Filing
and the Company has not updated the disclosure in this report to speak to any
later date. While this report primarily relates to the historical period
covered, events may have taken place since the date of the Original Filing that
might have been reflected in this report if they had taken place prior to the
Original Filing.
All information contained in this amendment and the Original Filing is
subject to updating and supplementing as provided in the Company's periodic
reports filed with the Securities and Exchange Commission subsequent to the
date of such reports.
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
The Company is filing this amended quarterly Report on Form 10-Q/A
to restate its consolidated condensed balance sheets at September 30, 2000 to
effect a reclassification of $190,459 to increase cash and increase long-term
debt to reflect cash held in investment or collateral accounts offset against
long-term debt in the Original Filing. In addition the Company has restated the
accompanying consolidated condensed financial statements as explained in Note 1.
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, JANUARY 1,
2000 2000
RESTATED RESTATED
------------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 226,976 $ 9,328
Accounts receivable, less reserves of $89,888 and $93,872 respectively 245,765 250,861
Marketable securities 210 72,921
Inventories 550,567 722,539
Other current assets 41,929 66,015
------------- ----------
Total current assets 1,065,447 1,121,664
Property, plant and equipment (net of accumulated depreciation
of $194,595 and $152,946, respectively) 335,842 326,352
------------- ----------
Other assets:
Excess of cost over net assets acquired - net 849,784 840,162
Other assets - net 338,412 331,497
Deferred income taxes 246,401 125,410
------------- ----------
Total other assets 1,434,597 1,297,069
------------- ----------
$2,835,886 $2,745,085
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 79,214 $ 11,052
Short-term debt 768 133,752
Accounts payable 320,438 599,768
Accrued liabilities 161,960 119,362
Income taxes payable 9,386 16,217
Deferred income taxes 8,470 7,468
------------- ----------
Total current liabilities 580,236 887,619
------------- ----------
Long-term debt 1,791,377 1,187,951
------------- ----------
Other long-term liabilities 52,096 29,295
------------- ----------
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities ($120,000 - par value) of Designer Finance Trust Holding
Solely Convertible Debentures 103,263 102,904
------------- ----------
Stockholders' equity:
Common stock: $.01 par value 654 654
Additional paid-in capital 920,996 961,368
Accumulated other comprehensive income (loss) (9,204) 24,877
Deficit (282,320) (125,461)
Treasury stock, at cost (313,840) (313,138)
Unearned stock compensation (7,372) (10,984)
------------- ----------
Total stockholders' equity 308,914 537,316
------------- ----------
$2,835,886 $2,745,085
============= ==========
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 OPERATIONS
(Amounts in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ---------------------------
SEPT. 30, SEPT. 30, OCTOBER 2,
2000 OCTOBER 2, 2000 1999
RESTATED 1999 RESTATED RESTATED
--------- --------- ---------- ----------
(UNAUDITED)
Net revenues $ 500,076 $577,112 $1,703,910 $1,510,952
Cost of goods sold 438,675 378,624 1,359,570 988,112
--------- -------- ---------- ----------
Gross profit 61,401 198,488 344,340 522,840
Selling, general and administrative expenses 166,382 112,577 474,737 327,739
--------- -------- ---------- ----------
Operating income (loss) (104,981) 85,911 (130,397) 195,101
Investment income - - (42,782) -
Interest expense 43,573 20,869 112,792 56,381
--------- -------- ---------- ----------
Income (loss) before provision for income taxes
and cumulative effect of change in accounting principle (148,554) 65,042 (200,407) 138,720
Income tax provision (benefit) (54,596) 20,663 (70,073) 41,503
--------- -------- ---------- ----------
Income (loss) before cumulative effect
of change in accounting principle (93,958) 44,379 (130,334) 97,217
Cumulative effect of change in accounting principle,
net of income tax benefits of $8,577 - - (13,110) -
--------- -------- ---------- ----------
Net income (loss) $ (93,958) $ 44,379 $ (143,444) $ 97,217
========= ======== ========== ==========
Basic earnings (loss) per common share:
Income (loss) before accounting change $ (1.77) $ 0.80 $ (2.46) $ 1.72
Cumulative effect of accounting change - - (0.25) -
--------- -------- ---------- ----------
Net income (loss) $ (1.77) $ 0.80 $ (2.71) $ 1.72
========= ======== ========== ==========
Diluted earnings (loss) per common share:
Income (loss) before accounting change $ (1.77) $ 0.80 $ (2.46) $ 1.69
Cumulative effect of accounting change - - (0.25) -
--------- -------- ---------- ----------
Net income (loss) $ (1.77) $ 0.80 $ (2.71) $ 1.69
========= ======== ========== ==========
Cash dividends declared per share of common stock $ 0.09 $ 0.09 $ 0.27 $ 0.27
========= ======== ========== ==========
Shares used in computing earnings (loss) per share:
Basic 53,054 55,154 52,939 56,463
========= ======== ========== ==========
Diluted 53,054 55,793 52,939 57,497
========= ======== ========== ==========
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)
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
RESTATED RESTATED
------------- ------------
(UNAUDITED)
Cash flow from operating activities:
Net income (loss) $(143,444) $ 97,217
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Pre-tax gain on sale of Interworld investment (42,782) -
Depreciation and amortization 71,260 44,121
Non-cash asset write-downs 42,476 -
Cumulative effect of accounting change, net of taxes 13,110 -
Amortization of unearned stock compensation 3,612 4,585
Deferred income taxes (94,492) 39,727
Change in operating assets and liabilities:
Accounts receivable 5,096 (118,655)
Inventories 158,872 (150,309)
Other current assets 21,386 (25,484)
Other long-term assets and liabilities 357 -
Accounts payable and accrued liabilities (263,262) (58,015)
Income taxes payable (6,831) (1,473)
--------- --------
Net cash (used in) operating activities (234,642) (168,286)
Cash flow from investing activities:
Disposals of fixed assets (2,035) -
Purchase of property, plant & equipment (85,874) (66,236)
Acquisition of assets and licenses - (39,708)
Proceeds from sale of marketable securities 50,357 -
Increase in intangible and other assets (6,915) (16,965)
--------- --------
Net cash (used in) investing activities (44,467) (122,909)
Cash flow from financing activities:
Borrowings under revolving credit facilities--net 485,833 328,247
Borrowings under acquisition loan facility 13,800 -
Borrowings under foreign credit facilities 13,716 104,870
Proceeds from termination of interest rate swaps 26,076
Proceeds from the exercise of stock options and
repayment of notes receivable from employees - 1,364
Purchase of treasury shares and payment of
withholding tax on restricted stock/option exercises (702) (117,246)
Repayments of debt (10,657) (7,780)
Cash dividends paid (14,829) (15,328)
Deferred financing costs (17,737) (2,514)
--------- --------
Net cash from financing activities 495,500 291,613
Effect on cash due to currency translation 1,257 3,944
--------- --------
Increase in cash 217,648 4,362
Cash at beginning of period 9,328 9,495
--------- --------
Cash at end of period $ 226,976 $ 13,857
========= ========
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 accounting principles generally
accepted in the United States of America 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 accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of The Warnaco Group, Inc. (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 September 30, 2000 as
well as its results of operations and cash flows for the periods ended September
30, 2000 and October 2, 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.
Restatement: In connection with the issuance of its fiscal 2000
consolidated financial statements the Company restated January 3, 1998
stockholders' equity reducing the balance by $26,000. The effect of the
restatement on the January 1, 2000 balance sheet was as follows: to increase
accounts receivable reserves by $64.100 to provide for discounts, returns and
allowances not previously reserved, to decrease inventory by $11,900, to
decrease other assets by $8,600 to increase accrued liabilities by $8,100,
partially offset by an increase to non-current deferred tax assets of $66,700
to provide for the tax effects of such adjustments and to eliminate tax
accruals not required. The 1999 and 2000 accounts have been revised to be
consistent with the accounting for the matters that resulted in the adjustments
to retained earnings. In addition, the fiscal 2000 consolidated financial
statements have been restated to reflect the effects of the change in
accounting principle related to the Company's valuation of its retail outlet
store inventory discussed below, as well as other adjustments principally
related to purchase accounting, amortization of deferred financing costs,
depreciation expense and special charges. The impact of the restatements for
the periods presented is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
-----------------------------------------------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
--------------- ------------ ------------- ----------
Increase (Decrease) net revenue $ 27 $(2,500) $ 314 $ 2,500
(Increase) Decrease cost of
goods sold 4,203 (500) 7,533 (8,500)
(Increase) Decrease selling, general
and administrative expenses 1,909 (1,300) (4,847) (3,900)
Increase interest expense (2,098) -- (3,000) --
------- ------- ------- -------
(Increase) Decrease pre-tax loss 4,041 (4,300) -- (9,900)
Increase (Decrease) income tax
provision 1,485 (4,300) -- (12,000)
------- ------- ------- -------
Increase in net income (loss) $ 2,556 $ -- $ -- $ 2,100
======= ======= ======= =======
Increase per diluted share $ .05 $ -- $ -- $ .04
======= ======= ======= =======
The above changes are before the cumulative effect of the change in
accounting.
In addition, the September 30, 2000 balance sheet has been further
restated by a reclassification of $190,459 to increase cash and a corresponding
increase in long-term debt to reflect cash held in investment or collateral
accounts that was offset against long-term debt in the Original Filing.
Change in Accounting Principle: Effective January 2, 2000, the Company
changed its accounting method for valuing its retail outlet store inventory to
the actual cost method. Prior to the change, the Company valued its retail
outlet inventory using average cost. The Company believes its new method is
preferable because it results in a better matching of revenue and expense and
is consistent with the method used for its other inventories. The cumulative
effect of the change as of January 1, 2000 was $13,110, net of tax ($.25 per
share). The information necessary to determine the pro-forma effect on 1999
results of operations is not available.
Impact of New Accounting Standards: In June 2000, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." This statement addresses a limited number of issues
causing implementation difficulties for entities applying SFAS No. 133. SFAS No.
133 requires that an entity recognize all derivative instruments as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (i) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (ii) a hedge
of the exposure to variable cash flows of a forecasted transaction, or (iii) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company is currently
evaluating the effects of this statement on its consolidated financial position,
liquidity, cash flows and results of operations.
In May 2000, the FASB's Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 00-14, "Accounting for Certain Sales Incentives," which addresses
the accounting for sales incentives, rebates, coupons and free products or
services. EITF No. 00-14 is effective for calendar year companies in the fourth
quarter of 2000. The adoption of EITF No. 00-14 did not have an impact on the
Company's financial position and results of operations.
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". In July 2000, the EITF issued Issue No. 00-19, "Determination of
Whether Share Settlement Is Within the Control of the Company for Purposes of
Applying EITF Issue No. 96-13". EITF No. 00-19 may require the Company to mark
to market the Equity Forward Purchase Transaction Agreements entered into on
December 10, 1999 and February 10, 2000 ("Equity Agreements") unless the Company
amends such agreements by June 30, 2001 to remove provisions which require net
cash settlement. See Note 2 to the consolidated condensed financial statements.
-5-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain of the SEC Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The implementation of this bulletin in the fourth
quarter of fiscal 2000 did not have an impact on the Company's results of
operations or equity.
NOTE 2 - EQUITY
As of September 30, 2000 and January 1, 2000, Class A common stock
outstanding was 53,343,822 shares, net of 12,063,672 shares held in treasury and
53,229,388 shares, net of 12,163,650 held in treasury, respectively.
In connection with the Company's stock repurchase program, the Company
entered into the Equity Agreements on December 10, 1999 and February 10, 2000.
The Equity Agreements provide for the purchase by the Company of up to 5.2
million shares of the Company's Common Stock from two banks and mature on August
12, 2002. As of September 30, 2000, the banks had purchased 5.2 million shares
under the Equity Agreements. On September 19, 2000, the Equity Agreements were
amended and supplemented to reduce the price at which the Equity Agreements
could be settled from $12.90 and $10.90, respectively to $4.50 a share to
provide for an aggregate cash payment by the Company of up to $23.4 million and
the issuance of promissory notes in the aggregate principal amount of up to
$23.4 million, which mature on the same date and bear the same interest rate as
the Company's credit facilities. In return for this reduction the banks received
interest bearing notes payable on August 12, 2002 in an initial aggregate amount
of $40,372 which resulted in a corresponding reduction in shareholders equity.
At September 30, 2000, the price at which the Company could effect net cash
settlement with the two banks under the Equity Agreements was $4.50. Dividends
on the shares outstanding under the Equity Agreements are reimbursed to the
Company. On October 6th, the Company entered into a modification agreement of
its credit facilities which prohibited the option of share and physical
settlement. The terms of the Equity Agreements allow the banks to sell, under
certain conditions, the 5.2 million shares and receive additional interest
bearing notes if the sale price is less than $4.50 per share or to pay cash to
the Company or reduce the outstanding notes if the sale price is in excess of
$4.50. Such additional notes would also mature on August 12, 2002. At September
30, if these Equity Agreements were settled on a net cash settlement basis, the
settlement costs would be approximately $2,600. Also see Note 5 - Debt.
NOTE 3 - SPECIAL CHARGES
THIRD QUARTER OF FISCAL 2000
As a result of a further strategic review of the Company's worldwide
businesses, manufacturing, distribution and other facilities, and product lines
and styles, the Company initiated a global implementation of programs designed
to create cost efficiencies through plant consolidations, workforce reductions
and consolidation of the finance, manufacturing and operations organizations
within the Company. As a result of the decision to implement these programs, the
Company recorded restructuring and special charges of $98,053 during the third
quarter of fiscal 2000 related to costs to exit certain facilities and
activities and consolidate such operations, including charges related to
inventory write-downs and other asset write-offs, facility shutdown and lease
obligation costs, employee termination and severance costs, retail outlet store
closings and other related costs. The third quarter restructuring and special
charges are net of $2,100 of reversals of second quarter charges due to lower
costs than originally anticipated in exiting certain leased facilities. The
non-cash portion of the charge is $67,398 and the cash portion is $30,655. Of
the total amount of charges, $66,548 as restated is reflected in cost of goods
sold and $31,505 as restated is reflected in selling, administrative and general
expenses. The detail of the charge, including costs incurred and reserves
remaining for costs estimated to be incurred through completion of the
aforementioned programs are summarized below:
-6-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
FACILITY
INVENTORY SHUTDOWN EMPLOYEE
WRITE-DOWNS AND AND LEASE TERMINATION
OTHER ASSET OBLIGATION AND SEVERANCE RETAIL OUTLET
WRITE-OFFS COSTS COSTS STORE CLOSINGS OTHER TOTAL
------------------ -------------- ---------------- ---------------- --------- ----------
Provisions $ 60,329 $ 13,115 $ 8,305 $ 9,503 $ 6,801 $ 98,053
Cash Reductions - (12,026) (419) (100) (4,505) (17,050)
Non-cash reductions (6,896) - - - - (6,896)
------------------ -------------- ---------------- ---------------- ------------ -------------
Balance as of Sept. 30, 2000 $ 53,433 $ 1,089 $ 7,886 $ 9,403 $ 2,296 $ 74,107
================== ============== ================ ================ ============ =============
INVENTORY WRITE-DOWNS AND OTHER ASSET WRITE-OFFS $(60,329 as restated)
Management's strategic review of the Company's manufacturing, distribution and
administrative facilities and product lines and styles resulted in the decision
to close two additional manufacturing plants and one distribution facility and
discontinue the manufacturing of certain raw materials and product styles as
well as the closure of an additional 15 outlet stores. In addition, the Company
wrote-off shop and fixture costs no longer in service at certain of its
customers retail locations. Included in the above amount are charges for
inventory write-downs for raw materials and finished goods of $42,566 and
write-off of fixed assets and other assets of $17,763. Of the total charge,
$46,127 is included in cost of sales and $14,202 is included in selling, general
and administrative expenses.
FACILITY SHUTDOWN AND LEASE OBLIGATION COSTS $(13,115 as restated)
Costs associated with the shutdown of the facilities mentioned above include
plant reconfiguration and shutdown costs of $10,735, which were charged to
expense as incurred and lease obligation costs of $2,380. Of the total charge,
$10,673 is included in cost of sales and $2,442 is included in selling, general
and administrative expenses.
EMPLOYEE TERMINATION AND SEVERANCE COSTS $(8,305)
The Company recorded charges of $3,117 to cost of goods sold related to
providing severance and benefits to 767 manufacturing related employees
terminated as a result of the closure of certain facilities. The Company also
recorded charges of $5,188 to selling, general and administrative expenses
related to providing severance and benefits to 903 distribution and
administrative employees terminated as a result of the closure of certain
facilities and administrative redundancy.
RETAIL OUTLET STORES CLOSINGS $(9,503)
In an effort to improve the overall profitability of the retail outlet division
and to respond to a soft outlet store market, the Company announced plans to
close 15 retail outlet stores. Included in the charge are costs for the
write-down of inventory of discontinued product lines and styles which the
Company intends to liquidate through these stores of $5,673, the write-off of
fixed assets associated with these stores of $1,370 and the costs of terminating
leases of $2,460. Of the total charge, $5,673 is included in cost of sales and
$3,830 is included in selling, general and administrative expenses.
-7-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
OTHER RELATED COSTS $(6,801)
Also included in the charge are $4,606 of legal expenses related to the Calvin
Klein litigation and global initiatives mentioned above and $2,195 of other
costs. Of the total charge, $958 is included in cost of sales and $5,843 is
included in selling, general and administrative expenses.
SECOND QUARTER OF FISCAL 2000
As a result of a strategic review of the Company's worldwide
businesses, manufacturing, distribution and other facilities, and product lines
and styles, the Company initiated a global implementation of programs designed
to create cost efficiencies through plant consolidations, workforce reductions
and consolidation of the finance, manufacturing and operations organizations
within the Company. The Company recorded restructuring and special charges of
$101,852 during the second quarter of fiscal 2000 related to costs to exit
certain facilities and activities and consolidate such operations, including
charges related to inventory write-downs and other asset write-offs, facility
shutdown and leasehold and contract termination costs, employee termination and
severance benefits, retail outlet store closings and other related costs. The
non-cash portion of the charge is $65,444 and the cash portion is $36,408. Of
the total amount of charges, $88,931 as restated is reflected in cost of goods
sold and $12,921 as restated is reflected in selling, administrative and general
expenses. The detail of the charge, including costs incurred and reserves
remaining for costs estimated to be incurred through completion of the
aforementioned programs are summarized below:
FACILITY
INVENTORY SHUTDOWN EMPLOYEE
WRITE-DOWNS AND AND CONTRACT TERMINATION
OTHER ASSET TERMINATION AND SEVERANCE RETAIL OUTLET
WRITE-OFFS COSTS COSTS STORE CLOSINGS OTHER TOTAL
------------------ --------------- ---------------- ---------------- ------------- -------------
Provisions $ 55,768 $ 20,237 $ 14,472 $ 10,375 $ 1,000 $ 101,852
Cash Reductions - (11,522) (2,922) - (273) (14,717)
Non-cash reductions (12,363) - - - - (12,363)
------------------ --------------- ---------------- ---------------- ------------- -------------
Balance as of July 1, 2000 $ 43,405 $ 8,715 $ 11,550 $ 10,375 $ 727 $ 74,772
Cash Reductions - (2,435) (5,668) - (727) (8,830)
Non-cash reductions (7,845) (655) - (5,054) - (13,554)
------------------ --------------- ---------------- ---------------- ------------- -------------
Balance as of Sept. 30, 2000 $ 35,560 $ 5,625 $ 5,882 $ 5,321 $ - $ 52,388
================== =============== ================ ================ ============= =============
INVENTORY WRITE-DOWNS AND OTHER ASSET WRITE-OFFS $(55,768 as restated)
Management's strategic review of the Company's manufacturing and distribution
facilities and product lines and styles resulted in the decision to close six
manufacturing plants and eight distribution facilities and discontinue the
manufacturing of certain raw materials and product styles that were associated
with these facilities. Included in the above amount are charges for inventory
write-downs for raw materials and finished goods of $55,089 and write-off of
fixed assets and investments of $679 which totals $55,768 and is included in
cost of sales.
-8-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
FACILITY SHUTDOWN AND CONTRACT TERMINATION COSTS $(20,237 as restated)
Costs associated with the shutdown of the facilities mentioned above include
plant reconfiguration and shutdown costs of $10,593, which were charged to
expense as incurred, lease obligation costs of $2,984 and contractual
obligations of $6,660. Of the total charge, $15,663 is included in cost of sales
and $4,574 is included in selling, general and administrative expenses.
EMPLOYEE TERMINATION AND SEVERANCE COSTS $(14,472)
The Company recorded charges of $8,239 to cost of goods sold related to
providing severance and benefits to 1,502 manufacturing related employees
terminated as a result of the closure of certain facilities. The Company also
recorded charges of $6,233 to selling, general and administrative expenses
related to providing severance and benefits to 521 distribution and
administrative employees terminated as a result of the closure of certain
facilities and administrative redundancy.
RETAIL OUTLET STORES CLOSINGS $(10,375)
In an effort to improve the overall profitability of the retail outlet division,
the Company announced plans to close 8 retail outlet stores. Included in the
charge are costs for the write-down of inventory of discontinued product lines
and styles which the Company intends to liquidate through these stores of
$9,262, the write-off of fixed assets associated with these stores of $415 and
the costs of terminating leases of $698. Of the total charge, $9,262 is included
in cost of sales and $1,113 is included in selling, general and administrative
expenses.
OTHER RELATED COSTS $(1,000)
Also included in the charge are $1,000 of legal expenses related to the global
initiatives mentioned above which is included in selling, general and
administrative expenses.
FIRST QUARTER OF FISCAL 2000
In the first quarter of fiscal 2000, the Company recorded severance costs of
$6,547 ($4,321 net of income tax benefit), $849 related to the cost of providing
severance benefits to 364 manufacturing employees which was charged to cost of
sales and $5,698 related to 120 management and administrative employees at the
date they were terminated, which was charged to selling, general and
administrative expenses. All such costs have been paid as of July 1, 2000.
NOTE 4 - FINANCIAL INSTRUMENTS
During 1998 and 1999, the Company invested $7,650 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 ($26,739 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
-9-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
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.
NOTE 5 - DEBT
On June 19, 2000, the Company requested and its lenders agreed to waive
certain financial covenants for the fiscal quarter ending July 1, 2000 contained
in certain of its loan agreements including the $600,000 and $450,000 Revolving
Credit Facilities, the $600,000 364-day Facility, the $500,000 Trade Credit
Facility, certain European Credit Lines and the Canadian Credit Facility. The
waivers executed on June 19, 2000 were extended through October 6, 2000.
On October 6, 2000 the Company and the lenders under its credit
facilities entered into an Amendment, Modification, Restatement and General
Provisions Agreement. Pursuant to this agreement, the maturity of the $600,000
364-day credit facility entered into on November 17, 1999 was extended from
October 8, 2000 to August 12, 2002, a new $400,000 trade credit facility which
replaced the Company's existing trade credit facility and which matures on
August 12, 2002 was entered into, and the maturities of the Company's other
credit facilities (except for those that mature after August 12, 2002) were
extended to August 12, 2002. In addition, as described in Note 2 - Equity, the
Company issued $40,372 of notes in conjunction with the amendment of Equity
Agreements with two of its banks. As a result of this refinancing, the
Company has committed credit facilities in an aggregate amount of $2,593,200 all
of which mature on or after August 12, 2002 with substantially no debt
amortization until then. Included in the Company's current portion of long-term
debt at September 30, 2000 were $68,214 of obligations which were repaid on
October 6, 2000 in conjunction with this refinancing.
As part of this transaction, obligations under the credit facilities
were guaranteed by The Warnaco Group, Inc., by all of its domestic subsidiaries
and, on a limited basis, by all of its subsidiaries located in Canada, the
United Kingdom, France, Germany, the Netherlands, Mexico, Belgium, Hong Kong and
Barbados. The Company and each of such entities has granted liens on
substantially all of its assets to secure these obligations.
NOTE 6 - 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
=========
-10-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
Included in intangible and other assets for the Authentic Fitness
acquisition is $412,556 of goodwill which is being amortized over 40 years. The
final allocation 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 nine months
ended October 2, 1999, assuming the acquisition had occurred as of 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.
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.
NINE MONTHS ENDED
OCTOBER 2, 1999
----------------------
Statement of Income Data:
Net revenues $ 1,834.6
======================
Net income $ 92.2
======================
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 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 -- net of cash balances $ 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 $54,136 of goodwill, which is being amortized over 20 years.
-11-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 7 - INVENTORY
SEPT. 30, JANUARY 1,
2000 2000
----------------- -----------------
Finished goods $ 417,017 $ 551,683
Work in process 77,619 89,422
Raw materials 55,931 81,434
----------------- -----------------
$ 550,567 $ 722,539
================= =================
NOTE 8 - 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 September 30,
2000 and January 1, 2000 and for the three months ended September 30, 2000 and
October 2, 1999, and for the nine months ended September 30, 2000 and October 2,
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.
The information below is not indicative of the future operating results.
BALANCE SHEET SUMMARY: SEPTEMBER 30, JANUARY 1,
2000 2000
----------------- -----------------
Current assets $ 183,167 $ 160,296
Non-current assets 500,347 549,090
Current liabilities 43,938 107,408
Non-current liabilities 42,390 29,168
Redeemable preferred securities 103,263 102,904
Stockholders' equity 493,923 469,906
INCOME STATEMENT SUMMARY: THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPT. 30, OCTOBER 2, SEPT. 30, OCTOBER 2,
2000 (a) 1999 (a) 2000 (a) 1999 (a)
-------------- -------------- --------------- --------------
Net revenues $ 128,303 $ 169,824 $ 364,614 $ 413,505
Cost of goods sold 90,743 103,225 255,112 264,253
Net income 9,039 24,201 24,017 49,706
(a) Excludes Retail Stores division net revenue for the third quarter of
fiscal 2000 and 1999 of $18,969 and $25,719 respectively, and cost of
goods sold of $11,637 and $17,000 for the same time period. For the
nine-month period, excludes net revenue of $58,346 and $61,100 and
cost of goods sold of $40,531 and $40,183 respectively. As a result
of the integration of Designer Holdings into the operations of the
Company, net income associated with these net revenues cannot be
separately identified.
- 12 -
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
-------------------------------
SEPT. 30, OCTOBER 2,
2000 1999
-------------- --------------
Cash paid for:
Interest, including $1,869 and $2,455 capitalized in the
first nine months of fiscal 2000 and 1999, respectively $ 110,492 $ 54,679
Income taxes, net of refunds received (5,968) 5,491
NOTE 10 - EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ------------------------------
SEPT. 30, OCTOBER 2, SEPT. 30, OCTOBER 2,
2000 1999 2000 1999
-------------- --------------- -------------- ------------
Numerator for basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $ (93,958) $44,379 $ (130,334) $ 97,217
Cumulative effect of change in accounting principle, net
of income tax benefit - - (13,110) -
-------------- --------------- -------------- ------------
Net income (loss) $ (93,958) $ 44,379 $ (143,444) $ 97,217
============== =============== ============== ============
Denominator for basic earnings (loss) per share -
weighted average shares 53,054 55,154 52,939 56,463
Effect of dilutive securities:
Employee stock options 27 169 37 316
Restricted stock shares 262 470 335 468
Shares under equity agreements (put option contracts) - - 596 250
-------------- --------------- -------------- ------------
Dilutive potential common shares 289 (a) 639 968 (a) 1,034
-------------- --------------- -------------- ------------
Denominator for diluted earnings (loss) per share -
weighted average adjusted shares (a) 53,054 55,793 52,939 57,497
============== =============== ============== ============
Basic earnings (loss) per share before cumulative effect
of change in accounting $ (1.77) $ 0.80 $ (2.46) $ 1.72
============== =============== ============== ============
Diluted earnings (loss) per share before cumulative effect
of change in accounting $ (1.77) $ 0.80 $ (2.46) $ 1.69
============== =============== ============== ============
(a) The effect of dilutive securities was not included in the computation of
diluted earnings (loss) per share for the three months and the nine months ended
September 30, 2000 because the effect would have been anti-dilutive.
Options to purchase shares of common stock that were outstanding during
the nine-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.
SEPT. 30, OCTOBER 2,
2000 1999
----------------- -----------------
Number of shares under option 16,909,336 14,723,736
Range of exercise price $10.88-$42.88 $18.25-$42.88
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.
- 13 -
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 11 - BUSINESS SEGMENTS
The Company operates in three segments: Sportswear and Accessories,
Intimate Apparel, and Retail Stores. The Company evaluates the performance of
its segments based on earnings before interest, taxes, and amortization of
intangibles and deferred financing costs and restructuring and special charges.
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 137 stores under the Speedo'r', Authentic Fitness'r' name
as well as 123 Company outlet stores for the disposition of excess and irregular
inventory. The Company does not manufacture or source products exclusively for
the outlet stores.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies" in Note 1 to the Company's
Form 10-K/A. Transfers to the Retail stores division occur at standard cost and
are not reflected in net revenues of the Intimate Apparel or Sportswear and
Accessories segments. The Company evaluates the performance of its segments
based on earnings before interest, taxes, amortization of intangibles and
deferred financing costs and restructuring and special charges ("Adjusted
EBIT"). Information by business segment is set forth below:
SPORTSWEAR
AND INTIMATE RETAIL
ACCESSORIES APPAREL STORES TOTAL
-------------- --------------- -------------- ---------------
Three months ended September 30, 2000:
- -----------------------------------------------
Net revenues $ 248,955 $ 192,371 $ 58,750 $ 500,076
Adjusted EBITDA 20,835 10,421 5,577 36,833
Depreciation 3,832 4,854 1,091 9,777
Adjusted EBIT 17,003 5,567 4,486 27,056
Three months ended October 2, 1999:
- -----------------------------------------------
Net revenues $ 289,107 $ 246,606 $ 41,399 $ 577,112
Adjusted EBITDA 55,904 57,967 5,314 119,185
Depreciation 1,382 6,757 641 8,780
Adjusted EBIT 54,522 51,210 4,673 110,405
Nine months ended September 30, 2000:
- -----------------------------------------------
Net revenues $ 952,898 $ 592,755 $ 158,257 $ 1,703,910
Adjusted EBITDA 150,428 65,197 (4,647) 210,978
Depreciation 13,724 16,174 2,559 32,457
Adjusted EBIT 136,704 49,023 (7,206) 178,521
Nine months ended October 2, 1999:
- -----------------------------------------------
Net revenues $ 729,779 $ 680,510 $ 100,663 $ 1,510,952
Adjusted EBITDA 130,392 150,873 9,324 290,589
Depreciation 6,906 15,493 1,987 24,386
Adjusted EBIT 123,486 135,380 7,337 266,203
- 14 -
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 for the three and nine months ended September 30, 2000 and
October 2, 1999, respectively, is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ---------------------------
SEPT. 30, OCTOBER 2, SEPT. 30, OCTOBER 2,
2000 1999 2000 1999
-------------- --------------- --------------- -----------
Total Adjusted EBIT for reportable segments $ 27,056 $ 110,405 $ 178,521 $ 266,203
General corporate expenses not allocated 21,534 17,631 63,663 51,367
Restructuring and special charges 98,053 - 206,452 -
Depreciation of corporate assets and amortization 12,450 6,863 38,803 19,735
Investment income - - (42,782) -
Interest expense 43,573 20,869 112,792 56,381
-------------- --------------- --------------- ----------
Income (loss) before provision for income taxes
and cumulative effect of change in
accounting principle $ (148,554) $ 65,042 $ (200,407) $ 138,720
============== =============== =============== ==========
NOTE 12 - COMPREHENSIVE INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -------------------------
SEPT. 30, OCTOBER 2, SEPT. 30, OCTOBER 2,
2000 1999 2000 1999
-------------- -------------- -------------- ---------
Net income (loss) $ (93,958) $ 44,379 $ (143,444) $ 97,217
-------------- -------------- -------------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustments 8,660 1,190 5,301 3,944
Change in unrealized gains (310) 23,808 (64,945) 24,420
Income tax (expense)/benefit - (8,571) 25,563 (8,791)
-------------- -------------- -------------- ----------
Total other comprehensive income (loss) 8,350 16,427 (34,081) 19,573
-------------- -------------- -------------- ----------
Comprehensive income (loss) $ (85,608) $ 60,806 $ (177,525) $ 116,790
============== ============== ============== ==========
The components of accumulated other comprehensive income (loss) as of
September 30, 2000 and January 1, 2000 are as follows:
SEPT. 30, JANUARY 1,
2000 2000
----------------- -----------------
Foreign currency translation adjustments $ (8,788) $ (14,089)
Unrealized holding (loss) gain, net (416) 38,966
----------------- -----------------
Total accumulated other comprehensive income (loss) $ (9,204) $ 24,877
================= =================
-15-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 13 - 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.
On September 29, 2000, the Chancery Court approved the dismissal of the
consolidated action without prejudice.
On May 30, 2000, Calvin Klein, Inc. and the Calvin Klein Trademark
Trust filed a complaint in the U.S. District Court in the Southern District of
New York (Calvin Klein Trademark Trust, et al. v. The Warnaco Group, Inc. et al.
No. 00CIV. 4052 (JSR) (S.D.N.Y.)) against The Warnaco Group, Inc., various other
Warnaco entities, and Wachner alleging, inter alia, claims for breach of
contract and trademark violations. The complaint seeks, inter alia, termination
of certain licensing agreements and trademark rights, injunctive relief and
damages.
On June 26, 2000, the Warnaco defendants filed an answer and
counterclaims (amended on July 31, 2000) against Calvin Klein, Inc. for, inter
alia, breach of the jeanswear and men's accessories licenses and breach of
fiduciary duty, and against Calvin Klein, Inc. and Calvin Klein personally for
tortious interference with business relations, defamation and trade libel.
Warnaco is seeking, inter alia, damages, injunctive and declaratory relief.
On August 3, 2000, the Court announced it would grant defendants'
motion to dismiss Wachner from four counts of the complaint. On August 29, 2000,
the Court reaffirmed its dismissal of Wachner from Counts nine, ten, eleven and
twelve of the Complaint, which alleged breach of the Quality Assurance
Agreement, breach of the Jeanswear License, breach of the Men's Accessories
License and breach of the Store License Agreement, respectively. The Court
granted the Warnaco defendants' motion to dismiss Counts four, five and sixteen
of the Complaint, which alleged breach of fiduciary duty, constructive trust and
deceptive acts or practices, respectively. The Court also dismissed defendants
The Warnaco Group, Inc. and Wachner from Count eight, which alleged intentional
misrepresentation, and granted defendants' motion to stay Count eight as to
Warnaco Inc., pending arbitration.
On October 10, 2000, the Court denied plaintiffs' motion to dismiss
Counterclaims one (alleging breach of the Jeanswear License against CKI), two
(alleging breach of the Accessories License against CKI), three and four
(alleging defamation and trade libel, respectively, against CKI and Calvin Klein
personally), five and six (alleging defamation and trade libel, respectively,
against CKI) seven (alleging tortious interference with business relations
against CKI and Calvin Klein) and nine (alleging removal of CKI as servicer
except to the extent premised on the alleged occurrence of a "CKI Event" under
the Administrative Agreement). The Court granted plaintiffs' motion to dismiss
defendants' Counterclaim eight which alleged breach of fiduciary duty against
CKI, leaving in place all other Warnaco Counterclaims.
-16-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
The Company believes the claims of Calvin Klein, Inc. and the Calvin
Klein Trademark Trust to be without merit and intends to vigorously defend and
to pursue its counterclaims. The impact of the litigation is expected to reduce
the Company's sales of Calvin Klein products in fiscal 2000 and 2001.
On September 14, 2000, Speedo International Limited ("SIL") filed a
complaint in the U.S. District Court for the Southern District of New York,
styled Speedo International Limited v. Authentic Fitness Corp., et al., No. 00
Civ. 6931 (DAB), against The Warnaco Group, Inc. and various other Warnaco
entities (the "Warnaco defendants") alleging claims, inter alia, for breach of
contract and trademark violations. The complaint seeks, inter alia, termination
of certain licensing agreements, injunctive relief and damages.
On November 8, 2000, the Warnaco defendants filed an answer and
counterclaims against SIL seeking, inter alia, a declaration that the Warnaco
defendants have not engaged in trademark violations and are not in breach of the
licensing agreements, and that the licensing agreements in issue may not be
terminated.
The Company believes the claims of SIL to be without merit and intends
to vigorously defend and pursue its counterclaims.
Between August 22, 2000 and October 26, 2000, seven putative class
action complaints were filed in the U.S. District Court for the Southern
District of New York against the Company and certain of its officers and
directors. The complaints, on behalf of a putative class of shareholders of the
Company who purchased Company stock between September 17, 1997 and July 20, 2000
(the "Class Period"), allege, inter alia, that defendants violated the
Securities Exchange Act of 1934 by artificially inflating the price of the
Company's stock and failing to disclose negative information during the Class
Period. The complaints seek damages and other relief. Motions to consolidate,
approve a Lead Plaintiff and approve a Lead Counsel are pending. A hearing is
scheduled for November 17, 2000.
The Company believes the claims to be without merit and intends to
vigorously defend them.
On October 13, 2000, a shareholders' derivative complaint was filed on
behalf of the Company in the U.S. District Court for the Southern District of
New York, styled Widdicombe, derivatively on behalf of The Warnaco Group, Inc.
v. Linda J. Wachner, et al., No. 00 Civ. 7816 (LMM), naming certain Company
officers and directors as defendants (the "Individual Defendants") and the
Company as a nominal defendant. The complaint (which has not yet been served on
the Company) asserts claims on the Company's behalf for, inter alia, breach of
fiduciary duty, corporate waste and unjust enrichment, and seeks, inter alia,
damages, punitive damages, and the imposition of a constructive trust upon the
assets of the Individual Defendants.
-17-
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 NINE MONTHS ENDED
-------------------------------- -------------------------------
SEPT. 30, SEPT. 30, OCTOBER 2,
2000 OCTOBER 2, 2000 1999
RESTATED 1999 RESTATED RESTATED
--------------- --------------- -------------- --------------
(Amounts in millions of dollars)
(Unaudited)
Net revenues $ 500.1 $ 577.1 $ 1,703.9 $ 1,510.9
Cost of goods sold (a) 438.7 378.6 1,359.6 988.1
--------------- --------------- -------------- --------------
Gross profit 61.4 198.5 344.3 522.8
% of net revenues 12.3 % 34.4 % 20.2 % 34.6%
Selling, general and administrative expenses (b) 166.4 112.6 474.7 327.7
--------------- --------------- -------------- --------------
Operating income (loss) (105.0) 85.9 (130.4) 195.1
% to net revenues (21.0)% 14.9 % (7.7)% 12.9%
Investment income - - (42.8) -
Interest expense 43.6 20.9 112.8 56.4
Income tax provision (benefit) (54.6) 20.6 (70.1) 41.5
--------------- --------------- -------------- --------------
Income (loss) before cumulative effect
of change in accounting principle $ (94.0) $ 44.4 $ (130.3) $ 97.2
=============== =============== ============== ==============
(a) Includes $66.5 and $156.3 of restructuring and special charges in the third
quarter and nine-months of fiscal 2000 respectively, related to global
operating strategic initiatives.
(b) Includes $31.5 and $50.1 of restructuring and special charges in the third
quarter and nine-months of fiscal 2000 respectively, related to global
operating strategic initiatives.
Net revenues in the third quarter of fiscal 2000 were $500.1 million a
decrease of $77.0 million or 13.3% from the $577.1 million recorded in the third
quarter of fiscal 1999. Net incremental revenues contributed by the 1999
acquisition of Authentic Fitness ($37.9 million) and ABS ($7.9 million) amounted
to $45.8 million. For the nine-month period, net revenues were $1,703.9 million,
an increase of $193.0 million or 12.8% from the $1,510.9 million recorded for
the fiscal 1999 period. Net incremental revenues contributed by the 1999
acquisition of Authentic Fitness ($339.5 million) and ABS ($30.1 million)
amounted to $369.6 million.
SPORTSWEAR AND ACCESSORIES DIVISION. Net revenues decreased
$40.1 million or 13.9% to $249.0 million in the third quarter of fiscal
2000 compared with $289.1 million in the third quarter of fiscal 1999.
Net incremental revenues contributed by the 1999 acquisitions of
Authentic Fitness ($21.2 million) and ABS ($7.9 million) amounted to
$29.1 million. Excluding acquisitions, net revenues of $219.9 million
were 23.9% lower than the fiscal quarter of 1999. Chaps net revenue in
the quarter was $61.3 million, down 36.3% from $96.2 million last year.
The decrease in net revenue is primarily due to Chaps being adversely
affected by the discounted pricing policy of its competitors as well as
their lost customers, SRI and Uptons due to bankruptcy. Shipments
resumed to SRI subsequent to July 1, 2000. In addition Calvin Klein
Jeans Division revenues was $146.9 million down $37.0 million or 20.1%
from $183.9 million last year in the Juniors and Kids divisions
primarily resulting from the impact of the litigation.
For the nine-month period net revenues increased $223.1
million or 30.6% to $952.9 million compared with $729.8 million for the
nine-month period last year. Net incremental revenues contributed by
the 1999 acquisitions of Authentic Fitness ($292.8 million), ABS ($30.1
million) amounted to $322.9 million. Excluding acquisitions, net
revenues of $630.0 million were down 13.7% compared to the same period
last year. The decrease in net revenue is primarily in Chaps, down
24.5% to $185.7 million from $245.9 million last year, primarily due to
the adverse effect of the discounted pricing policy of its competitors
and the lost customers as cited above. In addition, the Calvin Klein
Jeans division's revenues
-18-
were down 10.0% to $417.1 million from $463.3 million for the
nine-month period last year, primarily in the Juniors division.
INTIMATE APPAREL DIVISION. Net revenues decreased $54.2
million or 22.0% to $192.4 million in the third quarter of fiscal 2000
compared with $246.6 million in the third quarter of fiscal 1999.
Warner's and Olga decreased $22.9 million to $63.8 million from $86.7
million primarily due to the loss of three major customers (Uptons,
Eaton's and Mercantile) and softness at retail in intimate apparel.
Calvin Klein underwear decreased $19.1 million in the third quarter of
fiscal 2000 primarily in Sleepwear to $79.8 million from $98.9 million
last year. Lejaby decreased $4.9 million to $16.1 million primarily
related to the weakness of the Euro against the U.S. dollar (foreign
exchange).
For the nine-month period, net revenues in the Intimate
Apparel division decreased $87.7 million or 12.9% to $592.8 million
from $680.5 million during the nine-month period last year. Warners and
Olga decreased $37.9 million to $210.4 million from $248.3 million last
year due to their lost accounts mentioned above. Calvin Klein Underwear
decreased $21.3 million to $220.2 from $241.5 million, primarily in
Sleepwear, and Lejaby decreased $8.2 million to $67.6 million from
$75.8 million due to the weakness of the Euro against the U.S. dollar
(foreign exchange).
RETAIL STORE DIVISION. Net revenues increased $17.4 million or
41.9% to $58.8 million in the third quarter of fiscal 2000 compared
with $41.4 million in the third quarter of fiscal 1999. The acquisition
of Authentic Fitness contributed $16.7 million to net revenues.
Excluding net revenues of Authentic Fitness, net revenues increased
$0.7 million or 1.7%.
For the nine-month period of fiscal 2000, net revenues
increased 57.2% to $158.3 million compared with $100.7 million for the
nine-month period in fiscal 1999. The acquisition of Authentic Fitness
contributed $46.7 million to net revenues. Excluding Authentic Fitness,
net revenue of $111.6 million increased 10.8% due to a significant
effort made to liquidate excess inventory and improve cash flow.
Gross profit (excluding special charges) decreased $70.6 million or 35.6% to
$127.9 million in the third quarter of fiscal 2000 compared with $198.5 million
in the third quarter of fiscal 1999. Gross margin was 25.6% in the third quarter
of fiscal 2000 compared with 34.4% in the third quarter of fiscal 1999. For the
nine-month period gross profit (excluding special charges) decreased $22.2
million or 4.3% to $500.6 million compared with $522.8 million recorded for the
fiscal 1999 period. Gross margin was 29.4% for the nine-months compared to 34.6%
last year. The decrease in gross margin in the third quarter and nine-months is
attributable to higher off-price sales and increased markdowns taken in the
first, second and third quarters of fiscal 2000 to reduce inventories and
improve cash flow. Also included in cost of sales is $66.5 million and $156.3
million for the third quarter and nine months of fiscal 2000, respectively,
related to the global operating initiatives discussed above, see Note 3 to the
consolidated condensed financial statements. Gross profit on an as reported
basis after these charges were $61.4 million and $344.3 million for the third
quarter and nine-months of fiscal 2000, respectively.
SPORTSWEAR AND ACCESSORIES DIVISION. Gross profit (excluding
special charges) decreased $44.0 million or 45.7% to $52.3 million in
the third quarter of fiscal 2000 compared with $96.3 million in the
third quarter of fiscal 1999. Gross margins were 21.0% in the third
quarter of fiscal 2000 compared with 33.3% in the third quarter of
fiscal 1999. For the nine-month period gross profit (excluding special
charges) increased $37.5 million or 16.0% to $272.5 million compared
with $235.0 million in the comparable fiscal 1999 period. Gross margin
for the nine-month period of fiscal 2000 was 28.6% compared to 32.2%
for the same period last year. The decrease in gross margin is due to
higher margins of the newly acquired Authentic Fitness brands offset by
markdowns taken in the first, second and third quarters of fiscal 2000
primarily to reduce Chaps and Calvin Klein junior's inventories and
improve cash flow. In addition, restructuring and special charges as
outlined above were $25.1 million for the third quarter and nine months
of fiscal 2000.
-19-
INTIMATE APPAREL DIVISION. Gross profit (excluding special
charges) decreased $40.3 million or 45.3% to $48.6 million in the third
quarter of fiscal 2000 compared with $88.9 million in the third quarter
of fiscal 1999. Gross margins were 25.3% in the third quarter of fiscal
2000 compared with 36.1% in the third quarter of fiscal 1999. For the
nine-month period gross profit (excluding special charges) decreased
$95.4 million or 37.4% to $159.4 million compared with $254.8 million
in the fiscal 1999 period. Gross margin was 26.9% for the nine-month
period of fiscal 2000 compared with 37.4% for the nine-month period of
fiscal 1999. The decrease in gross margin is due to markdowns taken in
the first, second and third quarters of fiscal 2000 to reduce
inventories and improve cash flow. In addition, restructuring and
special charges as outlined above were $35.6 million and $116.0 million
for the third quarter and nine months of fiscal 2000.
RETAIL STORE DIVISION. Gross profit (excluding special
charges) increased $13.7 million or 103.0% to $27.0 million (45.9% of
net revenues) in the third quarter of fiscal 2000 compared with $13.3
million (32.2% of net revenues) in the third quarter of fiscal 1999.
For the nine-month period, gross profit (excluding special charges)
increased $35.7 million or 108.2% to $68.7 million (43.4% of net
revenues) compared with $33.0 million (32.8% of net revenues) in the
fiscal 1999 period. The increase in gross margin is due to higher
margins in the Authentic Fitness retail stores. In addition,
restructuring and special charges as outlined above were $5.9 million
in the third quarter and $15.2 nine months of fiscal 2000.
Selling, general and administrative expenses (excluding special
charges) increased $22.3 million or 19.8% to $134.9 million as compared to
$112.6 million in third quarter of fiscal 1999. Selling, general and
administrative expenses as a percentage of net revenue were 27.0% in the third
quarter of fiscal 2000 compared with 19.5% in the third quarter of fiscal 1999.
For the nine-month period, selling, general and administrative expenses
(excluding special charges) increased $96.9 million or 29.6% to $424.6 million
as compared to $327.7 million in 1999 period. Selling, general and
administrative expenses as a percentage of net revenue were 24.9% compared with
21.7% in the fiscal 1999 period. The increased selling, general and
administrative expenses as a percent of net sales is due to an increase in the
Company's Retail business (primarily Authentic Fitness), and higher depreciation
and amortization expense related to additional goodwill for acquisitions and
depreciation for systems implemented in fiscal 1999. Also included in selling,
general and administrative expenses is $31.5 million and $50.1 million for the
third quarter and nine months of fiscal 2000, respectively, related to the
global operating initiatives discussed above, see Note 3 to consolidated
condensed financial statements. Selling, general and administrative expenses on
an as reported basis after these charges were $166.4 million and $474.7 million
for the third quarter and nine months of fiscal 2000, respectively.
OPERATING PROFIT
SPORTSWEAR AND ACCESSORIES DIVISION. Operating profit
(excluding special charges) decreased $37.5 million to $17.0 million in
the third quarter of fiscal 2000 compared with $54.5 million in the
third quarter of fiscal 1999. For the nine-month period, operating
profit (excluding special charges) increased $13.2 million or 10.7% to
$136.7 million compared with $123.5 million in the fiscal 1999 period.
The decrease in operating profit in the third quarter resulted from
lower sales from the lost accounts and additional markdowns to reduce
excess inventory. The increase in operating profit from the nine-months
primarily was due to the acquisitions of Authentic Fitness, ABS and
Chaps Canada. In addition, restructuring and special charges as
outlined above were $32.3 million for the third quarter and nine months
of fiscal 2000.
INTIMATE APPAREL DIVISION. Operating profit (excluding special
charges) decreased $45.6 million to $5.6 million in the third quarter
of fiscal 2000 compared with $51.2 million in the third quarter of
fiscal 1999. For the nine-month period operating profit (excluding
special charges) decreased $86.4 million to $49.0 million compared with
$135.4 million in the fiscal 1999 period. The decrease in operating
profit primarily was due to the lost account mentioned above, a soft
retail environment and markdowns taken in the first, second and third
quarters of fiscal 2000 to reduce inventories and improve cash flow. In
-20-
addition, restructuring and special charges as outlined above were
$48.7 million and $137.5 million in the third quarter and nine months
of fiscal 2000.
RETAIL STORE DIVISION. Operating profit (excluding special
charges) decreased $0.4 million to $4.3 million in the third quarter of
fiscal 2000 compared with $4.7 million profit in the third quarter of
fiscal 1999. For the nine-month period operating profit (excluding
special charges) decreased $15.0 million to a loss of $7.7 million
compared with $7.3 million profit in the fiscal 1999 period. The
decrease in operating profit was due to markdowns taken and other costs
incurred in the first, second and third quarters of fiscal 2000 to
reduce inventories and improve cash flow. In addition, restructuring
and special charges as outlined above were $10.0 million and $20.4 for
the third quarter and nine months of fiscal 2000 respectively.
Interest expense increased $22.7 million to $43.6 million in the third
quarter of fiscal 2000 compared with $20.9 million in the third quarter of
fiscal 1999. For the nine-month period interest expense increased $56.4 million
to $112.8 million compared with $56.4 million in the fiscal 1999 period. The
increase reflects the funding of the Company's 1999 acquisitions and stock
buyback program, which totaled more than $800 million.
The benefit for income taxes recorded during the third quarter of
fiscal 2000 reflects an effective income tax rate of 36.7% as compared to the
provision for income taxes recorded at an effective income tax rate of 31.8% for
the same period in fiscal 1999. The benefit for income taxes for the first nine
months of fiscal 2000 reflects an effective income tax rate of 35.0% as compared
to the provision for income taxes recorded at an effective income tax rate of
29.9% for the same period in fiscal 1999. The higher rates in fiscal 2000
compared to last year resulted, in part, from higher non-deductible goodwill,
resulting from the 1999 acquisitions.
Income (loss) before accounting principle (excluding special charges)
for the third quarter of fiscal 2000 was $32.0 million compared with net income
of $44.4 million in the third quarter of fiscal 1999. For the nine-month period,
net loss (excluding special charges and investment income) was $23.9 million
compared with net income of $97.2 million in the fiscal 1999 period. Income
(loss) before accounting principle on an as reported basis after these items
was $94.0 million and $130.3 million for the third quarter and nine months of
fiscal 2000, respectively.
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
nine months of the fiscal year.
Cash used in operations was $234.6 million in the first nine months
of fiscal 2000 compared with cash used in operations of $168.3 million in the
first nine months of fiscal 1999. The $66.3 million increase in cash used by
operating activities reflects a decrease in accounts payable and accrued
liabilities of $205.2 million and lower net income of $240.7 partially offset
by the successful effort to lower net inventory, which improved cash flow by
$309.2 million, of which $97.7 million was related to the special charges. The
Company normally uses the greatest amount of cash on working capital in the
first half of the fiscal year due to seasonal inventory requirements.
Cash used by investing activities was $44.5 million for the first nine
months of fiscal 2000 compared with cash used of $122.9 million in the first
nine months of fiscal 1999. The first nine months of fiscal 2000 includes
-21-
proceeds from the sale of the Company's equity investment in InterWorld
Corporation of $50.4 million. Capital expenditures in the first nine months were
$85.9 million compared to $66.2 million in the comparable 1999 period. The first
nine months of fiscal 2000 includes amounts for new information systems
implementations of $39.2 million and store fixture programs of $20.4 million.
Intangibles assets and other have decreased $10.1 million from $17.0 million
last year to $6.9 million.
Cash provided by financing activities was $495.5 million in the first
nine months of fiscal 2000 compared with $291.6 million in the first nine months
of fiscal 1999. The increase in the Company's revolving credit balance during
the first nine months of fiscal 2000 of $499.5 million was higher than the
$433.1 million increase in the first nine months of fiscal 1999 due to the
deposit of $191.5 million of cash into investment and collateral accounts in the
third quarter of fiscal 2000 partially offset by the purchase of $117.2 million
of treasury shares in fiscal 1999. Also, the Company received $26.1 million in
the first nine months of fiscal 2000 from the termination of certain interest
rate swaps. The Company paid $14.8 million of dividends in the first nine months
of fiscal 2000 compared to $15.3 million in the first nine months of fiscal
1999.
On June 19, 2000, the Company requested and its lenders agreed to waive
certain financial covenants contained in certain of its loan agreements for the
fiscal quarter ending September 30, 2000 including the $600,000 and $450,000
Revolving Credit Facilities, the $600,000 364-day Facility, the $500,000 Trade
Credit Facility, certain European Credit Lines and the Canadian Credit Facility.
The waivers executed on June 19, 2000 were extended through October 6, 2000. On
October 6, 2000 the Company and the lenders under its credit facilities entered
into an Amendment, Modification, Restatement and General Provisions Agreement.
Pursuant to this agreement, the maturity of the $600,000 364-day credit facility
entered into on November 17, 1999 was extended from October 8, 2000 to August
12, 2002, a new $400,000 trade credit facility which replaced the Company's
existing trade credit facility and which matures on August 12, 2002 was entered
into, the maturity of the Company's receivables securitization facility was
extended to August 12, 2002 and the maturities of the Company's other credit
facilities (except for those that mature after August 12, 2002) were extended to
August 12, 2002. As a result of this refinancing, the Company has committed
credit facilities in an aggregate amount of $2,593,200 all of which mature on or
after August 12, 2002 with substantially no debt amortization until then.
As of September 30, 2000, the Company believes that funds available
under its existing credit facilities, and cash flow to be generated from future
operations will be sufficient to meet the working capital and capital
expenditure needs of the Company, including interest and principal payments on
outstanding debt obligations for the next twelve months.
NEW ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." This statement
addresses a limited number of issues causing implementation difficulties for
entities applying SFAS No. 133. SFAS No. 133 requires that an entity recognize
all derivative instruments as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (i) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (ii) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (iii) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company is currently evaluating the effects of this
statement on its consolidated financial position, liquidity, cash flows and
results of operations.
In May 2000, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," which
addresses the accounting for sales incentives, rebates, coupons
-22-
and free products or services. EITF No. 00-14 is effective for calendar year
companies in the fourth quarter of fiscal 2000. The adoption of EITF No. 00-14
did not have a material impact on the Company's financial position or results
of operations.
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". In July 2000, the EITF issued Issue No. 00-19,
"Determination of Whether Share Settlement Is within the Control of the Company
for Purposes of Applying EITF Issue No. 96-13". EITF No. 00-19 may require the
Company to mark to market the Equity Agreements unless the Company amends such
agreements by June 30, 2001 to remove provisions which require net cash
settlement, See Note 2 to the consolidated condensed financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain of the SEC Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The implementation of this bulletin in the fourth quarter
of fiscal 2000 did not have an impact on the Company's results of operations
or equity.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This report includes "forward-looking statements" within the meaning of
Section 27A of the 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. Factors that could cause actual results to differ materially from
those expressed or implied in such forward-looking statements include the effect
of worldwide regional and country general economic conditions, the overall level
of consumer spending, the performance of the Company's products within the
prevailing retail environment, competitive pricing pressures, consumer
preferences including acceptance of both new designs and newly-introduced
product lines, financial difficulties encountered by customers, inflation,
merchandise supply constraints, interest rate movements and access to capital.
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. Consequently, all of the forward-looking statements
made in this report are qualified by these and other factors, risks and
uncertainties.
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.
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
September 30, 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 September 30, 2000,
the net fair value asset of all financial instruments
-23-
(primarily interest rate swap agreements) with exposure to interest rate risk
was approximately zero. As of September 30, 2000, the Company had approximately
$1,649 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 September 30, 2000 would have had a
$10.2 million unfavorable impact on the Company's pre-tax earnings and cash flow
over the nine-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 September 30, 2000, the net fair value asset
of financial instruments with exposure to foreign currency risk was $0.8
million. The potential decrease in fair value resulting from a hypothetical 10%
adverse change in quoted foreign currency exchange rates would be approximately
$1.5 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 provide for the purchase
by the Company of up to 5.2 million shares of the Company's Common Stock from
two banks and mature on August 12, 2002. The Equity Agreements are required to
be settled by the Company, on a net cash settlement basis within the duration of
the Equity Agreements. As of September 30, 2000, the banks had purchased 5.2
million shares under the Equity Agreements. On September 19, 2000, the Equity
Agreements were amended and supplemented to reduce the price at which the Equity
Agreements could be settled from $12.90 and $10.90, respectively to $4.50 a
share, to provide for an aggregate cash payment by the Company of up to $23.4
million and the issuance of promissory notes in the aggregate principal amount
of up to $23.4 million, which mature on the same date and bear the same interest
rate as the Company's credit facilities. In return for this reduction, the banks
received interest bearing notes payable on August 12, 2002 in an aggregate
amount of $40,372 which resulted in a corresponding reduction in stockholders'
equity. Dividends on the shares outstanding under the Equity Agreements are
reimbursed to the Company. On October 6, 2000, the Company entered into a
modification agreement of its credit facilities which prohibited the option of
share and physical settlement. The terms of the Equity Agreements allow the
banks to sell, under certain conditions, the 5.2 million shares and receive
additional interest bearing notes if the sale price is less than $4.50 per share
or to pay cash to the Company or reduce the outstanding notes if the sale price
is in excess of $4.50. Such additional notes would also mature on August 12,
2002. If these Equity Agreements were settled on a net cash settlement basis at
September 30, 2000, the Company's settlement costs would be approximately
$2,600.
24
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: April 20, 2001 By: /S/ PHILIP TERENZIO
---------------------------
Philip Terenzio
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer
effective March 1, 2001)
Date: April 20, 2001 By: /S/ WILLIAM S. FINKELSTEIN
---------------------------
William S. Finkelstein
Senior Vice President
and Chief Operating Officer of
Calvin Klein Jeanswear and Underwear
(Former Senior Vice President and
Chief Financial Officer-
May 25, 1995-February 28, 2001).
Date: April 20, 2001 By: /S/ STANLEY P. SILVERSTEIN
--------------------------
Stanley P. Silverstein
Vice President, General Counsel
and Secretary
25
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as .....................'r'