================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 4, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10857
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THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
<Table>
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</Table>
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 661-1300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [x]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [x] No [ ]
From June 11, 2001 to February 4, 2003, the registrant's Class A Common
Stock, par value $.01 per share, the only voting stock of the registrant then
issued and outstanding, was traded on the over-the-counter electronic bulletin
board. The aggregate market value of such Class A Common Stock held by
non-affiliates of the registrant as of July 6, 2002, was approximately $781,582.
On February 4, 2003, the registrant's Class A Common Stock, par value $.01 per
share, was cancelled and the Company issued 45,000,000 shares of new Common
Stock, par value $.01 per share. As of March 28, 2003, the aggregate market
value of that Common Stock, the only voting stock of the registrant currently
issued and outstanding, held by non-affiliates of the registrant, was
approximately $474,176,000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [x] No [ ]
The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share as of March 28, 2003: 45,000,000.
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ITEM 1. BUSINESS.
INTRODUCTION
The Warnaco Group, Inc. ('Warnaco'), a Delaware corporation organized in
1986, and its subsidiaries (collectively, the 'Company') design, manufacture,
source and market a broad line of (i) intimate apparel (including bras, panties,
loungewear, sleepwear, shapewear and daywear for women, and underwear and
sleepwear for men); (ii) sportswear for men, women and juniors (including
jeanswear, khakis, knit and woven shirts, tops and outerwear); and
(iii) swimwear for men, women, juniors and children (including swim accessories
and fitness and active apparel). The Company traces its origins back more than
130 years, when the Warner's'r' intimate apparel line, which is owned by the
Company, first entered the market. Through a series of acquisitions, the Company
has grown to become a worldwide leader in the apparel business. The Company's
net revenues for Fiscal 2002 (as defined below) were $1,493.0 million.
The Company operates on a fiscal year basis. The Company's last five fiscal
years ended on January 2, 1999 ('Fiscal 1998'), January 1, 2000 ('Fiscal 1999'),
December 30, 2000 ('Fiscal 2000'), January 5, 2002 ('Fiscal 2001') and
January 4, 2003 ('Fiscal 2002').
The Company's products are distributed primarily to wholesale customers,
including department stores, independent retailers, chain stores, membership
clubs, specialty and other stores and mass merchandise stores, including such
leading retailers as Dayton-Hudson, Macy's and other units of Federated
Department Stores, J.C. Penney, The May Department Stores, Kohl's, Sears,
Wal-Mart and various other major retailers in the United States, Canada, Mexico,
Europe and Asia. In Fiscal 2002, the Company generated approximately 94% of its
net revenues from its wholesale customers and approximately 6% from direct
retail sales.
The Company owns and licenses a portfolio of highly recognized brand names.
As described below, the preponderance of trademarks used by the Company are
either owned or licensed in perpetuity. The Company's core brands have been
established in their respective markets for extended periods and have attained a
high level of consumer awareness. The following table sets forth the Company's
trademarks and licenses:
<Table>
OWNED TRADEMARKS
- ---------------------------------------------------
Warner's'r'
Olga'r'
Body by Nancy Ganz'TM'/Bodyslimmers'r'
Lejaby'r'
Rasurel'r'
Calvin Klein'r' (beneficially owned for men's and
women's underwear, loungewear and sleepwear)
White Stag'r'(a)
Catalina'r'(b)
A.B.S. by Allen Schwartz'r' and related trademarks
Cole of California'r'
Sunset Beach'r'
Sandcastle'r'
TRADEMARKS LICENSED IN PERPETUITY TERRITORY
- ---------------------------------------------------------- ----------------------------------------
Speedot'r'/Speedo Authentic Fitnesst'r'(c) United States, Canada, Mexico, Caribbean
Anne Cole'r' (for swimwear and sportswear)(d) Worldwide
TRADEMARKS LICENSED FOR A TERM TERRITORY EXPIRES
- ---------------------------------------------------------- ---------------------------------------- -----------
Calvin Kleint'r' (for jeans and jeans-related products)(e) North, South and Central America 12/31/2044
Chaps Ralph Lauren'r' (for men's sportswear) United States, Canada, Mexico 12/31/2008
Nautica'r' (for women's swimwear, beachwear and United States, Canada, Mexico, Caribbean 6/30/2007
acessories)(f)
Lifeguard'r' (for swimwear and related products) Worldwide 6/30/2005
Ralph Lauren'r' (for women's swimwear)(g) Worldwide 6/30/2003
</Table>
- ---------
(a) Licensed to Wal-Mart Stores, Inc. for women's sportswear
through 2004.
(b) Licensed to Wal-Mart Stores, Inc. for sportswear through
2004. The Company also sells swimwear wholesale to Wal-Mart
Stores, Inc. using the Catalina trademark.
(c) Licensed in perpetuity from Speedo International, Ltd.
(d) Licensed in perpetuity from Anne Cole and Anne Cole Design
Studio.
(footnotes continued on next page)
(footnotes continued from previous page)
(e) Includes a renewal option which permits the Company to
extend for an additional 10-year term subject to compliance
with certain conditions.
(f) License executed in March 2003. The Company expects to begin
shipments in the fourth quarter of fiscal 2003.
(g) Includes related trademarks for Polo Sport Ralph Lauren'r',
Polo Sport - RLX'r', Lauren/Ralph Lauren'r' and Ralph/Ralph
Lauren'r' that will not be renewed.
The Company relies on its portfolio of highly recognized brand names to
appeal to a broad range of consumers. The Company's goal is to develop products
that address a full range of price points and meet the needs and shopping
preferences of male and female consumers in all age groups. The Company believes
that its ability to serve multiple domestic and international distribution
channels with a diversified portfolio of products under widely recognized brand
names at varying price points distinguishes it from many of its competitors and
reduces the Company's reliance on any single distribution channel, product,
brand or price point.
In April 2001, the Company hired the turnaround crisis management firm of
Alvarez & Marsal, Inc. ('A&M') to advise the Company and evaluate its
operations. On June 11, 2001 (the 'Petition Date'), Warnaco and certain of its
subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S.
Bankruptcy Code (the 'Bankruptcy Code'). During the course of its
reorganization, the Company developed a turnaround plan that focused on three
strategies intended to maximize the Company's value: (i) stabilize and improve
the operations of the Company's core business units; (ii) pursue the sale or
liquidation of certain non-core businesses; and (iii) explore the sale of the
Company's main operating units, or the Company as a whole.
In connection with its reorganization, the Company:
closed 204 retail stores and terminated the related leases;
sold non-core business units and assets, including the sale
of substantially all of the assets of GJM Manufacturing Ltd.
('GJM'), a private label manufacturer of women's sleepwear,
and Penhaligon's Ltd. ('Penhaligon's'), a United
Kingdom-based retailer of perfumes, soaps, toiletries and
other products;
replaced certain members of its senior management and
recruited new leadership for its business groups; and
restructured its balance sheet, including reducing its
outstanding debt from approximately $2.2 billion as of the
Petition Date to approximately $246.4 million as of
February 4, 2003.
On February 4, 2003 (the 'Effective Date'), the Company emerged from Chapter
11 bankruptcy protection and the Company's New Common Stock (as defined below)
began trading on the NASDAQ National Stock Market on February 5, 2003 under the
symbol 'WRNC'.
BUSINESS STRATEGY
The Company's strategy is to capitalize on its portfolio of
highly-recognized brands, improved post-bankruptcy capital structure and
improved operating efficiency and discipline to provide consistent revenue and
earnings growth.
The Company expects to implement its strategy by:
Maintaining operating discipline with a focus on consumer demand. The
Company believes that one of the keys to improving its operating performance is
to maintain the operating discipline developed and implemented over the last 15
months. Beginning in December 2001, management instituted monthly operating
reviews of the Company's business units to monitor purchasing and production
levels, key retailer sell-through and inventory positions, excess and obsolete
inventory and the collection of accounts receivable. The Company also developed
procedures to monitor and improve management of the Company's working capital,
focusing specifically on inventory and accounts receivable. The Company has
reduced manufacturing and distribution inefficiencies by manufacturing, sourcing
and selling quantities of goods to retailers that retailers are likely to sell
and by monitoring the performance of the Company's products at the retail level.
The Company believes these practices improve performance at the retail level by
minimizing retailers' requests for sales discounts, returns and
2
allowances. The Company believes that this operating discipline has contributed
to an improvement in the Company's gross margins (29.5% in Fiscal 2002 versus
17.8% in Fiscal 2001) and liquidity position over the last 15 months.
Further improving its cost structure. The Company has also improved its
operating margins and cost structure by consolidating manufacturing and
distribution operations and reducing selling, general and administrative costs.
In particular, the Company increased its gross margins from 17.8% in Fiscal 2001
to 29.5% in Fiscal 2002, and reduced its selling, general and administrative
costs from $598.2 million in Fiscal 2001 to $411.0 million in Fiscal 2002. The
Company has identified opportunities to further improve its cost structure and
operating profit through more efficient manufacturing operations and improved
product sourcing. The Company is currently in the process of further
consolidating its European and North American Intimate Apparel Group
manufacturing operations and is expanding its use of third party contractors,
particularly in its Intimate Apparel and Swimwear Groups. The Company will
continue to assess opportunities to lower product costs and reduce operating
expenses.
Fostering organic growth within its operating units. The Company intends to
foster organic growth within its operating units by:
introducing new products and product extensions;
entering new channels of distribution; and
further expanding the international distribution of its
brands.
The Company relies on its portfolio of highly recognized brand names to appeal
to male and female consumers in all age groups at varying price points. The
Company believes that the quality, strength and diversity of its brand portfolio
will be the principal factors for achieving this organic growth.
Capitalizing on licensing and sublicensing opportunities. The Company
intends to seek to expand its business and enhance its profitability by
licensing additional brands to complement the Company's current product
portfolio and licensing or sublicensing existing brands in certain non-core
products. For example, the Company recently entered into an exclusive licensing
agreement with Nautica Apparel, Inc. ('Nautica'), under which the Company will
manufacture, distribute and sell women's fashion swimwear and related products
carrying the Nautica'r' brand name in the United States, Canada, Mexico and the
Caribbean Islands. To capitalize on the value of its existing brands in non-core
products, the Company recently entered into a sublicense agreement with Riviera
Trading Inc. ('Riviera') under which Riviera will develop and sell a line of
Speedo'r' sunglasses in North America.
Pursuing potential strategic acquisitions to complement its existing brand
portfolio. The Company believes that, over the long-term, attractive
opportunities will exist to increase revenues and earnings in its core operating
units with acquisitions of complementary product lines and businesses. The
Company intends to pursue these opportunities, in a disciplined manner, to the
extent they become available. As part of the active management of its brands,
the Company will also continue to assess its brand portfolio and may choose to
rationalize certain assets over time.
BUSINESS GROUPS
During Fiscal 2001, the Company operated in three business groups:
(i) Intimate Apparel Group; (ii) Sportswear and Swimwear Group; and
(iii) Retail Stores Group. Commencing in Fiscal 2002, the Company operated in
four business groups: (i) Intimate Apparel Group; (ii) Sportswear Group;
(iii) Swimwear Group; and (iv) Retail Stores Group. The Sportswear and Swimwear
Groups (previously combined as the Sportswear and Swimwear Group) were separated
in Fiscal 2002 to reflect the manner in which management currently evaluates the
Company's business. Accordingly, certain financial information contained in this
Annual Report on Form 10-K relating to fiscal periods prior to Fiscal 2002 has
been restated to correspond with the Company's revised reporting. The Company
expects that, because of the retail store closings during Fiscal 2001 and Fiscal
2002, the Retail Stores Group's net revenues will not represent a material
portion of the Company's net revenues in fiscal 2003. As a result, beginning in
fiscal 2003, the results of operations of the Retail Stores Group will be
included with the Company's three wholesale Groups according to the type of
product sold. The Company believes that an evaluation of the Company's operating
results and the operating results of its groups for the past
3
three years based solely on operating loss is not complete without considering
the effect of depreciation and amortization on those results. Since the Petition
Date, the Company has sold assets, written down impaired assets, recorded a
transitional impairment adjustment for the adoption of SFAS No. 142 and stopped
amortizing certain intangible assets that were previously amortized. As a
result, depreciation and amortization expense has decreased by approximately
$40.3 million in Fiscal 2002 compared to Fiscal 2001 and by approximately $44.7
million compared to Fiscal 2000. For informational purposes, the Company has
separately identified the depreciation and amortization components of operating
loss in the following table. See Note 6 of Notes to Consolidated Financial
Statements. The following table summarizes the Company's and each of its Group's
net revenues, Group operating income (loss) before depreciation and amortization
('Group EBITDA') (the Company does not allocate interest expense, income taxes,
depreciation, amortization of intangible assets and deferred financing costs,
corporate overhead, reorganization items or impairment charges to its operating
groups) and operating loss during each of the last three fiscal years:
<Table>
<Caption>
FISCAL
-----------------------------------------------------------------------
2000 2001 2002
---------------------- ---------------------- ---------------------
(DOLLARS IN THOUSANDS)
% OF % OF % OF
TOTAL TOTAL TOTAL
----- ----- -----
NET REVENUES:
Intimate Apparel........ $ 769,326 34.2% $ 594,889 35.6% $ 570,694 38.2%
Sportswear.............. 882,917 39.2% 573,697 34.3% 525,564 35.2%
Swimwear................ 355,199 15.8% 311,802 18.7% 304,994 20.4%
Retail Stores........... 242,494 10.8% 190,868 11.4% 91,704 6.1%
---------- --------- ---------- --------- ---------- -----
$2,249,936 100.0% $1,671,256 100.0% $1,492,956 100.0%
---------- --------- ---------- --------- ---------- -----
---------- --------- ---------- --------- ---------- -----
<Caption>
% OF NET % OF NET % OF NET
REVENUES REVENUES REVENUES
-------- -------- --------
OPERATING LOSS:
Intimate Apparel........ $ (114,791) -14.9% $ (74,378) -12.5% $ 64,126 11.2%
Sportswear.............. 39,638 4.5% (5,772) -1.0% 33,592 6.4%
Swimwear................ 81,323 22.9% (6,555) -2.1% 34,124 11.2%
Retail Stores........... (22,687) -9.4% (13,019) -6.8% 126 0.1%
---------- --------- ---------- --------- ---------- -----
Group EBITDA............ (16,517) -0.7% (99,724) -6.0% 131,968 8.8%
Group depreciation...... (46,499) -2.1% (42,664) -2.6% (35,397) -2.4%
---------- --------- ---------- --------- ---------- -----
Group operating income
(loss)................ (63,016) -2.8% (142,388) -8.5% 96,571 6.5%
Unallocated corporate
expenses.............. (101,871) -4.5% (103,770) -6.2% (45,208) -3.0%
Corporate depreciation
and amortization of
intangibles........... (55,580) -2.5% (55,154) -3.3% (22,022) -1.5%
Impairment charge....... -- -- (101,772) -6.1% -- --
Reorganization items.... -- -- (177,791) -10.6% (116,682) -7.8%
---------- --------- ---------- --------- ---------- -----
Operating loss.......... $ (220,467) -9.8% $ (580,875) -34.8% $ (87,341) -5.9%
---------- --------- ---------- --------- ---------- -----
---------- --------- ---------- --------- ---------- -----
</Table>
INTIMATE APPAREL
The Intimate Apparel Group designs, manufactures, sources and markets
moderate to premium priced intimate apparel and other products for women and
better to premium priced men's underwear and sleepwear. Net revenues of the
Intimate Apparel Group accounted for approximately 38.2% of the
4
Company's net revenues in Fiscal 2002. The following table sets forth the
Intimate Apparel Group's brand names and the apparel price ranges and types:
<Table>
<Caption>
BRAND NAME PRICE RANGE TYPE OF APPAREL
---------- ----------- ---------------
Warner's.................. Upper moderate to better Women's intimate apparel
Olga...................... Better Women's intimate apparel
Body by Nancy
Ganz/Bodyslimmers....... Better to premium Women's intimate apparel
Calvin Klein.............. Better to premium Women's intimate apparel/men's underwear
Lejaby/Rasurel............ Better to premium Women's intimate apparel, swimwear
</Table>
According to The NPD Group, a market research firm ('NPD'), in Fiscal 2002,
the Company owned or licensed three of the top ten selling intimate apparel
brands in participating U.S. department stores. Warner's, Olga and Calvin Klein
were the second, third and ninth leading sellers, respectively, of women's bras
in participating U.S. department stores in 2002. The Company's Calvin Klein,
Warner's and Olga brands were the third, fourth and ninth leading sellers,
respectively, of women's panties in participating U.S. department stores in
2002. Calvin Klein men's underwear was the number two selling brand of men's
underwear in participating U.S. department stores in 2002. According to Mercier,
a European market research firm, during Fiscal 2001, Lejaby was the number two
selling intimate apparel brand in the better to premium category in Western
Europe.
The Warner's, Olga and Lejaby lines consist primarily of bras, panties,
daywear and sleepwear. The Calvin Klein women's lines consist primarily of
women's underwear, bras, panties, daywear, loungewear and sleepwear. The Calvin
Klein men's lines consist primarily of men's underwear, briefs, boxers,
T-shirts, loungewear and sleepwear. The Body by Nancy Ganz/Bodyslimmers line is
primarily a shapewear line. The Rasurel lines consist primarily of swimwear sold
in Europe.
The Intimate Apparel Group targets a broad range of consumers and provides
products at a wide range of price-points. The Company's design team strives to
design products of a price, quality, fashion and style that meet its customers'
demands.
The Company's Intimate Apparel brands are distributed primarily through
department stores, independent retailers and chain stores and, to a lesser
extent, specialty stores. The following table sets forth the Intimate Apparel
Group's principal distribution channels and customers:
<Table>
<Caption>
CHANNELS OF DISTRIBUTION CUSTOMERS BRANDS
------------------------ --------- ------
UNITED STATES
Department Stores Federated Department Stores, Warner's, Olga, Body by Nancy
The May Company, Saks Fifth Ganz/Bodyslimmers, Lejaby and
Avenue and Dayton Hudson Calvin Klein underwear
Independent Retailers Nordstrom, Dillard's, Neiman Warner's, Olga, Body by Nancy
Marcus and Belk Ganz/Bodyslimmers, Lejaby and
Calvin Klein underwear
Chain Stores J.C. Penney, Kohl's, Sears and Warner's, Olga, Body by Nancy
Target Ganz/Bodyslimmers and Private
Label
CANADA Hudson Bay Company, Zellers, Warner's, Olga, Body by Nancy
Sears and Wal-Mart Ganz/Bodyslimmers, Calvin
Klein underwear and Lejaby,
MEXICO Wal-Mart, Sears, Liverpool and Warner's, Olga, Body by Nancy
Palacio de Hierro Ganz/Bodyslimmers and Calvin
Klein underwear
EUROPE Harrods, House of Fraser, Warner's, Body by Nancy
Galeries Lafayette, Au Ganz/Bodyslimmers, Lejaby,
Printemps, Karstadt, Kaufhof Rasurel and Calvin Klein
and El Corte Ingles underwear
ASIA Distributors Calvin Klein underwear
</Table>
5
The Intimate Apparel Group generally markets its product lines for three
retail-selling seasons (spring, fall and holiday). Its revenues are generally
consistent throughout the year, with approximately 49.8%, 45.8%, and 49.3% of
the Intimate Apparel Group's net revenues recorded in the first half of Fiscal
2000, 2001 and 2002, respectively.
The Intimate Apparel Group has operations in the Americas (United States,
Canada, Costa Rica, Honduras and Mexico), Europe (Austria, Belgium, France,
Germany, Italy, the Netherlands, Spain, Switzerland and the United Kingdom) and
Asia (Hong Kong). The following table sets forth the domestic and international
net revenues of the Intimate Apparel Group:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
NET % OF NET % OF NET % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
NET REVENUES:
United States................... $512,093 66.6% $372,149 62.6% $330,286 57.9%
International................... 257,233 33.4% 222,740 37.4% 240,408 42.1%
-------- ----- -------- ----- -------- -----
$769,326 100.0% $594,889 100.0% $570,694 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</Table>
The Company's intimate apparel products for the Warner's, Olga, Body by
Nancy Ganz/Bodyslimmers and Lejaby labels are either manufactured in the
Company's facilities in the United States, Costa Rica, Honduras, Mexico and
France or sourced from third parties located in Morocco, China and Tunisia.
Calvin Klein underwear products are sourced primarily from third parties located
in Asia. Sourcing allows the Company to maximize production flexibility while
avoiding significant capital expenditures, work-in-process inventory buildups
and the costs of managing a large production work force. The Company inspects
products manufactured by contractors to ensure that they meet the Company's
standards.
As part of the Company's overall business strategies, the Intimate Apparel
Group is implementing the following specific strategic initiatives:
Further improving the cost structure of the Intimate Apparel
Group and reducing its manufacturing and product acquisition
cost by:
Consolidating existing manufacturing facilities. The Company
is consolidating certain manufacturing operations in North
America and Europe.
Strategically utilizing contractors. The Company intends to
use contractors to: (i) facilitate the consolidation of
certain manufacturing operations in North America and
Europe; (ii) provide the Intimate Apparel Group with greater
flexibility in aligning its manufacturing capacity with the
changing demands of its customers; and (iii) reduce the
Intimate Apparel Group's manufacturing and product
acquisition costs.
Consolidating distribution facilities in Canada. The Company
intends to consolidate all of its distribution facilities in
Canada to reduce its selling and distribution costs.
Fostering organic growth of existing businesses by:
Expanding distribution of its products outside existing
geographic territories. For example, the Company believes
that there is an opportunity to increase revenues by
re-launching the Lejaby brand in the premium priced
distribution channel in North America.
Increasing penetration of its Calvin Klein men's and women's
underwear brands in Europe and Asia. For example, in Fiscal
2002, the Company signed new distribution agreements with
third parties in China, Korea, Malaysia and Singapore.
Building its private label business. The Company believes
that its design, product manufacturing and sourcing
expertise will enable it to build a private label intimate
apparel business. The Company believes that these private
label programs could provide incremental revenue and
profitability and will not directly compete with its
existing branded product offerings because the private label
products will generally be offered at lower price points and
will be sold to customers that do not carry the Company's
branded products.
6
Introducing products to the mass merchandise channels of
distribution. The Company believes that there is an
opportunity to develop and introduce new intimate apparel
products to the growing chain and mass merchandise market in
the United States and to the comparable European mass
merchandise channel, the hyper-market channel of
distribution.
SPORTSWEAR
The Sportswear Group designs, sources and distributes mass market to premium
priced men's and women's sportswear. Net revenues of the Sportswear Group
accounted for approximately 35.2% of the Company's net revenues in Fiscal 2002.
The following table sets forth the Sportswear Group's brand names and the
apparel price ranges and types:
<Table>
<Caption>
BRAND NAME PRICE RANGE TYPE OF APPAREL
---------- ----------- ---------------
Calvin Klein........................ Better to premium Men's, women's, junior's and
children's designer jeanswear,
khakis and jeans-related products
and men's accessories
Chaps Ralph Lauren.................. Upper moderate Men's knit and woven sport shirts,
sweaters, outerwear, sportswear and
bottoms
A.B.S. by Allen Schwartz and related
brands............................ Better to premium Women's and junior's casual
sportswear and dresses
Catalina............................ Mass market Men's and women's sportswear
White Stag.......................... Mass market Women's sportswear, including tops,
bottoms and activewear
</Table>
The Sportswear Group benefits from its association with some of the best
known and most innovative American fashion designers. According to a Women's
Wear Daily survey, the Calvin Klein and Ralph Lauren trademarks were two of the
most recognized brand names in the world. Moreover, the Company's A.B.S. by
Allen Schwartz line of women's clothing provides the Company with a product
offering in the women's premium priced sportswear market.
The Company licenses the Catalina and White Stag brands on an exclusive
basis to Wal-Mart Stores, Inc. ('Wal-Mart') for women's sportswear and White
Stag is the number one selling women's sportswear brand in Wal-Mart. The Company
designs product and receives royalty payments on sales by Wal-Mart. The Company
also assists Wal-Mart in sourcing products under the White Stag brand.
The Calvin Klein line includes men's and women's jeans and jeans-related
products, including khakis, knits and woven tops and shirts. Chaps Ralph Lauren
is a main-floor brand, offering a moderately priced men's sportswear line
providing a more casual product offering to the consumer. Catalina and White
Stag are women's mass market sportswear lines with a full range of products. The
Catalina and White Stag lines include women's sportswear, including tops,
bottoms and activewear. The A.B.S. by Allen Schwartz line is a women's and
junior's better to premium sportswear line.
7
The Sportswear Group's products are distributed primarily through department
stores, independent retailers, membership clubs and mass merchandisers and, to a
lesser extent, specialty stores. The following table sets forth the Sportswear
Group's principal distribution channels and customers:
<Table>
<Caption>
CHANNELS OF DISTRIBUTION CUSTOMERS BRANDS
------------------------ --------- ------
UNITED STATES
Department Stores Federated Department Calvin Klein jeans, Chaps
Stores, The May Company, Ralph Lauren and A.B.S. by
Saks Fifth Avenue and Allen Schwartz
Dayton Hudson
Independent Retailers Nordstrom, Dillard's, Calvin Klein jeans, Chaps
Neiman Marcus and Belk Ralph Lauren and A.B.S. by
Allen Schwartz
Other Military Chaps Ralph Lauren and
Calvin Klein jeans
Membership Clubs Costco and Sam's Club Calvin Klein jeans
Mass Merchandisers Wal-Mart Catalina/White Stag
(licensed)
CANADA Hudson Bay Company, Calvin Klein jeans and
Zellers, Sears and Wal-Mart Chaps Ralph Lauren
MEXICO Wal-Mart, Sears and Calvin Klein jeans and
Liverpool, Palacio de Chaps Ralph Lauren
Hierro
</Table>
The Sportswear Group generally markets its products for four retail selling
seasons (spring, summer, fall and holiday). New styles, fabrics and colors are
introduced based upon consumer preferences and market trends, and to coincide
with the appropriate selling season. Approximately 49.6%, 44.8% and 45.0% of the
Sportswear Group's net revenues were recorded in the first half of fiscal 2000,
2001 and 2002, respectively.
The Sportswear Group has operations in the United States, Canada and Mexico.
The following table sets forth the domestic and international net revenues of
the Sportswear Group:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
---------------- ---------------- ----------------
NET % OF NET % OF NET % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
NET REVENUES:
United States........... $823,064 93.2% $512,776 89.4% $472,214 89.8%
International........... 59,853 6.8% 60,921 10.6% 53,350 10.2%
-------- ----- -------- ----- -------- -----
$882,917 100.0% $573,697 100.0% $525,564 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</Table>
The Sportswear Group's products are primarily sourced from third party
contractors in the United States, Mexico and Asia.
As part of the Company's overall business strategies, the Sportswear Group
is implementing the following specific strategic initiatives:
Further improving the cost structure of the Sportswear Group
and reducing its manufacturing and product acquisition cost
by:
Reducing product cost. The Sportswear Group seeks to reduce
the costs of its products by increasing the use of
competitive sourcing. With the shutdown of the domestic
Calvin Klein jeans manufacturing facilities in Fiscal 2002,
the Company now sources all of the Sportswear Group's
products from third party vendors.
8
Reducing its selling and distribution costs. The Sportswear
Group seeks to reduce its selling and distribution costs by
consolidating certain distribution operations in the United
States and Canada.
Fostering organic growth of the Sportswear Group's business
by:
Exploring product extensions and new channels of
distribution. The Company recently introduced a men's
sportswear line under the Allen B'r' trademark and is
exploring the introduction of secondary brands for women's
sportswear to new channels of distribution.
Exploring potential sublicensing opportunities. The Company
holds the rights to distribute children's jeans and
jeans-related apparel under the Calvin Klein label. The
Company does not believe that children's apparel is a core
business and is seeking to sublicense to a third party the
right to sell Calvin Klein children's products, which could
provide incremental royalty income for the Company.
SWIMWEAR GROUP
The Swimwear Group designs, manufactures, sources and sells mass market to
premium priced swimwear, fitness apparel, swim accessories and related products.
Net revenues of the Swimwear Group accounted for approximately 20.4% of the
Company's net revenues in Fiscal 2002. The following table sets forth the
Swimwear Group's brand names and the apparel price ranges and types:
<Table>
<Caption>
BRAND NAME PRICE RANGE TYPE OF APPAREL
---------- ----------- ---------------
Speedo/Speedo Authentic Better Men's and women's competitive swimwear
Fitness................. and swim accessories, men's swimwear and
coordinating T-shirts, women's fitness
swimwear, Speedo Authentic Fitness
activewear and children's swimwear
Anne Cole................. Better to premium Women's swimwear
Cole of California........ Upper moderate to better Women's swimwear
Sunset Beach.............. Upper moderate to better Junior's swimwear
Sandcastle................ Upper moderate to better Women's swimwear
Catalina/White Stag....... Mass market Men's and women's swimwear
Lifeguard................. Upper moderate to better Swimwear and related products
Nautica................... Upper moderate to better Women's swimwear, beachwear and
accessories
Ralph Lauren(a)........... Better to premium Women's swimwear
</Table>
- ---------
(a) Includes related trademarks for Polo Sport Ralph Lauren'r',
Polo Sport-RLX'r', Lauren/Ralph Lauren'r' and Ralph/Ralph
Lauren'r' that will not be renewed.
Speedo is the pre-eminent competitive swimwear brand in the world and
innovations by the Swimwear Group and its licensor, Speedo International, Ltd.
have led and continue to lead the competitive swimwear industry. For example, a
Speedo product innovation was the development of the Speedo Fastskin suit
(developed by the Swimwear Group and its licensor, Speedo International, Ltd.)
which was introduced in 2000 and mimics shark skin for maximum speed.
Eighty-four percent of current world champions and over 90 percent of the medal
winners at the 2001 USA Swimming National Championships raced in Fastskin suits.
Speedo competitive swimwear is primarily distributed through sporting goods
stores and swim specialty shops. Competitive swimwear accounted for
approximately 10.0% of the Swimwear Group's net revenues in Fiscal 2002.
The Swimwear Group leverages the performance image of the Speedo competitive
swimwear brand to market its Speedo Authentic Fitness active and fitness
apparel. The Company also capitalizes on this image in marketing its Speedo
brand fitness and fashion swimwear for both men and women by
9
incorporating performance elements in these more fashion oriented products.
Speedo fitness and fashion swimwear, Speedo swimwear for children and
Speedo/Speedo Authentic Fitness active apparel are distributed through
department and specialty stores, independent retailers, chain stores, sporting
goods stores, catalog retailers and membership clubs. Speedo fashion swimwear,
active apparel and related products accounted for approximately 32.1% of the
Swimwear Group's net revenues in Fiscal 2002.
Speedo accessories, including swim goggles, water shoes, water-based fitness
products, water toys, electronics and other swim and fitness-related products
for adults and children, are primarily distributed through sporting goods
stores, chain stores, swim specialty shops, membership clubs and mass
merchandisers. Speedo accessories accounted for approximately 21.6% of the
Swimwear Group's net revenues in Fiscal 2002.
The Swimwear Group's Designer Swimwear business unit designs, manufactures,
sources and sells a broad range of fashion swimwear and beachwear for juniors
and women. Designer Swimwear products are distributed through all channels of
distribution in the United States and Canada including department stores,
independent retailers, chain stores, membership clubs, mass merchandisers and
swim specialty shops. Designer Swimwear accounted for approximately 36.3% of the
Swimwear Group's net revenues in Fiscal 2002.
The Swimwear Group's products are distributed primarily through department
stores, independent retailers, chain stores, membership clubs, mass
merchandisers and swim specialty stores.
The following table sets forth the Swimwear Group's principal distribution
channels and customers:
<Table>
<Caption>
CHANNELS OF DISTRIBUTION CUSTOMERS BRANDS
------------------------ --------- ------
UNITED STATES
Department Stores Federated Department Stores, Speedo fitness and active
The May Company, Saks Fifth apparel, Anne Cole, Cole of
Avenue and Dayton Hudson California, Sandcastle and
Sunset Beach
Independent Retailers Nordstrom, Dillard's, Neiman Anne Cole and Speedo fitness
Marcus and Belk and active apparel
Chain Stores J.C. Penney, Kohl's, Sears Speedo accessories and fitness
and Target and active apparel and private
label
Other Military, Victoria's Secret Speedo performance, fitness and
Catalog and The Sports active apparel and accessories,
Authority Anne Cole and private label
Membership Clubs Costco and Sam's Club Speedo fitness and active
apparel and accessories
Mass Merchandisers Wal-Mart Catalina/White Stag (wholesale
basis)
CANADA Hudson Bay Company, Zellers, Speedo fitness and active
Sears and Wal-Mart apparel and accessories
MEXICO Wal-Mart, Sears, Liverpool, Speedo fitness and active
and Palacio de Hierro apparel and accessories
</Table>
The Swimwear Group generally markets its products for three retail selling
seasons (spring, fall and holiday). New styles, fabrics and colors are
introduced based upon consumer preferences and market trends, and to coincide
with the appropriate selling season. The swimwear business is seasonal.
Approximately 76.5%, 78.1% and 71.2% of the Swimwear Group's net revenues were
recorded in the first halves of Fiscal 2000, 2001 and 2002, respectively.
10
The Swimwear Group has operations in the United States, Mexico and Canada.
The following table sets forth the domestic and international net revenues of
the Swimwear Group:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
----------------- ----------------- -----------------
NET % OF NET % OF NET % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
NET REVENUES:
United States.................. $340,286 95.8% $297,174 95.3% $291,032 95.4%
International.................. 14,913 4.2% 14,628 4.7% 13,962 4.6%
-------- ------ -------- ------ -------- ------
$355,199 100.0% $311,802 100.0% $304,994 100.0%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</Table>
The Swimwear Group's products are manufactured in the Company's facilities
in Mexico and are sourced from third party contractors in the United States,
Mexico and Asia.
As part of the Company's overall business strategies, the Swimwear Group has
developed the following specific strategic initiatives:
Further improving the cost structure of the Swimwear Group
and reducing its manufacturing and product acquisition cost
by reducing manufacturing costs. The Swimwear Group intends
to reduce manufacturing costs through more efficient plant
capacity utilization, further cost cutting initiatives and
enhancements to its manufacturing planning and material
requirements planning software and practices.
Fostering organic growth of the Swimwear Group's business
by:
Expanding distribution channels for its existing products to
new customers in new retail segments. The Swimwear Group
seeks to market Speedo accessories (such as swim goggles and
water toys for children) in grocery and drug store chains,
market its electronic products (such as Speedo timing
watches and underwater radios) in electronics stores, expand
the department store distribution of its fashion swimwear
lines and expand the distribution of Speedo outerwear and
fleece products.
Developing new products. The Company believes that the
Speedo brand can be further expanded to move Speedo 'out of
the water' through product offerings in classifications such
as fitness-related active sportswear.
Entering into new licensing agreements. In March 2003, the
Company entered into a license agreement with Nautica to
manufacture, distribute and sell women's fashion swimwear.
The Nautica brand adds to the Company's fashion swimwear
product portfolio.
Capitalizing on sublicensing opportunities. The Company
believes that the Speedo brand offers opportunities for
sublicenses that can generate royalty income. For example,
the Swimwear Group recently entered into a sublicense for
the distribution of Speedo sunglasses with Riviera. The
Company believes that further sublicense opportunities exist
in swim and active-related consumer products.
RETAIL STORES
Through January 4, 2003, the Company's Retail Stores Group was comprised of
both outlet and full price retail stores. As of January 5, 2002, the Company
operated 95 Speedo Authentic Fitness retail stores, 86 domestic and
international outlet retail stores and 16 full price Calvin Klein retail stores.
During Fiscal 2002, the Company sold the assets of and closed all of its
domestic outlet retail stores. During Fiscal 2002, the Company also closed 47
Speedo Authentic Fitness full price retail stores. The Company closed three
additional Speedo Authentic Fitness full price retail stores in January 2003.
The closing of the Company's domestic outlet retail stores and the sale of the
related inventory generated approximately $23.2 million of net proceeds through
January 4, 2003. The Company does not intend to operate any domestic outlet
retail stores in 2003. The Company continues to operate two outlet retail stores
in Canada; 13 outlet retail stores in Europe; 45 Speedo Authentic Fitness full
price retail stores in North America; five Calvin Klein underwear full price
retail stores in Europe; and 11 full price Calvin Klein underwear retail stores
in Asia.
11
The following table sets forth the domestic and international net revenues
of the Retail Stores Group:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
----------------- ----------------- -----------------
NET % OF NET % OF NET % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
NET REVENUES:
United States.................. $213,407 88.0% $160,621 84.2% $ 74,174 80.9%
International.................. 29,087 12.0% 30,247 15.8% 17,530 19.1%
-------- ------ -------- ------ -------- ------
$242,494 100.0% $190,868 100.0% $ 91,704 100.0%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</Table>
Net revenues of the Company's retail operations accounted for approximately
6.1% of the Company's net revenues in Fiscal 2002 and are expected to account
for approximately 3% of the Company's net revenues in fiscal 2003. As a result,
beginning in fiscal 2003, the results of operations of the Retail Stores Group
will be allocated among the Company's Intimate Apparel, Sportswear and Swimwear
Groups according to the type of product sold.
CUSTOMERS
The Company's products are widely distributed to department and specialty
stores, independent retailers, chain stores, membership clubs and mass
merchandise stores in North America and Europe. One customer, Federated
Department Stores, Inc., accounted for 10.5% of the Company's net revenues in
Fiscal 2002, and the Company's top 10 customers accounted for approximately
51.9% of the Company's net revenues in Fiscal 2002. No customer accounted for
10% or more of the Company's net revenues in either Fiscal 2000 or Fiscal 2001.
The Company offers a diversified portfolio of brands across multiple
distribution channels to a wide range of customers. The Company utilizes focus
groups, market research and in-house and licensor design staffs to align its
brands with the preferences of consumers. The Company believes that this
strategy reduces its reliance on any single distribution channel and allows the
Company to market products with designs and features that appeal to a wide range
of consumers at varying price points.
ADVERTISING AND PROMOTION
The Company devotes significant resources to advertising and promoting its
various brands. The goal of the Company's advertising and promotional program is
to increase consumer awareness of the Company's products with the retail
consumer and, consequently, to increase consumer demand.
Total advertising and promotion expense was approximately $141.3 million, or
6.3% of net revenues, in Fiscal 2000, compared with $138.4 million, or 8.3% of
net revenues, in Fiscal 2001, and $108.1 million, or 7.2% of net revenues, in
Fiscal 2002. The Company focuses its advertising and promotional spending on
brand and/or product specific advertising, primarily through point of sale
product displays, visuals and individual in-store promotions. Some of the
Company's brands also advertise in national print publications. The Company's
Swimwear Group sponsors a number of world-class swimmers, divers, volleyball
players and triathletes that wear the Company's products in competition and
participate in various promotional activities on behalf of the Speedo brand.
The Company participates in cooperative advertising programs with many of
its domestic customers, reimbursing customers for a portion of the cost incurred
by the customer in placing print advertising featuring the Company's products.
The Company's licenses to use the Calvin Klein, Nautica and Chaps Ralph
Lauren trademarks include provisions requiring the Company to spend a specified
percentage (ranging from 2% to 3%) of revenues on advertising and promotion
related to the licensed products. The Company also benefits from general
advertising campaigns conducted by its licensors. Though some of these
advertising campaigns do not focus specifically on the Company's licensed
products and often include the products of other licensees in addition to those
of the Company, the Company benefits from the general brand recognition that
these campaigns generate.
12
SALES
The Company's wholesale customers are served by over 300 salaried and
commissioned sales representatives, who are generally assigned to specific
brands and products. The Company also employs sales coordinators who assist the
Company's customers in presenting the Company's products effectively and in
educating consumers about the Company's various products. In addition, the
Company has customer service departments for each business unit that assist the
Company's sales representatives and customers in tracking goods available for
sale, determining order and shipping lead times and tracking the status of open
orders.
The Company utilizes Electronic Data Interchange ('EDI') programs wherever
possible, which permit the Company to receive purchase orders electronically
from customers and, in some cases, to transmit invoices electronically to
customers. EDI helps the Company ensure that its customers receive the Company's
products in a timely and efficient manner.
DISTRIBUTION
The Company distributes its products to its wholesale customers and its
retail stores from its various distribution facilities located in the United
States (five facilities including one third party logistics facility), Mexico
(one facility), Canada (three facilities) and the Netherlands (one facility
managed through a joint venture). Several of the Company's facilities are shared
by more than one of the Company's business units and/or operating segments. The
Company currently subcontracts the distribution and logistics of its Calvin
Klein jeans operation in the United States pursuant to an agreement which
expires in December 2003. The Company expects to either extend the contract or
consolidate its Calvin Klein jeans distribution in other facilities. The Company
owns one of its distribution facilities and leases all of its other distribution
facilities, other than the joint venture and sub-contracted facilities. The
Company expects to consolidate its three Canadian distribution operations in one
facility in the fourth quarter of fiscal 2003 in order to improve operating
efficiency.
RAW MATERIALS
The Company's raw materials are principally cotton, wool, silk, synthetic
and cotton-synthetic blends of fabrics and yarns. Raw materials are available
from multiple sources. The Company has not experienced any material shortage of
raw materials.
TRADEMARKS AND LICENSING AGREEMENTS
The Company owns and licenses a portfolio of highly recognized brand names.
Most of the trademarks used by the Company are either owned or licensed in
perpetuity. The Company's core brands have been established in their respective
markets for extended periods and have attained a high level of consumer
awareness. The Warner's and Olga brands have been in existence for 130 and 63
years, respectively, Speedo has been in existence for 75 years, Lejaby has been
in existence for over 50 years and Calvin Klein has been in existence for over
25 years. Warner's, Olga and Calvin Klein were three of the top ten selling
intimate apparel brands in U.S. department and specialty stores in Fiscal 2002
and the Company believes Speedo is the dominant competitive swimwear brand in
the United States.
The following table summarizes the Company's principal trademarks and
license agreements:
<Table>
OWNED TRADEMARKS
- ---------------------------------------------------
Warner's
Olga
Body by Nancy Ganz/Bodyslimmers
Lejaby
Rasurel
Calvin Klein (beneficially owned for men's and
women's underwear, loungewear and sleepwear)
White Stag (a)
Catalina (b)
A.B.S. by Allen Schwartz and related trademarks
Cole of California
Sunset Beach
Sandcastle
</Table>
(table continued on next page)
13
(table continued from previous page)
<Table>
TRADEMARKS LICENSED IN PERPETUITY TERRITORY
- ------------------------------------------------------ ----------------------------------------
Speedo/Speedo Authentic Fitness (c) United States, Canada, Mexico, Caribbean
Anne Cole (for swimwear and sportswear)(d) Worldwide
TRADEMARKS LICENSED FOR A TERM TERRITORY EXPIRES
- ------------------------------------------------------ ---------------------------------------- -----------
Calvin Klein (for jeans and jeans-related products)(e) North, South and Central America 12/31/2044
Chaps Ralph Lauren (for men's sportswear) United States, Canada, Mexico 12/31/2008
Nautica (for women's swimwear, beachwear and United States, Canada, Mexico, Caribbean 6/30/2007
acessories)(f)
Lifeguard (for swimwear and related products) Worldwide 6/30/2005
Ralph Lauren (for women's swimwear)(g) Worldwide 6/30/2003
</Table>
- ---------
(a) Licensed to Wal-Mart Stores, Inc. for women's sportswear
through 2004.
(b) Licensed to Wal-Mart Stores, Inc. for sportswear through
2004. The Company also sells swimwear wholesale to Wal-Mart
Stores, Inc. using the Catalina trademark.
(c) Licensed in perpetuity from Speedo International, Ltd.
(d) Licensed in perpetuity from Anne Cole and Anne Cole Design
Studio.
(e) Includes a renewal option which permits the Company to
extend for an additional 10-year term subject to compliance
with certain conditions.
(f) License executed in March 2003. The Company expects to begin
shipments in the fourth quarter of fiscal 2003.
(g) Includes related trademarks for Polo Sport Ralph Lauren,
Polo Sport - RLX, Lauren/Ralph Lauren and Ralph/Ralph Lauren
that will not be renewed.
The Company regards its intellectual property in general, and in particular
its owned trademarks and licenses, as its most valuable assets. The Company
believes the trademarks and licenses have substantial value in the marketing of
its products. The Company protects its trademarks by registering them with the
U.S. Patent and Trademark Office and with governmental agencies in other
countries where the Company's products are manufactured and sold. The Company
works vigorously to enforce and protect its trademark rights by engaging in
regular market reviews, helping local law enforcement authorities detect and
prosecute counterfeiters, issuing cease-and-desist letters against third parties
infringing or denigrating the Company's trademarks and initiating litigation as
necessary. The Company also works with trade groups and industry participants
seeking to strengthen laws relating to the protection of intellectual property
rights in markets around the world.
Although the specific terms of each of the Company's license agreements
vary, generally the agreements provide for minimum royalty payments and/or
royalty payments based on a percentage of net sales. The license agreements
generally also grant the licensor the right to approve any designs marketed by
the Company.
The Company licenses the White Stag and Catalina brand names to Wal-Mart for
sportswear and other products. The agreements require the licensee to pay
royalties and fees to the Company. The license with Wal-Mart for the use of the
White Stag and Catalina names expires on December 31, 2004. The Company, on an
ongoing basis, evaluates entering into distribution or license agreements with
other companies that would permit those companies to market products under the
Company's trademarks. In evaluating a potential distributor or licensee, the
Company generally considers the experience, financial stability, manufacturing
performance and marketing ability of the proposed licensee. Royalty income
derived from licensing was approximately $14.1 million, $16.1 million and $16.5
million in Fiscal 2002, 2001 and 2000, respectively.
The Company has license agreements in perpetuity with Speedo International,
Ltd. which permit the Company to design, manufacture and market certain men's,
women's and children's apparel including swimwear, sportswear and a wide variety
of other products using the Speedo trademark and certain other trademarks,
including Speedo, Surf Walker'r' and Speedo Authentic Fitness. The Company's
license to use the Speedo and other trademarks was granted in perpetuity subject
to certain conditions and is exclusive in the United States, its territories and
possessions, Canada, Mexico and the Caribbean. The agreements provide for
minimum royalty payments to be credited against future royalty payments based on
a percentage of net sales. The license agreements may be terminated with respect
to a particular territory in the event the Company does not pay royalties or
abandons the trademark in such territory. Moreover, the license agreements may
be terminated in the event the Company manufactures, or is controlled by a
company that manufactures, racing/competitive swimwear, swimwear caps or
swimwear accessories under a different trademark, as specifically defined in the
license agreements. The Company generally may sublicense the Speedo trademark
within the geographic regions covered by the
14
licenses. Speedo International, Ltd. retains the right to use or license its
brand names in other jurisdictions and actively uses or licenses the brand names
throughout the world outside of the Company's licensed territory.
In 1992, the Company entered into an agreement with Speedo Holdings B.V. and
its successor, Speedo International, Ltd., granting certain additional
irrevocable rights to the Company relating to the use of the Authentic Fitness
name and service mark, which rights are in addition to the rights under the
license agreements with Speedo International, Ltd.
The Company has an exclusive worldwide license agreement with Anne Cole and
Anne Cole Design Studio Ltd. Under the license agreement, the Company has the
right to use, in perpetuity, the Anne Cole trademark for women's swimwear,
activewear and beachwear and children's swimwear, subject to certain terms and
conditions. Under the license agreement, the Company is required to pay certain
minimum guaranteed annual royalties, to be credited against earned royalties,
based on a percentage of net sales. Anne Cole and Anne Cole Design Studio Ltd.
have the right to approve products bearing the licensed trademark, as set forth
in the license.
The Company has a license to develop, manufacture and market designer
jeanswear and jeans-related products under the Calvin Klein trademark in North,
South and Central America. The initial term of the license expires on December
31, 2034 and is extendable by the Company for a further 10-year term expiring on
December 31, 2044 if the Company achieves certain sales targets in the United
States, Mexico and Canada. The Company's exclusive worldwide license agreement
with Calvin Klein, Inc. to produce Calvin Klein men's accessories expires on
June 30, 2004. The Company does not expect to extend this license agreement.
All of the Calvin Klein trademarks (including all variations and formatives
thereof) (the 'Calvin Klein Trademarks') for all products and services are owned
by the Calvin Klein Trademark Trust (the 'Trust'). The Trust is co-owned by
Calvin Klein, Inc. and Warnaco Inc. The Class B and C Series Estates of the
Trust correspond to the Calvin Klein Trademarks for men's, women's and
children's underwear, intimate apparel and sleepwear, and are owned by Warnaco
Inc. Accordingly, as owner of the Series B and C Estate Shares of the Trust
corresponding to these products categories, Warnaco Inc. is the beneficial owner
of the Calvin Klein Trademarks for men's, women's and children's underwear,
intimate apparel, loungewear and sleepwear throughout the entire world.
The Company has exclusive license and design agreements for the Chaps Ralph
Lauren trademark that expire on December 31, 2008 in the United States and
December 31, 2013 in Canada (subject to extension of the U.S. agreements past
2008). These licenses grant the Company an exclusive right to use the Chaps
Ralph Lauren trademark in the United States, Canada and Mexico. The license and
design agreements do not contain further renewal options.
In March 2003, the Swimwear Group entered into a license agreement with
Nautica. Under the license agreement, the Company has the exclusive right to
manufacture, distribute and sell Nautica women's swimwear and related products
in the United States, Canada, Mexico and the Caribbean Islands for an initial
term of four years. The license agreement may be renewed at the Company's option
for two additional years if the Company achieves certain sales targets.
In July 1995, the Swimwear Group entered into a license agreement with
Lifeguard Licensing Corp. Under the license agreement, the Company has the
exclusive right to manufacture, source, sublicense, distribute, promote and
advertise Lifeguard apparel worldwide and the non-exclusive right to
manufacture, source, sublicense, distribute, promote and advertise certain
sporting accessories (other than sunglasses, watches and soap). The initial term
of the license agreement was five years expiring on June 30, 2000. The agreement
has been renewed through June 30, 2005.
In February 1998, the Company entered into an exclusive worldwide license
agreement with the Polo/Lauren Company, L.P. and PRL USA, Inc. and a design
services agreement with Polo/Ralph Lauren Corporation for Ralph Lauren, Polo
Sport Ralph Lauren and Polo Sport-RLX brand swimwear for women and girls. Under
the terms of the license agreement, the Company produces and markets swimsuits,
bathing suits and coordinating cover-ups, tops and bottoms for women and girls.
Shipments under this license agreement began in January 1999. Effective January
1, 2001 the Lauren/Ralph Lauren
15
and Ralph/Ralph Lauren marks were added to the license. These agreements expire
June 30, 2003 and will not be renewed.
Some of the Company's license agreements with third parties will expire by
their terms over the next several years. There can be no assurance that the
Company will be able to negotiate and conclude extensions of such agreements on
similar economic terms or at all. See Risk Factors.
COMPETITION
The apparel industry is highly competitive. The Company competes with many
domestic and foreign apparel manufacturers, some of which are larger and more
diversified and have greater financial and other resources than the Company. In
addition to competition from other branded apparel manufacturers, the Company
competes in certain product lines with department and specialty store private
label programs. The Company also competes with both domestic and foreign
manufacturers.
The Company offers a diversified portfolio of brands across a wide range of
price points in many channels of distribution in an effort to appeal to all
consumers. The Company competes on the basis of product quality, brand
recognition, price, product differentiation, marketing and advertising, customer
service and other factors. Although some of the Company's competitors have
greater sales, the Company does not believe that any single competitor dominates
any channel in which the Company operates. The Company believes that its ability
to serve multiple distribution channels with a diversified portfolio of products
under widely recognized brand names distinguishes it from many of its
competitors.
GOVERNMENT REGULATIONS
The Company is subject to federal, state and local laws and regulations
affecting its business, including those promulgated under the Occupational
Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics
Act, the Textile Fiber Product Identification Act, the rules and regulations of
the Consumer Products Safety Commission and various environmental laws and
regulations. The Company's international businesses are subject to similar
regulations in the countries where they operate. The Company believes that it is
in compliance in all material respects with all applicable governmental
regulations.
The Company's operations are also subject to various international trade
agreements and regulations such as the North American Free Trade Agreement and
the Caribbean Basin Initiative, and the activities and regulations of the World
Trade Organization (the 'WTO'). Generally, these trade agreements benefit the
Company's business by reducing or eliminating the duties and/or quotas assessed
on products manufactured in a particular country. However, trade agreements can
also impose requirements that negatively affect the Company's business, such as
limiting the countries from which the Company can purchase raw materials and
setting quotas on products that may be imported from a particular country. The
Company monitors trade-related matters pending with the United States government
for potential positive or negative effects on the Company's operations.
EMPLOYEES
As of January 4, 2003, the Company employed 13,536 employees. Approximately
4% of the Company's employees, all of whom are engaged in the manufacture and
distribution of its products, are represented by labor unions. The Company
considers labor relations with employees to be satisfactory and has not
experienced any significant interruption of its operations due to labor
disagreements. During the fourth quarter of Fiscal 2002, the Company completed a
strategic review of its Intimate Apparel operations in Europe and formalized a
plan to consolidate its European manufacturing operations and to restructure
other manufacturing, sales and administrative operations. The total cost of the
consolidation is expected to be approximately $12.0 to $15.0 million. See Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
16
BACKLOG
Open orders for shipments by the Company's Swimwear Group totaled
approximately $153.7 million and $213.1 million as of January 5, 2002 and
January 4, 2003, respectively. A substantial portion of net revenues of the
Company's other businesses is based on orders for immediate delivery and
therefore backlog is not necessarily indicative of future net revenues.
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On the Petition Date, Warnaco, 36 of its 37 U.S. subsidiaries and Warnaco of
Canada Company (collectively, the 'Debtors') filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the Southern District of New York (the 'Bankruptcy Court')
(collectively, the 'Chapter 11 Cases'). The remainder of the Company's foreign
subsidiaries were not debtors in the Chapter 11 Cases, nor were they subject to
foreign bankruptcy or insolvency proceedings.
On June 11, 2001, the Company entered into a Debtor-in-Possession Financing
Agreement ('DIP') with a group of banks, which was approved by the Bankruptcy
Court in an interim amount of $375.0 million. On July 9, 2001, the Bankruptcy
Court approved an increase in the amount of borrowing available to the Company
to $600.0 million. The DIP was subsequently amended as of August 27, 2001,
December 27, 2001, February 5, 2002 and May 15, 2002. In addition, certain
extensions were granted under the DIP on April 12, 2002, June 19, 2002, July 18,
2002, August 22, 2002 and September 30, 2002 (the DIP, subsequent to such
extensions and amendments, is referred to as the 'Amended DIP'). The amendments
and extensions, among other things, amended certain definitions and covenants,
permitted the sale of certain of the Company's assets and businesses, extended
certain deadlines with respect to certain asset sales and filing requirements
with respect to a plan of reorganization and reduced the size of the facility to
reflect the Debtor's revised business plan. On May 28, 2002, the Company
voluntarily reduced the amount of borrowing available to the Company under the
Amended DIP to $325.0 million. On October 8, 2002, the Company voluntarily
reduced the amount of borrowing available to the Company under the Amended DIP
to $275.0 million. The Amended DIP terminated on the Effective Date. Borrowing
under the Amended DIP totaled $155.9 million on January 5, 2002. All amounts
borrowed under the Amended DIP were repaid by June 30, 2002. On November 9,
2002, the Debtors filed the First Amended Joint Plan of Reorganization of The
Warnaco Group, Inc. and Its Affiliated Debtors and Debtors-In-Possession Under
Chapter 11 of the Bankruptcy Code (the 'Plan').
On January 16, 2003, the Bankruptcy Court entered its (i) Findings of Fact
to and Conclusions of Law Re: Order and Judgment Confirming The First Amended
Joint Plan of Reorganization of The Warnaco Group, Inc. and Its Affiliated
Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of the United
States Code, dated November 8, 2002, and (ii) an Order and Judgment Confirming
The First Amended Joint Plan of Reorganization of The Warnaco Group, Inc. and
Its Affiliated Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of
the United States Code, dated November 8, 2002, and Granting Related Relief (the
'Confirmation Order').
In accordance with the provisions of the Plan and the Confirmation Order,
the Plan became effective on February 4, 2003 and the Company entered into the
$275.0 million Senior Secured Revolving Credit Facility (the 'Exit Financing
Facility'). The Exit Financing Facility provides for a four-year, non-amortizing
revolving credit facility. The Exit Financing Facility includes provisions that
allow the Company to increase the maximum available borrowing from $275.0
million to $325.0 million, subject to certain conditions (including obtaining
the agreement of existing or new lenders to commit to lend the additional
amount). See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. Borrowings under the Exit Financing Facility bear
interest at Citibank's base rate plus 1.50% or at the London Interbank Offered
Rate ('LIBOR') plus 2.50%. Pursuant to the terms of the Exit Financing Facility,
the interest rate the Company will pay on its outstanding loans will decrease by
as much as 0.50% in the event the Company achieves certain defined ratios. The
Exit Financing Facility contains financial covenants that, among other things,
require the Company to maintain a fixed charge coverage ratio above a minimum
level, a leverage ratio below a maximum level and limit the amount of the
Company's capital expenditures. In addition, the Exit Financing Facility
contains certain covenants that, among other things, limit investments and asset
sales, prohibit the
17
payment of dividends and prohibit the Company from incurring material additional
indebtedness. Initial borrowings under the Exit Financing Facility were $39.2
million. The Exit Financing Facility is secured by substantially all of the
domestic assets of the Company. As of March 18, 2003 the Company had $76.0
million of outstanding borrowings and $58.5 million of standby and documentary
letters of credit resulting in approximately $140.5 million of additional credit
available, under the Exit Financing Facility. The Exit Financing Facility
replaced the Amended DIP.
Set forth below is a summary of certain material provisions of the Plan.
Among other things, as described below, the Plan resulted in the cancellation of
the Company's Class A Common Stock, par value $0.01 per share (the 'Old Common
Stock'), issued prior to the Petition Date. The holders of Old Common Stock did
not receive any distribution on account of the Old Common Stock under the Plan.
The Company, as reorganized under the Plan, issued 45,000,000 shares of common
stock, par value $0.01 per share (the 'New Common Stock'), which was distributed
to pre-petition creditors as specified below. In addition, 5,000,000 shares of
New Common Stock of the Company were reserved for issuance pursuant to
management incentive stock grants. On March 12, 2003, subject to approval by the
stockholders of the Company's proposed 2003 Management Incentive Plan, the
Company authorized the grant of 750,000 shares of restricted stock and options
to purchase 3,000,000 shares of New Common Stock at the fair market value on the
date of grant. The Plan also provided for the issuance by the Company of $200.9
million of New Warnaco Second Lien Notes due 2008 (the 'Second Lien Notes') to
pre-petition creditors and others as described below, secured by a second
priority security interest in substantially all of the Debtors' U.S. assets and
guaranteed by the Company and its domestic subsidiaries.
The following is a summary of distributions pursuant to the Plan:
(i) the Old Common Stock, including all stock options and restricted
shares, was extinguished and holders of the Old Common Stock received no
distribution on account of the Old Common Stock;
(ii) general unsecured claimants will receive approximately 2.55%
(1,147,050 shares) of the New Common Stock, which the Company expects to
distribute in the second quarter of fiscal 2003;
(iii) the Company's pre-petition secured lenders received their pro-rata
share of approximately $106.1 million in cash, Second Lien Notes in the
principal amount of $200.0 million and approximately 96.26% (43,318,350
shares) of the New Common Stock;
(iv) holders of claims arising from or related to certain preferred
securities received approximately 0.60% of the New Common Stock (268,200
shares);
(v) pursuant to the terms of his employment agreement, as modified by
the Plan, Antonio C. Alvarez II, the President and Chief Executive Officer
of the Company, received an incentive bonus consisting of approximately
$1.950 million in cash, Second Lien Notes in the principal amount of
approximately $0.942 million and approximately 0.59% of the New Common Stock
(266,400 shares); and
(vi) in addition to the foregoing, allowed administrative and certain
priority claims were paid in full in cash.
Reorganization and administrative expenses related to the Chapter 11 Cases
have been separately identified in the consolidated statement of operations as
reorganization items through January 4, 2003. The Company expects to recognize
additional reorganization items in fiscal 2003.
ASSET SALES
During the course of the Chapter 11 Cases, the Company obtained Bankruptcy
Court authorization to sell assets and settle liabilities for amounts other than
those reflected in the consolidated financial statements. Management evaluated
the Company's operations and identified assets for potential disposition. From
the Petition Date through January 4, 2003, the Company sold certain personal
property, certain owned buildings and land and other assets, including certain
inventory associated with the Company's domestic outlet retail stores,
generating net proceeds of approximately $36.3 million of which approximately
$30.0 million was generated during Fiscal 2002 (collectively, the 'Asset
Sales').
18
The Asset Sales did not result in a material gain or loss since the Company
had previously written-down assets identified for potential disposition to their
estimated net realizable value. Substantially all of the net proceeds from the
Asset Sales were used to reduce outstanding borrowings under the Amended DIP or
provide collateral for outstanding trade and standby letters of credit. In
Fiscal 2002, the Company closed all of its domestic outlet retail stores. The
closing of the outlet retail stores and the related sale of inventory at
approximately net book value generated approximately $23.2 million of net
proceeds through January 4, 2003, which were used to reduce amounts outstanding
under the Amended DIP or to provide collateral for outstanding trade letters of
credit.
In addition, during the first quarter of Fiscal 2002, the Company sold the
business and substantially all of the assets of GJM and Penhaligon's. The sales
of GJM and Penhaligon's generated aggregate net proceeds of approximately $20.5
million and an aggregate net loss of approximately $2.9 million. Proceeds from
the sale of GJM and Penhaligon's were used to: (i) reduce amounts outstanding
under certain debt agreements of the Company's foreign subsidiaries which were
not part of the Chapter 11 Cases (approximately $4.8 million); (ii) reduce
amounts outstanding under the Amended DIP (approximately $4.2 million);
(iii) create an escrow fund (subsequently disbursed in June 2002) for the
benefit of pre-petition secured lenders (approximately $9.8 million); and
(iv) create an escrow fund (subsequently returned to the Company in February
2003) for the benefit of the purchasers of GJM and Penhaligon's for potential
indemnification claims and for any working capital valuation adjustments
(approximately $1.7 million). In September 2002, the Company sold other assets
generating approximately $0.2 million of net proceeds and a loss on the sale of
approximately $1.4 million.
As part of the active management of its brands, the Company will continue to
assess its brand portfolio and may choose to divest certain other assets over
time.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.
The Company has operations in the Americas (Canada, Mexico, Costa Rica and
Honduras), Europe (Austria, Belgium, France, Germany, Italy, the Netherlands,
Portugal, Spain, Switzerland and the United Kingdom) and Asia (Hong Kong and
Singapore), which engage in sales, manufacturing and/or marketing activities.
International operations generated $357.7 million, or 15.9% of the Company's net
revenues, in Fiscal 2000 compared with $328.4 million, or 19.6% of the Company's
net revenues, in Fiscal 2001 and $325.3 million, or 21.8% of the Company's net
revenues, in Fiscal 2002. Export sales are not significant. See Note 6 of Notes
to Consolidated Financial Statements.
The movement of foreign currency exchange rates influence the Company's
results of operations. With the exception of the fluctuation in the rates of
exchange of the local currencies in which the Company's subsidiaries in Canada,
Western Europe and Hong Kong conduct their business, the Company does not
believe that its operations in Canada, Western Europe or Hong Kong are subject
to risks that are significantly different from those of the Company's domestic
operations. See Risk Factors. Mexico historically has been subject to high rates
of inflation and currency restrictions that may, from time to time, adversely
affect the Company's Mexican operation. However, fluctuation of the Peso against
the United States dollar is not expected to have a material effect on the
Company's consolidated financial position or results of operations.
The Company has manufacturing facilities in Costa Rica, Honduras, Mexico and
France. The Company has warehousing facilities in Canada, Mexico, France and the
Netherlands (through a joint venture). The Intimate Apparel and Swimwear Groups
operate manufacturing facilities in Costa Rica, Honduras and Mexico pursuant to
duty-advantaged (commonly referred to as 'Item 807') programs. Substantially all
of the Company's Warner's, Olga and Body by Nancy Ganz/Bodyslimmers products are
manufactured in the Company's facilities in Honduras. A sustained loss of
production from these facilities could have an adverse effect on the Company's
ability to deliver these products to its customers. The Company maintains
insurance policies designed to substantially mitigate the financial effects of
any disruption in the Company's sources of supply. The Company believes that
there is ample production capacity available to it worldwide to offset any loss
in its Honduran production within three months. See Risk Factors. The Company
has many potential sources of manufacturing, and, except with respect to the
facility in Honduras, a disruption at any one facility would not have a material
adverse effect upon the Company.
19
The majority of the Company's purchases which are imported into the United
States are invoiced in United States dollars or Hong Kong dollars (which
currently fluctuate in tandem with the United States dollar) and, therefore, are
not subject to currency fluctuations.
Substantially all of the Company's products are imported and are subject to
federal customs laws, which impose tariffs as well as import quota restrictions
established by the United States Department of Commerce. Importation of goods
from some countries may be subject to embargo by United States Customs
authorities if shipments exceed quota limits. The Company closely monitors
import quotas and can, in most cases, shift production to contractors located in
countries with available quotas or to domestic manufacturing facilities. As a
result, existence of import quotas has not had a material effect on the
Company's business. The Company's policy is to have many manufacturing sources
so that a disruption at any one facility will not significantly affect the
Company; however, there can be no guarantee that a disruption will not occur in
the future. See Risk Factors.
Additional information required by Item 1 is incorporated herein by
reference to Note 6 of Notes to Consolidated Financial Statements.
RISK FACTORS
This Annual Report may contain '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 (the 'Exchange Act'), as
amended, that reflect, when made, the Company's expectations or beliefs
concerning future events that involve risks and uncertainties, including the
sufficiency of the Company's credit facilities, the ability of the Company to
satisfy the conditions and requirements of its credit facilities, the effect of
national, international 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
products and existing product lines, financial difficulties encountered by
customers, the ability of the Company to attract, motivate and retain key
executives and employees and the ability of the Company to attract and retain
customers. All statements other than statements of historical facts included in
this Annual Report, including, without limitation, the statements under Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, 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.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. These forward-looking statements may contain the words
'believe,' 'anticipate,' 'expect,' 'estimate,' 'project,' 'will be,' 'will
continue,' 'will likely result,' or other similar words and phrases.
Forward-looking statements and the Company's plans and expectations are subject
to a number of risks and uncertainties that could cause actual results to differ
materially from those anticipated, and the Company's business in general is
subject to certain risks that could affect the value of the Company's stock.
The Company's business, operations and financial condition are subject to
various risks. Some of these risks are described below, and should be carefully
considered in evaluating the Company or any investment decision relating to
securities of the Company. This section does not describe all risks applicable
to the Company, its industry or its business. It is intended only as a summary
of the principal risks.
RISKS RELATING TO THE COMPANY'S INDUSTRY
The worldwide apparel industry is heavily influenced by general economic
conditions.
The apparel industry is highly cyclical and heavily dependent upon the
overall level of consumer spending. Purchases of apparel and related goods tend
to be highly correlated with cycles in the disposable income of the Company's
consumers. The Company's wholesale customers may anticipate and respond to
adverse changes in economic conditions and uncertainty by reducing inventories
and canceling orders. As a result, any substantial deterioration in general
economic conditions or increases
20
in interest rates in any of the regions in which the Company competes could
adversely affect the sales of the Company's products.
The effects of the recent economic slowdown and the deteriorating global
economic environment may have an adverse effect on the Company's financial
results. The ongoing war against terrorism and the war with Iraq have created a
significant amount of uncertainty about future U.S. and global economic
prospects and have led to declines in consumer spending. Moreover, a continued
delay in the recovery from the recession, the war with Iraq, additional
terrorist attacks or similar events could have further material adverse effects
on consumer confidence and spending and, as a result, on the Company's results
of operations.
The apparel industry is subject to constantly changing fashion trends and if the
Company misjudges consumer preferences, the image of one or more of its brands
may suffer and the demand for its products may decrease.
The Company believes its products are, in general, less subject to fashion
trends compared to many other apparel manufacturers because the Company's core
brands have existed for an extended period of time and enjoy a high level of
consumer awareness. Many of the Company's core intimate apparel and underwear
products are also produced primarily in basic colors that are not as dependent
upon fashion trends. However, the apparel industry in general is subject to
shifting consumer demands and evolving fashion trends and the Company's success
is also dependent upon its ability to anticipate and promptly respond to these
changes. Failure to anticipate, identify or promptly react to changing trends,
styles, or brand preferences may result in decreased demand for its products, as
well as excess inventories and markdowns, which could have a material adverse
effect on its business, results of operations, and financial condition. In
addition, if the Company misjudges consumer preferences, its brand image may be
impaired.
The apparel industry is subject to pricing pressures that may cause the Company
to lower the prices the Company charges for its products and adversely affect
its financial performance.
Prices in the apparel industry have been declining over the past several
years primarily as a result of the trend to move sewing operations offshore, the
introduction of new manufacturing technologies, growth of the mass retail
channel of distribution, increased competition, consolidation in the retail
industry and the general economic slowdown. Products sewn offshore generally
cost less to manufacture than those made domestically primarily because labor
costs are lower offshore. Many of the Company's competitors also source their
product requirements from developing countries to achieve a lower cost operating
environment, possibly in environments with lower costs than the Company's
offshore facilities, and those manufacturers may use these cost savings to
reduce prices. To remain competitive, the Company must adjust its prices from
time to time in response to these industrywide pricing pressures. Moreover,
increased customer demands for allowances, incentives and other forms of
economic support reduce the Company's gross margins and affect its
profitability. The Company's financial performance may be negatively affected by
these pricing pressures if the Company is forced to reduce its prices and it
cannot reduce its production costs or if its production costs increase and it
cannot increase its prices.
Increases in the price of raw materials used to manufacture the Company's
products could materially increase its costs and decrease its profitability.
The principal fabrics used in the Company's business are made from cotton,
wool, silk, synthetic and cotton-synthetic blends. The prices the Company pays
for these fabrics are dependent on the market price for the raw materials used
to produce them, primarily cotton and chemical components of synthetic fabrics.
These raw materials are subject to price volatility caused by weather, supply
conditions, government regulations, economic climate and other unpredictable
factors. Fluctuations in petroleum prices may also influence the prices of
related items such as chemicals, dyestuffs and polyester yarn. Any raw material
price increase could increase the Company's cost of sales and decrease its
profitability unless the Company is able to pass higher prices on to its
customers. In addition, if one
21
or more of its competitors is able to reduce its production costs by taking
advantage of any reductions in raw material prices or favorable sourcing
agreements, the Company may face pricing pressures from those competitors and
may be forced to reduce its prices or face a decline in net sales, either of
which could have a materially adverse effect on its business, results of
operations or financial condition.
Changing international trade regulation and the elimination of quotas on imports
of textiles and apparel may increase competition in the Company's industry.
Future quotas, duties or tariffs may increase the Company's costs or limit the
amount of products that the Company can import into a country.
Substantially all of the Company's operations are subject to quotas imposed
by bilateral textile agreements between the countries from which the Company
procures raw materials, such as yarn, and the countries where the Company's
manufacturing facilities are located. These quotas limit the amount of products
that may be imported from a particular country.
In addition, the countries in which the Company's products are manufactured
or into which they are imported may from time to time impose additional new
quotas, duties, tariffs and requirements as to where raw materials must be
purchased, additional workplace regulations, or other restrictions on its
imports or adversely modify existing restrictions. Adverse changes in these
costs and restrictions could harm the Company's business. The Company cannot
assure investors that future trade agreements will not provide its competitors
an advantage over it, or increase its costs, either of which could have a
material adverse effect on its business, results of operations or financial
condition.
The Company's operations are also subject to various international trade
agreements and regulations such as the North American Free Trade Agreement and
the Caribbean Basin Initiative, and the activities and regulations of the WTO.
Generally, these trade agreements benefit the Company's business by reducing or
eliminating the duties and/or quotas assessed on products manufactured in a
particular country. However, trade agreements can also impose requirements that
negatively affect the Company's business, such as limiting the countries from
which it can purchase raw materials and setting quotas on products that may be
imported into the United States from a particular country. In addition, the WTO
may commence a new round of trade negotiations that liberalize textile trade.
The elimination of quotas on WTO member countries by 2005 and other effects of
these trade agreements could result in increased competition from developing
countries which historically have lower labor costs, including China and Taiwan,
both of which recently became members of the WTO. This increased competition
from developing countries could have a material adverse effect on the Company's
business, results of operations or financial condition.
RISKS RELATING TO THE COMPANY'S BUSINESS
The Company cannot be certain that the bankruptcy proceedings will not adversely
affect its operations going forward.
The Company sought protection under Chapter 11 of the Bankruptcy Code on
June 11, 2001 and emerged from bankruptcy on February 4, 2003. The Company
cannot assure investors that the Chapter 11 Cases will not adversely affect its
operations going forward. The Chapter 11 Cases may affect the Company's ability
to negotiate favorable terms from suppliers, customers, landlords and others.
The failure to obtain such favorable terms could adversely affect the Company's
financial performance.
The Company has a history of significant losses, and it may not be able to
successfully improve its performance or return to profitability.
The Company incurred net losses of approximately $390.0 million, $861.2
million and $964.9 million during Fiscal 2000, Fiscal 2001 and Fiscal 2002,
respectively. The Company's ability to improve its performance and return to
profitability is dependent on its ability to maintain operating discipline,
improve its cost structure, foster organic growth within the Company's operating
groups and capitalize
22
on licensing and sublicensing opportunities. The Company cannot assure investors
that it will improve its performance or return to profitability.
During the reorganization the Company made significant changes in its senior
management team and expects to make additional changes in the near future.
Members of the Company's former senior management, including its former
chief executive officer and its former chief financial officer, were replaced
during the Company's reorganization. The Company's current chief executive
officer and chief financial officer are employed by A&M and expect to return to
A&M after a permanent chief executive officer and chief financial officer have
been recruited and after completion of an orderly transition. Although the
Company is currently conducting a search for a permanent chief executive officer
and chief financial officer, it cannot assure investors when this search will be
concluded. Moreover, the Company cannot assure investors that its current or
future management team will be able to successfully execute its strategy, and
its business and financial condition may suffer if it fails to do so.
The Company's success depends upon the continued protection of its trademarks
and other intellectual property rights and it may be forced to incur substantial
costs to maintain, defend, protect and enforce its intellectual property rights.
The Company's registered and common law trademarks, as well as certain of
its licensed trademarks, have significant value and are instrumental to its
ability to market its products. The Company cannot assure investors that third
parties will not assert claims against any such intellectual property or that it
will be able to successfully resolve all such claims. In addition, although the
Company seeks international protection of its intellectual property, the laws of
some foreign countries may not allow it to protect, defend or enforce its
intellectual property rights to the same extent as the laws of the United
States. The Company could also incur substantial costs to defend legal actions
relating to use of its intellectual property, which could have a material
adverse effect on its business, results of operations or financial condition.
Certain of the Company's license agreements, including the license
agreements with Speedo International, Ltd., Calvin Klein, Inc., Polo/Lauren
Company, L.P. and P.R.L. USA Inc., Nautica and Anne Cole and Anne Cole Design
Studio Ltd., require the Company to make minimum royalty payments, subject the
Company to restrictive covenants, require the Company to provide certain
services (such as design services) and may be terminated if certain conditions
are not met. While the Company is currently in compliance with the requirements
under its license agreements, the Company cannot assure investors that it will
continue to meet its obligations or fulfill the conditions under these
agreements in the future. The termination of a license agreement could have a
material adverse effect on the Company's business, results of operations or
financial condition.
In addition, some of the Company's license agreements with third parties
will expire by their terms over the next several years. There can be no
assurance that the Company will be able to negotiate and conclude extensions of
such agreements on similar economic terms or at all.
The Company depends on a limited number of customers for a significant portion
of its sales, and its financial success is linked to the success of its
customers, its customers' commitment to its products and its ability to satisfy
and maintain its customers.
Revenues from the Company's 10 largest customers totaled approximately 49.2%
and 51.9% of worldwide net revenues during Fiscal 2001 and 2002, respectively.
One customer, Federated Department Stores, Inc., accounted for 10.5% of the
Company's Fiscal 2002 net revenues.
Although the Company has long-standing customer relationships, the Company
does not have long-term contracts with any of its customers. Sales to customers
are generally on an order-by-order basis. If the Company cannot fill customers'
orders on time, orders may be cancelled and relationships with customers may
suffer, which could have an adverse effect on the Company, especially if the
relationship is with a major customer. Furthermore, if any of the Company's
customers experience a significant downturn in its business, or fail to remain
committed to the Company's programs or brands,
23
the customer may reduce or discontinue purchases from the Company. The loss of a
major customer or a reduction in the amount of the Company's products purchased
by several of its major customers, could have a material adverse effect on its
business, results of operations or financial condition.
In addition, during the past several years, various retailers, including
some of the Company's customers, have experienced significant changes and
difficulties, including consolidation of ownership, increased centralization of
buying decisions, restructurings, bankruptcies and liquidations. These and other
financial problems of some of the Company's retailers, as well as general
weakness in the retail environment, increase the risk of extending credit to
these retailers. A significant adverse change in a customer relationship or in a
customer's financial position could cause the Company to limit or discontinue
business with that customer, require the Company to assume more credit risk
relating to that customer's receivables or limit the Company's ability to
collect amounts related to previous purchases by that customer, all of which
could have a material adverse effect on the Company's business, results of
operations or financial condition.
The Company's success depends on the reputation of the Company's owned and
licensed brand names.
The success of the Company's business depends on the reputation and value of
its owned and licensed brand names. The value of the Company's brands could be
diminished by actions taken by licensors or others who have interests in the
brands for other products and/or territories. Because the Company cannot control
the quality of other products produced and sold under its licensed brand names,
if such products are of poor quality, the value of the brand name could be
damaged, which could have a material adverse affect on the sales of the Company.
In addition, some of the brand names licensed by the Company reflect the names
of living individuals, whose actions are outside the control of the Company. If
the reputation of one of these individuals is significantly harmed, the
Company's products bearing such individual's name may fall into disfavor, which
could adversely affect the business, financial condition and results of
operations of the Company. Moreover, although the Company regularly monitors the
use of its trademarks by its sublicensees, no assurance can be given that the
actions of sublicensees will not diminish the reputation of the brand, which
could adversely affect the business, financial condition and results of
operations of the Company.
The Company's business outside of the United States exposes it to uncertain
conditions in overseas markets.
The Company's foreign operations subject it to risks customarily associated
with foreign operations. As of January 4, 2003, the Company sold its products in
more than 25 countries and had facilities in 15 countries. In addition, the
Company sources many of its products from third-party vendors based in foreign
countries. For Fiscal 2002, the Company had net revenues outside of the United
States of approximately $325.3 million, representing approximately 21.8% of its
total net revenues, with the majority of these sales in Canada and Europe. The
Company is exposed to the risk of changes in social, political and economic
conditions inherent in operating in foreign countries, including:
currency fluctuations;
import and export license requirements;
trade restrictions;
changes in quotas, tariffs, taxes and duties;
restrictions on repatriating foreign profits back to the
United States;
foreign laws and regulations;
international trade agreements;
difficulties in staffing and managing international
operations;
political unrest; and
disruptions or delays in shipments.
24
The Company has foreign currency exposure relating to buying, selling and
financing in currencies other than the U.S. dollar, the Company's functional
currency. It also has foreign currency exposure related to foreign denominated
revenues and costs translated into U.S. dollars. These exposures are primarily
concentrated in the Euro, British pound sterling and Mexican peso. Fluctuations
in foreign currency exchange rates may adversely affect reported earnings and
the comparability of period-to-period results of operations. Moreover, changes
in currency exchange rates may affect the relative prices at which the Company
and its foreign competitors sell products in the same market. Changes in the
value of the relevant currencies may also affect the cost of certain items
required in the Company's operations. The Company cannot assure investors that
management of its foreign currency exposure will protect it from fluctuations in
foreign currency exchange rates which could have a materially adverse effect on
its business, results of operations and financial condition.
In addition, transactions between the Company and its foreign subsidiaries
may be subject to United States and foreign withholding taxes. Applicable tax
rates in foreign jurisdictions differ from those of the United States, and
change periodically.
The markets in which the Company operates are highly competitive and the Company
may not be able to compete effectively.
The apparel industry is extremely competitive. The Company competes with
many domestic and foreign apparel manufacturers, some of which are larger, more
diversified and have greater financial and other resources than the Company.
This competition could cause reduced unit sales or prices, or both, which could
materially and adversely affect the Company. The Company competes on the basis
of a variety of factors, including:
product quality;
brand recognition;
price;
product differentiation (including product innovation and
technology);
manufacturing and distribution expertise and efficiency;
marketing and advertising; and
customer service.
The Company's ability to remain competitive in these areas will, in large
part, determine the Company's future success. The Company cannot assure
investors that it will continue to compete successfully.
Fresh start accounting may make future financial statements difficult to
compare.
In accordance with the requirements of SOP 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code ('SOP 90-7'), the Company
will adopt frest start accounting as of February 4, 2003. The Company has
reflected the expected effects of such adoption on its pro forma consolidated
balance sheet as of January 4, 2003. The pro forma adjustments are preliminary
and subject to further adjustments. The Company's consolidated balance sheets
after such date and its consolidated statements of operations for periods
beginning after February 4, 2003 will not be comparable in certain material
respects to the consolidated financial statements for prior periods included
elsewhere herein, making it difficult to assess its future prospects based on
historical performance. See Note 25 of Notes to Consolidated Financial
Statements.
The SEC's current investigation relating to the Company and certain persons who
have been employed by or affiliated with the Company is ongoing. Although, as
previously disclosed, the Company does not expect the resolution of this matter
to have a material effect on its financial condition, results of operations or
business, there can be no assurances that this will be the case, and the
resolution of this matter could adversely affect the Company's business.
The staff of the SEC's Division of Enforcement has been conducting an
investigation to determine whether there have been any violations of the
Exchange Act in connection with the preparation and publication of various
financial statements and other public statements. In July 2002, the SEC staff
25
informed the Company that it intends to recommend that the SEC authorize an
enforcement action against the Company and certain persons who have been
employed by or affiliated with the Company since prior to the periods for which
the Company restated its financial results. The SEC staff invited the Company to
make a Wells Submission describing the reasons why no such action should be
brought. In September 2002, the Company filed its Wells Submission and is
continuing discussions with the SEC staff.
Publicity surrounding the SEC's investigation or any related enforcement
action, or the ultimate resolution of this matter, could adversely affect the
Company's financial condition, results of operations or business. Although the
Company does not expect the resolution of this matter to have a material effect
on its financial condition, results of operations or business, there can be no
assurances that this will be the case.
The Company is subject to local laws and regulations in the countries in which
it operates.
The Company is subject to federal, state and local laws and regulations
affecting its business, including those promulgated under the Occupational
Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics
Act, the Textile Fiber Product Identification Act, the rules and regulations of
the Consumer Products Safety Commission and various labor, workplace and related
laws, as well as environmental laws and regulations. The Company's international
businesses are subject to similar regulations in the countries where they
operate. Failure to comply with such laws may expose the Company to potential
liability and have an adverse effect on the Company's results of operations.
Shortages of supply of sourced goods from suppliers or interruptions in the
Company's manufacturing could adversely affect the Company's results of
operations.
The Company seeks to utilize foreign supply sources, and to have multiple
manufacturing facilities. However, an unexpected interruption in any of the
sources or facilities could temporarily adversely affect the Company's results
of operations until alternate sources or facilities can be secured.
The covenants in the Exit Financing Facility and the indenture governing the
Second Lien Notes impose restrictions that may limit the Company's operating and
financial flexibility.
As of February 4, 2003, upon the Company's emergence from the Chapter 11
proceedings and giving effect to the initial borrowings under the Exit Financing
Facility and to the Second Lien Notes, the Company's total indebtedness was
approximately $246.4 million, of which approximately $39.2 million was senior
secured indebtedness outstanding under the Exit Financing Facility, and the
Company's total debt as a percentage of total capitalization was approximately
34%. The Exit Financing Facility and the indenture governing the Second Lien
Notes contain a number of covenants that, among other things, could limit the
Company's ability to:
incur liens and debt or provide guarantees regarding the
obligations of any other person;
issue redeemable preferred stock and non-guarantor
subsidiary preferred stock;
pay common stock dividends above specified levels;
make redemptions and repurchases of capital stock;
make loans, investments and capital expenditures;
prepay, redeem or repurchase debt;
engage in mergers, consolidations and asset dispositions;
engage in sale/leaseback transactions and affiliate
transactions;
change the Company's business, amend the indenture and other
documents governing any subordinated debt that the Company
may issue in the future and issue and sell capital stock of
subsidiaries; and
make distributions from the subsidiaries to the Company.
Although the Company is currently in compliance with these covenants,
operating results substantially below the Company's expectations or other
adverse factors, including a significant increase
26
in interest rates, could result in the Company being unable to comply with the
financial covenants. If the Company violates these covenants and is unable to
obtain waivers from its lenders, the Company's debt under these agreements would
be in default and could be accelerated. If the Company's indebtedness is
accelerated, the Company may not be able to repay its debt or borrow sufficient
funds to refinance it. Even if the Company is able to obtain new financing, it
may not be on commercially reasonable terms or terms that are acceptable to the
Company. If the Company's expectations of future operating results are not
achieved, or the Company's debt is in default for any reason, the Company's
business, financial condition and results of operations would be materially and
adversely affected. In addition, complying with these covenants may also cause
the Company to take actions that are not favorable to holders of the Second Lien
Notes and may make it more difficult for the Company to successfully execute its
business strategy and compete against companies who are not subject to these
types of restrictions.
ADDITIONAL INFORMATION
The Company's internet website is http://www.warnaco.com. The Company makes
available free of charge on its website Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports as soon as reasonably practicable after the Company electronically files
or furnishes such materials to the Securities and Exchange Commission ("SEC").
ITEM 2. PROPERTIES.
The principal executive offices of the Company are located at 90 Park
Avenue, New York, New York. In January 2003, the Company rejected the 90 Park
Avenue lease pursuant to the provisions of the Bankruptcy Code. In March 2003,
the Company entered into a 14-year lease for new office space in New York, New
York and expects to occupy the new office space in the third quarter of fiscal
2003. In addition to its executive offices, the Company leases offices in
California, Connecticut and New York, pursuant to leases that expire between
2003 and 2008.
The Company has five domestic manufacturing and warehouse facilities located
in California, Georgia and Pennsylvania and 23 international manufacturing and
warehouse facilities in Canada, Costa Rica, France, Honduras, Mexico, the
Netherlands (through a joint venture) and the United Kingdom. Some of the
Company's manufacturing and warehouse facilities are also used for
administrative and retail functions. The Company owns two of its domestic and
three of its international facilities. The domestic owned facilities are subject
to liens in favor of the lenders under the Exit Financing Facility. The rest of
the Company's facilities are leased with terms (except for month-to-month
leases) expiring between 2003 and 2020. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company leases sales offices in a number of major cities, including
Atlanta, Dallas, Los Angeles and New York in the United States; Brussels,
Belgium; Toronto, Canada; Paris, France; Cologne, Germany; Hong Kong; Milan,
Italy; Mexico City, Mexico; and Lausanne, Switzerland. The sales office leases
expire between 2003 and 2008 and are generally renewable at the Company's
option. The Company currently leases 45 Speedo Authentic Fitness retail store
sites and 31 retail store sites in Canada, Europe and Asia. Retail leases expire
between 2003 and 2008 and are generally renewable at the Company's option. See
Item 1. Business -- Retail Stores Group.
All of the Company's production and warehouse facilities are located in
appropriately designed buildings, which are kept in good repair. All such
facilities have well-maintained equipment and sufficient capacity to handle
present and expected future volumes.
ITEM 3. LEGAL PROCEEDINGS.
Shareholder Class Actions. 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 (the 'District Court') against the Company and
certain of its officers and directors (the 'Shareholder I Class Action'). The
complaints, on behalf of a putative class of shareholders of the Company who
purchased the Old Common Stock between September 17, 1997 and July 19, 2000 (the
'Class Period'), allege,
27
inter alia, that the defendants violated the Exchange Act by artificially
inflating the price of the Old Common Stock and failing to disclose certain
information during the Class Period.
On November 17, 2000, the District Court consolidated the complaints into a
single action, styled In Re The Warnaco Group, Inc. Securities Litigation, No.
00-Civ-6266 (LMM), and appointed a lead plaintiff and approved a lead counsel
for the putative class. A second amended consolidated complaint was filed on
May 31, 2001. On October 5, 2001, the defendants other than the Company filed a
motion to dismiss based upon, among other things, the statute of limitations,
failure to state a claim and failure to plead fraud with the requisite
particularity. On April 25, 2002, the District Court granted the motion to
dismiss this action based on the statute of limitations. On May 10, 2002, the
plaintiffs filed a motion for reconsideration in the District Court. On May 24,
2002, the plaintiffs filed a notice of appeal with respect to such dismissal. On
July 23, 2002, plaintiffs' motion for reconsideration was denied. On July 30,
2002, the plaintiffs voluntarily dismissed, without prejudice, their claims
against the Company. On October 2, 2002, the plaintiffs filed a notice of appeal
with respect to the District Court's entry of a final judgment in favor of the
individual defendants.
Between April 20, 2001 and May 31, 2001, five putative class action
complaints against the Company and certain of its officers and directors were
filed in the District Court (the 'Shareholder II Class Action'). The complaints,
on behalf of a putative class of shareholders of the Company who purchased the
Old Common Stock between September 29, 2000 and April 18, 2001 (the 'Second
Class Period'), allege, inter alia, that defendants violated the Exchange Act by
artificially inflating the price of the Old Common Stock and failing to disclose
negative information during the Second Class Period.
On August 3, 2001, the District Court consolidated the actions into a single
action, styled In Re The Warnaco Group, Inc. Securities Litigation (II), No. 01
CIV 3346 (MCG), and appointed a lead plaintiff and approved a lead counsel for
the putative class. A consolidated amended complaint was filed against certain
current and former officers and directors of the Company, which expanded the
Second Class Period to encompass August 16, 2000 to June 8, 2001. The amended
complaint also dropped the Company as a defendant, but added as defendants
certain outside directors. On April 18, 2002, the District Court dismissed the
amended complaint, but granted plaintiffs leave to replead. On June 7, 2002, the
plaintiffs filed a second amended complaint, which again expanded the Second
Class Period to encompass August 15, 2000 to June 8, 2001. On June 24, 2002, the
defendants filed motions to dismiss the second amended complaint. On August 21,
2002, the plaintiffs filed a third amended complaint adding the Company's
current independent auditors as a defendant.
Neither the Shareholder I Class Action nor Shareholder II Class Action has
had, or will have, a material adverse effect on the Company's financial
condition, results of operations or business.
Speedo Litigation. On September 14, 2000, Speedo International, Ltd. 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) (the 'Speedo Litigation'), 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 'Speedo Claims'). The
complaint sought, inter alia, termination of certain licensing agreements,
injunctive relief and damages.
On November 8, 2000, the Warnaco Defendants filed an answer and
counterclaims against Speedo International, Ltd. 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 (the 'Speedo Licenses') may not be terminated.
On or about October 30, 2001, Speedo International, Ltd. filed a motion in
the Bankruptcy Court seeking relief from the automatic stay to pursue the Speedo
Litigation in the District Court, and have its rights determined there through a
jury trial (the 'Speedo Motion'). The Debtors opposed the Speedo Motion, and
oral argument was held on February 21, 2002. On June 11, 2002, the Bankruptcy
Court denied the Speedo Motion on the basis that inter alia, (i) the Speedo
Motion was premature and (ii) the Bankruptcy Court has core jurisdiction over
resolution of the Speedo Claims.
On November 25, 2002, the Warnaco Defendants entered into a settlement
agreement with Speedo International, Ltd. to resolve the Speedo Claims on a
final basis (the 'Speedo Settlement Agreement'). On December 13, 2002, the
Bankruptcy Court entered an order approving the Speedo Settlement Agreement and
the Speedo Litigation was subsequently dismissed with prejudice.
28
The Speedo Settlement Agreement provided for (a) a total payment by the
Company to Speedo International, Ltd. in the amount of $2,557,865 in settlement
of disputed claims; (b) the assignment by the Company to Speedo International,
Ltd. of certain domain names; (c) an amendment to the Speedo Licenses and
related agreements (which remain in full force and effect for a perpetual term)
to clarify certain contractual provisions therein; (d) the execution of a
separate Web Site Agreement to govern the use of the Speedo mark in connection
with the web site operated by the Company; and (e) full mutual releases in favor
of each of the parties. The settlement of the Speedo Litigation did not have a
material adverse effect on the Company's financial condition, results of
operations or business.
Wachner Claim. On January 18, 2002, Mrs. Linda J. Wachner, former President
and Chief Executive Officer of the Company, filed a proof of claim in the
Chapter 11 Cases related to the post-petition termination of her employment with
the Company asserting an administrative priority claim in excess of $25.0
million (the 'Wachner Claim'). The Debt Coordinators for the Company's
pre-petition lenders, the Official Committee of Unsecured Creditors and the
Company have objected to the Wachner Claim. On November 15, 2002, the parties
entered into a settlement agreement (the 'Wachner Settlement'), pursuant to
which Mrs. Wachner would receive, in full settlement of the Wachner Claim, the
following: (a) an Allowed Unsecured Claim in connection with the termination of
her employment agreement in the amount of $3.5 million (which would be satisfied
under the Plan by a distribution of its pro rata share of New Common Stock
having a value of approximately $0.25 million at the time of distribution; and
(b) an Allowed Administrative Claim of $0.2 million (which was satisfied by a
cash payment of such amount upon confirmation of the Plan). The Wachner
Settlement Agreement was approved by the Bankruptcy Court on December 13, 2002.
SEC Investigation. As previously disclosed, the staff of the SEC
has been conducting an investigation to determine whether there have been
any violations of the Exchange Act in connection with the preparation and
publication by the Company of various financial statements and other public
statements. On July 18, 2002, the SEC staff informed the Company that it
intends to recommend that the SEC authorize an enforcement action against
the Company and certain persons who have been employed by or affiliated with
the Company since prior to the periods covered by the Company's previous
restatements of its financial results alleging violations of the federal
securities laws. The SEC staff invited the Company to make a Wells Submission
describing the reasons why no such action should be brought. On September 3,
2002, the Company filed its Wells Submission and is continuing discussions
with the SEC staff as to a settlement of this investigation. The Company does
not expect the resolution of this matter as to the Company to have a material
effect on the Company's financial condition, results of operation or business.
Chapter 11 Cases. For a discussion of proceedings under Chapter 11 of the
Bankruptcy Code, see Item 1. Business -- Proceedings Under Chapter 11 of the
Bankruptcy Code.
In addition to the above, from time to time, the Company is involved in
arbitrations or legal proceedings that arise in the ordinary course of its
business. The Company cannot predict the timing or outcome of these claims and
proceedings. Currently, the Company is not involved in any arbitration and/or
legal proceeding that it expects to have a material effect on its business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
29
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
OLD COMMON STOCK
Prior to June 11, 2001, the Company's Old Common Stock was traded on the
New York Stock Exchange (the 'NYSE') under the symbol 'WAC'. On June 11, 2001,
the NYSE suspended trading of the Old Common Stock. The table below sets forth,
for the periods indicated through June 11, 2001, the high and low sales prices
of the Old Common Stock, as reported on the New York Stock Exchange Composite
Tape. From June 11, 2001 until February 4, 2003, the Old Common Stock was traded
on the over-the-counter electronic bulletin board (the 'OTCBB') under the ticker
symbol 'WACGQ.PK'. The table below sets forth the high and low sales prices of
the Old Common Stock per the OTCBB from June 12, 2001 through February 4, 2003.
<Table>
<Caption>
HIGH LOW
---- ---
2001
First Quarter............................................... $5.3200 $1.1200
Second Quarter (through June 11, 2001)...................... $1.5000 $0.3900
Second Quarter (from June 12, 2001)(a)...................... $0.1550 $0.0570
Third Quarter(a)............................................ $0.2245 $0.0600
Fourth Quarter(a)........................................... $0.2500 $0.0200
2002
First Quarter(a)............................................ $0.0750 $0.0350
Second Quarter(a)........................................... $0.0600 $0.0210
Third Quarter(a)............................................ $0.1600 $0.0400
Fourth Quarter(a)........................................... $0.0990 $0.0001
2003
First Quarter (through February 4, 2003)(a)................. $0.0010 $0.0000
</Table>
- ---------
(a) The quotations reflect inter-dealer prices without retail
mark-up, markdown or commission and may not represent actual
transactions.
NEW COMMON STOCK
Pursuant to the Plan, on February 4, 2003, the Company's Old Common Stock
was cancelled and the Company issued 45,000,000 shares of New Common Stock to
certain pre-petition creditors of the Company in reliance on the exemption from
registration afforded by Section 1145 of the Bankruptcy Code. The Company's New
Common Stock began trading on the NASDAQ National Stock Market on February 5,
2003 under the ticker symbol 'WRNC'. The table below sets forth the high and low
sales prices of the Company's New Common Stock as reported on the NASDAQ
Composite Tape from February 5, 2003 through March 28, 2003.
<Table>
<Caption>
HIGH LOW
---- ---
2003
First Quarter (February 5, 2003 through March 28, 2003)..... $14.1000 $8.8000
</Table>
As of March 28, 2003, there were 50 holders of the New Common Stock, based
upon the number of holders of record and the number of individual participants
in certain security position listings. Pursuant to the Plan, the Company has
issued 1,147,050 shares of New Common Stock for distribution to approximately
3,000 of the Company's unsecured creditors. The Company expects to distribute
these shares to these creditors in April 2003.
The last reported sale price of the New Common Stock as reported on the
NASDAQ Composite Tape on March 28, 2003 was $10.08 per share.
From January 2000 through December 2000, the Company paid a quarterly cash
dividend of $0.09 per share. The Company suspended payment of its quarterly cash
dividend in December 2000. The Exit
30
Financing Facility prohibits the Company from paying dividends on the New Common
Stock. See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
In accordance with the Plan, on February 4, 2003, the Company issued Second
Lien Notes to pre-petition creditors and others in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 1145(a) of the Bankruptcy Code. The aggregate principal amount of the
Second Lien Notes issued totaled $200.9 million. The Second Lien Notes mature on
February 4, 2008, subject, in certain instances, to earlier repayment in whole
or in part. The Second Lien Notes bear a per annum interest rate which is the
higher of (i) 9.5% plus a margin (initially 0% and beginning on July 4, 2003,
0.5% is added to the margin every six months) and (ii) LIBOR plus a margin
(initially 5%, and beginning on July 4, 2003, 0.5% is added to the margin every
six months). The indenture pursuant to which the Second Lien Notes were issued
contains certain covenants that, among other things, limit investments and asset
sales, prohibits the payment of cash dividends and prohibits the Company from
incurring material additional indebtedness. The Second Lien Notes are guaranteed
by most of the Company's domestic subsidiaries, and the obligations under such
guarantee, together with the Company's obligations under the Second Lien Notes,
are secured by a second priority lien on substantially the same assets which
secure the Exit Financing Facility.
The Company received no proceeds from the issuance of the New Common Stock
and the Second Lien Notes, however, approximately $2,486 million of indebtedness
was extinguished as a result of such issuances.
STOCK OPTION PLANS
At January 4, 2003, there were outstanding options to purchase shares of Old
Common Stock and restricted shares of Old Common Stock, which awards had been
previously granted to employees and directors of the Company under various
Company management incentive plans. Pursuant to the terms of the Plan, the Old
Common Stock and derivative securities relating to the Old Common Stock,
including all outstanding options, were cancelled on February 4, 2003.
On March 12, 2003, the Company's Board of Directors approved the adoption of
the 2003 Stock Incentive Plan (the 'Stock Plan') and also approved the granting
of an aggregate of 750,000 shares of restricted stock and options to purchase
3,000,000 shares of New Common Stock at $10.45, the fair market value on that
date. The Stock Plan and the awards granted in March 2003 are subject to
approval of the Company's stockholders at its next annual meeting of
stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is selected consolidated financial information for the five
years in the period ended January 4, 2003. The selected financial information
should be read in conjunction with Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations and the consolidated financial
statements and notes thereto included elsewhere in this Annual Report.
In Fiscal 2000, the Company restated its ending balance sheet for fiscal
1997 by adjusting stockholders' equity as of January 3, 1998. This restatement
reflected adjustments to accounts receivable and other items and did not have an
impact on net income (loss) for any subsequent period. The Company's previous
independent auditors did not issue a consent with respect to the inclusion of
their report on the consolidated financial statements for fiscal 1997 and Fiscal
1998 in the Company's Annual Report on Form 10-K for Fiscal 2000. As a result,
the selected financial information included below for Fiscal 1998 is derived
from unaudited financial statements.
The historical results presented below may not be indicative of future
results.
31
<Table>
<Caption>
(DOLLARS IN MILLIONS, EXCLUDING SHARE AND PER SHARE DATA)
----------------------------------------------------------------------------
FISCAL FISCAL FISCAL FISCAL FISCAL
1998(a)(b) 1999 2000(c)(d)(e) 2001(f) 2002(f)
---------- ---- ------------- ------- -------
STATEMENT OF INCOME DATA:
Net revenues....................... $ 1,950.3 $ 2,114.2 $ 2,249.9 $ 1,671.3 $ 1,493.0
Gross profit....................... 537.2 681.8 404.5 296.9 440.3
Impairment charge.................. -- -- -- 101.8 --
Reorganization items............... -- -- -- 177.8 116.7
Operating income (loss)............ 85.6 205.4 (220.5) (580.9) (87.3)
Investment income (loss)........... -- -- 36.9 (6.6) 0.1
Interest expense................... 63.8 81.0 172.2 122.8 22.0
Income (loss) before cumulative
effect of a change in accounting
principle........................ 14.1 93.7 (376.9) (861.2) (163.2)
Cumulative effect of change in
accounting principle, net of
taxes............................ (46.3) -- (13.1) -- (801.6)
Net income (loss) applicable to
Common Stock..................... (32.2) 93.7 (390.0) (861.2) (964.9)
Dividends on Common Stock.......... 22.4 20.3 13.0 -- --
Per Share Data:
Income (loss) before cumulative effect
of change in accounting principle
Basic.............................. $ 0.23 $ 1.68 $ (7.14) $ (16.28) $ (3.08)
Diluted............................ $ 0.22 $ 1.65 $ (7.14) $ (16.28) $ (3.08)
Net income (loss):
Basic.............................. $ (0.52) $ 1.68 $ (7.39) $ (16.28) $ (18.21)
Diluted............................ $ (0.51) $ 1.65 $ (7.39) $ (16.28) $ (18.21)
Dividends declared..................... $ 0.36 $ 0.36 $ 0.27 $ -- $ --
Shares used in computing earnings per
share:
Basic.............................. 61,361,843 55,910,371 52,783,379 52,911,005 52,989,965
Diluted............................ 63,005,358 56,796,203 52,783,379 52,911,005 52,989,965
Divisional Summary Data:
Net revenues:
Intimate Apparel................... $ 944.8 $ 943.4 $ 769.3 $ 594.9 $ 570.7
Sportswear......................... 875.3 986.4 882.9 573.7 525.6
Swimwear........................... -- 36.4 355.2 311.8 305.0
Retail Stores...................... 130.2 148.0 242.5 190.9 91.7
----------- ----------- ----------- ---------- -----------
$ 1,950.3 $ 2,114.2 $ 2,249.9 $ 1,671.3 $ 1,493.0
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Percentage of net revenues:
Intimate Apparel................... 48.4% 44.6% 34.2% 35.6% 38.2%
Sportswear......................... 44.9% 46.7% 39.2% 34.3% 35.2%
Swimwear........................... 0.0% 1.7% 15.8% 18.7% 20.5%
Retail Stores...................... 6.7% 7.0% 10.8% 11.4% 6.1%
----------- ----------- ----------- ---------- -----------
100.0% 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
BALANCE SHEET DATA:
Working capital.................... $ (38.3) $ 229.8 $ (1,484.2) $ 446.3(g) $ 470.6(g)
Total assets....................... 1,761.2 2,753.2 2,342.1 1,985.5 947.9
Liabilities subject to
compromise....................... -- -- -- 2,435.1 2,486.1
Debtor-in-possession financing..... -- -- -- 155.9 --
Long-term debt (excluding currrent
maturities)...................... 411.9 1,188.0 -- -- (h) 1.3(h)(i)
Mandatorily redeemable convertible
preferred securities............. 101.8 102.9 103.4 -- (h) -- (h)
Stockholders' equity (deficit)..... 552.1 533.2 27.2 (851.3) (1,856.1)
</Table>
(footnotes on next page)
32
(footnotes from previous page)
(a) Effective Fiscal 1998, the Company early adopted the
provisions of SOP 98-5, which requires, among other things,
that certain pre-operating costs, which had previously been
deferred and amortized, be expensed as incurred. The Company
recorded the impact as the cumulative effect of a change in
accounting principle of $46.3 million (net of income tax
benefit of $25.2 million), or $0.73 per diluted share.
(b) In fiscal 1997, the balance sheet was restated resulting in
a reduction of $26 million in stockholders' equity. This
restatement reflected adjustments to accounts receivable and
other items and had no effect on reported net income in any
subsequent year. The Company's previous independent auditors
did not issue a consent for the Company's consolidated
financial statements for fiscal 1997 and 1998. As a result,
the selected financial information for the year ended
January 2, 1999 is derived from unaudited financial
statements.
(c) Fiscal 2000 includes investment income of $36.9 million
resulting from a $42.8 million gain on the Company's sale of
its investments in InterWorld Corporation, net of losses
from its Equity Agreements of $5.9 million.
(d) Fiscal 2000 includes the impact of a change in accounting of
$13.1 million (net of income tax benefit of $8.6 million),
or $0.25 per diluted share, related to a change in the
method of valuation of inventory in the Company's retail
outlet stores.
(e) Fiscal 2000 includes a tax provision valuation reserve
allowance of $129.2 million, or $2.45 per diluted share for
the deferred tax asset.
(f) Includes reorganization items related to the Chapter 11
Cases of $177.8 million and $116.7 million in Fiscal 2001
and Fiscal 2002, respectively, impairment charges of $101.8
million in Fiscal 2001 and a tax provision of $151.0 million
in Fiscal 2001 primarily related to the increase in the
valuation allowance related to future income tax benefits.
Also includes the cumulative effect of a change in
accounting of $801.6 million, net of income tax benefit of
$53.5 million related to the adoption of SFAS No. 142. See
Notes 1, 2, 7 and 12 of Notes to Consolidated Financial
Statements.
(g) Does not include liabilities subject to compromise.
(h) Included in liabilities subject to compromise.
(i) Long-term debt represents other debt of $1.3 million at
January 4, 2003.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On the Petition Date Warnaco, 36 of its 37 U.S. subsidiaries and Warnaco of
Canada Company, each filed a petition for relief under Chapter 11 of the
Bankruptcy Code. The remainder of the Company's foreign subsidiaries were not
debtors in the Chapter 11 Cases, nor were they subject to foreign bankruptcy or
insolvency proceedings.
In April 2001, the Company hired A&M. In November 2001, Antonio C.
Alvarez II of A&M was elected President and Chief Executive Officer of the
Company and in December 2001, James P. Fogarty of A&M was elected Chief
Financial Officer of the Company. The Company, directed by Mr. Alvarez and Mr.
Fogarty, completed a comprehensive review of its business operations in order to
formulate a turnaround plan for the Company. The turnaround plan focused on
three strategies intended to maximize the Company's value:
(i) Stabilize and improve the operations of the Company's core business
units;
(ii) Pursue the sale or liquidation of certain non-core businesses and
assets; and
(iii) Explore the possible sale of the Company's main operating units,
or the Company as a whole, for purposes of comparing the values that might
be achieved in a sale versus stand-alone reorganization values.
Stabilize and improve the operations of the Company's core business units.
To improve operations at its core business units, the Company instituted
procedures to monitor and improve the management of the Company's working
capital, focusing specifically on accounts receivable and inventory. The Company
developed and implemented increased operating discipline at the Group level and
reduced selling, general and administrative expenses. Beginning in December
2001, the Company instituted monthly operating reviews for each business unit to
monitor purchasing and production levels, key retailer sell-through and
inventory positions and reduce excess and obsolete inventories and past-due
receivables. Since then, the Company has monitored purchasing and production
levels against its sales to customers, thereby minimizing requests for setoffs,
credits or discounts. The Company has reduced manufacturing and distribution
inefficiencies by manufacturing, sourcing and selling quantities of goods to
retailers that retailers are likely to sell and by monitoring the performance of
the Company's products at the retail level. The Company believes these practices
improve performance at the retail level by minimizing retailers' requests for
sales discounts, returns and allowances. Divisional management has focused on
collecting past-due receivables and liquidating excess and obsolete inventories.
The Company has also strengthened credit policies particularly in its Authentic
Fitness business and Mexican operations. The Company has reduced expenses by
closing and consolidating distribution facilities, closing manufacturing
facilities to reduce excess capacity and reducing administrative expenses.
The Company has also recruited new management for each of its core business
segments and hired additional personnel in each of its business units to provide
support for new management.
As a result of the actions taken to date, the Company's operating results
have improved since the end of Fiscal 2001. Operating loss improved from a loss
of $580.9 million in Fiscal 2001 to a loss of $87.3 million in Fiscal 2002.
Gross margin improved from 17.8% of net revenues to 29.5% of net revenues and
selling, general and administrative expenses have decreased from 35.8% of net
revenues to 27.5% of net revenues.
As a result of the improved performance and operating results, the Company
experienced improved liquidity over the last 15 months. In July 2001, borrowings
under the $600 million Amended DIP peaked at $203.4 million. On May 28, 2002,
the Company voluntarily reduced the amount of borrowing available to the Company
under the Amended DIP to $325.0 million. On October 8, 2002, the Company
voluntarily reduced the amount of borrowing available to the Company under the
Amended DIP to $275.0 million. Borrowing under the Amended DIP totaled $155.9
million on January 5, 2002. All amounts borrowed under the Amended DIP were
repaid by June 30, 2002. The
34
Amended DIP terminated on the Effective Date. As of January 4, 2003, the Company
had approximately $94.1 million in excess cash compared to outstanding borrowing
under the Amended DIP facility of $155.9 million at the end of Fiscal 2001. The
Company generated approximately $226.2 million of cash flow from operating
activities in Fiscal 2002, reflecting improvements in operating earnings and
working capital management.
Pursue the sale or liquidation of certain non-core businesses and assets.
From the Petition Date through January 4, 2003, the Company has sold real
estate, excess machinery and equipment and other assets generating net proceeds
of approximately $36.3 million. In February 2002, the Company sold its GJM and
Penhaligon's businesses generating net proceeds of approximately $20.5 million.
In Fiscal 2001, the Company made a strategic decision to close its domestic
outlet retail stores. In connection with the closing of the stores, the Company
sold the inventory generating net proceeds of approximately $23.2 million
through January 4, 2003. All of the Company's domestic outlet retail stores were
closed by the end of January 2003. As of January 4, 2003, the Company had
classified certain assets as assets held for sale. The assets held for sale of
$1.5 million are primarily fixed assets that the Company expects to sell by the
end of fiscal 2003.
Explore the possible sale of the Company's main operating units, or the Company
as a whole, for purposes of comparing the values that might be achieved in a
sale versus stand-alone reorganization values.
With the assistance of an investment banking firm, the Company explored the
potential sale of its core businesses. After considering the likely timing and
value of consummation of any such potential sales, the Company concluded that
prompt consummation of the Plan, rather than a sale of the Company's core
businesses, would maximize value for its constituencies.
The Debtors filed their proposed joint plan of reorganization on October 1,
2002. The Debtors filed the Plan on November 9, 2002. Pursuant to a solicitation
procedures order entered by the Bankruptcy Court on November 13, 2002, the
Bankruptcy Court set a deadline of December 27, 2002 by which the Debtors'
various creditor constituencies entitled to vote could vote to accept or reject
the Plan. The Debtors' various creditor constituencies which were entitled to
vote and voted, overwhelmingly voted to accept the Plan. The Bankruptcy Court
approved the Plan on January 16, 2003. The Plan was consummated on February 4,
2003.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to use judgment in making estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses in the
Company's consolidated financial statements and accompanying notes. The
following critical accounting policies are based on, among other things,
judgments and assumptions made by management that include inherent risks and
uncertainties.
Use of estimates. The Company uses estimates and assumptions in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements. These estimates and assumptions also affect the reported amounts of
revenues and expenses. Actual results could materially differ from these
estimates. The estimates the Company makes are based upon historical factors,
current circumstances and the experience and judgment of the Company's
management. The Company evaluates its assumptions and estimates on an on-going
basis and may employ outside experts to assist in the Company's evaluations. The
Company believes that the use of estimates affects the application of all of the
Company's accounting policies and procedures.
The Company has used the amounts set forth in allowed proofs of claim to
determine the amounts of liabilities subject to compromise as of January 4,
2003. The Plan provides for specific amounts of
35
cash, Second Lien Notes and New Common Stock to be distributed to each class of
the Company's creditors as approved by the Bankruptcy Court. See Item 1.
Business -- Proceedings Under Chapter 11 of the Bankruptcy Code.
The Company has identified reorganization items related to the Chapter 11
Cases. The Company reviews its estimates of reorganization items on a monthly
basis and adjustments to the previously estimated amounts are recorded when it
becomes evident that a particular item will be settled for more or less than was
originally estimated. See Note 2 of Notes to Consolidated Financial Statements.
In Fiscal 2000, the Company recorded special charges related to the closing
of facilities, discontinuing under-performing product lines, write-down of
assets and reduction of its production, distribution and administrative
workforce. The determination of the amount of these special items involved the
estimation of amounts that will be realized from the sales of assets and the
amount of liabilities that will be incurred in the future. The actual amounts
that will ultimately be realized from asset sales or incurred may differ
significantly from the amounts originally estimated by the Company. The Company
reviews its estimates of special items on an ongoing basis. Adjustments to the
previously estimated amounts are recorded when it becomes evident that a
particular item will be settled for more or less than was originally estimated.
In the first quarter of Fiscal 2002, the Company recorded a transitional
impairment charge of $801.6 million, net of income tax benefit of $53.5 million,
for the cumulative effect of a change in accounting related to the adoption of
SFAS No. 142. Determination of the amount of the cumulative effect involved
significant judgment in the estimates of the future earnings of the Company and
its various business units and the fair value assigned to the Company's various
assets and liabilities. The amount that the Company and its various business
units will ultimately earn and the future fair value of the Company's assets and
business units could differ significantly from these estimates. In connection
with the adoption of 'Fresh Start' accounting in accordance with the provisions
of SOP 90-7, the Company will obtain third party appraisals of its intangible
and certain other assets. Based upon the appraisal of the Company's Business
Enterprise Value and the fair value of the Company's assets and liabilities at
February 4, 2003, the Company expects that it will record intangible and other
assets associated with the 'Fresh Start' of between $275.0 and $325.0 million.
During the fourth quarter of Fiscal 2002, the Company completed a strategic
review of its Intimate Apparel operations in Europe and formalized a plan to
consolidate certain manufacturing facilities, restructure other manufacturing
operations and consolidate certain sales and back office operations in Europe.
The Company expects to incur severance, outplacement, legal, accounting and
other expenses associated with the consolidation covering approximately 350
employees. Portions of the consolidation plan involve the consolidation of
certain operations in France. Consolidating operations in France requires that
the Company comply with certain procedures and processes that are defined in
French law and French labor regulations. The Company has recorded a
restructuring charge of $8.7 million in the fourth quarter of Fiscal 2002
reflecting the statutory and regulatory defined severance and other obligations
that the Company will incur related to the consolidation. Included in the
restructuring charge are $0.1 million of legal and other professional fees
incurred in Fiscal 2002 related to the consolidation. Additional severance costs
attributable to settlements with individuals are subject to final negotiation.
The Company expects that all severance and other costs attributable to the
consolidation will be fully paid by the end of fiscal 2003. The Company expects
that the ultimate cost of the consolidation and other restructuring costs that
have been incurred and will be incurred in fiscal 2003 will be between $12.0
million and $15.0 million. The determination of the amount of liabilities that
the Company will ultimately incur in connection with the consolidation and its
other restructuring initiatives involves the use of estimates and judgments by
the Company and its professional and legal advisors. The amount and timing of
the final settlement of such liabilities could differ from those estimates.
Revenue recognition. The Company recognizes revenue when goods are shipped
to customers and title and risk of loss has passed, net of allowances for
returns and other discounts. The Company recognizes revenue from its retail
stores when goods are sold to customers.
Accounts receivable. The Company maintains reserves for estimated amounts
that the Company does not expect to collect from its trade customers. Accounts
receivable reserves include amounts the Company expects its customers to deduct
for trade discounts, other promotional activity, amounts for
36
accounts that go out of business or seek the protection of the Bankruptcy Code
and amounts related to charges in dispute with customers. The Company's estimate
of the allowance amounts that are necessary includes amounts for specific
deductions the Company has authorized and an amount for other estimated losses.
The provision for accounts receivable allowances is affected by general economic
conditions, the financial condition of the Company's customers, the inventory
position of the Company's customers, sell-through of the Company's products by
these customers and many other factors most of which are not controlled by the
Company or its management. As of January 4, 2003, the Company had $276.9 million
of open trade invoices and other accounts receivable and $10.4 million of
outstanding debit memos. Based upon the Company's analysis of estimated
recoveries and collections associated with the related invoices and debit memos,
the Company had $87.5 million of accounts receivable reserves. As of January 5,
2002, the Company had $361.5 million of open trade invoices and other accounts
receivable and $33.8 million of outstanding debit memos. Based upon the
Company's analysis of estimated recoveries and collections associated with the
related invoices and debit memos, the Company had $112.9 million of accounts
receivable reserves. The determination of the amount of the accounts receivable
reserves is subject to significant levels of judgment and estimation by the
Company's management. If circumstances change or economic conditions
deteriorate, the Company may need to increase the reserve significantly. The
Company has purchased credit insurance to help mitigate the potential losses it
may incur from the bankruptcy, reorganization or liquidation of some of its
customers.
Inventories. The Company values its inventories at the lower of cost,
determined on a first-in first-out basis, or market value. The Company includes
certain design, procurement, receiving and other inventory-related costs in its
determination of inventory cost. These costs amounted to approximately $54.6
million and $30.2 million at January 5, 2002 and January 4, 2003, respectively.
The Company evaluates its inventories to determine excess units or slow-moving
styles based upon quantities on hand, orders in-house and expected future
orders. For those items for which the Company believes it has an excess supply
or for styles or colors that are obsolete, the Company estimates the net amount
that the Company expects to realize from the sale of such items. The Company's
objective is to recognize projected inventory losses at the time the loss is
evident rather than when the goods are ultimately sold. As of January 4, 2003,
the Company had identified inventory with a carrying value of approximately
$61.5 million as potentially excess and/or obsolete. Based upon the estimated
recoveries related to such inventory, as of January 4, 2003, the Company had
approximately $33.8 million of inventory reserves for excess, obsolete and other
inventory adjustments. As of January 5, 2002, the Company had identified
inventory with a carrying value of approximately $88.3 million as potentially
excess and/or obsolete. Based upon the estimated recoveries related to such
inventory, as of January 5, 2002, the Company had approximately $50.1 million of
inventory reserves for excess, obsolete and other inventory adjustments.
Long-Lived Assets. The Company reviews its long-lived assets for possible
impairment when events or circumstances indicate that the carrying value of the
assets may not be recoverable. Assumptions and estimates used in the evaluation
of impairment may affect the carrying value of long-lived assets, which could
result in impairment charges in future periods. In addition, depreciation and
amortization expense is affected by the Company's determination of the estimated
useful lives of the related assets.
Income Taxes. The provision for income taxes, income taxes payable and
deferred income taxes are determined using the liability method. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
enacted tax rates and laws to taxable years in which such differences are
expected to reverse. A valuation allowance is provided when the Company
determines that it is more likely than not that a portion of the deferred tax
asset balance will not be realized.
Provision for U.S. income taxes on unremitted earnings of foreign
subsidiaries is made only on those amounts in excess of the funds considered to
be permanently reinvested.
Pension Plan. The Company has a defined benefit pension plan (the 'Pension
Plan') covering substantially all full-time non-union and certain union domestic
employees. The determination of the total amount of liability attributable to
benefits owed to participants covered by the Pension Plan and the amount of
pension expenses recorded by the Company related to the Pension Plan are
determined by the Pension Plan's third party actuary as of the first day of the
fiscal year using assumptions provided by the Company. The assumptions used can
have a significant impact on the amount of pension expense
37
and pension liability recorded by the Company. The Pension Plan actuary also
determines the annual cash contribution to the Pension Plan using assumptions
defined by the Pension Benefit Guaranty Corporation (the 'PBGC'). The Pension
Plan was under-funded as of January 4, 2003 and January 5, 2002. The Pension
Plan contemplates that the Company will continue to fund its minimum required
contibutions and any other premiums due under ERISA and the Internal Revenue
Code. The amount of pension contributions that is deductible for federal income
tax purposes is also determined by the Pension Plan actuary using assumptions
defined by the Internal Revenue Service (the 'IRS') and other regulatory
agencies. Effective January 1, 2003, the Pension Plan was amended, and, as a
result, no future benefits will accrue to participants under the Pension Plan.
This amendment resulted in a curtailment of the Pension Plan and a reduction in
the total liability determined by the Pension Plan actuary of approximately $8.9
million as of January 4, 2003. The Company, after consulting with its outside
advisors, updated its discount rate and assumed rate of return on pension
assets. The Pension Plan liability was determined using a discount rate of
approximately 5.3% at January 4, 2003 compared to a rate of 7.5% at January 5,
2002. The discount rate of 5.3% is based upon the PBGC's discount rate. In
addition, after considering the nature of the Pension Plan's assets and
investment strategy, the Company will reduce the expected rate of return on
Pension Plan assets from 9.5% to 7% for valuations completed after January 4,
2003. The Company's cash contribution to the Pension Plan for fiscal 2003 will
be approximately $9.3 million and is estimated to be approximately $27.7 million
over the next five years. The amount of cash contribution the Company will be
required to make to the Pension Plan could increase or decrease depending upon
the actual return that the Pension Plan assets earn compared to the estimated
return on Pension Plan assets of 7%. See Note 8 of Notes to Consolidated
Financial Statements.
REORGANIZATION ITEMS
In connection with the Chapter 11 Cases, the Company initiated several
strategic and organizational changes to streamline the Company's operations,
focus on its core businesses and return the Company to profitability. Many of
the strategic actions are long-term in nature and, though initiated in Fiscal
2001 and Fiscal 2002, will not be completed until the end of fiscal 2003. In
connection with these actions, the Company has closed all of its domestic outlet
retail stores and reorganized its Speedo Authentic Fitness retail stores. The
Company closed 204 of the 283 or 72.1% of the retail stores it operated at the
beginning of Fiscal 2001. The Company closed 86 stores during Fiscal 2001 and
118 stores were closed during Fiscal 2002. In the first quarter of fiscal 2003,
the Company closed three additional Speedo Authentic Fitness retail stores. The
closing of the domestic outlet retail stores and the sale of the related
inventory generated net proceeds of approximately $23.2 million in Fiscal 2002.
The Company wrote off $13.3 million of fixed assets and accrued $9.4 million
of lease termination costs related to rejected leases of the closed stores in
Fiscal 2002. In October 2002, the Company agreed to settle certain lease
obligations with Bancomext related to certain leased facilities in Mexico. Under
the terms of the settlement agreement, the Company paid Bancomext $0.1 million
in cash for outstanding rent payments and other fees and granted an unsecured
claim to Bancomext in the amount of $9.5 million in consideration for
(i) Bancomext's release of the Company's lease obligation on a closed facility
and (ii) certain amendments to leases for two other facilities. The Company had
accrued approximately $6.9 million in the fourth quarter of Fiscal 2001 as a
reorganization item for its estimated obligations under the lease for the closed
facility. The additional accrual of approximately $2.6 million for the total
unsecured claim pursuant to the settlement agreement is included in
reorganization items in Fiscal 2002. Lease termination costs are classified as
liabilities subject to compromise. Lease expense included in operating loss
incurred prior to the settlement with GECC (as defined below) was $18.1 million,
$16.5 million and $8.2 million in Fiscal 2000, 2001 and 2002, respectively.
In the first quarter of Fiscal 2002, the Company sold the assets of GJM and
Penhaligon's for net proceeds of approximately $20.5 million in the aggregate.
The net loss on the sale of Penhaligon's and GJM was approximately $2.9 million
and is included in reorganization items in Fiscal 2002. In Fiscal 2001, the
Company recorded an impairment loss related to the goodwill of GJM of
approximately $26.8 million.
38
On June 12, 2002, the Bankruptcy Court approved the Company's settlement of
certain operating lease agreements with General Electric Capital Corporation
('GECC'). The leases had original terms from three to seven years and were
secured by certain equipment, machinery, furniture, fixtures and other assets.
GECC's claims under the leases totaled approximately $51.2 million. Under the
terms of the settlement agreement GECC will receive $15.2 million payable as
follows: (i) prior to the Effective Date of the Plan, the Company paid GECC
monthly installments of $0.55 million, and, (ii) after the Effective Date, the
Company is obligated to pay GECC monthly installments of $0.75 million until the
balance is paid in full. Through June 12, 2002, the Company had paid GECC $5.5
million of the $15.2 million. The present value of the remaining cash payments
to GECC under the settlement agreement of $5.6 million as of January 4, 2003 is
included in the current portion of long-term debt not subject to compromise. The
remaining amount of the GECC claim of approximately $36.0 million is included in
liabilities subject to compromise as of January 4, 2003. The Company had
recorded accrued liabilities related to the GECC leases of approximately $13.0
million prior to the settlement and recorded approximately $22.9 million as
reorganization items in Fiscal 2002. See Note 14 of Notes to Consolidated
Condensed Financial Statements.
During Fiscal 2001 and Fiscal 2002, the Company sold certain personal
property, vacated buildings, surplus land and other assets generating net
proceeds of approximately $6.2 million and $6.8 million, respectively, since the
Petition Date. The losses related to the write-down of these assets were
approximately $3.7 million and $1.0 million for Fiscal 2001 and Fiscal 2002,
respectively. The Company vacated certain leased premises and rejected those
leases (many related to its Retail Stores Division) under the provisions of the
Bankruptcy Code.
During the fourth quarter of Fiscal 2002, the Company completed a strategic
review of its Intimate Apparel operations in Europe and formalized a plan to
consolidate its European manufacturing operations and to restructure certain
other manufacturing, sales and administrative operations in Europe. The Company
expects to incur severance, outplacement, legal, accounting and other expenses
associated with the consolidation covering approximately 326 employees. The
Company has recorded a restructuring charge of approximately $8.7 million in the
fourth quarter of Fiscal 2002 reflecting the statutory and regulatory defined
severance and other obligations that the Company expects to incur related to the
consolidation. Included in the restructuring charge is approximately $0.1
million of legal and other professional fees incurred in Fiscal 2002 related to
the consolidation. The Company expects that all severance, outplacement, legal
and other costs attributable to the consolidation will be fully paid by the end
of fiscal 2003. The Company expects that the ultimate costs of the consolidation
that have been incurred and will be incurred in fiscal 2003 will be between
$12.0 million and $15.0 million, including the $8.7 million recorded in Fiscal
2002.
As a direct result of the Chapter 11 Cases, the Company has recorded certain
liabilities, incurred certain legal and professional fees, written-down certain
assets and accelerated the recognition of certain deferred charges. The
transactions were recorded in accordance with the provisions of SOP 90-7.
Reorganization items included in the consolidated condensed statement of
operations in Fiscal 2002 and Fiscal 2001 were $116.7 million and $177.8
million, respectively. Included in reorganization items are certain non-cash
asset impairment provisions and accruals for items that have been, or will be,
paid in cash. In addition, certain accruals are subject to compromise under the
provisions of the Bankruptcy Code. The Company has recorded these accruals at
the estimated amount the creditor is entitled to claim under the provisions of
the Bankruptcy Code. The ultimate amount of and settlement terms for such
liabilities are detailed in the Plan. See Item 1. Business -- Proceedings Under
Chapter 11 of the Bankruptcy Code and Note 2 of Notes to Consolidated Financial
Statements.
39
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS (SELECTED DATA)
The consolidated statements of operations for the Company are summarized
below:
<Table>
<Caption>
FISCAL % OF NET FISCAL % OF NET FISCAL % OF NET
2000 REVENUES 2001 REVENUES 2002 REVENUES
---- -------- ---- -------- ---- --------
(DOLLARS IN MILLIONS)
Net revenues................... $2,249.9 100.0% $1,671.3 100.0% $1,493.0 100.0%
Cost of goods sold............. 1,845.4 82.0% 1,374.4 82.2% 1,052.7 70.5%
-------- ----- -------- --------- -------- -----
Gross profit................... 404.5 18.0% 296.9 17.8% 440.3 29.5%
Selling, administrative and
general expenses............. 625.0 27.8% 598.2 35.8% 411.0 27.5%
Impairment charge.............. -- -- 101.8 6.1% -- --
Reorganization expenses........ -- -- 177.8 10.6% 116.7 7.8%
-------- ----- -------- --------- -------- -----
Operating loss................. (220.5) -9.8% (580.9) -34.8% (87.4) -5.9%
Investment income (loss),
net.......................... 36.9 (6.5) 0.1
Interest expense (a)........... 172.2 122.8 22.0
-------- -------- --------
Loss before provision for
income taxes and cumulative
effect of change in
accounting principle......... (355.8) (710.2) (109.3)
Provision for income taxes..... 21.0 151.0 54.0
-------- -------- --------
Loss before cumulative effect
of change in accounting
principle.................... (376.9) (861.2) (163.3)
Cumulative effect of change in
accounting principle, net of
tax.......................... (13.1) -- (801.6)
-------- -------- --------
Net loss....................... $ (390.0) $ (861.2) $ (964.9)
-------- -------- --------
-------- -------- --------
</Table>
- ---------
(a) Contractual interest was $221.6 million and $180.2 million
for Fiscal 2001 and Fiscal 2002, respectively.
COMPARISON OF FISCAL 2002 TO FISCAL 2001
NET REVENUES
Net revenues are as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
---- ---- ---------- --------
(DOLLARS IN THOUSANDS)
Intimate Apparel Group................... $ 594,889 $ 570,694 $ (24,195) -4.1%
Sportswear Group......................... 573,697 525,564 (48,133) -8.4%
Swimwear Group........................... 311,802 304,994 (6,808) -2.2%
Retail Stores Group...................... 190,868 91,704 (99,164) -52.0%
---------- ---------- --------- ---------
$1,671,256 $1,492,956 $(178,300) -10.7%
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</Table>
Net revenues decreased $178.3 million, or 10.7%, to $1,493.0 million in
Fiscal 2002 compared to $1,671.3 million in Fiscal 2001. In the same period,
Intimate Apparel Group net revenues decreased $24.2 million, or 4.1%, to $570.7
million (excluding discontinued and sold business units, Intimate Apparel Group
net revenues increased $45.2 million, or 8.7%), Sportswear Group net revenues
decreased $48.1 million, or 8.4%, to $525.6 million, Swimwear Group net revenues
decreased $6.8 million, or 2.2%, to $305.0 million and Retail Stores Group net
revenues decreased $99.2 million, or 52.0%, to $91.7 million.
Intimate Apparel Group
Intimate Apparel Group net revenues are as follows:
40
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
---- ---- ---------- --------
(DOLLARS IN THOUSANDS)
Warner's/Olga/Body by Nancy
Ganz/Bodyslimmers......................... $229,446 $235,893 $ 6,447 2.8%
Calvin Klein underwear...................... 211,141 239,662 28,521 13.5%
Lejaby...................................... 80,201 90,468 10,267 12.8%
-------- -------- -------- ----------
Total continuing............................ 520,788 566,023 45,235 8.7%
Total discontinued business units........... 74,101 4,671 (69,430) -93.7%
-------- -------- -------- ----------
Intimate Apparel Group...................... $594,889 $570,694 $(24,195) -4.1%
-------- -------- -------- ----------
-------- -------- -------- ----------
</Table>
For Fiscal 2002, Intimate Apparel net revenues decreased $24.2 million, or
4.1%, to $570.7 million compared with $594.9 million in Fiscal 2001. Excluding
net revenues from sold and discontinued business units (GJM, Fruit of the Loom
and Weight Watchers), Intimate Apparel net revenues increased $45.2 million, or
8.7%, to $566.0 million in Fiscal 2002 compared to $520.8 million in Fiscal
2001. Increases in Warner's, Olga and Lejaby net revenues primarily reflect
improved distribution fulfillment, favorable reception of Lejaby products at
retail and more favorable customer allowance and markdown experience. Despite
the Company's decision to exit the J.C. Penney's business, Calvin Klein
underwear net revenues increased $28.5 million due to improved sell-through at
the retail level, particularly in the women's business. J.C. Penney's business
decreased approximately $9.7 million in Fiscal 2002 compared to Fiscal 2001. The
decrease in J.C. Penney's business was partially offset by a re-launch of Calvin
Klein underwear in Dillard's which accounted for approximately $4.3 million of
net revenue in the fourth quarter of Fiscal 2002.
Sportswear Group
Sportswear Group net revenues are as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
---- ---- ---------- --------
(DOLLARS IN THOUSANDS)
Chaps Ralph Lauren.......................... $190,896 $137,022 $(53,874) -28.2%
Calvin Klein jeans/kids..................... 325,168 317,167 (8,001) -2.5%
Calvin Klein Accessories.................... 14,049 14,404 355 2.5%
A.B.S. by Allen Schwartz.................... 27,453 42,888 15,435 56.2%
White Stag/Catalina (licensed).............. 16,131 14,083 (2,048) -12.7%
-------- -------- -------- ---------
Sportswear Group............................ $573,697 $525,564 $(48,133) -8.4%
-------- -------- -------- ---------
-------- -------- -------- ---------
</Table>
For Fiscal 2002, Sportswear net revenues decreased $48.1 million, or 8.4%,
to $525.6 million compared with $573.7 million in Fiscal 2001. The decrease in
Chaps net revenues reflects lower sales to warehouse clubs ($32.8 million),
lower sales to department stores ($17.2 million), including the loss of the
Dillard's business ($4.2 million), lower sales in Mexico and the overall
softness in the men's sportswear business. Sales to the military related retail
stores, which accounted for 9.8% of Chaps gross sales in Fiscal 2002, could be
negatively affected in 2003 with the deployment of troops in the Middle East and
the war with Iraq. The decrease in Calvin Klein jeans net revenues primarily
reflects softness in the sportswear business and the decision to exit the Calvin
Klein kids business. The Company is seeking to sublicense the rights to sell
Calvin Klein kids products in fiscal 2003. A.B.S. by Allen Schwartz net revenues
have benefited from a favorable reception of its new styles at the retail level.
Swimwear Group
Swimwear Group net revenues are as follows:
41
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
---- ---- ---------- --------
(DOLLARS IN THOUSANDS)
Speedo...................................... $184,089 $200,376 $ 16,287 8.8%
Designer(a)................................. 127,626 104,618 (23,008) -18.0%
Ubertech.................................... 87 -- (87) -100.0%
-------- -------- -------- ----------
Swimwear Group.............................. $311,802 $304,994 $ (6,808) -2.2%
-------- -------- -------- ----------
-------- -------- -------- ----------
</Table>
- ---------
(a) Includes Catalina/White Stag wholesale swimwear.
For Fiscal 2002, Swimwear Group net revenues decreased $6.8 million, or
2.2%, to $305.0 million compared with $311.8 million in Fiscal 2001. The
increase in Speedo's net revenues of $16.3 million is primarily a result of more
favorable customer allowance and return experience due to improvements in
operations, order fulfillment rates and on-time deliveries. The increase in net
revenues was accomplished despite the strategic decision to reduce accounts
receivable exposure to certain swim team dealers, which resulted in a reduction
in shipments to team dealers in Fiscal 2002 compared to Fiscal 2001. The
decrease in Designer Swimwear's net revenues in Fiscal 2002 compared to Fiscal
2001 primarily reflects a decrease due to the reduction in the Victoria's Secret
catalog business ($8.8 million) and general softness in the department store
business.
Retail Stores Group
Retail Stores Group net revenues are as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
---- ---- ---------- --------
(DOLLARS IN THOUSANDS)
Outlet stores................................ $123,948 $56,033 $(67,915) -54.8%
Speedo Authentic Fitness stores.............. 54,277 34,658 (19,619) -36.1%
Penhaligon's................................. 11,511 676 (10,835) -94.1%
IZKA......................................... 1,132 337 (795) -70.2%
-------- ------- -------- ---------
Retail Group................................. $190,868 $91,704 $(99,164) -52.0%
-------- ------- -------- ---------
-------- ------- -------- ---------
</Table>
In Fiscal 2001, the Company made a strategic decision to close all its
domestic outlet retail stores. During Fiscal 2002, the Company closed 64
domestic outlet stores and 47 Speedo Authentic Fitness stores. The Company
closed three additional Speedo Authentic Fitness stores in January 2003. The
closing of the domestic outlet retail stores and the related sale of inventory
generated net proceeds of approximately $23.2 million through January 4, 2003.
Beginning with the first quarter of fiscal 2003, the operating results of the
remaining 45 Speedo Authentic Fitness stores will be included in the Swimwear
Group and the remaining 16 Calvin Klein full price and 15 outlet stores will be
included in the Intimate Apparel Group.
For Fiscal 2002, net revenues decreased $99.2 million, or 52.0%, to $91.7
million compared to $190.9 million in Fiscal 2001. The decrease in net revenues
reflects the reduction in the number of retail outlet stores and Speedo
Authentic Fitness stores the Company operates. Same store sales for the 45
Speedo Authentic Fitness stores the Company continues to operate decreased
approximately 5.6% in Fiscal 2002 compared to the comparable period of Fiscal
2001. The Penhaligon's business was sold in February 2002 and IZKA, a French
retail subsidiary, was liquidated in the third quarter of Fiscal 2002.
GROSS PROFIT
Gross profit for Fiscal 2002 increased $143.4 million, or 48.3%, to $440.3
million compared with $296.9 million in Fiscal 2001. Gross margin for Fiscal
2002 was 29.5% compared to 17.8% in Fiscal 2001. The improvement in gross margin
reflects the more favorable mix of full price sales, improved markdown and
allowance experience, improved manufacturing efficiencies and more efficient
product sourcing.
42
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for Fiscal 2002 decreased
$187.2 million, or 31.3%, to $411.0 million compared to $598.2 million in Fiscal
2001. Selling, general and administrative expenses as a percentage of net
revenues were 27.5% in Fiscal 2002 compared with 35.8% in Fiscal 2001.
The decrease in selling, general and administrative expenses reflects lower
marketing expenses, lower amortization expense of $36.0 million (due to the
adoption of SFAS 142 effective January 6, 2002), lower retail expenses of
$37.2 million due to the reduction in the number of retail stores the Company
operates, lower expenses in the Intimate Apparel Group of $60.9 million related
to lower distribution expenses due to the consolidation of certain of the
Company's distribution facilities in Duncansville, Pennsylvania, cost saving
measures implemented as part of the Company's restructuring efforts, the
discontinuance of the Fruit of the Loom and Weight Watchers business units and
the sale of GJM. Marketing expenses decreased approximately $30.3 million, or
from 8.3% of net revenues in Fiscal 2001, to 7.2% of net revenues in Fiscal
2002, due primarily to a decrease in co-operative advertising expenses and lower
sales volume which decreased the amount the Company was required to pay certain
licensors for national advertising.
OPERATING LOSS
The Company evaluates the operating results of its segments based on Group
operating income (loss) before interest, taxes, depreciation, amortization of
intangibles and deferred financing costs, impairment charges, reorganization
items and certain general corporate expenses not allocated to segments ('Group
EBITDA'). The Company believes that an evaluation of the Company's operating
results and the operating results of its segments for the past three years based
solely on operating income (loss) is not complete without considering the effect
of depreciation and amortization on those results. Since the Petition Date, the
Company has sold assets, written down impaired assets, recorded a transitional
impairment adjustment for the adoption of SFAS 142 and stopped amortizing
certain intangible assets that were previously amortized. As a result,
depreciation and amortization expense has decreased by approximately $40.3
million in Fiscal 2002 compared to Fiscal 2001 and by approximately $44.7
million compared to Fiscal 2000. For informational purposes, the Company has
separately identified the depreciation and amortization components of operating
income (loss) in the following table. See Note 6 of Notes to Consolidated
Financial Statements. The Company does not allocate interest expense, income
taxes, corporate overhead, reorganization items or impairment charges to its
operating segments. The following table summarizes Group EBITDA for Fiscal 2001
and Fiscal 2002.
<Table>
<Caption>
FISCAL FISCAL INCREASE %
2001 2002 (DECREASE) CHANGE
---- ---- ---------- ------
(DOLLARS IN THOUSANDS)
Intimate Apparel Group............................. $ (74,378) $ 64,126 $138,504 186.2%
Sportswear Group................................... (5,772) 33,592 39,364 682.0%
Swimwear Group..................................... (6,555) 34,124 40,679 620.6%
Retail Stores Group................................ (13,019) 126 13,145 101.0%
--------- --------- -------- ------
Group EBITDA....................................... (99,724) 131,968 231,692 232.3%
Group depreciation................................. (42,664) (35,397) 7,267 17.0%
--------- --------- -------- ------
Group operating income (loss)...................... (142,388) 96,571 238,959 167.8%
Unallocated corporate expenses..................... (103,770) (45,208) 58,562 56.4%
Corporate depreciation and amortization of
intangibles...................................... (55,154) (22,022) 33,132 60.1%
Impairment charge.................................. (101,772) -- 101,772 --
Reorganization items............................... (177,791) (116,682) 61,109 34.4%
--------- --------- -------- ------
Operating loss..................................... $(580,875) $ (87,341) $493,534 85.0%
--------- --------- -------- ------
--------- --------- -------- ------
</Table>
43
The following table presents operating income (loss) by Group including
depreciation expense in each group.
<Table>
<Caption>
FISCAL FISCAL INCREASE %
2001 2002 (DECREASE) CHANGE
---- ---- ---------- ------
(DOLLARS IN THOUSANDS)
Intimate Apparel Group............................. $ (96,317) $ 48,386 $144,703 150.2%
Sportswear Group................................... (15,868) 24,212 40,080 252.6%
Swimwear Group..................................... (9,933) 28,561 38,494 387.5%
Retail Stores Group................................ (20,270) (4,588) 15,682 77.4%
--------- --------- -------- ------
Group operating income (loss)...................... (142,388) 96,571 238,959 167.8%
Unallocated corporate expenses..................... (158,924) (67,230) 91,694 57.7%
Impairment charge.................................. (101,772) -- 101,772 --
Reorganization items............................... (177,791) (116,682) 61,109 34.4%
--------- --------- -------- ------
Operating income (loss)............................ $(580,875) $ (87,341) $493,534 85.0%
--------- --------- -------- ------
--------- --------- -------- ------
</Table>
Operating loss decreased $493.5 million to $87.3 million (-5.9% of net
revenues) in Fiscal 2002 compared to an operating loss of $580.9 million
(-34.8% of net revenues) in Fiscal 2001. The decrease in operating loss
reflects the increase in gross margin to 29.5% from 17.8% and the decrease in
selling, general and administrative expenses to 27.5% of net revenues from 35.8%
of net revenues. The improvement in gross margin reflects the better regular to
off-price sales mix, improved management of customer sales allowance and
markdown deductions and improved manufacturing efficiencies, as noted above. The
decrease in selling, general and administrative expenses reflects the lower
depreciation and amortization (due to the adoption of SFAS 142 in January
2002), lower cooperative advertising expenses, lower retail selling costs and
other cost savings, as noted above. Operating income (loss) includes the impact
of a reduction in certain capitalized design, procurement, receiving and other
product related costs of $24.4 million and $9.8 million in Fiscal 2002 and
Fiscal 2001, respectively. Operating income also includes the impact of lease
expenses incurred prior to the GECC settlement of $16.5 million and $8.2 million
in Fiscal 2002 and Fiscal 2001, respectively.
Intimate Apparel Group
Intimate Apparel Group operating income (loss) is as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE %
2001 2002 (DECREASE) CHANGE
---- ---- ---------- ------
(DOLLARS IN THOUSANDS)
Warner's/Olga/Body by Nancy Ganz/Bodyslimmers...... $(83,259) $10,081 $ 93,340 112.1%
Calvin Klein underwear............................. (730) 27,736 28,466 -3,899.5%
Lejaby............................................. 4,968 8,572 3,604 72.5%
-------- ------- -------- -------------
Total continuing business units.................... (79,021) 46,389 125,410 158.7%
Total discontinued/sold business units............. (17,296) 1,997 19,293 111.5%
-------- ------- -------- -------------
Intimate Apparel Group............................. $(96,317) $48,386 $144,703 150.2%
-------- ------- -------- -------------
-------- ------- -------- -------------
</Table>
The Intimate Apparel Group's operating income for Fiscal 2002 increased
$144.7 million to $48.4 million compared to an operating loss of $96.30 million
in Fiscal 2001. Warner's/Olga operating income for Fiscal 2002 increased $93.3
million, or 112.1%, to $10.1 million compared to an operating loss of $83.3
million in Fiscal 2001 reflecting more favorable experience related to customer
sales allowances and markdowns and improved manufacturing efficiencies.
Warner's/Olga also benefited from lower selling, general and administrative
expenses reflecting the consolidation of Warner's/Olga distribution in
Duncansville, Pennsylvania as well as other cost reduction efforts. The increase
in Calvin Klein underwear operating income reflects higher gross profit due to
higher sales volume and improved gross margins and lower selling, general and
administrative expenses. The improved gross margin reflects favorable markdown
and allowance experience. Selling, general and administrative expenses decreased
due to better bad debt experience and other cost saving measures. Fiscal 2001
includes a $17.3 million loss from the discontinued/sold GJM, Weight Watchers
and Fruit of the Loom businesses compared to
44
operating income of $2.0 million in Fiscal 2002. The operating income for Fiscal
2002 related to discontinued/sold business units reflects the settlement of
final liabilities and sales of residual inventories for amounts that were more
favorable than originally anticipated.
Sportswear Group
Sportswear Group operating income (loss) is as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE %
2001 2002 (DECREASE) CHANGE
---- ---- ---------- ------
(DOLLARS IN THOUSANDS)
Chaps Ralph Lauren.................................... $ 6,957 $ 8,947 $ 1,990 28.6%
Calvin Klein jeans.................................... (27,568) (147) 27,421 99.5%
Calvin Klein Accessories.............................. (1,746) 761 2,507 143.6%
A.B.S. by Allen Schwartz.............................. (6,772) 4,027 10,799 159.5%
White Stag/Catalina (licensed)........................ 13,261 10,624 (2,637) -19.9%
-------- ------- ------- ------
Sportswear Group...................................... $(15,868) $24,212 $40,080 252.6%
-------- ------- ------- ------
-------- ------- ------- ------
</Table>
The improvement in Chaps operating income in Fiscal 2002 compared to Fiscal
2001 reflects lower selling, general and administrative expenses due primarily
to lower sales volumes and cost saving measures that were implemented in the
second half of Fiscal 2001. Chaps gross margin improved 1.1% in Fiscal 2002 from
Fiscal 2001. The improved gross margin in Chaps reflects better markdown and
allowance experience. The increase in Calvin Klein jeans operating income
reflects higher gross profit (despite lower sales) and lower selling, general
and administrative expenses. The improvement in A.B.S. by Allen Schwartz
operating income reflects higher net revenues and higher gross margin.
Swimwear Group
Swimwear Group operating income (loss) is as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE %
2001 2002 (DECREASE) CHANGE
---- ---- ---------- ------
(DOLLARS IN THOUSANDS)
Speedo................................................. $(9,873) $21,340 $31,213 316.1%
Designer............................................... 1,443 7,875 6,432 445.7%
Ubertech............................................... (1,503) (654) 849 56.5%
------- ------- ------- ------
Swimwear Group......................................... $(9,933) $28,561 $38,494 387.5%
------- ------- ------- ------
------- ------- ------- ------
</Table>
The Swimwear Group's operating income for Fiscal 2002 increased $38.5
million to $28.6 million compared to an operating loss of $9.9 million in Fiscal
2001. The improvement in operating income reflects higher gross profit and lower
selling, general and administrative expenses in both Speedo and Designer
Swimwear. The improvement in gross profit primarily reflects better markdown and
allowance experience. Lower selling, general and administrative expenses
primarily reflect cost saving measures.
Retail Stores Group
Retail Stores Group operating loss is as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE %
2001 2002 (DECREASE) CHANGE
---- ---- ---------- ------
(DOLLARS IN THOUSANDS)
Outlet retail stores............................... $ (15,593) $(3,755) $ 11,838 75.9%
Speedo Authentic Fitness stores.................... (3,565) 240 3,805 106.7%
Penhaligon's....................................... 729 (125) (854) -117.1%
IZKA............................................... (1,841) (948) 893 48.5%
--------- ------- -------- -----------
Retail Stores Group................................ $ (20,270) $(4,588) $ 15,682 77.4%
--------- ------- -------- -----------
--------- ------- -------- -----------
</Table>
45
The decrease in the Retail Stores Group's operating loss for Fiscal 2002
compared to Fiscal 2001 primarily reflects the closing of the Company's outlet
retail stores and the liquidation of IZKA. The closing of the outlet retail
stores during the year resulted in a decrease in outlet retail stores operating
losses from $15.6 million in 2001 to $3.8 million in 2002. Speedo Authentic
Fitness stores operating income improved $3.8 million in Fiscal 2002 compared to
Fiscal 2001 due primarily to the closing of unprofitable and marginally
profitable stores during the first six months of Fiscal 2002. The Company closed
three additional Speedo Authentic Fitness stores in January 2003.
General corporate expenses and amortization of intangibles
General corporate expenses represent corporate expenses that are not
allocated to individual operating groups. General corporate expenses and
amortization of intangibles decreased $91.7 million to $67.2 million in Fiscal
2002 from $158.9 million in Fiscal 2001. The decrease in general corporate
expenses primarily reflects cost savings measures implemented during the second
half of Fiscal 2001 and in Fiscal 2002. Amortization expense for Fiscal 2002
was $36.0 million lower than Fiscal 2001 due to the adoption of SFAS 142 on
January 6, 2002.
Impairment charge
In the fourth quarter of Fiscal 2001 the Company recorded impairment charges
related to the write-down of certain intangible assets and goodwill in the
amount of $101.8 million. See Note 12 of Notes to Consolidated Financial
Statements.
Reorganization items
Due to the Chapter 11 Cases, the Company has recorded certain items directly
related to the Chapter 11 Cases including legal and professional fees, asset
write-downs, lease termination costs, employee retention costs, retail store
closure provisions and other items totaling $177.8 million and $116.7 million in
Fiscal 2001 and Fiscal 2002, respectively. Reorganization items are separately
identified in operating loss in the consolidated statement of operations. See
Note 2 of Notes to Consolidated Financial Statements.
INVESTMENT LOSS
Investment loss for Fiscal 2001 was $6.5 million. The investment loss
reflects the adjustment of amounts due under the equity forward purchase
agreements ('Equity Agreements') entered into in connection with the Company's
stock repurchase program based upon changes in the price of the Old Common
Stock. No comparable adjustment was recorded in Fiscal 2002 because the Equity
Agreements are liabilities subject to compromise. Investment gain of $0.1
million for Fiscal 2002 represents the unrealized appreciation in the market
value of certain marketable securities received by the Company in various
bankruptcy and other settlements. The Company's practice with respect to such
securities is to sell such securities as soon as practicable.
INTEREST EXPENSE
Interest expense decreased $100.7 million to $22.1 million in Fiscal 2002
compared with $122.8 million in Fiscal 2001. As of June 11, 2002, the Company
stopped accruing interest on approximately $2.3 billion of pre-petition debt
(not including certain foreign debt agreements). Interest expense for Fiscal
2002 primarily reflects interest and related fees on the Amended DIP and
interest on certain foreign debt. The Company had repaid all amounts borrowed
under the Amended DIP prior to the start of the third quarter of Fiscal 2002.
Certain of the Company's foreign debt agreements were subject to standstill and
inter-creditor agreements with the Company's pre-petition lenders. The Company
continued to accrue interest on these foreign debt agreements. The Company
repaid the outstanding principal amount and accrued interest on the foreign debt
of approximately $106.1 million as part of the consummation of the Plan on
February 4, 2003. Interest expense for Fiscal 2002 includes approximately $9.8
million of interest on these foreign debt agreements. Interest expense for
Fiscal 2002 includes
46
interest income of approximately $3.0 million related to tax refunds received by
the Company in June 2002 and interest earned on cash balances held in the
Company's cash collateral accounts.
INCOME TAXES
The Company has incurred operating losses in the United States in Fiscal
2001 and 2002 and, as a result, does not owe federal income taxes. The Company
has taxable income in foreign countries and, as a result, pays foreign income
taxes. The income tax provision for Fiscal 2002 was $53.9 million, which
consists primarily of an increase in the valuation allowance of $50.1 million
resulting mainly from the adoption of SFAS 142, a tax provision of $32.8
million relating to a distribution of foreign earnings and a tax provision of
$6.5 million relating to earnings from foreign operations, offset by a tax
benefit of $38.3 million relating to the Company's pre-tax operating loss of
approximately $109.3 million. This compares to a provision for income taxes in
Fiscal 2001 of $151.0 million, which consists of an increase in the valuation
allowance of $135.0 million and a tax provision of $16.0 million relating to
earnings from foreign operations.
The consummation of the Plan resulted in the forgiveness of approximately
$2.5 billion of the Company's pre-petition debt and other liabilities subject to
compromise. The Company expects to utilize virtually all of its U.S. net
operating loss carryforwards to offset the tax impact resulting from such debt
forgiveness. As a result of the consummation of the Plan, the Company
anticipates that the 'change in ownership' rules as defined by the Internal
Revenue Code of 1986 will limit the Company's ability to utilize any remaining
U.S. net operating loss carryforwards.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
As of January 5, 2002, the Company had goodwill and other indefinite lived
intangible assets net of accumulated amortization of approximately $940.1
million. The Company adopted SFAS 142 effective January 6, 2002. Under the
provisions of SFAS 142, goodwill is deemed potentially impaired if the net
book value of a business reporting unit exceeds the fair value of that business
reporting unit. Intangible assets may be deemed impaired if the carrying amount
exceeds the fair value of the assets. The Company obtained an independent
appraisal of its Business Enterprise Value ('BEV') in connection with the
preparation of the Plan. The Company allocated the appraised BEV to its various
reporting units and determined that the value of certain of the Company's
indefinite lived intangible assets and goodwill was impaired. As a result, the
Company recorded a charge of $801.6 million net of income tax benefit of $53.5
million as a cumulative effect of a change in accounting from the adoption
of SFAS 142 in the first quarter of Fiscal 2002. The income tax benefit of
$53.5 million includes a tax benefit of $81.7 million relating to tax deductible
goodwill of $206.8 million offset by an increase in the valuation allowance of
$28.2 million on the Company's deferred tax asset resulting from the adoption of
SFAS 142.
COMPARISON OF FISCAL 2001 TO FISCAL 2000
FISCAL 2000 -- SPECIAL CHARGES
The Company recorded special charges during Fiscal 2000 in an amount equal
to $269.6 million, of which $171.3 million represents non-cash asset
write-downs. Of the total amount, $201.3 million is reflected in cost of goods
sold and $68.3 million is reflected in selling, general and administrative
expenses. See Note 3 of Notes to Consolidated Financial Statements.
NET REVENUES
Net revenues in Fiscal 2001 decreased $578.7 million, or 25.7%, to $1,671.3
million from $2,249.9 million in Fiscal 2000. The decrease reflects a decrease
in revenues from the Intimate Apparel Group of $174.4 million, a decrease in
Sportswear Group net revenues of $309.2 million, a decrease in Swimwear Group
net revenues of $43.4 million and a decrease in the Retail Stores Group net
revenues of $51.6 million. Net revenues for Fiscal 2001 were negatively affected
by the disruption in the Company's business caused by the Chapter 11 Cases and
the overall decrease in retail traffic and sales experienced
47
by the Company's core department and specialty store customers in part related
to the events of September 11, 2001 and the downturn in the United States
economy. Due to the poor retail selling environment, particularly in the
Company's core department and specialty stores, and its deteriorating experience
relating to discounts, allowances and customer deductions, the Company increased
its estimate of the reserves required for expected sales returns, discounts and
allowances. The increase in the Company's reserve estimate resulted in a
decrease of approximately $35 million in net revenues in Fiscal 2001 compared to
Fiscal 2000. The Company also made a strategic decision during Fiscal 2001 to
improve the quality of its sales to its customers. As a result of this strategy
the Company's off-price sales volume for Fiscal 2001 decreased by $158.1 million
compared to Fiscal 2000.
Intimate Apparel Group. Net revenues decreased $174.4 million, or 22.7%, to
$594.9 million in Fiscal 2001 compared to $769.3 million in Fiscal 2000. All
brands experienced significant sales declines. Overall retail sales in
department stores decreased significantly in Fiscal 2001 compared to Fiscal
2000, adversely affecting the Company's intimate apparel business. The Intimate
Apparel Group increased its estimate of reserves necessary for customer returns
and allowances to 13.6% in Fiscal 2001 from 13.1% in Fiscal 2000. The increased
estimate resulted in a decrease of approximately $4.0 million in net revenues
compared to Fiscal 2000. Excluding net revenues from sold and discontinued
business units (GJM, Fruit of the Loom and Weight Watchers), Intimate Apparel
Group net revenues decreased $150.0 million, or 22.4%, to $520.1 million in
Fiscal 2001 compared to $670.7 million in Fiscal 1999. Calvin Klein underwear
net revenues decreased $55.5 million, or 20.8%, to $211.1 million from $266.6
million in Fiscal 2000. Calvin Klein net revenues decreased in all geographic
regions. Lejaby net revenues were $80.2 million in Fiscal 2001 compared to $83.4
million in Fiscal 2000. The decrease in Lejaby net revenues was primarily
related to a decrease of $2 million in Lejaby sales in the United States.
Sportswear Group. Net revenues decreased $309.2 million, or 35.0%, to $573.7
million in Fiscal 2001 from $882.9 million in Fiscal 2000. Consistent with the
Intimate Apparel Group, the Sportswear Group was also adversely affected by the
poor retail environment and the overall Company strategy to reduce off-price
sales, as noted above. The Sportswear Group increased its estimate of reserves
necessary for customer returns and allowances from 9.5% of gross sales in Fiscal
2000 to 12.6% of gross sales in Fiscal 2001. The increased reserves estimate
resulted in a decrease of approximately $31.5 million in Fiscal 2001 net
revenues compared to Fiscal 2000. Calvin Klein jeans net revenues decreased
$194.8 million, or 38.4%, to $312.5 million in Fiscal 2001 from $507.3 million
in Fiscal 2000. The decrease in Calvin Klein jeans net revenues includes a
decrease in net revenues of $74.6 million in Fiscal 2001 compared to Fiscal 2000
to certain discount and membership club customers. Calvin Klein kids net
revenues decreased by $24.2 million in Fiscal 2001 compared to Fiscal 2000.
Chaps net revenues decreased $63.6 million, or 25.0%, to $190.9 million in
Fiscal 2001 from $254.5 million in Fiscal 2000. A.B.S. by Allen Schwartz net
revenues decreased $16.9 million, or 38.0%, to $27.5 million in Fiscal 2001 from
$44.4 million in Fiscal 2000. Chaps and A.B.S. by Allen Schwartz were negatively
affected by the overall poor retail environment for department and specialty
stores noted above. The White Stag unit earned royalty income of $16.1 million
in Fiscal 2001 compared to $15.7 million in Fiscal 2000. The increase in royalty
income in Fiscal 2001 compared to Fiscal 2000 reflected the relative strength of
Wal-Mart's retail business. Wal-Mart experienced same store sales growth in
Fiscal 2001 compared to the substantial same store sales decreases experienced
by many of the Sportswear Group's department store customers.
Swimwear Group. Net revenues decreased $43.4 million, or 12.2%, to $311.8
million in Fiscal 2001 from $355.2 million in Fiscal 2000. The decrease in
Swimwear net revenues is attributable to the Company's inability to deliver
customer orders on a timely basis and to increased allowances to swim team
dealers. Designer Swimwear net revenues decreased $4.7 million, or 3.5%, to
$127.6 million in Fiscal 2001 compared to $132.3 million in Fiscal 2000
primarily from the increase in returns and allowances reserves attributed to
overall weakness of the department store business.
Retail Stores Group. Net revenues decreased $51.6 million, or 21.3%, to
$190.9 million in Fiscal 2001 from $242.5 million in Fiscal 2000. During Fiscal
2001 the Company closed 86 of the 281, or 30.6%, of the retail stores it was
operating at the beginning of Fiscal 2001.
48
GROSS PROFIT
Gross profit decreased $107.6 million, or 26.6%, to $296.9 million in Fiscal
2001 from $404.5 million in Fiscal 2000. The Intimate Apparel Group's gross
profit increased $38.7 million, the Sportswear and Swimwear Group's gross profit
decreased $134.3 million and the Retail Stores Group's gross profit decreased
$12.0 million. Gross profit as a percentage of net revenues was 17.8% in Fiscal
2001 compared to 18.0% in Fiscal 2000. The decrease in gross profit primarily
reflected the lower net revenues noted above. Gross profit was adversely
affected in both Fiscal 2001 and Fiscal 2000 by inventory liquidations, plant
closings, inventory markdown and other charges. The Company recorded
approximately $36.0 million of additional inventory reserves in May and June of
Fiscal 2001 to reflect its revised strategy of disposing of its excess and
obsolete inventory at the end of each selling season.
Intimate Apparel Group. Gross profit increased $30.4 million, or 66.2%, to
$76.3 million in Fiscal 2001 from $45.9 million in Fiscal 2000 despite the 20.7%
decrease in net revenues. Gross profit as a percentage of net revenues was 12.8%
in Fiscal 2001 compared to 6.0% in Fiscal 2000. The increase in gross profit
included the effect of $143.1 million of restructuring charges incurred in
Fiscal 2000 related to plant closings, inventory markdowns and other items (See
Note 3 of Notes to Consolidated Financial Statements), as well as improvements
in the Calvin Klein underwear business where gross profit as a percentage of net
revenues increased by over 10 percentage points of net revenue in Fiscal 2001
compared to Fiscal 2000.
Sportswear Group. Gross profit decreased $128.8 million, or 46.0%, in Fiscal
2001 to $151.4 million compared to $280.2 million in Fiscal 2000. Gross profit
as a percentage of net revenues decreased to 26.4% in Fiscal 2001 from 31.7% in
Fiscal 2000. The Chaps and Calvin Klein accessories businesses recorded higher
gross profit as a percentage of net revenues in Fiscal 2001 compared to Fiscal
2000 due primarily to reduced off-price sales. Calvin Klein jeans gross profit
as a percentage of net revenues decreased approximately 2% in Fiscal 2001
compared to Fiscal 2000 due primarily to lower sales volume and the reduction in
the Calvin Klein kids business noted above.
Swimwear Group. Gross profit decreased $68.7 million, or 50.3%, to $68.0
million in Fiscal 2001 from $136.7 million in Fiscal 2000. Gross profit as a
percentage of net revenues decreased to 21.8% in Fiscal 2001 from 38.5% in
Fiscal 2000. The gross profit decrease primarily reflects the generally weak
retail environment and the effect of inventory reserves of $9.2 million recorded
in the second quarter of Fiscal 2001.
Retail Stores Group. Gross profit decreased $9.2 million, or 11.7%, to $69.2
million in Fiscal 2001 compared to $78.4 million in Fiscal 2000. Gross profit as
a percentage of net revenues increased to 36.3% of net revenues in Fiscal 2001
from 32.3% in Fiscal 2000. The decrease in gross profit reflects the lower sales
volume. The improvement in gross profit as a percentage of net revenues in
Fiscal 2001 compared to Fiscal 2000 reflects the Company's strategic decision to
close marginal retail outlet stores. The Company's decision to close 39 of its
less profitable Speedo Authentic Fitness stores in Fiscal 2001 also contributed
to the Retail Stores Group's improvement in gross profit as a percentage of net
revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $26.8 million, or
4.3%, to $598.2 million in Fiscal 2001 compared to $625.0 million in Fiscal
2000. Marketing and advertising expenses decreased slightly in Fiscal 2001 to
$138.4 million, or 8.3%, of net revenues compared to $141.3 million, or 6.3%, of
net revenues in Fiscal 2000. Marketing expense for Fiscal 2001 includes $15.7
million related to the Company's review of the amounts necessary for customer
co-operative advertising claims. The increase in cooperative advertising claims
was caused, in part, by the decrease in retail traffic and sales experienced by
the Company's core department and specialty store customers due to the events of
September 11, 2001 and the downturn in the United States economy. Selling
expenses decreased $23 million in Fiscal 2001 compared to Fiscal 2000. The
decrease in selling expenses in Fiscal 2001 compared to Fiscal 2000 is primarily
a result of lower variable selling costs on the lower sales volumes noted above
and the consolidation of the Company's distribution operations into its most
efficient locations. Selling, general and administrative expenses for Fiscal
2001 included the write-down of $30.7 million related to
49
certain barter assets. Depreciation and amortization expense was $97.8 million
in Fiscal 2001 compared to $102.1 million in Fiscal 2000.
OPERATING INCOME (LOSS)
The operating loss for Fiscal 2001 was $580.9 million compared to an
operating loss of $220.5 million in Fiscal 2000. The increased operating loss
was a result of the lower gross profit of $107.6 million discussed above, the
effect of the impairment charge of $101.8 million and reorganization items of
$177.8 million also noted above, partially offset by lower selling, general and
administrative expenses.
Intimate Apparel Group. Operating loss decreased $40.7 million to $96.3
million in Fiscal 2001 from $137.0 million in Fiscal 2000 reflecting
increased gross profit of $33.2 million.
Sportswear Group. Operating income (loss) decreased $45.1 million to an
operating loss of $15.9 million in Fiscal 2001 from operating income of $29.3
million in Fiscal 2000. Operating loss for Fiscal 2001 reflected a gross profit
decline as noted above.
Swimwear Group. Operating income (loss) decreased $81.8 million to an
operating loss of $9.9 million in Fiscal 2001 from operating income of $71.9
million in Fiscal 2000. Operating loss for Fiscal 2001 reflected a gross profit
decline, as noted above.
Retail Stores Group. Operating loss improved $6.9 million to $20.3 million
in Fiscal 2001 compared to $27.1 million in Fiscal 2000. The reduction in
operating loss reflected the Company's efforts to close less profitable retail
doors, which commenced in Fiscal 2000.
Impairment Charge
In the fourth quarter of Fiscal 2001 the Company recorded impairment charges
related to the write-down of certain intangible assets and goodwill in the
amount of $101.8 million. The impairment charge is separately identified in
operating loss in the consolidated statement of operations. See Note 1 of Notes
to Consolidated Financial Statements.
Reorganization Items
Due to the Chapter 11 Cases during Fiscal 2001, the Company recorded certain
items directly related to the Chapter 11 Cases, including legal and professional
fees, asset write-downs, lease termination costs, employee retention costs,
retail store closure provisions and other items totaling $177.8 million.
Reorganization items are separately identified in operating loss in the
consolidated statement of operations. See Note 2 of Notes to Consolidated
Financial Statements.
INTEREST EXPENSE
Interest expense decreased $49.4 million to $122.8 million in Fiscal 2001
from $172.2 million recorded in Fiscal 2000. The reduction in interest expense
primarily reflected the impact of the Chapter 11 Cases. The Company stopped
accruing interest in accordance with the provisions of SOP 90-7 on the Petition
Date on approximately $2.2 billion (including $351.4 million of trade drafts
payable) of outstanding debt that is subject to compromise. Interest expense in
Fiscal 2001 was also favorably affected by an overall decrease in market
interest rates since the beginning of Fiscal 2001. Certain of the Company's
foreign subsidiaries (non-Debtor entities in the Chapter 11 Cases) were parties
to debt agreements that are subject to standstill agreements and intercreditor
agreements. The Company recorded $4.1 million of interest on these debt
agreements for the year ended January 5, 2002.
INCOME TAXES
The provision for income taxes in Fiscal 2001 was $151.0 million, which
consisted of foreign income taxes of $16.0 million and $135.0 million of
domestic tax expense. The provision for domestic income taxes primarily
reflected an increase in the valuation allowance. The increase in the valuation
allowance related to an increase in the net operating loss and other deferred
tax assets that may not be realized. In addition, the Company was unable to
implement certain tax planning strategies resulting in a further
50
increase to the valuation allowance. At January 5, 2002, the Company estimated
U.S. net operating loss carryforwards of $1,173.2 million and foreign net
operating loss carryforwards of $95.3 million available to offset future taxable
income. The estimated U.S. net operating loss carryforwards were adjusted for
certain carryback claims, restatements and other adjustments. The U.S. and
foreign net operating loss carryforwards expire, in varying amounts, between
2003 and 2021.
NET LOSS BEFORE CUMULATIVE EFFECT
Net loss before cumulative effect of a change in accounting principle
increased to $861.2 million ($16.28 per common share) in Fiscal 2001
compared to $376.9 million ($7.14 per common share) in Fiscal 2000. The
increased net loss in Fiscal 2001 is primarily a result of the decreased gross
profit of $107.6 million noted above, the impact of the reorganization expenses
of $177.8 million and the impairment loss of $101.8 million.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ARRANGEMENTS
In accordance with the provisions of the Plan and the Confirmation Order, on
February 4, 2003, the Plan became effective and the Company entered into the
$275.0 million Exit Financing Facility. The Exit Financing Facility provides for
a four-year, non-amortizing revolving credit facility. The Exit Financing
Facility includes provisions that allow the Company to increase the maximum
available borrowing from $275.0 million to $325.0 million, subject to certain
conditions (including obtaining the agreement of existing or new lenders to
commit to lend the additional amount). Borrowings under the Exit Financing
Facility bear interest at Citibank's base rate plus 1.5% or at LIBOR plus 2.50%.
Pursuant to the terms of the Exit Financing Facility, the interest rate the
Company will pay on its outstanding loans will decrease by as much as 1/2% in
the event the Company achieves certain defined ratios. The Exit Financing
Facility contains financial covenants that, among other things, require the
Company to maintain a fixed charge coverage ratio above a minimum level, a
leverage ratio below a maximum level and limit the amount of the Company's
capital expenditures. In addition, the Exit Financing Facility contains certain
covenants that, among other things, limit investments and asset sales, prohibit
the payment of dividends and prohibit the Company from incurring material
additional indebtedness. Initial borrowings under the Exit Financing Facility
were $39.2 million. The Exit Financing Facility is secured by substantially all
of the domestic assets of the Company. As of March 18, 2003, the Company had
$76.0 million of outstanding borrowings and $58.5 million of standby and
documentary letters of credit, resulting in approximately $140.5 million of
additional credit available under the Exit Financing Facility.
Maximum borrowings under the Exit Financing Facility are subject to a
borrowing base which limits amounts available under the Exit Financing Facility
to approximately 75% of eligible accounts receivable, 69% of eligible finished
inventory and 5 - 50% of other inventory (the foregoing percentages are subject
to reduction based on the discretion of the administrative agent under the Exit
Financing Facility and certain criteria). The Exit Financing Facility replaced
the Amended DIP upon the Company's emergence from Chapter 11. The Company had no
outstanding borrowing under the Amended DIP at January 4, 2003 or at
February 4, 2003. The Company had approximately $94.1 million of excess cash
available as collateral against outstanding letters of credit on January 4,
2003. Excess cash of approximately $75.5 million was distributed to the
Company's pre-petition secured creditors pursuant to the terms of the Plan. A
description of the DIP financing facility follows.
On June 11, 2001, the Company entered into the DIP with a group of banks
which was approved by the Bankruptcy Court in an interim amount of $375.0
million. On July 9, 2001, the Bankruptcy Court approved an increase in the
amount of borrowing available to the Company to $600.0 million. The DIP was
subsequently amended as of August 27, 2001, December 27, 2001, February 5, 2002
and May 15, 2002. In addition, certain extensions were granted under the DIP on
April 12, 2002, June 19, 2002, July 18, 2002, August 22, 2002 and September 30,
2002. The amendments and extensions, among other things, amend certain
definitions and covenants, permit the sale of certain of the Company's assets
and businesses, extend certain deadlines with respect to certain asset sales and
certain filing requirements
51
with respect to a plan of reorganization and reduce the size of the facility to
reflect the Debtor's revised business plan.
The Amended DIP (when originally executed) provided for a $375.0 million
non-amortizing revolving credit facility (which included a letter of credit
facility of up to $200.0 million) ('Tranche A') and a $225.0 million reducing
revolving credit facility ('Tranche B'). On April 19, 2002, the Company elected
to eliminate the Tranche B facility based upon its determination that the
Company's liquidity position had improved significantly since the Petition Date
and the Tranche B facility would not be needed to fund the Company's ongoing
operations. On May 28, 2002, the Company voluntarily reduced the amount of
borrowing available under the Amended DIP to $325.0 million. On October 8, 2002,
the Company voluntarily reduced the amount of borrowing available under the
Amended DIP to $275.0 million. The Amended DIP terminated on the Effective Date.
Borrowings under the Amended DIP bore interest at either LIBOR plus 2.75%
(4.25% at January 4, 2003) or at the Citibank N.A. Base Rate plus 1.75% (6.5% at
January 4, 2003). In addition, commitment fees were 0.50% for Tranche A. During
Fiscal 2001 and through its termination on April 19, 2002, the Company did not
borrow any funds under Tranche B. The Amended DIP contained restrictive
covenants that required the Company to achieve a minimum of $70.8 million of
earnings before interest, income taxes, depreciation, amortization and
restructuring charges, as defined ('EBITDAR') in Fiscal 2002. The Amended DIP
also restricted investments, limited the annual amount of capital expenditures
the Company could incur for Fiscal 2002, prohibited paying dividends and
prohibited the Company from incurring material additional indebtedness. The
Company was in compliance with the financial and restrictive covenants of the
Amended DIP as of January 4, 2003 and as of February 4, 2003.
Certain restrictive covenants were subject to adjustment in the event the
Company sold certain business units and/or assets. In addition, the Amended DIP
required proceeds from the sale of certain business units and/or assets to be
used to reduce the outstanding balance of Tranche A. The maximum borrowings
under Tranche A were limited to 75% of eligible accounts receivable, 25% to 67%
of eligible inventory and 50% of other inventory covered by outstanding trade
letters of credit.
The Company did not have any loans outstanding under the Amended DIP at
January 4, 2003. The Company had stand-by and documentary letters of credit
outstanding under the Amended DIP at January 4, 2003 of $60.7 million that were
collateralized by excess cash deposits of $94.1 million. The total amount of
additional credit available to the Company after giving effect to the calculated
borrowing base at January 4, 2003 was $160.9 million.
The Amended DIP was secured by substantially all of the domestic assets of
the Company.
LIQUIDITY
During Fiscal 2002, the Company operated under the provisions of the
Bankruptcy Code which directly affected the Company's cash flows. Operating
under the protection of the Bankruptcy Court, the Company made improvements in
its operations and sold certain assets, thereby improving its cash position
subsequent to the Petition Date through February 4, 2003. The Company was not
permitted to pay any pre-petition liabilities without prior approval of the
Bankruptcy Court, including interest or principal on its pre-petition debt
obligations. The Company had approximately $2,486 million of pre-petition
liabilities outstanding at January 4, 2003, including approximately $349.7
million of trade drafts and approximately $164.8 million of accounts payable and
accrued liabilities. Since the Petition Date through January 4, 2003, the
Company sold certain personal property, certain owned buildings and land and
other assets for approximately $36.2 million, including $23.2 million from the
sale of inventory associated with the Company's closed outlet retail stores.
Substantially all of the net proceeds from these sales were used to reduce
outstanding borrowing under the Amended DIP or provide collateral for
outstanding trade and stand-by letters of credit. The Amended DIP terminated on
the Effective Date.
In accordance with the Plan, on February 4, 2003, the Company issued the
Second Lien Notes to pre-petition creditors and others in a transaction exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 1145(a) of the Bankruptcy Code. The aggregate principal
amount of the Second Lien Notes issued totaled $200.9 million. The Second Lien
Notes
52
mature on February 4, 2008, subject, in certain instances, to earlier repayment
in whole or in part. The Second Lien Notes bear a per annum interest rate which
is the higher of (i) 9.5% plus a margin (initially 0% and beginning on July 4,
2003, 0.5% is added to the margin every six months) and (ii) LIBOR plus a margin
(initially 5%, and beginning on July 4, 2003, 0.5% is added to the margin every
six months). The indenture pursuant to which the Second Lien Notes were issued
contains certain covenants that, among other things, limit investments and asset
sales, prohibit the payment of cash dividends and prohibit the Company from
incurring material additional indebtedness. The Second Lien Notes are guaranteed
by most of the Company's domestic subsidiaries, and the obligations under such
guarantees, together with the Company's obligations under the Second Lien Notes,
are secured by a second priority lien on substantially the same assets which
secure the Exit Financing Facility.
In addition, during the first quarter of Fiscal 2002, the Company sold the
business and substantially all of the assets of GJM and Penhaligon's. The sales
of GJM and Penhaligon's generated aggregate net proceeds of approximately $20.5
million and an aggregate net loss of approximately $2.9 million. Proceeds from
the sale of GJM and Penhaligon's were used to: (i) reduce amounts outstanding
under certain debt agreements of the Company's foreign subsidiaries which were
not part of the Chapter 11 Cases (approximately $4.8 million); (ii) reduce
amounts outstanding under the Amended DIP (approximately $4.2 million);
(iii) create an escrow fund (subsequently returned in June 2002) for the
benefit of pre-petition secured lenders (approximately $9.4 million); and
(iv) create an escrow fund (subsequently returned to the Company in February
2003) for the benefit of the purchasers of GJM and Penhaligon's for potential
indemnification claims and for any working capital valuation adjustments
(approximately $1.7 million).
At January 4, 2003, the Company had working capital of approximately $470.6
million, excluding $2,486.1 million of pre-petition liabilities that are subject
to compromise. The working capital calculation includes $94.1 million of excess
cash at January 4, 2003. The excess cash was distributed to the Company's
pre-petition secured lenders in connection with the consummation of the Plan.
Working capital, not including excess cash, was $376.5 million, a decrease of
approximately $70 million from January 5, 2002.
The Company believes that credit available under the Exit Financing Facility
combined with cash flow to be generated by operations will be sufficient to fund
the Company's operating and capital expenditure requirements for at least the
next four years. Should the Company require additional sources of capital it
will consider reducing capital expenditures, seeking additional financing or
selling assets to meet such requirements.
CASH FLOWS
For Fiscal 2002, cash provided by operating activities was $226.2 million
compared to cash used in operating activities of $422.8 million in Fiscal 2001.
The Company repurchased $185.0 million of accounts receivable previously subject
to a securitization arrangement in June 2001 as part of the completion of the
DIP financing. The improvement in cash flow from operating activities (not
including the repurchase of the accounts receivable of $185.0 million) of $464.1
million in Fiscal 2002 compared to Fiscal 2001 reflects improved operating
income of $493.5 million (including reductions in amortization expenses of
approximately $36.0 million due to the adoption of SFAS 142), lower interest
expense of $100.7 million, proceeds of $23.2 million from the sale of outlet
retail store inventory and improved working capital management. Better
management of inventory and accounts receivable contributed $173.9 million of
improvement. The reduction in inventory balances reflects improved inventory
management including a reduction in excess and obsolete inventory at January 4,
2003 to approximately $61.5 million from approximately $88.3 million at
January 5, 2002. Inventory turned 3.3 times in Fiscal 2002 compared to 2.7 times
in Fiscal 2001. Improved accounts receivable collection efforts have resulted in
a reduction of 15 days of sales outstanding to 49 days at January 4, 2003
compared to 64 days at January 5, 2002. Cash interest expense for Fiscal 2002
was $13.5 million, $89.8 million lower than the $103.3 million in Fiscal 2001.
The decrease in cash interest is primarily a result of the improved cash flow
and the Chapter 11 Cases. Amortization expense decreased approximately $36.0
million in Fiscal 2002 compared to Fiscal 2001, reflecting the adoption of SFAS
142 effective with the first quarter of Fiscal 2002.
53
Net cash provided from investing activities was $16.2 million in Fiscal 2002
compared to cash used in investing activities of $21.4 million in Fiscal 2001.
Cash provided from investing activities in Fiscal 2002 primarily reflects
proceeds from the sales of GJM, Penhaligon's and Ubertech Products, Inc. of
$20.6 million and proceeds from other asset dispositions of $6.8 million
partially offset by capital expenditures of $11.2 million. Cash used in
investing activities in Fiscal 2001 primarily reflects capital expenditures of
$24.7 million offset by the disposition of certain fixed assets of $6.2 million.
In general, the Company's capital expenditures are limited to approximately
$25.0 million per year through fiscal 2006 due to restrictions contained in the
Exit Financing Facility.
Cash used in financing activities of $177.0 million in Fiscal 2002 reflects
the repayment of borrowing under the Amended DIP of $155.9 million, repayments
of other debt of $14.6 million consisting primarily of repayments of certain
pre-petition debt amounts with proceeds from the sales of GJM, Penhaligon's and
other assets and payments of amounts due to GECC under the settlement agreement
of $3.5 million. In Fiscal 2001, the Company financed its increase in working
capital, as noted above, by borrowing approximately $474.6 million net of debt
repayments and deferred financing costs. Financing activity for Fiscal 2001
included the payment of $19.9 million of amendment fees and deferred financing
costs associated with the Company's pre-petition credit agreements and with the
Amended DIP.
There were no loans outstanding under the Amended DIP at January 4, 2003.
The Company had stand-by and documentary letters of credit outstanding under the
Amended DIP at January 4, 2003 of $60.7 million. The Company had excess cash
available as collateral against outstanding trade and stand-by letters of credit
of approximately $94.1 million at January 4, 2003. The Company also had cash in
operating accounts of approximately $19.9 million at January 4, 2003, not
including restricted cash held in escrow (subsequently returned to the Company
in February 2003) of $1.7 million related to the sale of Penhaligon's and cash
deposits of $4.4 million, subsequently returned to the Company. Cash in
operating accounts primarily represents lock-box receipts not yet cleared or
available to the Company and cash held by foreign subsidiaries.
Pursuant to the terms of the Plan, the Company distributed $106.1 million of
cash to the Company's pre-petition secured creditors on February 4, 2003. The
source of the cash distribution was excess cash on hand of $75.5 million and
borrowing of $39.2 million under the Exit Financing Facility. The Company also
made $8.6 million of cash distributions for various administrative claims and
expenses, including bank fees associated with the Exit Financing Facility on
February 4, 2003. As of March 18, 2003, the Company had borrowed approximately
$76.0 million under the Exit Financing Facility and had approximately $140.5
million of additional credit available (including outstanding letters of credit
and considering the borrowing base availability) under the Exit Financing
Facility.
The Company's Pension Plan covers substantially all domestic full time
employees. The Company amended the Pension Plan effective January 1, 2003 such
that participants in the Pension Plan will not earn any future benefits under
the Pension Plan. The Pension Plan is not fully funded and will require cash
contributions from the Company of approximately $9.3 million in fiscal 2003 and
approximately $27.7 million over the next five years. Pension Plan obligations
by year are summarized in the table of future cash commitments included below.
The amount and timing of cash contributions to the Pension Plan are affected by
the return that Pension Plan assets earn and the age and mortality of Pension
Plan participants and other factors, none of which are under the control of the
Company.
PRE-PETITION DEBT
The Company was in default on substantially all of its U.S. pre-petition
credit agreements as of January 4, 2003. In accordance with the provision of SOP
90-7, pre-petition debt of the Debtors has been reclassified with liabilities
subject to compromise in the consolidated balance sheet at January 4, 2003 and
January 5, 2002. In addition, the Company stopped accruing interest on all
domestic pre-petition credit facilities and outstanding balances on the Petition
Date. The Company has continued to accrue interest on certain foreign credit
agreements that are subject to standstill and intercreditor agreements. Such
interest of approximately $14.8 million was paid pursuant to the Plan on
February 4, 2003. Such interest is included in liabilities subject to compromise
at January 4, 2003. A brief description of each pre-petition credit facility and
the terms thereof is included below.
54
AMENDMENT AGREEMENT
On October 6, 2000, the Company and the lenders under its credit facilities
entered into an Amendment, Modification, Restatement and General Provisions
Agreement (the 'Amendment Agreement') and an Inter-creditor Agreement. Pursuant
to the Amendment Agreement, the Company's credit facilities were modified so
that each contained identical representations and warranties, covenants,
mandatory prepayment obligations and events of default. The Amendment Agreement
also amended uncommitted credit facilities and those which matured prior to
August 12, 2002 so that they would mature on August 12, 2002 (the maturity dates
of the credit facilities due after August 12, 2002 were unaffected).
The Amendment Agreement made the margins added to a base rate or Eurodollar
rate loan uniform under the credit facilities with such rate determined
according to the debt rating of the Company. As of December 30, 2000, the
applicable margin for base rate advances under the credit facilities was 2.5%,
and the applicable margin for Eurodollar rate advances under the credit
facilities was 3.5%. The Amendment Agreement also made the fee charged based on
the letters of credit outstanding and a commitment fee charged based on the
undrawn amount of the credit facilities consistent across the credit facilities.
Both of these fees also varied according to the Company's debt rating.
As part of the signing of the Amendment Agreement, obligations under each of
the credit facilities were guaranteed by the Company, by all of its domestic
subsidiaries and, on a limited basis, by all of its subsidiaries located in
Barbados, Belgium, Canada, France, Germany, Hong Kong, Mexico, the Netherlands
and the United Kingdom. The Company and each of such entities granted liens on
substantially all of their assets to secure these obligations. As a result of
the Amendment Agreement, as of December 30, 2000, the Company had committed to
credit facilities in an aggregate amount of $2.6 billion, all of which were to
mature on or after August 12, 2002, with substantially no debt amortization
until then. All obligations under the Amendment Agreement were in default under
the Chapter 11 Cases. The Company did not accrue interest on these obligations
from the Petition Date, except for interest on certain foreign credit
agreements, as previously noted. Creditors under the Amendment Agreement were
considered secured creditors in the Chapter 11 Cases, and as such, in accordance
with applicable bankruptcy law, received a higher priority than other classes of
creditors. Amounts outstanding under the Amendment Agreement, not including
accrued interest, at the Petition Date were approximately $2.2 billion,
including $351.4 million of trade drafts. The Company has classified these
obligations as liabilities subject to compromise. The Amendment Agreement and
Amended DIP required that the proceeds from certain asset sales be used to repay
amounts outstanding under the Company's pre-petition debt agreements. Such
repayments were approximately $14.6 million in Fiscal 2002.
$600,000,000 REVOLVING CREDIT FACILITY
The Company was the borrower under a $600 million Revolving Credit Facility,
which included a $100 million sub-facility available for letters of credit. This
facility was scheduled to expire on August 12, 2002 in accordance with the terms
of the Amended and Restated Credit Agreement, dated November 17, 1999, which
governed the facility. Amounts borrowed under this facility were borrowed at
either base rate or at an interest rate based on the Eurodollar rate plus a
margin determined under the Amendment Agreement. As of January 5, 2002 and
January 4, 2003, $595.1 million and $592.4 million, respectively, was
outstanding under this facility, all of which is included in liabilities subject
to compromise.
$450,000,000 REVOLVING CREDIT FACILITY
The Company was also a borrower under a $450 million Revolving Credit
Facility, which was reduced to $423.6 million under the Amendment Agreement. The
credit agreement governing this facility, dated November 17, 1999, provided that
the term of the facility will expire on November 17, 2004. Amounts borrowed
under this facility were subject to interest at a base rate or at an interest
rate based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. As of
55
January 5, 2002 and January 4, 2003, $423.6 million and $421.6 million,
respectively, was outstanding under this facility, all of which is included in
liabilities subject to compromise.
$587,548,000 TERM LOAN
The Company was also a borrower under a $600 million Term Loan, dated
November 17, 1999, which was reduced to approximately $587.5 million under the
Amendment Agreement. The maturity of this loan was also extended until August
12, 2002 in connection with the Amendment Agreement. Amounts borrowed under this
facility were subject to interest at a base rate or an interest rate based on
the Eurodollar rate plus a margin determined under the Amendment Agreement. As
of January 5, 2002 and January 4, 2003, $587.5 million and $584.8 million,
respectively, was outstanding under this facility all of which is included in
liabilities subject to compromise.
FRENCH FRANC FACILITIES
The Company and its subsidiaries entered into French Franc facilities in
July and August 1996 relating to its acquisition of Lejaby. These facilities,
which were amended in April 1998 and in August and November 1999, included a
term loan facility in an original amount of 370 million French Francs and a
revolving credit facility of 480 million French Francs, which was reduced to
441.6 million French Francs pursuant to the Amendment Agreement. Amounts
borrowed under these facilities were subject to interest at an interest rate
based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. Beginning in July 1997, the Company began repaying the term loan in
annual installments, with a final installment due on December 31, 2001. In
conjunction with the Amendment Agreement, the annual installments were
eliminated, and the maturity of the loan was extended to August 12, 2002. The
revolving portion of this facility provided for multi-currency revolving loans
to be made to the Company and a number of its European subsidiaries. As of
January 5, 2002 and January 4, 2003, the total amount outstanding under these
facilities was $59.5 million equivalent and $55.4 million equivalent,
respectively, all of which is included in liabilities subject to compromise.
$400,000,000 TRADE CREDIT FACILITY
On October 6, 2000, in conjunction with signing the Amendment Agreement, the
Company entered into a new $400 million Trade Credit Facility which provided
commercial letters of credit for the purchase of inventory from suppliers and
offered the Company extended terms for periods of up to 180 days ('Trade
Drafts'). Amounts drawn under this facility were subject to interest at an
interest rate based on the Eurodollar rate plus a margin determined under the
Amendment Agreement. The Company classified the 180-day Trade Drafts in trade
accounts payable. As of January 5, 2002 and January 4, 2003, the Company had
approximately $351.4 million and $349.7 million, respectively, of Trade Drafts
outstanding under this facility, all of which is included in liabilities subject
to compromise.
OTHER FACILITIES
In July 1998, the Company entered into a term loan agreement with a member
of its existing bank group. This loan was due to be repaid in equal installments
with a final maturity date of July 4, 2002. Amounts outstanding under this
agreement as of January 5, 2002 and January 4, 2003 were $27.2 million and $27.0
million, respectively, and are included in liabilities subject to compromise.
The Company issued $40.4 million of notes in conjunction with the amendment
of its Equity Agreements with two of its banks. Amounts borrowed under these
notes were subject to interest at a rate based on the Eurodollar rate plus a
margin determined under the Amendment Agreement. These notes were to mature on
August 12, 2002. As of January 5, 2002 and January 4, 2003, the total amount
outstanding under the Equity Agreements, including Equity Adjustments, was $56.7
million and $56.5 million, respectively. Loans related to the Equity Agreements
outstanding are included in liabilities subject to compromise.
56
PRE-PETITION DEBT AGREEMENTS -- SUBJECT TO STANDSTILL AGREEMENTS
FOREIGN CREDIT FACILITIES
The Company and certain of its foreign subsidiaries entered into credit
agreements that provided for revolving lines of credit and issuance of letters
of credit ('Foreign Credit Facilities'). At January 5, 2002 and January 4, 2003,
the total outstanding amounts of the Foreign Credit Facilities were
approximately $83.9 million equivalent and $91.5 million equivalent,
respectively. The increase in the Foreign Credit Facilities outstanding
balance from the end of Fiscal 2001 to the end of Fiscal 2002 reflects
unfavorable exchange rate movement in the Euro, Pound Sterling and Canadian
dollar compared to the United States dollar. The foreign subsidiaries were not
parties to the Chapter 11 Cases. The Foreign Credit Facilities are subject to
standstill and inter-creditor agreements. The Company recorded interest
expense of $4.1 million and $9.8 million in Fiscal 2001 and Fiscal 2002,
respectively, on certain of these foreign credit facilities. The Plan required
the payment of such interest and, as a result, the Company repaid the
outstanding principal amount and accrued interest totaling $106.1 million
pursuant to the terms of the Plan on February 4, 2003.
RESTRICTIVE COVENANTS -- AMENDMENT AGREEMENT
Pursuant to the terms of the Amendment Agreement, the Company was required
to maintain certain financial ratios and was prohibited from paying dividends.
On March 29, 2001, lenders under the Amendment Agreement waived compliance with
the financial ratios until April 16, 2001. On April 13, 2001, the lenders
extended this waiver until May 16, 2001 and, on May 16, 2001, the lenders
extended the waiver to June 15, 2001. The Company filed for protection under
Chapter 11 of the Bankruptcy Code on June 11, 2001.
RESTRICTIVE COVENANTS -- AMENDED DIP
The Amended DIP contained financial and restrictive covenants that, among
other things, required the Company to achieve a minimum level of EBITDAR, as
defined, restricted the amount of capital expenditures the Company could incur
and prohibited the Company from incurring additional indebtedness and paying
dividends. As of January 5, 2002 and January 4, 2003, the Company was in
compliance with all covenants of the Amended DIP.
RESTRICTIVE COVENANTS -- EXIT FINANCING FACILITY AND SECOND LIEN NOTES
The Exit Financing Facility contains certain covenants that, among other
things, limit investments and asset sales, prohibit the payment of dividends and
prohibit the Company from incurring material additional indebtedness. The
indenture pursuant to which the Second Lien Notes were issued contains certain
covenants that, among other things, limit investments and asset sales, prohibits
the payment of cash dividends and prohibits the Company from incurring material
additional indebtedness.
COMMITMENTS AND CONTINGENCIES
Prior to the Petition Date, the Company utilized a bankruptcy remote special
purpose entity for the purpose of securitizing its outstanding accounts
receivable. Pursuant to the terms of the Amended DIP, the securitization
facility was terminated and all outstanding amounts due under the securitization
facility were repaid on June 11, 2001. See Note 4 of Notes to Consolidated
Financial Statements. As of January 4, 2003, the Company is not engaged in
off-balance sheet arrangements through unconsolidated, limited purpose entities.
There are no material guarantees of debt or other commitments, other than those
mentioned herein related to trade and standby letters of credit issued under the
Amended DIP, or otherwise reflected in the table below, existing at January 4,
2003.
The Company has entered into operating lease agreements for manufacturing,
distribution and administrative facilities and retail stores. The Company has
provided approximately $20.6 million and $32.4 million for the estimated total
amount of claims the Company expected to receive related to rejected leases as
of January 5, 2002 and January 4, 2003, respectively. In addition, the Company
has
57
entered into operating leases for equipment and other assets and has accepted
certain lease agreements pursuant to the Plan.
Future contractual obligations of the Company including leases accepted as
part of the Plan as of January 4, 2003 are summarized below:
<Table>
<Caption>
PAYMENTS DUE BY YEAR(A)
-------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER
---- ---- ---- ---- ---- ----------
(DOLLARS IN THOUSANDS)
Exit Financing Facility(b).......... $ -- $ -- $ -- $ -- $ -- $ --
Retention plan bonuses(c)........... 4,746 -- -- -- -- --
Severance obligations(d)............ 12,000 -- -- -- -- --
Pension plan funding(e)............. 9,320 3,501 14,271 7,533 2,399 --
GECC debt(f)........................ 5,603
Operating leases(g)................. 20,264 14,790 9,417 6,386 4,855 35,401
Minimum royalties(h)................ 19,828 20,403 22,603 22,803 23,003 205,840
Second Lien Notes(i)................ -- 40,188 40,188 40,188 40,188 40,188
Trade letters of credit(j).......... 45,504 -- -- -- -- --
Other long-term debt................ 475 313 313 313 -- --
-------- ------- ------- ------- ------- --------
Total........................... $117,740 $79,195 $86,792 $77,223 $70,445 $281,429
-------- ------- ------- ------- ------- --------
-------- ------- ------- ------- ------- --------
</Table>
- ---------
(a) Does not include approximately $2.4 billion of liabilities
subject to compromise in the Chapter 11 Cases (including
$120.0 million payable under Company-obligated mandatorily
redeemable convertible preferred securities).
(b) The Exit Financing Facility matures on February 4, 2007.
There were no amounts outstanding under the Exit Financing
Facility or the Amended DIP as of January 4, 2003, therefore
no maturity amount is included in the commitments table. The
Company had approximately $76.0 million of outstanding
borrowing under the Exit Financing Facility on March 18,
2003.
(c) Reflects the liability for stay bonuses and discretionary
bonuses for key employees during the Chapter 11 Cases.
(d) Reflects estimated severance and other obligations related
to the Company's European consolidation.
(e) Estimates of total Pension Plan funding subject to final
calculation by actuaries based on assumptions and other
factors.
(f) Reflects remaining GECC settlement payments as approved by
the Bankruptcy Court in June 2002.
(g) Includes all operating leases which were accepted under the
provisions of the Bankruptcy and includes rent due under the
lease entered in March 2003 for office space in New York,
New York of $2.1 million -- 2003, $3.6 million -- 2004,
$3.6 million -- 2005, $3.6 million -- 2006, $3.6 million
-- 2007, $33.5 million thereafter. See Note 19 of Notes to
Consolidated Financial Statements.
(h) Includes all minimum royalty obligations. Some of the
Company's license agreements have no expiration date or
extend beyond 20 years. The duration of these agreements for
the purposes of this item are assumed to be 20 years. Variable
based minimum royalty obligations are based upon payments
for the most recent fiscal year.
(i) Issued pursuant to the Plan on February 4, 2003.
(j) Trade letters of credit represent obligations to suppliers
for inventory purchases. The trade letters of credit
generally have maturities of six months or less and will
only be paid upon satisfactory delivery of the inventory by
the supplier. The Company also has contingent liabilities
under standby letters of credit in the amount of $15.2
million representing guarantees of performance under various
contractual obligations. These commitments will only be
drawn if the Company fails to meet its obligations under the
related contract.
The Company paid a quarterly cash dividend on its common stock from June
1995 through December 2000. Total dividends paid in Fiscal 2000 were $14.4
million. The Company suspended payment of its cash dividend in December 2000.
Under the terms of the Exit Financing Facility, the
58
Company is prohibited from paying dividends or making distributions to
stockholders. See Item 5. Market for the Company's Common Equity and Related
Stockholder Matters.
SEASONALITY
The operations of the Company are somewhat seasonal. In Fiscal 2002,
approximately 53.1% of the Company's net revenues were generated in the first
half of the fiscal year. The Company's Swimwear business is seasonal;
approximately 71.2% of the Swimwear Group's net revenues were generated in the
first half of the 2002 fiscal year. The working capital needs of the Swimwear
Group partially offset the working capital needs of the remaining businesses of
the Company. Sales and earnings from the Company's other Groups and business
units are generally expected to be somewhat higher in the second half of the
fiscal year.
The following sets forth the net revenues, operating income and net cash
flow from operating activities generated for each quarter of Fiscal 2001 and
Fiscal 2002.
<Table>
<Caption>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
APRIL 7, JULY 7, OCT. 6, JAN. 5, APRIL 6, JULY 6, OCT 5, JAN. 4,
2001 2001 2001 2002 2002 2002 2002 2003
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net revenues.............. $ 499.2 $ 362.3 $397.7 $ 412.1 $410.1 $381.8 $345.5 $355.6
Operating income (loss)... $ 3.2 $(216.5) $(26.7) $(163.1) $ 0.7 $(27.3) $ (8.8) $(51.9)
Cash flow provided by
(used in) operating
activities.............. $(257.5) $(197.1) $ 15.8 $ 5.6 $ 43.0 $175.4 $(15.2) $ 29.2
</Table>
INFLATION
The Company does not believe that the relatively moderate levels of
inflation in the United States, Canada and Western Europe have had a significant
effect on its net revenues or its profitability in any of the last three fiscal
years. The Company believes that, in the past, the Company has been able to
offset such effects by increasing prices or instituting improvements in
productivity. Mexico historically has been subject to high rates of inflation;
however, the effects of inflation on the operation of the Company's Mexican
subsidiaries have not had a material effect on the results of the Company in any
of the last three fiscal years.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The Company adopted the provisions of SFAS 143
for its 2003 fiscal year and does not expect the adoption of SFAS 143 to
have a material impact on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 rescinds the provisions of SFAS 4 that require
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS
13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS 145 related to the classification of
debt extinguishment are effective for the period beginning after May 15, 2002.
The provisions of SFAS 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have
a material impact on the financial position or results of operations of the
Company.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ('EITF') Issue No. 94-3, 'Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including
59
Certain Costs Incurred in a Restructuring).' SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. This statement also established that fair value
is the objective for initial measurement of the liability. The provisions of
SFAS 146 are effective for exit or disposal activities that are initiated
after December 31, 2002.
The FASB has issued SFAS No. 148 'Accounting for Stock-Based
Compensation -- Transition and Disclosure.' SFAS 148 amends SFAS No. 123,
'Accounting for Stock-Based Compensation,' to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure requirements of SFAS 148. As
of January 4, 2003, the Company accounts for stock-based employee compensation
in accordance with APB Opinion No. 25, 'Accounting for Stock Issued to
Employees,' and related interpretations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees. Including Indirect
Guarantees of Indebtedness of Others ('FIN 45'). This interpretation requires
certain disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
interim and annual period beginning after December 15, 2002. The initial
recognition and initial measurement requirements of FIN 45 are effective
prospectively for guarantees issued or modified after December 31, 2002. The
Company does not believe the adoption of the recognition and initial measurement
requirements of FIN 45 will have a material impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities -- an interpretation of ARB No. 51 ('FIN 46').
FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 explains
how to identify variable interest entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to consolidate that
entity. It requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. It also requires certain disclosures by
the primary beneficiary of a variable interest entity and by an enterprise that
holds significant variable interests in a variable interest entity where the
enterprise is not the primary beneficiary. FIN 46 is effective for variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date, and
effective for the first fiscal year or interim period beginning after June 15,
2003 to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. FIN 46 requires an entity to
disclose certain information regarding a variable interest entity, if, when the
Interpretation becomes effective, it is reasonably possible that an enterprise
will consolidate or have to disclose information about that variable interest
entity, regardless of the date on which the variable entity interest was
created. The Company currently does not have any interest in any unconsolidated
entity for which variable interest entity accounting is required and therefore
does not expect FIN 46 to have a material effect on the Company's consolidated
financial statements.
ITEM 7A. 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. Prior to the Petition Date, the Company
selectively used financial instruments to manage these risks. The Company has
not entered any financial instruments to manage these risks since the Petition
Date and has sold or terminated all such arrangements.
60
INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in interest
rates based primarily on its financing activities. Prior to the Petition Date,
the Company entered into interest rate swap agreements, which had 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 October 6, 2001, the Company had terminated all previously
outstanding interest rate swap agreements. As of January 4, 2003, the Company
did not have any borrowings outstanding under the Amended DIP, therefore a
hypothetical 10% adverse change in interest rates during Fiscal 2002 would not
have had a significant impact on the Company's interest expense in Fiscal 2002.
The Company estimates that a hypothetical 10% adverse change in interest rates
would increase the Company's projected interest expense for fiscal 2003 by
approximately $1.0 million.
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,
British pound and Euro. Prior to the Petition Date, the Company entered into
foreign currency forward and option contracts to mitigate the risk of doing
business in foreign currencies. As of January 4, 2003, the Company had no such
financial instruments outstanding.
EQUITY PRICE RISK
The Company was subject to market risk from changes in its stock price as a
result of its Equity Agreements with several banks prior to the Petition Date.
The Equity Agreements were 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. As of
December 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. 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 charge to
shareholders equity. Amounts recorded as liabilities subject to compromise as of
January 4, 2003 were approximately $56.5 million. The amount of equity notes
outstanding reflects repayments of Equity Agreements of approximately $0.2
million in the first quarter of Fiscal 2002 from the proceeds of the
Penhaligon's and GJM sales. See Note 17 of Notes to Consolidated Financial
Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 of Part II is incorporated by reference
to the Consolidated Financial Statements filed with this Annual Report on
Form 10-K. See Item 15 of Part IV.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company, their age and their
position as of March 28, 2003 are set forth below.
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
Stuart D. Buchalter....................... 65 Non-Executive Chairman of the Board
Antonio C. Alvarez II..................... 54 Director, President and Chief Executive Officer
James P. Fogarty.......................... 34 Director, Senior Vice President--Finance and
Chief Financial Officer
Stanley P. Silverstein.................... 50 Senior Vice President--Corporate Development,
Chief Administrative Officer and Secretary
Jay A. Galluzzo........................... 28 Vice President and General Counsel
Richard Karl Goeltz....................... 60 Director
Harvey Golub.............................. 63 Director
</Table>
Mr. Buchalter currently serves as Non-Executive Chairman of the Board of
Directors for the Company. Mr. Buchalter was elected to the Board of Directors
of the Company in February 2000 and served as a member of the Board's
Restructuring Committee from June 2001 to February 2003. Mr. Buchalter is Of
Counsel to the California law firm of Buchalter, Nemer, Fields & Younger P.C.
Mr. Buchalter serves as a director of City National Corporation. He also serves
as the Chairman of the Board of Trustees of Otis College of Art & Design. Mr.
Buchalter attended Harvard Law School, earning an L.L.B. in 1962 and did his
undergraduate work at the University of California at Berkeley, receiving a B.A.
in 1959.
Mr. Alvarez was elected President and Chief Executive Officer of the Company
on November 16, 2001 and was elected to the Board of Directors on March 19,
2002. Mr. Alvarez served as a member of the Board's Restructuring Committee from
March 2002 until February 2003. Prior to his election to these positions, Mr.
Alvarez served the Company as Chief Restructuring Officer from June 11, 2001 to
November 16, 2001 and as Chief Restructuring Advisor to the Company while
employed by A&M, a leading turnaround and crisis management consulting firm,
from April 30, 2001 to June 11, 2001. Mr. Alvarez is a co-founding Managing
Director of A&M. Over the last 18 years, Mr. Alvarez has served as restructuring
officer, consultant or operating officer of numerous troubled companies.
Mr. Fogarty was elected Senior Vice President-Finance and Chief Financial
Officer of the Company on December 20, 2001. Mr. Fogarty was elected to the
Company's Board of Directors on February 6, 2003. Prior to his election to these
positions, Mr. Fogarty served the Company as Senior Vice President from June 11,
2001 to December 20, 2001 and served as an advisor to the Company (while
employed by A&M) from April 30, 2001 to June 11, 2001. Mr. Fogarty, a Managing
Director of A&M, has been associated with A&M since August 1994. As part of his
work with A&M, Mr. Fogarty has held management positions with Bridge Information
Systems, DDS Partners LLC, AM Cosmetics, Inc. and Color Tile, Inc. In addition,
Mr. Fogarty provided restructuring advisory services to Fruehauf Trailer and
Homeland Stores, Inc. Mr. Fogarty was associated with the accounting firm KPMG
from June 1990 until July 1994. Mr. Fogarty holds an M.B.A. in Finance and
Accounting from the Leonard Stern School of Business at New York University, an
M.S. in Accounting from the Leonard Stern School of Business at New York
University and a B.A. in Economics and Computer Science from Williams College.
Mr. Silverstein has served as Senior Vice President--Corporate Development
of the Company since March 2003 and as Chief Administrative Officer since
December 2001. Mr. Silverstein served as Vice President and General Counsel of
the Company from December 1990 until February 2003. Mr. Silverstein served as
Assistant Secretary of the Company from June 1986 until his appointment as
Secretary in January 1987. Mr. Silverstein received a J.D. from Harvard Law
School in 1977 and a B.A. from Yale College in 1974.
Mr. Galluzzo has served as Vice President and General Counsel of the Company
since March 2003. Mr. Galluzzo was formerly associated with the law firm of
Skadden, Arps, Slate, Meagher & Flom LLP ('Skadden Arps'). Prior to joining
Skadden Arps in October 2000, Mr. Galluzzo served as a law clerk
62
to the Hon. Charles L. Brieant, United States District Judge for the Southern
District of New York. Mr. Galluzzo received a J.D. from Columbia Law School and
holds a B.A. in Communications and Sociology from the University of
Pennsylvania.
Mr. Goeltz has been a Director of the Company since July 2002. Mr. Goeltz
served as Vice Chairman and Chief Financial Officer of the American Express
Company from 1996 to 2000. Previously, Mr. Goeltz was Group Chief Financial
Officer and a member of the Board of Directors of NatWest Group ('NatWest'), the
parent company of National Westminister Bank PLC. Prior to joining NatWest, Mr.
Goeltz served The Seagram Company for over 20 years in a variety of management
positions. Mr. Goeltz previously held various financial positions in the
treasurer's department of Exxon Corporation in New York and Central America. Mr.
Goeltz is a director of the New Germany Fund, a member of the Board of Overseers
of Columbia Business School, a director of Opera Orchestra of New York, a member
of the Council on Foreign Relations and a member of the Court of Governors of
the London School of Economics and Political Science. Mr. Goeltz received his
M.B.A. from Columbia Business School, his B.A. in Economics from Brown
University and also studied at the London School of Economics and New York
University.
Mr. Golub has been a Director of the Company since January 2001. Mr. Golub
served as a member of the Restructuring Committee of the Board of Directors from
June 2001 until February 2003. Mr. Golub served as a member of the Board of
Directors of American Express Company from September 1990 until his retirement
in April 2001, as Chairman of American Express Company from August 1993 until
April 2001 and as Chief Executive Officer from January 1993 to January 2001. Mr.
Golub serves as a Director of Campbell Soup Company and Dow Jones & Co., and as
the Chairman and Chief Executive Officer of Airclic Inc., Chairman of
ClientLogic and Chairman of TH Lee Putnam Ventures. Mr. Golub also serves on the
Boards of Lincoln Center for the Performing Arts, the American Enterprise
Institute and the New York-Presbyterian Hospitals, Inc. Mr. Golub serves as a
Senior Advisor to Lazard Freres.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who own more than
ten percent of the Company's common stock, to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater
than ten percent stockholders are required by SEC regulations to furnish the
Company with copies of all such Section 16(a) forms that they file.
Based solely on a review of the copies of such reports furnished to the
Company, the Company believes that, during the fiscal year ended January 4,
2003, all Section 16(a) filing requirements applicable to the Company's
executive officers and directors and greater than ten percent shareholders were
complied with.
63
ITEM 11. EXECUTIVE COMPENSATION.
The following table discloses summary information regarding the compensation
of (i) Antonio C. Alvarez II, the Chief Executive Officer and (ii) the two most
highly compensated officers serving at January 4, 2003 other than Mr. Alvarez,
namely James P. Fogarty, Senior Vice President-Finance and Chief Financial
Officer and Stanley P. Silverstein, Senior Vice President-Corporate Development,
Chief Administrative Officer and Secretary (collectively, the 'Named
Executives').
<Table>
<Caption>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------
SECURITIES
OTHER UNDERLYING ALL
ANNUAL OPTIONS/ OTHER
COMPEN- SAR'S COMPEN-
YEAR SALARY BONUS SATION (SHARES) SATION
---- ------ ----- ------ -------- ------
NAME OF OFFICER AND POSITION(S):
Antonio C. Alvarez II (a) ........................ 2002 $1,500,058 $ -- (b) $ -- $--
President and Chief Executive Officer 2001 1,152,927 -- (b) -- --
2000 -- -- -- -- --
James P. Fogarty (c) ............................. 2002 375,014 -- (b) -- 1,530(e)
Senior Vice President-Finance and Chief Financial 2001 210,344 -- (b) -- --
Officer 2000 -- -- -- -- --
Stanley P. Silverstein (f) ....................... 2002 450,018 187,500(d) (b) -- --
Senior Vice President-Corporate Development, 2001 450,018 187,500(d) (b) -- --
Chief Administrative Officer and Secretary 2000 525,061 -- (b) 100,000 --
</Table>
- ---------
(a) Mr. Alvarez was elected President and Chief Executive
Officer of the Company on November 16, 2001. Prior to his
election to these positions, Mr. Alvarez served the Company
as Chief Restructuring Officer from June 11, 2001 to
November 16, 2001 and as Chief Restructuring Advisor from
April 30, 2001 to June 11, 2001 pursuant to a contract
between the Company and A&M. See Item 13. Certain
Relationships.
(b) Other annual compensation was less than $50,000 or 10% of
such officer's annual salary and bonus for such year.
(c) Mr. Fogarty was elected Chief Financial Officer of the
Company on December 20, 2001. Prior to his election to this
position, Mr. Fogarty served the Company as Senior Vice
President from June 11, 2001 to December 20, 2001 and served
as an advisor to the Company (while employed by A&M) from
April 30, 2001 to June 11, 2001. See Item 13. Certain
Relationships.
(d) Represents retention bonus paid pursuant to the Company's
Key Domestic Employee Retention Plan implemented as a result
of the Chapter 11 Cases.
(e) Represents employer matching contributions under the
Company's Employee Savings Plan.
(f) In March 2003, Mr. Silverstein was appointed Senior Vice
President-Corporate Development and continued to serve as
Chief Administrative Officer and Secretary. Prior to March
2003, Mr. Silverstein served as Vice President, General
Counsel, Secretary and Chief Administrative Officer.
64
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
There were no Option/SAR grants to any employee, including the Named
Executives, in Fiscal 2002.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
There were no Option/SAR exercises by any employee or Named Executives in
Fiscal 2002. Pursuant to the terms of the Plan, the Old Common Stock was
cancelled and holders of the Old Common Stock received no distribution. As of
January 4, 2003, all options (including Mr. Silverstein's options) were
out-of-the money and were cancelled pursuant to the Plan on February 4, 2003.
AGGREGATED OPTIONS/SAR EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTIONS/SAR VALUES
<Table>
<Caption>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS/SARS AT
FISCAL YEAR-END
(#) EXERCISABLE/
UNEXERCISABLE
-------------
Antonio C. Alvarez.......................................... 0/0
James P. Fogarty............................................ 0/0
Stanley P. Silverstein...................................... 792,577/50,000
</Table>
PENSION PLAN
PENSION PLAN TABLE
<Table>
<Caption>
YEARS OF SERVICE
AVERAGE ANNUAL COMPENSATION ---------------------------------------------------------
BEST 12 YEARS 5 10 15 20 25 30
------------- - -- -- -- -- --
$100,000..................... $ 6,884 $13,767 $20,651 $27,535 $34,418 $41,302
$150,000..................... 10,884 21,767 32,651 43,535 54,418 65,302
$200,000..................... 11,350 22,701 34,051 45,401 56,752 68,102
$250,000..................... 11,350 22,701 34,051 45,401 56,752 68,102
$300,000..................... 11,350 22,701 34,051 45,401 56,752 68,102
</Table>
The preceding table sets forth the annual pension benefits payable at age 65
pursuant to the Company's Pension Plan, which provides such pension benefits to
all qualified personnel based on the average highest twelve consecutive calendar
years' compensation multiplied by the years of credited service. Such benefits
payable are expressed as straight life annuity amounts and are not subject to
reduction for social security or other offset. Benefits under the Company's
Pension Plan were frozen effective December 31, 2002, and as a result no future
benefits will be earned by any participant in the Plan. As of January 4, 2003,
the credited years of service under the plan for the Named Executives are: Mr.
Fogarty, one year, seven months; and Mr. Silverstein, 18 years, nine months.
Pursuant to the terms of his employment agreement, Mr. Alvarez was not eligible
to participate in the Company's Pension Plan. The current maximum, remuneration
covered by the Company's Employee Retirement Plan for each such individual is
$170,000. Such amounts are included in the Summary Compensation Table under
'Salary' and 'Bonus'.
COMPENSATION OF DIRECTORS
The Company does not pay any additional remuneration to employees for
serving as directors of the Company. For his service as Non-Executive Chairman
of the Board from November 2001 through February 4, 2003, Mr. Buchalter was paid
an annual fee of $500,000, payable semi-monthly. As reported in the Plan, Mr.
Buchalter will receive $500,000 per year for his continued service as
Non-Executive Chairman of the Board. Upon the hiring of a permanent chief
executive officer and the appointment of two additional directors, Mr.
Buchalter's compensation for his service as Non-Executive Chairman of
65
the Board will be reduced to $250,000 per year. In connection with the
consummation of the Plan on February 4, 2003, Mr. Buchalter was paid a cash
bonus of $210,004. In addition, Mr. Buchalter will receive 12,975 shares of New
Common Stock upon the approval by the stockholders of the Company of the
Company's 2003 Stock Incentive Plan.
In Fiscal 2002, other directors of the Company who were not employees
received an annual retainer fee of $50,000, payable in cash, plus fees of $1,500
per day for attendance at meetings of the Board of Directors and $1,000 per day
for attendance at meetings of its committees. In addition, the Chairmen of the
Audit, Restructuring, Compensation and Pension Committees were paid additional
fees of $4,375, $4,375, $1,458 and $1,458, respectively. Directors of the
Company were also reimbursed for out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors and its committees.
Effective February 4, 2003, other directors of the Company who are not
employees receive an annual retainer fee of $65,000, payable 60% in cash and 40%
in equity, plus fees of $2,500 per day for attendance at meetings of the Board
of Directors and $1,000 per day for attendance at meetings of its committees,
and the Chairmen of the Audit, Compensation and Nominating and Corporate
Governance Committees are paid additional annual fees of $10,000, $5,000 and
$5,000, respectively. Directors of the Company are also reimbursed for
out-of-pocket expenses incurred in connection with attendance at meetings of the
Board of Directors and its committees.
EMPLOYMENT AGREEMENTS
Antonio C. Alvarez II. Mr. Alvarez's services to the Company were initially
governed by a contract with A&M, dated April 30, 2001, pursuant to which Mr.
Alvarez served as the Company's Chief Restructuring Advisor. See Item 13.
Certain Relationships. The Company then entered into an employment agreement
with Mr. Alvarez, effective June 11, 2001, pursuant to which Mr. Alvarez served
as the Company's Chief Restructuring Officer. The employment agreement was
amended in connection with his election to the positions of President and Chief
Executive Officer in November 2001 (the employment agreement, as amended, the
'Alvarez Agreement'). The Alvarez Agreement, as further amended, was
subsequently approved by the Bankruptcy Court on February 21, 2002. The term of
the Alvarez Agreement was further amended as of July 16, 2002 to extend through
the earlier of April 30, 2003 or consummation of a plan of reorganization for
all or substantially all of the Debtors in the Chapter 11 Cases. The Alvarez
Agreement provided for Mr. Alvarez's employment as President and Chief Executive
Officer of the Company at a monthly base salary of $0.125 million. Under the
Alvarez Agreement, Mr. Alvarez was not entitled to participate in the Company's
benefit plans or programs, including its pension or group health care programs.
The Alvarez Agreement provided that Mr. Alvarez would be entitled to earn an
incentive bonus of not less than $2.25 million (the 'Minimum Bonus'), payable
following the 'Final Payment Date,' which was defined as the earlier of (i) the
expiration of the Alvarez Agreement, (ii) the date on which there is a complete
disposition of the Company (whether by a sale of substantially all of the
Company's stock or assets or otherwise), (iii) the date on which a plan of
reorganization is consummated or (iv) the date on which Mr. Alvarez's employment
is terminated either by the Company without 'Cause' or by Mr. Alvarez for 'Good
Reason' (each term as defined in the Alvarez Agreement). All or part of the
Minimum Bonus could have become payable earlier than the Final Payment Date if
certain financial targets were met. Mr. Alvarez was also entitled to earn an
incremental bonus (the 'Incremental Bonus') based upon the value of the pool of
funds available for distribution to creditors under the Plan ('CPP' as defined
in the Alvarez Agreement). No Incremental Bonus was payable until the CPP
exceeded $625 million. The amount of the Incremental Bonus was to be calculated
as an escalating percentage of the amount by which the CPP exceeded $625
million. The Incremental Bonus, if earned, was payable following the Final
Payment Date, but portions of the Incremental Bonus may have been paid earlier
than the Final Payment Date if certain financial targets were met. The Alvarez
Agreement provided that the Incremental Bonus was to be paid in cash, debt or
securities in the same proportions as the CPP, except that no less than $2.25
million of the Incremental Bonus was to be paid in cash. Pursuant to the Plan
and pursuant to the Alvarez Agreement, as modified, on the Effective Date of the
Plan, Mr. Alvarez received an incentive bonus of approximately $1.950 million in
cash, Second Lien Notes in the principal amount of $0.942 million and
66
approximately 0.59% of the New Common Stock (266,400 shares). As discussed below
in Item 13. Certain Relationships, effective as of February 4, 2003, the Alvarez
Agreement was replaced with, and superceded by, the A&M Agreement (as defined
below).
James P. Fogarty. Mr. Fogarty's services to the Company were initially
governed by the contract with A&M, dated April 30, 2001, pursuant to which Mr.
Fogarty served as an advisor to the Company. See Item 13. Certain Relationships.
On June 11, 2001, the Company entered into an employment agreement with Mr.
Fogarty (the 'Fogarty Agreement') which set forth the terms and conditions of
Mr. Fogarty's employment. The term of the Fogarty Agreement was amended as of
July 16, 2002 to extend through the earlier of April 30, 2003 or consummation of
a plan of reorganization for all or substantially all of the Debtors in the
Chapter 11 Cases. The Fogarty Agreement could have been terminated by either
party upon 30 days' written notice. The Fogarty Agreement provided for Mr.
Fogarty's employment as Senior Vice President Finance at an annual base salary
of $0.375 million as well as certain other benefits and reimbursement of
expenses. Mr. Fogarty was elected to the additional position of Chief Financial
Officer on December 20, 2001. Mr. Fogarty was entitled to participate in all of
the Company's employee benefit plans and programs, including its pension and
group health benefit plans. As discussed below in Item 13. Certain
Relationships, effective as of February 4, 2003, the Fogarty Agreement was
replaced with, and superceded by, the A&M Agreement.
KEY DOMESTIC EMPLOYEE RETENTION PLAN
In connection with the Chapter 11 Cases, the Company instituted a Key
Domestic Employee Retention Plan (the 'Retention Plan') which was approved by
the Bankruptcy Court. The Retention Plan provided for stay bonuses, enhanced
severance protection and discretionary transaction bonus opportunities during
the Chapter 11 Cases. The stay bonuses provided under the Retention Plan
replaced the Company's existing bonus and other cash incentive compensation
programs for the participants. Approximately 245 key domestic employees,
including Mr. Silverstein, were covered under the Retention Plan. One-third of
the total stay bonus was paid to Mr. Silverstein on December 10, 2001, one-third
was paid on June 10, 2002 and one-third was paid on February 7, 2003. No
severance or discretionary transaction bonus was paid to Mr. Silverstein.
As a condition to participating in the Retention Plan, all participants were
required to execute an Employee Waiver, Release and Discharge of Claims which
released the Company and its affiliates from claims by the participants against
the Company (except with respect to certain indemnification rights and claims
arising under the Company's retirement and savings plans).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During Fiscal 2002, the members of the Compensation Committee were Mr.
Joseph A. Califano, Jr. Mr. Donald G. Drapkin and Mr. Golub, Chairman, all of
whom were non-employee directors.
67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of January 4, 2003 with respect
to the Company's Old Common Stock issuable under its equity compensation plans:
<Table>
<Caption>
NUMBER OF SECURITIES
REMAINING AVAILABLE
NUMBER OF FOR FUTURE ISSUANCE
SECURITIES UNDER EQUITY
TO BE ISSUED UPON WEIGHTED-AVERAGE COMPENSATION PLANS
EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN COLUMN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS (A))(2)
- ------------- -------------------- -------------------- -----------------------
(A) (B) (C)
Equity Compensation Plans approved by
stock holders:......................
1991 Stock Option Plan............ 59,900 $26.74 143,025
1993 Stock Plan................... 1,177,613 $22.54 12,954,701
1993 Non-Employee Director Stock
Plan............................ 70,000 $20.21 330,000
1998 Stock Plan for Non-Employee
Directors(1).................... 340,000 $12.45 11,902,629
Equity Compensation Plans not approved
by stock holders:...................
1988 Employee Stock Purchase
Plan............................ -- n/a 278,700
1997 Stock Option Plan............ 2,044,850 $19.03 9,844,515
</Table>
- ---------
(1) Provides for issuance of shares up to the number of shares
held in the Company's treasury.
(2) Pursuant to the terms of the Plan, the Old Common Stock and
derivative securities relating to the Old Common Stock,
including all outstanding options, were cancelled on
February 4, 2003.
DESCRIPTION OF NON-STOCKHOLDER APPROVED PLANS
1988 Employee Stock Purchase Plan (the '1988 Plan'). The 1988 Plan provided
for the sale of shares of Old Common Stock to certain key employees and
directors of the Company. The number of shares subject to the 1988 Plan was
subject to equitable adjustment in the event of certain corporate events such as
mergers, consolidations, recapitalizations and stock splits. The 1988 Plan was
administered by the Compensation Committee of the Board, which had the authority
to determine the number of shares to be sold or granted, the time at which
restrictions on shares would lapse, voting requirements and other terms and
conditions of the purchase agreement between the Company and the participant to
whom shares were granted or sold. Generally, shares granted or sold under the
1988 Plan vested over a four-year period, were subject to repurchase if the
participant's employment or service terminated, and were subject to restrictions
on transfer of any interest in such shares.
1997 Stock Option Plan (the '1997 Plan'). The 1997 Plan provided for the
grant of stock options on Old Common Stock and restricted shares of Old Common
Stock to selected employees (including employees who were directors) of the
Company. Shares to be issued under the 1997 Plan were treasury shares of the
Company and thus were exempted from the shareholder approval requirements of the
NYSE. The 1997 Plan was administered by the Compensation Committee of the Board,
which had the authority to determine the persons to whom awards were to be
granted and the terms and conditions of awards, provided that the per share
exercise price of options granted under the 1997 Plan could not be less than
100% of the fair market value of a share of Old Common Stock on the date of
grant. Adjustments in the number and kind of shares subject to awards granted
under the 1997 Plan were to be made in the event that the Compensation Committee
determined that a dividend or other distribution, recapitalization, stock split,
reorganization, merger, consolidation or other corporate events affected the
shares such that an adjustment was necessary in order to prevent dilution or
enlargement of the benefits intended to be made available under the 1997 Plan.
In the event that any award, or any shares subject to an
68
award, under the 1997 Plan were forfeited, or were returned to the Company
following the exercise or vesting of an award, or an award otherwise terminated
or was cancelled, the shares so forfeited would become available for future
grants under the 1997 Plan. Awards granted under the 1997 Plan were generally
non-transferable, and rights under such awards were exercisable only by the
participant during the participant's lifetime.
STOCK INCENTIVE PLANS
As of January 4, 2003, there remained outstanding options to purchase shares
of Old Common Stock and restricted shares of Old Common Stock, which awards were
previously granted to employees and directors of the Company under various
Company management incentive plans. Pursuant to the terms of the Plan, the Old
Common Stock and derivative securities relating to the Old Common Stock,
including all outstanding options, were cancelled on February 4, 2003.
On March 12, 2003, the Company's Board of Directors approved the adoption of
the 2003 Stock Incentive Plan (the 'Stock Plan') and also approved the granting
of an aggregate of 750,000 shares of restricted stock and options to purchase
3,000,000 shares of New Common Stock at fair market value. The Stock Plan and
the aforementioned awards that have been approved are subject to approval of the
Company's stockholders, at the next annual meeting of stockholders.
BENEFICIAL OWNERSHIP OF COMPANY COMMON STOCK
The following table sets forth certain information with respect to
beneficial ownership of the New Common Stock as of March 28, 2003 by (i) each of
the Company's directors, (ii) each of the Company's executive officers, (iii)
all directors and executive officers as a group and (iv) each person who is
known by the Company to own five percent or more of any class of the Company's
voting securities as of March 28, 2003.
<Table>
<Caption>
SHARES BENEFICIALLY
OWNED
---------------------
NUMBER OF PERCENT
NAME SHARES OF SHARES
---- ------ ---------
Antonio C. Alvarez II(a).................................... 246,400 *
Stuart D. Buchalter(a)(b)................................... 12,975 *
James P. Fogarty(a)......................................... -- *
Jay A. Galluzzo(a)(c)....................................... 3,000 *
Richard Karl Goeltz(a)...................................... -- *
Harvey Golub(a)............................................. -- *
Stanley P. Silverstein(a)(c)................................ 33,000 *
All directors and executive officers as a group............. 295,375 *
OTHER 5% STOCKHOLDERS
The Bank of Nova Scotia(d).................................. 4,407,211 9.8%
Bank of America Corporation(e).............................. 2,692,655 6.0%
Chesapeake Partners Management Co., Inc.(f)................. 2,597,613 5.8%
Commerzbank Aktiengesellschaft(g)........................... 4,240,252 9.4%
General Electric Capital Corporation(h)..................... 3,939,786 8.8%
JP Morgan Chase Bank(i)..................................... 3,731,329 8.3%
Societe Generale(j)......................................... 4,425,436 9.8%
</Table>
- -------------
* Less than 1%
(a) The business address of each of the directors and officers
is c/o The Warnaco Group, Inc., 90 Park Avenue, New York,
New York 10016.
(b) Shares to be issued pursuant to the 2003 Stock Incentive
Plan, subject to stockholder approval at the next annual
meeting of stockholders.
(c) Shares of restricted stock to be issued pursuant to the 2003
Stock Incentive Plan, subject to stockholder approval at the
next annual meeting of stockholders. Restrictions lapse with
respect to
(footnotes continued on next page)
69
(footnotes continued from previous page)
25% of such shares on September 12, 2003 and with respect to
an additional 25% of such shares on each of the first,
second and third anniversaries of September 12, 2003.
(d) Information based solely on a Schedule 13G dated February
10, 2003 filed with the SEC by The Bank of Nova Scotia
('Scotiabank'), 44 West King Street West, Toronto, Ontario,
Canada, M5H 1H1, reporting the beneficial ownership of the
shares of Common Stock set forth in the table. According to
the Schedule 13G Scotiabank has sole voting power and sole
dispositive power with respect to all such shares.
(e) Information based solely on a Schedule 13G, dated February
13, 2003, filed with the SEC by Bank of America Corporation,
100 North Tryon Street, Charlotte, North Carolina 28255,
reporting the beneficial ownership of the shares of New
Common Stock held by Bank of America Corporation ('BAC') and
its affiliates and subsidiaries (i) NB Holdings Corporation
('NB'); (ii) Bank of America, N.A. ('BACNA'); (iii) BANA
(#1) LLC ('LLC'); (iv) Banc of America Strategic Solutions,
Inc. ('BASS'); (v) NationsBank Montgomery Holdings
Corporation ('NBC'); and (vi) Banc of America Securities,
LLC ('BACLLC'). According to the Schedule 13G (i) BAC has
shared voting power and shared dispositive power with
respect to 2,692,655 shares; (ii) NB has shared voting power
and shared dispositive power with respect to 2,692,655
shares; (iii) BACNA has sole voting power and sole
dispositive power with respect to 8,500 shares and has
shared voting power and shared dispositive power with
respect to 2,286,453 shares; (iv) LLC has shared voting
power and shared dispositive power with respect to 2,286,453
shares; (v) BASS has sole voting power and sole dispositive
power with respect to 2,286,453 shares; (vi) NBC has shared
voting power and shared dispositive power with respect to
397,702 shares; and (vii) BACLLC has sole voting power and
sole dispositive power with respect to 397,702 shares.
(f) Information based solely on a Schedule 13G, dated February
5, 2003, filed with the SEC by Chesapeake Partners
Management Co., Inc. ('CPMC'), 1829 Reisterstown Road, Suite
220, Baltimore, Maryland, 21208, reporting the beneficial
ownership of the shares of New Common Stock held by CPMC and
its affiliates and subsidiaries (i) Chesapeake Partners
Limited Partnership ('CPLP'); (ii) Chesapeake Partners
Institutional Fund Limited Partnership ('CPIFLP'); (iii)
Chesapeake Partners International Ltd. ('CPINTL'); and (iv)
Barclay's Global Investors Event Driven Fund II
('Barclays'). According to the Schedule 13G (i) CPMC has
shared voting and shared dispositive power with respect to
2,597,613 shares; (ii) CPLP has shared voting power and
shared dispositive power with respect to 1,487,253 shares;
(iii) CPIFLP has shared voting power and shared dispositive
power with respect to 52,045 shares; (iv) CPINTL has shares
voting power and shared dispositive power with respect to
977,015 shares; and (v) Barclays has shared voting power and
shared dispositive power with respect to 81,300 shares.
(g) Information based solely on a letter dated March 25, 2003
from Commerzbank Aktiengesellschaft to the Company.
(h) Total represents the number of shares of New Common Stock
distributed to General Electric Capital Corporation on
February 4, 2002 pursuant to the terms of the Plan.
(i) Total represents the number of shares of New Common Stock
distributed to JP Morgan Chase Bank on February 4, 2002
pursuant to the terms of the Plan.
(j) Total represents the number of shares of New Common Stock
distributed to Societe Generale on February 4, 2002 pursuant
to the terms of the Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From April 30, 2001 to June 11, 2001, the Company paid consulting fees to
A&M of $1,256,000 pursuant to a consulting agreement. Under this agreement,
several individuals who hold executive positions with the Company (including
Messrs. Alvarez and Fogarty) provided services as advisors to the Company. The
A&M consulting agreement was terminated on June 11, 2001 and certain A&M
employees became employees of the Company.
70
In connection with the Company's emergence from Chapter 11 bankruptcy
protection, the Company entered into a second consulting agreement with A&M on
January 29, 2003 (as supplemented by the March 18, 2003 letter agreement, the
'A&M Agreement'), pursuant to which Mr. Alvarez and Mr. Fogarty will continue
serving the Company as Chief Executive Officer and Chief Financial Officer,
respectively, and certain other A&M affiliated persons will continue serving the
Company in a consulting capacity. The A&M Agreement was effective as of February
4, 2003 and replaced and superceded the Alvarez and Fogarty Agreements. The A&M
Agreement may be terminated by either party, without cause, upon 30 days'
written notice. Upon the commencement of employment of a permanent Chief
Executive Officer ('New CEO') or Chief Financial Officer ('New CFO'),
Mr. Alvarez and Mr. Fogarty are obligated to provide transitional assistance to
the New CEO and New CFO, respectively, as reasonably required by the Company.
The A&M Agreement provides that the Company will pay A&M on account of Mr.
Alvarez's service as follows: (i) $0.125 million per month until commencement of
employment of the New CEO; (ii) $0.125 million per month for 15 days after the
commencement of employment of the New CEO; and (iii) after the period described
in (ii) above, $750 per hour of transition services provided by Mr. Alvarez. The
A&M Agreement further provides that the Company will pay A&M on account of Mr.
Fogarty's service at a rate of $475 per hour. Moreover, A&M is eligible to
receive the following incentive compensation under the terms of the agreement:
(i) additional payments upon the consummation of certain transactions and (ii)
participation in the Company's incentive compensation program for the periods
Mr. Alvarez and Mr. Fogarty serve as Chief Executive Officer and Chief Financial
Officer, respectively. Incentive compensation payable to A&M upon the
consummation of certain transactions is not currently determinable because it is
contingent upon future events which may or may not occur. Mr. Alvarez, Mr.
Fogarty and A&M are bound by certain confidentiality, indemnification and
non-solicitation obligations under the terms of the A&M Agreement.
Mr. Alvarez is a co-founding Managing Director and Mr. Fogarty is a Managing
Director of A&M. See Item 11. Executive Compensation.
The Company leases certain real property from an entity controlled by an
employee who is the former owner of A.B.S. by Allen Schwartz. The lease expires
on May 31, 2005 and includes four five-year renewal options. Rent expense
related to this lease for Fiscal 2002 was $0.5 million.
ITEM 14. CONTROLS AND PROCEDURES.
In response to recent legislation and regulations, the Company has
established a Disclosure Committee comprised of certain members of the Company's
management and has reviewed its internal control structure and disclosure
controls and procedures (as such term is defined in Rules 13a-14(c) and
15d-14(c) under the Exchange Act). Within 90 days prior to the filing of this
Annual Report (the 'Evaluation Date'), the Company carried out an evaluation of
the effectiveness of the Company's disclosure controls and procedures. Based
upon that evaluation, after giving consideration and subject to the ongoing
evaluation of the Company's internal control environment and corrective actions
taken by the Company to date, as discussed below, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to the Company,
including its consolidated subsidiaries, required to be included in the
Company's reports filed or submitted under the Exchange Act.
There have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect such controls
subsequent to the Evaluation Date.
The Company's independent auditors, Deloitte & Touche LLP ('Deloitte') had
advised the Company's management and its Audit Committee of certain matters
noted in connection with its audits of the Company's consolidated financial
statements for Fiscal 2000 and Fiscal 2001 which Deloitte considered material
weaknesses constituting reportable conditions under standards established by the
American Institute of Certified Public Accountants. Beginning in Fiscal 2001 and
continuing through Fiscal 2002, the Company took corrective actions including
replacing certain financial staff, hiring additional financial staff and
instituting monthly and quarterly reviews to ensure timely and consistent
application of accounting principles and procedures and transaction review and
approval procedures. In
71
connection with its audit of the Company's consolidated financial statements for
Fiscal 2002, Deloitte advised management and the Audit Committee that no matters
involving the Company's internal controls or its operations are considered
material weaknesses or reportable conditions.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The Consolidated Financial Statements of The Warnaco Group, Inc.
<Table>
<Caption>
PAGE
----
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of January 5, 2002 and
January 4, 2003........................................... F-2
Consolidated Statements of Operations for the Years Ended
December 30, 2000, January 5, 2002 and January 4, 2003.... F-3
Consolidated Statements of Stockholders' Deficiency and
Comprehensive Loss For the Years Ended December 30, 2000,
January 5, 2002 and January 4, 2003....................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 30, 2000, January 5, 2002 and January 4, 2003.... F-5
Notes to Consolidated Financial Statements ............ F-6-F-57
2. Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts and
Reserves.................................................. A-1
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission which are not included with this additional financial
data have been omitted because they are not applicable or the
required information is shown in the Consolidated Financial
Statements or Notes thereto.
3. List of Exhibits.
</Table>
<Table>
2.1 Sale and Purchase Agreement, dated December 18, 2001,
between Mullion International Limited and Royal Holdings,
Inc. (incorporated herein by reference to Exhibit 2.3 to the
Company's Form 10-K filed July 31, 2002).*
2.2 Deed of Variation, dated February 8, 2002, among Mullion
International Limited, Royal Holdings, Inc. and Cradle
Penhaligon's Limited (incorporated herein by reference to
Exhibit 2.4 to the Company's Form 10-K filed July 31,
2002).*
2.3 Stock and Asset Sale Agreement, dated as of December 21,
2001, by and among Warnaco Inc., Warner's (U.K.) Ltd.,
Warnaco (HK) Ltd. and Luen Thai Overseas Limited
(incorporated herein by reference to Exhibit 2.5 to the
Company's Form 10-K filed July 31, 2002).*
2.4 Consent and Waiver, dated as of January 21, 2002, by and
among Warnaco Inc., Warner's (U.K.) Ltd., Warnaco (HK) Ltd.
and Luen Thai Overseas Limited (incorporated herein by
reference to Exhibit 2.6 to the Company's Form 10-K filed
July 31, 2002).*
2.5 Consent and Waiver, dated as of February 1, 2002, by and
among Warnaco Inc., Warner's (U.K.) Ltd., Warnaco (HK) Ltd.
and Luen Thai Overseas Limited (incorporated herein by
reference to Exhibit 2.7 to the Company's Form 10-K filed
July 31, 2002).*
2.6 First Amended Joint Plan of Reorganization of The Warnaco
Group, Inc. and its Affiliated Debtors and Debtors in
Possession Under Chapter 11 of the Bankruptcy Code
(incorporated herein by reference to Exhibit 99.2 to the
Company's Form 10-Q filed November 18, 2002).*
2.7 Disclosure Statement with respect to the First Amended Joint
Plan of Reorganization of The Warnaco Group, Inc. and its
Affiliated Debtors and Debtors in Possession Under Chapter
11 of the Bankruptcy Code (incorporated herein by reference
to Exhibit 99.3 to the Company's Form 10-Q filed November
18, 2002).*
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 1 to the Form
8-A/A filed by the Company on February 4, 2003).*
3.2 Bylaws of the Company.'D'
</Table>
72
<Table>
4.1 Amended and Restated Declaration of Trust of Designer
Finance Trust, dated as of November 6, 1996, among Designer
Holdings, as Sponsor, IBJ Schroder Bank & Trust Company, as
Property Trustee, Delaware Trust Capital Management, Inc. as
Delaware Trustee and Merril M. Halpern and Arnold H. Simon,
as Trustees (incorporated herein by reference to Exhibit 4.1
to the Company's Form 10-Q filed November 14, 1997).*
4.2 First Supplemental Indenture, dated as of March 31, 1998,
between Designer Holdings, The Warnaco Group, Inc. and IBJ
Schroder Bank & Trust Company, as Trustee (incorporated
herein by reference to Exhibit 4.3 to the Company's Form
10-K filed April 3, 1998).*
4.3 Preferred Securities Guarantee Agreement, dated as of March
31, 1998, between The Warnaco Group, Inc., as Guarantor and
IBJ Schroder Bank & Trust Company, as Preferred Guarantee
Trustee, with respect to the Preferred Securities of
Designer Finance Trust (incorporated herein by reference to
Exhibit 4.4 to the Company's Form 10-K filed April 3,
1998).*
4.4 Form of Rights Agreement, dated as of February 4, 2003,
between the Company and the Rights Agent, including Form of
Rights Certificate as Exhibit A, Summary of Rights to
Purchase Preferred Stock as Exhibit B and the Form of
Certificate of Designation for the Preferred Stock as
Exhibit C. Pursuant to the Rights Agreement, printed Rights
Certificates will not be mailed until after the Distribution
Date (as such term is defined in the Rights Agreement)
(incorporated by reference to Exhibit 4 to the Form 8-A/A
filed by the Company on February 4, 2003).*
4.5 Indenture, dated as of February 4, 2003, among Warnaco, the
Guarantors and the Indenture Trustee (incorporated herein by
reference to Exhibit 4.2 to the Company's Form 8-K filed
February 10, 2003).*
4.6 Pledge and Security Agreement, dated as of February 4, 2003,
among Warnaco, as a grantor, the Guarantors and the
Collateral Trustee (incorporated herein by reference to
Exhibit 4.3 to the Company's Form 8-K filed February 10,
2003).*
4.7 Collateral Trustee Agreement, dated as of February 4, 2003,
among Warnaco, the Company, the Guarantors, the Indenture
Trustee and the Collateral Trustee (incorporated herein by
reference to Exhibit 4.4 to the Company's Form 8-K filed
February 10, 2003).*
4.8 Registration Rights Agreement, dated as of February 4, 2003,
among the Company and certain creditors of the Company (as
described in the Registration Rights Agreement)
(incorporated herein by reference to Exhibit 4.5 to the
Company's Form 8-K filed February 10, 2003).*
10.1 Warnaco Employee Retirement Plan (incorporated herein by
reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, No. 33-4587).*
10.2 Amended and Restated License Agreement, dated as of January
1, 1996, between Polo Ralph Lauren, L.P. and Warnaco Inc.
(incorporated herein by reference to Exhibit 10.4 to the
Company's Form 10-Q filed November 14, 1997).*
10.3 Amended and Restated Design Services Agreement, dated as of
January 1, 1996, between Polo Ralph Lauren Enterprises, L.P.
and Warnaco Inc. (incorporated herein by reference to
Exhibit 10.5 to the Company's Form 10-Q filed November 14,
1997).*
10.4 License Agreement, dated as of August 4, 1994, between
Calvin Klein, Inc. and Calvin Klein Jeanswear Company
(incorporated by reference to Exhibit 10.20 to Designer
Holdings, Ltd.'s Registration Statement on Form S-1 (File
No. 333-02236)).*
10.5 Amendment to the Calvin Klein License Agreement, dated as of
December 7, 1994; incorporated by reference to Exhibit 10.21
to Designer Holdings, Ltd.'s Registration Statement on Form
S-1 (File No. 333-02236)).*
10.6 Amendment to the Calvin Klein License Agreement, dated as of
January 10, 1995 (incorporated by reference to Exhibit 10.22
to Designer Holdings, Ltd.'s Registration Statement on Form
S-1 (File No. 333-02236)).*
10.7 Amendment to the Calvin Klein License Agreement, dated as of
February 28, 1995 (incorporated by reference to Exhibit
10.23 to Designer Holdings, Ltd.'s Registration Statement on
Form S-1 (File No. 333-02236)).*
10.8 Amendment to the Calvin Klein License Agreement, dated as of
April 22, 1996 (incorporated by reference to Exhibit 10.38
to Designer Holdings, Ltd.'s Registration Statement on Form
S-1 (File No. 333-02236)).*
</Table>
73
<Table>
10.9 Offer Letter and Employee Waiver, Release and Discharge of
Claims pursuant to the Key Domestic Employee Retention Plan
for Stanley Silverstein, dated November 26, 2001
(incorporated herein by reference to Exhibit 10.41 to the
Company's Form 10-K filed July 31, 2002).*
10.10 Amended Employment Agreement, dated as of June 11, 2001,
between The Warnaco Group, Inc. and Antonio Alvarez
(incorporated herein by reference to Exhibit 10.42 to the
Company's Form 10-K filed July 31, 2002).*
10.11 Senior Secured Super-Priority Debtor in Possession Revolving
Credit Agreement, dated as of June 11, 2001, among Warnaco
Inc., as Debtor and Debtor In Possession, as Borrower and
The Warnaco Group, Inc., and the Subsidiaries of The Warnaco
Group, Inc., party thereto, as Debtors and Debtors In
Possession, as Guarantors and the Lenders and Issuers From
Time to Time Party thereto and Citibank, N.A., as
Administrative Agent and Salomon Smith Barney Inc., J.P.
Morgan Securities, Inc. and The Bank of Nova Scotia as Joint
Lead Arrangers (incorporated herein by reference to Exhibit
10.43 to the Company's Form 10-K filed July 31, 2002).*
10.12 Amendment and Waiver to the Senior Secured Super-Priority
Debtor In Possession Revolving Credit Agreement, dated as of
August 27, 2001 (incorporated herein by reference to Exhibit
10.44 to the Company's Form 10-K filed July 31, 2002).*
10.13 Amendment No. 2 to the Senior Secured Super-Priority Debtor
In Possession Revolving Credit Agreement, dated as of
December 21, 2001 (incorporated herein by reference to
Exhibit 10.45 to the Company's Form 10-K filed July 31,
2002).*
10.14 Amendment No. 3 and Waiver to the Senior Secured
Super-Priority Debtor In Possession Revolving Credit
Agreement, dated as of February 5, 2002 (incorporated herein
by reference to Exhibit 10.46 to the Company's Form 10-K
filed July 31, 2002).*
10.15 Amendment No. 4 and Waiver to the Senior Secured
Super-Priority Debtor In Possession Revolving Credit
Agreement, dated as of May 15, 2002 (incorporated herein by
reference to Exhibit 10.47 to the Company's Form 10-K filed
July 31, 2002).*
10.16 Senior Secured Revolving Credit Agreement, dated as of
February 4, 2003, among Warnaco, the Company, the
Administrative Agent, the Lenders, the Issuing Banks, the
Syndication Agent and Salomon Smith Barney Inc. and J.P.
Morgan Securities, Inc., as joint lead arrangers and joint
lead book managers (incorporated herein by reference to
Exhibit 99.2 to the Company's Form 8-K filed February 10,
2003).*
10.17 Pledge and Security Agreement, dated as of February 4, 2003,
among Warnaco, as a grantor, the Guarantors and Citicorp
North America, Inc., as administrative agent (incorporated
herein by reference to Exhibit 99.3 to the Company's Form
8-K filed February 10, 2003).*
10.18 Intercreditor Agreement, dated as of February 4, 2003, among
the Administrative Agent, the Indenture Trustee, the
Collateral Trustee, Warnaco and the Guarantors (incorporated
herein by reference to Exhibit 99.4 to the Company's Form
8-K filed February 10, 2003).*
10.19 Employment Agreement, dated as of June 11, 2001, between The
Warnaco Group, Inc. and James P. Fogarty (incorporated
herein by reference to Exhibit 10.48 to the Company's Form
10-K filed July 31, 2002).*
10.20 Consent and Amendment No. 1 to the Facility Agreement, dated
as of February 5, 2002 (incorporated herein by reference to
Exhibit 10.49 to the Company's Form 10-K filed July 31,
2002).*
10.21 Amendment No. 1 to the Intercreditor Agreement, dated as of
June 8, 2001 (incorporated herein by reference to Exhibit
10.50 to the Company's Form 10-K filed July 31, 2002).*
10.22 Letter Agreement, dated April 30, 2001, between The Warnaco
Group, Inc. and Alvarez & Marsal, Inc. (incorporated herein
by reference to Exhibit 10.52 to the Company's Form 10-K
filed July 31, 2002).*
10.23 Employment Agreement, dated as of June 11, 2001, between The
Warnaco Group, Inc. and Antonio Alvarez (incorporated herein
by reference to Exhibit 10.53 to the Company's Form 10-K
filed July 31, 2002).*
10.24 Agreement to Extend Amended Employment Agreement between The
Warnaco Group, Inc. and Antonio Alvarez, dated July 16, 2002
(incorporated herein by reference to Exhibit 10.54 to the
Company's Form 10-K filed July 31, 2002).*
</Table>
74
<Table>
10.25 Agreement to Extend Employment Agreement between The Warnaco
Group, Inc. and James P. Fogarty, dated July 19, 2002
(incorporated herein by reference to Exhibit 10.55 to the
Company's Form 10-K filed July 31, 2002).*
10.26 Letter Agreement, dated January 29, 2003, by and between
Alvarez & Marsal, Inc. and The Warnaco Group, Inc.'D'
10.27 Letter Agreement, dated March 18, 2003, by and between
Alvarez & Marsal, Inc. and The Warnaco Group, Inc.'D'#
10.28 Speedo Settlement Agreement, dated November 25, 2002, by and
between Speedo International Limited and Authentic Fitness
Corporation, Authentic Fitness Products, Inc., The Warnaco
Group, Inc. and Warnaco Inc.'D'
10.29 Amendment to the Speedo Licenses, dated as of November 25,
2002, by and among Speedo International Limited, Authentic
Fitness Corporation and Authentic Fitness Products, Inc.'D'#
10.30 Settlement Agreement, dated January 22, 2001, by and between
Calvin Klein Trademark Trust, Calvin Klein, Inc. and Calvin
Klein and Linda Wachner, The Warnaco Group, Inc., Warnaco
Inc., Designer Holdings, Ltd, CKJ Holdings, Inc., Jeanswear
Holdings Inc., Calvin Klein Jeanswear Company and Outlet
Holdings, Inc. (incorporated herein by reference to Exhibit
10.57 to the Company's Form 10-K filed July 31, 2002).*
10.31 License Agreement, dated as of March 1, 2003, by and between
Nautica Apparel, Inc. and Authentic Fitness Corporation.'D'#
10.32 Summary of Key Domestic Employee Retention Plan
(incorporated herein by reference to Exhibit 10.51 to the
Company's Form 10-K filed July 31, 2002).*
10.33 Amended and Restated Master Agreement of Sale, dated as of
September 30, 1998, among Warnaco Inc., as Originator, and
Gregory Street, Inc., as Buyer and Servicer (incorporated
herein by reference to Exhibit 10.4 to the Company's Form
10-Q filed November 16, 1998).*
10.34 Master Agreement of Sale, dated as of September 30, 1998,
among Calvin Klein Jeanswear Company, as Originator, and
Gregory Street, Inc., as Buyer and Servicer (incorporated
herein by reference to Exhibit 10.5 to the Company's Form
10-Q filed November 16, 1998).*
10.35 Purchase and Sale Agreement, dated as of September 30, 1998,
among Gregory Street, Inc., as Seller and initial Servicer
and Warnaco Operations Corporation, as Buyer (incorporated
herein by reference to Exhibit 10.6 to the Company's Form
10-Q filed November 16, 1998).*
10.36 Parallel Purchase Commitment, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller and
certain commercial lending institutions, as the Banks, and
Gregory Street, Inc., as the initial Servicer and The Bank
of Nova Scotia, as Agent (incorporated herein by reference
to Exhibit 10.7 to the Company's Form 10-Q filed November
16, 1998).*
10.37 Receivables Purchase Agreement, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller,
Gregory Street, Inc., as Servicer, Liberty Street Funding
Corp., and Corporate Asset Funding Company, Inc. as
Investors and The Bank of Nova Scotia, as Agent, and
Citicorp North America, Inc., as Co-Agent (incorporated
herein by reference to Exhibit 10.8 to the Company's Form
10-Q filed November 16, 1998).*
10.38 Settlement Agreement, dated November 15, 2002, by and among
Linda J. Wachner, the Debtors, the Bank of Nova Scotia and
Citibank, N.A. in their capacity as Debt Coordinators for
the Debtors' Prepetition Secured Lenders and the Official
Committee of Unsecured Creditors of the Debtors.'D'
21 Subsidiaries of the Company.'D'
99.1 Certificate of CEO and CFO pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.'D'
</Table>
- ---------
* Previously filed
'D' Filed herewith
# Certain information omitted pursuant to a request for confidential treatment
filed separately with the Securities and Exchange Commission.
(b) Reports on Form 8-K.
75
On December 10, 2002, the Company filed a Current Report on Form 8-K dated
December 9, 2002. The Form 8-K reported at Item 5 the financial results of the
Debtors as filed with the Bankruptcy Court for period commencing October 6, 2002
and ending November 2, 2002.
On January 7, 2003, the Company filed a Current Report on Form 8-K dated
January 7, 2003. The Form 8-K reported at Item 5 the financial results of the
Debtors as filed with the Bankruptcy Court for period commencing November 3,
2002 and ending November 30, 2003.
On January 16, 2003, the Company filed a Current Report on Form 8-K dated
January 16, 2003. The Form 8-K reported at Item 5 that the Company issued a
press release stating that the Bankruptcy Court had confirmed the First Amended
Plan of Reorganization of the Company and certain of its subsidiaries.
On January 27, 2003, the Company filed a Current Report on Form 8-K dated
January 16, 2003. The Report on Form 8-K reported at Item 3 a summary of the
provisions of the Company's First Amended Plan of Reorganization as approved by
the Bankruptcy Court and related post filing modifications and technical
amendments to the plan.
On February 4, 2003, the Company filed a Current Report on Form 8-K dated
February 4, 2003. The Report on Form 8-K reported at Item 5 the Company's
emergence from reorganization proceedings under Chapter 11 of the United States
Bankruptcy Code.
On February 10, 2003, the Company filed a Current Report on Form 8-K dated
February 4, 2003. The Report on Form 8-K reported at Item 5 that in conjunction
with the Company's emergence from Bankruptcy, the Company filed a Form 8-A/A
registering certain securities distributed pursuant to the Company's approved
plan of reorganization. The Form 8-K also reported that the Company's New Common
Stock was approved for listing on the NASDAQ National Stock Market and that the
Company entered into certain credit, trust and other agreements related to its
emergence from bankruptcy protection. In addition, the Current Report on Form
8-K noted the Company's filing of its Amended and Restated Certificate of
Incorporation.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 4th day of
April, 2003.
THE WARNACO GROUP, INC.
By: /S/ ANTONIO C. ALVAREZ II
..................................
ANTONIO C. ALVAREZ II
DIRECTOR, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STUART D. BUCHALTER Non-Executive Chairman of the Board April 4, 2003
.........................................
STUART D. BUCHALTER
/s/ ANTONIO C. ALVAREZ II Director, President and Chief April 4, 2003
......................................... Executive Officer (Principal
ANTONIO C. ALVAREZ II Executive Officer)
/s/ JAMES P. FOGARTY Director, Senior Vice President- April 4, 2003
......................................... Finance and Chief Financial
JAMES P. FOGARTY Officer (Principal Financial and
Accounting Officer)
/s/ RICHARD KARL GOELTZ Director April 4, 2003
.........................................
RICHARD KARL GOELTZ
/s/ HARVEY GOLUB Director April 4, 2003
.........................................
HARVEY GOLUB
</Table>
77
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Antonio C. Alvarez II, certify that:
1. I have reviewed this annual report on Form 10-K of The Warnaco Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the 'Evaluation Date'); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
<Table>
Date: April 4, 2003 By: /S/ ANTONIO C. ALVAREZ II
.............................................
ANTONIO C. ALVAREZ II
CHIEF EXECUTIVE OFFICER
</Table>
78
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, James P. Fogarty, certify that:
1. I have reviewed this annual report on Form 10-K of The Warnaco Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the 'Evaluation Date'); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
<Table>
Date: April 4, 2003 By: /S/ JAMES P. FOGARTY
.............................................
JAMES P. FOGARTY
CHIEF FINANCIAL OFFICER
</Table>
79
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
THE WARNACO GROUP, INC.
We have audited the accompanying consolidated balance sheets of The Warnaco
Group, Inc. (Debtor-in-Possession) and its subsidiaries (the 'Company') as of
January 4, 2003 and January 5, 2002, and the related consolidated statements of
operations, stockholders' deficiency and comprehensive loss and of cash flows
for each of the three years in the period ended January 4, 2003. Our audits also
included the financial statement schedule listed in the Index at Item 15(a) 2.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Warnaco Group, Inc.
(Debtor-in-Possession) and its subsidiaries as of January 4, 2003 and January 5,
2002, and the results of their operations and their cash flows for each of the
three years in the period ended January 4, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
January 5, 2002, the Company changed its method of accounting for goodwill and
other intangible assets to conform to Statement of Financial Accounting
Standards No. 142, 'Goodwill and Other Intangible Assets'.
As discussed in Note 1 to the consolidated financial statements, effective
January 2, 2000, the Company changed its method of accounting for its retail
outlet store inventory.
As discussed in Note 1, The Warnaco Group, Inc. and certain of its
subsidiaries have filed for reorganization under Chapter 11 of the Federal
Bankruptcy Code. The accompanying consolidated financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such financial statements do not purport to show (a)
as to assets, their net realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to pre-petition liabilities, the
amounts that may be allowed for claims or contingencies, or the status or
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company or; (d) as to operations, the
effect of any changes that may be made in its business. On January 16, 2003, the
Bankruptcy Court entered an order confirming the plan of reorganization which
became effective on February 4, 2003. Under the plan of reorganization, the
Company is required to comply with certain terms and conditions as more fully
described in Note 1.
DELOITTE & TOUCHE LLP
New York, New York
March 12, 2003
F-1
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCLUDING SHARE DATA)
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
ASSETS
Current assets:
Cash.................................................... $ 39,558 $ 114,025
Restricted cash......................................... -- 6,100
Accounts receivable, less reserves of $112,918 -- 2001
and $87,512 -- 2002................................... 282,387 199,817
Inventories, less reserves of $50,097 -- 2001 and
$33,816 -- 2002....................................... 418,902 345,268
Prepaid expenses and other current assets............... 36,988 31,438
Assets held for sale.................................... 31,066 1,458
Deferred income taxes................................... -- 2,972
----------- -----------
Total current assets................................ 808,901 701,078
----------- -----------
Property, plant and equipment -- net........................ 212,129 156,712
Other assets:
Licenses, trademarks, intangible and other assets, at
cost, less accumulated amortization of
$108,067 -- 2001 and $19,069 -- 2002.................. 271,500 90,090
Goodwill, less accumulated amortization of
$101,094 -- 2001...................................... 692,925 --
----------- -----------
Total other assets.................................. 964,425 90,090
----------- -----------
$ 1,985,455 $ 947,880
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt....................... $ 2,111 $ 5,765
Debtor-in-possession revolving credit facility.......... 155,915 --
Accounts payable........................................ 84,764 103,630
Accrued liabilities..................................... 105,278 92,661
Accrued income taxes payable............................ 14,505 28,420
----------- -----------
Total current liabilities........................... 362,573 230,476
----------- -----------
Other long-term liabilities............................... 31,754 81,202
Long-term debt............................................ 2,207 1,252
Liabilities subject to compromise........................... 2,435,075 2,486,082
Deferred income taxes....................................... 5,130 4,964
Commitments and Contingencies
Stockholders' deficiency:
Class A Common Stock, $0.01 par value, 130,000,000
shares authorized, 65,232,594 issued in 2001 and
2002.................................................. 654 654
Additional paid-in capital.............................. 909,054 908,939
Accumulated other comprehensive loss.................... (53,016) (93,223)
Deficit................................................. (1,393,674) (2,358,537)
Treasury stock, at cost -- 12,242,629 shares -- 2001 and
2002.................................................. (313,889) (313,889)
Unearned stock compensation............................. (413) (40)
----------- -----------
Total stockholders' deficiency...................... (851,284) (1,856,096)
----------- -----------
$ 1,985,455 $ 947,880
----------- -----------
----------- -----------
</Table>
See Notes to Consolidated Financial Statements
F-2
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
<Table>
<Caption>
FOR THE YEARS ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Net revenues............................................. $2,249,936 $1,671,256 $1,492,956
Cost of goods sold....................................... 1,845,389 1,374,382 1,052,661
---------- ---------- ----------
Gross profit............................................. 404,547 296,874 440,295
Selling, general and administrative expenses............. 625,014 598,186 410,954
Impairment charge........................................ -- 101,772 --
Reorganization items..................................... -- 177,791 116,682
---------- ---------- ----------
Operating loss........................................... (220,467) (580,875) (87,341)
Investment income (loss), net............................ 36,882 (6,556) 62
Interest expense (contractual interest of
$221,557 -- 2001 and $180,237 -- 2002)................. 172,232 122,752 22,048
---------- ---------- ----------
Loss before provision for income taxes and cumulative
effect of change in accounting principle............... (355,817) (710,183) (109,327)
Provision for income taxes............................... 21,044 150,970 53,914
---------- ---------- ----------
Loss before cumulative effect of a change in accounting
principle.............................................. (376,861) (861,153) (163,241)
Cumulative effect of change in accounting principle (net
of income tax benefits of $8,577 -- 2000 and
$53,513 -- 2002)....................................... (13,110) -- (801,622)
---------- ---------- ----------
Net loss................................................. $ (389,971) $ (861,153) $ (964,863)
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted loss per common share:
Loss before accounting change........................ $ (7.14) $ (16.28) $ (3.08)
Cumulative effect of accounting change............... (0.25) -- (15.13)
---------- ---------- ----------
Net loss............................................. $ (7.39) $ (16.28) $ (18.21)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares outstanding used in
computing loss per common share:
Basic and diluted.................................... 52,783 52,911 52,990
---------- ---------- ----------
---------- ---------- ----------
</Table>
See Notes to Consolidated Financial Statements
F-3
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCLUDING SHARE DATA)
<Table>
<Caption>
ACCUMULATED
CLASS A ADDITIONAL OTHER UNEARNED
COMMON PAID-IN COMPREHENSIVE TREASURY STOCK
STOCK CAPITAL INCOME/(LOSS) DEFICIT STOCK COMPENSATION TOTAL
----- ------- ------------- ------- ----- ------------ -----
Balance at January 1, 2000........ $654 $961,368 $ 24,877 $ (129,592) $(313,138) $(10,984) $ 533,185
Net loss........................... (389,971) (389,971)
Foreign currency translation
adjustments....................... (4,618) (4,618)
Unfunded minimum pension
liability......................... (14,648) (14,648)
Unrealized loss on marketable
securities net of tax............. (680) (680)
-----------
Comprehensive loss................. (409,917)
Adjustment for items included in
net income, net of tax............ (38,681) (38,681)
Shares tendered for withholding tax
on restricted stock............... -- (702) (702)
Dividends declared................. (12,958) (12,958)
Amortization of unearned stock
compensation...................... 787 4,643 5,430
Equity Forward Contract............ (49,172) (49,172)
---- -------- ----------- ----------- --------- -------- -----------
Balance at December 30, 2000....... 654 912,983 (33,750) (532,521) (313,840) (6,341) 27,185
---- -------- ----------- ----------- --------- -------- -----------
Transition adjustments related to
the adoption of accounting
principle......................... 21,744 21,744
Recognition of deferred gain on
interest rate swap................ (21,744) (21,744)
Net loss........................... (861,153) (861,153)
Foreign currency translation
adjustments....................... (1,854) (1,854)
Unrealized gain on marketable
securities, net of tax............ 434 434
Unfunded minimum pension
liability......................... (17,846) (17,846)
-----------
Comprehensive loss................. (880,419)
Shares tendered for withholding tax
on restricted stock............... (49) (49)
Restricted shares forfeited........ (3,929) 3,929 --
Amortization of unearned stock
compensation...................... -- 1,999 1,999
---- -------- ----------- ----------- --------- -------- -----------
Balance at January 5, 2002......... 654 909,054 (53,016) (1,393,674) (313,889) (413) (851,284)
---- -------- ----------- ----------- --------- -------- -----------
Net loss........................... (964,863) (964,863)
Foreign currency translation
adjustments....................... 153 153
Unrealized loss on marketable
securities, net of tax............ (195) (195)
Unfunded minimum pension
liability......................... (40,165) (40,165)
-----------
Comprehensive loss................. (1,005,070)
Restricted shares forfeited........ (115) 115 --
Amortization of unearned stock
compensation...................... 258 258
---- -------- ----------- ----------- --------- -------- -----------
Balance at January 4, 2003......... $654 $908,939 $ (93,223) $(2,358,537) $(313,889) $ (40) $(1,856,096)
---- -------- ----------- ----------- --------- -------- -----------
---- -------- ----------- ----------- --------- -------- -----------
</Table>
See Notes to Consolidated Financial Statements
F-4
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
FOR THE YEARS ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Cash flow from operating activities:
Net loss................................................. $(389,971) $(861,153) $(964,863)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Pre-tax gain on sale of investment.................... (42,782) -- --
Net loss on sale of GJM, Penhaligon's and Ubertech.... -- -- 4,262
Loss on sale of fixed assets.......................... -- 37,061 170
Depreciation and amortization......................... 102,079 97,818 57,419
Provision for receivable allowances................... 262,641 253,943 188,771
Provision for inventory reserves...................... 179,254 74,786 42,354
Cumulative effect of accounting change, net of
taxes............................................... 13,110 -- 801,622
Amortization of deferred financing costs.............. 12,353 19,414 8,508
Interest rate swap income............................. (4,064) (21,355) --
Preferred stock accretion............................. 483 16,613 --
Market value adjustment to Equity Agreements.......... 5,900 6,556 --
Non-cash reorganization items and asset write-downs... 22,704 236,585 52,531
Amortization of unearned stock compensation........... 4,643 1,999 258
Deferred income taxes................................. 17,343 149,691 53,347
Sale of accounts receivable.............................. 53,700 -- --
Repurchase of accounts receivable........................ -- (185,000) --
Accounts receivable...................................... (204,603) (229,306) (109,759)
Inventories.............................................. 38,857 (21,647) 32,731
Prepaid expenses and other current and long term
assets.................................................. 32,401 (5,087) 7,556
Accounts payable and accrued expenses.................... (114,748) 6,241 51,341
--------- --------- ---------
Net cash provided by (used in) operating activities......... (10,700) (422,841) 226,248
--------- --------- ---------
Cash flows from investing activities:
Disposal of fixed assets................................. 2,599 6,213 6,814
Increase in intangibles and other assets................. (9,976) (1,427) --
Purchase of property, plant and equipment................ (110,062) (24,727) (11,238)
Acquisition of businesses, net of cash acquired.......... (2,585) (1,492) --
Proceeds from sale of business units..................... -- -- 20,609
Proceeds from sale of marketable securities.............. 50,432 -- --
--------- --------- ---------
Net cash provided by (used in) investing activities......... (69,592) (21,433) 16,185
--------- --------- ---------
Cash flows from financing activities:
Proceeds from the termination of interest rate swaps..... 26,076 -- --
Borrowings under revolving credit facilities............. 133,724 303,377 --
Borrowings under term loan agreements.................... 15,499 -- --
Borrowings under acquisition loan facility............... 13,800 -- --
Borrowings under foreign credit facilities............... -- 72,842 --
Repayments of acquisition loan facility.................. (12,452) -- --
Repayments of term loan and other pre-petition debt...... (22,079) (36,195) (14,554)
Repayments of foreign credit facilities.................. (18,720) -- --
Repayments of GECC debt.................................. -- -- (3,458)
Repayments of capital lease obligations.................. (2,762) (938) (2,902)
Borrowings (repayments) under DIP facility............... -- 155,915 (155,915)
Cash dividends paid...................................... (14,362) -- --
Payment of withholding taxes on option exercises and
restricted stock vesting................................ (702) (49) --
Purchase of treasury shares and net cash settlements
under Equity Arrangements............................... 1,404 -- --
Deferred Financing Costs................................. (37,314) (19,852) --
Other.................................................... -- (490) --
--------- --------- ---------
Net cash provided by (used in) financing activities......... 82,112 474,610 (176,829)
--------- --------- ---------
Translation adjustment...................................... (72) (1,854) 8,863
--------- --------- ---------
Increase in cash............................................ 1,748 28,482 74,467
Cash at beginning of year................................... 9,328 11,076 39,558
--------- --------- ---------
Cash at end of year......................................... $ 11,076 $ 39,558 $ 114,025
--------- --------- ---------
--------- --------- ---------
</Table>
See Notes to Consolidated Financial Statements
F-5
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: The Warnaco Group, Inc. was incorporated in Delaware on
March 14, 1986 and on May 10, 1986 acquired substantially all of the outstanding
shares of Warnaco Inc. ('Warnaco'). Warnaco is the principal operating
subsidiary. The Warnaco Group, Inc. and Warnaco were reorganized under
Chapter 11 of the Bankruptcy Code effective February 4, 2003.
Nature of Operations: The Warnaco Group, Inc. and its subsidiaries
(collectively, the 'Company') design, manufacture, source and market a broad
line of (i) intimate apparel (including bras, panties, sleepwear, loungewear,
shapewear and daywear for women, and underwear and sleepwear for men);
(ii) sportswear for men, women and juniors (including jeanswear, khakis, knit
and woven shirts, tops and outerwear); and (iii) swimwear for men, women,
juniors and children (including swim accessories and fitness and active
apparel). The Company's products are sold under a number of internationally
known owned or licensed brand names. The Company offers a diversified portfolio
of brands across multiple distribution channels to a wide range of customers.
The Company distributes its products worldwide to wholesale customers through a
variety of channels, including department and specialty stores, independent
retailers, chain stores, membership clubs and mass merchandisers. The Company
also sells its products directly to consumers through 76 retail stores,
including 45 Company-operated Speedo Authentic Fitness full price retail stores
in North America, two outlet retail stores in Canada, five Calvin Klein
underwear full price retail stores in Europe, 11 Calvin Klein underwear full
price retail stores in Asia and 13 Warnaco outlet retail stores in Europe.
Basis of Consolidation and Presentation: The accompanying consolidated
financial statements include the accounts of the Company for the years ended
December 30, 2000 ('Fiscal 2000'), January 5, 2002 ('Fiscal 2001') and
January 4, 2003 ('Fiscal 2002'). All inter-company accounts and transactions are
eliminated in consolidation. The accompanying consolidated financial statements
have been prepared in accordance with the American Institute of Certified Public
Accountants Statement of Position No. 90-7 Financial Reporting by Entities in
Reorganization under the Bankruptcy Code ('SOP 90-7').
Chapter 11 Cases. On June 11, 2001 (the 'Petition Date'), The Warnaco Group,
Inc. and certain of its subsidiaries (each a 'Debtor' and, collectively, the
'Debtors') each filed a voluntary petition for relief under Chapter 11 of the
U.S. Bankruptcy Code, 11 U.S.C. 'SS'SS' 101-1330, as amended (the 'Bankruptcy
Code'), in the United States Bankruptcy Court for the Southern District of New
York (the 'Bankruptcy Court') (collectively the 'Chapter 11 Cases'). The Warnaco
Group, Inc., 36 of its 37 U.S. subsidiaries and one of the Company's Canadian
subsidiaries, Warnaco of Canada Company ('Warnaco Canada') were Debtors in the
Chapter 11 Cases. The remainder of the Company's foreign subsidiaries were not
debtors in the Chapter 11 Cases, nor were they subject to foreign bankruptcy or
insolvency proceedings.
As a result of the Chapter 11 Cases and the circumstances leading to the
filing thereof, as of January 4, 2003, the Company was not in compliance with
certain financial and bankruptcy covenants contained in certain of its license
agreements. Under applicable provisions of the Bankruptcy Code, compliance with
such terms and conditions in executory contracts generally were either excused
or suspended during the Chapter 11 Cases. Upon the Company's emergence from
bankruptcy, the Company was in compliance with the terms and covenants of its
license and other agreements.
In the Chapter 11 Cases, substantially all of the Debtors' unsecured
liabilities as of the Petition Date are subject to compromise or other treatment
under a plan or plans of reorganization which must be confirmed by the
Bankruptcy Court after obtaining the requisite amount of votes from affected
parties. For financial reporting purposes, those liabilities have been
segregated and classified as liabilities subject to compromise in the
consolidated condensed balance sheets.
F-6
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
On November 8, 2002, the Debtors filed the First Amended Joint Plan of
Reorganizaton of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtor-In-Possession Under Chapter 11 of the Bankruptcy Code (the 'Plan'). On
January 16, 2003, the Bankruptcy Court entered its (i) Findings of Fact to and
Conclusions of Law Re: Order and Judgment Confirming The First Amended Joint
Plan of Reorganization of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtors-In-Possession Under Chapter 11 of Title 11 of the United States Code,
dated November 8, 2002, and (ii) an Order and Judgment Confirming The First
Amended Joint Plan of Reorganization of The Warnaco Group, Inc. and Its
Affiliated Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of the
United States Code, dated November 8, 2002, and Granting Related Relief (the
'Confirmation Order').
In accordance with the provisions of the Plan and the Confirmation Order,
the Plan became effective on February 4, 2003 and the Company entered into the
$275,000 Senior Secured Revolving Credit Facility (the 'Exit Financing
Facility'). The Exit Financing Facility provides for a four-year, non-
amortizing revolving credit facility. The Exit Financing Facility includes
provisions that allow the Company to increase the maximum available borrowing
from $275,000 to $325,000, subject to certain conditions (including obtaining
the agreement of existing or new lenders to commit to lend the additional
amount). Borrowings under the Exit Financing Facility currently bear interest at
Citibank's base rate plus 1.50% or at the London Interbank Offered Rate
('LIBOR') plus 2.50%. Pursuant to the terms of the Exit Financing Facility, the
interest rate the Company will pay on its outstanding loans will decrease by as
much as 1/2% in the event the Company achieves certain defined ratios. The Exit
Financing Facility contains financial covenants that, among other things,
require the Company to maintain a fixed charged coverage ratio above a minimum
level, a leverage ratio below a maximum level and limit the amount of the
Company's capital expenditures. In addition, the Exit Financing Facility
contains certain covenants that, among other things, limit investments and asset
sales, prohibit the payment of dividends and prohibit the Company from incurring
material additional indebtedness. Initial borrowings under the Exit Financing
Facility on February 4, 2003 were $39,200. The Exit Financing Facility is
secured by substantially all of the domestic assets of the Company. The Exit
Financing Facility replaced the Amended DIP (as defined below) which is
discussed in Note 14.
In accordance with the Plan, on February 4, 2003, the Company issued Second
Lien Notes to pre-petition creditors and others in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 1145(a) of the Bankruptcy Code. The aggregate principal amount of the
New Warnaco Second Lien Notes due 2008 (the 'Second Lien Notes') issued totaled
$200,942. The Second Lien Notes mature on February 4, 2008, subject, in certain
instances, to earlier repayment in whole or in part. The Second Lien Notes bear
a per annum interest rate which is the higher of (i) 9.5% plus a margin
(initially 0% and beginning on July 4, 2003, 0.5% is added to the margin every
six months) and (ii) LIBOR plus a margin (initially 5%, and beginning on
July 4, 2003, 0.5% is added to the margin every six months). The indenture
pursuant to which the Second Lien Notes were issued contains certain covenants
that, among other things, limit investments and asset sales, prohibits the
payment of cash dividends and prohibit the Company from incurring material
additional indebtedness. The Second Lien Notes are guaranteed by most of the
Company's domestic subsidiaries, and the obligations under such guarantee,
together with the Company's obligations under the Second Lien Notes, are secured
by a second priority lien on substantially the same assets which secure the Exit
Financing Facility.
Set forth below is a summary of certain material provisions of the Plan.
Among other things, as described below, the Plan resulted in the cancellation of
the Company's Class A Common Stock, par value $0.01 per share (the 'Old Common
Stock'), issued prior to the Petition Date. The holders of Old Common Stock did
not receive any distribution on account of the Old Common Stock under the Plan.
The Company, as reorganized under the Plan, issued 45,000,000 shares of common
stock, par value $0.01 per share (the 'New Common Stock'), which was distributed
to pre-petition creditors as specified
F-7
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
below. In addition, 5,000,000 shares of New Common Stock of the Company were
reserved for issuance pursuant to management incentive stock grants. On
March 12, 2003, subject to approval by the stockholders of the Company's
proposed 2003 Management Incentive Plan, the Company authorized the grant of
750,000 shares of restricted stock and options to purchase 3,000,000 of New
Common Stock at the fair market value on the date of grant. The Plan also
provided for the issuance by the Company of $200,942 of New Warnaco Second Lien
Notes due 2008 (the 'Second Lien Notes') to pre-petition creditors and others as
specified below, secured by a second priority security interest in substantially
all of the Debtors' domestic assets and guaranteed by the Company and its
domestic subsidiaries.
The following is a summary of distributions pursuant to the Plan:
(i) the Old Common Stock, including all stock options and restricted shares,
was extinguished, and holders of the Old Common Stock received no
distribution on account of the Old Common Stock;
(ii) general unsecured claimants will receive approximately 2.55% (1,147,050
shares) of the New Common Stock which the Company expects to distribute
in the second quarter of fiscal 2003;
(iii) the Company's pre-petition secured lenders received their pro-rata
share of approximately $106,112 in cash, Second Lien Notes in the
principal amount of $200,000 and approximately 96.26% (43,318,350
shares) of the New Common Stock;
(iv) holders of claims arising from or related to certain preferred
securities received approximately 0.60% of the New Common Stock
(268,200 shares);
(v) pursuant to the terms of his employment agreement, as modified by the
Plan, Antonio C. Alvarez II, the President and Chief Executive Officer
of the Company, received an incentive bonus consisting of approximately
$1,950 in cash, Second Lien Notes in the principal amount of
approximately $942 and approximately 0.59% of the New Common Stock
(266,400 shares); and
(vi) in addition to the foregoing, allowed administrative and certain
priority claims were paid in full in cash.
Reorganization and administrative expenses related to the Chapter 11 Cases
have been separately identified in the consolidated statement of operations as
reorganization items through January 4, 2003. The Company expects to recognize
additional reorganization items in fiscal 2003.
During the course of the Chapter 11 Cases, the Company obtained Bankruptcy
Court authorization to sell assets and settle liabilities for amounts other than
those reflected in the consolidated financial statements. Management evaluated
the Company's operations and identified assets for potential disposition. From
the Petition Date, through January 4, 2003, the Company sold certain personal
property, certain owned buildings and land and other assets, including certain
inventory of its domestic outlet retail stores, generating net proceeds of
approximately $36,256 of which approximately $30,043 was generated during Fiscal
2002 (collectively, the 'Asset Sales'). The Asset Sales did not result in a
material gain or loss since the Company had previously written-down assets
identified for potential disposition to their estimated net realizable value.
Substantially all of the net proceeds from the Asset Sales were used to reduce
outstanding borrowings under the Amended DIP or provide collateral for
outstanding trade and standby letters of credit. In Fiscal 2002, the Company
closed all of its domestic outlet retail stores. The closing of the outlet
retail stores and the related sale of inventory at approximately net book value
generated approximately $23,200 of net proceeds through January 4, 2003, which
were used to reduce amounts outstanding under the Amended DIP or to provide
collateral for outstanding trade letters of credit.
In addition, during the first quarter of Fiscal 2002, the Company sold the
business and substantially all of the assets of GJM Manufacturing Ltd. ('GJM'),
a private label manufacturer of women's sleepwear, and Penhaligon's Ltd.
('Penhaligon's'), a United Kingdom-based retailer of perfumes, soaps,
F-8
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
toiletries and other products. The sales of GJM and Penhaligon's generated
aggregate net proceeds of approximately $20,459 and an aggregate net loss on the
sales of approximately $2,897. Proceeds from the sale of GJM and Penhaligon's
were used to: (i) reduce amounts outstanding under certain debt agreements of
the Company's foreign subsidiaries which were not part of the Chapter 11 Cases
(approximately $4,800); (ii) reduce amounts outstanding under the Amended DIP
(approximately $4,200); (iii) create an escrow fund (subsequently disbursed in
June 2002) for the benefit of pre-petition secured lenders (approximately
$9,400); and (iv) create an escrow fund (subsequently returned to the Company in
February 2003) for the benefit of the purchasers of GJM and Penhaligon's for
potential indemnification claims and for any working capital valuation
adjustments (approximately $1,700). In September 2002, the Company sold other
assets generating approximately $150 of net proceeds and a loss on the sale of
approximately $1,365.
Changes in accounting principles: Effective January 6, 2002, the Company
adopted Statement of Financial Accounting Standards ('SFAS') No. 142 Goodwill
and Other Intangible Assets ('SFAS 142'). SFAS 142 addresses the financial
accounting and reporting for acquired goodwill and other intangible assets with
indefinite lives. As a result of adopting SFAS 142, goodwill and a substantial
amount of the Company's intangible assets are no longer amortized. During Fiscal
2002, the Company completed its impairment review (see Note 12).
Effective January 2, 2000, the Company changed its accounting method for
valuing its retail outlet store inventory. Prior to the change, the Company
valued its retail inventory using average cost. Under its new method, the
Company values its retail inventory using the actual cost method. 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 to
increase net loss by $13,110, net of tax of $8,577.
Use of Estimates: The Company uses estimates and assumptions in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements. These estimates and assumptions also affect the reported amounts of
revenues and expenses. Actual results could materially differ from these
estimates. The estimates the Company makes are based upon historical factors,
current circumstances and the experience and judgment of the Company's
management. The Company evaluates its assumptions and estimates on an ongoing
basis and may employ outside experts to assist in the Company's evaluations. The
Company believes that the use of estimates affects the application of all of the
Company's accounting policies and procedures.
Revenue recognition. The Company recognizes revenue when the goods are
shipped to customers and title and risk of loss has passed to the customers, net
of allowances for returns and other discounts. The Company recognizes revenue
from its retail stores when goods are sold to customers.
Accounts receivable. The Company maintains reserves for estimated amounts
that the Company does not expect to collect from its trade customers. Accounts
receivable reserves include amounts the Company expects its customers to deduct
for trade discounts, other promotional activity, amounts for accounts that go
out of business or seek the protection of the Bankruptcy Code and amounts
related to charges in dispute with customers. The Company's estimate of the
allowance amounts that are necessary includes amounts for specific deductions
the Company has authorized and an amount for other estimated losses. The
provision for accounts receivable allowances is affected by general economic
conditions, the financial condition of the Company's customers, the inventory
position of the Company's customers, sell-through of the Company's products by
these customers and many other factors most of which are not controlled by the
Company or its management. As of January 4, 2003, the Company had $276,889 of
open trade invoices and other receivables and $10,440 of outstanding debit
memos. Based
F-9
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
upon the Company's analysis of estimated recoveries and collections associated
with the related invoices and debit memos, the Company had $87,512 of accounts
receivable reserves. As of January 5, 2002, the Company had $361,530 of open
trade invoices and other receivables and $33,775 of outstanding debit memos.
Based upon the Company's analysis of estimated recoveries and collections
associated with the related invoices and debit memos, the Company had $112,918
of accounts receivable reserves. The determination of the amount of the accounts
receivable reserve is subject to significant levels of judgment and estimation
by the Company's management. If circumstances change or economic conditions
deteriorate, the Company may need to increase the reserve significantly. The
Company has purchased credit insurance to help mitigate the potential losses it
may incur from the bankruptcy, reorganization or liquidation of some of its
customers.
Inventories. The Company values its inventories at the lower of cost,
determined on a first-in first-out basis, or market value. The Company includes
certain design, procurement, receiving and other product-related costs in its
determination of inventory cost. Such costs amounted to approximately $54,600
and $30,200 at January 5, 2002 and January 4, 2003, respectively. The Company
evaluates its inventories to determine excess units or slow-moving styles based
upon quantities on hand, orders in house and expected future orders. For those
items for which the Company believes it has an excess supply or for styles or
colors that are obsolete, the Company estimates the net amount that the Company
expects to realize from the sale of such items. The Company's objective is to
recognize projected inventory losses at the time the loss is evident rather than
when the goods are ultimately sold. As of January 4, 2003, the Company had
identified inventory with a carrying value of approximately $61,500 as
potentially excess and/or obsolete. Based upon the estimated recoveries related
to such inventory, as of January 4, 2003, the Company had approximately $33,816
of inventory reserves for excess, obsolete and other inventory adjustments. As
of January 5, 2002, the Company had identified inventory with a carrying value
of approximately $88,300 as potentially excess and/or obsolete. Based upon the
estimated recoveries related to such inventory, as of January 5, 2002, the
Company had approximately $50,097 of inventory reserves for excess, obsolete and
other inventory adjustments.
Long-Lived Assets. The Company reviews its long-lived assets for possible
impairment when events or circumstances indicate that the carrying value of the
assets may not be recoverable. Assumptions and estimates used in the evaluation
of impairment may affect the carrying value of long-lived assets, which could
result in impairment charges in future periods. In addition, depreciation and
amortization expense is affected by the Company's determination of the estimated
useful lives of the related assets.
Income Taxes. The provision for income taxes, income taxes payable and
deferred income taxes are determined using the liability method. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
enacted tax rates and laws to taxable years in which such differences are
expected to reverse. A valuation allowance is provided when the Company
determines that it is more likely than not that a portion of the deferred tax
asset balance will not be realized.
Provision for U.S. income taxes on unremitted earnings of foreign
subsidiaries is made only on those amounts in excess of the funds considered to
be permanently reinvested.
Pension Plan. The Company has a defined benefit pension plan (the 'Pension
Plan') covering substantially all full-time non-union and certain union domestic
employees. The determination of the total amount of liability attributable to
benefits owed to participants covered by the Pension Plan and the amount of
pension expenses recorded by the Company related to the Pension Plan are
determined by the Pension Plan's third party actuary as of the first day of the
fiscal year using assumptions provided by the Company. The assumptions used can
have a significant impact on the amount of pension expense and pension liability
recorded by the Company. The Pension Plan actuary also determines the annual
cash contribution to the Pension Plan using assumptions defined by the Pension
Benefit Guaranty
F-10
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Corporation (the 'PBGC'). The Pension Plan was under-funded as of January 4,
2003 and January 5, 2002. The Pension Plan contemplates that the Company will
continue to fully fund its minimum required contributions and any other premiums
due under ERISA and the Internal Revenue Code. The amount of pension
contributions that is deductible for Federal income tax purposes is also
determined by the Pension Plan actuary using assumptions defined by the Internal
Revenue Service (the 'IRS') and other regulatory agencies. Effective January 1,
2003, the Pension Plan was amended and as a result no future benefits will
accrue to participants under the Pension Plan. This amendment resulted in a
curtailment of the Pension Plan and a reduction in the total liability
determined by the Pension Plan actuary of approximately $8,897 as of January 4,
2003. The Company's cash contribution to the Pension Plan for fiscal 2003 will
be approximately $9,320 and is estimated to be approximately $27,704 over the
next five years. The amount of cash contribution the Company will be required to
make to the Pension Plan could increase or decrease depending upon the actual
return that the Pension Plan assets earn compared to the estimated rate of
return on Pension Plan assets of 7%.
Translation of Foreign Currencies: Cumulative translation adjustments,
arising primarily from consolidating the net assets and liabilities of the
Company's foreign operations at current rates of exchange as of the respective
balance sheet date, are applied directly to stockholders' deficiency and are
included as part of accumulated other comprehensive loss. Income and expense
items for the Company's foreign operations are translated using monthly average
exchange rates.
Marketable Securities: Marketable securities are stated at fair value based
on quoted market prices. Marketable securities are classified as
available-for-sale with any unrealized gains or losses, net of tax, included as
a component of stockholders' deficiency and included in other comprehensive
loss.
Assets held for sale: The Company classifies assets to be sold as assets
held for sale. Assets held for sale are reported at the lower of their carrying
amount or estimated fair value less selling costs. Assets held for sale at
January 5, 2002 include accounts receivable, inventories, prepaid expenses,
fixed assets and other assets of GJM and Penhaligon's and other assets
identified for disposition. Assets held for sale at January 4, 2003 include
certain land, buildings and other assets identified for disposition.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided over the lesser of the estimated useful lives of the
asset or terms of the lease, using the straight-line method, as summarized
below:
<Table>
Buildings...................................... 20 - 40 years
Building improvements.......................... 2 - 20 years
Machinery and equipment........................ 3 - 10 years
Furniture and fixtures......................... 7 - 10 years
Computer hardware.............................. 3 - 5 years
Computer software.............................. 3 - 7 years
</Table>
Depreciation and amortization expense was $62,148, $60,890 and $56,497 for
Fiscal 2000, 2001 and 2002, respectively.
Computer Software Costs: Internal and external costs incurred in developing
or obtaining computer software for internal use are capitalized in property,
plant and equipment in accordance with SOP 98-1 'Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use' and related guidance
and are amortized on a straight-line basis, over the estimated useful life of
the software (3 to 7 years). General and administrative costs related to
developing or obtaining such software are expensed as incurred.
Intangible and Other Assets: Intangible and other assets consisted of
goodwill, licenses, trademarks, deferred financing costs and other intangible
assets as of January 5, 2002. Intangible assets consist of
F-11
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
licenses and trademarks at January 4, 2003. Goodwill represents the excess of
cost over net assets acquired from business acquisitions. The Company performs
an annual impairment test for goodwill and intangible assets. Goodwill was
allocated to various reporting units, which are either the operating segment or
one reporting level below the operating segment. The Company's reporting units
for purposes of applying the provisions of SFAS 142 are: Warner's'r'/Olga'r'/
Body by Nancy Ganz'TM'/Bodyslimmers'r', Calvin Klein'r' underwear, Lejaby'r',
White Stag'r'/Catalina'r', Calvin Klein'r' jeans, A.B.S. by Allen Schwartz'r',
Chaps Ralph Lauren'r' and Swimwear. SFAS 142 requires the Company to compare
the fair value of the reporting unit to its carrying amount on an annual basis
to determine if there is potential impairment. If the fair value of the
reporting unit is less than its carrying value, an impairment loss is
recorded to the extent that the implied fair value of the goodwill within the
reporting unit is less than its carrying value. If the carrying amount of the
intangible asset with an indefinite life exceeds its fair value, an impairment
loss is recognized. Fair values for goodwill and intangible assets are
determined based on discounted cash flows, market multiples or appraised values
as appropriate.
Identified intangible assets with finite lives are amortized on a
straight-line basis over their estimated useful lives. Deferred financing costs
are amortized over the life of the related debt, using the interest method and
included in interest expense.
Advertising Costs: Advertising costs are included in selling, general and
administrative expenses and are expensed when the advertising or promotion is
published or presented to consumers. Cooperative advertising allowances provided
to customers are charged to operations as incurred and included in selling,
general and administrative expenses. The amounts charged to operations for
advertising (including cooperative advertising), marketing and promotion
expenses during Fiscal 2000, 2001 and 2002 were $141,340, $138,407 and $108,076,
respectively.
Shipping and Handling Costs: Shipping and handling costs included in the
statement of operations are expensed as incurred. The amounts charged to
operations for shipping and handling costs during Fiscal 2000, 2001 and 2002
were $64,888, $76,085 and $71,510, respectively.
Reorganization Items: Reorganization items relate to expenses incurred and
amounts accrued as a direct result of the Chapter 11 Cases and include certain
impairment losses, professional fees, facility shutdown costs, employee
severance payments, employee retention payments, lease termination accruals, and
other items. Reorganization items are separately identified on the consolidated
statement of operations.
Stock Based Compensation: The Company follows the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, 'Accounting for
Stock-Based Compensation' ('SFAS 123'). SFAS 123 encourages, but does not
require, companies to adopt a fair value based method for determining expense
related to stock option compensation. The Company continues to account for
stock-based compensation for employees using the intrinsic value method as
prescribed by Accounting Principles Board Opinion No. 25, 'Accounting for Stock
Issued to Employees ('APB 25')' and related Interpretations. Under APB 25, no
compensation expense is recognized for employee share option grants because the
exercise price of the options granted to date has equaled the market price of
the underlying shares on the date of grant (the 'intrinsic value method'). The
following table illustrates the effect on net loss and net loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation for the years ended December 30, 2000,
January 5, 2002 and January 4, 2003, respectively.
F-12
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Reported net loss................................. $(389,971) $(861,153) $(964,863)
Less: Total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of tax:............. (18,267) (12,250) (6,996)
--------- --------- ---------
Pro forma net loss................................ $(408,238) $(873,403) $(971,859)
--------- --------- ---------
--------- --------- ---------
Net loss per share
Reported
Basic and diluted......................... $ (7.39) $ (16.28) $ (18.21)
--------- --------- ---------
--------- --------- ---------
Pro forma
Basic and diluted......................... $ (7.73) $ (16.51) $ (18.34)
--------- --------- ---------
--------- --------- ---------
</Table>
The fair values of these stock options were estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions:
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Risk-free interest rate............................ 5.24% 4.50% n/a
Dividend yield..................................... -- -- n/a
Expected volatility of market price of Company's
Common Stock..................................... 54.50% 104.64% n/a
Expected option life............................... 5 years 5 years n/a
</Table>
Pro forma compensation expense reflected for prior periods is not indicative
of future compensation expense that would be recorded by the Company if it
adopted the fair value based recognition provisions of SFAS 123. Future pro
forma expense may vary based upon factors such as the number of awards granted
by the Company and the then-current fair market value of such awards.
Detailed information for activity in the Company's stock plans can be found
in Note 17.
Financial Instruments: Derivative financial instruments were used by the
Company in the management of its interest rate and foreign currency exposures
prior to the Petition Date. The Company also used derivative financial
instruments to execute purchases of its shares under its stock buyback program.
The Company does not use derivative financial instruments for speculation or for
trading purposes. Gains and losses realized prior to the Petition Date on
termination of interest rate swap contracts were deferred and amortized over the
remaining terms of the original hedging relationship.
A number of major international financial institutions are counterparties to
the Company's financial instruments and letters of credit. The Company monitors
its positions with, and the credit quality of, these counterparty financial
institutions and does not anticipate non-performance of these counter parties.
Management believes that the Company would not suffer a material loss in the
event of nonperformance by these counterparties.
Equity Instruments Indexed to the Company's Common Stock: Prior to
September 19, 2000, equity instruments indexed to the Company's Old Common Stock
(the 'Equity Agreements') were recorded at fair value. Proceeds received under
net share settlements or amounts paid upon the purchase of such equity
instruments were recorded as a component of stockholders' deficiency. Subsequent
changes in the fair value of the Equity Agreements were not recorded.
Repurchases of common stock pursuant to the terms of the Equity Agreements were
recorded as treasury stock. On September 19, 2000, the
F-13
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Company amended its Equity Agreements and elected to cash settle a portion of
its obligation to the bank through notes payable. As a result, the Company
recorded notes payable ('Equity Agreement Notes') in an amount equal to the
difference between the forward equity price of the Company's Old Common Stock
and the fair value of the Company's Old Common Stock. The recognition of the
Equity Agreement Notes was recorded as an adjustment to stockholders'
deficiency. On October 6, 2000, the Company amended its outstanding credit
agreements and recorded an adjustment to increase the balance of the Equity
Agreement Notes based upon the change in fair value of the Company's Old Common
Stock. Changes in the fair value of the equity instruments after October 6, 2000
through the Petition Date were recorded as a component of operating loss and as
a change in the carrying amount of the related Equity Agreement Notes.
Subsequent to October 6, 2000, the Company was required to cash settle the
Equity Agreements. Since the Petition Date, no changes in the fair value of the
Equity Agreement Notes have been recorded. Equity Agreement Notes are classified
in liabilities subject to compromise as of January 5, 2002 and January 4, 2003
(see Note 15).
Comprehensive Loss: Comprehensive loss consists of net loss, unrealized
gain/(loss) on marketable securities (net of tax), unfunded minimum pension
liability and cumulative foreign currency translation adjustments. Because such
cumulative translation adjustments are considered a component of permanently
invested earnings of foreign subsidiaries, no income taxes are provided on such
amounts.
Start-Up Costs: Pre-operating costs relating to the start-up of new
manufacturing facilities, product lines and businesses are expensed as incurred.
Recent accounting pronouncements: In June 2001, the FASB issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS 143 addresses
financial accounting and reporting obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs. The Company will
adopt the provisions of SFAS 143 for its 2003 fiscal year and does not
expect the adoption of SFAS 143 to have a material impact on the Company's
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). SFAS 145 rescinds the provisions of SFAS 4 that
require companies to classify certain gains and losses from debt extinguishments
as extraordinary items, eliminates the provisions of SFAS 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS 13
to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS 145 related to the classification of debt
extinguishment are effective for the period beginning after May 15, 2002. The
provisions of SFAS 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have
a material impact on the financial position or results of operations of the
Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ('SFAS 146'). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ('EITF') Issue No. 94-3, 'Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring).' SFAS 146
requires that a liability for costs associated with the exit or disposal of an
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002.
The FASB has issued SFAS No. 148 Accounting for Stock-Based Compensation,
Transition and Disclosure ('SFAS 148'). SFAS No. 148 amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of
F-14
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure requirements of SFAS 148. As of
January 4, 2003, the Company accounts for stock-based employee compensation in
accordance with APB Opinion 25, Accounting for Stock Issued to Employees, and
related interpretations.
In November 2002, the FASB issued Interpretation Number 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees. Including Indirect
Guarantees of Indebtedness of Others ('FIN 45'). This interpretation requires
certain disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
interim and annual period beginning after December 15, 2002. The initial
recognition and initial measurement requirements of FIN 45 are effective
prospectively for guarantees issued or modified after December 31, 2002. The
Company does not believe the adoption of the recognition and initial measurement
requirements of FIN 45 will have a material impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51 ('FIN 46'). FIN
46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 explains
how to identify variable interest entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to consolidate that
entity. It requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. It also requires certain disclosures by
the primary beneficiary of a variable interest entity and by an enterprise that
holds significant variable interests in a variable interest entity where the
enterprise is not the primary beneficiary. FIN 46 is effective for variable
interest entities created after January 31, 2003 and to variable interest
entitites in which an enterprise obtains an interest after that date, and
effective for the first fiscal year or interim period beginning after June 15,
2003 to variable interest entitites in which an enterprise holds a variable
interest that it acquired before February 1, 2003. FIN 46 requires an entity to
disclose certain information regarding a variable interest entity, if, when the
Interpretation becomes effective, it is reasonably possible that an enterprise
will consolidate or have to disclose information about that variable interest
entity, regardless of the date on which the variable entity interest was
created. The Company currently does not have any interest in any unconsolidated
entity for which variable interest entity accounting is required and therefore
does not expect FIN 46 to have a material affect on the Company's consolidated
financial statements.
Reclassifications: Certain Fiscal 2000 and 2001 amounts have been
reclassified to conform to the current year presentation.
NOTE 2 -- REORGANIZATION ITEMS
In connection with the Chapter 11 Cases, the Company initiated several
strategic and organizational changes to streamline the Company's operations,
focus on its core businesses, and return the Company to profitability. Many of
the strategic actions are long-term in nature and, though initiated in Fiscal
2001 and Fiscal 2002, will not be completed until the end of fiscal 2003. In
connection with these actions, the Company has closed all of its domestic outlet
retail stores and reorganized its Speedo
F-15
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Authentic Fitness retail stores. The Company closed 204 of the 283 or 72% of the
retail stores it operated at the beginning of Fiscal 2001. In Fiscal 2001, the
Company closed 86 stores and 118 stores were closed during Fiscal 2002. In the
first quarter of fiscal 2003, the Company closed three additional Speedo
Authentic Fitness retail stores. The closing of the domestic outlet retail
stores and the sale of the related inventory generated net proceeds of
approximately $23,200 in Fiscal 2002.
In the first quarter of Fiscal 2002, the Company sold the assets of GJM and
Penhaligon's for net proceeds of approximately $20,459 in the aggregate. The net
loss on the sale of GJM and Penhaligon's was approximately $2,897 and is
included in reorganization items in Fiscal 2002. In Fiscal 2001, the Company
recorded an impairment loss related to the goodwill of GJM of approximately
$26,842.
During Fiscal 2001 and Fiscal 2002, the Company sold certain personal
property, vacated buildings, surplus land and other assets generating net
proceeds of approximately $6,213 and $6,814 respectively, since the Petition
Date. The losses related to the write-down of these assets was approximately
$3,656 and $1,035 for the fiscal years ended January 5, 2002 and January 4,
2003, respectively. The Company has vacated certain leased premises, and
rejected those leases (many related to its Retail Stores Division) under the
provisions of the Bankruptcy Code.
During the fourth quarter of Fiscal 2002, the Company completed a strategic
review of its Intimate Apparel operations in Europe and formalized a plan to
consolidate its European manufacturing operations and to restructure certain
other manufacturing, sales and back office operations in Europe. The Company
expects to incur severance, outplacement, legal, accounting and other expenses
associated with the consolidation covering approximately 350 employees. The
consolidation includes the consolidation of certain manufacturing operations in
France which requires that the Company comply with certain procedures and
processes that are defined in French law and French labor regulations. The
Company has recorded a restructuring charge of $8,657 in the fourth quarter of
Fiscal 2002 reflecting the statutory and regulatory defined severance and other
obligations that the Company will incur related to the consolidation. Included
in the restructuring charge is approximately $113 of legal and other
professional fees incurred in Fiscal 2002 related to the consolidation.
Additional severance costs attributable to negotiated settlements with
individual employees are subject to final negotiation. The Company expects that
all severance, outplacement, legal and other costs attributable to the
consolidation will be fully paid by the end of fiscal 2003. The Company expects
that the ultimate cost of the consolidation that have been incurred and will be
incurred in fiscal 2003 will be between $12,000 and $15,000 including the $8,657
recorded in Fiscal 2002.
As a direct result of the Chapter 11 Cases, the Company has recorded certain
liabilities, incurred certain legal and professional fees, written-down certain
assets and accelerated the recognition of certain deferred charges. The
transactions were recorded in accordance with the provisions of SOP 90-7.
Reorganization items included in the consolidated statements of
operations in Fiscal 2001 and Fiscal 2002 were $177,791 and $116,682,
respectively. Included in reorganization items are certain non-cash asset
impairment provisions and accruals for items that have been, or will be, paid in
cash. In addition, certain accruals are subject to compromise under the
provisions of the Bankruptcy Code. The Company has recorded these accruals at
the estimated amount the creditor is entitled to claim under the provisions of
the Bankruptcy Code. The ultimate amount of and settlement terms for such
liabilities are detailed in the Plan.
F-16
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FISCAL YEARS ENDED
-----------------------
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Legal & professional fees................................... $ 24,206 $ 27,734
Employee contracts and retention............................ 8,728 25,571
GECC lease settlement....................................... -- 22,898
Write-off of fixed assets related to retail stores closed... 6,105 13,250
Facility shutdown costs..................................... 8,440 9,201
Lease terminations.......................................... 20,591 9,352
Sales of Penhaligon's, GJM and Ubertech..................... -- 4,262
Employee benefit costs related to plant closings............ 821 3,068
Aviation and other assets................................... 1,650 1,176
Losses from write-offs and sales of fixed assets............ 37,061 170
Company-obligated mandatorily redeemable preferred
securities(a)............................................. 21,411 --
Systems development abandoned............................... 33,066 --
Deferred financing fees..................................... 34,599 --
Interest rate swap gain..................................... (18,887) --
-------- --------
$177,791 $116,682
-------- --------
-------- --------
Cash portion of reorganization items........................ $ 36,893 $ 59,719
Non-cash portion of reorganization items.................... $140,898 $ 56,963
</Table>
- ---------
(a) Includes original issue discount and deferred bond issue
costs of $4,798 net of accumulated amortization.
Certain accruals are included in liabilities subject to compromise. The Plan
was consummated on February 4, 2003. Pursuant to the Plan, unsecured
pre-petition claimants will receive their pro-rata share of 1,147,050 shares of
New Common Stock. The number of shares to be distributed to each claimant is
subject to the final approval and reconciliation of all of the unsecured
pre-petition claims. The Company expects that such distribution will take place
in the second quarter of fiscal 2003.
NOTE 3 -- SPECIAL CHARGES -- FISCAL 2000
The Company performed a strategic review of its worldwide businesses,
manufacturing, distribution and other facilities, and product lines and styles
and 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 and the discontinuation of product lines and styles that were
unprofitable. As a result of these initiatives which commenced in Fiscal 2000,
the Company recorded special charges of $269,626 during 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 non-cash
portion of the charge was originally estimated to be $171,317 and the cash
portion was originally estimated to be $98,309. As of January 4, 2003, $3,332 of
accruals remained related primarily to severance obligations and expected
payments under discontinued licenses. Actual cash charges through January 4,
2003 were $93,593. Non-cash charges were $172,574. Of the total amount of
charges, $201,279 is reflected in cost of goods sold and $68,347 is reflected in
selling, general and administrative expenses
F-17
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
in the Fiscal 2000. The detail of the charge, including costs incurred and
reserves remaining for costs the Company expects to incur through completion of
the aforementioned programs are summarized below:
<Table>
<Caption>
FACILITY
INVENTORY SHUTDOWN EMPLOYEE
WRITE-DOWNS AND AND CONTRACT TERMINATION LEGAL AND
OTHER ASSET TERMINATION AND SEVERANCE RETAIL OUTLET OTHER RELATED
WRITE-OFFS COSTS COSTS STORE CLOSINGS COSTS TOTAL
---------- ----- ----- -------------- ----- -----
Provisions............ $ 154,851 $ 53,261 $ 25,772 $ 20,037 $ 15,705 $ 269,626
Cash Reductions --
2000................ -- (41,456) (19,117) (2,969) (10,909) (74,451)
Non-cash reductions --
2000................ (125,350) -- -- (12,357) (976) (138,683)
--------- -------- -------- -------- -------- ---------
Balance as of Dec. 30,
2000................ 29,501 11,805 6,655 4,711 3,820 56,492
Cash Reductions --
2001................ -- (3,998) (6,376) (1,578) (4,186) (16,138)
Non-cash reductions --
2001................ (29,501) (1,257) -- (3,133) -- (33,891)
Other adjustments --
2001(a)............. -- (493) -- -- 366 (127)
--------- -------- -------- -------- -------- ---------
Balance as of Jan 5,
2002................ -- 6,057 279 -- -- 6,336
Cash Reductions --
2002................ -- (2,743) (261) -- -- (3,004)
--------- -------- -------- -------- -------- ---------
Balance as of Jan 4,
2003................ $ -- $3,314(b) $ 18 $-- $ -- $ 3,332
--------- -------- -------- -------- -------- ---------
--------- -------- -------- -------- -------- ---------
</Table>
- ---------
(a) Other adjustments represent reversals of over accruals
related to facility shutdowns and additional legal costs.
The net effect of other adjustments is included in selling,
general and administrative expenses in Fiscal 2001 and
Fiscal 2002.
(b) Includes $2,923 of liabilities subject to compromise.
INVENTORY WRITE-DOWNS AND OTHER ASSET WRITE-OFFS $(154,851)
Management's strategic review of the Company's manufacturing, distribution
and administrative facilities and product lines and styles resulted in the
decision to close seven manufacturing plants, twelve distribution facilities and
two administrative facilities as well as the closure of 26 outlet stores. In
addition, the Company discontinued the manufacturing of certain raw materials
and product styles and wrote-off shop and fixture costs no longer in service at
certain of its customer's retail locations. Included in the above amount are
charges for inventory write-downs of $127,825 and write-off of fixed assets and
other assets of $27,026. Of the total charge, $134,901 is included in cost of
sales and $19,950 is included in selling, general and administrative expenses.
FACILITY SHUTDOWN AND CONTRACT TERMINATION COSTS $(53,261)
Costs associated with the shutdown of the facilities mentioned above include
plant reconfiguration and shutdown costs of $47,751, which were expensed as
incurred and lease obligation costs of $5,510. Of the total charge, $40,281 is
included in cost of sales and $12,980 is included in selling, administrative and
general expenses in Fiscal 2000. Accruals amounting to $3,314 for future lease
and contract payments remain at January 4, 2003.
F-18
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
EMPLOYEE TERMINATION AND SEVERANCE COSTS $(25,772)
The Company recorded charges of $11,729 to cost of goods sold related to
providing severance and benefits to 3,589 manufacturing related employees
terminated as a result of the closure of certain facilities in Fiscal 2000. The
Company also recorded charges of $14,043 to selling, administrative and general
expenses related to providing severance and benefits to 816 distribution and
administrative employees who were terminated in Fiscal 2000. Remaining severance
amounts at January 4, 2003 were $18, and are expected to be paid in fiscal 2003.
RETAIL OUTLET STORE CLOSINGS $(20,037)
During Fiscal 2000, the Company announced plans to close 26 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 $13,697, the write-off of fixed assets associated with
these stores of $1,793 and the costs of terminating leases of $1,653. Of the
total charge, $13,697 is included in cost of sales and $6,340 is included in
selling, general and administrative expenses in Fiscal 2000.
LEGAL AND OTHER RELATED COSTS $(15,705)
Also included in the charge are $12,490 of legal expenses related to the
Calvin Klein litigation and global initiatives mentioned above and $3,215 of
other costs in Fiscal 2000. Of the total charge, $671 is included in cost of
sales and $15,034 is included in selling, general and administrative expenses in
Fiscal 2000.
NOTE 4 -- ACCOUNTS RECEIVABLE SECURITIZATION
In October 1998, the Company entered into a revolving accounts receivable
securitization facility, to mature on August 12, 2002, whereby it could obtain
up to $200,000 of funding from the securitization of eligible United States
trade accounts receivable through a bankruptcy remote special purpose
subsidiary. The facility was amended in March 2000 to provide up to $300,000 of
funding. In Fiscal 1999 the Company securitized $383,827 of accounts receivable
(gross) for which it received cash proceeds of $195,900. In Fiscal 2000, the
Company securitized $454,862 of accounts receivable (gross) for which it
received cash proceeds of $249,600. In Fiscal 2001, prior to the Petition Date,
the Company securitized $366,233 of accounts receivable (gross) for which it
received cash proceeds of approximately $185,000. The Company retained the
interest in and subsequent realization of the excess of amounts securitized over
the proceeds received and provided allowances as appropriate on the entire
balance. The proceeds received are included in cash flows from operating
activities in the consolidated statement of cash flows. Fees for this program
were paid monthly and were based on variable rates indexed to commercial paper
and are included in selling, general and administrative expense. On June 11,
2001, concurrent with the completion of the DIP, the Company terminated the
revolving accounts receivable securitization agreement by repaying $186,214
previously received under the account receivable securitization facility. The
repayment of the accounts receivable securitization facility included $1,214 of
fees and accrued interest. Consequently, none of the Company's outstanding trade
accounts receivable were securitized at January 5, 2002 or January 4, 2003.
NOTE 5 -- RELATED PARTY TRANSACTIONS
A former director of the Company is the sole stockholder, President and a
director of The Spectrum Group, Inc. ('Spectrum'). The Company recognized
consulting expenses of $560 in Fiscal
F-19
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2000 pursuant to a consulting agreement with Spectrum that was terminated
effective December 31, 2000.
The Company leases certain real property from an entity controlled by an
employee and the former owner of A.B.S. by Allen Schwartz. The lease expires on
May 31, 2005 and includes four five-year renewal options. Rent expense related
to this lease for Fiscal 2000, Fiscal 2001 and Fiscal 2002 was $345, $458 and
$470, respectively.
From April 30, 2001 to June 11, 2001, the Company incurred consulting fees
to Alvarez & Marsal, Inc. ('A&M') of $1,256 pursuant to a consulting agreement.
The President and Chief Executive Officer and the Chief Financial Officer of the
Company are affiliated with A&M. The A&M consulting agreement was terminated on
June 11, 2001. In connection with the Company's emergence from bankruptcy on
February 4, 2003 and as contemplated by the Plan, the Company entered into a new
consulting agreement with A&M. Pursuant to the terms of his Employment
Agreement, as adjusted under the Plan, Antonio C. Alvarez II, the President and
Chief Executive Officer of the Company, received an incentive bonus consisting
of $1,950 in cash, Second Lien Notes in the principal amount of $942 and 0.59%
of the New Common Stock (266,400 shares) of the reorganized Company.
The Company entered into a second consulting agreement with A&M on January
29, 2003 (as supplemented by the March 18, 2003 letter agreement, the 'A&M
Agreement'), pursuant to which Mr. Alvarez and Mr. Fogarty will continue serving
the Company as Chief Executive Officer and Chief Financial Officer,
respectively, and certain other A&M affiliated persons will continue serving the
Company in a consulting capacity. The A&M Agreement was effective as of February
4, 2003 and replaced and superceded the Alvarez and Fogarty Agreements. The A&M
Agreement may be terminated by either party, without cause, upon 30 days'
written notice. Upon the commencement of employment of a new Chief Executive
Officer ('New CEO') or Chief Financial Officer ('New CFO'), Mr. Alvarez and
Mr. Fogarty are obligated to provide transitional assistance to the New CEO
and New CFO, respectively, as reasonably required by the Company. The A&M
Agreement provides that the Company will pay A&M on account of Mr. Alvarez's
service as follows: (i) $125 per month until commencement of employment of the
New CEO; (ii) $125 per month for 15 days after the commencement of employment of
the New CEO; and (iii) after the period described in (ii) above, $.750 per hour
of transition services provided by Mr. Alvarez. The A&M Agreement further
provides that the Company will pay A&M on account of Mr. Fogarty's service at a
rate of $.475 per hour. Moreover, A&M is eligible to receive the following
incentive compensation under the terms of the agreement: (i) additional payments
upon the consummation of certain transactions and (ii) participation in the
Company's incentive compensation program for the periods Mr. Alvarez and Mr.
Fogarty serve as Chief Executive Officer and Chief Financial Officer,
respectively. Incentive compensation payable to A&M upon the consummation of
certain transactions is not currently determinable because it is contingent upon
future events which may or may not occur. Mr. Alvarez, Mr. Fogarty and A&M are
bound by certain confidentiality, indemnification and non-solicitation
obligations under the terms of the A&M Agreement.
The Company believes that the terms of the relationships and transactions
described above are at least as favorable to the Company as could have been
obtained from a third party.
NOTE 6 -- BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
BUSINESS SEGMENTS
During Fiscal 2001, the Company operated in three business segments or
groups: (i) Intimate Apparel Group; (ii) Sportswear and Swimwear Group; and
(iii) Retail Stores. During Fiscal 2002, the
F-20
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Company operated in four business segments: (i) Intimate Apparel Group;
(ii) Sportswear Group; (iii) Swimwear Group; and (iv) Retail Stores Group. The
Sportswear and Swimwear Groups (previously combined as the Sportswear and
Swimwear Group) were separated in Fiscal 2002 to reflect the manner in which
management currently evaluates the Company's business. Accordingly, certain
financial information contained in this Annual Report on Form 10-K relating to
fiscal periods prior to Fiscal 2002 has been restated to correspond with the
Company's four segment business operations. The Groups currently operate as
separate business segments. Moreover, the Company expects that, because of the
retail store closings during Fiscal 2001 and Fiscal 2002, the Retail Stores
Group's net revenues will not represent a material portion of the Company's net
revenues in fiscal 2003. The Company does not intend to operate any retail
outlet stores in fiscal 2003. As a result, beginning in fiscal 2003, the results
of operations of the Retail Stores Group will be included with the Company's
three wholesale Groups according to the type of product sold.
The Company designs, manufactures and markets apparel within the Sportswear,
Swimwear and Intimate Apparel markets and operates a Retail Stores Group, with
stores under the Speedo'r' Authentic Fitness'r' and Calvin Klein names.
The Intimate Apparel Group designs, manufactures, sources and markets
moderate to premium priced intimate apparel and other products for women and
better to premium priced men's underwear and sleepwear under the Warner's'r',
Olga'r', Body by Nancy Ganz'TM'/Bodyslimmers'r', Calvin Klein'r', Lejaby'r' and
Rasurel'r' names.
The Sportswear Group designs, sources, and markets moderate to premium
priced men's and women's sportswear under the Calvin Klein'r', Chaps Ralph
Lauren'r', A.B.S. by Allen Schwartz'r', Catalina'r' and White Stag'r' names.
The Swimwear Group designs, manufactures, sources and sells moderate to
premium priced swimwear, fitness apparel, swim accessories and related products
under the Speedo'r'/Speedo Authentic Fitness'r', Anne Cole'r', Cole of
California'r', Sunset Beach'r', SandCastle'r', Catalina'r', White Stag'r',
Lifeguard'r', Nautica'r' and Ralph Lauren'r' names.
The Retail Stores Group principally sells the Company's products to the
general public through stores under the Speedo'r' Authentic Fitness'r' and
Calvin Klein names. As of January 5, 2002, the Company operated 95 Speedo
Authentic Fitness retail stores, 16 Calvin Klein full-price underwear stores, 86
domestic and international outlet retail stores. During Fiscal 2002, the Company
closed 47 Speedo Authentic Fitness full price retail stores and all 64 of its
domestic outlet retail stores leaving 48 Speedo Authentic Fitness, 15
international outlet retail stores and 16 full price international Calvin Klein
underwear stores operating as of January 4, 2003. The closing of the domestic
outlet retail stores and the related sale of inventory generated approximately
$23,200 of net proceeds in Fiscal 2002. During Fiscal 2002, the Company accrued
approximately $22,889 related to rejected leases and wrote-off approximately
$13,250 of fixed assets related to the above-mentioned store closures. The
Company closed 3 additional Speedo Authentic Fitness retail stores in the first
quarter of fiscal 2003.
Net revenues for the closed domestic outlet retail stores for Fiscal 2000,
2001 and 2002 were $153,049, $107,775 and $40,505, respectively.
Net revenues for the 47 Speedo Authentic Fitness stores closed during Fiscal
2000, Fiscal 2001 and Fiscal 2002 were $18,563, $17,596 and $7,482,
respectively.
The accounting policies of the segments are the same as those described in
the 'Summary of Significant Accounting Policies' in Note 1. Transfers to the
Retail Stores Group are made at standard cost and are not reflected in net
revenues of the Intimate Apparel, Sportswear or Swimwear segments. Management
evaluates the performance of its segments based on operating income (loss)
before depreciation, interest, taxes, amortization of intangibles and deferred
financing costs, impairment
F-21
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
charges, reorganization items and certain general corporate expenses not
allocated to segments, as well as the effect of the adoption of new accounting
pronouncements or other changes in accounting ('Group EBITDA'). The table
below also presents group operating income (loss) which includes depreciation
of property, plant and equipment. The Company believes that an evaluation of
the Company's operating results and the operating results of its segments for
the past three years based solely on operating income (loss) is not complete
without considering the effect of depreciation and amortization on those
results. Since the Petition Date, the Company has sold assets, written down
impaired assets, recorded a transitional impairment adjustment for the
adoption of SFAS 142 and stopped amortizing certain intangible assets that
were previously amortized. As a result, depreciation and amortization expense
has decreased by approximately $40.3 million in Fiscal 2002 compared to
Fiscal 2001 and by approximately $44.7 million compared to Fiscal 2000. For
informational purposes, the Company has separately identified the depreciation
and amortization components of operating income (loss) in the following table.
The presentation of segment information in prior years has been restated to
reflect current year classification of the segments. Information by business
segment is set forth below:
<Table>
<Caption>
INTIMATE APPAREL SPORTSWEAR SWIMWEAR RETAIL TOTAL
---------------- ---------- -------- ------ -----
Fiscal 2002
Net revenues................... $ 570,694 $525,564 $304,994 $ 91,704 $1,492,956
Group EBITDA................... 64,126 33,592 34,124 126 131,968
Group operating income
(loss)....................... 48,386 24,212 28,561 (4,588) 96,571
Fiscal 2001
Net revenues................... $ 594,889 $573,697 $311,802 $190,868 $1,671,256
Group EBITDA................... (74,378) (5,772) (6,555) (13,019) (99,724)
Group operating loss........... (96,317) (15,868) (9,933) (20,270) (142,388)
Fiscal 2000
Net revenues................... $ 769,326 $882,917 $355,199 $242,494 $2,249,936
Group EBITDA................... (114,791) 39,638 81,323 (22,687) (16,517)
Group operating income
(loss)....................... (137,023) 29,269 71,868 (27,130) (63,016)
</Table>
A reconciliation of Group operating income (loss) to consolidated loss
before provision for income taxes and cumulative effect of a change in
accounting principle for fiscal years ended December 30, 2000, January 5, 2002
and January 4, 2003, is as follows:
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Group EBITDA.............................................. (16,517) (99,724) 131,968
Group depreciation........................................ 46,499 42,664 35,397
--------- --------- ---------
Group operating income (loss)............................. (63,016) (142,388) 96,571
General corporate expenses not allocated.................. 101,871 103,770 45,208
Depreciation of corporate assets and amortization of
intangibles (a)......................................... 55,580 55,154 22,022
Impairment charge......................................... -- 101,772 --
Reorganization items...................................... -- 177,791 116,682
--------- --------- ---------
Consolidated operating loss............................... (220,467) (580,875) (87,341)
Investment income (loss).................................. 36,882 (6,556) 62
Interest expense.......................................... 172,232 122,752 22,048
--------- --------- ---------
Loss before provision for income taxes and cumulative
effect of a change in accounting principle.............. $(355,817) $(710,183) $(109,327)
--------- --------- ---------
--------- --------- ---------
</Table>
- ---------
(a) Includes amortization of intangibles of $39,931, $36,928 and
$922 for the years ended December 30, 2000, January 5, 2002
and January 4, 2003, respectively, which is a corporate item
not allocated to business segments.
F-22
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
INTIMATE RETAIL RECONCILING
APPAREL SPORTSWEAR SWIMWEAR STORES ITEMS(a) CONSOLIDATED
------- ---------- -------- ------ -------- ------------
Year Ended January 4, 2003
Total Assets................ $296,365 $147,815 $194,634 $ 18,186 $290,880 $ 947,880
Depreciation and
amortization.............. 15,740 9,380 5,563 4,714 22,022 57,419
Capital expenditures(b)..... 6,233 2,357 1,423 132 10,164 20,309
Year Ended January 5, 2002
Total Assets................ $415,965 $544,078 $605,238 $ 87,613 $332,561 $1,985,455
Depreciation and
amortization.............. 21,939 10,096 3,378 7,251 55,154 97,818
Capital expenditures........ 8,463 2,005 2,947 1,187 10,125 24,727
Year Ended December 30, 2000
Total Assets................ $616,228 $739,171 $637,484 $116,735 $232,531 $2,342,149
Depreciation and
amortization.............. 22,232 10,369 9,455 4,443 55,580 102,079
Capital expenditures........ 33,043 15,195 2,513 10,089 49,222 110,062
</Table>
- ---------
(a) Includes corporate items not allocated to business segments,
primarily fixed assets related to the Company's management
information systems and corporate facilities and goodwill,
intangible and other assets.
(b) Includes assets acquired pursuant to the GECC lease
settlement of $9,071.
GEOGRAPHIC INFORMATION
Included in the consolidated financial statements are the following amounts
relating to geographic locations:
<Table>
<Caption>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 % 2002 % 2003 %
---- - ---- - ---- -
Net revenues:
United States............. $1,892,219 84.1 $1,342,903 80.4 $1,167,706 78.2
Canada.................... 96,840 4.3 82,897 4.9 83,185 5.6
Europe.................... 199,736 8.9 185,570 11.1 195,529 13.1
Mexico.................... 45,112 2.0 41,896 2.5 25,971 1.7
Asia...................... 16,029 0.7 17,990 1.1 20,565 1.4
---------- ----- ---------- ----- ---------- -----
$2,249,936 100.0 $1,671,256 100.0 $1,492,956 100.0
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Property, plant and equipment,
net
United States............. $ 293,384 89.0 $ 173,569 81.8 $ 137,351 87.6
Canada.................... 6,888 2.1 4,638 2.2 3,452 2.2
All other................. 29,242 8.9 33,922 16.0 15,909 10.2
---------- ----- ---------- ----- ---------- -----
$ 329,514 100.0 $ 212,129 100.0 $ 156,712 100.0
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</Table>
INFORMATION ABOUT MAJOR CUSTOMERS
In Fiscal 2000 and 2001 no customer accounted for more than 10% of the
Company's net revenues. In Fiscal 2002, one customer, Federated Department
Stores, Inc., accounted for approximately 10.5% of the Company's net revenues.
F-23
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 7 -- INCOME TAXES
The following presents the United States and foreign components of income
from continuing operations before income taxes and cumulative effect of change
in accounting principle and the total provision for United States federal and
other income taxes:
<Table>
<Caption>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Loss before provision for income taxes and cumulative
effect of change in accounting principle:
Domestic.............................................. $(337,394) $(659,321) $(101,925)
Foreign............................................... (18,423) (50,862) (7,402)
--------- --------- ---------
Total............................................. $(355,817) $(710,183) $(109,327)
--------- --------- ---------
--------- --------- ---------
Current tax provision:
Federal............................................... $ -- $ -- $ --
State and local....................................... 588 600 600
Foreign............................................... 410 17,946 9,506
--------- --------- ---------
Total current tax provision............................... 998 18,546 10,106
--------- --------- ---------
Deferred tax provision:
Federal............................................... (106,864) (202,150) 1,510
State and local....................................... (20,189) (44,543) 325
Foreign............................................... (4,901) (14,201) (8,097)
Valuation allowance increase.......................... 152,000 393,318 50,070
--------- --------- ---------
Total deferred tax provision.............................. 20,046 132,424 43,808
--------- --------- ---------
Provision for income taxes................................ $ 21,044 $ 150,970 $ 53,914
--------- --------- ---------
--------- --------- ---------
</Table>
The following presents the reconciliation of the provision for income taxes
to United States federal income taxes computed at the statutory rate:
<Table>
<Caption>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Loss before provision for income taxes and cumulative
effect of change in accounting principle................ $(355,817) $(710,183) $(109,327)
--------- --------- ---------
--------- --------- ---------
Benefit for income taxes at the statutory rate............ $(124,536) $(248,564) $ (38,265)
State income taxes benefit, net of federal tax benefit.... (18,947) (28,353) 835
Impact of foreign taxes accrued........................... 1,344 3,899 4,000
Net U.S. tax on distribution of foreign earnings.......... -- -- 32,846
Non-deductible intangible amortization and impairment
charges................................................. 6,504 16,297 --
Increase in valuation allowance........................... 152,000 393,318 50,070
Other, net................................................ 4,679 14,373 4,428
--------- --------- ---------
Provision for income taxes................................ $ 21,044 $ 150,970 $ 53,914
--------- --------- ---------
--------- --------- ---------
</Table>
F-24
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The components of deferred tax assets and liabilities as of January 5, 2002
and January 4, 2003 are as follows:
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Deferred Tax Assets:
Discounts and sales allowances.......................... $ 2,060 $ 1,857
Inventory............................................... 22,594 20,559
Postretirement benefits................................. 16,721 30,507
Alternative minimum tax credit carryovers............... 5,245 2,270
Advertising credits..................................... 13,219 13,219
Reserves and accruals................................... 88,666 94,606
Depreciation and amortization........................... -- 10,951
Net operating losses and tax credits.................... 501,432 502,197
--------- ---------
Gross deferred tax assets............................... 649,937 676,166
Valuation allowances.................................... (582,249) (670,772)
--------- ---------
Deferred tax assets -- net.......................... 67,688 5,394
--------- ---------
Deferred Tax Liabilities:
Prepaid and other assets................................ 3,280 3,057
Depreciation and amortization........................... 48,509 --
Bond discount........................................... 6,865 --
Other................................................... 14,164 4,329
--------- ---------
Deferred tax liabilities............................ 72,818 7,386
--------- ---------
Net deferred tax asset (liability).................. $ (5,130) $ (1,992)
--------- ---------
--------- ---------
</Table>
During Fiscal 2002, the Company repatriated approximately $98,000 of foreign
earnings. No U.S. income taxes were incurred in connection with the repatriation
since those earnings were completely offset by the Company's U.S. operating
losses. At January 4, 2003, unremitted earnings of foreign subsidiaries were
approximately $62,500. Since it is the Company's intention to permanently
reinvest these earnings, no U.S. income taxes have been provided. Management
believes that there would be no additional liability on the statutory earnings
of foreign subsidiaries, if remitted.
The Company and its subsidiaries' income tax returns are routinely examined
by various tax authorities. In connection with such examinations, tax
authorities have raised issues and proposed tax adjustments. The Company is
reviewing the issues raised and will contest any adjustments it deems
appropriate. In management's opinion, adequate provision for income taxes have
been made for all open years.
The Company has estimated United States net operating loss carryforwards of
approximately $1,166,500 and foreign net operating loss carryforwards of
approximately $85,400 at January 4, 2003. The United States net operating loss
carryforwards, if they remain unused, expire as follows:
<Table>
<Caption>
YEAR AMOUNT
- ---- ------
2003 - 2010........................................ $ 119,000
2011 - 2017........................................ 46,300
2018 - 2022........................................ 1,001,200
----------
$1,166,500
----------
----------
</Table>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized. The valuation allowance
increased to $670,772 (of which $29,334 relates
F-25
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
to foreign entities) in Fiscal 2002 from $582,249 (of which $28,041 relates to
foreign entities) in Fiscal 2001. The increase in the valuation allowance
results from the Fiscal 2002 operating loss and other deferred tax assets that
may not be realized.
A portion of the valuation allowance in the amount of approximately $19,026
(of which $4,841 relates to foreign entities) and approximately $14,185 at
January 5, 2002 and January 4, 2003, respectively, relates to net deferred tax
assets which were recorded in purchase accounting. The realization of such
amount in future years will be allocated to reduce other non-current intangible
assets.
The consummation of the Plan resulted in the forgiveness of approximately
$2,486,000 of the Company's pre-petition debt and other liabilities subject to
compromise. The Company expects to utilize virtually all of its U.S. net
operating loss carryforwards to offset the tax impact resulting from such debt
forgiveness. As a result of the Chapter 11 Cases, the Company anticipates that
the 'change in ownership' rules as defined by the Internal Revenue Code of 1986
will limit the Company's ability to utilize any remaining net operating loss
carryforwards.
At January 5, 2002 and January 4, 2003, prepaid expenses and other current
assets includes current income taxes receivable of $19,500 (of which $3,200
relates to foreign entities) and $10,031 (of which $6,896 relates to foreign
entities), respectively, and current liabilities include income taxes payable of
$14,505 (of which $13,900 relates to foreign entities) and $28,420 (of which
$18,371 relates to foreign entities), respectively.
NOTE 8 -- EMPLOYEE RETIREMENT PLANS
The Company has a defined benefit pension plan, which covers substantially
all full time domestic employees (the 'Pension Plan'). The Pension Benefit Plan
is noncontributory and benefits are based upon years of service. The Company
also has defined benefit health care and life insurance plans that provide
postretirement benefits to retired employees and former directors ('Other
Benefit Plans'). The Other Benefit Plans are, in most cases, contributory with
retiree contributions adjusted annually.
The components of net periodic benefit cost is as follows:
<Table>
<Caption>
PENSION BENEFIT PLAN OTHER BENEFIT PLANS
FOR THE YEAR ENDED FOR THE YEAR ENDED
-------------------------------------- --------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4, DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003 2000 2002 2003
---- ---- ---- ---- ---- ----
Service Cost............... $ 2,640 $ 2,658 $ 2,845 $ 143 $ 163 $ 223
Interest Cost.............. 9,307 9,316 9,155 424 283 259
Expected return on plan
assets................... (11,252) (9,645) (8,797) -- -- --
Amortization of prior
service cost............. (74) (74) (49) (33) (33) (33)
Net actuarial gain
(loss)................... -- 684 2,245 (263) (133) (107)
-------- ------- ------- ----- ----- -----
Net benefit cost........... $ 621 $ 2,939 $ 5,399 $ 271 $ 280 $ 342
-------- ------- ------- ----- ----- -----
-------- ------- ------- ----- ----- -----
</Table>
A reconciliation of the balance of the benefit obligations is as follows:
F-26
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
PENSION BENEFIT PLAN OTHER BENEFIT PLANS
----------------------- -----------------------
JANUARY 5, JANUARY 4, JANUARY 5, JANUARY 4,
2002 2003 2002 2003
---- ---- ---- ----
Change in benefit obligations
Benefit obligation at beginning of year......... $126,676 $134,073 $5,296 $ 5,204
Settlements..................................... -- -- -- (1,899)
Service cost.................................... 2,658 2,845 163 223
Interest cost................................... 9,316 9,155 283 259
Change in actuarial assumptions................. 5,015 31,142 (233) 1,093
Curtailment..................................... -- (8,897) -- --
Benefits paid................................... (9,592) (9,785) (305) (255)
-------- -------- ------ -------
Benefit obligation at end of year............... $134,073 $158,533 $5,204 $ 4,625
-------- -------- ------ -------
-------- -------- ------ -------
</Table>
A reconciliation of the change in the fair value of plan assets is as
follows:
<Table>
<Caption>
PENSION BENEFIT PLAN OTHER BENEFIT PLANS
----------------------- -----------------------
JANUARY 5, JANUARY 4, JANUARY 5, JANUARY 4,
2002 2003 2002 2003
---- ---- ---- ----
Fair value of plan assets at beginning of
year.......................................... $104,249 $ 95,858 $ -- $ --
Actual return on plan assets.................... (2,985) (5,314) -- --
Employer's contributions........................ 4,186 2,606 305 255
Benefits paid................................... (9,592) (9,785) (305) (255)
-------- -------- ------- -------
Fair value of plan assets at end of year........ $ 95,858 $ 83,365 $ -- $ --
-------- -------- ------- -------
-------- -------- ------- -------
Funded status................................... $(38,215) $(75,168) $(5,204) $(4,625)
Unrecognized prior service cost................. (48) -- (406) (373)
Unrecognized net actuarial (gain) loss.......... 38,547 72,659 (3,588) (991)
-------- -------- ------- -------
Net amount recognized........................... $ 284 $ (2,509) $(9,198) $(5,989)
-------- -------- ------- -------
-------- -------- ------- -------
</Table>
Effective January 1, 2003 the Pension Plan was amended such that
participants in the Pension Plan will not earn any additional pension benefits
after December 31, 2002. The amendment to the Pension Plan resulted in a
curtailment gain of $8,897 in the fourth quarter of Fiscal 2002. As a result of
the curtailment, the Company's pension liability was reduced by $8,897. The
curtailment gain reduced the unrecognized net actuarial (gain) loss component of
the Company's accrued pension liability which was recorded in other
comprehensive loss in the fourth quarter of Fiscal 2002. In addition, the
Pension Plan was underfunded at January 5, 2002 and January 4, 2003,
respectively. The Company will make cash contributions to the Pension Plan of
approximately $9,320 in fiscal 2003 and approximately $27,704 over the next five
years.
Pension Plan assets include fixed income securities and marketable equity
securities, including 673,100 shares of the Company's Old Common Stock, which
had a fair market value of $37 and $2 at January 5, 2002 and January 4, 2003,
respectively. The Company's Old Common Stock was cancelled on February 4, 2003
pursuant to the Plan. Holders of the Old Common Stock, including the Pension
Plan did not receive any distribution under the terms of the Plan and as a
result, the Pension Plan's investment in such Old Common Stock was written off
in February 2003. The Company contributes to multi-employer defined benefit
pension plans on behalf of union employees of two manufacturing facilities and a
warehouse and distribution facility, which amounts are not significant for the
periods presented. The Company closed the two manufacturing facilities in Fiscal
2002 and recorded a termination liability of $2,317 related to the
multi-employer plans associated with the closed plants during Fiscal 2002. The
accrued liability of $2,317 is included in liabilities subject to compromise at
January 4, 2003.
F-27
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The weighted-average assumptions used in the actuarial calculations were as
follows:
<Table>
<Caption>
FISCAL FISCAL FISCAL FISCAL
2000 2001 2002 2003(a)
---- ---- ---- --------
Discount rate............................... 7.75% 7.25% 5.30% 5.30%
Expected return on plan assets.............. 9.50% 9.50% 9.50% 7.00%
Rate of compensation increase............... 5.00% 5.00% 5.00% N/A
</Table>
- ---------
(a) The Company evaluated its assumptions related to the
expected return on plan assets in the fourth quarter of
Fiscal 2002 and revised the expected return on plan assets
for future valuations to 7% effective with the Pension
Plan's fiscal 2003 year. The rate of compensation increase
is not applicable because no future benefits will be earned
by Pension Plan participants.
For measurement purposes, the weighted average annual assumed rate of
increase in the per capita cost of covered benefits (health care cost trend
rate) was 11.5% for 2002 and decreases by 0.5% each year from 2003 to 2014 to
5.5%. Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<Table>
<Caption>
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components..... $ 43 $ (37)
Effect on health care component of the accumulated
post-retirement benefit obligation........................ $307 $(256)
</Table>
The Company also sponsors a defined contribution plan for substantially all
of its domestic employees. Employees can contribute to the plan, on a pre-tax
and after-tax basis, a percentage of their qualifying compensation up to the
legal limits allowed. The Company contributes amounts equal to 15.0% of the
first 6.0% of employee contributions to the defined contribution plan. The
Company increased the Company's contribution to 35.0% of the first 6.0% of
employee contributions effective January 1, 2003. The maximum Company
contribution on behalf of any employee was $1.530, $1.530 and $1.800 for Fiscal
2000, Fiscal 2001 and Fiscal 2002, respectively. Employees vest in the Company
contribution over four years. Company contributions to the defined contribution
plan totaled $552, $483 and $377 for Fiscal 2000, 2001 and 2002, respectively.
NOTE 9 -- MARKETABLE SECURITIES
During 1998 and 1999, the Company made investments, aggregating $7,650, to
acquire an interest in InterWorld Corporation, a provider of E-Commerce software
systems and other applications for electronic commerce sites. These investments
were classified as available-for-sale securities and recorded at fair value
based on quoted market prices at January 1, 2000. In the first quarter of Fiscal
2000, the Company sold its investment in InterWorld resulting in a realized
pre-tax gain of $42,782 ($25,862 net of taxes), which is recorded as investment
income.
F-28
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 10 -- INVENTORIES
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Finished goods.......................................... $375,956 $281,610
Work in process......................................... 47,325 51,792
Raw materials........................................... 45,718 45,682
-------- --------
468,999 379,084
Less: reserves.......................................... 50,097 33,816
-------- --------
$418,902 $345,268
-------- --------
-------- --------
</Table>
NOTE 11 -- PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Land and land improvements............................ $ 573 $ 1,223
Building and building improvements.................... 70,428 51,513
Furniture and fixtures................................ 102,833 101,861
Machinery and equipment............................... 76,711 73,104
Computer hardware and software........................ 169,811 169,194
Construction in progress.............................. 1,101 435
--------- ---------
$ 421,457 $ 397,330
Less: Accumulated depreciation and amortization....... (209,328) (240,618)
--------- ---------
Property, plant and equipment, net.................... $ 212,129 $ 156,712
--------- ---------
--------- ---------
</Table>
NOTE 12 -- INTANGIBLE ASSETS AND GOODWILL
Prior to the adoption of SFAS 142, the Company reviewed any potential
impairment of long-lived assets when changes in circumstances, which include,
but are not limited to, the historical and projected operating performance of
business operations, specific industry trends and general economic conditions,
indicated that the carrying value of business specific intangibles or goodwill
may not be recoverable. Under these circumstances, the Company estimates future
undiscounted cash flows as a basis for determining any impairment loss. If
undiscounted cash flows are less than the carrying amount of the asset then
impairment charges are recorded to adjust the carrying value of long-lived
assets to the estimated fair value. The Company recorded an impairment charge of
$101,772 for the write-off of goodwill related to Bodyslimmers, CK Kids and ABS
of $96,171 and the write-off of certain other intangible assets of $5,601 in the
fourth quarter of Fiscal 2001.
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets. SFAS 142 eliminates the amortization of goodwill and certain other
intangible assets with indefinite lives and was effective for the Company's 2002
fiscal year. SFAS 142 requires that indefinite lived intangible assets be tested
for impairment at least annually. Intangible assets with finite useful lives are
to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS 144, Accounting for Impairment or Disposal of Long-Lived
Assets.
As of January 5, 2002, the Company had intangible assets with indefinite
useful lives and goodwill net of accumulated amortization of approximately
$940,065. The Intimate Apparel Group's intangible assets consisted of goodwill
of $136,960 and indefinite lived intangible assets (primarily owned trademarks)
of $64,992. The Sportswear Group and and Swimwear Group's intangible assets
consisted of goodwill of $551,864 and indefinite lived intangible assets
(primarily owned trademarks and license
F-29
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
rights for periods exceeding forty years) of $172,683. The Retail Stores Group
had intangible assets consisting of goodwill of $3,616 (subsequently written-off
in connection with the sale of Penhaligon's). The Company also had other
indefinite lived intangible assets consisting of owned trademarks of $9,950. In
addition, the Sportswear Group had finite lived intangible assets consisting of
certain license rights of $6,316 net of accumulated amortization.
Under the provisions of SFAS 142, goodwill is deemed potentially impaired if
the net book value of a business reporting unit exceeds the fair value of that
business reporting unit. As of January 5, 2002, the Company had incurred losses
in each of its previous two fiscal years and had filed bankruptcy on June 11,
2001. As a result the Company's 'Business Enterprise Value' ('BEV') decreased.
Intangible assets are deemed impaired if the carrying amount exceeds the fair
value of the assets. The Company obtained an independent appraisal of its BEV in
connection with the preparation of the Plan. The independent appraiser
considered the future earnings of the reorganized Company and other factors
related to the Plan. The Company allocated the appraised BEV to its various
reporting units and determined that the value of certain of the Company's
intangible assets and goodwill were impaired. As a result, the Company recorded
a charge of $801,622 net of income tax benefit of $53,513 as a cumulative effect
of a change in accounting from the adoption of SFAS 142 on January 6, 2002. The
income tax benefit of $53,513 includes a tax benefit of $81,657 relating to tax
deductible goodwill of $206,811 offset by an increase in valuation allowance of
$28,144 on the Company's deferred tax asset resulting from the adoption of SFAS
142. The remaining value of intangible assets with indefinite useful lives after
the adoption of SFAS 142 is $81,305. The Intimate Apparel Group has indefinite
lived intangible assets of $52,037 related to certain owned trademarks. The
Sportswear Group has indefinite lived intangible assets of $19,327 related to
certain licensed trademarks. The Company also has other indefinite lived
intangible assets of $9,941 related to certain owned trademarks. The Retail
Stores Group had goodwill of $3,616 (subsequently written-off in connection with
the sale of Penhaligon's). In addition, the Sportswear Group, as of January 5,
2002 and January 4, 2003 had finite lived intangible assets of $6,316 and
$5,522, net of accumulated amortization of $2,712 and $2,494, respectively, with
a remaining useful life of six years as of January 4, 2003 related to certain
licensed trademarks. Future amortization expense of finite lived intangible
assets will be approximately $925 per year through 2008.
Amortization expense related to goodwill and intangible assets, included in
selling, general and administrative expenses was, $39,931, $36,928 and $922 for
Fiscal 2000, Fiscal 2001 and Fiscal 2002, respectively. Net loss for Fiscal 2000
and Fiscal 2001, assuming SFAS No. 142 had been adopted effective January 1,
2000 is as follows:
<Table>
<Caption>
FISCAL YEAR ENDED
-------------------------
DECEMBER 30, JANUARY 5,
2000 2002
---- ----
Net loss -- as reported.......................... $(389,971) $(861,153)
Decrease in amortization expense................. 39,009 36,006
--------- ---------
Net loss -- as adjusted.......................... $(350,962) $(825,147)
--------- ---------
--------- ---------
Basic and diluted loss per weighted average share
outstanding:
As reported.................................. $ (7.39) $ (16.28)
--------- ---------
--------- ---------
As adjusted.................................. $ (6.65) $ (15.59)
--------- ---------
--------- ---------
</Table>
Deferred financing costs, net of accumulated amortization, were $8,971 and
$463 as of January 5, 2002 and January 4, 2003, respectively. Deferred financing
costs relating to pre-petition debt of the Company were written-off as of the
Petition Date resulting in a charge to reorganization items of $34,599 in the
second quarter of Fiscal 2001. Other assets of $11,612 at January 5, 2002 and
$2,800 at
F-30
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
January 4, 2003 include long-term investments, other non-current assets and
deposits. The Company reviews other long-term assets for potential impairment,
annually or when circumstances indicate that a long-term asset may be impaired.
As a result of this review, in the fourth quarter of Fiscal 2001, the Company
wrote down the carrying amount of certain barter credits by $30,734 to $2,006
based upon the Company's plans to utilize such credits in the future. Barter
credits included in other assets amounted to $2,006 and $683 as of January 5,
2002 and January 4, 2003, respectively.
NOTE 13 -- ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as of December 30,
2000, January 5, 2002 and January 4, 2003 are summarized below:
<Table>
<Caption>
FOR THE YEAR ENDED
-----------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Foreign currency translation adjustments.......... $(18,707) $(20,561) $(20,408)
Unfunded minimum pension liability................ (14,648) (32,494) (72,659)
Unrealized holding (loss) gain -- net............. (395) 39 (156)
-------- -------- --------
Total accumulated other comprehensive loss........ $(33,750) $(53,016) $(93,223)
-------- -------- --------
-------- -------- --------
</Table>
NOTE 14 -- DEBT
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003(a)
---- -------
Amended DIP..................................... $ 155,915 $ --
GECC lease settlement (b)....................... -- 5,603
$600 million term loan.......................... 587,548 584,824
Revolving credit facilities..................... 1,018,719 1,013,995
Term loan agreements............................ 27,161 27,034
Capital lease obligations....................... 5,582 2,679
Foreign credit facilities (c)................... 143,439 146,958
Equity Agreement Notes (d)...................... 56,677 56,506
----------- -----------
1,995,041 1,837,599
Current portion................................. (158,026) (5,765)
Reclassified to liabilities subject to
compromise.................................... (1,834,808) (1,830,582)
----------- -----------
Total long-term debt........................ $ 2,207 $ 1,252
----------- -----------
----------- -----------
</Table>
- ---------
(a) The reduction in pre-petition credit facilities primarily
reflects the pro-rata repayment of certain amounts from the
proceeds generated from the sale of GJM and Penhaligon's and
certain other assets.
(b) Represents amounts due pursuant to the GECC lease
settlement, net of payments made through January 4, 2003.
(c) Includes the impact of fluctuations in foreign currency
exchange rates.
(d) Interest bearing notes payable to certain banks related to
the settlement of equity forward purchase agreements
('Equity Agreements') entered into in connection with the
Company's stock repurchase program.
F-31
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Total debt does not include pre-petition trade drafts outstanding as of
January 5, 2002 and January 4, 2003 of $351,367 and $349,737, respectively, that
are included in liabilities subject to compromise.
DEBTOR-IN-POSSESSION FINANCING
On June 11, 2001, the Company entered into a Debtor-In-Possession Financing
Agreement ('DIP') with a group of banks, which was approved by the Bankruptcy
Court in an interim amount of $375,000. On July 9, 2001, the Bankruptcy Court
approved an increase in the amount of borrowing available to the Company to
$600,000. The DIP was subsequently amended on August 27, 2001, December 27,
2001, February 5, 2002 and May 15, 2002. In addition, certain extensions were
granted under the DIP on April 12, 2002, June 19, 2002, July 18, 2002,
August 22, 2002 and September 30, 2002 (the DIP, subsequent to such extensions
and amendments, is referred to as the 'Amended DIP'). The amendments and
extensions, among other things, amended certain definitions and covenants,
permitted the sale of certain of the Company's assets and businesses, extended
deadlines with respect to certain asset sales and filing requirements with
respect to a plan of reorganization and reduced the size of the facility to
reflect the Debtor's revised business plan. The Amended DIP (when originally
executed) provided for a $375,000 non-amortizing revolving credit facility
(which includes a letter of credit facility of up to $200,000) ('Tranche A') and
a $225,000 revolving credit facility ('Tranche B'). On December 27, 2001 the
Tranche B commitment was reduced to $100,000. On April 19, 2002, the Company
voluntarily elected to eliminate Tranche B based upon its determination that the
Company's liquidity position had improved significantly since the Petition Date
and Tranche B would not be needed to fund the Company's on-going operations. On
May 28, 2002, the Company voluntarily reduced the amount of borrowing available
to the Company under the Amended DIP to $325,000. On October 8, 2002, the
Company voluntarily reduced the amount of borrowing available to the Company
under the Amended DIP to $275,000. Borrowing under the Amended DIP bore interest
at either the London Inter Bank Offering Rate (LIBOR) plus 2.75% (approximately
4.25% at January 4, 2003) or at the Citibank N.A. Base Rate plus 1.75% (6.5% at
January 4, 2003). The Amended DIP contained restrictive covenants which required
the Company to achieve $70,800 of earnings before interest, income taxes,
depreciation, amortization and restructuring charges, as defined ('EBITDAR') and
limited capital expenditures. As of January 4, 2003, the Company was in
compliance with all of the covenants under the Amended DIP.
All outstanding borrowings under the Amended DIP had been repaid as of
January 4, 2003. Loans outstanding under the Amended DIP at January 5, 2002 and
January 4, 2003 were $155,915 and $0, respectively with a weighted average
interest rate of 4.8% for Fiscal 2001. In addition, the Company had stand-by and
documentary letters of credit outstanding under the Amended DIP at January 5,
2002 and January 4, 2003 of approximately $60,031 and $60,672, respectively. The
total amount of additional credit available to the Company at January 5, 2002
and January 4, 2003 was $159,054 and $160,906, respectively. In addition, at
January 4, 2003, the Company had approximately $94,059 of excess cash available
as collateral against outstanding stand-by and trade letters of credit.
The Amended DIP was secured by substantially all of the domestic assets of
the Company. The Amended DIP terminated on the Effective Date and was replaced
by the Exit Financing Facility.
GECC SETTLEMENT
On June 12, 2002, the Bankruptcy Court approved the Company's settlement of
certain operating lease agreements with General Electric Capital Corporation
('GECC'). The leases had original terms from three to seven years and were
secured by certain equipment, machinery, furniture, fixtures and other assets.
GECC's claims under the leases totaled approximately $51,152. Under the terms of
the
F-32
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
settlement agreement GECC will receive $15,200 payable as follows: (i) prior to
the Effective Date of the Plan, the Company paid GECC monthly installments of
$550; and (ii) after the Effective Date, the Company is obligated to pay GECC
monthly installments of $750 until the balance is paid in full. Through
June 12, 2002, the Company had paid GECC $5,500 of the $15,200. The present
value of the remaining cash payments to GECC under the settlement agreement of
$5,603 as of January 4, 2003 are included in the current portion of long-term
debt not subject to compromise. The remaining amount of the GECC claim of
approximately $35,952 is included in liabilities subject to compromise as of
January 4, 2003. The Company had recorded accrued liabilities related to the
GECC leases of approximately $13,045 prior to the settlement and recorded
approximately $22,907 as reorganization items in Fiscal 2002. GECC retains a
perfected security interest in the leased assets equal to the outstanding cash
settlement payments due under the settlement agreement until all such amounts
are paid. Lease expenses related to the GECC leases was $18,011, $16,504 and
$8,228 for Fiscal 2000, 2001 and 2002, respectively.
The assets acquired pursuant to the terms of the settlement agreement were
recorded at their estimated fair value, which was estimated to be equal to the
present value of payments due to GECC under the terms of the settlement
agreement. Such assets are being depreciated using the straight-line method over
their estimated remaining useful lives of two to four years.
PRE-PETITION DEBT
The Company was in default of substantially all of its U.S. pre-petition
credit agreements as of January 4, 2003. All pre-petition debt of the Debtors
has been classified as liabilities subject to compromise in the consolidated
balance sheet at January 4, 2003 and January 5, 2002. In addition, the Company
stopped accruing interest on all domestic pre-petition credit facilities and
outstanding balances on June 11, 2001. The Company continued to accrue interest
on certain foreign credit agreements that are subject to standstill and
inter-creditor agreements. Such interest of approximately $14,844 was paid
pursuant to the Plan on February 4, 2003. Such interest is included in
liabilities subject to compromise at January 4, 2003. A brief description of
each pre-petition credit facility and the terms thereof is included below.
A brief description of each pre-petition credit facility and its terms is
included below.
AMENDMENT AGREEMENT
On October 6, 2000, the Company and the lenders under its credit facilities
entered into an Amendment, Modification, Restatement and General Provisions
Agreement (the 'Amendment Agreement') and an Inter-creditor Agreement. Pursuant
to the Amendment Agreement, the Company's credit facilities were modified so
that each contained identical representations and warranties, covenants,
mandatory prepayment obligations and events of default. The Amendment Agreement
also amended uncommitted credit facilities and those which matured prior to
August 12, 2002 so that they would mature on August 12, 2002 (maturity dates of
the credit facilities due after August 12, 2002 were unaffected).
The Amendment Agreement made the margins added to a base rate or Eurodollar
rate loan uniform under the credit facilities with such rate determined
according to the debt rating of the Company. As of December 30, 2000, the
applicable margin for base rate advances under the credit facilities was 2.5%
and the applicable margin for Eurodollar rate advances under the credit
facilities was 3.5%. The Amendment Agreement also made the fee charged based on
the letters of credit outstanding and a commitment fee charged based on the
undrawn amount of the credit facilities consistent across the credit facilities.
Both of these fees also varied according to the Company's debt rating.
F-33
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
As part of the signing of the Amendment Agreement, obligations under each of
the credit facilities were guaranteed by the Company and by all of its domestic
subsidiaries. Additionally, on a limited basis, several foreign subsidiaries
cross guaranteed the foreign obligations. The Company and each of such entities
have granted liens on substantially all of their assets to secure these
obligations. As a result of the Amendment Agreement, as of December 30, 2000,
the Company had committed to credit facilities in an aggregate amount of
$2,609,000, all of which were to mature on or after August 12, 2002 with
substantially no debt amortization until then. All obligations under the
Amendment Agreement were in default under the Chapter 11 Cases. The Company did
not accrue interest on these obligations since the Petition Date, except for
interest on certain foreign credit agreements, as previously noted. Creditors
under the Amendment Agreement were considered secured creditors in the
Chapter 11 Cases, and as such, in accordance with applicable bankruptcy law,
received a higher priority than other classes of creditors. Amounts outstanding
under the Amendment Agreement, not including accrued interest, at January 5,
2002 and January 4, 2003 were approximately $2,184,911, including trade drafts
of $351,367, and $2,179,054, including trade drafts of $349,737 respectively.
The Company has classified these obligations as liabilities subject to
compromise. The Amendment Agreement and Amended DIP required that the proceeds
from certain asset sales be used to repay amounts outstanding under the
Company's pre-petition debt agreements. Such repayments were approximately
$14,500 in Fiscal 2002.
$600,000 REVOLVING CREDIT FACILITY
The Company was the borrower under a $600,000 Revolving Credit Facility,
which included a $100,000 sub-facility available for letters of credit. This
facility was scheduled to expire on August 12, 2002 in accordance with the terms
of the Amended and Restated Credit Agreement, dated November 17, 1999, which
governed the facility. Amounts borrowed under this facility were borrowed at
either base rate or at an interest rate based on the Eurodollar rate plus a
margin determined under the Amendment Agreement. As of January 5, 2002 and
January 4, 2003, $595,119 and $592,359, respectively, was outstanding under this
facility, all of which is included in liabilities subject to compromise.
$450,000 REVOLVING CREDIT FACILITY
The Company was also a borrower under a $450,000 Revolving Credit Facility,
which was reduced to $423,600 under the Amendment Agreement. The credit
agreement governing this facility, dated November 17, 1999, provided that the
term of the facility will expire on November 17, 2004. Amounts borrowed under
this facility were subject to interest at a base rate or at an interest rate
based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. As of January 5, 2002, and January 4, 2003, $423,600 and $421,636,
respectively, was outstanding under this facility, all of which is included in
liabilities subject to compromise.
$587,548 TERM LOAN
The Company was a borrower under a $600,000 Term Loan, dated November 17,
1999, which was reduced to approximately $587,548 under the Amendment Agreement.
The maturity of this loan was also extended until August 12, 2002 in connection
with the Amendment Agreement. Amounts borrowed under this facility were subject
to interest at a base rate or an interest rate based on the Eurodollar rate plus
a margin determined under the Amendment Agreement. As of January 5, 2002 and
January 4, 2003, $587,548 and $584,824, respectively, was outstanding under this
facility all of which is included in liabilities subject to compromise.
F-34
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FRENCH FRANC FACILITIES
The Company and its subsidiaries entered into French Franc facilities in
July and August 1996 relating to its acquisition of Lejaby. These facilities,
which were amended in April 1998 and in August and November 1999, included a
term loan facility in an original amount of 370 million French Francs and a
revolving credit facility of 480 million French Francs, which was reduced to
441.6 million French Francs pursuant to the Amendment Agreement. Amounts
borrowed under these facilities were subject to interest at an interest rate
based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. Beginning in July 1997, the Company began repaying the term loan in
annual installments, with a final installment due on December 31, 2001. In
conjunction with the Amendment Agreement the annual installments were eliminated
and the maturity of the loan was extended to August 12, 2002. The revolving
portion of this facility provided for multi-currency revolving loans to be made
to the Company and a number of its European subsidiaries. As of January 5, 2002
and January 4, 2003, the total amount outstanding under these facilities was
$59,545 and $55,424 equivalent, respectively, all of which is included in
liabilities subject to compromise.
$400,000 TRADE CREDIT FACILITY
On October 6, 2000, in conjunction with signing the Amendment Agreement, the
Company entered into a new $400,000 Trade Credit Facility which provided
commercial letters of credit for the purchase of inventory from suppliers and
offered the Company extended terms for periods of up to 180 days ('Trade
Drafts'). Amounts drawn under this facility were subject to interest at an
interest rate based on the Eurodollar rate plus a margin determined under the
Amendment Agreement. The Company classified the 180-day Trade Drafts in trade
accounts payable. At January 5, 2002 and January 4, 2003, the Company had
approximately $351,367 and $349,737, respectively of Trade Drafts outstanding
under this facility, all of which is included in liabilities subject to
compromise.
OTHER FACILITIES
In July 1998, the Company entered into a term loan agreement with a member
of its existing bank group. This loan was due to be repaid in equal installments
with a final maturity date of July 4, 2002. Amounts outstanding under this
agreement as of January 5, 2002 and January 4, 2003 were $27,161 and $27,034,
respectively, and are included in liabilities subject to compromise.
The Company issued $40,372 of notes in conjunction with the amendment of its
Equity Agreements with two of its banks. Amounts borrowed under these notes were
subject to interest at a rate based on the Eurodollar rate plus a margin
determined under the Amendment Agreement. These notes were to mature on
August 12, 2002. As of January 5, 2002 and January 4, 2003, the total amount
outstanding under the Equity Agreements, including Equity Adjustments was
$56,677 and $56,506, respectively. Loans related to the Equity Agreements
outstanding are included in liabilities subject to compromise.
FOREIGN CREDIT FACILITIES
The Company and certain of its foreign subsidiaries entered into credit
agreements that provided for revolving lines of credit and issuance of letters
of credit ('Foreign Credit Facilities'). At January 5, 2002 and January 4, 2003,
the total outstanding amounts of the Foreign Credit Facilities were
approximately $83,894 equivalent and $91,534 equivalent, respectively. The
increase in the Foreign Credit Facilities outstanding balance from the end of
Fiscal 2001 to the end of Fiscal 2002 reflects unfavorable exchange rate
movement in the Euro, Pound Sterling and Canadian dollar compared to the United
States dollar. The foreign subsidiaries were not parties to the Chapter 11
Cases. The Foreign Credit Facilities are subject to standstill and
inter-creditor agreements. The Company recorded interest expense of $4,110 and
$9,833 in Fiscal 2001 and Fiscal 2002, respectively, on certain of these foreign
F-35
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
credit facilities. The Plan required the payment of such interest and, as a
result, the Company repaid the outstanding principal amount and accrued interest
totaling $106,112 pursuant to the terms of the Plan on February 4, 2003.
RESTRICTIVE COVENANTS -- AMENDMENT AGREEMENT
Pursuant to the terms of the Amendment Agreement, the Company was required
to maintain certain financial ratios and was prohibited from paying dividends.
On March 29, 2001, lenders under the Amendment Agreement waived compliance with
the financial ratios until April 16, 2001. On April 13, 2001, the lenders
extended this waiver until May 16, 2001 and on May 16, 2001, the lenders
extended the waiver to June 15, 2001. The Company filed for protection under
Chapter 11 of the Bankruptcy Code on June 11, 2001.
RESTRICTIVE COVENANTS -- AMENDED DIP
The Amended DIP contained financial and restrictive covenants that, among
other things, required the Company to achieve a minimum level of EBITDAR, as
defined, restricted the amount of capital expenditures the Company could incur
and prohibited the Company from incurring additional indebtedness and paying
dividends. As of January 5, 2002 and January 4, 2003, the Company was in
compliance with all covenants of the Amended DIP.
LEASE REJECTIONS
The Company has entered into operating lease agreements for manufacturing,
distribution and administrative facilities and retail stores. The Company has
provided approximately $20,600 and $32,389 for the estimated total amount of
claims the Company expected to receive related to rejected leases as of
January 5, 2002 and January 4, 2003, respectively. In addition, the Company has
entered into operating leases for equipment and other assets and has accepted
certain lease agreements pursuant to the Plan.
INTEREST RATE SWAPS
As of December 30, 2000, the Company had four interest rate swap agreements
in place which were used to convert variable interest rate borrowings of
$329,500 to fixed interest rates. The counter-parties to all of the Company's
interest rate swap agreements were banks who were lenders in the Company's bank
credit agreements. The fair value of these swaps based on quoted market prices
at December 30, 2000 was $512 less than the carrying amount. Due to the
Chapter 11 Cases, the Company's outstanding swap agreement maturing in June 2006
were cancelled as of the Petition Date resulting in a loss $420 in Fiscal 2001.
The Company's agreements in place as of January 1, 2000 in the amounts of
$75,000, $210,000, $150,000 and $250,000 were terminated in March 2000 for a
cash gain of $26,076, which was being amortized over the life of the agreements.
Unamortized deferred swap income of $21,744 was reclassified to other
comprehensive income as a transition adjustment upon the adoption of SFAS 133 in
the first quarter of Fiscal 2001. In conjunction with the Chapter 11 Cases, the
Company suspended interest payments on the outstanding debt obligations of the
Debtors, and as a result, realized the deferred income as of the Petition Date.
The unamortized amount of $18,887 was included in reorganization items for the
year ended January 5, 2002.
Differences between the fixed interest rate on each swap and the one-month
or three-month LIBOR rate were settled at least quarterly between the Company
and each counter-party. Pursuant to
F-36
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
its interest rate swap agreements, the Company made payments totaling $372 in
the year ended December 30, 2000 (none in Fiscal 2001 and Fiscal 2002).
NOTE 15 -- LIABILITIES SUBJECT TO COMPROMISE
The principal categories of obligations classified as liabilities subject to
compromise are identified below. The amounts set forth below may vary
significantly from the stated amounts of proofs of claim as filed with the
Bankruptcy Court and may be subject to future adjustments depending on the final
settlement of certain unsecured pre-petition obligations prior to the final
distributions of shares of New Common Stock to unsecured creditors. The Company
expects to make such final distributions in April 2003. The following summarizes
the amount of liabilities subject to compromise:
<Table>
<Caption>
FISCAL YEARS ENDED
-----------------------
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Current liabilities:
Accounts payable(a)..................................... $ 386,711 $ 385,931
Accrued liabilities, including unsecured GECC claim..... 66,070 128,567
Debt:
$600 million term loan(b)............................... 587,548 584,824
Revolving credit facilities(b).......................... 1,018,719 1,013,995
Term loan agreements(b)................................. 27,161 27,034
Capital lease obligations............................... 1,265 1,265
Foreign credit facilities(b)............................ 143,439 146,958
Equity Agreement Notes(b)............................... 56,677 56,506
Company-obligated mandatorily redeemable convertible
preferred securities.................................. 120,000 120,000
Other liabilities....................................... 27,485 21,002
---------- ----------
$2,435,075 $2,486,082
---------- ----------
---------- ----------
</Table>
- ---------
(a) Accounts payable includes $351,367 and $349,737 of trade
drafts payable at January 5, 2002 and January 4, 2003,
respectively. As a result of the Chapter 11 Cases, no
principal or interest payments were made on unsecured
pre-petition debt.
(b) Changes due to pro-rata repayments and fluctuations in
foreign currency exchange rates.
NOTE 16 -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES
In 1996, Designer Holdings, Ltd. ('Designer Holdings') issued 2.4 million
Company-obligated mandatorily redeemable convertible preferred securities of a
wholly owned subsidiary (the 'Preferred Securities') for aggregate gross
proceeds of $120,000. The Preferred Securities represented preferred undivided
beneficial interests in the assets of Designer Finance Trust ('Trust'), a
statutory business trust formed under the laws of the State of Delaware in 1996.
Designer Holdings owned all of the common securities representing undivided
beneficial interests of the assets of the Trust. Accordingly, the Trust is
included in the consolidated financial statements of the Company. The Trust
exists for the sole purpose of (i) issuing the Preferred Securities and common
securities (together with the Preferred Securities, the 'Trust Securities'),
(ii) investing the gross proceeds of the Trust Securities in 6% Convertible
Subordinated Debentures of Designer Holdings due 2016 ('Convertible Debentures')
and (iii) engaging in only those other activities necessary or incidental
thereto. The Company indirectly owns 100% of the voting common securities of the
Trust, which is equal to 3% of the Trust's total capital.
F-37
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Each Preferred Security was convertible at the option of the holder thereof
into 0.6888 of a share of Old Common Stock of the Company, or 1,653,177 shares
of the Company's Old Common Stock in the aggregate, at an effective conversion
price of $72.59 per share of Old Common Stock, subject to adjustments in certain
circumstances.
The holders of the Preferred Securities were entitled to receive cumulative
cash distributions at an annual rate of 6% of the liquidation amount of $50.00
per Preferred Security, payable quarterly in arrears. The distribution rate and
payment dates correspond to the interest rate and interest payment dates on the
Convertible Debentures, which were the sole assets of the Trust. As a result of
the acquisition of Designer Holdings by the Company, the Preferred Securities
were adjusted to their estimated fair value at the date of acquisition of
$100,500, resulting in a decrease in their recorded value of approximately
$19,500. This decrease was being amortized, using the effective interest rate
method to maturity of the Preferred Securities. Such distributions and accretion
to redeemable value were included in interest expense. As of the Petition Date
the Company suspended payments due under the Convertible Debentures and wrote
off the original issue discount related to the Convertible Debentures and the
related bond issue costs, net of accumulated amortization, as of the Petition
Date totaling $21,411. This amount is included in reorganization items and the
nominal value of the Convertible Debentures of $120,000 is included in
liabilities subject to compromise as of January 5, 2002 and January 4, 2003.
The Company had the right to defer payments of interest on the Convertible
Debentures and distributions on the Preferred Securities for up to twenty
consecutive quarters (five years), provided such deferral did not extend past
the maturity date of the Convertible Debentures. Upon the payment, in full, of
such deferred interest and distributions, the Company may defer such payments
for additional five-year periods. The Company deferred the interest payments
under these instruments that were due on December 31, 2000 and March 31, 2001.
The deferred interest and distributions through the Petition Date amounting to
$4,975 are included in liabilities subject to compromise at January 5, 2002 and
January 4, 2003.
The Preferred Securities were mandatorily redeemable upon the maturity of
the Convertible Debentures on December 31, 2016, or earlier to the extent of any
redemption by the Company of any Convertible Debenture, at a redemption price of
$50.00 per share plus accrued and unpaid distributions to the date fixed for
redemption. In addition, there are certain circumstances wherein the Trust will
be dissolved, with the result that the Convertible Debentures will be
distributed pro-rata to the holders of the Trust Securities.
The Company guaranteed, on a subordinated basis, distributions and other
payments due on the Preferred Securities ('Guarantee'). In addition, the Company
entered into a supplemental indenture pursuant to which it has assumed, as a
joint and several obligor with Designer Holdings, liability for the payment of
principal, premium, if any, and interest on the Convertible Debentures, as well
as the obligation to deliver shares of Old Common Stock, par value $.01 per
share, of the Company upon conversion of the Preferred Securities as described
above. The claims of the holders of the Convertible Debentures are subordinate
to the secured creditors and other preferred creditors under the Chapter 11
Cases and are structurally subordinated to general unsecured claims. Holders of
the Convertible Debentures received 268,200 shares of New Common Stock on
February 4, 2003, pursuant to the terms of the Plan.
The following is summarized financial information of Designer Holdings and
its subsidiaries as of January 5, 2002 and January 4, 2003 and for each of the
three fiscal years in the period ended January 4, 2003.
F-38
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Current assets.............................................. $ 96,536 $ 70,605
Non-current assets.......................................... 421,955 111,117
Current liabilities......................................... 24,684 25,335
Non-current liabilities..................................... 39,562 --
Liabilities subject to compromise:
Current liabilities..................................... 8,564 8,595
Redeemable preferred securities......................... 120,000 120,000
Stockholder's equity........................................ 325,681 27,792
</Table>
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 30, JANUARY 5, JANUARY 4,
2000(a) 2002(a) 2003(a)
------- ------- -------
Net revenues................................ $481,835 $287,655 $ 282,861
Cost of goods sold.......................... 374,221 236,675 214,757
Net loss.................................... (43,171)(b) (97,129)(b) (297,889)(b),(c)
</Table>
- ---------
(a) Excludes Retail Store Group net revenues of $72,456, $53,146
and $31,063 for Fiscal 2000, 2001 and Fiscal 2002,
respectively, and cost of goods sold of $49,025, $38,643 and
$17,238 for Fiscal 2000, Fiscal 2001 and Fiscal 2002,
respectively. As a result of the integration of Designer
Holdings into the operations of the Company, net income
associated with these revenues cannot be separately
identified. Excludes special charges of $18,074 in Fiscal
2000 as described in Note 5.
(b) Net loss includes a charge of $54,752, $38,842 and $16,702
of general corporate expenses for Fiscal 2000, Fiscal 2001
and Fiscal 2002, respectively.
(c) Includes the cumulative effect of a change in accounting
policy of $294,497 in Fiscal 2002 related to the adoption of
SFAS No. 142.
NOTE 17 -- STOCKHOLDERS' DEFICIENCY
Total dividends declared during Fiscal 2000 was $12,958 ($0.27 per share).
In December 2000, the Company suspended payment of its quarterly cash dividend.
The Amended DIP and the Exit Financing Facility prohibits the Company from the
paying dividends or making distributions to the holders of common stock.
The Company has 10,000,000 shares of authorized and unissued preferred stock
with a par value of $0.01 per share.
In August 1999, the Board of Directors of the Company adopted a rights
agreement (the 'Old Rights Agreement'). Under the terms of the Old Rights
Agreement, the Company declared a dividend distribution of one right for each
outstanding share of Old Common Stock to stockholders of record on August 31,
1999. Each right entitled the holder to purchase from the Company a unit
consisting of one one-thousandth of a Series A Junior Participating Preferred
Stock, par value $.01 per share, at a purchase price of $100 per unit. The
rights only became exercisable, if not redeemed, ten days after a person or
group has acquired 15% or more of the Company's Old Common Stock or the
announcement of a tender offer that would result in a person or group acquiring
15% or more of the Old Common Stock. The Old Rights Agreement expired on
February 4, 2003 in conjunction with the consummation of the Plan.
On the Effective Date, pursuant to the Plan and a rights agreement (the 'New
Rights Agreement'), the Company distributed one Right (a 'Right') for each
outstanding share of Company
F-39
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
New Common Stock to stockholders of record at the Effective Date and authorized
the issuance of one Right for each share of New Common Stock issued thereafter
and prior to the Distribution Date (as defined in the New Rights Agreement).
Each Right entitles the registered holder to purchase from the Company one
one-thousandth of a share (a 'Unit') of Series A Preferred Stock, par value
$0.01 per share, at a purchase price of $45.00 per Unit, subject to adjustment.
Subject to the terms and conditions of the New Rights Agreement, if not earlier
redeemed upon the approval of the holders of 55% of the New Common Stock, the
Rights only become exercisable upon the occurrence of certain events as set
forth in the New Rights Agreement.
The plans described below relate to Old Common Stock that was cancelled in
connection with the Plan.
STOCK COMPENSATION PLANS
The Board of Directors and Compensation Committee thereof are responsible
for administration of the Company's compensation plans and determine, subject to
the provisions of the plans, the number of shares to be issued, the terms of
awards, the sale or exercise price, the number of shares awarded and the rate at
which awards vest or become exercisable. A summary of option and other stock
awards outstanding under the Company's various stock compensation plans as of
January 4, 2003 are summarized below. All such options and the related stock
were cancelled in connection with the Plan.
1988 EMPLOYEE STOCK PURCHASE PLAN
In 1988, the Company adopted the 1988 Employee Stock Purchase Plan ('Stock
Purchase Plan'), which provides for sales of up to 4,800,000 shares of Old
Common Stock of the Company to certain key employees. At December 31, 2000,
January 5, 2002 and January 4, 2003, 4,521,300 shares were issued and
outstanding pursuant to grants under the Stock Purchase Plan. All shares were
sold at amounts determined to be equal to the fair market value.
1991 STOCK OPTION PLAN
In 1991, the Company established The Warnaco Group, Inc. 1991 Stock Option
Plan ('Option Plan') and authorized the issuance of up to 1,500,000 shares of
Old Common Stock pursuant to incentive and non-qualified option grants to be
made under the Option Plan. The exercise price on any stock option award may not
be less than the fair market value of the Company's Common Stock at the date of
the grant. The Option Plan limits the amount of qualified stock options that may
become exercisable by any individual during a calendar year. Options generally
expire ten years from the date of grant and vest ratably over four years.
1993 STOCK PLAN
On May 14, 1993, the stockholders approved the adoption of The Warnaco
Group, Inc. 1993 Stock Plan ('Stock Plan') which provided for the issuance of up
to 2,000,000 shares of Old Common Stock of the Company through awards of stock
options, stock appreciation rights, performance awards, restricted stock units
and stock unit awards. On May 12, 1994, the stockholders approved an amendment
to the Stock Plan whereby the number of shares issuable under the Stock Plan was
to be automatically increased each year by 3% of the number of outstanding
shares of Old Common Stock of the Company as of the beginning of each fiscal
year. The exercise price of any stock option award may not be less than the fair
market value of the Old Common Stock at the date of the grant. Options generally
expire ten years from the date of grant and vest ratably over four years.
F-40
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
In accordance with the provisions of the Stock Plan, the Company granted
190,680 shares of restricted stock to certain employees, including certain
officers of the Company, during the fiscal year ended January 1, 2000. During
Fiscal 2000, 2001 and 2002, there were no restricted stock grants. The
restricted shares vest over four years. The fair market value of the restricted
shares was $5,458 at the date of grant. The Company recognizes compensation
expense equal to the fair value of the restricted shares over the vesting
period. Compensation expense for the 2000, 2001 and 2002 fiscal years was
$4,643, $1,999 and $258, respectively. During Fiscal 2000, there were no
restricted shares cancelled. During Fiscal 2001, 119,250 unvested restricted
shares were cancelled and the unearned stock compensation of $3,929 was reversed
in stockholders' equity (deficiency). During Fiscal 2002, 4,000 unvested
restricted shares were cancelled and the unearned stock compensation of $115 was
reversed in stockholders' deficiency. Unearned stock compensation at December
30, 2000, January 5, 2002 and January 4, 2003 was $6,341, $413 and $40
respectively, and is included in stockholders' deficiency.
1993 NON-EMPLOYEE DIRECTOR STOCK PLAN AND 1998 DIRECTOR PLAN
In May 1994, the Company's stockholders approved the adoption of the 1993
Non-Employee Director Stock Plan ('Director Plan'). The Director Plan provides
for awards of non-qualified options to non-employee directors of the Company.
Options granted under the Director Plan are exercisable in whole or in part
until the earlier of ten years from the date of the grant or one year from the
date on which an option holder ceases to be a Director eligible for grants.
Options are granted at the fair market value of the Company's Common Stock at
the date of the grant. In May 1998, the Board of Directors approved the adoption
of the 1998 Stock Plan for Non-Employee Directors ('1998 Director Plan', and
together with the Director Plan, 'Combined Director Plan'). The 1998 Director
Plan includes the same features as the Director Plan and provides for issuance
of the Company's Common Stock held in treasury. The Combined Director Plan
provides for the automatic grant of options to purchase (i) 30,000 shares of
Common Stock upon a Director's election to the Company's Board of Directors and
(ii) 20,000 shares of Common Stock immediately following each annual
shareholder's meeting as of the date of such meeting.
1997 STOCK OPTION PLAN
In 1997, the Company's Board of Directors approved the adoption of The
Warnaco Group, Inc. 1997 Stock Option Plan ('1997 Plan') which provides for the
issuance of incentive and non-qualified stock options and restricted stock up to
the number of shares of common stock held in treasury. The exercise price on any
stock option award may not be less than the fair market value of the Company's
common stock on the date of grant. The Plan limits the amount of qualified stock
options that may become exercisable by any individual during a calendar year and
limits the vesting period for options awarded under the 1997 Plan.
F-41
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
A summary of the status of the Company's stock option plans are presented
below:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
--------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Outstanding at beginning of
year........................ 13,857,346 $29.85 15,741,796 $26.03 6,011,639 $20.92
Granted....................... 2,718,750 10.73 430,000 3.52 --
Exercised..................... -- -- -- -- --
Cancelled..................... (834,300) 24.10 (10,160,157) 28.85 (2,319,276) 22.87
---------- ----------- ----------
Outstanding at end of year.... 15,741,796 26.03 6,011,639 20.92 3,692,363 22.30
---------- ----------- ----------
---------- ----------- ----------
Options exercisable at end of
year........................ 12,237,437 28.62 3,793,572 23.00 2,887,229 10.34
---------- ----------- ----------
---------- ----------- ----------
Weighted average fair value of
options granted............. $ 5.66 $ 2.75 $--
------ ------ ------
------ ------ ------
Options available for future
grant....................... 2,788,611 14,226,104 16,545,380
---------- ----------- ----------
---------- ----------- ----------
</Table>
In Fiscal 2000, Fiscal 2001 and Fiscal 2002, in exchange for shares received
from option holders with a fair value of $702, $49 and $0, respectively, the
Company paid $702, $49 and $0, respectively, of withholding taxes on options
that were exercised during the year. Such shares have been included in treasury
at cost, which equals fair value at date of option exercise or vesting.
Summary information related to options outstanding and exercisable at
January 4, 2003 is as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
AT CONTRACTUAL AVERAGE AT AVERAGE
JANUARY 4, LIFE EXERCISE JANUARY 4, EXERCISE
RANGE OF EXERCISE PRICES 2003 (YEARS) PRICE 2003 PRICE
------------------------ ---- ------- ----- ---- -----
$ 0.67 - $10.00.......................... 427,500 8.04 $ 3.94 181,250 $ 4.44
$10.01 - $20.00.......................... 1,335,250 4.98 12.27 880,125 13.12
$20.01 - $30.00.......................... 1,219,538 5.44 25.18 1,115,779 25.19
$30.01 - $40.00.......................... 655,075 4.72 33.01 655,075 33.01
$40.01 - $50.00.......................... 55,000 5.32 41.85 55,000 41.85
--------- ---------
3,692,363 2,887,229
--------- ---------
--------- ---------
</Table>
The Company reserved 16,545,380 shares of Old Common Stock for issuance
under the Director Plan, Stock Plan and Option Plan as of January 4, 2003. In
addition, as of January 4, 2003 there were 12,242,629 shares of Old Common Stock
in treasury stock available for issuance under the 1997 Plan.
The following are the number of shares of Old Common Stock and treasury
stock outstanding as of December 30, 2000, January 5, 2002 and January 4, 2003.
F-42
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
NUMBER OF SHARES
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Common Stock:
Balance at beginning of year......................... 65,393,038 65,232,594 65,232,594
Shares issued under restricted stock grants, net of
cancellations...................................... (160,444) -- --
---------- ---------- ----------
Balance at end of year............................... 65,232,594 65,232,594 65,232,594
---------- ---------- ----------
---------- ---------- ----------
Treasury Stock:
Balance at beginning of year......................... 12,163,650 12,063,672 12,242,629
Net additions/returned............................... (99,978) 178,957 --
---------- ---------- ----------
Balance at end of year............................... 12,063,672 12,242,629 12,242,629
---------- ---------- ----------
---------- ---------- ----------
</Table>
STOCK BUYBACK PROGRAM
On November 14, 1996, the Board of Directors approved a stock buyback
program of up to 2.0 million shares. On May 14, 1997, the Company's Board of
Directors approved an increase of this program to 2,420,000 shares. On February
19, 1998 and on March 1, 1999, the Company's Board of Directors authorized the
repurchase of an additional 10,000,000 shares, resulting in a total
authorization of 22.42 million shares. During Fiscal 1999, the Company
repurchased 6,182,088 shares of its Old Common Stock under the repurchase
programs at a cost of $144,688. At January 4, 2003, there were 10,353,894 shares
available for repurchase under this program.
The Company has used a combined put-call option contract to facilitate the
repurchase of its common stock. This contract provides for the sale of a put
option giving the counter-party the right to sell the Company's shares to the
Company at a preset price at a future date and for the simultaneous purchase of
a call option giving the Company the right to purchase its shares from the
counter-party at the same price at the same future date.
In connection with the Company's stock repurchase program, the Company
entered into Equity Forward Purchase Agreements ('Equity Agreements') on
December 10, 1999 and February 10, 2000, with two banks for terms of up to two
and one-half years. The Equity Agreements provided for the purchase by the
Company of up to 5.2 million shares of the Company's Old Common Stock. The
Equity Agreements were 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. As of
December 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. 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 charge to
shareholders equity. As of January 5, 2002 and January 4, 2003, the price at
which the Company could effect physical settlement or settle in cash or net
shares with the two banks under the Equity Agreements was $4.50. Losses related
to the Equity Agreements are included with investment income (loss) in the
consolidated statements of operations for the years ended January 5, 2002 and
January 4, 2003 were $6,556 and $0, respectively. Amounts due to the banks under
these agreements totaled $56,677 and $56,506, respectively, at January 5, 2002
and January 4, 2003 and are included in liabilities subject to compromise.
F-43
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 18 -- LOSS PER SHARE
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Numerator for basic and diluted loss per share:
Loss before cumulative effect of change in
accounting....................................... $(376,861) $(861,153) $(163,241)
Cumulative effect of change in accounting, net of
taxes............................................ (13,110) -- (801,622)
--------- --------- ---------
Net loss............................................... $(389,971) $(861,153) $(964,863)
--------- --------- ---------
--------- --------- ---------
Denominator for basic and diluted loss per
share -- Weighted average shares..................... 52,783 52,911 52,990 (a)
--------- --------- ---------
Basic and diluted loss per share before cumulative
effect of change in accounting....................... $ (7.14) $ (16.28) $ (3.08)
--------- --------- ---------
--------- --------- ---------
</Table>
- --------
(a) The effect of dilutive securities was not included in the
computation of diluted loss per share for the fiscal years
ended December 30, 2000, January 5, 2002 and January 4, 2003
because the effect would have been anti-dilutive. Dilutive
securities included options outstanding to purchase
15,741,796, 6,011,639 and 3,692,363 shares of Old Common
Stock, unvested restricted stock of 260,950, 19,424 and
5,200, and 5,200,000 of shares under Equity Agreements at
December 30, 2000, January 5, 2002 and January 4, 2003,
respectively. Additionally, incremental shares issuable on
the assumed conversion of the Preferred Securities of
1,653,177 were not included in the Fiscal 2000, 2001 or 2002
computation of diluted earnings per share as the impact
would have been anti-dilutive for each period presented.
There are no outstanding in-the-money stock options at or
for the years ended December 30, 2000, January 5, 2002 and
January 4, 2003
NOTE 19 -- LEASE AND OTHER COMMITMENTS
The Company is a party to various lease agreements for equipment, real
estate, furniture, fixtures and other assets, which expire at various dates
through 2020. Under these agreements, the Company is required to pay various
amounts including property taxes, insurance, maintenance fees, and other costs.
The following is a schedule of future minimum rental payments required under
operating leases with terms in excess of one year, as of January 4, 2003:
<Table>
<Caption>
RENTAL PAYMENTS
-----------------------
YEAR REAL ESTATE EQUIPMENT
- ---- ----------- ---------
2003........................................................ $17,206 $947
2004........................................................ 11,116 55
2005........................................................ 5,763 35
2006........................................................ 2,742 25
2007........................................................ 1,223 13
2008 and thereafter......................................... 1,887 --
</Table>
Rent expense included in the consolidated statements of operations for the
years ended December 31, 2000, January 5, 2002 and January 4, 2003 was $70,827,
$56,519 and $38,401, respectively.
In March 2003, the Company entered into a 14 year operating lease for office
space in New York City. Minimum lease commitments under the lease are:
F-44
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
RENTAL
YEAR PAYMENTS
- ---- --------
2003........................................................ $ 2,111
2004........................................................ 3,619
2005........................................................ 3,619
2006........................................................ 3,619
2007........................................................ 3,619
2008 and thereafter......................................... 33,514
</Table>
The Company's domestic lease agreements are subject to the provisions of the
Bankruptcy Code. Accrued rent for leases rejected pursuant to the bankruptcy
proceedings totaled $20,600 and $32,389 at January 5, 2002 and January 4, 2003,
respectively. The accrual for rejected leases is included in liabilities subject
to compromise at January 5, 2002 and January 4, 2003. Lease rejection accruals
represent general unsecured claims. All general unsecured claimants will receive
their pro-rata share of 1,147,050 shares of New Common Stock pursuant to the
Company's plan of reorganization. The number of shares that each claimant will
ultimately receive is subject to the final reconciliation of all unsecured
claims. The Company expects that all distributions to unsecured claimants will
be completed in the second quarter of fiscal 2003.
As discussed in Note 14, on June 9, 2002, the Bankruptcy Court approved the
Company's settlement of certain operating lease agreements with GECC. The leases
had original terms of from three to seven years and were secured by certain
equipment, machinery, furniture, fixtures and other assets. The total amount
payable to GECC under the settlement agreement was $15,200 of which $5,500 had
been paid by the Company, via operating lease payments, through June 12, 2002.
The present value of the remaining liability was $9,071 and this amount was
capitalized on June 12, 2002. The Company made principal payments of $3,458
against this liability and at January 4, 2003 the amount outstanding was $5,603.
This liability is to be settled by the Company in equal installments of $750
inclusive of finance charges.
The Company has license agreements with the following minimum guaranteed
royalty payments:
<Table>
<Caption>
MINIMUM
YEAR ROYALTY
- ---- -------
2003........................................................ $ 19,828
2004........................................................ 20,403
2005........................................................ 22,603
2006........................................................ 22,803
2007........................................................ 23,003
2008 and thereafter(a)...................................... 205,840
</Table>
- -------------
(a) Includes all minimum royalty obligations. Some of the Company's license
agreements have no expiration date or extend beyond 20 years. The duration
of these agreements for the purposes of this item are assumed to be
20 years. Variable based minimum royalty obligations are based upon
payments for the most recent fiscal year.
Although the specific terms of each of the Company's license agreements
vary, generally such agreements provide for minimum royalty payments and/or
royalty payments based upon a percentage of net sales. Such license agreements
also generally grant the licensor the right to approve any designs marketed by
the licensee.
Certain of the Company's license agreements with third parties will expire
by their terms over the next several years. There can be no assurance that the
Company will be able to negotiate and conclude extensions of such agreements on
similar economic terms.
In connection with the Chapter 11 Cases, the Company instituted a Key
Domestic Employee Retention Plan (the 'Retention Plan'), which was approved by
the Bankruptcy Court. The Retention Plan provided for stay bonuses, severance
protection and discretionary bonuses during the Chapter 11 Cases. Approximately
245 domestic employees are covered under the Retention Plan. Participants must
meet certain criteria to receive payments under the Retention Plan. The Company
incurred $5,982 of expenses related to the Retention Plan in the year ended
January 4, 2003, representing approximately one-third of the total amount due
under the Retention Plan. Retention Plan payments are included in
F-45
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
reorganization items for the year ended January 4, 2003. On June 10, 2002 the
Company made the second payment of $4,654 amounting to one-third of amounts due
to employees under the Retention Plan. The Company paid the final Retention Plan
payment in the amount of $4,746 on February 7, 2003.
During Fiscal 2001, the Company entered into an employment agreement with
the President and Chief Executive Officer of the Company. The employment
agreement, as amended, provided for a monthly salary of $125 payable through
April 30, 2003 or the consummation of a plan of reorganization for all or
substantially all of the Debtors in the Chapter 11 Cases. In conjunction with
the consummation of the Plan, the employee received (i) a cash bonus in the
amount of $1,950; (ii) 266,400 shares of New Common Stock; and (iii) $942 of
Second Lien Notes. Based upon the assumed BEV in the Plan ('implied equity
value') of $10.79 per share of the Company's New Common Stock on February 5,
2003, the total amount of bonus received by the employee is estimated to be
approximately $5,766. The employment agreement was terminated on February 4,
2003 and replaced by a consulting agreement as described in Note 5.
NOTE 20 -- FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Accounts Receivable. The carrying amount of the Company's accounts
receivables approximates fair value.
Marketable Securities. Marketable securities are stated at fair value based
on quoted market prices.
Pre-petition revolving loans, term loans and other borrowings. The carrying
amounts of the Company's outstanding balances under its various pre-petition
Bank Credit Agreements are recorded at the nominal amount plus accrued interest
and fees through the Petition Date less pro-rata repayments from the proceeds of
certain asset sales and are included in liabilities subject to compromise at
January 5, 2002 and January 4, 2003. Pursuant to the terms of the Plan, the
Company's pre-petition secured lenders received their pro-rata share of (i)
$106,112 in cash; (ii) $200,000 in Second Lien Notes; and (iii) 43,318,350
shares of New Common Stock. The estimated fair value of all distributions is
approximately $773,517 based upon the cash of $106,112, $200,000 nominal amount
of the Second Lien Notes and New Common Stock valued at approximately $467,405.
The value of the Company's New Common Stock is estimated at $10.79 per share
based upon the Company's BEV as described in the Plan.
Amended DIP. The carrying amounts under the Amended DIP, if any are recorded
at the nominal amount which approximates its fair value because the interest
rate on the outstanding debt is variable and there are no prepayment penalties.
Redeemable preferred securities. These securities were publicly traded on
the New York Stock Exchange prior to the petition date. At January 5, 2002 the
redeemable preferred securities are recorded at their nominal value of $120,000
and are included in liabilities subject to compromise. Pursuant to the Company's
plan of reorganization, holders of redeemable preferred securities received
268,200 shares of New Common Stock valued at approximately $2,894 based on the
implied equity value of $10.79 per share.
Letters of credit -- post petition. Letters of credit collateralize the
Company's obligations to third parties and have terms ranging from 30 days to
one year. The face amounts of the letters of credit are a reasonable estimate of
the fair value since the value for each is fixed over its relatively short
maturity.
Letters of credit -- pre-petition. Letters of credit collateralize the
Company's obligations to third parties and have terms ranging from 30 days to
one year. The face amounts of the letters of credit are a reasonable estimate of
the fair value since the value for each is fixed over its relatively short
maturity.
F-46
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Pre-petition letters of credit are recorded at their face amount. Pre-petition
letters of credit were satisfied by the Company's lenders or by the Company
during Fiscal 2001.
Equity agreements. These arrangements could be settled, at the Company's
option, by the purchase of shares, on a net basis in shares of the Company's Old
Common Stock or on a net cash basis prior to Petition Date. To the extent that
the market price of the Company's Old Common Stock on the settlement date was
higher or lower than the forward purchase price, the net differential could have
been paid or received by the Company in cash or in the Company's common stock.
Amounts payable under the Equity Agreements are included in liabilities subject
to compromise at January 5, 2002 and January 4, 2003. Equity Agreements were
included with the Company's other secured pre-petition lenders in the Plan.
Holders of the Equity Agreements received their pro-rata share of cash, New
Common Stock and Second Lien Notes.
Foreign currency transactions. Prior to the Petition Date, the Company
entered into various foreign currency forward and option contracts to hedge
certain commercial transactions. The fair value of open foreign currency forward
and option contracts was based upon quotes from brokers and reflects the cash
benefit if the existing contracts had been sold. The Company has no foreign
currency forward contracts outstanding as of January 5, 2002 and January 4,
2003. The Company had no foreign currency option contracts outstanding at
January 5, 2002 and January 4, 2003.
The carrying amounts and fair value of the Company's financial instruments
as of January 5, 2002 and January 4, 2003, are as follows:
<Table>
<Caption>
JANUARY 5, 2002 JANUARY 4, 2003
--------------------- -----------------------
CARRYING FAIR CARRYING
AMOUNT VALUE AMOUNT FAIR VALUE
------ ----- ------ ----------
Accounts receivable..................... $ 282,387 $282,387 $ 199,817 $ 199,817
Marketable securities................... 155 155 156 156
Amended DIP............................. 155,915 155,915 -- --
Revolving loans......................... 1,162,158 (a) 1,160,953 412,113
Acquisition term loan................... 587,548 (a) 584,824 207,600
Term loans.............................. 27,161 (a) 27,034 9,596
Other long term debt.................... 5,582 4,317 2,679 1,414
GECC lease settlement................... -- -- 5,603 5,603
Redeemable preferred securities......... 120,000 (a) 120,000 2,894
Equity agreements....................... 56,677 (a) 56,506 20,058
Letters of credit....................... -- 60,031 -- 60,672
</Table>
- --------
(a) Amounts outstanding under these debt agreements were subject
to compromise under the Chapter 11 Cases and as a result the
fair value could not be estimated at January 5, 2002.
FOREIGN CURRENCY-RISK MANAGEMENT
The Company's international operations are subject to certain risks,
including currency fluctuations and government actions. The Company closely
monitors its operations in each country so that it can respond to changing
economic and political environments and to fluctuations in foreign currencies.
Accordingly, prior to the Petition Date the Company utilized foreign currency
option contracts and forward contracts to hedge its exposure on anticipated
transactions and firm commitments, primarily for receivables and payables
denominated in currencies other than the entities' functional currencies.
Foreign currency instruments generally had maturities that did not exceed twelve
months.
The Company had foreign currency instruments, primarily denominated in
Canadian dollars, British pounds, Euros and Mexican pesos. At December 30, 2000,
the Company had $4,996 in foreign currency instruments outstanding. For Fiscal
2000, the net realized gains or losses associated with these types of
instruments were not material.
F-47
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company did not have any foreign currency hedge contracts at January 5,
2002 or January 4, 2003.
NOTE 21 -- CASH FLOW INFORMATION
The following table sets forth supplemental cash flow information for Fiscal
2000, 2001 and 2002:
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Cash paid (received) during the year for:
Interest....................................... 166,523 85,957 6,228
Income taxes, net of refunds received.......... (10,008) 6,148 (7,519)
Supplemental Non-Cash Investing and Financing
Activities:
Debt issued for purchase of fixed assets(a).... -- -- 9,071
</Table>
- --------
(a) Represents debt incurred and assets purchased under the GECC
lease settlement -- Note 14.
NOTE 22 -- LEGAL MATTERS
Shareholder Class Actions. 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 (the 'District Court') against the Company and
certain of its officers and directors (the 'Shareholder I Class Action'). The
complaints, on behalf of a putative class of shareholders of the Company who
purchased the Old Common Stock between September 17, 1997 and July 19, 2000 (the
'Class Period'), allege, inter alia, that the defendants violated the Exchange
Act by artificially inflating the price of the Old Common Stock and failing to
disclose certain information during the Class Period.
On November 17, 2000, the District Court consolidated the complaints into a
single action, styled In Re The Warnaco Group, Inc. Securities Litigation, No.
00-Civ-6266 (LMM), and appointed a lead plaintiff and approved a lead counsel
for the putative class. A second amended consolidated complaint was filed on
May 31, 2001. On October 5, 2001, the defendants other than the Company filed a
motion to dismiss based upon, among other things, the statute of limitations,
failure to state a claim and failure to plead fraud with the requisite
particularity. On April 25, 2002, the District Court granted the motion to
dismiss this action based on the statute of limitations. On May 10, 2002, the
plaintiffs filed a motion for reconsideration in the District Court. On May 24,
2002, the plaintiffs filed a notice of appeal with respect to such dismissal. On
July 23, 2002, plaintiffs' motion for reconsideration was denied. On July 30,
2002, the plaintiffs voluntarily dismissed, without prejudice, their claims
against the Company. On October 2, 2002, the plaintiffs filed a notice of appeal
with respect to the District Court's entry of a final judgment in favor of the
individual defendants.
Between April 20, 2001 and May 31, 2001, five putative class action
complaints against the Company and certain of its officers and directors were
filed in the District Court (the 'Shareholder II Class Action'). The complaints,
on behalf of a putative class of shareholders of the Company who purchased the
Old Common Stock between September 29, 2000 and April 18, 2001 (the 'Second
Class Period'), allege, inter alia, that defendants violated the Exchange Act by
artificially inflating the price of the Old Common Stock and failing to disclose
negative information during the Second Class Period.
On August 3, 2001, the District Court consolidated the actions into a single
action, styled In Re The Warnaco Group, Inc. Securities Litigation (II), No. 01
CIV 3346 (MCG), and appointed a lead plaintiff and approved a lead counsel for
the putative class. A consolidated amended complaint was filed against certain
current and former officers and directors of the Company, which expanded the
Second Class Period to encompass August 16, 2000 to June 8, 2001. The amended
complaint also dropped the Company as a defendant, but added as defendants
certain outside directors. On April 18,
F-48
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2002, the District Court dismissed the amended complaint, but granted plaintiffs
leave to replead. On June 7, 2002, the plaintiffs filed a second amended
complaint, which again expanded the Second Class Period to encompass August 15,
2000 to June 8, 2001. On June 24, 2002, the defendants filed motions to dismiss
the second amended complaint. On August 21, 2002, the plaintiffs filed a third
amended complaint adding the Company's current independent auditors as a
defendant.
Neither the Shareholder I Class Action nor Shareholder II Class Action has
had, or will have, a material adverse effect on the Company's financial
condition, results of operations or business.
Speedo Litigation. On September 14, 2000, Speedo International, Ltd. 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) (the 'Speedo Litigation'), 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 'Speedo Claims'). The
complaint sought, inter alia, termination of certain licensing agreements,
injunctive relief and damages.
On November 8, 2000, the Warnaco Defendants filed an answer and
counterclaims against Speedo International, Ltd. 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 (the 'Speedo Licenses') may not be terminated.
On or about October 30, 2001, Speedo International, Ltd. filed a motion in
the Bankruptcy Court seeking relief from the automatic stay to pursue the Speedo
Litigation in the District Court, and have its rights determined there through a
jury trial (the 'Speedo Motion'). The Debtors opposed the Speedo Motion, and
oral argument was held on February 21, 2002. On June 11, 2002, the Bankruptcy
Court denied the Speedo Motion on the basis that inter alia, (i) the Speedo
Motion was premature and (ii) the Bankruptcy Court has core jurisdiction over
resolution of the Speedo Claims.
On November 25, 2002, the Warnaco Defendants entered into a settlement
agreement with Speedo International, Ltd. to resolve the Speedo Claims on a
final basis (the 'Speedo Settlement Agreement'). On December 13, 2002, the
Bankruptcy Court entered an order approving the Speedo Settlement Agreement and
the Speedo Litigation was subsequently dismissed with prejudice.
The Speedo Settlement Agreement provided for (a) a total payment by the
Company to Speedo International, Ltd. in the amount of $2,558 in settlement of
disputed claims; (b) the assignment to Speedo International, Ltd. of certain
domain names; (c) an amendment to the Speedo Licenses and related agreements
(which remain in full force and effect for a perpetual term) to clarify certain
contractual provisions therein; (d) the execution of a separate Web Site
Agreement to govern the use of the Speedo mark in connection with the web site
operated by the Company; and (e) full mutual releases in favor of each of the
parties. The settlement of the Speedo Litigation did not have a material adverse
effect on the Company's financial condition, results of operations or business.
Wachner Claim. On January 18, 2002, Mrs. Linda J. Wachner, former President
and Chief Executive Officer of the Company, filed a proof of claim in the
Chapter 11 Cases related to the post-petition termination of her employment with
the Company asserting an administrative priority claim in excess of $25,000 (the
'Wachner Claim'). The Debt Coordinators for the Company's pre-petition lenders,
the Official Committee of Unsecured Creditors and the Company have objected to
the Wachner Claim. On November 15, 2002, the parties entered into a settlement
agreement (the 'Wachner Settlement'), pursuant to which Mrs. Wachner would
receive, in full settlement of the Wachner Claim, the following: (a) an Allowed
Unsecured Claim in connection with the termination of her employment agreement
in the amount of $3,500 (which would be satisfied under the Plan by a
distribution of its pro rata share of New Common Stock having a value of
approximately $250 at the time of distribution; and (b) an Allowed
Administrative Claim of $200 (which was satisfied by a cash payment of such
amount
F-49
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
upon confirmation of the Plan). The Wachner Settlement Agreement was approved by
the Bankruptcy Court on December 13, 2002.
SEC Investigation. As previously disclosed, the staff of the Securities and
Exchange Commission (the 'SEC') has been conducting an investigation to
determine whether there have been any violations of the Exchange Act in
connection with the preparation and publication by the Company of various
financial statements and other public statements. On July 18, 2002, the SEC
staff informed the Company that it intends to recommend that the SEC authorize
an enforcement action against the Company and certain persons who have been
employed by or affiliated with the Company since prior to the periods covered by
the Company's previous restatements of its financial results alleging violations
of the federal securities laws. The SEC staff invited the Company to make a
Wells Submission describing the reasons why no such action should be brought. On
September 3, 2002, the Company filed its Wells Submission and is continuing
discussions with the SEC staff as to a settlement of this investigation. The
Company does not expect the resolution of this matter as to the Company to have
a material effect on the Company's financial condition, results of operation or
business.
Chapter 11 Cases. For a discussion of proceedings under Chapter 11 of the
Bankruptcy Code, see Note 1.
In addition to the above, from time to time, the Company is involved in
arbitrations or legal proceedings that arise in the ordinary course of its
business. The Company cannot predict the timing or outcome of these claims and
proceedings. Currently, the Company is not involved in any arbitration and/or
legal proceeding that it expects to have a material effect on its business,
financial condition or results of operations.
NOTE 23 -- SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL INFORMATION
The following condensed consolidated financial statements of The Warnaco
Group, Inc., 36 of its 37 U.S. subsidiaries and Warnaco Canada represent the
condensed consolidated financial position as of January 5, 2002 and January 4,
2003, results of operations and cash flows for the Debtors for the years ended
January 5, 2002 and January 4, 2003.
F-50
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JANUARY 5, 2002 JANUARY 4, 2003
--------------- ---------------
Net revenues................................................ $1,410,597 $1,238,301
Cost of goods sold.......................................... 1,233,982 912,014
---------- ----------
Gross profit................................................ 176,615 326,287
Selling, general and administrative expenses................ 465,120 316,462
Impairment charge........................................... 101,772 --
Reorganization items........................................ 138,815 103,824
Equity in loss of unconsolidated subsidiaries............... 54,661 13,305
---------- ----------
Operating loss.............................................. (583,753) (107,304)
Interest expense............................................ 129,826 14,969
Investment loss............................................. (6,556) --
Other income................................................ 1,319 5,876
---------- ----------
Loss before provision for income taxes and cumulative effect
of change in accounting principle......................... (718,816) (116,397)
Provision for income taxes.................................. 142,337 46,844
Loss before cumulative effect of change in account
principle................................................. (861,153) (163,241)
Cumulative effect of change in accounting principle, net of
income tax benefits of $53,513 - 2002..................... -- (801,622)
---------- ----------
Net loss.................................................... $ (861,153) $ (964,863)
---------- ----------
---------- ----------
</Table>
F-51
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
JANUARY 5, 2002 JANUARY 4, 2003
--------------- ---------------
ASSETS
Current assets.............................................. $ 624,623 $ 556,512
Net property, plant and equipment........................... 191,117 139,219
Intercompany accounts, net.................................. 44,532 100,230
Intangible assets - net..................................... 869,659 64,038
Deferred income taxes....................................... -- 1,290
Investment in affiliates.................................... 181,212 7,128
----------- -----------
$ 1,911,143 $ 868,417
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities not subject to compromise:
Current liabilities:
Amended DIP........................................... $ 155,915 $ --
Other current liabilities............................. 132,831 155,994
----------- -----------
Total current liabilities....................... 288,746 155,994
Long-term debt............................................ 1,740 1,252
Other long-term liabilities............................... 31,736 81,185
Deferred income taxes....................................... 5,130 --
Liabilities subject to compromise........................... 2,435,075 2,486,082
Stockholders' deficiency:
Class A Common Stock, $0.01 par value, 130,000,000
shares authorized, 65,232,594 issued.................. 654 654
Additional paid-in capital.............................. 909,054 908,939
Accumulated other comprehensive loss.................... (53,016) (93,223)
Deficit................................................. (1,393,674) (2,358,537)
Treasury stock, at cost 12,242,629 shares............... (313,889) (313,889)
Unearned stock compensation............................. (413) (40)
----------- -----------
Total stockholders' deficiency.................. (851,284) (1,856,096)
----------- -----------
$ 1,911,143 $ 868,417
----------- -----------
----------- -----------
</Table>
F-52
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JANUARY 5, 2002 JANUARY 4, 2003
--------------- ---------------
Cash flows from operating activities:
Net loss.................................................... $(861,153) $(964,863)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization....................... 87,590 51,298
Amortization of deferred financing costs............ 19,414 10,984
Market value adjustment to Equity Agreement......... 6,556 --
Cumulative effect of accounting change net of
taxes............................................. -- 801,622
Non-cash assets write-downs and reorganization
items............................................. 242,738 61,973
Interest rate swap income........................... (21,355) --
Preferred stock interest accretion.................. 16,613 --
Amortization of unearned stock compensation......... 1,999 --
Deferred income taxes............................... 149,691 --
Repurchase of accounts receivable........................... (185,000) --
Accounts receivable......................................... 97,745 78,315
Inventories................................................. 50,905 61,931
Prepaid expenses and other current and long-term assets..... 2,210 102,150
Accounts payable and accrued liabilities.................... 2,456 18,576
--------- ---------
Net cash provided by (used in) operating
activities.................................... (389,591) 221,986
Cash flows from investing activities:
Capital expenditures.................................... (20,155) (5,076)
Disposal of fixed assets................................ 6,213 --
Increase in intangible and other assets................. (1,427) --
--------- ---------
Net cash used in investing activities........... (15,369) (5,076)
Cash flows from financing activities:
Repayments under pre-petition credit facilities......... (37,133) (10,873)
Borrowings under pre-petition credit facilities......... 366,593 --
Borrowings (repayments) under Amended DIP............... 155,915 (155,915)
Deferred financing costs................................ (19,852) --
Repayments of other debt................................ -- (5,351)
Net change in intercompany accounts..................... (42,841) 25,890
Other................................................... (2,465) --
--------- ---------
Net cash provided by (used in) financing
activities.................................... 420,217 (146,249)
Translation adjustments..................................... (1,854) 5,414
--------- ---------
Net increase in cash........................................ 13,403 76,075
Cash at beginning of year................................... 5,355 18,758
--------- ---------
Cash at end of year......................................... $ 18,758 $ 94,833
--------- ---------
--------- ---------
</Table>
F-53
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 24 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
YEAR ENDED JANUARY 5, 2002
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenues....................................... $499,219 $ 362,270 $397,664 $ 412,103
Gross profit (loss)................................ 145,277 (24,313) 87,512 88,398
Impairment charges................................. -- -- -- 101,772
Reorganization items............................... -- 78,202 25,735 73,854
Net loss........................................... (63,618) (338,418) (64,171) (394,946)
Basic loss per common share........................ (1.20) (6.40) (1.21) (7.46)
Diluted loss per common share...................... (1.20) (6.40) (1.21) (7.46)
</Table>
<Table>
<Caption>
YEAR ENDED JANUARY 4, 2003
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenues...................................... $ 410,052 $ 381,767 $345,458 $ 355,679
Gross profit...................................... 118,412 115,848 99,296 106,739
Reorganization items.............................. 15,531 42,554 21,122 37,475
Loss before cumulative effect of accounting
change.......................................... (56,130) (31,989) (15,631) (59,491)
Cumulative effect of accounting change, net of
taxes........................................... (801,622) -- --
--------- --------- -------- ---------
Net loss.......................................... $(857,752) $ (31,989) $(15,631) $ (59,491)
--------- --------- -------- ---------
--------- --------- -------- ---------
Basic and diluted loss per common share:
Loss before accounting change................. $ (1.06) $ (0.60) $ (0.30) $ (1.12)
Cumulative effect of accounting change, net of
taxes....................................... (15.14) -- -- --
--------- --------- -------- ---------
Net loss...................................... $ (16.20) $ (0.60) $ (0.30) $ (1.12)
--------- --------- -------- ---------
--------- --------- -------- ---------
</Table>
NOTE 25 -- FRESH START ACCOUNTING (UNAUDITED)
The Company's emergence from Chapter 11 proceedings on February 4, 2003 will
result in a new reporting entity and adoption of fresh start accounting as of
that date, in accordance with SOP 90-7. The consolidated financial statements as
of January 4, 2003 do not give effect to any adjustments in the carrying value
of assets or the amounts of liabilities that will be recorded upon
implementation of the Company's plan of reorganization
The following unaudited pro forma financial information reflects the
implementation of the Plan as if the Plan had been effective on January 4, 2003.
Reorganization adjustments have been estimated in the pro forma financial
information to reflect the discharge of debt and the adoption of fresh start
reporting in accordance with SOP 90-7. Accordingly, the estimated reorganization
value of the Company of $750,000 and equity value of $485,500, which served as
the basis for the Plan as approved by the Bankruptcy Court, has been used to
determine the pro forma value allocated to the assets and liabilities of the
Company in proportion to their relative fair values in conformity with SFAS No.
141 'Business Combinations.'
Estimated reorganization adjustments in the Pro Forma Balance Sheet result
primarily from the:
(i) reduction of property, plant and equipment carrying values;
(ii) reduction in the carrying value of inventory;
F-54
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(iii) increase in the carrying value of the Company's various
trademarks and license agreements;
(iv) forgiveness of the Company's pre-petition debt;
(v) issuance of New Common Stock and Second Lien Notes pursuant to the
Plan;
(vi) payment of various administrative and other claims associated with
the Company's emergence from Chapter 11; and
(vii) distribution of cash of $106,112 to the Company's pre-petition
secured lenders.
These adjustments were based upon the preliminary work of outside appraisers
and financial consultants, as well as other valuation estimates to determine the
relative fair values of the Company's assets and liabilities. The allocation of
the reorganization value to individual assets and liabilities will change based
upon facts present at the actual effective date of the Company's plan of
reorganization and will result in differences to the fresh start adjustments and
allocated values estimated in this pro forma information.
F-55
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
PRO-FORMA
JANUARY 4, DISCHARGE OF ISSUANCE OF FRESH START JANUARY 4,
2003 INDEBTEDNESS SECURITIES ADJUSTMENTS 2003
---- ------------ ---------- ----------- ----
ASSETS
Current assets:
Cash........................................... $ 114,025 $ (94,059)(a) $ -- $ -- $ 19,966
Restricted cash................................ 6,100 6,100
Accounts receivable............................ 199,817 199,817
Inventories, net............................... 345,268 (22,494)(d) 322,774
Prepaid expenses and other current assets...... 31,438 31,438
Assets held for sale........................... 1,458 1,458
Deferred income taxes.......................... 2,972 2,972
------------ ---------- ----------- -------- ----------
Current assets.................................... 701,078 (94,059) -- (22,494) 584,525
------------ ---------- ----------- -------- ----------
Property, plant and equipment -- net.............. 156,712 (26,712)(d) 130,000
Other assets:
Licenses, trademarks and other intangible
assets........................................ 87,031 213,169 (d) 300,200
Other assets................................... 3,059 4,158 (e) 7,217
Reorganization value in excess of net assets... -- (537,577)(a)(b) 686,492 (c) (97,755)(d)(e) 51,160
------------ ---------- ----------- -------- ----------
Total other assets....................... 90,090 (537,577) 686,492 119,572 358,577
------------ ---------- ----------- -------- ----------
$ 947,880 $ (631,636) $ 686,492 $ 70,366 $1,073,102
------------ ---------- ----------- -------- ----------
------------ ---------- ----------- -------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt.............. $ 5,765 $ 5,765
Debtor-in-possession revolving credit
facility...................................... -- --
Revolving credit facility...................... -- 12,052 (a) -- 14,561 (e) 26,613(f)
Accounts payable............................... 103,630 -- 103,630
Accrued liabilities............................ 92,661 (13,702)(a) -- (9,203)(e) 69,756
Accrued income taxes payable................... 28,420 28,420
------------ ---------- ----------- -------- ----------
Total current liabilities................ 230,476 (1,650) -- 5,358 234,184
------------ ---------- ----------- -------- ----------
Other long term liabilities................. 81,202 -- -- -- 81,202
Long-term debt:
Second Lien Notes due 2008..................... -- (a) 200,942 (c) -- 200,942
Other.......................................... 1,252 1,252
Liabilities subject to compromise................. 2,486,082 (2,486,082)(b) -- -- --
Deferred income taxes............................. 4,964 65,008 (d) 69,972
Stockholders' equity (deficiency):
Class A Common Stock, $0.01 par value.......... 654 (654)(b) 450 (c) -- 450
Additional paid-in capital..................... 908,939 (908,939)(b) 485,100 (c) -- 485,100
Accumulated other comprehensive loss........... (93,223) 93,223 (b) -- -- --
Deficit........................................ (2,358,537) 2,358,537 (b) -- -- --
Treasury stock, at cost........................ (313,889) 313,889 (b) -- -- --
Unearned stock compensation.................... (40) 40 (b) -- -- --
------------ ---------- ----------- -------- ----------
Total stockholders' equity (deficiency).. (1,856,096) 1,856,096 485,550 -- 485,550
------------ ---------- ----------- -------- ----------
$ 947,880 $ (631,636) $ 686,492 $ 70,366 $1,073,102
------------ ---------- ----------- -------- ----------
------------ ---------- ----------- -------- ----------
</Table>
- ---------
(a) Borrowed $12,052 under the Exit Financing Facility and
together with excess cash of $94,059 paid $106,111
(including accrued interest of $13,702) to the Company's
pre-petition secured creditors.
(footnotes continued on next page)
F-56
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(footnotes continued from previous page)
(b) Reflects the discharge of prepetition indebtedness and
cancellation of all outstanding shares of Old Common Stock,
including all options and restricted stock, additional
paid-in capital, treasury stock, unearned stock compensation
and other accumulated comprehensive loss.
(c) Reflects the issuance of 45,000,000 shares of New Common
Stock and $200,942 principal amount of Second Lien Notes
pursuant to the terms of the Plan.
(d) Reflects the adjustment of fixed assets to estimated fair
value of $130,000, licenses and trademarks to fair value of
$300,200, and the recognition of a deferred income tax
liability primarily related to the adjustment to fair value
of certain intangible assets of $69,972. Reflects the
elimination of certain design, procurement, receiving and
other inventory related costs of approximately $22,494.
(e) Borrowed $14,561 under the Exit Financing Facility to pay
deferred financing fees of $4,158, cash bonuses of $7,896
and other administrative claims of $2,507.
(f) Actual borrowing under the Exit Financing Facility on
February 4, 2003 was $39,200 reflecting changes in the
Company's cash position from January 4, 2003 through
February 4, 2003.
F-57
SCHEDULE II
THE WARNACO GROUP, INC.
VALUATION & QUALIFYING ACCOUNTS & RESERVES(5)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
ADDITIONS
BALANCE AT CHARGES TO OTHER BALANCE AT
BEGINNING COSTS AND ADDITIONS/ END
DESCRIPTION OF YEAR EXPENSES(1) RECLASSIFICATION DEDUCTIONS(4) OF YEAR
----------- ------- ----------- ---------------- ------------- -------
Year Ended December 30, 2000
Receivable allowances....... $ 93,872 $262,641 $ 6,993 (2) $(267,837) $ 95,669
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
Inventory reserves.......... $ 14,374 $179,254 $ 4,076 (2) $(168,408) $ 29,296
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
Year Ended January 5, 2002
Receivable allowances....... $ 95,669 $253,943 $(1,344)(3) $(235,350) $112,918
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
Inventory reserves.......... $ 29,296 $ 74,786 $ (627)(3) $ (53,358) $ 50,097
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
Year Ended January 4, 2003
Receivable allowances....... $112,918 $188,771 -- $(214,177) $ 87,512
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
Inventory reserves.......... $ 50,097 $ 42,354 $(2,981) $ (55,654) $ 33,816
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
</Table>
- -----------
(1) Includes bad debts, cash discounts, allowances and sales returns.
(2) Reserves related to assets acquired including fair value adjustments.
(3) Reclassifications of reserve amounts for assets held for sale.
(4) Credits issued and amounts written-off, net of recoveries.
(5) See Note 7 for income tax valuation allowance information.
A-1
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as ........................... 'TM'
The registered trademark symbol shall be expressed as ................ 'r'
The dagger symbol shall be expressed as .............................. 'D'