________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 5, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10857
-------------------
THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(212) 661-1300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
COPIES OF ALL COMMUNICATIONS TO:
THE WARNACO GROUP, INC.
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: GENERAL COUNSEL
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) of the Exchange Act. [x] Yes [ ] 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 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 44,999,973 shares of new Common Stock, par
value $.01 per share (the 'New Common Stock'). As of May 15, 2003, the aggregate
market value of the New Common Stock, the only voting stock of the registrant
currently issued and outstanding, held by non-affiliates of the registrant, was
approximately $469,702,517.
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. [x] Yes [ ] No
The number of shares outstanding of the registrant's common stock as of May
15, 2003 is as follows: 44,999,973.
________________________________________________________________________________
EXPLANATORY NOTE
This Amendment (the 'Amendment') on Form 10-Q/A constitutes Amendment No. 1
to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended
April 5, 2003, dated May 20, 2003 (as amended, the 'Quarterly Report'). In
connection with the filing of this Amendment and pursuant to Rule 12b-15 of the
Securities Exchange Act of 1934, as amended, certain currently dated
certifications have been included. The registrant has amended and restated the
Form 10-Q in its entirety.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------ -----------
APRIL 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---- ---- ----
ASSETS
Current assets:
Cash..................................................... $ 26,419 $ 20,706 $ 114,025
Restricted cash.......................................... -- 6,200 6,100
Accounts receivable, less reserves of $80,462 as of
April 5, 2003, $79,705 as of February 4, 2003 and
$87,512 as of January 4, 2003........................... 302,728 213,048 199,817
Inventories, net......................................... 315,632 348,033 345,268
Prepaid expenses and other current assets................ 30,435 30,890 31,438
Assets held for sale..................................... 1,364 1,485 1,458
Deferred income taxes.................................... 7,399 7,399 2,972
---------- ---------- -----------
Total current assets.................................. 683,977 627,761 701,078
---------- ---------- -----------
Property, plant and equipment -- net........................ 126,073 129,357 156,712
Other assets:
Licenses, trademarks, intangible and other assets, at
cost, less accumulated amortization of $4,473 as of
April 5, 2003, $0 as of February 4, 2003 and $19,069 as
of January 4, 2003...................................... 360,414 364,700 86,827
Deferred financing costs................................. 4,758 5,286 463
Other assets............................................. 2,876 2,703 2,800
Reorganization value..................................... 24,066 34,142 --
---------- ---------- -----------
Total other assets.................................... 392,114 406,831 90,090
---------- ---------- -----------
$1,202,164 $1,163,949 $ 947,880
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt........................ $ 3,757 $ 5,050 $ 5,765
Revolving credit facility................................ 60,990 39,200 --
Accounts payable......................................... 100,718 122,376 103,630
Accrued liabilities...................................... 119,424 105,302 102,026
Accrued income tax payable............................... 33,138 28,140 28,420
---------- ---------- -----------
Total current liabilities............................. 318,027 300,068 239,841
---------- ---------- -----------
Long-term debt............................................. 202,188 202,202 1,252
Deferred income taxes...................................... 83,681 86,975 4,964
Other long-term liabilities................................ 71,896 71,156 71,837
Liabilities subject to compromise........................... -- -- 2,486,082
Commitments and contingencies
Stockholders' equity (deficiency):
Successor preferred stock: $0.01 par value, 20,000,000
shares authorized Series A preferred stock, $0.01 par
value, 112,500 shares authorized as of April 5, 2003 and
February 4, 2003........................................ -- -- --
Successor common stock: $.01 par value, 112,500,000
shares authorized, 44,999,973 issued and outstanding as
of April 5, 2003 and February 4, 2003................... 450 450 --
Predecessor Class A common stock: $.01 par value,
130,000,000 shares authorized, 65,232,594 issued as of
January 4, 2003......................................... -- -- 654
Additional paid-in capital............................... 508,437 503,098 908,939
Accumulated other comprehensive loss..................... (34) -- (93,223)
Retained earnings (deficit).............................. 22,639 -- (2,358,537)
Predecessor Treasury stock, at cost 12,242,629 shares as
of January 4, 2003...................................... -- -- (313,889)
Unearned stock compensation.............................. (5,120) -- (40)
---------- ---------- -----------
Total stockholders' equity (deficiency)............... 526,372 503,548 (1,856,096)
---------- ---------- -----------
$1,202,164 $1,163,949 $ 947,880
---------- ---------- -----------
---------- ---------- -----------
</Table>
See Notes to Consolidated Condensed Financial Statements.
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------------- ------------------------------------
FOR THE
FOR THE PERIOD FOR THE PERIOD THREE MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO APRIL 5, 2003 TO FEBRUARY 4, 2003 APRIL 6, 2002
---------------- ------------------- -------------
Net revenues............................ $326,324 $ 115,960 $ 410,052
Cost of goods sold...................... 204,918 70,214 291,640
-------- ----------- ---------
Gross profit............................ 121,406 45,746 118,412
Selling, general and administrative
expenses.............................. 72,537 35,313 102,118
Amortization of sales order backlog..... 4,200 -- --
Reorganization items.................... 1,383 29,922 15,531
-------- ----------- ---------
Operating income (loss)................. 43,286 (19,489) 763
Reorganization items:
Gain on cancellation of pre-petition
indebtedness...................... -- (1,692,696) --
Fresh start adjustments............. -- (765,726) --
Investment loss, net.................... 35 359 --
Interest expense........................ 4,428 1,887 6,964
-------- ----------- ---------
Income (loss) before provision for
income taxes and cumulative effect of
a change in accounting principle...... 38,823 2,436,687 (6,201)
Provision for income taxes.............. 16,184 78,150 49,929
-------- ----------- ---------
Income (loss) before cumulative effect
of a change in accounting principle... 22,639 2,358,537 (56,130)
Cumulative effect of change in
accounting principle (net of income
tax benefit of $53,513 -- three months
ended April 6, 2002).................. -- -- (801,622)
-------- ----------- ---------
Net income (loss)....................... $ 22,639 $ 2,358,537 $(857,752)
-------- ----------- ---------
-------- ----------- ---------
Basic and diluted income (loss) per
common share:
Income (loss) before accounting
change............................ $ 0.50 $ 44.51 $ (1.06)
Cumulative effect of accounting
change............................ -- -- (15.14)
-------- ----------- ---------
Net income (loss)................... $ 0.50 $ 44.51 $ (16.20)
-------- ----------- ---------
-------- ----------- ---------
Weighted average number of shares
outstanding used in computing income
(loss) per common share:
Basic............................... 45,000 52,990 52,936
-------- ----------- ---------
-------- ----------- ---------
Diluted............................. 45,200 52,990 52,936
-------- ----------- ---------
-------- ----------- ---------
</Table>
See Notes to Consolidated Condensed Financial Statements.
2
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------------- ---------------------------------------
FOR THE
FOR THE PERIOD FOR THE PERIOD THREE MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO APRIL 5, 2003 TO FEBRUARY 4, 2003 APRIL 6, 2002
---------------- ------------------- -------------
Net income (loss)............................... $ 22,639 $ 2,358,537 $(857,752)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Gain on cancellation of pre-petition
indebtedness.............................. -- (1,692,696) --
Fresh start adjustments..................... -- (765,726) --
Provision for receivable allowances......... 30,413 15,206 57,647
Provision for inventory reserves............ 6,970 3,484 13,842
Net loss on sale of GJM, Penhaligon's and
Ubertech.................................. -- -- 2,139
Cumulative effect of change in accounting,
net of taxes.............................. -- -- 801,622
Provision for deferred income tax........... -- 77,584 46,058
Depreciation and amortization............... 10,046 4,511 13,831
Amortization of unearned stock
compensation.............................. 219 8 120
Amortization of deferred financing costs.... 213 463 2,350
Non-cash reorganization items............... -- 15,561 1,249
Change in operating assets and liabilities:
Accounts receivable......................... (120,093) (28,437) (75,379)
Inventories................................. 25,431 (28,520) 30,407
Prepaid expenses and other assets........... 5,998 (142) (6,762)
Accounts payable, accrued expenses and other
liabilities............................... (7,876) 14,948 362
Accrued income taxes........................ 13,863 293 2,361
-------- ----------- ---------
Net cash provided by (used in) operating
activities.................................... (12,177) (24,926) 32,095
-------- ----------- ---------
Cash flows from investing activities:
Disposals of fixed assets................... 60 -- 346
Purchase of property, plant & equipment..... (2,769) (745) (1,978)
Proceeds from sale of business units, net of
cash balances............................. -- -- 20,459
Increase in intangible and other assets..... -- -- 685
-------- ----------- ---------
Net cash provided by (used in) investing
activities.................................... (2,709) (745) 19,512
-------- ----------- ---------
Cash flows from financing activities:
Repayments of GECC debt..................... (1,437) (715) --
Repayments of capital lease obligations..... (74) -- --
Repayments of pre-petition debt............. -- (106,112) (5,932)
Repayments under Amended DIP................ -- -- (47,056)
Borrowings under revolving credit
facility.................................. 21,790 39,200 --
Other....................................... -- -- (1,243)
-------- ----------- ---------
Net cash provided by (used in) financing
activities.................................... 20,279 (67,627) (54,231)
-------- ----------- ---------
Translation adjustments......................... 320 (21) 1,730
-------- ----------- ---------
Increase (decrease) in cash..................... 5,713 (93,319) (894)
Cash at beginning of period..................... 20,706 114,025 39,558
-------- ----------- ---------
Cash at end of period........................... $ 26,419 $ 20,706 $ 38,664
-------- ----------- ---------
-------- ----------- ---------
</Table>
See Notes to Consolidated Condensed Financial Statements.
3
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 -- NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Organization: The Warnaco Group, Inc. ('Warnaco Group') 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 of Warnaco Group. Warnaco Group, Warnaco and certain of its
subsidiaries were reorganized under Chapter 11 of the Bankruptcy Code effective
February 4, 2003 (the 'Effective Date').
Nature of Operations: Warnaco Group 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 and 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 80 retail stores, including 45 Company-operated Speedo
Authentic Fitness full price retail stores in North America (including one
online store), four A.B.S. by Allen Schwartz full price retail stores in North
America, two Warnaco 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.
Chapter 11 Cases. On June 11, 2001 (the 'Petition Date'), Warnaco Group, 36
of its 37 U.S. subsidiaries and one of its Canadian subsidiaries, Warnaco of
Canada Company (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 remainder of Warnaco's foreign
subsidiaries were not debtors in the Chapter 11 Cases, nor were they subject to
foreign bankruptcy or insolvency proceedings.
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 (i) its 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 the Effective Date, 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. See Note 14. In accordance with the Plan, on the
Effective Date, the Company issued $200,942 of New Warnaco Second Lien Notes due
2008 (the 'Second Lien Notes') to certain 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. See
Note 14.
4
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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
Warnaco Group'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 44,999,973 shares of common
stock, par value $0.01 per share (the 'New Common Stock') in reliance on the
exemption from registration afforded by Section 1145 of the Bankruptcy Code,
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 Warnaco
of the Second Lien Notes in the principal amount of $200,942 to pre-petition
creditors and others (as specified below), which was secured by a second
priority security interest in substantially all of the Debtors' domestic assets
and guaranteed by Warnaco Group and Warnaco's domestic subsidiaries. The Company
received no proceeds from the issuance of the New Common Stock and the Second
Lien Notes; however, approximately $2,499,385 of indebtedness was extinguished
as a result of such issuances.
The following is a summary of distributions made pursuant to the Plan:
(a) 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;
(b) general unsecured claimants received 2.55% (1,147,023 shares) of the New
Common Stock, which the Company distributed in April 2003;
(c) the Company's pre-petition secured lenders received their pro-rata share
of $106,112 in cash, Second Lien Notes in the principal amount of
$200,000 and 96.26% of the New Common Stock (43,318,350 shares);
(d) holders of claims arising from or related to certain preferred
securities received 0.60% of the New Common Stock (268,200 shares);
(e) pursuant to the terms of his employment agreement, as modified by the
Plan, Antonio C. Alvarez II, the former 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); and
(f) in addition to the foregoing, allowed administrative and certain
priority claims were paid in full in cash.
Basis of Consolidation and Presentation: References in these consolidated
condensed financial statements to the 'Predecessor' refer to the Company prior
to February 4, 2003. References to the 'Successor' refer to the Company on and
after February 4, 2003 after giving effect to the implementation of fresh start
reporting. All intercompany accounts have been eliminated in consolidation.
The accompanying consolidated condensed financial statements of the
Predecessor for the periods January 6, 2002 to April 6, 2002 (the 'First Quarter
of Fiscal 2002') and January 5, 2003 to February 4, 2003 (the 'Stub Period')
have been presented in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code ('SOP 90-7'). In the Chapter 11 Cases,
substantially
5
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
all unsecured liabilities and under-secured liabilities as of the Petition Date
were subject to compromise or other treatment under the Plan. For financial
reporting purposes, those liabilities and obligations whose treatment and
satisfaction were dependent on the outcome of the Chapter 11 Cases have been
segregated and classified as liabilities subject to compromise in the
accompanying consolidated condensed balance sheet as of January 4, 2003.
Pursuant to SOP 90-7, professional fees and other costs associated with the
Chapter 11 Cases were expensed as incurred and reported as reorganization items.
Interest expense was reported only to the extent that it was to be paid during
the Chapter 11 Cases.
Upon its emergence from bankruptcy on February 4, 2003, the Company
implemented fresh start reporting under the provisions of SOP 90-7. Pursuant to
the provisions of SOP 90-7, (i) the Company's reorganization value of $750,000
was allocated to the fair value of the Company's assets; (ii) the Company's
accumulated deficit was eliminated; and (iii) the Old Common Stock was
cancelled. In addition, approximately $2,499,385 of the Company's outstanding
pre-petition debt and liabilities were discharged.
The accompanying unaudited consolidated condensed financial statements
include all adjustments (all of which were of a normal, recurring nature except
for (i) the adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ('SFAS 142'); (ii) adjustments related to
the Chapter 11 Cases; and (iii) adjustments related to the forgiveness of
indebtedness and adoption of fresh start accounting pursuant to the provisions
of SOP 90-7) which are, in the opinion of management, necessary for fair
presentation of the results of operations and financial position of the Company.
Periods Covered: The First Quarter of Fiscal 2002 contained 13 weeks of
operations of the Predecessor. The month ended February 4, 2003 contained 4
weeks of operations of the Predecessor. The two months ended April 5, 2003
contained 9 weeks of operations of the Successor.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
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 condensed
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 goods are shipped
to customers and title and risk of loss has passed to the customers, net of
reserves 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
6
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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 April 5, 2003 the Company had approximately
$367,292 of open trade invoices and other receivables and $15,898 of open debit
memos. Based upon the Company's analysis of estimated recoveries and collections
associated with the related invoices and debit memos, the Company had $80,462 of
accounts receivable reserves at April 5, 2003. As of February 4, 2003, the
Company had approximately $281,917 of open trade invoices and other receivables
and $10,836 of open debit memos. Based upon the Company's analysis of estimated
recoveries and collections associated with the related invoices and debit memos,
the Company had $79,705 of accounts receivable reserves at February 4, 2003. As
of January 4, 2003, the Company had approximately $276,889 of open trade
accounts receivable and $10,440 of open debit memos. Based upon the Company's
analysis of estimated recoveries and collections associated with the related
invoices and debit memos, the Company had $87,512 of accounts receivable
reserves at January 4, 2003. The net accounts receivable balance of $213,048 at
February 4, 2003 was estimated to be the fair value of the Company's accounts
receivable at February 4, 2003. The determination of 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. 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. At April 5, 2003, the Company had identified
inventory with a carrying value of approximately $62,500 as potentially excess
and/or obsolete. Based upon the estimated recoveries related to such inventory,
as of April 5, 2003, the Company had approximately $31,666 of inventory reserves
for excess, obsolete and other inventory adjustments. At February 4, 2003, the
Company had identified inventory with a carrying value of approximately $57,200
as potentially excess and/or obsolete. Based upon the estimated recoveries
related to such inventory, as of February 4, 2003, the Company had approximately
$32,785 of inventory reserves for excess, obsolete and other inventory
adjustments. At 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. The Company believes that the carrying
value of its inventory, net of the reserves noted, was equal to its fair value
at February 4, 2003. As of February 4, 2003, the Company expenses certain
design, receiving, and other product related costs as incurred. These costs were
previously capitalized.
Long-lived Assets: As of February 4, 2003, property, plant and equipment was
recorded at its fair values based upon the preliminary appraised values of such
assets. See Notes 3 and 4. Intangible assets consist primarily of licenses and
trademarks. The fair value of such licenses and trademarks owned by the Company
are based upon the appraised value of such assets as determined by an
independent third party appraiser and the Company. Identifiable intangible
assets
7
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
with finite useful lives are amortized on a straight-line basis over the
estimated useful lives of the assets. See Note 11.
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. For periods beginning after February 4, 2003 the
estimated remaining useful lives of the Company's fixed assets and finite lived
intangible assets are based upon the remaining useful lives as determined by
independent third party appraisers.
Income Taxes: 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.
Pension Plan: The Company has a defined benefit pension plan (the 'Pension
Plan') covering certain full-time non-union domestic employees and certain
domestic employees covered by a collective bargaining agreement. The
determination of the total liability attributable to benefits owed to
participants covered by the Pension Plan are determined by the Pension Plan's
third party actuary using assumptions provided by the Company. The assumptions
used can have a significant effect 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 the assumptions defined by
the Pension Benefit Guaranty Corporation. The Pension Plan was under-funded as
of January 4, 2003, February 4, 2003 and April 5, 2003. The Pension Plan and the
Plan contemplate that the Company will continue to fully fund its minimum
required contributions and any other premiums due under the Employee Retirement
Income Security Act of 1974, as amended ('ERISA') and the United States Internal
Revenue Code of 1986, as amended (the 'Code'). Effective January 1, 2003, the
Pension Plan was amended and, as a result, no future benefits will accrue to
participants in the Pension Plan. As of February 4, 2003 and April 5, 2003, the
Company had recorded a Pension Plan liability equal to the amount that the
present value of accumulated benefit obligations (discounted using an interest
rate of approximately 5.3%) exceeded the fair value of Pension Plan assets as
determined by the Pension Plan trustee. The Company's cash contributions to the
Pension Plan for fiscal 2003 will be approximately $9,320 and will be
approximately $45,576 in the aggregate from fiscal 2004 through fiscal 2008. The
amount of estimated cash contributions that the Company will be required to make
to the Pension Plan could increase or decrease depending on the actual return
earned by the assets of the Pension Plan compared to the estimated rate of
return on Pension Plan assets. The accrued long-term Pension Plan liability and
accruals for other post retirement benefits are classified as other long-term
liabilities in the consolidated condensed balance sheet at April 5, 2003.
Contributions to the Pension Plan to be paid in fiscal 2003 of $9,320 are
classified with accrued liabilities at April 5, 2003.
Stock Based Compensation: Effective February 5, 2003, the Successor adopted
the fair value method of accounting for stock options for all options granted by
the Successor after February 4, 2003 pursuant to the prospective method
provisions of SFAS No. 148, Accounting for Stock Based Compensation, Transition
and Disclosure ('SFAS 148'). The Company uses the Black-Scholes model to
calculate the fair value of stock option awards. The Black-Scholes model
requires the Company to make significant judgments regarding the assumptions
used within the Black-Scholes
8
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
model, the most significant of which are the stock price volatility assumption,
the expected life of the option award and the risk-free rate of return. The
Company recently emerged from bankruptcy, and as a result, the Company does not
have a relevant stock price history upon which to base its volatility
assumption. In determining the volatility used in its model, the Company
considered the volatility of the stock prices of selected companies in the
apparel industry, the nature of those companies, the Company's recent emergence
from bankruptcy and other factors in determining its stock price volatility
assumption of 35%. The Company based its estimate of the average life of a stock
option of five years upon the vesting period of 40 months and the option term of
ten years. The Company's risk-free rate of return assumption of 2.55% is equal
to the quoted yield for five-year U.S. treasury bonds at the valuation date.
Prior to February 5, 2003, the Company followed the disclosure-only
provisions of Statement of Financial Accounting Standards ('SFAS') 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 accounted 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 was recognized for employee share option grants because the exercise
price of the options granted has equaled the market price of the underlying
shares on the date of grant (the 'intrinsic value method').
The following table illustrates the effect that stock based compensation
would have had on net income (loss) and earnings per share of the Predecessor
had such compensation been included in its net income (loss) and earnings per
share for the Stub Period and for the First Quarter of Fiscal 2002,
respectively:
<Table>
<Caption>
PREDECESSOR
------------------------------
FOR THE FOR THE
PERIOD THREE MONTHS
JANUARY 5, 2003 ENDED
TO FEBRUARY 4, APRIL 6,
2003 2002
---- ----
Net income (loss) as reported............................... $2,358,537 $(857,752)
Less: Stock based employee compensation cost, net of income
tax effects, that would have been included in the
determination of net income (loss) if the fair value
method had been applied to all awards..................... (244) (1,749)
---------- ---------
Pro forma net income (loss)................................. $2,358,293 $(856,003)
---------- ---------
---------- ---------
Earnings per share:
Basic -- as reported.................................... $ 44.51 $ (16.20)
---------- ---------
---------- ---------
Basic -- pro-forma...................................... $ 44.50 $ (16.17)
---------- ---------
---------- ---------
Diluted -- as reported.................................. $ 44.51 $ (16.20)
---------- ---------
---------- ---------
Diluted -- pro forma.................................... $ 44.50 $ (16.17)
---------- ---------
---------- ---------
Weighted average number of shares outstanding:
Basic................................................... 52,990 52,936
---------- ---------
---------- ---------
Diluted................................................. 52,990 52,936
---------- ---------
---------- ---------
</Table>
Stock based compensation expense included in the consolidated condensed
statement of operations for the two months ended April 5, 2003 was $131 (net of
income tax benefit of $88). Compensation expense attributable to stock options
for the two month period ended April 5, 2003 was $77 (net of tax benefit of
$51). Stock-based compensation expense did not have a material effect on
earnings per share in the two-month period ended April 5, 2003. See Note 16.
9
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
The fair value of the stock options was determined at the date of grant
using a Black-Scholes option pricing model with the following assumptions:
<Table>
<Caption>
SUCCESSOR
-------------
FOR THE
TWO MONTHS
ENDED
APRIL 5, 2003
-------------
Risk free rate of return.................................... 2.55%
Dividend yield(a)........................................... --
Expected volatility of the market price of the Company's
common stock.............................................. 35.0%
Expected option life........................................ 5 years
</Table>
- ---------
(a) the Company is restricted from paying dividends under the
terms of the Exit Financing Facility.
The Predecessor did not grant any stock based compensation or stock options
in the First Quarter of Fiscal 2002 or in the Stub Period.
Marketable Securities: Marketable securities are stated at fair value based
on quoted market prices. Marketable securities are classified as
available-for-sale.
Assets Held for Sale: The Company classifies assets to be sold as assets
held for sale. Assets held for sale are reported at the estimated fair value
less selling costs. Assets held for sale include certain property and equipment
of closed facilities which the Company has identified for disposition.
Property, Plant and Equipment: Property, plant and equipment as of
February 4, 2003 and April 5, 2003 are stated at estimated fair values, net of
accumulated depreciation. The estimated useful lives of such assets are
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>
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 (three to seven years). General and administrative costs related to
developing or obtaining such software are expensed as incurred.
Intangible Assets: Intangible assets primarily consist of licenses and
trademarks. The fair value of such licenses and trademarks owned by the Company
at February 4, 2003 are based upon the appraised values of such assets as
determined by an independent third party appraiser and the Company. Identifiable
intangible assets with finite lives are amortized on a straight-line basis over
the estimated useful lives of the assets. Pursuant to the provisions of
SFAS 142 intangible assets with indefinite lives are not amortized. See
Note 11.
Reorganization Value: Reorganization value in excess of the fair value of
net assets represents the amount by which the Company's reorganization value
exceeds the fair value of its tangible assets and identified intangible assets
minus its liabilities allocated in accordance with the provisions of SFAS 141 as
of February 4, 2003. Pursuant to the provisions of SFAS 142 reorganization value
is not amortized.
10
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Deferred Financing Costs: Deferred financing costs represent legal, other
professional and bank underwriting fees incurred in connection with the
Company's Exit Financing Facility. Such fees are amortized over the life of the
related debt using the interest method. Amortization expense is included in
interest expense.
Other Assets: Other assets include certain barter credits and long-term rent
receivable related to certain subleases. Barter assets are recognized when
realized and deferred rent charges are recognized over the life of the related
lease.
Financial Instruments: The Company has not used derivative financial
instruments for speculation or for trading purposes since the Petition Date. The
Company had no hedging financial instruments outstanding at April 5, 2003.
A number of major international financial institutions are counterparties to
the Company's outstanding letters of credit. The Company monitors its positions
with, and the credit quality of, these counterparty financial institutions and
does not anticipate nonperformance of these counterparties. Management believes
that the Company would not suffer a material loss in the event of nonperformance
by these counterparties.
Start-Up Costs: Pre-operating costs relating to the start-up of new
manufacturing facilities, product lines and businesses are expensed as incurred.
Other Liabilities: Other long-term liabilities include long-term accrued
pension and post retirement benefit obligations.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net
income (loss), unrealized gain/(loss) on marketable securities (net of tax),
unfunded pension liability (net of tax) and cumulative 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.
Translation of Foreign Currencies: Cumulative translation adjustments arise
primarily from consolidating the net assets and liabilities of the Company's
foreign operations at current rates of exchange. Assets and liabilities of the
Company's foreign operations are recorded at current rates of exchange at the
balance sheet date and are applied directly to stockholders' equity (deficiency)
and are included as part of other comprehensive income (loss). The consolidated
condensed balance sheet at February 4, 2003 represents the fair value of the
Company's assets at that date and, as a result, there is no cumulative
translation adjustment on that date. Income and expense items for the Company's
foreign operations are translated using monthly average exchange rates.
Reclassifications: Certain items have been reclassified to conform to the
current period presentation.
Recent Accounting Pronouncements: In April 2003, the Financial Accounting
Standards Board (the 'FASB') issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ('SFAS 149'). FASB Statements No.
133, Accounting for Derivative Instruments and Hedging Activities ('SFAS 133')
and No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, establish accounting and reporting standards for derivative
instruments including derivatives embedded in other contracts (collectively
referred to as 'derivatives') and for hedging activities. SFAS 149 amends
SFAS 133 for certain decisions made by the Board as part of the Derivatives
Implementation Group ('DIG') process. This Statement contains amendments
relating to FASB Concepts Statement No. 7, Using Cash Flow Information and
Present Value in Accounting Measurements, and FASB Statements No. 65, Accounting
for Certain Mortgage Banking Activities, No. 91 Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases, No. 95,
11
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Statement of Cash Flows, and No. 126, Exemption from Certain Required
Disclosures about Financial Instruments for Certain Nonpublic Entities. The
provisions of SFAS 149 are effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS 149 is not expected to have a material
effect on the Company's consolidated financial statements.
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 periods 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
adoption of FIN 45 did not have an effect on the Company's consolidated
financial statements.
NOTE 3 -- REORGANIZATION VALUE
In conjunction with the preparation of the Plan, the Company engaged an
independent third party appraisal and consulting firm (the 'BEV Appraiser') to
prepare a valuation analysis of the reorganized Company. In preparing its
analysis, the BEV Appraiser received certain publicly available historical
information and financial statements of the Company, reviewed and discussed with
management the Company's overall business plan, including long-term risks and
opportunities, evaluated the Company's projections and the assumptions
underlying the projections, considered the market value of publicly traded
companies that are reasonably comparable to the Company, considered the purchase
price paid in acquisitions of comparable companies and made such other analyses
as the BEV Appraiser deemed necessary or appropriate for the purposes of the
valuation. Based upon its analysis the BEV Appraiser determined that the
business enterprise value ('BEV') of the reorganized Company was between
$730,000 and $770,000. Based upon the timing of the Debtors' emergence from
bankruptcy, market conditions at the time of emergence and the net assets of the
Company at the Effective Date, the Company determined its reorganization equity
value of $503,548 by subtracting the Company's debt of $246,452 on the Effective
Date from the mid-point ($750,000) of the BEV valuation range provided by the
BEV Appraiser.
NOTE 4 -- FAIR VALUE OF CERTAIN LONG-TERM TANGIBLE AND INTANGIBLE ASSETS
Considering the provisions of SFAS 141 and the nature and complexity of the
Company's business, the Company determined that an independent third party
appraisal of its various business units and long-term tangible and intangible
assets was necessary in order to allocate the reorganization value of the
Company to its various assets and liabilities at February 4, 2003. The Company
engaged an independent third party appraisal and consulting firm separate from
the BEV Appraiser to determine the fair value of the Company's long-term
tangible assets and identifiable intangible assets (the 'Asset Appraiser').
Based upon the reorganization value of the Company as determined by the BEV
Appraiser, the Asset Appraiser provided detailed analysis of the Company's
long-term tangible and intangible assets. See Note 11.
NOTE 5 -- FRESH START ACCOUNTING
The Debtors' emergence from bankruptcy proceedings on February 4, 2003
resulted in a new reporting entity and adoption of fresh start accounting as of
that date in accordance with SOP 90-7. The consolidated condensed balance sheet
as of February 4, 2003 gives effect to
12
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
adjustments in the carrying value of assets and liabilities to fair value in
accordance with the provisions of SOP 90-7 and SFAS 141.
The following table reflects the implementation of the Plan and the
adjustments recorded to the Company's assets and liabilities to reflect the
implementation of the Plan and the adjustments of such assets and liabilities to
fair value at February 4, 2003, based upon the Company's reorganization value of
$750,000 (as included in the Plan and as approved by the Bankruptcy Court).
Reorganization adjustments resulted primarily from the:
(a) adjustment of property, plant and equipment carrying values
to fair value;
(b) adjustment of the carrying value of the Company's various
trademarks and license agreements to fair value;
(c) forgiveness of the Debtors' pre-petition debt;
(d) issuance of New Common Stock and Second Lien Notes pursuant
to the Plan;
(e) payment of various administrative and other claims
associated with the Company's emergence from bankruptcy; and
(f) distribution of cash of $106,112 (including accrued interest
of $14,844) to the Company's pre-petition secured lenders.
These adjustments were based upon the work of the BEV Appraiser and Asset
Appraiser, as well as other valuation estimates to determine the relative fair
values of the Company's assets and liabilities. The table below reflects
reorganization adjustments for the discharge of indebtedness, issuance of New
Common Stock, issuance of Second Lien Notes, and the fresh start adjustments and
the resulting fresh start consolidated balance sheet.
13
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
PREDECESSOR SUCCESSOR
FEBRUARY 4, DISCHARGE OF ISSUANCE OF FRESH START FEBRUARY 4,
2003 INDEBTEDNESS NEW SECURITIES ADJUSTMENTS 2003
---- ------------ -------------- ----------- ----
ASSETS
Current assets:
Cash............................... $ 96,224 $ (75,533)(a) $ -- $ 15 (f) $ 20,706
Restricted cash.................... 6,100 100 (f) 6,200
Accounts receivable................ 213,048 213,048
Inventories........................ 370,527 (22,494)(h) 348,033
Prepaid expenses and other current
assets............................ 30,890 30,890
Assets held for sale............... 1,485 1,485
Deferred income taxes.............. 2,972 4,427 (e) 7,399
----------- ---------- -------- --------- ----------
Current assets........................ 721,246 (75,533) -- (17,952) 627,761
----------- ---------- -------- --------- ----------
Property, plant and equipment......... 153,394 (24,037)(e) 129,357
Other assets:
Licenses, trademarks and other
intangible assets................. 86,904 277,796 (e) 364,700
Deferred financing costs........... 859 4,427 (d) 5,286
Other assets....................... 2,703 2,703
Reorganization value in excess of
fair value of net assets.......... -- (515,659)(b) 700,567 (c)(d) (150,766)(e)(f)(g)(h) 34,142
----------- ---------- -------- --------- ----------
Total other assets.............. 90,466 (515,659) 704,994 127,030 406,831
----------- ---------- -------- --------- ----------
$ 965,106 $ (591,192) $704,994 $ 85,041 $1,163,949
----------- ---------- -------- --------- ----------
----------- ---------- -------- --------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term
debt.............................. $ 5,050 $ 5,050
Debtor-in-possession revolving
credit facility................... -- --
Revolving credit facility.......... -- 30,579 (a) 6,377 (d) 2,244 (f) 39,200
Accounts payable................... 123,235 (859)(f) 122,376
Accrued liabilities................ 109,530 -- (5,873)(d) 1,645 (f)(g) 105,302
Accrued income taxes payable....... 28,140 -- 28,140
----------- ---------- -------- --------- ----------
Total current liabilities....... 265,955 30,579 504 3,030 300,068
----------- ---------- -------- --------- ----------
Long-term debt:
Second Lien Notes.................. -- -- 200,942 (d) -- 200,942
Capital lease obligations.......... 1,260 1,260
Liabilities subject to compromise..... 2,499,385 (2,499,385)(a)(b) -- -- --
Deferred income taxes................. 4,964 82,011 (e) 86,975
Other long-term liabilities........... 71,156 71,156
Stockholders' equity (deficiency):
Common Stock, $0.01 par value...... 654 (654)(b) 450 (c) -- 450
Additional paid-in capital......... 908,939 (908,939)(b) 503,098 (c) -- 503,098
Accumulated other comprehensive
loss.............................. (92,671) 92,671 (b) -- -- --
Deficit............................ (2,380,615) 2,380,615 (b) -- -- --
Treasury stock, at cost............ (313,889) 313,889 (b) -- -- --
Unearned stock compensation........ (32) 32 (b) -- -- --
----------- ---------- -------- --------- ----------
Total stockholders' equity
(deficiency).................. (1,877,614) 1,877,614 503,548 -- 503,548
----------- ---------- -------- --------- ----------
$ 965,106 $ (591,192) $704,994 $ 85,041 $1,163,949
----------- ---------- -------- --------- ----------
----------- ---------- -------- --------- ----------
</Table>
(footnotes on next page)
14
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(footnotes from previous page)
(a) Utilized excess cash of $75,533 and borrowed $30,579 under
the Exit Financing Facility to pay $106,112 (including
accrued interest of $14,844) to the Company's pre-petition
secured creditors.
(b) Reflects the discharge of pre-petition indebtedness of
$2,393,273 (not including $106,112 in cash paid to
pre-petition secured lenders) 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 44,999,973 shares of New Common
Stock and recognition of reorganization equity value of
$503,548 as determined by the BEV Appraiser pursuant to the
provisions of the Plan.
(d) Reflects the issuance of $200,942 principal amount of Second
Lien Notes pursuant to the terms of the Plan, payment of a
bonus of $5,873 to the Company's former Chief Executive
Officer pursuant to the terms of the Plan and the payment of
$4,427 of deferred financing costs. Cash payments were
funded by borrowing $6,377 under the Exit Financing
Facility.
(e) Reflects the adjustment of fixed assets to fair value of
$129,357 as determined by the Asset Appraiser, intangible
assets to fair value of $364,700 as determined by the Asset
Appraiser, the recognition of deferred income tax liability
of $82,011 and deferred tax assets of $4,427 related to the
fair value adjustments noted above.
(f) Borrowed $2,244 under the Exit Financing Facility to pay
certain administrative and priority claims of $2,015, tax
claims of $114, the translation escrow account (subsequently
released to the Company) of $100 and provide additional cash
funds at closing of $15.
(g) Reflects the recording of an unfavorable contract commitment
of $2,801 related to one of the Company's distribution
facilities.
(h) Reflects adjustments of $22,494 to adjust inventory to fair
value.
NOTE 6 -- REORGANIZATION ITEMS
In connection with the Chapter 11 Cases, the Company initiated 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. The Company has
recorded reductions to the net realizable value for assets the Company believes
will not be fully realized when they are sold or abandoned.
Certain reorganization-related accruals were classified as liabilities
subject to compromise. The Plan summarized the amount of distribution that each
class of impaired creditors received. See Note 1.
As a direct result of the Chapter 11 Cases, the Company has recorded certain
liabilities, incurred certain legal and professional fees and written-down
certain assets. The transactions recorded were consistent with the provisions of
SOP 90-7. The components of reorganization items are as follows:
15
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------- ------------------------------
FOR THE
FOR THE PERIOD FOR THE PERIOD THREE MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO APRIL 5, TO FEBRUARY 4, APRIL 6,
2003 2003 2002
---- ---- ----
Legal and professional fees................ $1,314 $ 4,501 $ 7,181
Lease terminations......................... -- 10,098 --
Employee contracts and retention........... 19 14,540 5,163
Facility shutdown costs.................... -- 82 --
Loss from sale of Penhaligon's and GJM..... -- -- 2,139
Loss from sales of fixed and other
assets................................... -- 70 126
Other...................................... 50 631 922
------ ------- -------
$1,383 $29,922 $15,531
------ ------- -------
------ ------- -------
Cash portion of reorganization items....... $1,383 $14,361 $14,282
Non-cash portion of reorganization items... -- 15,561 1,249
</Table>
NOTE 7 -- BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Company operates in three business segments or groups: (i) Intimate
Apparel Group; (ii) Sportswear Group; and (iii) Swimwear Group. During fiscal
2002, the Company operated in four business segments or groups (i) Intimate
Apparel Group; (ii) Sportswear Group; (iii) Swimwear Group and (iv) Retail
Stores Group. Because the Company has closed over 200 retail stores in the last
three years, the retail stores no longer represent a material portion of the
Company's net revenues (retail stores accounted for 1.6% of consolidated net
revenue in the two months ended April 5, 2003). In addition, the operations of
the remaining retail stores have been combined both on a functional and on a
reporting basis with the operations of the Company's three wholesale business
groups. Beginning in fiscal 2003, the operations of the Retail Stores Group were
included with the Company's three wholesale groups according to the type of
product sold. Certain financial information contained in this Quarterly Report
on Form 10-Q has been restated to correspond to the Company's current segment
presentation.
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 loungewear under the Warner's'r',
Olga'r', Body Nancy Ganz'TM'/Bodyslimmers'r', Calvin Klein'r', Lejaby'r' and
Rasurel'r' brand names. The Intimate Apparel Group also operates 31 retail
stores, including 11 full price Calvin Klein underwear retail stores in Asia,
five full price Calvin Klein underwear retail stores in Europe, two Warnaco
outlet stores in Canada and 13 Warnaco outlet retail stores in Europe.
The Sportswear Group designs, sources and markets mass market 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' brand
names. The Sportswear Group also operates four full price A.B.S. by Allen
Schwartz retail stores.
The Swimwear Group designs, manufactures, sources and markets mass market 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' and Nautica'r' brand names. The Swimwear Group also operates 45
full price Speedo Authentic Fitness retail stores (including one online store.)
16
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
The accounting policies of the segments are the same as those described in
Note 2 -- 'Significant Accounting Policies'.
During the Company's bankruptcy, the Company sold assets, wrote down
impaired assets, recorded an impairment charge related to the adoption of
SFAS 142 and stopped amortizing goodwill and certain intangible assets that were
previously amortized. In addition, on February 4, 2003, the Company emerged from
bankruptcy and adopted fresh start accounting in accordance with the provisions
of SOP 90-7. The adoption of fresh start accounting resulted in adjustments of
the Company's assets and liabilities to fair value. As a result of these changes
and adjustments, depreciation and amortization expense has decreased by in
excess of $20,000 annually from the amounts reported in previous years. 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 for prior periods has been restated to
reflect the current classification of the Company's business groups. Information
by business group is set forth below:
<Table>
<Caption>
INTIMATE
APPAREL SPORTSWEAR SWIMWEAR GROUP CORPORATE/
GROUP GROUP GROUP TOTAL OTHER ITEMS TOTAL
----- ----- ----- ----- ----------- -----
Successor
For the period February 5, 2003
to April 5, 2003
Net revenues................ $114,404 $ 98,055 $113,865 $ 326,324 $ -- $ 326,324
Operating income............ 16,556 13,977 29,960 60,493 (17,207) 43,286
Depreciation and
amortization.............. 1,124 524 1,003 2,651 7,395 10,046
Reorganization items........ -- -- -- -- 1,383 1,383
- ----------------------------------------------------------------------------------------------------------
Predecessor
For the period January 5, 2003
to February 4, 2003
Net revenues................ $ 36,656 $ 41,091 $ 38,213 $ 115,960 $ -- $ 115,960
Operating income............ 2,508 5,910 8,443 16,861 (36,350) (19,489)
Depreciation and
amortization.............. 1,137 877 634 2,648 1,863 4,511
Reorganization items........ -- -- -- -- 29,922 29,922
For the three months ended
April 6, 2002
Net revenues................ $158,337 $129,204 $122,511 $ 410,052 $ -- $ 410,052
Operating income............ 4,851 10,080 20,279 35,210 (34,447) 763
Depreciation and
amortization.............. 4,721 2,380 2,049 9,150 4,681 13,831
Reorganization items........ -- -- -- -- 15,531 15,531
Total Assets
Successor
April 5, 2003............... $398,232 $356,405 $307,188 $1,061,825 $140,339 $1,202,164
February 4, 2003............ 376,574 343,666 294,622 1,014,862 149,087 1,163,949
- ----------------------------------------------------------------------------------------------------------
Predecessor
January 4, 2003............. 305,059 147,815 204,126 657,000 290,880 947,880
</Table>
17
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
A reconciliation of total group operating income (loss) to total
consolidated income before taxes and cumulative effect of a change in accounting
principle for the period February 5, 2003 to April 5, 2003, January 5, 2003 to
February 4, 2003 and First Quarter of Fiscal 2002, is as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- -------------------------------
FOR THE PERIOD FOR THE PERIOD FOR THE THREE
FEBRUARY 5, 2003 JANUARY 5, 2003 MONTHS ENDED
TO APRIL 5, TO FEBRUARY 4, APRIL 6,
2003 2003 2002
---- ---- ----
Operating income (loss)................... 43,286 (19,489) 763
Gain on cancellation of pre-petition
indebtedness............................ -- 1,692,696 --
Fresh start adjustments................... -- 765,726 --
Investment loss, net...................... 35 359 --
Interest expense.......................... 4,428 1,887 6,964
------- ---------- -------
Income (loss) before provision for income
taxes and cumulative effect of a change
in accounting principle................. $38,823 $2,436,687 $(6,201)
------- ---------- -------
------- ---------- -------
</Table>
NOTE 8 -- COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- -------------------------------
FOR THE PERIOD FOR THE PERIOD FOR THE THREE
FEBRUARY 5, 2003 JANUARY 5, 2003 MONTHS ENDED
TO APRIL 5, TO FEBRUARY 4, APRIL 6,
2003 2003 2002
---- ---- ----
Net income (loss)......................... $22,639 $2,358,537 $(857,752)
Foreign currency translation
adjustments............................. (115) 244 1,730
Change in unfunded minimum pension
liability............................... -- -- (2,000)
Unrealized gain (loss) on marketable
securities.............................. 81 308 (45)
------- ---------- ---------
Total other comprehensive income (loss)... $22,605 $2,359,089 $(858,067)
------- ---------- ---------
------- ---------- ---------
</Table>
The components of accumulated other comprehensive loss are as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------------- -----------
APRIL 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---- ---- ----
Foreign currency translation adjustments.............. $(115) $ -- $(20,408)
Change in unfunded minimum pension liability.......... -- -- (72,659)
Unrealized gain (loss) on marketable securities....... 81 -- (156)
----- ----- --------
Total accumulated other comprehensive loss............ $ (34) $ -- $(93,223)
----- ----- --------
----- ----- --------
</Table>
NOTE 9 -- INCOME TAXES
PREDECESSOR COMPANY
The provision for income taxes of $78,150 for the one month ended
February 4, 2003 consists of a deferred income tax provision of $77,584 related
to the increase in the carrying value of certain assets to fair value recorded
in connection with the Company's adoption of fresh start accounting and accrued
income taxes for foreign earnings of $566.
18
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
As of February 4, 2003, the Company had recorded a valuation allowance
against deferred tax assets to reduce the amount of deferred tax assets created
as a result of the fresh start accounting to an amount that the Company
believes, based upon objectively verifiable evidence, is realizable. The future
recognition of such amounts will first reduce reorganization value in excess of
the fair value of net assets. Should the recognition of net deferred tax assets
result in the elimination of reorganization value in excess of the fair value of
net assets, any additional deferred tax asset recognition will reduce other
intangible assets. Deferred tax assets recognized in excess of the carrying
value of intangible assets will be treated as an increase to additional paid-in
capital.
The Company has also established a valuation allowance against certain
foreign net operating loss carryforwards to reduce them to the amount that will
more likely than not be realized.
SUCCESSOR COMPANY
The provision for income taxes of $16,184 for the two months ended April 5,
2003 consists of accrued income taxes of $12,454 on domestic earnings and
accrued income taxes of $3,730 on foreign earnings.
During the two months ended April 5, 2003, the Company generated sufficient
taxable income to realize a deferred tax asset of $3,302 on which a valuation
allowance was previously established. As discussed above, the realization of
this deferred tax asset for which a valuation allowance was previously
established reduced reorganization value in excess of fair value of net assets.
In addition, reorganization value in excess of fair value of net assets was
further reduced by $8,373 resulting from the use of net operating loss
carryforwards (subject to certain limitations as discussed below) for tax
reporting purposes.
The Company has also established a valuation allowance against certain
foreign net operating loss carryforwards to reduce them to the amount that will
more likely than not be realized.
BANKRUPTCY EFFECT
In connection with the Debtors' emergence from bankruptcy, the Company
realized a gain on the extinguishment of debt of $1,692,696. This gain will not
be taxable since the gain resulted from the Company's reorganization under the
Bankruptcy Code. However, for U.S. income tax reporting purposes, as of the
beginning of its 2004 taxable year, the Company will be required to reduce
certain tax attributes, including (a) net operating loss carryforwards,
(b) certain tax credit carryforwards, and (c) tax bases in assets in an amount
equal to the gain on the extinguishment of debt. The reorganization of the
Company on the Effective Date constituted an ownership change under Section 382
of the Code, and the use of any of the Company's net operating loss
carryforwards and tax credit carryforwards generated prior to the ownership
change that are not reduced pursuant to these provisions will be subject to an
overall annual limitation. The actual amount of reduction in tax attributes for
U.S. income tax reporting purposes will not be determined until 2004 and is
therefore not reflected in this note to the consolidated condensed financial
statements.
19
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 10 -- INVENTORIES
<Table>
<Caption>
SUCCESSOR PREDECESSOR
-------------------------------- -----------
APRIL 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---- ---- ----
Finished goods................................ $256,896 $266,061 $281,610
Work in process............................... 50,065 68,914 51,792
Raw materials................................. 40,337 45,843 45,682
-------- -------- --------
347,298 380,818 379,084
Less: reserves(a)............................. 31,666 32,785 33,816
-------- -------- --------
$315,632 $348,033 $345,268
-------- -------- --------
-------- -------- --------
</Table>
- ---------
(a) Inventory reserves are based upon the estimated recoveries
the Company expects to receive from the disposition of
excess and obsolete inventory. As of April 5, 2003,
February 4, 2003 and January 4, 2003 the Company had
identified inventory with a carrying value of $62,500,
$57,200 and $61,500, respectively, as potentially excess
and/or obsolete.
NOTE 11 -- INTANGIBLE ASSETS
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------------- -----------
APRIL 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---- ---- ----
Indefinite lived intangible assets:
Trademarks...................................... $202,500 $202,500 $61,978
Licenses in perpetuity.......................... 139,900 139,900 19,327
Finite lived assets:
Licenses for a term............................. 9,614 9,700 5,522
Sales order backlog............................. 8,400 12,600 --
-------- -------- -------
Intangible assets -- net............................ $360,414 $364,700 $86,827
-------- -------- -------
-------- -------- -------
</Table>
Accumulated amortization related to finite lived licenses for a term at
April 5, 2003, February 4, 2003 and January 4, 2003 was $273, $0 and $2,494,
respectively. Accumulated amortization of sales orders backlog was $4,200 at
April 5, 2003. Amortization expense for the two months ended April 5, 2003 was
$273. Amortization expense will be $14,102 for fiscal 2003 and $1,639 in each of
fiscal 2004 through fiscal 2007.
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets
('SFAS 142'). SFAS 142 eliminated the amortization of goodwill and certain other
intangible assets with indefinite lives effective for the Company's 2002 fiscal
year. SFAS 142 addresses financial accounting and reporting for intangible
assets and acquired goodwill. 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 No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets.
Under the provisions of SFAS No. 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 two previous fiscal years and had filed for
bankruptcy. As a result the Company's business enterprise value ('BEV') had
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 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
20
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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. The remaining
value of intangible assets with indefinite useful lives after the adoption of
SFAS No. 142 was $81,305 and the remaining value of other intangible assets with
finite lives was $6,316.
Reorganization value in excess of fair value of net assets decreased $10,076
in the two month period ended April 5, 2003, reflecting adjustments to the
Company's deferred tax asset valuation allowance of $11,675 offset by a
reclassification of certain reorganization accruals of $1,599.
NOTE 12 -- PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------------- -----------
APRIL 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---- ---- ----
Land and land improvements.......................... $ 1,343 $ 1,305 $ 1,223
Building and building improvements.................. 23,133 23,071 51,513
Furniture and fixtures.............................. 16,918 15,813 101,861
Machinery and equipment............................. 32,228 32,072 73,104
Computer hardware and software...................... 57,643 56,778 169,194
Construction in progress............................ 384 318 435
-------- -------- ---------
$131,649 $129,357 $ 397,330
Less: Accumulated depreciation and amortization..... (5,576) -- (240,618)
-------- -------- ---------
Property, plant and equipment, net.................. $126,073 $129,357 $ 156,712
-------- -------- ---------
-------- -------- ---------
</Table>
NOTE 13 -- LIABILITIES SUBJECT TO COMPROMISE
The following liabilities subject to compromise were discharged upon the
Company's emergence from bankruptcy:
<Table>
<Caption>
PREDECESSOR
------------------
JANUARY 4, 2003(a)
------------------
Current liabilities:
Accounts payable (a).................................... $ 385,931
Accrued liabilities, including unsecured GECC
claim(b).............................................. 128,567
Debt:
$600 million term loan.................................. 584,824
Revolving credit facilities............................. 1,013,995
Term loan agreements.................................... 27,034
Capital lease obligations............................... 1,265
Foreign credit facilities............................... 146,958
Equity Agreement Notes.................................. 56,506
Company-obligated mandatorily redeemable preferred
securities............................................ 120,000
Other liabilities....................................... 21,002
----------
Total long-term debt.................................... $2,486,082
----------
----------
</Table>
- ---------
(a) Accounts payable includes $349,737 of trade drafts payable
at January 4, 2003. As a result of the Chapter 11 Cases, no
principal or interest payments were made on unsecured
pre-petition debt.
(b) See Note 14.
21
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 14 -- DEBT
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------------------- ------------
APRIL 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---- ---- ----
Exit Financing Facility......................... $ 60,990 $ 39,200 $ --
GECC debt....................................... 3,652 4,890 5,603
Second Lien Notes............................... 200,942 200,942 --
Capital lease obligations....................... 1,351 1,420 2,679
$600 million term loan.......................... -- -- 584,824
Revolving credit facilities..................... -- -- 1,013,995
Term loan agreements............................ -- -- 27,034
Foreign credit facilities....................... -- -- 146,958
Equity Agreement Notes.......................... -- -- 56,506
-------- -------- -----------
266,935 246,452 1,837,599
Current portion................................. (64,747) (44,250) (5,765)
Reclassified to liabilities subject to
compromise.................................... -- -- (1,830,582)
-------- -------- -----------
Total long-term debt........................ $202,188 $202,202 $ 1,252
-------- -------- -----------
-------- -------- -----------
</Table>
EXIT FINANCING FACILITY
On the Effective Date the Company entered into a $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 bear interest at Citibank N.A.'s base rate plus 1.50% (5.75% at
April 5, 2003) or at the London Interbank Offered Rate ('LIBOR') plus 2.50%
(approximately 3.8% at April 5, 2003). 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 0.5% 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 to 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 (subject to
limited exceptions) and prohibit the Company from incurring material additional
indebtedness. Initial borrowings under the Exit Financing Facility on the
Effective Date were $39,200. The Exit Financing Facility is guaranteed by most
of the Company's domestic subsidiaries and the obligations under such guarantee,
together with the Company's obligations under the Exit Financing Facility, are
secured by a lien on substantially all of the domestic assets of the Company and
its domestic subsidiaries.
SECOND LIEN NOTES
In accordance with the Plan, on the Effective Date, the Company issued
$200,942 of New Warnaco Second Lien Notes due 2008 (the 'Second Lien Notes') to
certain 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 Second Lien Notes mature on
February 4, 2008, subject to, in certain instances, earlier repayment in whole
or in part. The Second Lien Notes bear an annual interest rate (9.5% at
April 5, 2003) which is the greater
22
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
of (i) 9.5% plus a margin (initially 0%, and beginning on August 4, 2003, 0.5%
is added to the margin every six months); and (ii) LIBOR plus 5.0% plus a margin
(initially 0%, and beginning on August 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 Company from paying dividends (subject to limited
exceptions) and 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 Second Lien Notes
are payable in equal annual installments of $40,188 beginning in April 2004
through April 2008. Second Lien Note principal payments can only be made if the
Company achieves a defined fixed charge coverage ratio and has additional
borrowing availability, after the principal payment, of $75,000 or more under
the Exit Financing Facility.
GECC
On June 12, 2002, the Bankruptcy Court approved the Predecessor'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.
The terms of the settlement agreement require the Company to make payments to
GECC totaling $15,200. The net present value of the remaining GECC payments of
$3,652 is classified with the current portion of long-term debt at April 5,
2003. Remaining amounts payable to GECC will be paid in monthly installments of
$750 including interest through November 2003. Obligations to GECC are secured
by first priority liens on the applicable assets.
OTHER DEBT
Certain of the Company's foreign subsidiaries are parties to capital lease
obligations related to certain facilities and equipment. The total amount of
capital lease obligations outstanding at April 5, 2003, February 4, 2003 and
January 4, 2003 related to these leases were approximately $1,351, $1,420 and
$2,679, of which $105, $160 and $162 are included with the current portion of
long-term debt, respectively.
NOTE 15 -- SUPPLEMENTAL CASH FLOW INFORMATION
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- ------------------------------
FOR THE
FOR THE PERIOD FOR THE PERIOD THREE MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO APRIL 5, TO FEBRUARY 4, APRIL 6,
2003 2003 2002
---- ---- ----
Cash paid during the year for:
Interest.................................. 971 14,844 3,202
Income taxes, net of refunds received..... 1,346 273 1,706
</Table>
NOTE 16 -- STOCKHOLDERS EQUITY (DEFICIENCY)
The Successor has authorized an aggregate of 20,000,000 shares of preferred
stock, par value $0.01 per share, of which 112,500 shares are designated as
Series A preferred stock, par value $0.01 per share. There are no shares of
preferred stock issued and outstanding. The Successor has authorized an
aggregate of 112,500,000 shares of common stock, $0.01 par value per share, of
which the Successor issued 44,999,973 shares pursuant to the terms of the Plan.
23
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
On March 12, 2003, the Company issued 498,500 shares of restricted stock to
certain of its employees. The fair market value at the date of grant was $10.45
per share. The restricted shares vest with respect to 25% of the shares on
September 12, 2003 and with respect to an additional 25% of such shares each
September 12 thereafter through 2006. In addition, the Company also granted
options for the purchase of 1,998,000 shares of New Common Stock at an exercise
price of $10.45 per share, which was equal to the closing market price on the
date of grant. The options vest with respect to 25% of the shares on
September 12, 2003 and with respect to an additional 25% of such shares each
September 12 thereafter through 2006. The options have a ten-year term.
Compensation expense related to the restricted share and option grants was $219
for the two months ended April 5, 2003. The total fair value of the options and
restricted share grants was $12,502.
The Company has reserved 5,000,000 shares of common stock for stock based
compensation awards.
The Predecessor had various stock based incentive plans in place prior to
February 4, 2003. All options to purchase shares of Old Common Stock and
restricted shares related to the Old Common Stock were cancelled on February 4,
2003 pursuant to the terms of the Plan.
At February 4, 2003, the Predecessor had options outstanding for the
purchase of 3,692,363 shares of Old Common Stock at weighted average exercise
prices from $0.67 to $42.00 per share. Pursuant to the Plan, all outstanding
options to purchase shares of Old Common Stock were cancelled effective
February 4, 2003.
NOTE 17 -- INCOME (LOSS) SHARE
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- -------------------------------
FOR THE PERIOD FOR THE PERIOD FOR THE THREE
FEBRUARY 5, 2003 JANUARY 5, 2003 MONTHS ENDED
TO APRIL 5, TO FEBRUARY 4, APRIL 6,
2003 2003 2002
---- ---- ----
Numerator for basic and diluted income (loss) per
share:
Income (loss) before cumulative effect of
change in accounting........................ $22,639 $2,358,537 $ (56,130)
Cumulative effect of change in accounting..... -- -- (801,622)
------- ---------- ---------
Net income (loss)............................. $22,639 $2,358,537 $(857,752)
------- ---------- ---------
------- ---------- ---------
Denominator for basic and diluted income (loss)
per share:
Weighted average shares
outstanding -- basic........................ 45,000 52,990 52,936
------- ---------- ---------
------- ---------- ---------
Weighted average shares
outstanding -- diluted...................... 45,200 52,990 52,936
------- ---------- ---------
------- ---------- ---------
Income (loss) per share before cumulative effect
of change in accounting -- basic................ $ 0.50 $ 44.51 $ (1.06)
------- ---------- ---------
------- ---------- ---------
Income (loss) per share before cumulative effect
of change in accounting -- diluted.............. $ 0.50 $ 44.51 $ (1.06)
------- ---------- ---------
------- ---------- ---------
</Table>
NOTE 18 -- 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')
24
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
against the Company and certain of its officers and directors (the
'Shareholder I Class Action'). The complaints, on behalf of a putative class of
the Company's shareholders who purchased the Old Common Stock between
September 17, 1997 and July 19, 2000 (the 'Class Period'), allege, among other
things, that the defendants violated the Securities Exchange Act of 1934, as
amended (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 us. 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 64 shareholders who purchased the Old Common
Stock between September 29, 2000 and April 18, 2001 (the 'Second Class Period'),
allege, among other things, 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
of the Company's current and former officers and directors, 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.
SEC INVESTIGATION
The staff of the Securities and Exchange Commission ('SEC') Division of
Enforcement has been conducting an investigation to determine whether there have
been any violations of the Exchange Act, in connection with, among other things,
the preparation and publication by the Company of (i) the financial statements
included in the Company's Annual Report on Form 10-K for Fiscal 1998 and
Quarterly Report on Form 10-Q for the third quarter of Fiscal 2000 and (ii) the
Company's press release announcing its results for Fiscal 1998. In July 2002,
the SEC staff
25
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
informed the Company that it intends to recommend that the SEC bring a civil
injunctive action against the Company, alleging violations of the federal
securities laws, including Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of
the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 promulgated
thereunder. The SEC staff invited the Company to make a Wells Submission
describing the reasons why no action should be brought. In September 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 to have a material effect on the Company's business,
financial condition or results of operations.
The Company is also aware that the SEC staff has informed certain persons
who were employed by the Company at the time of the preparation of the documents
referred to above (including one current member of management) that it intends
to recommend that the SEC bring a civil injunctive action against such persons
alleging violations of the securities laws. The Company is advised that such
persons also have filed Wells Submissions.
CHAPTER 11 CASES
For a discussion of bankruptcy proceedings under the Bankruptcy Code, see
the discussion of 'Chapter 11 Cases' in Note 1.
OTHER
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.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company is subject to certain risks and uncertainties that could cause
its future results of operations to differ materially from its historical
results of operations and those expected in the future. The Company generally is
subject to certain risks that could affect the value of the Company's New Common
Stock. See Item 5 of Part II in this Quarterly Report on Form 10-Q/A (the
'Quarterly Report'). Please refer to Item 1. Business included in the Company's
Annual Report on Form 10-K for the year ended January 4, 2003 (the 'Annual
Report') for a discussion of the Company's business operations. Except for the
historical information contained in this Quarterly Report, this Quarterly
Report, including the following discussion, contains forward-looking statements
that involve risks and uncertainties. See 'Statement Regarding Forward-Looking
Disclosure.'
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE AND REORGANIZATION
On June 11, 2001 (the 'Petition Date'), The Warnaco Group, Inc. ('Warnaco
Group'), 36 of its 37 U.S. subsidiaries and Warnaco of Canada Company (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 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 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 (i) its 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'). On February 4, 2003 (the 'Effective Date'), the Plan
became effective and the Debtors successfully emerged from their bankruptcy
proceedings.
Pursuant to the Plan, the following distributions were made:
(a) Warnaco Group's Class A, Common Stock, par value $0.01 per
share ('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;
(b) general unsecured claimants received 2.55% (1,147,023
shares) of the New Common Stock, which was distributed in
April 2003;
(c) the Company's pre-petition secured lenders received their
pro-rata share of 106.1 million in cash, Second Lien Notes
in the principal amount of $200 million and approximately
96.26% of the New Common Stock (43,318,350 shares);
(d) holders of claims arising from or related to certain
preferred securities received 0.60% of the New Common Stock
(268,200 shares);
(e) pursuant to the terms of his employment agreement, as
modified by the Plan, Antonio C. Alvarez II, the former
President and Chief Executive Officer of Warnaco Group,
received an incentive bonus consisting of $1.95 million in
cash, Second Lien Notes in the principal amount of
approximately $0.9 million and 0.59% of the New Common Stock
(266,400 shares); and
(f) in addition to the foregoing, allowed administrative and
certain priority claims were paid in full in cash.
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
27
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 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.
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 the
Company to 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. During the First Quarter
of Fiscal 2003, the Company established a minimum level of benefits to be paid
to terminated employees and recorded $6.5 million of additional costs in
connection with the European consolidation. 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 to the customers, net of
reserves 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 April 5, 2003, the Company had approximately
$367.3 million of open trade invoices and other receivables and $15.9 million of
open debit memos. Based upon the Company's analysis of estimated recoveries and
collections associated with the related invoices and debit memos, the Company
had $80.5 million of accounts receivable reserves at April 5, 2003. As of
February 4, 2003 and January 4, 2003, the Company had approximately
$281.9 million and $276.9 million of open trade invoices and other receivables,
respectively, and $10.8 million and $10.4 million of open debit memos,
respectively. Based upon the Company's analysis of estimated recoveries and
collections associated with the related invoices and debit memos, the Company
had $79.7 million and $87.5 million of accounts receivable reserves at
February 4, 2003 and
28
January 4, 2003, respectively. The determination of the amount of 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. 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. At April 5, 2003, the Company had identified
inventory with a carrying value of approximately $62.5 million as potentially
excess and/or obsolete. Based upon the estimated recoveries related to such
inventory, as of April 5, 2003, the Company had approximately $31.7 million of
inventory reserves for excess, obsolete and other inventory adjustments. At
February 4, 2003 and January 4, 2003, the Company had identified inventory with
carrying values of approximately $57.2 million and $61.5 million, respectively,
as potentially excess and/or obsolete. Based upon the estimated recoveries
related to such inventory, as of February 4, 2003 and January 4, 2003, the
Company had approximately $32.8 million and $33.8 million, respectively, of
inventory reserves for excess, obsolete and other inventory adjustments. The
Company believes that the carrying value of its inventory, net of the reserves
noted, is equal to its fair value at February 4, 2003. As of February 4, 2003,
the Company adopted the fresh start accounting provisions of SOP 90-7 and
changed its inventory accounting policies. As a result, the Company expenses
certain design, receiving, and other product related costs as incurred. These
costs were previously capitalized.
Long-lived Assets: Property, plant and equipment at February 4, 2003 are
recorded in the consolidated condensed balance sheet at their fair values based
upon the appraised values of such assets. See Notes 3, 4 and 5 of Notes to
Consolidated Condensed Financial Statements. Intangible assets consist primarily
of licenses and trademarks. The Company engaged a third party appraisal firm to
assist it in its determination of the fair value of its long-lived assets.
Identifiable intangible assets with finite useful lives are amortized on a
straight-line basis over the estimated useful lives of the asset. See Note 11 of
Notes to Consolidated Condensed Financial Statements.
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. The estimated remaining useful lives of the Company's
fixed assets and finite lived intangible assets for periods after February 4,
2003 are based upon the remaining useful lives as determined by independent
third party appraisers and the Company.
Income Taxes: 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.
Pension Plan: The Company has a defined benefit pension plan (the 'Pension
Plan') covering certain full time non-union domestic employees and certain
domestic employees covered by a collective bargaining agreement. The
determination of the total liability attributable to benefits owed to
participants covered by the Pension Plan are determined by the Pension Plan's
third party actuary using assumptions provided by the Company. The assumptions
used can have a significant effect 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 the assumptions defined by
the Pension Benefit Guaranty Corporation. The Pension Plan was under-funded as
of April 5, 2003,
29
February 4, 2003 and January 4, 2003. The Pension Plan and the Company's plan of
reorganization contemplate that the Company will continue to fully fund its
minimum required contributions and any other premiums due under the Employee
Retirement Income Security Act of 1974, as amended ('ERISA') and the United
States Internal Revenue Code of 1986, as amended (the 'Code'). Effective
January 1, 2003, the Pension Plan was amended and, as a result, no future
benefits will accrue to participants of the Pension Plan. The Company has
recorded a Pension Plan liability equal to the amount that the present value of
accumulated benefit obligations (discounted using an interest rate of
approximately 5.3%) exceeded the fair value of Pension Plan assets at April 5,
2003 and February 4, 2003. The Company's cash contributions to the Pension Plan
for fiscal 2003 will be approximately $9.3 million. The Company estimates that
its cash contributions to the Pension Plan will be $45.6 million in the
aggregate from fiscal 2004 through fiscal 2008. The amount of estimated cash
contributions that the Company will be required to make to the Pension Plan
could increase or decrease depending on the actual return earned by the assets
of the Pension Plan compared to the estimated rate of return on Pension Plan
assets. The accrued long-term Pension Plan liability and accruals for other post
retirement benefits are classified as other long-term liabilities in the
consolidated condensed balance sheets. Contributions to the Pension Plan to be
paid in fiscal 2003 of $9.3 million are classified with accrued liabilities.
Stock Based Compensation: Effective February 5, 2003, the Company adopted
the fair value method of accounting for stock options for all options granted by
the Company after February 4, 2003 pursuant to the prospective method provisions
of Statement of Financial Accounting Standards ('SFAS') No. 148, Accounting for
Stock Based Compensation, Transition and Disclosure ('SFAS 148'). The Company
uses the Black-Scholes model to calculate the fair value of stock option awards.
The Black-Scholes model requires the Company to make significant judgments
regarding the assumptions used within the Black-Scholes model, the most
significant of which are the stock price volatility assumption, the expected
life of the option award and the risk free rate of return. The Company recently
emerged from bankruptcy, and as a result, the Company does not have a relevant
stock price history upon which to base its volatility assumption. In determining
the volatility used in its model, the Company considered the volatility of the
stock prices of selected companies in the apparel industry, the nature of those
companies, the Company's recent emergence from bankruptcy and other factors in
determining its stock price volatility assumption of 35%. The Company based its
estimate of the average life of a stock option of five years upon the vesting
period of 40 months and the option term of ten years. The Company's risk-free
rate of return assumption of 2.55% is equal to the quoted yield for five-year
U.S. treasury bonds at the valuation date.
Prior to February 5, 2003, the Company followed 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 accounted 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 was recognized for employee share option grants because the exercise
price of the options granted has equaled the market price of the underlying
shares on the date of grant.
Reorganization Value: In connection with its emergence from bankruptcy on
February 4, 2003, the Company engaged a third party appraisal firm to assist it
in its determination of its reorganization value. Reorganization value in excess
of the fair value of net assets represents the amount by which the Company's
reorganization value exceeded the fair value of its tangible assets, identified
intangible assets minus its liabilities as of February 4, 2003. The Company
allocated reorganization value to its various assets in accordance with the
provisions of SFAS No. 141, Business Combinations ('SFAS 141'). Reorganization
value is not amortized.
Reorganization Items: Reorganization items included in the consolidated
condensed statement of operations for the periods ended April 5, 2003,
February 4, 2003 and three months ended April 6, 2002 were $1.4 million, $29.9
million and $15.5 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
30
cash. Certain accruals at January 4, 2003 were subject to compromise under the
provisions of the Bankruptcy Code. The Company had recorded these accruals at
the estimated amount the creditor would have been 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 Note 6 of Notes to
Consolidated Condensed Financial Statements.
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS (SELECTED DATA)
The following tables summarize the historical results of operations of the
Company for the three month period ended April 6, 2002 ('the First Quarter of
Fiscal 2002'), the one month period ended February 4, 2003 (the 'Stub Period')
and for the two month period ended April 5, 2003. The Stub Period combined with
the two month period ended April 5, 2003 constitute a combined presentation of
the 'First Quarter of Fiscal 2003'.
Results of operations for the First Quarter of Fiscal 2003 are set forth
under the heading 'Combined' in the following table. References in the
discussion below refer to such combined results.
<Table>
<Caption>
SUCCESSOR PREDECESSOR COMBINED
------------------- ------------------- ------------------------
FOR THE PERIOD FOR THE PERIOD
FEBRUARY 5, 2003 TO JANUARY 5, 2003 TO FIRST QUARTER OF
APRIL 5, 2003 FEBRUARY 4, 2003 FISCAL 2003
------------- ---------------- -----------
Net revenues.......................... $326,324 $ 115,960 $ 442,284
Cost of goods sold.................... 204,918 70,214 275,132
-------- ----------- -----------
Gross profit.......................... 121,406 45,746 167,152
Selling, general, and administrative
expenses............................ 72,537 35,313 107,850
Amortization of sales order backlog... 4,200 -- 4,200
Reorganization items.................. 1,383 29,922 31,305
-------- ----------- -----------
Operating income (loss)............... 43,286 (19,489) 23,797
Reorganization items:
Gain on cancellation of
pre-petition indebtedness....... -- (1,692,696) (1,692,696)
Fresh start adjustments........... -- (765,726) (765,726)
Investment loss, net.................. 35 359 394
Interest expense...................... 4,428 1,887 6,315
-------- ----------- -----------
Income (loss) before provision for
income taxes and cumulative effect
of change in accounting principle... 38,823 2,436,687 2,475,510
Provision for income taxes............ 16,184 78,150 94,334
-------- ----------- -----------
Net income............................ $ 22,639 $ 2,358,537 $ 2,381,176
-------- ----------- -----------
-------- ----------- -----------
</Table>
The First Quarter of Fiscal 2002 included 13 weeks of operations, the Stub
Period included four weeks of operations and the period February 5, 2003 to
April 5, 2003 included nine weeks of operations. (the Stub Period combined with
the period February 5, 2003 to April 5, 2003 are the 'First Quarter of Fiscal
2003'). References in this Item 2 to the 'Predecessor' refer to the Company
prior to February 4, 2003. References to the 'Successor' refer to the Company on
and after February 4, 2003 after giving effect to the implementation of fresh
start reporting.
The following statement of operations data compares the combined Stub Period
and the period February 5, 2003 to April 5, 2003 to the First Quarter of Fiscal
2002.
31
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
<Table>
<Caption>
COMBINED
-------------
FIRST QUARTER % OF FIRST QUARTER % OF
OF FISCAL NET OF FISCAL NET
2003 REVENUES 2002 REVENUES
---- -------- ---- --------
Net revenues...................................... $ 442,284 100.0% $ 410,052 100.0%
Cost of goods sold................................ 275,132 62.2% 291,640 71.1%
----------- ----- ---------
Gross profit...................................... 167,152 37.8% 118,412 28.9%
Selling, general, and administrative expenses..... 107,850 24.4% 102,118 24.9%
Amortization of sales order backlog............... 4,200 0.9% -- 0.0%
Reorganization items.............................. 31,305 7.1% 15,531 3.8%
----------- ----- ---------
Operating income.................................. 23,797 5.4% 763 0.2%
Reorganization items:
Gain on cancellation of pre-petition
indebtedness................................ (1,692,696) n/m -- n/m
Fresh start adjustments....................... (765,726) n/m -- n/m
Investment loss, net.............................. 394 0.1% -- 0.0%
Interest expense.................................. 6,315 1.4% 6,964 1.7%
----------- ---------
Income (loss) before provision for income taxes
and cumulative effect of change in accounting
principle....................................... 2,475,510 (6,201) n/m
Provision for income taxes........................ 94,334 n/m 49,929 n/m
----------- ---------
Income (loss) before cumulative effect of a change
in accounting principle......................... 2,381,176 n/m (56,130) n/m
Cumulative effect of change in accounting
principle (net of income tax benefits of
$53,513 -- 3 months ended April 6, 2002)........ -- (801,622) n/m
----------- ---------
Net income (loss)................................. $ 2,381,176 n/m $(857,752) n/m
----------- ---------
----------- ---------
</Table>
The Company notes that its results for the First Quarter of Fiscal 2003
reflect many factors including increased sales of swimwear products, as compared
to the prior year period. Also, earlier shipment of certain swimwear, Calvin
Klein underwear and Calvin Klein jeans programs had a positive effect on the
First Quarter of Fiscal 2003. The Company expects that these earlier shipments
combined with lower-than-expected second quarter 2003 shipments of intimate
apparel will cause second quarter results to be significantly below the prior
year's results. However, the Company expects first six months' results to be
ahead of the prior year's results.
NET REVENUES
Net revenues are as follows:
<Table>
<Caption>
FIRST QUARTER OF FISCAL
(DOLLARS IN THOUSANDS)
---------------------------------------------
INCREASE PERCENTAGE
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
Intimate Apparel Group(a)................... $151,060 $158,337 $(7,277) -4.6%
Sportswear Group............................ 139,146 129,204 9,942 7.7
Swimwear Group.............................. 152,078 122,511 29,567 24.1
-------- -------- -------
Net Revenue................................. $442,284 $410,052 $32,232 7.9%
-------- -------- -------
-------- -------- -------
</Table>
- ---------
(a) Intimate Apparel net revenues for the First Quarter of
Fiscal 2002 include $19.1 million of revenues from
discontinued and sold units. Not including these revenues,
Intimate Apparel net revenues increased 8.5% and
consolidated net revenues increased 13.1%.
Net revenues increased $32.2 million, or 7.9%, to $442.3 million in the
First Quarter of Fiscal 2003 compared to $410.1 million in the First Quarter of
Fiscal 2002. In the same period, Sportswear Group net revenues increased
$9.9 million, or 7.7%, to $139.1 million, Swimwear Group net revenues increased
32
by $29.6 million, or 24.1%, to $152.1 million and Intimate Apparel Group net
revenues decreased $7.3 million, or 4.6%, to $151.1 million (excluding
sold/discontinued operations Intimate Apparel Group net revenues increased by
8.5%).
Intimate Apparel Group
Intimate Apparel Group net revenues are as follows:
<Table>
<Caption>
FIRST QUARTER OF FISCAL
(DOLLARS IN THOUSANDS)
---------------------------------------------
INCREASE PERCENTAGE
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
INTIMATE APPAREL GROUP
Warner's/Olga/Body Nancy Ganz............... 48,341 58,518 (10,177) -17.4%
Calvin Klein Underwear...................... 68,206 52,775 15,431 29.2
Lejaby...................................... 31,885 24,525 7,360 30.0
Retail...................................... 2,616 3,398 (782) -23.0
-------- -------- --------
Total continuing business units............. 151,048 139,216 11,832 8.5
Discontinued/sold business units............ 12 19,121 (19,109) -99.9
-------- -------- --------
Intimate Apparel Group...................... $151,060 $158,337 $ (7,277) -4.6
-------- -------- --------
-------- -------- --------
</Table>
Intimate Apparel net revenues decreased $7.3 million, or 4.6%, to
$151.1 million for the First Quarter of Fiscal 2003, from $158.3 million for the
First Quarter of Fiscal 2002. Excluding net revenues from sold and discontinued
business units (GJM, Fruit of the Loom, Weight Watchers and domestic outlet
retail stores), Intimate Apparel net revenues increased $11.8 million, or 8.5%,
to $151.0 million for the First Quarter of Fiscal 2003 compared to $139.2
million for the First Quarter of Fiscal 2002. Warner's/Olga/Body Nancy Ganz net
revenues decreased $10.2 million, reflecting a less favorable reception of
certain new products at retail coupled with an over stock position at several
key retailers. The Company expects that the negative trend in
Warner's'r'/Olga'r'/Body Nancy Ganz'r' net revenues will continue at least
through the Second Quarter of Fiscal 2003 as retailers sell through inventory on
hand. The increase in Calvin Klein underwear net revenues reflects increases in
all major accounts, including the international divisions, due to improved
sell-through at retail, particularly in the women's business. Lejaby'r' net
revenues increased $7.4 million, or 30.0%, primarily through favorable reception
of products at retail and a favorable Rasurel'r' swimwear shipping season.
Revenues from sold or discontinued business units decreased $19.1 million, to
$.01 million for the First Quarter of Fiscal 2003. The decrease is primarily
attributable to the decision to close all domestic outlet retail stores in
fiscal 2002. The remaining Intimate Apparel retail business is comprised of five
full price Calvin Klein underwear stores in Europe, 13 outlet retail stores in
Europe, two Warnaco outlet retail stores in Canada and 11 full price Calvin
Klein underwear stores in Asia.
Sportswear Group
Sportswear Group net revenues are as follows:
<Table>
<Caption>
FIRST QUARTER OF FISCAL
(DOLLARS IN THOUSANDS)
---------------------------------------------
INCREASE PERCENTAGE
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
SPORTSWEAR GROUP
Chaps Ralph Lauren...................... $ 33,482 $ 32,555 $ 927 2.9%
Calvin Klein Jeans...................... 86,776 79,215 7,561 9.6
Calvin Klein Accessories................ 3,610 3,401 209 6.2
A.B.S. by Allen Schwartz................ 10,972 9,201 1,771 19.3
Mass sportswear licensing............... 4,306 4,832 (526) -10.9
-------- -------- ------
Sportswear Group........................ $139,146 $129,204 $9,942 7.7
-------- -------- ------
-------- -------- ------
</Table>
Sportswear net revenues increased by $9.9 million, or 7.7%, to
$139.1 million for the First Quarter of Fiscal 2003, from $129.2 million for the
First Quarter of Fiscal 2002 . The small growth rate in Chaps'r' net revenues
reflects overall softness in the men's sportswear business. The increase in
Calvin Klein
33
jeans net revenues reflects certain programs that were shipped in the First
Quarter of Fiscal 2003. Those programs were shipped in the second and third
quarters of fiscal 2002. Net revenues for the second quarter and third quarters
of fiscal 2003 will be negatively affected by these earlier Calvin Klein jeans
orders. A.B.S. by Allen Schwartz'r' net revenues have benefited from a favorable
reception of its new styles at retail, primarily in denim sportswear and day
dresses. Mass sportswear licensing has been affected by slower sell-through at
Wal-Mart.
Swimwear Group
Swimwear Group net revenues are as follows:
<Table>
<Caption>
FIRST QUARTER OF FISCAL
(DOLLARS IN THOUSANDS)
---------------------------------------------
INCREASE PERCENTAGE
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
SWIMWEAR GROUP
Speedo...................................... $101,294 $ 70,235 $31,059 44.2%
Designer.................................... 45,598 42,337 3,261 7.7
Retail...................................... 5,186 9,939 (4,753) -47.8
-------- -------- -------
Swimwear Group.............................. $152,078 $122,511 $29,567 24.1
-------- -------- -------
-------- -------- -------
</Table>
Swimwear net revenues increased $29.6 million, or 24.1%, to $152.1 million
for the First Quarter of Fiscal 2003, from $122.5 million for the First Quarter
of Fiscal 2002. Better inventory management, new product lines and an expanded
customer base contributed to the overall increase in the Swimwear Group's net
revenues. Better inventory management and production controls resulted in more
timely shipment of goods to customers than were shipped in the First Quarter of
Fiscal 2002. Consequently a portion of the overall increase relates to recurring
orders that were shipped in the First Quarter of Fiscal 2003, while the
corresponding orders were shipped in the second quarter of Fiscal 2002. Revenues
in the second quarter of Fiscal 2003 may thus be negatively impacted by these
timing differences. Speedo'r' net revenue increased $31.1 million, or 44.2%, to
$101.3 million for the First Quarter of Fiscal 2003 compared to $70.2 million
for the First Quarter of Fiscal 2002. The increase in Speedo net revenues
primarily reflects increased sales of Speedo fitness swim products and
accessories. Designer swimwear net revenues increased $3.3 million or 7.7% to
$45.6 million in the First Quarter of Fiscal 2003 compared to $42.3 million in
the First Quarter of Fiscal 2002 due to favorable reception at retail, in
particular, the Anne Cole'r' line. Speedo Authentic Fitness'r' retail net
revenues decreased $4.8 million, or 47.8%, to $5.2 million for the First Quarter
of Fiscal 2003 compared to $9.9 million for the First Quarter of Fiscal 2002.
The decrease in Speedo Authentic Fitness retail was primarily due to the closing
of 50 stores from the beginning of fiscal 2002 through the end of the First
Quarter of Fiscal 2003.
GROSS PROFIT
Gross profit increased $48.8 million to $167.2 million or 37.8% of net
revenues for the First Quarter of Fiscal 2003 from $118.4 million or 28.9% of
net revenues for the First Quarter of Fiscal 2002. The increase in gross profit
reflects higher sales volume, an improved regular to off-price sales mix,
improved sales allowance and markdown experience, improved manufacturing
efficiencies, inventory management and more efficient product sourcing. Cost of
goods sold for the First Quarter of Fiscal 2002 includes expenses of $3.4
million related to certain design, procurement, receiving and other product
related costs. Through February 4, 2003, the Company had capitalized such costs.
Effective February 4, 2003, the Company changed its method of accounting and
expenses such costs as they are incurred.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the First Quarter of Fiscal
2003 increased $5.7 million, or 5.6%, to $107.9 million (24.4% of net revenues)
compared to $102.1 million (24.9% of net revenues) for the First Quarter of
Fiscal 2002. Marketing expenses in the First Quarter of Fiscal 2003 decreased
$2.0 million, or 6.8%, to $27.2 million compared to $29.2 million in the First
Quarter of Fiscal 2002. Marketing expenses as a percentage of net revenues
decreased to 6.1% of net revenues in
34
the First Quarter of Fiscal 2003 from 7.1% in the First Quarter of Fiscal 2002.
Depreciation and amortization expense decreased approximately $3.5 million in
the First Quarter of Fiscal 2003 compared to the First Quarter of Fiscal 2002
reflecting the adjustments in the carrying value of the Company's fixed assets
to fair value in connection with the adoption of fresh start reporting on
February 4, 2003. Selling expenses decreased as a percentage of net revenues
from 12.8% in the First Quarter of Fiscal 2002 to 9.8% in the First Quarter of
Fiscal 2003. The decrease in selling expenses as a percentage of net revenues
reflects the decrease in the number of full price and outlet retail stores the
Company operates. The First Quarter of Fiscal 2002 includes $4.1 million of
lease expense for certain operating leases that were settled in connection with
the Company's bankruptcy. There is no comparable expense in the First Quarter of
Fiscal 2003.
AMORTIZATION OF SALES ORDER BACKLOG
Amortization of sales order backlog of $4.2 million represents amortization
expense of the appraised value of the Company's existing order backlog at
February 4, 2003.
REORGANIZATION ITEMS
Reorganization items were $31.3 million in the First Quarter of Fiscal 2003
compared to $15.5 million in the First Quarter of Fiscal 2002.
Reorganization items for the First Quarter of Fiscal 2003 primarily consist
of lease termination expenses associated with the final reconciliation of
rejected leases and contracts of $10.1 million, employee contracts, bonus and
retention payments of $14.6 million (including the accrual of certain costs
associated with the consolidation of manufacturing facilities in Europe of
$6.5 million), legal and professional fees of $5.8 million and $0.8 million
other items. Reorganization items for the First Quarter of Fiscal 2002 consisted
of legal and professional fees of $7.2 million, employee related payments of
$5.2 million, loss on the sales of certain business units of $2.1 million and
other items of $1.0 million.
OPERATING INCOME
The following table presents operating income by Group, including
depreciation and amortization expense in each Group.
<Table>
<Caption>
FIRST QUARTER OF FISCAL
(DOLLARS IN THOUSANDS)
---------------------------------------------
INCREASE PERCENTAGE
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
Intimate Apparel Group.............................. $ 19,064 $ 4,851 $ 14,213 293.0%
Sportswear Group.................................... 19,887 10,080 9,807 97.3
Swimwear Group...................................... 38,403 20,279 18,124 89.4
-------- -------- --------
Group operating income.............................. 77,354 35,210 42,144 119.7
Unallocated general corporate expenses.............. (17,704) (18,690) 986 5.3
Amortization of intangibles......................... (4,548) (226) (4,322) -1912.4
Reorganization items................................ (31,305) (15,531) (15,774) -101.6
-------- -------- --------
Operating income.................................... $ 23,797 $ 763 $ 23,034 3018.9
-------- -------- --------
-------- -------- --------
</Table>
Operating income increased $23.0 million for the First Quarter of Fiscal
2003 compared to operating income of $0.8 million for the First Quarter of
Fiscal 2002 primarily reflecting increased operating income by the Company's
business groups, of $42.1 million and lower corporate expenses of $1.0 million.
The higher Group operating income and corporate expenses savings were offset by
higher amortization of intangibles (primarily from the amortization of sales
order backlog of $4.2 million), and higher reorganization items of
$15.8 million primarily reflecting the final settlement of certain bankruptcy
claims and rejected leases in connection with the Company's emergence from
bankruptcy. Reorganization items for the First Quarter of Fiscal 2003 also
includes accruals of $6.5 million for the consolidation of certain manufacturing
operations in Europe based on the status of various negotiations with labor
unions and employee groups. Depreciation expense for the First Quarter of Fiscal
2003
35
decreased $3.6 million compared to the First Quarter of Fiscal 2002 due to the
adjustments of the Company's fixed assets to fair value in connection with the
adoption of fresh start accounting provision of SOP 90-7.
Intimate Apparel Group
Intimate Apparel Group operating income is as follows:
<Table>
<Caption>
FIRST QUARTER OF FISCAL
(DOLLARS IN THOUSANDS)
---------------------------------------------
INCREASE PERCENTAGE
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
INTIMATE APPAREL
Continuing:
Warner's/Olga/Body Nancy Ganz............. $ 3,397 $ 150 $ 3,247 2164.7%
Calvin Klein Underwear.................... 10,261 4,135 6,126 148.2
Lejaby.................................... 6,104 4,494 1,610 35.8
Retail.................................... (356) (249) (107) -n/m
------- ------- -------
Total continuing business units............... 19,406 8,530 10,876 127.5
Sold/discontinued business units.............. (342) (3,679) 3,337 n/m
------- ------- -------
Intimate Apparel Group........................ $19,064 $ 4,851 $14,213 293.0
------- ------- -------
------- ------- -------
</Table>
The Intimate Apparel Group's operating income increased $14.2 million to
$19.1 million for the First Quarter of Fiscal 2003 compared to operating income
of $4.9 million for the First Quarter of Fiscal 2002. Excluding operating losses
from sold and discontinued business units (GJM, Fruit of the Loom, Weight
Watchers and domestic outlet retail stores), Intimate Apparel operating income
increased $10.9 million, or 127.5%, to $19.4 million for the First Quarter of
Fiscal 2003 compared to $8.5 million for the First Quarter of Fiscal 2002. The
increase is attributable to increased revenues, primarily in Calvin Klein
underwear and Lejaby. Warner's/Olga/Body Nancy Ganz reflect improved rates of
returns and allowances due to better product quality which contributed to a
higher operating income despite a decrease in net revenues.
Sportswear Group
Sportswear Group operating income is as follows:
<Table>
<Caption>
FIRST QUARTER OF FISCAL
(DOLLARS IN THOUSANDS)
---------------------------------------------
INCREASE PERCENTAGE
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
SPORTSWEAR GROUP
Chaps Ralph Lauren............................ $ 4,475 $ 3,752 $ 723 19.3%
Calvin Klein Jeans............................ 10,585 1,658 8,927 538.4
Calvin Klein Accessories...................... 552 111 441 397.3
A.B.S. by Allen Schwartz...................... 899 472 427 90.5
Mass sportswear licensing..................... 3,376 4,087 (711) -17.4
------- ------- ------
Sportswear Group.............................. $19,887 $10,080 $9,807 97.3
------- ------- ------
------- ------- ------
</Table>
The Sportswear Group's operating income increased $9.8 million or 97.3% to
$19.9 million for the First Quarter of Fiscal 2003 compared to operating income
of $10.1 million for the First Quarter of Fiscal 2002. The increase in Calvin
Klein jeans operating income primarily reflects increased gross margins as a
result of lower product costs of certain jeans which were manufactured
domestically for the first half of fiscal 2002 and which, for the second half of
Fiscal 2002 and First Quarter of Fiscal 2003, were sourced at lower costs from a
third party. The increase in Chaps Ralph Lauren operating income is a result of
increased net revenues, as noted above, and more effective product sourcing.
36
Swimwear Group
Swimwear Group operating income is as follows:
<Table>
<Caption>
FIRST QUARTER OF FISCAL
(DOLLARS IN THOUSANDS)
---------------------------------------------
INCREASE PERCENTAGE
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
SWIMWEAR GROUP
Speedo........................................ $27,971 $12,967 $15,004 115.7%
Designer...................................... 11,040 8,203 2,837 34.6
Ubertech...................................... (11) (249) 238 95.6
Retail........................................ (597) (642) 45 7.0
------- ------- -------
Swimwear Group................................ $38,403 $20,279 $18,124 89.4
------- ------- -------
------- ------- -------
</Table>
The Swimwear Group's operating income increased $18.1 million, or 89%, to
$38.4 million for the First Quarter of Fiscal 2003 compared to an operating
income of $20.3 million for the First Quarter of Fiscal 2002. The increase in
the Swimwear Group's operating income for the First Quarter of Fiscal 2003
compared to the First Quarter of Fiscal 2002 reflects increased revenues and
increased gross margins due to better inventory management, new product lines
and an expanded customer base. In addition, the Swimwear Group experienced lower
levels of returns and allowances during the First Quarter of Fiscal 2003
compared to the First Quarter of Fiscal 2002 which contributed to a higher gross
margin and operating income.
REORGANIZATION ITEMS -- GAIN ON CANCELLATION OF DEBT AND FRESH START ADJUSTMENTS
The First Quarter of Fiscal 2003 includes a gain of $1,692.7 million related
to the cancellation of the Company's pre-petition debt and other liabilities
subject to compromise net of the fair value of cash and securities distributed
to the pre-petition creditors. Fresh start adjustments of $765.7 million
represent adjustments to the carrying amount of the Company's assets to fair
value in accordance with the provisions of 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'). See Note 5 of
Notes to the Consolidated Condensed Financial Statements.
INTEREST EXPENSE
Interest expense decreased $0.7 million, or 9.3%, to $6.3 million for the
First Quarter of Fiscal 2003 compared with $7.0 million for the First Quarter of
Fiscal 2002. Interest expense for the First Quarter of Fiscal 2003 included
interest on foreign debt for one month of approximately $1.1 million, interest
expense related to the settlement of certain operating leases of $0.1 million,
interest on the Second Lien Notes of $3.2 million, interest on the Exit
Financing Facility of approximately $1.1 million and other interest of
approximately $0.8 million. The decrease in interest expense primarily reflects
the reduction of borrowing under the Company's revolving credit facilities and a
corresponding decrease in interest payments. Amortization of deferred financing
costs totaled $2.4 million in the First Quarter of Fiscal 2002 related to fees
and charges on the DIP. Interest on foreign debt agreements was approximately
$1.6 million in the First Quarter of Fiscal 2002. Accrued interest related to
the foreign debt agreements included as part of liabilities subject to
compromise at February 4, 2003 was paid on the emergence date according to the
Plan. (See Note 1 of Notes to Consolidated Condensed Financial Statements).
INCOME TAXES
The provision for income taxes for the First Quarter of Fiscal 2003 of $94.3
million consists of $77.6 million of deferred income taxes related to the
increase in asset values recorded as part of the Company's adoption of fresh
start reporting. The provision also includes taxes on domestic and foreign
earnings of approximately $12.5 million and $4.3 million, respectively for the
First Quarter of Fiscal 2003. The Company has recorded a valuation allowance
against the deferred tax assets created in the First Quarter of Fiscal 2003 as a
result of the fresh start adjustments, as well as against certain foreign net
operating losses, to the amount that will more likely than not be realized.
37
The provision for income taxes for the First Quarter Fiscal 2002 of $49.9
million reflects an increase in the Company's valuation allowance of
approximately $46.1 million and accrued income taxes of approximately $3.9
million on foreign earnings. The increase in the valuation allowance in the
First Quarter of Fiscal 2002 reflects an offset to the income tax benefit
recorded in connection with the cumulative effect of an accounting change for
the adoption of SFAS 142. The increase in the valuation allowance during the
First Quarter of Fiscal 2002 results from an increase in the Company's deferred
tax assets that may not be realized.
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 with the First Quarter of
Fiscal 2002. Under the provisions of SFAS 142, goodwill is deemed 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 engaged a
third party appraisal firm to assist in its determination 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 on
January 6, 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 on January 6, 2002.
CAPITAL RESOURCES AND LIQUIDITY
FINANCING ARRANGEMENTS
On the Effective Date the Company entered into a $275.0 million Senior
Secured Revolving Credit 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 1.50% (5.75% at April 5, 2003) or at the
London Interbank Offered Rate ('LIBOR') plus 2.50% (approximately 3.8% at
April 5, 2003). 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 0.5% 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 to 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 (subject to limited exceptions) and
prohibit the Company from incurring material additional indebtedness. Initial
borrowings under the Exit Financing Facility on the Effective Date were
$39.2 million. The Exit Financing Facility is guaranteed by most of the
Company's domestic subsidiaries and the obligations under such guarantee,
together with the Company's obligations under the Exit Financing Facility, are
secured by a lien on substantially all of the domestic assets of the Company and
its domestic subsidiaries.
As of May 16, 2003, the Company had approximately $6.4 million outstanding,
$48.6 million of letters of credit outstanding under the Exit Financing Facility
and had approximately $206.4 million of additional credit available under the
Exit Financing Facility.
SECOND LIEN NOTES
In accordance with the Plan, on the Effective Date, the Company issued
$200.9 million of New Warnaco Second Lien Notes due 2008 to certain pre-petition
creditors and others in a transaction exempt from the registration requirements
of the Securities Act of 1933, as amended, pursuant to
38
Section 1145(a) of the Bankruptcy Code. The Second Lien Notes mature on
February 4, 2008, subject to, in certain instances, earlier repayment in whole
or in part. The Second Lien Notes bear an annual interest rate (9.5% at
April 5, 2003) which is the greater of (i) 9.5% plus a margin (initially 0%, and
beginning on August 4, 2003, 0.5% is added to the margin every six months); and
(ii) LIBOR plus 5.0% plus a margin (initially 0%, and beginning on August 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 Company from
paying dividends (subject to limited exceptions) and 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 Second Lien Notes are payable in equal annual
installments of $40.2 million beginning in April 2004 through April 2008. Second
Lien Note principal payments can only be made if the Company achieves a defined
certain fixed charge coverage ratio and has additional borrowing availability,
after the principal payment, of $75.0 million or more under the Exit Financing
Facility.
LIQUIDITY
The Company emerged from bankruptcy on February 4, 2003. Initial borrowings
under the Exit Financing Facility were $39.2 million on February 4, 2003. Since
the Effective Date through May 16, 2003 the Company has repaid approximately
$30 million of its initial borrowing under the Exit Financing Facility. As of
May 16, 2003, the Company had approximately $6.4 million of borrowing
outstanding and $48.6 million of letters of credit outstanding under the Exit
Financing Facility and had approximately $206.4 million of additional credit
available under the Exit Financing Facility.
At April 5, 2003, the Company had working capital of $366.0 million. The
Company believes that the credit available under its Exit Financing facility
combined with cash flows from operations will be sufficient to fund the
Company's operating and capital expenditures requirements for at least the next
two to four years. Should the Company require additional sources of capital it
will consider reducing its capital expenditures, seeking additional financing or
selling assets to meet such requirements.
CASH FLOWS
The following discussion of cash flows includes cash flows for the Stub
Period and for the two month period ended April 5, 2003 added together in order
to provide comparison to the First Quarter of Fiscal 2002.
For the First Quarter of Fiscal 2003 cash used in operating activities was
$37.1 million compared to cash provided by operating activities of
$32.1 million for First Quarter of Fiscal 2002. The decrease in cash flow from
operations reflects higher usage of working capital, primarily accounts
receivable and inventory due to the higher sales, particularly of swimwear and
the related investment in inventory and accounts receivable that was required.
In addition, the First Quarter of Fiscal 2002 benefited from the Company's sale
of inventory related to retail store closures. The Company also paid
administrative and other claims related to the bankruptcy proceedings in the
First Quarter of Fiscal 2003 resulting in additional cash use. Cash interest
expense for the First Quarter of Fiscal 2003 was $0.6 million lower than the
First Quarter of Fiscal 2002. The decrease in cash interest is primarily a
result of the Company's excess cash position in the first month of fiscal 2003
compared to borrowings of $155.9 million at year end 2001 under the Amended DIP.
Net cash used in investing activities was $3.5 million for the First Quarter
of Fiscal 2003 consisting primarily of capital expenditures partially offset by
proceeds from asset sales. The Company sold the Penhaligon's and GJM businesses
in the First Quarter of Fiscal 2002 which generated $20.5 million of proceeds
from asset sales. Capital expenditures were $2.0 million in the First Quarter of
Fiscal 2002 reflecting the Company's decision to limit capital investment during
the bankruptcy.
Cash used in financing activities for the First Quarter of Fiscal 2003 was
$47.3 million reflecting the payment of $106.1 million of cash to the secured
pre-petition lenders as part of the Company's bankruptcy settlement partially
offset by borrowings of approximately $61.0 million under the Exit
39
Financing Facility. The Company also paid approximately $4.5 million of bank
underwriting fees and legal fees associated with the closing of the Exit
Financing Facility on February 4, 2003.
There was $6.4 million outstanding under the Exit Financing Facility on
May 16, 2003. The Company had stand-by and documentary letters of credit
outstanding under the Exit Financing Facility on May 16, 2003 of approximately
$48.6 million. Cash in operating accounts primarily represents lock-box receipts
not yet cleared or available to the Company, cash held by foreign subsidiaries
and compensating balances required under various trade, credit and other
arrangements.
NEW ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards No. 149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities ('SFAS 149'). FASB Statements
No. 133 Accounting for Derivative Instruments and Hedging Activities ('SFAS
133') and No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, establish accounting and reporting standards for derivative
instruments including derivatives embedded in other contracts (collectively
referred to as 'derivatives') and for hedging activities. SFAS 149 amends SFAS
133 for certain decisions made by the Board as part of the Derivatives
Implementation Group ('DIG') process. This Statement contains amendments
relating to FASB Concepts Statement No. 7, Using Cash Flow Information and
Present Value in Accounting Measurements, and FASB Statements No. 65, Accounting
for Certain Mortgage Banking Activities, No. 91 Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases, No. 95, Statement of Cash Flows, and No. 126, Exemption from
Certain Required Disclosures about Financial Instruments for Certain Nonpublic
Entities. The provisions of SFAS 149 are effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS 149 is not expected to have a
material effect on the Company's financial statements.
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 periods 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
adoption of FIN 45 did not have an effect on the Company's consolidated
financial statements.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Quarterly 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, as amended, that reflect,
when made, the Company's expectations or beliefs concerning future events that
involve risks and uncertainties, including general economic conditions affecting
the apparel industry, changing fashion trends, pricing pressures which may cause
the Company to lower its prices, increases in the prices of raw materials the
Company uses, changing international trade regulation and elimination of quotas
on imports of textiles and apparel, the Company's history of losses, the changes
in the Company's senior management team, the Company's ability to protect its
intellectual property rights, the Company's dependency on a limited number of
customers, the Company's dependency on the reputation of its brand names, the
Company's exposure to conditions in overseas markets, the competition in the
Company's markets, the Company's recent emergence from bankruptcy, the
comparability of financial statements for periods before and after the Company's
adoption of fresh start accounting; the Company's history of insufficient
disclosure controls and procedures and internal controls and restated financial
statements, the Company's future plans concerning guidance regarding its results
of operations, the effect of the SEC's investigation, the effect of local laws
and regulations, shortages of supply of sourced goods or interruptions in the
Company's manufacturing, the impact of SARS, the Company's level of debt, the
Company's ability to obtain additional financing, the restrictions on the
Company's operations imposed by the Exit Financing Facility and the indenture
governing the Second
40
Lien Notes and the Company's ability to service its debt. All statements other
than statements of historical facts included in this Quarterly Report,
including, without limitation, the statements under Management's Discussion and
Analysis of Financial Condition 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 its stock.
ITEM 3. 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.
INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in interest
rates based primarily on its financing activities. As of April 5, 2003, the
Company had approximately $61 million of borrowings outstanding under the Exit
Financing Facility, and therefore, a hypothetical 1% adverse change in interest
rates as of April 5, 2003 (i.e. an increase from the Company's actual interest
rate of 3.8% at April 5, 2003 to 4.8%) would have resulted in an increase of
approximately $0.2 million in interest expense for the First Quarter of Fiscal
2003 had the $61 million been outstanding for the entire three month period. A
1% change in interest rates would not have had any effect on interest related to
the Second Lien Notes as the minimum interest rate on the Second Lien Notes is
significantly higher than current variable interest rate plus the applicable
margin. See Note 14 of Notes to Consolidated Condensed Financial Statements.
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 the 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 April 5, 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 certain equity forward purchase agreements with several banks entered
into prior to the Petition Date to purchase shares of Old Common Stock of the
Company. Prior to the Petition Date, the banks purchased the maximum of
5.2 million shares under the equity agreements. All amounts owing under the
equity agreements and related equity agreement Notes were discharged upon the
Debtors' emergence from bankruptcy. The Company does not believe that it
currently has any material exposure to a sudden increase or decline in its stock
price.
ITEM 4. 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
Quarterly Report (the 'Evaluation Date'), the Company carried out an evaluation
of the effectiveness of the Company's
41
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 connection with the audit of the Company's consolidated financial
statements for Fiscal 2002, Deloitte did not advise management or the Audit
Committee of any material weaknesses or reportable conditions related to the
Company's internal controls or its operations.
42
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item 1 of Part II is incorporated herein by
reference to Part I, Item 1. Financial Statements Note 18 -- 'Legal Matters.'
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information required by this Item 2 of Part II is incorporated herein by
reference to the discussion of 'Chapter 11 Cases' in Part I, Item 1. Financial
Statements Note 1 -- 'Nature of Operations and Basis of Presentation.'
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
RISK FACTORS
The Company's business, operations and financial condition are subject to
various risks. Some of these risks are described below, and you should take
these risks into account in evaluating the Company or any investment decision
involving the Company. This section does not describe all the risks applicable
to the Company, its industry or its business and it is intended only as a
summary of certain material factors. In this section, the terms 'we,' 'us' and
'our' refer to the Company.
RISKS RELATING TO OUR 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 consumers. Our
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 in interest rates in any of the regions in which we compete could
adversely affect the sales of our products.
The effects of the recent economic slowdown and the deteriorating global
economic environment may have an adverse effect on our financial results. The
ongoing war against terrorism and the turmoil in 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 turmoil in the Middle East, additional
terrorist attacks or similar events could have further material adverse effects
on consumer confidence and spending and, as a result, on our results of
operations.
THE APPAREL INDUSTRY IS SUBJECT TO CONSTANTLY CHANGING FASHION TRENDS AND IF
WE MISJUDGE CONSUMER PREFERENCES, THE IMAGE OF ONE OR MORE OF OUR BRANDS MAY
SUFFER AND THE DEMAND FOR OUR PRODUCTS MAY DECREASE.
We believe our products are, in general, less subject to fashion trends
compared to many other apparel manufacturers because our core brands have
existed for an extended period of time and enjoy a high level of consumer
awareness. Many of our core intimate apparel and underwear products are also
produced primarily in basic colors that are not as dependent upon fashion
43
trends. However, the apparel industry is subject to shifting consumer demands
and evolving fashion trends and our success is also dependent upon our 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 our products, as well as excess inventories and
markdowns, which could have a material adverse effect on our business, results
of operations, and financial condition. In addition, if we misjudge consumer
preferences, our brand image may be impaired.
THE APPAREL INDUSTRY IS SUBJECT TO PRICING PRESSURES THAT MAY CAUSE US TO
LOWER THE PRICES WE CHARGE FOR OUR PRODUCTS AND ADVERSELY AFFECT OUR 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 our competitors also source their product
requirements from developing countries to achieve a lower cost operating
environment, possibly in environments with lower costs than our offshore
facilities, and those manufacturers may use these cost savings to reduce prices.
To remain competitive, we must adjust our prices from time to time in response
to these industry-wide pricing pressures. Moreover, increased customer demands
for allowances, incentives and other forms of economic support reduce our gross
margins and affect our profitability. Our financial performance may be
negatively affected by these pricing pressures if we are forced to reduce our
prices and if we cannot reduce our production costs or if our production costs
increase and we cannot increase our prices.
INCREASES IN THE PRICE OF RAW MATERIALS USED TO MANUFACTURE OUR PRODUCTS
COULD MATERIALLY INCREASE OUR COSTS AND DECREASE OUR PROFITABILITY.
The principal fabrics used in our business are made from cotton, wool, silk,
synthetic and cotton-synthetic blends. The prices we pay 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 our cost of sales and decrease our profitability unless we are
able to pass higher prices on to our customers. In addition, if one or more of
our competitors is able to reduce their production costs by taking advantage of
any reductions in raw material prices or favorable sourcing agreements, we may
face pricing pressures from those competitors and may be forced to reduce our
prices or face a decline in net sales, either of which could have a materially
adverse effect on our 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 OUR INDUSTRY. FUTURE
QUOTAS, DUTIES OR TARIFFS MAY INCREASE OUR COSTS OR LIMIT THE AMOUNT OF PRODUCTS
THAT WE CAN IMPORT INTO A COUNTRY.
Substantially all of our operations are subject to quotas imposed by
bilateral textile agreements between the countries from which we procure raw
materials, such as yarn, and the countries where our 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 our 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 our imports or
adversely modify existing restrictions. Adverse changes in these costs and
restrictions could harm our business. We cannot assure you that future trade
agreements will not provide our competitors an advantage over us, or increase
our costs, either of which could have a material adverse effect on our business,
results of operations or financial condition.
44
Our 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 ('WTO'). Generally, these trade agreements benefit our
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 our business, such as limiting
the countries from which we 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 our business, results of operations or financial condition.
RISKS RELATING TO OUR BUSINESS
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND WE MAY NOT BE ABLE TO
SUCCESSFULLY IMPROVE OUR PERFORMANCE OR RETURN TO PROFITABILITY.
We incurred net losses of $390.0 million, $861.2 million and $964.9 million
during Fiscal 2000, Fiscal 2001 and Fiscal 2002, respectively. Our ability to
improve our performance and return to profitability is dependent on our ability
to maintain operating discipline, improve our cost structure, foster organic
growth within our operating groups and capitalize on licensing and sublicensing
opportunities. We cannot assure you that we will improve our performance or
return to profitability.
DURING THE REORGANIZATION WE MADE SIGNIFICANT CHANGES IN OUR SENIOR
MANAGEMENT TEAM AND EXPECT TO MAKE ADDITIONAL CHANGES IN THE NEAR FUTURE.
Members of our former senior management, including our former Chief
Executive Officer and our former Chief Financial Officer, were replaced during
our reorganization. Our current Chief Executive Officer was hired in April 2003.
Our current Chief Financial Officer is employed by Alvarez & Marsal, Inc. and
expects to return to Alvarez & Marsal after a permanent chief financial officer
has been recruited and after completion of an orderly transition. Although we
are currently conducting a search for a permanent chief financial officer, we
cannot assure you when this search will be concluded. Moreover, we cannot assure
you that our current or future management team will be able to successfully
execute our strategy, and our business and financial condition may suffer if it
fails to do so.
OUR SUCCESS DEPENDS UPON THE CONTINUED PROTECTION OF OUR TRADEMARKS AND
OTHER INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE FORCED TO INCUR SUBSTANTIAL
COSTS TO MAINTAIN, DEFEND, PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS.
Our registered and common law trademarks, as well as certain of our licensed
trademarks, have significant value and are instrumental to our ability to market
our products. We cannot assure you that third parties will not assert claims
against any such intellectual property or that we will be able to successfully
resolve all such claims. In addition, although we seek international protection
of our intellectual property, the laws of some foreign countries may not allow
us to protect, defend or enforce our intellectual property rights to the same
extent as the laws of the United States. We could also incur substantial costs
to defend legal actions relating to use of our intellectual property, which
could have a material adverse effect on our business, results of operations or
financial condition.
Certain of our license agreements, including the license agreements with
Speedo International, Ltd., Calvin Klein, Inc., Nautica Apparel, Inc. and Anne
Cole and Anne Cole Design Studio Ltd., require us to make minimum royalty
payments, subject us to restrictive covenants, require us to provide certain
services (such as design services) and may be terminated if certain conditions
are not met. Although we believe we currently are in compliance with the
requirements under our license agreements, we cannot assure you that we will
continue to meet our obligations or fulfill
45
the conditions under these agreements in the future. The termination of certain
of these license agreements could have a material adverse effect on our
business, results of operations or financial condition.
In addition, some of our license agreements with third parties will expire
by their terms over the next several years. There can be no assurance that we
will be able to negotiate and conclude extensions of such agreements on similar
economic terms or at all.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR
SALES, AND OUR FINANCIAL SUCCESS IS LINKED TO THE SUCCESS OF OUR CUSTOMERS, OUR
CUSTOMERS' COMMITMENT TO OUR PRODUCTS AND OUR ABILITY TO SATISFY AND MAINTAIN
OUR CUSTOMERS.
Net revenues from our ten largest customers totaled 49.2% and 51.9% of our
worldwide net revenues during Fiscal 2001 and 2002, respectively. One customer,
Federated Department Stores, Inc., accounted for 10.5% of our Fiscal 2002 net
revenues.
Although we have long-standing customer relationships, we do not have
long-term contracts with any of our customers. Sales to customers are generally
on an order-by-order basis. If we cannot fill customers' orders on time, orders
may be cancelled and relationships with customers may suffer, which could have
an adverse effect on us, especially if the relationship is with a major
customer. Furthermore, if any of our customers experience a significant downturn
in their business, or fail to remain committed to our programs or brands, the
customer may reduce or discontinue purchases from us. The loss of a major
customer or a reduction in the amount of our products purchased by several of
our major customers could have a material adverse effect on our business,
results of operations or financial condition.
In addition, during the past several years, various retailers, including
some of our 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 experienced by some of our customers that are 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 us to limit or
discontinue business with that customer, require us to assume more credit risk
relating to that customer's receivables or limit our ability to collect amounts
related to previous purchases by that customer, all of which could have a
material adverse effect on our business, results of operations or financial
condition.
OUR SUCCESS DEPENDS ON THE REPUTATION OF OUR OWNED AND LICENSED BRAND NAMES.
The success of our business depends on the reputation and value of our owned
and licensed brand names. The value of our brands could be diminished by actions
taken by licensors or others who have interests in the brands for other products
and/or territories. Because we cannot control the quality of other products
produced and sold under such 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 effect on our sales. In addition, some of the brand names
licensed by us reflect the names of living individuals, whose actions are
outside our control. If the reputation of one of these individuals is
significantly harmed, our products bearing such individual's name may fall into
disfavor, which could adversely affect our business, financial condition and
results of operations. Moreover, although we regularly monitor the use of our
trademarks by our sublicensees, no assurance can be given that the actions of
sublicensees will not diminish the reputation of the brand, which could
adversely affect our business, financial condition and results of operations.
OUR BUSINESS OUTSIDE OF THE UNITED STATES EXPOSES US TO UNCERTAIN CONDITIONS
IN OVERSEAS MARKETS.
Our foreign operations subject us to risks customarily associated with
foreign operations. As of April 5, 2003, we sold our products in more than 25
countries and had facilities in 15 countries. In addition, we source many of our
products from third-party vendors based in foreign countries. For Fiscal 2002,
we had net revenues outside of the United States of $325.3 million, representing
21.8% of our total net revenues, with the majority of these sales in Canada and
Europe. We are
46
exposed to the risk of changes in social, political and economic conditions
inherent in operating in foreign countries, including:
o currency fluctuations;
o import and export license requirements;
o trade restrictions;
o changes in quotas, tariffs, taxes and duties;
o restrictions on repatriating foreign profits back to the
United States;
o foreign laws and regulations;
o international trade agreements;
o difficulties in staffing and managing international
operations;
o political unrest; and
o disruptions or delays in shipments.
We have foreign currency exposure relating to buying, selling and financing
in currencies other than the U.S. dollar, our functional currency. We also have
foreign currency exposure related to foreign denominated revenues and costs
translated into U.S. dollars. These exposures are primarily concentrated in the
Canadian Dollar, Euro, British pound sterling and Mexican peso. Fluctuations in
foreign currency exchange rates may adversely affect our 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 we and our
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
our operations. We cannot assure you that management of our foreign currency
exposure will protect us from fluctuations in foreign currency exchange rates
which could have a material adverse effect on our business, results of
operations and financial condition.
In addition, transactions between us and our 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 WE OPERATE ARE HIGHLY COMPETITIVE AND WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY.
The apparel industry is extremely competitive. We compete with many domestic
and foreign apparel manufacturers, some of which are larger, more diversified
and have greater financial and other resources than us. This competition could
cause reduced unit sales or prices, or both, which could materially and
adversely affect us. We compete on the basis of a variety of factors, including:
o product quality;
o brand recognition;
o price;
o product differentiation (including product innovation and
technology);
o manufacturing and distribution expertise and efficiency;
o marketing and advertising; and
o customer service.
Our ability to remain competitive in these areas will, in large part,
determine our future success. We cannot assure you that we will continue to
compete successfully.
WE CANNOT BE CERTAIN THAT THE BANKRUPTCY PROCEEDINGS WILL NOT ADVERSELY
AFFECT OUR OPERATIONS GOING FORWARD.
We sought protection under the Bankruptcy Code on June 11, 2001 and emerged
from bankruptcy on February 4, 2003. We cannot assure you that the Chapter 11
Cases will not adversely affect our operations going forward. The Chapter 11
Cases may affect our ability to
47
negotiate favorable terms from suppliers, customers, landlords and others. The
failure to obtain such favorable terms could adversely affect our financial
performance.
FRESH START ACCOUNTING MAY MAKE FUTURE FINANCIAL STATEMENTS DIFFICULT TO
COMPARE.
In accordance with the requirements of SOP 90-7, we have adopted fresh start
accounting as of February 4, 2003. Our consolidated balance sheets as of and
after February 4, 2003, and our 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 our future prospects
based on historical performance.
WE HAVE A HISTORY OF INSUFFICIENT DISCLOSURE CONTROLS AND PROCEDURES AND
INTERNAL CONTROLS, AS WELL AS RESTATED FINANCIAL STATEMENTS, THE RECURRENCE OF
WHICH WOULD AFFECT OUR ABILITY TO ENSURE TIMELY AND RELIABLE FINANCIAL
INFORMATION AND MAY ADVERSELY AFFECT OUR BUSINESS.
On March 29, 2001, we announced that we intended to restate our balance
sheet as of January 3, 1998. In our Annual Report on Form 10-K for the fiscal
year ended December 30, 2000, we restated our consolidated financial statements
for our fiscal year ended January 4, 1997 (Fiscal 1996) and our fiscal year
ended January 3, 1998 (Fiscal 1997). In addition, on April 20, 2001, we filed a
restated quarterly report for the third fiscal quarter of 2000. On August 22,
2001, we announced that we expected to restate our financial results for the
prior three fiscal years. Subsequently, in our Annual Report on Form 10-K for
the fiscal year ended January 5, 2002, we restated our consolidated financial
statements for Fiscal 1999, Fiscal 2000, each of the quarterly periods in Fiscal
1999 and Fiscal 2000 and the quarter ended April 7, 2001. The restatements
resulted from a variety of different reasons.
In connection with the audits of our consolidated financial statements for
Fiscal 2000 and Fiscal 2001, our independent auditors, Deloitte & Touche LLP
('Deloitte'), advised our management and the audit committee of our board of
directors of the following matters that Deloitte considered material weaknesses
constituting reportable conditions under standards established by the American
Institute of Certified Public Accountants:
o certain corporate and U.S. division accounting personnel
lacked appropriate experience and/or technical accounting
knowledge appropriate for their responsibilities and
required additional supervision and review of their work on
an ongoing basis;
o there were an insufficient number of qualified accounting
personnel and certain employees or management lacked the
qualifications and training to fulfill their assigned
functions;
o there was an absence of appropriate reviews and approvals of
transactions, accounting entries, systems output, account
reconciliations and analyses, and there were inadequate
procedures for assessing and applying accounting principles;
and
o there were numerous company-prepared closing entries and
adjusting entries as a result of Deloitte's audits.
Beginning in Fiscal 2001 and continuing through Fiscal 2002, we took corrective
actions to address each of these matters including:
o replacing certain financial staff and hiring additional
accounting and financial staff with appropriate experience
and technical accounting knowledge in certain domestic
divisions and in corporate finance;
o replacing and upgrading certain financial staff in our
international divisions and assigning personnel with
extensive accounting and internal control experience to
provide additional supervision of our international
accounting personnel and review of our international
accounting and financial operations;
o instituting monthly and quarterly reviews to ensure timely
and consistent application of accounting principles and
procedures and approval and appropriate review of
transactional activity by each of our business units; and
48
o recruiting new personnel to create a corporate financial
reporting department with responsibility for financial
reporting and the assessment and application of accounting
principles.
In connection with the audit of our consolidated financial statements for
Fiscal 2002, Deloitte did not advise our management or the audit committee of
any material weaknesses or reportable conditions related to our internal
controls or our operations. However, they recommended that improvements should
be made. We are continuing to identify and implement measures to further improve
the effectiveness of our disclosure controls and procedures and internal
controls, including the enhancement of systems, processes, policies, procedures
and controls. Significant supplemental resources, including time from our
management team, will continue to be required to maintain appropriate controls
and procedures and prepare the required financial and other information in a
timely and reliable manner. In addition, we need to hire additional employees
and further train existing employees to fill certain positions and augment our
existing financial reporting department. We also need to implement a formalized
business continuity and disaster recovery program.
If we fail to maintain effective internal controls and procedures for
financial reporting, we could be unable to provide timely and reliable financial
information.
THE SEC'S CURRENT INVESTIGATION RELATING TO CERTAIN OF OUR HISTORICAL
FINANCIAL STATEMENTS AND OTHER DOCUMENTS IS ONGOING. ALTHOUGH WE DO NOT EXPECT
THE RESOLUTION OF THIS MATTER TO HAVE A MATERIAL EFFECT ON OUR 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
OUR 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, among other things, the preparation and
publication by us of (i) the financial statements included in our Annual Report
on Form 10-K for Fiscal 1998 and Quarterly Report on Form 10-Q for the third
quarter of Fiscal 2000 and (ii) our press release announcing our results for
Fiscal 1998. In July 2002, the SEC staff informed us that it intends to
recommend that the SEC bring a civil injunctive action against us, alleging
violations of the federal securities laws, including Sections 10(b), 13(a),
13(b)(2)(A) and 3(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1
and 13a-13 promulgated thereunder. The SEC staff invited us to make a Wells
Submission describing the reasons why no action should be brought. In September
2002, we filed our Wells Submission and we are continuing discussions with the
SEC staff as to a settlement of this investigation.
We are also aware that the SEC staff has informed certain persons who were
employed by us at the time of the preparation of the documents referred to above
(including one current member of management) that it intends to recommend that
the SEC bring a civil injunctive action against such persons alleging violations
of the securities laws. We are advised that such persons also have filed Wells
Submissions.
Publicity surrounding the SEC's investigation or any related enforcement
action, or the ultimate resolution of this matter, could adversely affect our
financial condition, results of operations or business. Although we do not
expect the resolution of this matter to have a material effect on our business,
financial condition or results of operations, there can be no assurances that
this will be the case. In addition, the ultimate resolution of this matter could
result in our being unable to take advantage of a 'safe harbor' under the
Private Securities Litigation Reform Act of 1995 for certain forward-looking
statements (including guidance as to future results). The loss of the safe
harbor would eliminate a defense that could otherwise be available to us in any
future securities litigation.
WE ARE SUBJECT TO LOCAL LAWS AND REGULATIONS IN THE COUNTRIES IN WHICH WE
OPERATE.
We are subject to federal, state and local laws and regulations affecting
our 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. Our international
businesses are subject to
49
similar regulations in the countries where they operate. Failure to comply with
such laws may expose us to potential liability and have an adverse effect on our
results of operations.
SHORTAGES OF SUPPLY OF SOURCED GOODS FROM SUPPLIERS OR INTERRUPTIONS IN OUR
MANUFACTURING COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We utilize multiple supply sources and manufacturing facilities. However, an
unexpected interruption in any of the sources or facilities could temporarily
adversely affect our results of operations until alternate sources or facilities
can be secured.
THE SPREAD OF SEVERE ACUTE RESPIRATORY SYNDROME MAY HAVE A NEGATIVE IMPACT
ON OUR BUSINESS AND RESULTS OF OPERATIONS.
The recent outbreak of severe acute respiratory syndrome, or SARS, that
originated in Asia, may have a negative impact on our business. To date, we are
not aware of any of our employees or buying agents in Asia having contracted
this illness and have had no disruption in our sourcing operations in the region
due to the illness. We are continuing to monitor the possible implications of
the SARS outbreak, but at this time it is difficult to quantify the future
impact on our business. Our operations may be impacted by a number of
SARS-related factors, including the decline in our wholesale and retail
operations in Asia and our wholesale operations in Toronto, and may also
interfere with our ability to source products in these regions.
RISKS RELATING TO OUR INDEBTEDNESS
OUR LEVEL OF DEBT COULD LIMIT CASH FLOW AVAILABLE FOR OUR OPERATIONS AND
COULD ADVERSELY AFFECT OUR ABILITY TO OBTAIN ADDITIONAL FINANCING, IF NECESSARY;
OUR ABILITY TO OBTAIN ADDITIONAL FINANCING THROUGH THE ISSUANCE OF DEBT OR
EQUITY SECURITIES MAY ALSO BE LIMITED BY THE TERMS OF OUR CONTRACTUAL
ARRANGEMENTS AND BY OUR CURRENT INTENTION NOT TO PROVIDE GUIDANCE REGARDING OUR
FUTURE OPERATING RESULTS.
We emerged from bankruptcy on February 4, 2003. At May 22, 2003, we had
$199.6 million of availability under our Exit Financing Facility, which we
expect will be drawn upon from time to time for working capital purposes. Our
level of debt could restrict our operations and make it more difficult for us to
satisfy our obligations. Among other things, our debt may:
o limit our ability to obtain additional financing for working
capital, capital expenditures, strategic acquisitions and
general corporate purposes;
o require us to dedicate all or a substantial portion of our
cash flow to service our debt, which will reduce funds
available for other business purposes, such as capital
expenditures or acquisitions;
o limit our flexibility in planning for or reacting to changes
in the markets in which we compete;
o place us at a competitive disadvantage relative to our
competitors with less debt;
o render us more vulnerable to general adverse economic and
industry conditions; and
o make it more difficult for us to satisfy our financial
obligations.
We and our subsidiaries may still be able to incur additional debt. The
terms of our Exit Financing Facility and the agreements governing our other debt
will permit additional borrowings. Our incurrence of additional debt could
further exacerbate the risks described herein.
In addition, our ability to obtain additional financing through the issuance
of debt or equity securities may be limited by the terms of our contractual
agreements with certain stockholders of Warnaco Group. In connection with our
emergence from bankruptcy proceedings, we issued New Common Stock to certain of
our creditors and we entered into a registration rights agreement that restricts
us from issuing equity securities until February 4, 2006, except under limited
circumstances. Our ability to raise capital through the issuance of debt or
equity securities may also be affected because we do not currently intend to
provide guidance regarding our future operating results although many comparable
apparel companies provide such guidance.
THE COVENANTS IN OUR EXIT FINANCING FACILITY AND THE INDENTURE GOVERNING THE
SECOND LIEN NOTES IMPOSE RESTRICTIONS THAT MAY LIMIT OUR OPERATING AND FINANCIAL
FLEXIBILITY.
50
Our Exit Financing Facility and the indenture governing the Second Lien
Notes contain a number of significant restrictions and covenants, including ones
which limit our ability and our subsidiaries' ability to:
o incur liens and debt or provide guarantees regarding the
obligations of any other person;
o issue redeemable preferred stock and non-guarantor
subsidiary preferred stock;
o increase our common stock dividends above specified levels;
o make redemptions and repurchases of capital stock;
o make loans, investments and capital expenditures;
o prepay, redeem or repurchase debt;
o engage in mergers, consolidations and asset dispositions;
o engage in sale/leaseback transactions and affiliate
transactions;
o change our business, amend the indenture and other documents
governing any subordinated debt that we may issue in the
future and issue and sell capital stock of subsidiaries;
o change our accounting treatment and reporting policies;
o modify our constituent documents including, for example, our
charter and by-laws; and
o restrict distributions from subsidiaries.
Further, the Exit Financing Facility contains various covenants, including
financial covenants, with which we are required to comply. Failure to meet such
covenants may cause us to be unable to make additional borrowings under the Exit
Financing Facility, may require us to prepay our debt, may result in an event of
default under the Exit Financing Facility and could cause a cross default under
our other debt. Although we currently expect to be able to comply with these
covenants, operating results substantially below our business plan or other
adverse factors, including a significant increase in interest rates, could
result in our being unable to comply with our financial covenants. If we do not
comply with these covenants and are unable to obtain waivers from our lenders,
our debt under these agreements would be in default and could be accelerated by
our lenders. If our debt is accelerated, we may not be able to repay our debt or
borrow sufficient funds to refinance it. Even if we are able to obtain new
financing, it may not be on commercially reasonable terms, or terms that are
acceptable to us. If our expectations of future operating results are not
achieved, or our debt is in default for any reason, our business, financial
condition and results of operations would be materially and adversely affected.
In addition, complying with these covenants may also cause us to take actions
that may make it more difficult for us to successfully execute our business
strategy and compete against companies that are not subject to these types of
restrictions.
OUR ABILITY TO SERVICE OUR DEBT AND MEET OUR CASH REQUIREMENTS DEPENDS ON
MANY FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL.
Our ability to satisfy our obligations will depend on our future operating
performance and financial results, which will be subject, in part, to factors
beyond our control, including interest rates and general economic, financial and
business conditions. If we are unable to generate sufficient cash flow to
service our debt, we may be required to:
o refinance all or a portion of our debt;
o obtain additional financing;
o sell some of our assets or operations;
o reduce or delay capital expenditures; or
o revise or delay our strategic plans.
If we are required to take any of these actions, it could have a material
adverse effect on our business, financial condition or results of operations. In
addition, we cannot assure you that we would be able to take any of these
actions, that these actions would enable us to continue to satisfy our capital
requirements or that these actions would be permitted under the terms of our
51
debt instruments, including the Exit Financing Facility and the indenture
governing the Second Lien Notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
3.1 Amended and Restated Certificate of Incorporation of Warnaco
Group (incorporated by reference to Exhibit 1 to the
Form 8-A/A filed by Warnaco Group on February 4, 2003).*
3.2 Bylaws of Warnaco Group (incorporated by reference to the
Annual Report on Form 10-K filed by Warnaco Group on
April 4, 2003).*
4.1 Rights Agreement, dated as of February 4, 2003, between
Warnaco Group 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 Warnaco
Group on February 4, 2003).*
4.2 Indenture, dated as of February 4, 2003, among Warnaco, the
Guarantors and the Indenture Trustee (incorporated herein by
reference to Exhibit 4.2 to Warnaco Group's Form 8-K filed
February 10, 2003).*
4.3 Pledge and Security Agreement, dated as of February 4, 2003,
among Warnaco, as grantor, the Guarantors and the Collateral
Trustee (incorporated herein by reference to Exhibit 4.3 to
Warnaco Group's Form 8-K filed February 10, 2003).*
4.4 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 Warnaco Group's Form 8-K filed
February 10, 2003).*
4.5 Registration Rights Agreement, dated as of February 4, 2003,
among Warnaco Group and certain creditors of Warnaco Group
(as described in the Registration Rights Agreement)
(incorporated herein by reference to Exhibit 4.5 to Warnaco
Group's Form 8-K filed February 10, 2003).*
10.1 Warnaco Employee Retirement Plan (incorporated herein by
reference to Exhibit 10.11 to Warnaco Group's Registration
Statement on Form S-1, No. 33-4587).*
10.2 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 Warnaco Group's Form 8-K filed February 10,
2003).*
10.3 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 Warnaco Group's
Form 8-K filed February 10, 2003).*
10.4 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 Warnaco Group's
Form 8-K filed February 10, 2003).*
10.5 Letter Agreement, dated January 29, 2003, by and between
Alvarez & Marsal, Inc. and Warnaco Group (incorporated by
reference to the Annual Report on Form 10-K filed by Warnaco
Group on April 4, 2003).*
10.6 Letter Agreement, dated March 18, 2003, by and between
Alvarez & Marsal, Inc. and Warnaco Group (incorporated by
reference to the Annual Report on Form 10-K filed by Warnaco
Group on April 4, 2003).*
10.7 Employment Agreement, dated as of April 14, 2003, by and
between Warnaco Group and Joseph R. Gromek (incorporated by
reference to the Quarterly Report on Form 10-Q filed by
Warnaco Group on May 20, 2003).*
99.1 Certification 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
(b) Reports on Form 8-K
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.
52
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.
On March 20, 2003, the Company filed a Current Report on Form 8-K, dated
March 20, 2003. The Form 8-K reported at Item 5 (i) the date, time and location
of the Company's 2003 Annual Meeting of Stockholders (the 'Annual Meeting'),
(ii) the record date for determining stockholders entitled to notice of and to
vote at the Annual Meeting, (iii) the deadline for stockholder proposals to be
considered at the Annual Meeting and (iv) the date on which the Company expected
to mail its Annual Report to Stockholders for the fiscal year ended January 4,
2003 along with the Notice and Proxy Statement of the Annual Meeting.
On April 7, 2003, the Company filed a Current Report on Form 8-K dated
April 7, 2003. The Report on Form 8-K reported at Item 12 that the Company
issued a press release announcing its financial results for the fiscal year
ended January 4, 2003.
On April 14, 2003, the Company filed a Current Report on Form 8-K dated
April 14, 2003. The Form 8-K reported at Item 5 the financial results of the
Debtors as filed with the Bankruptcy Court for period commencing December 1,
2002 and ending January 4, 2003.
On April 15, 2003, the Company filed a Current Report on Form 8-K dated
April 15, 2003. The Report on Form 8-K reported at Item 9 that the Company
issued a press release announcing that it had named Joe Gromek President and
Chief Executive Officer, effective April 15, 2003.
On April 28, 2003, the Company filed a Current Report on Form 8-K dated
April 28, 2003. The Report on Form 8-K reported at Item 5 that the Company
issued a press release announcing the election of David A. Bell and Charles R.
Perrin to its board of directors.
On May 7, 2003, the Company filed a Current Report on Form 8-K dated May 7,
2003. The Form 8-K reported at Item 5 the Company's adoption of fresh start
accounting and included the Company's consolidated balance sheet as of
February 4, 2003 and the Company's independent auditors' opinion with respect to
the Company's consolidated balance sheet.
On May 15, 2003, the Company filed a Current Report on Form 8-K dated May
15, 2003. The Report on Form 8-K reported at Item 12 that the Company issued a
press release announcing its financial results for the first quarter ended
April 5, 2003.
On May 27, 2003, the Company filed a Current Report on Form 8-K dated
May 27, 2003. The Form 8-K reported at Item 5 that the Company issued a press
release announcing a proposed financing.
On May 29, 2003, the Company filed a Current Report on Form 8-K dated
May 29, 2003. The Form 8-K reported at Item 9 that the Company furnished certain
financial and other information.
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WARNACO GROUP, INC.
<Table>
Date: May 29, 2003 /s/ JOSEPH R. GROMEK
.............................................
JOSEPH R. GROMEK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 29, 2003 /s/ JAMES P. FOGARTY
.............................................
JAMES P. FOGARTY
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</Table>
54
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Joseph R. Gromek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Warnaco
Group, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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 quarterly report (the 'Evaluation Date'); and
c) Presented in this quarterly 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 quarterly 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: May 29, 2003 By: /s/ JOSEPH R. GROMEK
..............................................
JOSEPH R. GROMEK
CHIEF EXECUTIVE OFFICER
</Table>
55
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, James P. Fogarty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Warnaco
Group, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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 quarterly report (the 'Evaluation Date'); and
c) Presented in this quarterly 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 quarterly 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: May 29, 2003 By: /s/ JAMES P. FOGARTY
..............................................
JAMES P. FOGARTY
CHIEF FINANCIAL OFFICER
</Table>
56
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
The section symbol shall be expressed as............................... 'SS'
The dagger symbol shall be expressed as................................ 'D'