AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 2003
REGISTRATION NO. 333-107788
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
<Table>
DELAWARE 2300 95-4032739
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
ORGANIZATION OR INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</Table>
501 SEVENTH AVENUE
NEW YORK, NEW YORK 10018
(212) 287-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------
SEE TABLE OF REGISTRANTS
-------------------
JAY A. GALLUZZO, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
THE WARNACO GROUP, INC.
501 SEVENTH AVENUE
NEW YORK, NEW YORK 10018
(212) 287-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------
WITH COPIES TO:
STACY J. KANTER, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
FOUR TIMES SQUARE
NEW YORK, NEW YORK 10036-6522
(212) 735-3000
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment is filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO THE SAID SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
TABLE OF REGISTRANTS
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<Caption>
STATE OR OTHER PRIMARY STANDARD
JURISDICTION OF INDUSTRIAL
INCORPORATION OR CLASSIFICATION I.R.S. EMPLOYER
EXACT NAME OF REGISTRANTS(7) FORMATION CODE NUMBER IDENTIFICATION NUMBER
-------------------------- ----------------- -------------------------- ---------------------
ISSUER
Warnaco Inc.(3)...................... Delaware 2300 22-1897478
GUARANTORS
The Warnaco Group, Inc.(3)........... Delaware 2300 95-4032739
184 Benton Street Inc.(1)............ Delaware 5600 06-1045343
A.B.S. Clothing Collection, Inc.(2).. California 5130 95-3799247
Abbeville Manufacturing Company(3)... Delaware 2300 13-3779929
Authentic Fitness Corporation(4)..... Delaware 2300 95-4268251
Authentic Fitness On-Line, Inc.(4)... Nevada 5960 95-4741962
Authentic Fitness Products Inc.(4)... Delaware 2300 95-4267322
Authentic Fitness Retail Inc.(4)..... Delaware 5600 95-4442062
CCC Acquisition Corp.(4)............. Delaware 2300 95-4456443
C.F. Hathaway Company(1)............. Delaware 2300 01-0263592
Calvin Klein Jeanswear Company(5).... Delaware 5130 13-3779381
CKJ Holdings, Inc.(3)................ Delaware 2300 13-3928129
Designer Holdings Ltd.(3)............ Delaware 2300 13-3818542
Gregory Street, Inc.(1).............. Delaware 6199 06-1469376
Jeanswear Holdings, Inc.(3).......... Delaware 2300 13-3779227
Kai Jay Manufacturing Company(3)..... Delaware 2300 13-3779231
Myrtle Avenue, Inc.(1)............... Delaware 6199 06-1469379
Outlet Holdings, Inc.(3)............. Delaware 2300 13-3907558
Outlet Stores, Inc.(1)............... Delaware 5600 13-3907560
Penhaligon's by Request, Inc.(3)..... Delaware 5961 13-4076897
Rio Sportswear, Inc.(3).............. Delaware 5130 13-3779228
Ubertech Products, Inc.(6)........... Delaware 3060 06-1577619
Warnaco International, L.L.C.(1)..... Delaware 2300 06-1442942
Warnaco Men's Sportswear Inc.(1)..... Delaware 2300 25-1141063
Warnaco Puerto Rico, Inc.(1)......... Delaware 8900 66-0585156
Warnaco Sourcing Inc.(1)............. Delaware 2300 06-1172666
Warnaco U.S., Inc.(1)................ Delaware 2300 06-1519997
Warner's de Costa Rica Inc.(1)....... Delaware 2300 06-0937741
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- ---------
<Table>
(1) 470 Wheeler's Farms Rd.
Milford, CT, 06460
(2) 231 Long Beach Avenue
Los Angeles, CA 90021
(3) 501 Seventh Avenue
New York, NY 10018
(4) 6040 Bandini Blvd.
City of Commerce, CA 90040
(5) 205 West 39th Street
New York, NY 10018
(6) 704 Bastrop
Houston, TX 77003
(7) The agent for service of each of the Registrants is:
Jay A. Galluzzo, Esq.
c/o The Warnaco Group, Inc.
Vice President, General Counsel and Secretary
501 Seventh Avenue
New York, NY 10018
(212) 287-8000
</Table>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 2003
PROSPECTUS
[WARNACO LOGO]
Warnaco Inc.
A WHOLLY OWNED SUBSIDIARY OF
THE WARNACO GROUP, INC.
OFFER TO EXCHANGE $210,000,000 AGGREGATE PRINCIPAL AMOUNT OF 8 7/8% SENIOR NOTES
DUE 2013 CUSIPS 934391 AE3 AND U93439 AA2 FOR $210,000,000 AGGREGATE PRINCIPAL
AMOUNT OF 8 7/8% SENIOR NOTES DUE 2013 CUSIP WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED
-------------------
THE EXCHANGE OFFER WILL EXPIRE AT P.M., NEW YORK CITY TIME, ON , 2003,
UNLESS WARNACO INC. EXTENDS THE EXCHANGE OFFER IN ITS SOLE AND ABSOLUTE
DISCRETION
-------------------
TERMS OF THE EXCHANGE OFFER:
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Warnaco Inc. will exchange the new notes to be issued for
all outstanding old notes that are validly tendered and not
withdrawn pursuant to the exchange offer.
The new notes will be fully and unconditionally guaranteed,
jointly and severally, on a senior unsecured basis by The
Warnaco Group, Inc. and substantially all of its domestic
subsidiaries. The Warnaco Group, Inc.'s direct and indirect
foreign subsidiaries will not guarantee the new notes. As of
July 5, 2003, Warnaco and the guarantors on a consolidated
basis had $1.5 million of senior debt (excluding unused
commitments made by lenders and intercompany debt) that is
pari passu with the notes or the guarantees, all of which
was secured, and none of Warnaco's or any guarantor's debt
was subordinated to the notes or the guarantees.
You may withdraw tenders of old notes at any time prior to
the expiration of the exchange offer.
The terms of the new notes are substantially identical to
those of the old notes, except that the transfer
restrictions and registration rights relating to the old
notes will not apply to the new notes.
The exchange of old notes for new notes will not be a
taxable transaction for U.S. federal income tax purposes,
but you should see the discussion under the heading
'Material U.S. Federal Income Tax Consequences.'
Neither Warnaco Inc. nor any of the guarantors will receive
any cash proceeds from the exchange offer.
Warnaco Inc. issued the old notes in a transaction not
requiring registration under the Securities Act, and as a
result, their transfer is restricted. Warnaco Inc. is making
the exchange offer to satisfy your registration rights, as a
holder of the old notes.
There is no established trading market for the new notes or
the old notes. The new notes are expected to be eligible for
trading in the Private Offerings, Resales and Trading
through Automatic Linkages Market, commonly referred to as
the PORTAL'sm' market.
</Table>
SEE 'RISK FACTORS' BEGINNING ON PAGE 16 FOR A DISCUSSION OF RISKS YOU SHOULD
CONSIDER PRIOR TO TENDERING YOUR OUTSTANDING OLD NOTES FOR EXCHANGE.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
PROSPECTUS DATED , 2003
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934. Accordingly, we file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission. We
also furnish annual reports to our stockholders that include financial
statements audited by our independent certified public accountants and other
reports which the law requires us to send to our stockholders. Except as
expressly provided for herein, such information has not been incorporated by
reference into this prospectus. The public may read and copy any reports, proxy
statements or other information that we file at the SEC's public reference room
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The public
may obtain information on the public reference room by calling the SEC at
1-800-SEC-0330. Our SEC filings are also available to the public from commercial
document retrieval services and at the web site maintained by the SEC at
www.sec.gov. Our internet website is http://www.warnaco.com. Our common stock is
listed on NASDAQ under the symbol 'WRNC.' You can inspect and copy reports,
proxy statements and other information about us at: Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
INCORPORATION BY REFERENCE
We are incorporating by reference certain information that we have filed
with the SEC under the informational requirements of the Securities Exchange Act
of 1934, which means that we disclose important information to you by referring
you to another document filed separately with the SEC. The information contained
in the documents we are incorporating by reference is considered to be part of
this prospectus and the information that we later file with the SEC will
automatically update and supercede the information contained or incorporated by
reference into this prospectus. All documents that we subsequently file pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
prior to the termination of this exchange offer will be deemed to be
incorporated by reference into this prospectus from the date of filing such
documents. These documents are or will be available for inspection or copying at
the locations identified above under the caption 'Where You Can Find More
Information.'
You may request a copy, at no cost, of any and all documents that have been
incorporated by reference but not delivered with this prospectus, by writing or
telephoning us at the following address or phone number:
The Warnaco Group, Inc.
501 Seventh Avenue
New York, New York 10018
Attention: Jay A. Galluzzo, Esq.
Vice President, General Counsel and Secretary
(212) 287-8000
IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THE INFORMATION NO
LATER THAN FIVE BUSINESS DAYS BEFORE YOU MUST MAKE YOUR INVESTMENT DECISION.
i
TABLE OF CONTENTS
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<Caption>
Page
----
Forward-Looking Statements.................................. iii
Prospectus Summary.......................................... 1
Risk Factors................................................ 16
Use of Proceeds............................................. 28
Cash and Capitalization..................................... 28
Market for the Company's Common Equity and Related
Stockholder Matters....................................... 29
Selected Historical Consolidated Financial Data............. 30
Unaudited Pro Forma Consolidated Financial Information...... 33
The Exchange Offer.......................................... 40
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 46
Business.................................................... 83
Management.................................................. 103
Executive Compensation...................................... 105
Principal Stockholders...................................... 112
Certain Relationships and Related Party Transactions........ 114
Description of Material Debt................................ 115
Description of the Notes.................................... 120
Exchange Offer; Registration Rights......................... 164
Material U.S. Federal Income Tax Consequences............... 165
Plan of Distribution........................................ 167
Legal Matters............................................... 168
Experts..................................................... 168
</Table>
-------------------
In this prospectus, the terms 'we,' 'us,' and 'our' refer to The Warnaco
Group, Inc. and its consolidated subsidiaries, including Warnaco Inc. (the
issuer of the new notes). All financial information included in this prospectus
is for The Warnaco Group, Inc. and its consolidated subsidiaries.
ii
FORWARD-LOOKING STATEMENTS
This prospectus may contain 'forward-looking statements' that reflect, when
made, our expectations or beliefs concerning future events that involve risks
and uncertainties, including our level of debt, our ability to obtain additional
financing, the restrictions in our senior secured revolving credit facility and
the indenture on our operations, our ability to service our debt, the absence of
a public market for the notes and the availability of funds to repurchase the
notes upon a change of control, our history of losses, the changes in our senior
management team, our ability to protect our intellectual property rights, our
dependency on a limited number of customers, our dependency on the reputation of
our brand names, our exposure to conditions in overseas markets, the competition
in our markets, our recent emergence from bankruptcy, the comparability of
financial statements for periods before and after our adoption of fresh start
accounting, our history of insufficient disclosure controls and procedures and
internal controls and restated financial statements, our future plans concerning
guidance regarding our 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 our manufacturing, the impact of SARS, general
economic conditions affecting the apparel industry, changing fashion trends,
pricing pressures which may cause us to lower our prices, increases in the
prices of raw materials we use and changing international trade regulation and
elimination of quotas on imports of textiles and apparel. All statements other
than statements of historical facts included in this prospectus, including,
without limitation, the statements under 'Management's Discussion and Analysis
of Financial Condition and Results of Operations,' are forward-looking
statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. We disclaim 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 our plans and expectations are
subject to a number of risks and uncertainties that could cause actual results
to differ materially from those anticipated, and our business in general is
subject to certain risks that could affect the value of our stock and the notes.
iii
PROSPECTUS SUMMARY
The following summary highlights selected information about us and this
exchange offer. This summary does not contain all of the information that you
should consider before exchanging the notes. We encourage you to read this
prospectus carefully and in its entirety. In this prospectus, 'old notes' refers
to the 8 7/8% Senior Notes due 2013 issued on June 12, 2003, 'new notes' refers
to the 8 7/8% Senior Notes due 2013 offered hereby and 'notes' refers to the old
notes and/or the new notes, as the case may be. In this prospectus, 'Fiscal
2000' refers to the fiscal year ended December 30, 2000, 'Fiscal 2001' refers to
the fiscal year ended January 5, 2002, 'Fiscal 2002' refers to the fiscal year
ended January 4, 2003, 'Fiscal 2003' refers to the fiscal year ending
January 3, 2004, 'First Half of Fiscal 2002' refers to the six month period
ended July 6, 2002, and 'First Half of Fiscal 2003' refers to the one month
period January 5, 2003 to February 4, 2003 (the date we emerged from bankruptcy)
combined with the five month period February 5, 2003 to July 5, 2003. In this
prospectus, 'EBITDA' refers to net income before interest expense, income taxes,
depreciation and amortization and 'Pro Forma EBITDA' refers to EBITDA on a pro
forma basis giving effect to the Pro Forma Adjustments relating to the offering
of the old notes and our emergence from bankruptcy as described in 'Unaudited
Pro Forma Consolidated Financial Information.'
THE EXCHANGE OFFER
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OLD NOTES................................. $210.0 million aggregate principal amount of 8 7/8% Senior Notes due
June 15, 2013, which Warnaco Inc. ('Warnaco') issued on June 12,
2003.
NEW NOTES................................. $210.0 million aggregate principal amount of 8 7/8% Senior Notes due
June 15, 2013, the issuance of which has been registered under the
Securities Act of 1933. The form and terms of the new notes are
identical in all material respects to those of the old notes, except
that the transfer restrictions, registration rights and special
interest provisions relating to the old notes do not apply to the new
notes.
EXCHANGE OFFER............................ Warnaco is offering to issue up to $210.0 million aggregate principal
amount of the new notes in exchange for a like principal amount of
the old notes to satisfy its obligations under the Registration
Rights Agreement that it entered into when the old notes were issued.
The old notes were issued in a private placement under Section 4(2)
of the Securities Act and in reliance upon the exemption from
registration provided by Regulation S under the Securities Act and
were qualified for resale pursuant to Rule 144A under the Securities
Act.
EXPIRATION DATE; TENDERS.................. The exchange offer will expire at p.m., New York City time, on
, 2003, unless extended in Warnaco's sole and absolute
discretion. By tendering your old notes, you represent that:
you are not an 'affiliate,' as defined in Rule 405 under the
Securities Act, of Warnaco or any of the guarantors;
any new notes you receive in the exchange offer are being acquired
by you in the ordinary course of your business;
</Table>
1
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at the time of commencement of the exchange offer, neither you nor,
to your knowledge, anyone receiving new notes from you, has any
arrangement or understanding with any person to participate in the
distribution, as defined in the Securities Act, of the old notes or
the new notes in violation of the Securities Act;
if you are not a participating broker-dealer, you are not engaged in,
and do not intend to engage in, the distribution, as defined in the
Securities Act, of the old notes or the new notes; and
if you are a broker-dealer, you will receive the new notes for your own
account in exchange for old notes that were acquired by you as a result
of your market making or other trading activities and that you will
deliver a prospectus in connection with any resale of the new notes you
receive. For further information regarding resales of the new notes by
participating broker-dealers, see the discussion under the caption
'Plan of Distribution.'
WITHDRAWAL; NON-ACCEPTANCE................ You may withdraw any old notes tendered in the exchange offer at any
time prior to 5:00 p.m., New York City time, on , 2003. If
Warnaco decides for any reason not to accept any old notes tendered
for exchange, the old notes will be returned to the registered holder
at Warnaco's expense promptly after the expiration or termination of
the exchange offer. In the case of old notes tendered by book-entry
transfer into the exchange agent's account at The Depository Trust
Company, or DTC, any withdrawn or unaccepted old notes will be
credited to the tendering holder's account at DTC. For further
information regarding the withdrawal of tendered old notes, see 'The
Exchange Offer -- Terms of the Exchange Offer; Period for Tendering
Old Notes' and the 'The Exchange Offer -- Withdrawal Rights.'
CONDITIONS TO THE
EXCHANGE OFFER.......................... The exchange offer is subject to certain conditions, which Warnaco
may waive. See the discussion below under the caption 'The Exchange
Offer -- Conditions to the Exchange Offer' for more information
regarding the conditions to the exchange offer.
PROCEDURES FOR TENDERING
OLD NOTES............................... Unless you comply with the procedures described below under the
caption 'The Exchange Offer -- Guaranteed Delivery Procedures,' you
must do one of the following on or prior to the expiration or
termination of the exchange offer to participate in the exchange
offer:
tender your old notes by sending the certificates for your old
notes, in proper form for transfer, a properly completed and duly
executed letter of transmittal and all other documents required by
the letter of transmittal, to Wells Fargo Bank Minnesota, National
Association, as exchange agent, at one of the addresses listed below
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2
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under the caption 'The Exchange Offer -- Exchange Agent'; or
tender your old notes by using the book-entry transfer procedures
described below and transmitting a properly completed and duly
executed letter of transmittal, or an agent's message instead of
the letter of transmittal, to the exchange agent. In order for a
book-entry transfer to constitute a valid tender of your old notes
in the exchange offer, Wells Fargo Bank Minnesota, National
Association, as exchange agent, must receive a confirmation of
book-entry transfer of your old notes into the exchange agent's
account at DTC prior to the expiration or termination of the
exchange offer. For more information regarding the use of book-entry
transfer procedures, including a description of the required agent's
message, see the discussion below under the caption 'The Exchange
Offer -- Book-Entry Transfers.'
GUARANTEED DELIVERY PROCEDURES............ If you are a registered holder of old notes and wish to tender your
old notes in the exchange offer, but
the old notes are not immediately available;
time will not permit your old notes or other required documents to
reach the exchange agent before the expiration or termination of
the exchange offer; or
the procedure for book-entry transfer cannot be completed prior to
the expiration or termination of the exchange offer;
then you may tender old notes by following the procedures described
below under the caption 'The Exchange Offer -- Guaranteed Delivery
Procedures.'
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS....................... If you are a beneficial owner whose old notes are registered in the
name of the broker, dealer, commercial bank, trust company or other
nominee and you wish to tender your old notes in the exchange offer,
you should promptly contact the person in whose name the old notes
are registered and instruct that person to tender on your behalf. If
you wish to tender in the exchange offer on your behalf, prior to
completing and executing the letter of transmittal and delivering
your old notes, you must either make appropriate arrangements to
register ownership of the old notes in your name, or obtain a
properly completed bond power from the person in whose name the old
notes are registered.
MATERIAL U.S. FEDERAL INCOME
TAX CONSEQUENCES........................ The exchange of old notes for new notes in the exchange offer will
not be a taxable transaction for United States federal income tax
purposes. See the discussion below under the caption 'Material U.S.
Federal Income Tax Consequences' for more information regarding the
tax consequences of the exchange offer to you.
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3
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USE OF PROCEEDS........................... Neither Warnaco nor any of the guarantors will receive any cash
proceeds from the exchange offer.
EXCHANGE AGENT............................ Wells Fargo Bank Minnesota, National Association, is the exchange
agent for the exchange offer. You can find the address and telephone
number of the exchange agent below under the caption 'The Exchange
Offer -- Exchange Agent.'
RESALES................................... Based on interpretations by the staff of the SEC, as set forth in
no-action letters issued to third parties, Warnaco believes that the
new notes issued in the exchange offer may be offered for resale,
resold or otherwise transferred by you without compliance with the
registration and prospectus delivery requirements of the Securities
Act as long as:
you are acquiring the new notes in the ordinary course of your
business;
you are not participating, do not intend to participate and have
no arrangement or understanding with any person to participate,
in a distribution of the old notes or the new notes; and
you are not an affiliate of Warnaco or any of the guarantors.
If you are an affiliate of Warnaco or any of the guarantors or are
engaged in or intend to engage in or have any arrangement or
understanding with any person to participate in the distribution of
the old notes or the new notes:
you cannot rely on the applicable interpretations of the staff of
the SEC; and
you must comply with the registration requirements of the Securities
Act in connection with any resale transaction.
Each broker or dealer that receives new notes for its own account in
exchange for old notes that were acquired as a result of
market-making or other trading activities must acknowledge that it
will comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any offer,
resale, or other transfer of the new notes issued in the exchange
offer, including information with respect to any selling holder
required by the Securities Act in connection with any resale of the
new notes.
Furthermore, any broker-dealer that acquired any of its old notes
directly from Warnaco:
may not rely on the applicable interpretation of the staff of the
SEC's position contained in Exxon Capital Holdings Corp., SEC
no-action letter (April 13, 1988), Morgan, Stanley & Co. Inc.,
SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC
no-action letter (July 2, 1993); and
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4
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must also be named as a selling noteholder in connection with the
registration and prospectus delivery requirements of the Securities
Act relating to any resale transaction.
BROKER-DEALERS............................ Each broker-dealer that receives new notes for its own account in
exchange for old notes, where such old notes were acquired by such
broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. See 'Plan
of Distribution.'
REGISTRATION RIGHTS AGREEMENT............. When Warnaco issued the old notes on June 12, 2003, it entered into a
Registration Rights Agreement with the initial purchasers of the old
notes. Under the terms of the Registration Rights Agreement, Warnaco
agreed to:
file a registration statement within 60 days after the issue date
of the old notes enabling holders to exchange the privately placed
old notes for publicly registered new notes with substantially
identical terms;
use its reasonable efforts to cause the registration statement to
become effective within 210 days after the issue date of the old
notes;
keep the exchange offer open for not less than 30 days and not more
than 45 days; and
file a shelf registration statement for the resale of the notes if
it cannot effect an exchange offer within the specified time period
and in certain other circumstances described in this prospectus.
If Warnaco fails to comply with its obligations under the
Registration Rights Agreement, it will be required to pay special
interest to holders of the old notes as described under 'Exchange
Offer; Registration Rights.'
A copy of the Registration Rights Agreement is included as an exhibit
to the registration statement of which this prospectus is a part.
CONSEQUENCES OF NOT
EXCHANGING OLD NOTES.................... If you do not exchange your old notes in the exchange offer, you will
continue to be subject to the restrictions on transfer described in
the legend on your old notes. In general, you may offer or sell your
old notes only:
if they are registered under the Securities Act and applicable state
securities laws;
if they are offered or sold under an exemption from registration
under the Securities Act and applicable state securities laws; or
if they are offered or sold in a transaction not subject to the
Securities Act and applicable state securities laws.
Warnaco does not currently intend to register the old notes under the
Securities Act. Under some circumstances,
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5
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however, holders of the old notes, including holders who are not
permitted to participate in the exchange offer or who may not freely
sell new notes received in the exchange offer, may require Warnaco to
file, and to cause to become effective, a shelf registration
statement covering resales of the old notes by these holders. For
more information regarding the consequences of not tendering your old
notes and Warnaco's obligations to file a shelf registration
statement, see 'The Exchange Offer -- Consequences of Exchanging or
Failing to Exchange Old Notes' and 'Exchange Offer; Registration
Rights.'
</Table>
6
OUR COMPANY
We believe we are one of the world's leading apparel companies. We design,
manufacture, source and market a broad line of intimate apparel, sportswear and
swimwear worldwide. We sell our products under several highly recognized brand
names, including Warner's'r', Olga'r', Calvin Klein'r', Speedo'r', Chaps Ralph
Lauren'r' and Lejaby'r'. For Fiscal 2002, we generated net revenues of
approximately $1.5 billion and incurred net losses of $964.9 million.
Intimate Apparel. Our intimate apparel products, which include bras,
panties, loungewear, sleepwear, shapewear and daywear for women, and underwear
and sleepwear for men, are principally sold under the Warner's, Olga, Body Nancy
Ganz'TM', Calvin Klein, Lejaby and Rasurel'r' brands. According to a survey by
The NPD Group, a market research firm, in Fiscal 2002, Olga, Warner's and Calvin
Klein represented the second, third and ninth leading brands, respectively, of
women's bras sold in participating U.S. department stores, and Calvin Klein was
the second leading brand of men's underwear. Our intimate apparel products are
sold in the United States, Canada, Mexico, Western Europe and Asia through
department stores, independent retailers and chain stores and, to a lesser
extent, specialty stores. For Fiscal 2002, our Intimate Apparel Group generated
net revenues of $570.7 million and operating income of $48.4 million.
Sportswear. Our sportswear products for men, women and juniors, which
include jeanswear and jeans related products, knit and woven shirts, tops and
outerwear, are principally sold under the Calvin Klein, Chaps Ralph Lauren and
A.B.S. by Allen Schwartz'r' brands. We have licensed the White Stag'r' and
Catalina'r' brands to Wal-Mart Stores, Inc. on an exclusive basis for women's
sportswear. White Stag is one of Wal-Mart's leading women's sportswear brands.
According to a December 2001 survey by Women's Wear Daily, Calvin Klein and
Ralph Lauren'r' were two of the most recognized brand names in the world. Our
sportswear products are sold in the United States, Canada and Mexico through
department stores, independent retailers, membership clubs and mass
merchandisers and, to a lesser extent, specialty stores. For Fiscal 2002, our
Sportswear Group generated net revenues of $525.6 million and operating income
of $24.2 million.
Swimwear. Our swimwear products, which include swim accessories and fitness
and active apparel, are sold under the Speedo and Speedo Authentic Fitness'r'
brand names as well as several designer labels, including Anne Cole'r',
Catalina, Sunset Beach'r', Sandcastle'r', Lifeguard'r' and Nautica'r'. Speedo is
the leading brand name for competitive swimwear products. Our swimwear products
are sold in the United States, Canada and Mexico through department stores,
independent retailers, chain stores, membership clubs, mass merchandisers and
swim specialty stores, as well as through our 45 Speedo Authentic Fitness retail
stores, including our online store. For Fiscal 2002, our Swimwear Group
generated net revenues of $305.0 million and operating income of $28.6 million.
BANKRUPTCY REORGANIZATION AND TURNAROUND
On June 11, 2001, we filed a voluntary petition for relief under Chapter 11
of the U.S. Bankruptcy Code. We emerged from bankruptcy on February 4, 2003. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Bankruptcy Reorganization and Turnaround.'
On February 5, 2003, our new common stock, which we issued to creditors in
connection with our exit from bankruptcy, began trading on the NASDAQ National
Stock Market under the ticker symbol 'WRNC.'
RECENT DEVELOPMENTS
On June 5, 2003, we entered into an agreement with Calvin Klein, Inc. which,
among other things, amends certain existing agreements and provides for us to
enter into a five-year swimwear licensing agreement (with an option for us to
extend for an additional five-year period provided that we achieve certain
specified sales targets) pursuant to which we will manufacture, distribute
7
and sell swimwear for women and juniors under certain Calvin Klein trademarks
throughout the world commencing in January 2004. The agreement also enabled us
to enter into a sublicensing agreement with Happy Kids, Inc. for them to
manufacture, distribute and sell Calvin Klein children's jeanswear in North,
Central and South America, which we entered into on June 18, 2003.
On September 15, 2003 we announced that we had elected Lawrence R. Rutkowski
as our Chief Financial Officer to succeed James P. Fogarty. Following an orderly
transition, Mr. Fogarty returned to Alvarez & Marsal, Inc. Mr. Rutkowski was
most recently Executive Vice President and Chief Financial Officer at Primedia,
Inc.
On September 22, 2003 we announced that we had amended our existing license
agreement with Polo/Ralph Lauren Corporation for the Chaps Ralph Lauren line of
men's sportswear. The amendment (a) extends the duration of the license beyond
its current term, which expires on December 31, 2008, by adding two five-year
renewal terms up to and through December 31, 2018 and (b) expands (i) the scope
of licensed products to include a jeanswear collection, activewear and swimwear
in addition to the current sportswear products and (ii) the range of approved
accounts. As part of the amendment, we will introduce a newly re-designed Chaps
Ralph Lauren trademark and logo. The new Chaps Ralph Lauren men's line is
scheduled to launch in Fall 2004.
* * *
Our principal executive offices are located at 501 Seventh Avenue, New York,
New York 10018 and our telephone number is (212) 287-8000.
8
THE NOTES
The terms of the new notes Warnaco is issuing in this exchange offer and the
old notes that are outstanding are identical in all material respects, except:
<Table>
the new notes will have been registered under the Securities
Act;
the new notes will not contain transfer restrictions and
registration rights that relate to the old notes; and
the new notes will not contain provisions relating to the
payment of special interest to be made to the holders of the
old notes under certain circumstances related to the timing
of the exchange offer.
</Table>
A brief description of the material terms of the new notes follows:
<Table>
ISSUER.................................... Warnaco Inc., a Delaware corporation ('Warnaco') and a wholly owned
subsidiary of The Warnaco Group, Inc. ('Holdco').
NOTES OFFERED............................. $210.0 million aggregate principal amount of 8 7/8% Senior Notes due
2013.
MATURITY.................................. June 15, 2013.
INTEREST PAYMENT DATES.................... June 15 and December 15 of each year, beginning on December 15, 2003.
GUARANTEES................................ The new notes will be fully and unconditionally guaranteed, jointly
and severally, on a senior unsecured basis, by Holdco and
substantially all of its domestic subsidiaries. Holdco's direct and
indirect foreign subsidiaries will not guarantee the new notes.
For the period February 5, 2003 to July 5, 2003, 23.4% of our
consolidated net revenues and 98.1% of our consolidated net income
were generated by Holdco's consolidated subsidiaries that are not
subsidiary guarantors. As of July 5, 2003, 19.8% of our consolidated
assets were owned by the non-guarantor subsidiaries.
RANKING................................... The new notes will be:
senior unsecured obligations of Warnaco;
effectively subordinate to all debt and other
obligations (including trade payables) of any of
Holdco's subsidiaries that do not guarantee the new
notes;
effectively subordinate to all of Warnaco's existing
and future secured debt, including borrowings under
the senior secured revolving credit facility and
related hedges, to the extent of the value of the
assets securing that debt;
equal in right of payment with all of Warnaco's
existing and future senior debt; and
senior in right of payment to all of Warnaco's future
subordinated debt.
The guarantees of each guarantor will be:
senior unsecured obligations of that guarantor;
</Table>
9
<Table>
effectively subordinate to that guarantor's existing
and future secured debt, including guarantees of the
senior secured revolving credit facility and related
hedges, to the extent of the value of the assets
securing that debt;
equal in right of payment with that guarantor's
existing and future senior debt; and
senior in right of payment to all of that guarantor's
future subordinated debt.
As of July 5, 2003, on a consolidated basis, Warnaco and the
guarantors had $212.8 million of senior debt, Warnaco's subsidiaries
that are not guarantors had $94.9 million of balance sheet
liabilities (in each case excluding unused commitments made by
lenders and intercompany debt) and none of Warnaco's or any
guarantor's debt was subordinated to the notes or the guarantees.
As of September 30, 2003, we had cash on hand of $20.8 million, no
borrowings outstanding and $149.6 million of availability under our
senior secured revolving credit facility.
Substantially all of our assets are pledged to secure our obligations
to secured creditors, including the lenders under our senior secured
revolving credit facility. In the event that our secured creditors
exercise their rights with respect to our pledged assets, our secured
lenders would be entitled to be repaid in full from the proceeds of
the liquidation of those assets before those assets would be
available for distribution to other creditors, including holders of
the new notes. Holders of the notes will participate in our remaining
assets ratably with all of our unsubordinated creditors.
OPTIONAL REDEMPTION....................... Prior to June 15, 2008, Warnaco may redeem some or all of the notes
by paying a specified 'make-whole' premium. At any time on or after
June 15, 2008, Warnaco may redeem some or all of the notes at the
redemption prices specified in this prospectus under 'Description of
the Notes -- Optional Redemption.'
At any time prior to June 15, 2006, Warnaco may redeem up to 35% of
the aggregate principal amount of the notes in an amount not to
exceed the amount of proceeds of one or more public equity offerings,
at a price equal to 108.875% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the redemption date, provided
that at least 65% of the original aggregate principal amount of the
notes issued remains outstanding after the redemption.
COVENANTS................................. Warnaco will issue the new notes under an indenture between Warnaco
and Wells Fargo Bank Minnesota, National Association, as trustee. The
indenture includes covenants that limit the ability of Holdco and
each of its restricted subsidiaries (including Warnaco) to:
incur additional debt;
</Table>
10
<Table>
pay dividends and make other restricted payments;
create or permit certain liens;
use the proceeds from sales of assets and subsidiary
stock;
create or permit restrictions on the ability of
Warnaco's restricted subsidiaries to pay dividends or
make other distributions to Warnaco or to Holdco;
enter into transactions with affiliates;
engage in certain business activities;
engage in sale and leaseback transactions; and
consolidate or merge or sell all or substantially all
of its assets.
All of Holdco's subsidiaries (including Warnaco) are restricted
subsidiaries, as defined in the indenture. These covenants will be
subject to a number of important exceptions and qualifications as
described under 'Description of the Notes -- Certain Covenants.'
CHANGE OF CONTROL......................... Following a change of control, Warnaco will be required to offer to
purchase all of the notes at a purchase price of 101% of their
principal amount, plus accrued and unpaid interest, if any, to the
date of purchase.
ABSENCE OF ESTABLISHED MARKET FOR THE NEW
NOTES................................... The new notes are a new issue of securities, and currently there is
no market for them. Warnaco does not intend to apply for the new
notes to be listed on any securities exchange or to arrange for any
quotation system to quote them. Warnaco expects the new notes to be
eligible for trading in the PORTAL market. The initial purchasers of
the old notes have advised Warnaco that they intend to make a market
for the new notes, but they are not obligated to do so. The initial
purchasers of the old notes may discontinue any market-making in the
new notes at any time in their sole discretion. Accordingly, we
cannot assure you that a liquid market will develop for the new
notes.
USE OF PROCEEDS........................... Neither Warnaco nor any of the guarantors will receive any proceeds
from the exchange offer.
RISK FACTORS.............................. You should carefully consider the information set forth in the
section entitled 'Risk Factors' and the other information included in
this prospectus in deciding whether to exchange the old notes for the
new notes.
</Table>
For more complete information about the new notes, see the 'Description of
the Notes' section of this prospectus.
11
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary historical and pro forma
consolidated financial data. The summary historical consolidated data is derived
from our audited consolidated financial statements as of and for the year ended
January 4, 2003 and our unaudited consolidated condensed financial statements as
of July 5, 2003, and for the First Half of Fiscal 2002, the one month period
January 5, 2003 to February 4, 2003 (the date we emerged from bankruptcy) and
the five month period February 5, 2003 to July 5, 2003. The one month and five
month periods of 2003 on a combined basis are referred to as the First Half of
Fiscal 2003. Our audited consolidated financial statements as of and for the
year ended January 4, 2003 are included elsewhere in this prospectus beginning
on page F-2. Our unaudited financial statements as of July 5, 2003 and for the
First Half of Fiscal 2002 and for the one month period January 5, 2003 to
February 4, 2003 and for the five month period February 5, 2003 to July 5, 2003
are included elsewhere in this prospectus beginning on page H-1. The summary pro
forma financial data is derived from our 'Unaudited Pro Forma Consolidated
Financial Information' included elsewhere in this prospectus.
We emerged from bankruptcy on February 4, 2003, and, pursuant to American
Institute of Certified Public Accountants Statement of Position 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code ('SOP 90-7'),
we adopted fresh start accounting. Fresh start accounting principles provide,
among other things, that we determine the reorganization value of our company
and allocate such reorganization value to the fair value of our assets in
accordance with the provisions of Statement of Financial Accounting Standards
No. 141, Business Combinations ('SFAS 141'). We engaged an independent third
party appraisal firm to assist us in determining our reorganization value. The
reorganization value of our company as approved by the bankruptcy court was
$750.0 million. Using the work of valuation specialists we allocated the
reorganization value to the fair value of our tangible assets, finite lived
intangible assets and indefinite lived intangible assets in accordance with the
provisions of SFAS 141. Our audited consolidated balance sheet as of
February 4, 2003 and related notes thereto reflecting the implementation of our
plan of reorganization (the 'Plan') and our emergence from bankruptcy is
included in this prospectus beginning on page G-1. Our consolidated balance
sheet as of February 4, 2003 is not, and our consolidated statements of
operations for periods beginning after February 4, 2003 will not be, comparable
in certain material respects to the historical consolidated financial statements
for prior periods included elsewhere in this prospectus.
We believe that the consummation of the Plan, the adoption of fresh start
accounting and the offering of the old notes are significant events and,
therefore, the presentation of pro forma financial information giving effect to
these events provides material information that is useful to investors. The pro
forma statement of operations data in the following table is adjusted to reflect
the following as if each had been completed at the beginning of Fiscal 2002:
the implementation of the Plan and our emergence from
bankruptcy, including adjustments to:
reflect fresh start accounting;
eliminate reorganization items related to our bankruptcy;
reflect the elimination of interest expense related to
certain foreign debt subject to standstill agreements which
principal was repaid as part of our reorganization; and
record income taxes at normalized post-emergence rates; and
the issuance of the old notes and the application of the
proceeds thereof.
The pro forma financial information does not purport to be indicative of our
operating results.
12
The information set forth in the following table should be read in
conjunction with 'Management's Discussion and Analysis of Financial Condition
and Results of Operations,' 'Selected Historical Consolidated Financial Data,'
'Unaudited Pro Forma Consolidated Financial Information' and our consolidated
financial statements and related notes thereto included elsewhere in this
prospectus.
<Table>
<Caption>
HISTORICAL PRO FORMA(a)
---------------------------------- ------------------------------------------------------
COMBINED
COMBINED COMBINED LAST TWELVE
FIRST FIRST FIRST FIRST MONTHS
FISCAL HALF HALF FISCAL HALF HALF ENDED
YEAR OF FISCAL OF FISCAL YEAR OF FISCAL OF FISCAL JULY 5,
2002 2002 2003 2002 2002 2003 2003
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS) (IN MILLIONS OF DOLLARS)
STATEMENT OF OPERATIONS DATA:
Net revenues................ $1,493.0 $ 791.8 $ 778.1 $1,493.0 $791.8 $778.1 $1,479.3
Gross profit................ 440.3 234.3 263.5 462.4 241.5 263.5 484.4
Selling, general and
administrative expenses... 411.0 202.7 204.0 379.8 182.3 198.6 396.1
Amortization of sales order
backlog(b)................ -- -- 10.5 -- -- -- --
Restructuring items......... -- -- 6.1
Reorganization items........ 116.7 58.1 29.9 -- -- -- --
Operating income (loss)..... (87.4) (26.5) 13.0 82.6 59.2 64.9 88.3
Gain on cancellation of
pre-petition
indebtedness.............. -- -- 1,692.7 -- -- -- --
Fresh start adjustments..... -- -- 765.7 -- -- -- --
Other income (loss)......... 0.1 -- 1.0 0.1 -- 1.0 1.1
Interest expense............ 22.0 10.1 11.7 31.6 16.7 12.4 27.3
Income (loss) before income
taxes and cumulative
effect of change in
accounting principle...... (109.3) (36.6) 2,460.7 51.1 42.5 53.5 62.1
Provision for income
taxes..................... 53.9 51.5 87.9 20.4 17.0 21.4 24.8
Income (loss) before
cumulative effect of
change in accounting
principle................. (163.2) (88.1) 2,372.8 30.7 25.5 32.1 37.3
Cumulative effect of change
in accounting principle... (801.6) (801.6) -- -- -- -- --
Net income (loss)........... (964.8) (889.7) 2,372.8 30.7 25.5 32.1 37.3
Depreciation and
amortization.............. 57.4 29.0 30.8 34.5 16.9 18.9 36.5
PER SHARE DATA:
Income (loss) before
cumulative effect of a
change in accounting
principle:
Basic.................... $ (3.08) $ (1.66) $ 52.72 $ 0.68 $ 0.57 $ 0.71 $ 0.83
Diluted.................. $ (3.08) $ (1.66) $ 52.55 $ 0.68 $ 0.57 $ 0.71 $ 0.83
-------- ------- -------- -------- ------ ------ --------
Net income (loss):(f)
Basic.................... $ (18.21) $(16.81) $ 52.72 $ 0.68 $ 0.57 $ 0.71 $ 0.83
-------- ------- -------- -------- ------ ------ --------
-------- ------- -------- -------- ------ ------ --------
Diluted.................. $ (18.21) $(16.81) $ 52.55 $ 0.68 $ 0.57 $ 0.71 $ 0.83
-------- ------- -------- -------- ------ ------ --------
-------- ------- -------- -------- ------ ------ --------
Weighted average number of
shares outstanding used in
computing earnings per
share:(g)(h)
Basic..................... 52,990 52,936 45,006 45,009 45,006 45,006 45,006
-------- ------- -------- -------- ------ ------ --------
-------- ------- -------- -------- ------ ------ --------
Diluted................... 52,990 52,936 45,154 45,231 45,154 45,154 45,154
-------- ------- -------- -------- ------ ------ --------
-------- ------- -------- -------- ------ ------ --------
OTHER DATA:
Ratio of earnings to fixed
charges(e)................ n/a n/a n/a 1.87 2.41 3.66 2.27
Deficit of earnings to fixed
charges(e)................ 109.3 36.6 n/a n/a n/a n/a n/a
</Table>
<Table>
<Caption>
AS OF JULY 5, 2003
------------------------
(IN MILLIONS OF DOLLARS)
BALANCE SHEET DATA:(c)
Cash....................................................... $ 65.9
Working capital............................................ 372.0
Total assets............................................... 1,137.5
Senior secured revolving credit facility................... --
Senior Notes due 2013...................................... 210.0
Total debt(d).............................................. 212.8
Stockholders' equity....................................... 528.8
Total capitalization....................................... 741.6
</Table>
- ---------
(a) The pro forma financial information includes adjustments to reflect our
results of operations as if we had emerged from bankruptcy at the
beginning of Fiscal 2002 and the offering of the
(footnotes continued on next page)
13
(footnotes continued from previous page)
old notes and the application of the proceeds thereof had been completed
at the beginning of Fiscal 2002. The adjustments to the historical
financial information are discussed in 'Unaudited Pro Forma Consolidated
Financial Data.'
(b) We recorded intangible assets of $12.6 million related to the value of our
sales order backlog in connection with the adoption of fresh start
accounting. We consider the amortization of the sales order backlog to be
a non-recurring adjustment and, as a result, have excluded the
amortization of the sales order backlog from our pro forma adjustments.
(c) The consolidated balance sheet data is derived from our unaudited
consolidated condensed balance sheet as of July 5, 2003.
(d) Total debt includes capital lease obligations of $1.3 million and $1.5
million in amounts payable related to the settlement of certain leases
with GECC as part of our bankruptcy.
(e) For the purposes of computing the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes, plus fixed charges and less capitalized interest. Fixed charges are
defined as the sum of interest expense, including the amortization of
deferred financing costs, capitalized interest, and that portion of rental
expense which we believe to be representative of an interest factor. The
deficit of earnings to fixed charges represents the amount of earnings
that would be required to increase the ratio of earnings to fixed charges
to 1.00 in those cases where earnings are less than the total fixed
charges.
(f) Pro forma basic and diluted earnings per share is calculated by dividing
pro forma net income by the pro forma weighted average number of shares
outstanding of 45.0 million and 45.2 million, respectively. The
computation of the pro forma weighted average number of shares outstanding
is based upon the number of shares issued pursuant to our Plan. Due to the
cancellation of our old common stock and the issuance of new common stock
pursuant to our Plan, net income (loss) per share for period beginning
February 5, 2003, will not be comparable to net income (loss) per share
for periods beginning before February 5, 2003.
(g) Effective February 4, 2003, all 53.0 million shares of our common stock
and all outstanding options to purchase shares of our common stock were
cancelled pursuant to the terms of our reorganization under the bankruptcy
code.
(h) Effective February 5, 2003 we issued 45.0 million shares of new common
stock pursuant to the terms of the Plan.
EBITDA AND OTHER DATA
EBITDA is defined as net income before interest expense, income taxes,
depreciation and amortization. Our pro forma statement of operations data and
the other data set forth below, including EBITDA, give effect to the
implementation of the Plan, our emergence from bankruptcy and the offering of
the old notes and the application of the proceeds thereof as if each had
occurred at the beginning of Fiscal 2002. Our senior secured revolving credit
facility and the indenture governing the notes include provisions that use
EBITDA as a component of certain covenants. We believe that information
regarding EBITDA is useful to investors in evaluating our company and our
long-term and short-term debt.
EBITDA is a non-GAAP financial measure and you should not construe EBITDA as
an alternative to net income (loss), as an indicator of our operating
performance, or as an alternative to cash flows from operating activities as a
measure of our liquidity. We may calculate EBITDA differently than other
companies. A reconciliation of pro forma net income to Pro Forma EBITDA is set
forth below:
14
<Table>
<Caption>
PRO FORMA
----------------------------------------------------------
COMBINED COMBINED
FIRST HALF FIRST HALF LAST TWELVE
FISCAL YEAR OF FISCAL OF FISCAL MONTHS ENDED
2002 2002 2003 JULY 5, 2003
---- ---- ---- ------------
(IN MILLIONS OF DOLLARS)
EBITDA AND OTHER DATA:
EBITDA................................ $117.2 $125.9
Total debt............................ 212.8 (a) 212.8
Interest expense...................... 31.6 33.4
Total debt to EBITDA.................. 1.82 1.69x
EBITDA to interest expense............ 3.71x 3.77
RECONCILIATION OF NET INCOME TO EBITDA:
Net income.............................. $ 30.7 $25.5 $32.1 $ 37.3
Provision for income taxes............ 20.4 17.0 21.4 24.8
Interest expense...................... 31.6 16.7 12.4 27.3
Other income (loss)................... (0.1) -- (1.0) (1.1)
------ ----- ----- ------
Operating income........................ 82.6 59.2 64.9 88.3
Other income (loss)................... 0.1 -- 1.0 1.1
Depreciation and amortization......... 34.5 16.9 18.9 36.5
------ ----- ----- ------
EBITDA.................................. $117.2 $76.1 $84.8 $125.9
------ ----- ----- ------
------ ----- ----- ------
</Table>
- ---------
(a) Total debt reflects the balance as of July 5, 2003. We
believe that the total debt balance as of January 4, 2003 is
not meaningful because substantially all of the debt was
subject to compromise in our bankruptcy.
15
RISK FACTORS
Our business, operations and financial condition are subject to various
risks. The most significant risks are described below, and you should take these
risks into account in evaluating us or any investment decision involving us or
in deciding whether to exchange the old notes for the new notes. This section
does not describe all the risks applicable to us, our industry or our business
and it is intended only as a summary of the most significant risks.
RISKS RELATING TO THE NOTES
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. As of July 5, 2003, we and
the guarantors had total debt of $212.8 million and our total debt as a
percentage of our total capitalization was 28.7%. At September 30, 2003, we had
$149.6 million of availability under our senior secured revolving credit
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 under the notes. Among other
things, our debt may:
limit our ability to obtain additional financing for working
capital, capital expenditures, strategic acquisitions and
general corporate purposes;
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;
limit our flexibility in planning for or reacting to changes
in the markets in which we compete;
place us at a competitive disadvantage relative to our
competitors with less debt;
render us more vulnerable to general adverse economic and
industry conditions; and
make it more difficult for us to satisfy our financial
obligations, including those relating to the notes.
We and our subsidiaries may still be able to incur additional debt. The
terms of our senior secured revolving credit facility, the indenture governing
the notes and the agreements governing our other debt will permit additional
borrowings and any such borrowings may rank equally with the notes and the
related guarantees. Our incurrence of additional debt could further exacerbate
the risks described in this prospectus, including our ability to make payments
on the notes. The subsidiaries that guarantee the notes may be borrowers or
guarantors under such new credit facilities. In addition, we may enter into
acquisitions, recapitalizations or other transactions that would not constitute
a change of control under the indenture but that could increase the amount of
our outstanding debt. Holders of the notes would not be entitled to require us
to purchase such notes in those events. See 'Description of the Notes -- Certain
Covenants -- Limitation on Debt' and 'Description of Material Debt.'
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 The Warnaco Group, Inc. In connection
with our emergence from Chapter 11, we issued 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.
16
IF OUR NON-GUARANTOR SUBSIDIARIES ARE UNABLE TO DISTRIBUTE CASH TO US WHEN
NEEDED, WE MAY BE UNABLE TO SATISFY OUR OBLIGATIONS UNDER THE NOTES.
We conduct certain of our operations through subsidiaries that do not
guarantee the notes. For the period February 5, 2003 to July 5, 2003, 23.4% of
our consolidated net revenues and 98.1% of our consolidated net income were
generated by our subsidiaries that are not guarantors of the notes. As a result,
we depend in part upon dividends or other intercompany transfers of funds from
our non-guarantor subsidiaries for the funds necessary to meet our debt service
obligations, including payments on the notes. We only receive the cash that
remains after the non-guarantor subsidiaries satisfy their obligations. If those
subsidiaries are unable to pass on the amount of cash that we need, we will be
unable to make payments to our noteholders. Any agreements our non-guarantor
subsidiaries enter into with other parties, as well as applicable laws and
regulations limiting the right and ability of non-guarantor subsidiaries and
affiliates to pay dividends and remit earnings to affiliated companies, may
restrict the ability of our non-guarantor subsidiaries to pay dividends or make
other distributions to us.
THE COVENANTS IN OUR SENIOR SECURED REVOLVING CREDIT FACILITY AND THE
INDENTURE GOVERNING THE NOTES IMPOSE RESTRICTIONS THAT MAY LIMIT OUR OPERATING
AND FINANCIAL FLEXIBILITY.
Our senior secured revolving credit facility and the indenture governing the
notes contain a number of significant restrictions and covenants, including ones
which limit our ability and our subsidiaries' ability to:
incur liens and debt or provide guarantees regarding the
obligations of any other person;
issue redeemable preferred stock and non-guarantor subsidiary
preferred stock;
increase our common stock dividends above specified levels;
make redemptions and repurchases of capital stock;
make loans, investments and capital expenditures;
prepay, redeem or repurchase debt;
engage in mergers, consolidations and asset dispositions;
engage in sale/leaseback transactions and affiliate
transactions;
change 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;
change our accounting treatment and reporting policies;
modify our constituent documents including, for example, our
charter and by-laws; and
restrict distributions from subsidiaries.
For a more detailed discussion of these covenants, see 'Description of
Material Debt -- Credit Facility' and 'Description of the Notes.'
Further, the senior secured revolving credit 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 senior secured revolving credit facility, may require us to
prepay our debt, may result in an event of default under the senior secured
revolving credit facility and could cause a cross default under our swap
agreements and other debt which contains cross default provisions (to the extent
we become party to such agreements). 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,
17
complying with these covenants may also cause us to take actions that are not
favorable to holders of the notes and 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:
refinance all or a portion of our debt, including the notes;
obtain additional financing;
sell some of our assets or operations;
reduce or delay capital expenditures; or
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.
Our ability to take these actions may be limited, and taking such actions may
not be sufficient to enable us to continue to satisfy our capital requirements.
Further, these actions would be permitted under the terms of our various debt
instruments, including the senior secured revolving credit facility and the
indenture governing the notes. Any such failure may result in our inability to
satisfy our obligations under the notes.
THE NOTES AND THE GUARANTEES RANK EQUALLY IN RIGHT OF PAYMENT WITH ALL OF
OUR EXISTING AND FUTURE SENIOR DEBT, INCLUDING TRADE PAYABLES, AND ARE
EFFECTIVELY SUBORDINATE TO ALL OF OUR SECURED DEBT. IF A DEFAULT OCCURS, WE MAY
NOT HAVE SUFFICIENT FUNDS TO FULFILL OUR OBLIGATIONS UNDER THE NOTES AND THE
GUARANTEES.
The notes are general unsecured senior obligations that rank equally in
right of payment with all of our existing and future senior debt, including
trade payables. In addition, because the notes are unsecured, the notes are
effectively subordinate to any secured debt with respect to the right to be
satisfied from the assets that secure such secured debt as collateral. As of
July 5, 2003, on a consolidated basis, we and the guarantors had $212.8 million
of senior debt and none of our or any guarantor's debt were subordinated to the
notes or the guarantees. As of September 30, 2003, we had $149.6 million
available for borrowing under the senior secured revolving credit facility. In
the event of our bankruptcy, liquidation, reorganization or other winding up,
our assets that secure our secured debt (and the related swaps) will be
available to pay obligations on the notes only after all secured debt has been
repaid in full from our assets, and our senior creditors have been satisfied.
Likewise, because our senior secured revolving credit facility is a secured
obligation, our failure to comply with the terms of the senior secured revolving
credit facility would entitle those lenders to foreclose on substantially all of
our assets which serve as collateral. In that event, our secured lenders would
be entitled to be repaid in full from the proceeds of the liquidation of those
assets before those assets would be available for distribution to other
creditors, including holders of the notes. Holders of the notes will participate
in our remaining assets ratably with all holders of our unsecured debt that is
deemed to be of the same class as the notes, and potentially with all of our
other general creditors. If there are not sufficient assets remaining to pay
amounts due on all the unsecured debt that is deemed to be of the same class as
the notes, then all or a portion of the notes then outstanding would remain
unpaid. The guarantees of the notes will have a similar ranking with respect to
secured and unsecured senior debt of the subsidiaries as the notes do with
respect to our secured and unsecured senior debt.
THE NOTES WILL BE STRUCTURALLY SUBORDINATED TO ALL OF THE DEBT AND OTHER
LIABILITIES, INCLUDING TRADE PAYABLES, OF OUR SUBSIDIARIES THAT ARE NOT
GUARANTORS OF THE NOTES.
Some, but not all, of our subsidiaries will guarantee the notes. Holders of
notes will not have any claim as a creditor against our subsidiaries that are
not guarantors of the notes. Therefore, debt and other liabilities, including
trade payables, whether secured or unsecured, of our non-
18
guarantor subsidiaries will effectively be senior to your claims against those
subsidiaries. As of July 5, 2003, on a consolidated basis, our subsidiaries that
are not guarantors represented 19.8% of our consolidated total assets. For the
five month period February 5, 2003 to July 5, 2003, 23.4% of our consolidated
net revenues and 98.1% of our consolidated net income were generated by the
subsidiaries that are not guarantors. In addition, the indenture does not
restrict these subsidiaries from incurring additional debt and does not contain
any limitation on the amount of other liabilities, such as trade payables, that
they may incur.
A SUBSIDIARY GUARANTEE COULD BE VOIDED OR SUBORDINATED BECAUSE OF FEDERAL
BANKRUPTCY LAW OR COMPARABLE STATE LAW PROVISIONS.
Our obligations under the notes are guaranteed by certain of our
subsidiaries. Under the federal bankruptcy law and comparable provisions of
state fraudulent transfer laws, one or more of the subsidiary guarantees could
be voided or claims against a subsidiary guarantee could be subordinated to all
other debts of that guarantor if, among other things, the guarantor, at the time
it incurred the debt evidenced by its guarantee, received less than reasonably
equivalent value or fair consideration for the incurrence of the guarantee and:
was insolvent or rendered insolvent by reason of such
incurrence;
was engaged in a business or transaction for which the
guarantor's remaining assets constituted unreasonably small
capital; or
intended to incur, or believed that it would incur, debts
beyond its ability to pay its debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor or to a fund for the
benefit of the creditors of the guarantor. The measure of insolvency for
purposes of fraudulent transfer laws will vary depending upon the law applied in
any proceeding to determine whether a fraudulent transfer has occurred.
Generally, however, a guarantor would be considered insolvent if:
the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all of its assets;
the present fair saleable value of its assets was less than
the amount that would be required to pay its probable
liability on its existing debts, including contingent
liabilities, as they become absolute and mature; or
it could not pay its debts as they become due.
We cannot be sure which standards a court would use to determine whether or
not the guarantors were solvent at the relevant time, or, regardless of the
standard that the court uses, that the issuance of the guarantee of the notes
would not be voided or the guarantee of the new notes would not be subordinated
to that guarantor's other debt. If the guarantees were legally challenged, any
guarantee could also be subject to the claim that the obligations of the
applicable guarantor were incurred for less than fair consideration, since the
guarantee was incurred for our benefit.
A court could thus void the obligations under the guarantee or subordinate
the guarantee to the applicable guarantor's other debt or take other action
detrimental to holders of the notes.
THERE IS NO PUBLIC MARKET FOR THE NOTES AND WE DO NOT KNOW IF A MARKET WILL
EVER DEVELOP OR, IF A MARKET DOES DEVELOP, WHETHER IT WILL BE SUSTAINED.
Both the old notes and the new notes are a new issue of securities with no
existing trading market. The initial purchasers of the old notes have no
obligation to make a market in the notes and may discontinue making a market at
any time without notice. As a result, a liquid market for the notes may not
develop and you may not be able to sell your notes at a particular time or at
favorable prices.
Warnaco does not intend to apply for listing or quotation of the notes on
any securities exchange or stock market, although we expect that the notes will
be eligible for trading in the
19
PORTAL Market of the National Association of Securities Dealers, Inc. The
liquidity of any market for the notes will depend on a number of factors,
including:
the number of holders of notes;
our operating performance and financial condition;
our ability to complete the offer to exchange the old notes
for the new notes;
the market for similar securities;
the interest of securities dealers in making a market in the
notes; and
prevailing interest rates.
Historically, the market for non-investment grade debt has been subject to
substantial volatility. Any such volatility could have an adverse effect on
holders of the notes.
WE MAY NOT HAVE SUFFICIENT FUNDS TO SATISFY OUR REPURCHASE OBLIGATIONS THAT
ARISE UPON A CHANGE OF CONTROL.
If a change of control occurs, we will be required, subject to certain
conditions, to offer to purchase all outstanding notes at a price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest thereon to the
date of purchase.
As of July 5, 2003, we did not have sufficient funds available to purchase
all of the outstanding notes were they to be tendered in response to an offer
made as a result of a change of control. The source of funds for any purchase of
these notes will be our available cash, cash generated from our operations or
other sources, including borrowings, sales of assets or sales of equity. If we
do not have sufficient cash on hand, we could seek to refinance the debt under
our senior secured revolving credit facility, the notes, and our other debt or
obtain a waiver from the lenders or the holders of the notes. We may not,
however, be able to obtain a waiver or refinance our debt on satisfactory terms,
or at all.
Our failure to purchase, or give notice of purchase of, the notes would be a
default under the indenture governing the notes, which would in turn be a
default under our senior secured revolving credit facility. In addition, a
change of control will constitute an event of default under our senior secured
revolving credit facility. A default under our senior secured revolving credit
facility would result in an event of default under the indenture governing the
notes if the lenders were to accelerate the debt under the senior secured
revolving credit facility. Furthermore, if the holders of the notes exercise
their right to require us to repurchase notes, the financial effect of this
repurchase could cause a default under our other debt, even if the event itself
would not cause a default.
RISKS RELATING TO THE EXCHANGE OFFER
HOLDERS WHO FAIL TO EXCHANGE THEIR OLD NOTES WILL CONTINUE TO BE SUBJECT TO
RESTRICTIONS ON TRANSFER.
If you do not exchange your old notes for new notes in the exchange offer,
you will continue to be subject to the restrictions on transfer of your old
notes described in the legend on your old notes. The restrictions on transfer of
your old notes arise because Warnaco issued the old notes under exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, you may only
offer or sell the old notes if they are registered under the Securities Act and
applicable state securities laws, or are offered and sold under an exemption
from these requirements. Warnaco does not plan to register the old notes under
the Securities Act. For further information regarding the consequences of not
tendering your old notes in the exchange offer, see the discussions below under
the captions 'The Exchange Offer -- Consequences of Exchanging or Failing to
Exchange Old Notes' and 'Material U.S. Federal Income Tax Consequences.'
20
SOME HOLDERS WHO EXCHANGE THEIR OLD NOTES MAY BE DEEMED TO BE UNDERWRITERS
AND THESE HOLDERS WILL BE REQUIRED TO COMPLY WITH THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS IN CONNECTION WITH ANY RESALE TRANSACTION.
If you exchange your old notes in the exchange offer for the purpose of
participating in a distribution of the new notes, you may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
RISKS RELATING TO OUR BUSINESS
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND WE MAY NOT BE ABLE TO
SUCCESSFULLY IMPROVE OUR PERFORMANCE OR MAINTAIN 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 maintain 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. Our failure to improve our performance or maintain profitability
could have a material adverse effect on our business, results of operations or
financial condition, and could adversely affect our ability to make payments on
the notes.
WE HAVE MADE SIGNIFICANT CHANGES IN OUR SENIOR MANAGEMENT TEAM.
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 and Chief Financial
Officer were hired in April 2003 and September 2003, respectively. Our current
or future management team may not be able to successfully execute our strategy,
and our business and financial condition and our ability to make payments on
your notes 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. Third parties may assert claims against any such intellectual
property and we may not be able to successfully resolve such claims. In
addition, 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. We may not be able to continue to meet our obligations or fulfill
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 and on our ability to
make payments on your notes.
In addition, some of our license agreements with third parties will expire
by their terms over the next several years. We may not be able to negotiate and
conclude extensions of such agreements on similar economic terms or at all.
21
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.
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 and on our ability
to make payments on your notes.
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 and on our ability to make payments on your notes.
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 and our ability to make payments on your notes. Moreover,
the actions of our sublicensees may 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 September 30, 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 exposed to the risk of changes in social, political
and economic conditions inherent in operating in foreign countries, including:
currency fluctuations;
import and export license requirements;
trade restrictions;
changes in quotas, tariffs, taxes and duties;
22
restrictions on repatriating foreign profits back to the
United States;
foreign laws and regulations;
international trade agreements;
difficulties in staffing and managing international operations;
political unrest; and
disruptions or delays in shipments.
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. Management of our foreign currency exposure may not sufficiently
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 and on our ability to make payments on your notes.
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:
product quality;
brand recognition;
price;
product differentiation (including product innovation and technology);
manufacturing and distribution expertise and efficiency;
marketing and advertising; and
customer service.
Our ability to remain competitive in these areas will, in large part,
determine our future success. Our failure to compete successfully could
adversely affect our business, results of operations or financial condition and
our ability to make payments on your notes.
OUR BANKRUPTCY PROCEEDINGS COULD ADVERSELY AFFECT OUR OPERATIONS GOING
FORWARD.
We sought protection under Chapter 11 of the Bankruptcy Code on June 11,
2001 and emerged from bankruptcy on February 4, 2003. The Chapter 11 cases could
adversely affect our operations going forward. The Chapter 11 cases may affect
our ability to negotiate favorable terms from suppliers, customers, landlords
and others. The failure to obtain such favorable terms could adversely affect
our financial performance and our ability to make payments on your notes.
FRESH START ACCOUNTING MAY MAKE FUTURE FINANCIAL STATEMENTS DIFFICULT TO
COMPARE.
In accordance with the requirements of SOP 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, we have adopted fresh
start accounting as of February 4, 2003. Our consolidated balance sheets as of
and after February 4, 2003, and our
23
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:
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;
there were an insufficient number of qualified accounting
personnel and certain employees or management lacked the
qualifications and training to fulfill their assigned
functions;
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
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:
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;
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;
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
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.
24
In connection with its audit of our financial statements for Fiscal 2002,
Deloitte recommended that we make certain operational and efficiency
improvements. The recommendations related to the continued integration of
corporate information systems by our operating divisions, improvements to our
documentation of accounting policies and procedures and enhancements to security
over our information systems. Deloitte also recommended that we upgrade our
disaster recovery and business continuity plans. We have taken action during
Fiscal 2003 to address Deloitte's recommendations.
As part of our ongoing evaluation of our internal controls and procedures,
we continue to identify and implement measures to further improve the
effectiveness of our internal controls, including our disclosure controls and
internal controls over financial reporting. To the extent we identify any
weaknesses in our internal controls, significant resources from our management
team may be required to implement and maintain effective controls and
procedures. In addition, we may need to hire additional employees and further
train our existing employees.
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. 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 Reports
on Form 10-K for Fiscal 1998, Fiscal 1999 and Fiscal 2000 and our 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 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 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. The resolution of this
matter could have a material effect on our business, financial condition or
results of operations. 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 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 and our ability to make
payments on your notes.
25
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. 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 and our ability to make payments on your
notes may be affected 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 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 and on our ability to make payments on your notes.
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.
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, resulting in an adverse effect on
our results of operations and on our ability to make payments on your notes.
THE APPAREL INDUSTRY IS SUBJECT TO PRICING PRESSURES THAT MAY CAUSE US TO
LOWER THE PRICES WE CHARGE FOR OUR PRODUCTS.
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
26
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 and our ability
to make payments on your notes 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 and
our ability to make payments on your notes.
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. Future trade agreements could 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 and our ability to make payments on your notes.
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'). Trade agreements could impose requirements that may
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 had 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 and our ability to make payments on
your notes.
27
USE OF PROCEEDS
Neither Warnaco nor any of the guarantors will receive any proceeds from the
exchange offer.
The proceeds of the offering of the old notes were $210.0 million, before
deducting discounts, commissions and expenses related to the offering of $7.1
million in the aggregate. We used the net proceeds of the offering of the old
notes to repay the outstanding principal of $200.9 million of our Second Lien
Notes due February 4, 2008 plus accrued interest of approximately $2.0 million.
CASH AND CAPITALIZATION
The following table sets forth our cash and capitalization as of July 5,
2003. You should read the capitalization data set forth in the table below in
conjunction with 'Selected Historical Consolidated Financial Data,'
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and our consolidated financial statements and the accompanying notes
appearing elsewhere in this prospectus.
<Table>
<Caption>
AS OF
JULY 5, 2003
------------
(IN MILLIONS
OF DOLLARS)
Cash........................................................ $ 65.9
------
------
Debt
Senior secured revolving credit facility(a)............. --
GECC debt............................................... 1.5
Capital leases.......................................... 1.3
Senior Notes due 2013................................... 210.0
------
Total debt.................................................. 212.8
Total stockholders' equity.................................. 528.8
------
Total capitalization........................................ $741.6
------
------
</Table>
- ---------
(a) As of September 30, 2003, we had no borrowings outstanding and
$149.6 million of availability under our senior secured revolving credit
facility.
28
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Old Common Stock
Prior to June 11, 2001, our Old Common Stock, was traded on the New York
Stock Exchange (the 'NYSE') under the symbol 'WAC'. On June 11, 2001, the NYSE
suspended trading of our Old Common Stock. The table below sets forth, for the
periods indicated through June 11, 2001, the high and low sales prices of the
Old Common Stock, as reported on the New York Stock Exchange Composite Tape.
From June 11, 2001 until February 4, 2003, the Old Common Stock was traded on
the over-the-counter electronic bulletin board (the 'OTCBB') under the ticker
symbol 'WACGQ.PK'. The table below sets forth the high and low sales prices of
the Old Common Stock per the OTCBB from June 12, 2001 through February 4, 2003.
<Table>
<Caption>
HIGH LOW
---- ---
2001
First Quarter............................................... $5.3200 $1.1200
Second Quarter (through June 11, 2001)...................... $1.5000 $0.3900
Second Quarter (from June 12, 2001)(a)...................... $0.1550 $0.0570
Third Quarter (a)........................................... $0.2245 $0.0600
Fourth Quarter (a).......................................... $0.2500 $0.0200
2002
First Quarter (a)........................................... $0.0750 $0.0350
Second Quarter (a).......................................... $0.0600 $0.0210
Third Quarter (a)........................................... $0.1600 $0.0400
Fourth Quarter (a).......................................... $0.0990 $0.0001
2003
First Quarter (through February 4, 2003) (a)................ $0.0010 $0.0000
</Table>
- ---------
(a) The quotations reflect inter-dealer prices without retail
mark-up, markdown or commission and may not represent actual
transactions.
New Common Stock
Effective with the consummation of our Plan of Reorganization on
February 4, 2003, our Old Common Stock was cancelled and we issued 44,999,973
shares of New Common Stock to certain of our pre-petition creditors in reliance
on the exemption from registration afforded to us by Section 1145 of the
Bankruptcy Code. Our New Common Stock began trading on the NASDAQ National Stock
Market on February 5, 2003 under the ticker symbol 'WRNC'. The table below sets
forth the high and low sales prices of our New Common Stock as reported on the
NASDAQ Composite Tape from February 5, 2003 through September 30, 2003.
<Table>
<Caption>
HIGH LOW
---- ---
2003
First Quarter (from February 5, 2003)....................... $14.1000 $ 8.8000
Second Quarter.............................................. $13.9900 $ 8.9600
Third Quarter (through September 30, 2003).................. $17.9300 $13.5700
</Table>
As of October 6, 2003, there were 2,096 holders of the Common Stock, based
upon the number of holders of record and the number of individual participants
in certain security position listings.
The last reported sale price of the New Common Stock as reported on the
NASDAQ Composite Tape on September 30, 2003 was $15.57 per share.
From January 2000 through December 2000, we paid a quarterly cash dividend
of $0.09 per share. We suspended payment of our quarterly cash dividend in
December 2000. Our current revolving credit agreement places restrictions on our
ability to pay dividends on the New Common Stock.
29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial and operating data for the periods indicated. The selected
consolidated financial data as of January 5, 2002 and January 4, 2003 and for
each of the three years in the period ended January 4, 2003 are derived from our
audited consolidated financial statements included elsewhere in this prospectus.
The selected consolidated financial data as of July 5, 2003, for the First Half
of Fiscal 2002, for the one month period January 5, 2003 to February 4, 2003 and
for the five month period February 5, 2003 to July 5, 2003 are derived from our
unaudited consolidated condensed financial statements included elsewhere in this
prospectus. The selected consolidated financial data as of January 1, 2000 and
December 30, 2000 and for the year ended January 1, 2000 is derived from our
audited financial statements not included in this prospectus. In Fiscal 2000, we
restated our balance sheet for Fiscal 1997 by adjusting stockholders' equity as
of January 3, 1998. This restatement reflected adjustments to accounts
receivable and other items and did not have an impact on net income (loss) for
any subsequent period. Our previous independent auditors did not issue a consent
with respect to the inclusion of their report on the consolidated financial
statements for Fiscal 1997 and Fiscal 1998 in our Annual Report on Form 10-K for
Fiscal 2000. As a result, the selected financial information included below for
Fiscal 1998 is derived from unaudited financial statements.
Our fiscal year ends on the Saturday nearest to January 1. Fiscal 1998,
1999, 2000, 2001 and 2002 ended on January 2, 1999, January 1, 2000, December
30, 2000, January 5, 2002 and January 4, 2003, respectively, and each contained
52 weeks.
We emerged from bankruptcy on February 4, 2003, and, pursuant to American
Institute of Certified Public Accountants Statement of Position 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code ('SOP 90-7'),
we adopted fresh start accounting. Fresh start accounting principles provide,
among other things, that we determine the reorganization value of our company
and allocate such reorganization value to the fair value of our assets in
accordance with the provisions of Statement of Financial Accounting Standards
No. 141, Business Combinations ('SFAS 141'). We engaged an independent third
party appraisal firm to assist us in determining our reorganization value. The
reorganization value of our company as approved by the bankruptcy court was
$750.0 million. Using the work of valuation specialists we allocated the
reorganization value to the fair value of our tangible assets, finite lived
intangible assets and indefinite lived intangible assets in accordance with the
provisions of SFAS 141. Our audited consolidated balance sheet as of February 4,
2003 reflecting the implementation of the Plan and our emergence from bankruptcy
is included in this prospectus beginning on page G-1. Our consolidated balance
sheet at February 4, 2003 is not, and our consolidated statements of operations
for periods beginning after February 4, 2003 will not be, comparable in certain
material respects to the historical consolidated financial statements for prior
periods included elsewhere in this prospectus.
References to the 'Predecessor' refer to us prior to February 4, 2003.
References to the 'Successor' refer to us on and after February 4, 2003 after
giving effect to the implementation of fresh start accounting.
The information set forth in the following table should be read in
conjunction with 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and our consolidated financial statements and related
notes thereto included elsewhere in this prospectus.
30
PREDECESSOR
---------------------------------------------------------------------
FISCAL YEAR
---------------------------------------------------------------------
1998(a)(b) 1999 2000(c)(d)(e) 2001(f) 2002(f)
---------- ---- ------------- ------- -------
(UNAUDITED) (IN MILLIONS OF DOLLARS)
STATEMENT OF
OPERATIONS
DATA:
Net revenues.... $ 1,950.3 $ 2,114.2 $ 2,249.9 $ 1,671.3 $ 1,493.0
Gross profit.... 537.2 681.8 404.5 296.9 440.3
Selling, general
and
administrative
expenses....... 451.6 476.4 625.0 598.2 411.0
Amortization of
sales order
backlog........ -- -- -- -- --
Restructuring
items.......... -- -- -- -- --
Reorganization
items.......... -- -- -- 177.8 116.7
Operating income
(loss)......... 85.6 205.4 (220.5) (580.9) (87.4)
Gain on
cancellation of
pre-petition
indebtedness... -- -- -- -- --
Fresh start
adjustments.... -- -- -- -- --
Other income
(loss)......... -- -- 36.9 (6.6) 0.1
Interest
expense........ 63.8 81.0 172.2 122.8 22.0
Income (loss)
before
cumulative
effect of a
change in
accounting
principle...... 14.1 93.7 (376.9) (861.2) (163.2)
Cumulative
effect of
change in
accounting
principle, net
of taxes....... (46.3) -- (13.1) -- (801.6)
Net income
(loss)......... (32.2) 93.7 (390.0) (861.2) (964.8)
Net income
(loss)
applicable to
Common Stock... (32.2) 93.7 (390.0) (861.2) (964.8)
Dividends on
Common Stock... 22.4 20.3 13.0 -- --
PER SHARE DATA:
Income (loss)
before
cumulative
effect change
in accounting
principle
Basic........ $ 0.23 $ 1.68 $ (7.14) $ (16.28) $ (3.08)
Diluted...... 0.22 1.65 (7.14) (16.28) (3.08)
Net income
(loss):
Basic........ (0.52) 1.68 (7.39) (16.28) (18.21)
Diluted...... (0.51) 1.65 (7.39) (16.28) (18.21)
Dividends
declared....... 0.36 0.36 0.27 -- --
Shares used in
computing
earnings per
share(g)
Basic........ 61,361,843 55,910,371 52,783,379 52,911,005 52,989,965
Diluted...... 63,005,358 56,796,203 52,783,379 52,911,005 52,989,965
</Table>
PREDECESSOR
---------------------------------------------------------------------
FISCAL YEAR
---------------------------------------------------------------------
1998(a)(b) 1999 2000(c)(d)(e) 2001(f) 2002(f)
---------- ---- ------------- ------- -------
(UNAUDITED) (IN MILLIONS OF DOLLARS)
OTHER DATA:
Cash flows from
operating
activities..... 334.7 10.0 (10.7) (422.8) 226.2
Cash flows from
investing
activities..... (222.8) (736.5) (69.6) (21.4) 16.2
Cash flows from
financing
activities..... (116.3) 724.7 82.1 474.6 (176.8)
Depreciation and
amortization... 46.5 61.0 102.1 97.8 57.4
Capital
expenditures... 142.8 109.1 110.1 24.7 11.2
Ratio of
earnings to
fixed
charges........ 1.23 1.92 -- -- --
Deficit of
earnings to
fixed
charges(h)..... -- -- 355.8 710.2 109.3
PREDECESSOR SUCCESSOR
----------------------- ---------
FOR THE FOR THE
PERIOD PERIOD
JANUARY 5, FEBRUARY 5,
FIRST HALF 2003 TO 2003 TO
OF FISCAL FEBRUARY 4, JULY 5,
2002 2003 2003
---------- ----------- ----------
STATEMENT OF
OPERATIONS
DATA:
Net revenues.... $ 791.8 $ 116.0 $ 662.2
Gross profit.... 234.3 45.8 217.8
Selling, general
and
administrative
expenses....... 202.7 35.3 168.7
Amortization of
sales order
backlog........ -- -- 10.5
Restructuring
items.......... -- -- 6.1
Reorganization
items.......... 58.1 29.9 --
Operating income
(loss)......... (26.5) (19.4) 32.5
Gain on
cancellation of
pre-petition
indebtedness... -- (1,692.7) --
Fresh start
adjustments.... -- (765.7) --
Other income
(loss)......... -- (0.4) 1.3
Interest
expense........ 10.1 1.9 9.9
Income (loss)
before
cumulative
effect of a
change in
accounting
principle...... (88.1) 2,358.5 14.2
Cumulative
effect of
change in
accounting
principle, net
of taxes....... (801.6) -- --
Net income
(loss)......... (889.7) 2,358.5 14.2
Net income
(loss)
applicable to
Common Stock... (889.7) 2,358.5 14.2
Dividends on
Common Stock... -- -- --
PREDECESSOR SUCCESSOR
----------------------- ---------
FOR THE FOR THE
PERIOD PERIOD
JANUARY 5, FEBRUARY 5,
FIRST HALF 2003 TO 2003 TO
OF FISCAL FEBRUARY 4, JULY 5,
2002 2003 2003
---------- ----------- ----------
PER SHARE DATA:
Income (loss)
before
cumulative
effect change
in accounting
principle
Basic........ $ (1.66) $ 44.51 $ 0.31
Diluted...... (1.66) 44.51 0.31
Net income
(loss):
Basic........ (16.81) 44.51 0.31
Diluted...... (16.81) 44.51 0.31
Dividends
declared....... -- -- --
Shares used in
computing
earnings per
share(g)
Basic........ 52,936,000 52,989,965 45,005,897
Diluted...... 52,936,000 52,989,965 45,153,925
OTHER DATA:
Cash flows from
operating
activities..... 218.4 (24.9) 89.2
Cash flows from
investing
activities..... 22.8 (0.7) (6.2)
Cash flows from
financing
activities..... (166.5) (67.6) (42.0)
Depreciation and
amortization... 29.0 4.5 26.3
Capital
expenditures... 5.2 0.7 6.4
Ratio of
earnings to
fixed
charges........ 768.4 2.47
Deficit of
earnings to
fixed
charges(h)..... 36.6 -- --
PREDECESSOR
-----------------------------------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30, JANUARY 5, JANAURY 4,
1999(b) 2000 2000 2002 2003
---------- ---------- ----------- ------------ -----------
(UNAUDITED) (IN MILLIONS OF DOLLARS)
BALANCE SHEET DATA:
Working capital......... (38.3) 229.8 (1,484.2) 446.3(i) 470.6(i)
Total assets............ 1,761.2 2,753.2 2,342.1 1,985.5 947.9
Liabilities subject
to compromise.......... -- -- -- 2,435.1 2,486.1
Debtor-in-possession
financing.............. -- -- -- 155.9 --
Senior secured credit
facility............... -- -- -- -- --
Second Lien Notes
due 2008............... -- -- -- -- --
8 7/8% Senior Notes
due 2013............... -- -- -- -- --
Long-term debt
(excluding current
maturities)............ 411.9 1,188.0 --(j) 2.2 1.3
Mandatorily redeemable
convertible preferred
securities............. 101.8 102.9 103.4 --(k) --(k)
Stockholders' equity
(deficit).............. 552.1 533.2 27.2 (851.3) (1,856.1)
SUCCESSOR
----------------------------
FEBRUARY 4, JULY 5,
2003 2003
------------ -----------
BALANCE SHEET DATA:
Statement of operations
data:
Working capital.............. 327.7 372.0
Total assets................. 1,163.9 1,137.5
Liabilities subject to
compromise.................. -- --
Debtor-in-possessio
financing................... -- --
Senior secured credit
facility.................... 39.2 --
Second Lien Notes due 2008... 200.9 --
8 7/8% Senior Notes
due 2013.................... -- 210.0
Long-term debt (excluding
current maturities)......... 202.2 211.3
Mandatorily redeemable
convertible preferred
securities.................. -- --
Stockholders' equity
(deficit)................... 503.5 528.8
</Table>
(footnotes on next page)
31
(footnotes from previous page)
(a) Effective Fiscal 1998, we adopted the provisions of SOP
98-5, which requires, among other things, that certain
pre-operating costs, which had previously been deferred and
amortized, be expensed as incurred. We recorded the impact
as the cumulative effect of a change in accounting principle
of $46.3 million (net of income tax benefit of $25.2
million).
(b) In Fiscal 2000, the balance sheet as of January 3, 1998 was
restated resulting in a reduction of $26 million in
stockholders' equity. This restatement reflected adjustments
to accounts receivable and other items and had no effect on
reported net income in any subsequent year. Our previous
independent auditors did not issue a consent for our
restated consolidated financial statements for Fiscal 1997
and 1998. As a result, the selected financial information
for the fiscal year ended January 2, 1999 is derived from
unaudited financial statements.
(c) Fiscal 2000 includes investment income of $36.9 million
resulting from a $42.8 million gain on our sale of our
investments in InterWorld Corporation, net of losses of $5.9
million in connection with certain equity forward purchase
agreements that we entered into prior to our bankruptcy with
certain of our lenders, which were discharged in our
bankruptcy.
(d) Fiscal 2000 includes the impact of a change in accounting of
$13.1 million (net of income tax benefit of $8.6 million)
related to a change in the method of valuation of inventory
in our retail outlet stores.
(e) Fiscal 2000 includes a tax provision valuation reserve
allowance of $129.2 million for the deferred tax asset.
(f) Includes reorganization items related to the Chapter 11
cases of $177.8 million and $116.7 million in Fiscal 2001
and Fiscal 2002, respectively, impairment charges of $101.8
million in Fiscal 2001, and a tax provision of $151.0
million in Fiscal 2001 primarily related to the increase in
the valuation allowance related to future income tax
benefits. Also includes the cumulative effect of a change in
accounting of $801.6 million, net of income tax benefit of
$53.5 million related to the adoption of SFAS No. 142 in
Fiscal 2002.
(g) On February 4, 2003, pursuant to the terms of our Plan, our
outstanding Class A Common Stock was cancelled and we issued
44,999,973 shares of New Common Stock.
(h) For the purposes of computing the ratio of earnings to fixed
charges, earnings are defined as income from continuing
operations before income taxes, plus fixed charges and less
capitalized interest. Fixed charges are defined as the sum
of interest expense, including the amortization of deferred
financing costs, capitalized interest, and that portion of
rental expense which we believe to be representative of an
interest factor. The deficit of earnings to fixed charges
represents the amount of earnings that would be required to
increase the ratio of earnings to fixed charges to 1.00 in
those cases where earnings are less than the total fixed
charges.
(i) Does not include liabilities subject to compromise.
(j) Included in working capital as a current liability.
(k) Included in liabilities subject to compromise.
32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
We emerged from bankruptcy on February 4, 2003 and, pursuant to American
Institute of Certified Public Accountants Statement of Position 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code ('SOP 90-7'),
we adopted fresh start accounting. Fresh start accounting principles provide,
among other things, that we determine the reorganization value of our company
and allocate such reorganization value to the fair value of our assets in
accordance with the provisions of Statement of Financial Accounting Standards
No. 141, Business Combinations ('SFAS 141'). We engaged an independent third
party appraisal firm to assist us in determining our reorganization value. The
reorganization value of our company as approved by the bankruptcy court was
$750.0 million. Using the work of valuation specialists we allocated the
reorganization value to the fair value of our tangible assets, finite lived
intangible assets and indefinite lived intangible assets in accordance with the
provisions of SFAS 141. Our audited consolidated balance sheet as of
February 4, 2003 and related notes thereto reflecting the implementation of the
Plan and our emergence from bankruptcy is included in this prospectus beginning
on page G-1. Our consolidated balance sheet as of February 4, 2003 is not, and
our consolidated statements of operations for periods beginning after
February 4, 2003 will not be, comparable in certain material respects to the
historical consolidated financial statements for prior periods included
elsewhere in this prospectus.
We believe that the consummation of the Plan, the adoption of fresh start
accounting and the offering of the old notes are significant events and,
therefore, the presentation of pro forma financial information giving effect to
these events provides material information that is useful to investors.
The unaudited pro forma consolidated condensed statement of operations data
in the following tables for Fiscal 2002, the First Half of Fiscal 2002 and the
First Half of Fiscal 2003 is adjusted (the 'Pro Forma Adjustments') to reflect
the following as if each had been completed at the beginning of Fiscal 2002:
the implementation of the Plan and our emergence from bankruptcy,
including adjustments to:
reflect fresh start accounting;
eliminate reorganization items related to our bankruptcy;
reflect the elimination of interest expense related to
certain foreign debt subject to standstill agreements which
principal was repaid as part of our reorganization; and
record income taxes at normalized post-emergence rates; and
the issuance of the old notes and the application of the
proceeds thereof.
The pro forma financial information does not purport to be indicative of our
operating results.
The pro forma financial information should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations,' 'Selected Historical Consolidated Financial Data' and our
consolidated financial statements and related notes thereto included elsewhere
in this prospectus.
33
THE WARNACO GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
<Table>
<Caption>
HISTORICAL PRO PRO FORMA
FISCAL FORMA FISCAL
2002 ADJUSTMENTS 2002
---- ----------- ----
(IN MILLIONS OF DOLLARS)
Net revenues............................................. $1,493.0 $ -- $1,493.0
Cost of goods sold....................................... 1,052.7 (22.1)(a) 1,030.6
-------- ------- --------
Gross profit............................................. 440.3 22.1 462.4
Selling, general and administrative expenses............. 411.0 (31.2)(b) 379.8
Reorganization items..................................... 116.7 (116.7)(c) --
Amortization of sales order backlog...................... -- -- (d) --
-------- ------- --------
Operating income (loss).................................. (87.4) 170.0 82.6
Investment income, net................................... 0.1 -- 0.1
Interest expense......................................... 22.0 9.6 (e) 31.6
-------- ------- --------
Income (loss) before provision for income taxes and
cumulative effect of change in accounting principle.... (109.3) 160.4 51.1
Provision for income taxes............................... 53.9 (33.5)(f)(g) 20.4
-------- ------- --------
Income (loss) before cumulative effect of change in
accounting principle................................... (163.2) 193.9 30.7
Cumulative effect of change in accounting principle...... (801.6) 801.6 (f) --
-------- ------- --------
Net income (loss)........................................ $ (964.8) $ 995.5 $ 30.7
-------- ------- --------
-------- ------- --------
Basic and diluted (loss) per common share:
Income (loss) before accounting change............... $ (3.08) $ 0.68
Cumulative effect of accounting change............... (15.13) --
-------- --------
Net income (loss)........................................ $ (18.21) $ 0.68
-------- --------
-------- --------
Weighted average number of shares outstanding used in
computing income (loss) per common share (52,990)(h)
Basic(j)............................................. 52,990 45,009 (i) 45,009
-------- --------
-------- --------
Diluted(j)........................................... 52,990 45,231 (i) 45,231
-------- --------
-------- --------
</Table>
- ---------
(a) Upon the adoption of fresh start accounting, we changed our
inventory accounting policies to expense certain design,
procurement, receiving and other product related costs as
incurred. As a result of this change, the pro forma
adjustment eliminates $24.4 million of design, procurement,
receiving and other product related costs previously
capitalized that were reflected in cost of goods sold for
Fiscal 2002, offset by $2.3 million of inventory costs that
would have been expensed in Fiscal 2002.
(b) Eliminates historical depreciation and amortization expenses
of $57.4 million, records depreciation and amortization
expense of $34.5 million based upon the fair value of our
assets and eliminates lease expenses of $8.3 million related
to certain leases settled as part of our bankruptcy in
accordance with fresh start accounting.
(c) Eliminates reorganization items of $116.7 million.
(d) We valued our sales order backlog as part of our
determination of the fair value of our assets in connection
with our adoption of fresh start accounting. The
amortization of sales order backlog is a non-recurring
charge and is not expected to have a continuing effect on
our results of operations after it is fully amortized in
Fiscal 2003 and, as a result, has been excluded from the pro
forma statement of operations. The amortization of this
backlog will be $12.6 million for Fiscal 2003.
(e) Reflects interest expense of $18.6 million on the old notes,
offset by the elimination of interest expense of $9.8
million on certain foreign debt agreements subject to
standstill agreements that was paid as part of the Plan and
reflects interest expense of $0.8 million on
(footnotes continued on next page)
34
(footnotes continued from previous page)
certain leases settled in connection with our bankruptcy.
Although our average borrowings in the First Half of Fiscal
2003 have been substantially lower than our average
borrowings in the First Half of Fiscal 2002, no adjustment
has been made to interest expense for the lower level of
borrowings.
(f) Eliminates cumulative effect of change in accounting
principle relating to goodwill and intangible assets of
$801.6 million net of income tax benefit of $53.5 million as
goodwill and intangible assets would have been recorded at
fair value in connection with the adoption of fresh start
accounting at the beginning of Fiscal 2002.
(g) Adjusts income tax provision to reflect our estimated income
tax rate of 40%.
(h) Effective February 4, 2003, all 53.0 million shares of our
common stock and all outstanding options to purchase shares
of our common stock were cancelled pursuant to the terms of
our reorganization under the bankruptcy code.
(i) Effective February 5, 2003 we issued 45.0 million shares of
new common stock pursuant to the terms of the Plan.
(j) Pro forma basic and diluted earnings per share is calculated
by dividing pro forma net income by the pro forma weighted
average number of shares outstanding of 45.0 million and
45.2 million, respectively. The computation of the pro forma
weighted average number of shares outstanding is based upon
the number of shares issued pursuant to our Plan. Due to the
cancellation of our old common stock and the issuance of new
common stock pursuant to our Plan, net income (loss) per
share for period beginning February 5, 2003, will not be
comparable to net income (loss) per share for periods
beginning before February 5, 2003.
35
THE WARNACO GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
<Table>
<Caption>
HISTORICAL PRO PRO FORMA
FIRST HALF OF FORMA FIRST HALF OF
FISCAL 2002 ADJUSTMENTS FISCAL 2002
----------- ----------- -----------
(IN MILLIONS OF DOLLARS)
Net revenues........................................ $ 791.8 $ -- $ 791.8
Cost of goods sold.................................. 557.5 (7.2)(a) 550.3
------- ------- -------
Gross profit........................................ 234.3 7.2 241.5
Selling, general and administrative expenses........ 202.7 (20.4)(b) 182.3
Reorganization items................................ 58.1 (58.1)(c) --
Amortization of sales order backlog................. -- -- (d) --
------- ------- -------
Operating income.................................... (26.5) 85.7 59.2
Interest expense.................................... 10.1 6.6 (e) 16.7
------- ------- -------
Income (loss) before provision for income taxes and
cumulative effect of change in accounting
principle......................................... (36.6) 79.1 42.5
Provision for income taxes.......................... 51.5 (34.5)(f)(g) 17.0
------- ------- -------
Income (loss) before cumulative effect of change in
accounting principle.............................. (88.1) 113.6 25.5
Cumulative effect of change in accounting
principle......................................... (801.6) 801.6 (f) --
------- ------- -------
Net income (loss)................................... $(889.7) $ 915.2 $ 25.5
------- ------- -------
------- ------- -------
Basic and diluted (loss) per common share:
Income (loss) before accounting change.......... $ (1.66) $ 0.57
Cumulative effect of accounting change.......... (15.14) --
------- -------
Net income (loss)................................... $(16.81) $ 0.57
------- -------
------- -------
Weighted average number of shares outstanding used
in computing income (loss) per common share: (52,936)(h)
Basic(j)........................................ 52,936 45,006 (i) 45,006
------- -------
------- -------
Diluted(j)...................................... 52,936 45,154 (i) 45,154
------- -------
------- -------
</Table>
- ---------
(a) Upon the adoption of fresh start accounting, we changed our
inventory accounting policies to expense certain design,
procurement, receiving and other product related costs as
incurred. As a result of this change, the pro forma
adjustment eliminates $8.0 million of design, procurement,
receiving and other product related costs previously
capitalized that were reflected in cost of goods sold for
the First Half of Fiscal 2002, offset by $0.8 million of
inventory costs that would have been expensed in the First
Half of Fiscal 2002.
(b) Eliminates historical depreciation and amortization expense
of $29.0 million, records depreciation and amortization
expense of $16.8 million based on the fair value of our
assets and eliminates lease expense of $8.2 million related
to certain leases settled as part of our bankruptcy in
accordance with fresh start accounting.
(c) Eliminates reorganization items of $58.1 million.
(d) We valued our sales order backlog as part of our
determination of the fair value of our assets in connection
with our adoption of fresh start accounting. The
amortization of sales order backlog is a non-recurring
charge and is not expected to have a continuing effect on
our results of operations after it is fully amortized in
Fiscal 2003 and, as a result has been excluded from the pro
forma statement of operations. The amortization of this
backlog will be $12.6 million for Fiscal 2003.
(e) Reflects interest expense of $9.3 million on the old notes,
offset by the elimination of interest expense of $3.2
million on certain foreign debt agreements subject to
standstill agreements that was paid as part of the Plan and
reflects interest expense of $0.5 million on certain leases
settled in connection with our bankruptcy. Although our
average borrowings in the First Half of Fiscal 2003 have
been substantially lower than our average borrowings in the
First Half of
(footnotes continued on next page)
36
(footnotes continued from previous page)
Fiscal 2002, no adjustment has been made to interest expense
for the lower level of borrowings.
(f) Eliminates cumulative effect of change in accounting
principle relating to goodwill and intangible assets of
$801.6 million net of income tax benefit of $53.5 million as
goodwill and intangible assets would have been recorded at
fair value in connection with the adoption of fresh start
accounting at the beginning of Fiscal 2002.
(g) Adjusts income tax provision to reflect our estimated income
tax rate of 40%.
(h) Effective February 4, 2003, all 53.0 million shares of our
common stock and all outstanding options to purchase shares
of our common stock were cancelled pursuant to the terms of
our reorganization under the bankruptcy code.
(i) Effective February 5, 2003 we issued 45.0 million shares of
new common stock pursuant to the terms of our Plan.
(j) Pro forma basic and diluted earnings per share is calculated
by dividing pro forma net income by the pro forma weighted
average number of shares outstanding of 45.0 million and
45.2 million, respectively. The computation of the pro forma
weighted average number of shares outstanding is based upon
the number of shares issued pursuant to our Plan. Due to the
cancellation of our old common stock and the issuance of new
common stock pursuant to our Plan, net income (loss) per
share for period beginning February 5, 2003, will not be
comparable to net income (loss) per share for periods
beginning before February 5, 2003.
37
THE WARNACO GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<Table>
<Caption>
HISTORICAL
------------------------------------------------------
PREDECESSOR SUCCESSOR COMBINED
----------- --------- -------------- PRO FORMA
JANUARY 5, 2003 TO FEBRUARY 5, 2003 FIRST HALF OF PRO FORMA FIRST HALF OF
FEBRUARY 4, 2003 TO JULY 5, 2003 FISCAL 2003 ADJUSTMENTS FISCAL 2003
---------------- --------------- ----------- ----------- -----------
(IN MILLIONS OF DOLLARS)
Net revenues................ $ 116.0 $662.1 $ 778.1 $ -- $778.1
Cost of goods sold.......... 70.2 444.4 514.6 -- 514.6
--------- ------ --------- --------- ------
Gross profit................ 45.8 217.7 263.5 263.5
Selling, general and
administrative expenses... 35.3 168.7 204.0 (5.4)(a) 198.6
Restructuring items......... -- 6.1 6.1 (6.1)(b) --
Reorganization items........ 29.9 -- 29.9 (29.9)(b) --
Amortization of sales order
backlog................... -- 10.5 10.5 (10.5)(c) --
--------- ------ --------- --------- ------
Operating income (loss)..... (19.4) 32.4 13.0 51.9 64.9
Reorganization items:
Gain on cancellation of
pre-petition
indebtedness.......... (1,692.7) -- (1,692.7) 1,692.7 (b) --
Fresh start
adjustments........... (765.7) -- (765.7) 765.7 (b) --
Other income (loss)......... (0.4) 1.4 1.0 -- 1.0
Interest expense............ 1.9 9.8 11.7 0.7 (d) 12.4
--------- ------ --------- --------- ------
Income before provision for
income taxes.............. 2,436.7 24.0 2,460.7 (2,407.2) 53.5
Provision for income
taxes..................... 78.2 9.7 87.9 (66.5)(e) 21.4
--------- ------ --------- --------- ------
Net income.................. $ 2,358.5 $ 14.3 $ 2,372.8 $(2,340.7) $ 32.1
--------- ------ --------- --------- ------
--------- ------ --------- --------- ------
Income (loss) per common
share:
Basic................... $ 44.51 $ 0.31 $ 52.72 $ 0.71
--------- ------ --------- ------
--------- ------ --------- ------
Diluted................. $ 44.51 $ 0.31 $ 52.55 $ 0.71
--------- ------ --------- ------
--------- ------ --------- ------
Weighted average number of
shares outstanding used in
computing income (loss)
per common share:
Basic(h)................ 52,990 (f) 45,006(g) 45,006 45,006
--------- ------ --------- ------
--------- ------ --------- ------
Diluted(h).............. 52,990 45,154 45,154 45,154
--------- ------ --------- ------
--------- ------ --------- ------
</Table>
- ---------
(a) Eliminates historical depreciation and amortization expense
of $4.5 million for the one month period January 5, 2003 to
February 4, 2003 and records depreciation and amortization
expense of $3.1 million based upon the fair value of our
assets in accordance with fresh start accounting and
eliminates bankruptcy and reorganization related expenses
included in selling, general and administrative expenses of
$4.0 million.
(b) Eliminates gain on cancellation of pre-petition debt of
$1,692.7 million, fresh start adjustments of $765.7 million
and other reorganization and restructuring items of
$29.9 million and $6.1 million, respectively.
(c) Eliminates the amortization of sales order backlog. The
amortization of sales order backlog results from our
adoption of fresh start accounting as of February 4, 2003.
The amortization of sales order backlog is a non-recurring
charge and is not expected to have a continuing effect on
our results of operations after it is fully amortized in
Fiscal 2003.
(footnotes continued on next page)
38
(footnotes continued from previous page)
(d) Reflects interest expense of $1.6 million on the old notes,
offset by the elimination of interest expense of
$0.9 million on certain foreign debt agreements subject to
standstill agreements that was paid as part of the Plan.
Although our average borrowings in the First Half of Fiscal
2003 have been substantially lower than our average
borrowings in the First Half of Fiscal 2002, no adjustment
has been made to interest expense for the lower level of
borrowings.
(e) Adjusts the income tax provision using our estimated rate of
40%.
(f) Effective February 4, 2003, all 53.0 million shares of our
common stock and all outstanding options to purchase shares
of our common stock were cancelled pursuant to the terms of
our reorganization under the bankruptcy code.
(g) Effective February 5, 2003 we issued 45.0 million shares of
new common stock pursuant to the terms of our Plan.
(h) Pro forma basic and diluted earnings per share is calculated
by dividing pro forma net income by the pro forma weighted
average number of shares outstanding of 45.0 million and
45.2 million, respectively. The computation of the pro forma
weighted average number of shares outstanding is based upon
the number of shares issued pursuant to our Plan. Due to the
cancellation of our old common stock and the issuance of new
common stock pursuant to our Plan, net income (loss) per
share for period beginning February 5, 2003, will not be
comparable to net income (loss) per share for periods
beginning before February 5, 2003.
39
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Subject to terms and conditions, Warnaco will accept for exchange old notes
which are properly tendered on or prior to the expiration date and not withdrawn
as permitted below. As used herein, the term expiration date means p.m., New
York City time, , 2003. Warnaco may, however, in its sole discretion,
extend the period of time during which the exchange offer is open. In the event
of any such extension, the term expiration date means the latest time and date
to which the exchange offer is extended.
As of the date of this prospectus, $210.0 million principal amount of old
notes are outstanding. Warnaco is sending this prospectus, together with the
letter of transmittal, to all holders of old notes that it knows of.
Warnaco expressly reserves the right, at any time, to extend the period of
time during which the exchange offer is open, and delay acceptance for exchange
of any old notes, by giving oral or written notice of such extension to the
holders thereof as described below. During any such extension, all old notes
previously tendered will remain subject to the exchange offer and may be
accepted for exchange by Warnaco. Any old notes not accepted for exchange for
any reason will be returned without expense to the tendering holder promptly
after the expiration or termination of the exchange offer.
Old notes tendered in the exchange offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
Warnaco expressly reserves the right to amend or terminate the exchange
offer, and not to accept for exchange any old notes, upon the occurrence of any
of the conditions of the exchange offer specified under ' -- Conditions to the
Exchange Offer.' Warnaco will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the old notes as
promptly as practicable. Such notice, in the case of any extension, will be
issued by means of a press release or other public announcement no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled expiration date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to Warnaco of old notes by you as set forth below and Warnaco's
acceptance of the old notes will constitute a binding agreement between Warnaco
and you upon the terms and subject to the conditions set forth in this
prospectus and in the accompanying letter of transmittal. Except as set forth
below, to tender old notes for exchange pursuant to the exchange offer, you must
transmit a properly completed and duly executed letter of transmittal, including
all other documents required by such letter of transmittal or, in the case of a
book-entry transfer, an agent's message in lieu of such letter of transmittal,
to Wells Fargo Bank Minnesota, National Association, as exchange agent, at the
address set forth below under 'Exchange Agent' on or prior to the expiration
date. In addition, either:
certificates for such old notes must be received by the
exchange agent along with the letter of transmittal, or
a timely confirmation of a book-entry transfer (a
'book-entry confirmation') of such old notes, if such
procedure is available, into the exchange agent's account at
DTC pursuant to the procedure for book-entry transfer
described beginning on page 42 must be received by the
exchange agent, prior to the expiration date, with the
letter of transmittal or an agent's message in lieu of such
letter of transmittal, or the holder must comply with the
guaranteed delivery procedures described below.
The term 'agent's message' means a message, transmitted by DTC to and
received by the exchange agent and forming a part of a book-entry confirmation,
which states that DTC has received an express acknowledgment from the tendering
participant stating that such participant
40
has received and agrees to be bound by the letter of transmittal and that
Warnaco may enforce such letter of transmittal against such participant.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the old notes surrendered for exchange are
tendered:
by a holder of the old notes who has not completed the box
entitled 'Special Issuance Instructions' or 'Special
Delivery Instructions' on the letter of transmittal, or
for the account of an Eligible Institution (as defined
below).
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, such guarantees must be by a firm
which is a member of the Securities Transfer Agent Medallion Program, the Stock
Exchanges Medallion Program or the New York Stock Exchange Medallion Program
(each such entity being hereinafter referred to as an 'Eligible Institution').
If old notes are registered in the name of a person other than the signer of the
letter of transmittal, the old notes surrendered for exchange must be endorsed
by, or be accompanied by a written instrument or instruments of transfer or
exchange, in satisfactory form as Warnaco or the exchange agent determines in
its sole discretion, duly executed by the holders with the signature thereon
guaranteed by an Eligible Institution.
Warnaco (or the exchange agent on its behalf) in its sole discretion will
make a final and binding determination on all questions as to the validity,
form, eligibility (including time of receipt) and acceptance of old notes
tendered for exchange. Warnaco reserves the absolute right to reject any and all
tenders of any particular old note not properly tendered or to not accept any
particular old note which acceptance might, in its judgment or its counsel's
judgment, be unlawful. Warnaco also reserves the absolute right to waive any
defects or irregularities or conditions of the exchange offer as to any
particular old note either before or after the expiration date (including the
right to waive the ineligibility of any holder who seeks to tender old notes in
the exchange offer), except that Warnaco will not waive any condition of the
exchange offer with respect to an individual holder unless it waives that
condition with respect to all holders. Warnaco's or the exchange agent's
interpretation of the terms and conditions of the exchange offer as to any
particular old note either before or after the expiration date (including the
letter of transmittal and the instructions thereto) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of old notes for exchange must be cured within a reasonable period of
time, as Warnaco determines. Warnaco is not, nor is the exchange agent or any
other person, under any duty to notify you of any defect or irregularity with
respect to your tender of old notes for exchange, and no one will be liable for
failing to provide such notification.
If the letter of transmittal or any old notes or powers of attorneys are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by Warnaco
or the exchange agent, proper evidence satisfactory to Warnaco of their
authority to so act must be submitted with the letter of transmittal.
By tendering old notes, you represent that, among other things:
the new notes acquired pursuant to the exchange offer are
being obtained in the ordinary course of business of the
person receiving such new notes, whether or not such person
is the holder; and
neither the holder nor such other person has any arrangement
or understanding with any person, to participate in the
distribution of the old notes or the new notes.
In the case of a holder that is not a broker-dealer, that holder, by
tendering, will also represent that the holder is not engaged in or does not
intend to engage in a distribution of the old notes or the new notes.
If you are an 'affiliate,' as defined under Rule 405 under the Securities
Act, of Warnaco or any of the guarantors and engage in or intend to engage in or
have an arrangement or understanding with any person to participate in a
distribution of the old notes or the new notes to be acquired pursuant to the
exchange offer, you or any such other person:
41
could not rely on the applicable interpretations of the
staff of the SEC; and
must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any
resale transaction.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such new
notes. See 'Plan of Distribution.' The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
Warnaco will accept, promptly after the expiration date, all old notes properly
tendered and will issue the new notes promptly after acceptance of the old
notes. See ' -- Conditions to the Exchange Offer.' For purposes of the exchange
offer, Warnaco will be deemed to have accepted properly tendered old notes for
exchange if and when it gives oral (confirmed in writing) or written notice to
the exchange agent.
The holder of each old note accepted for exchange will receive a new note in
the amount equal to the surrendered old note. Accordingly, holders of new notes
on the relevant record date for the first interest payment date following the
consummation of the exchange offer will receive interest accruing from the most
recent date to which interest has been paid on the old notes. Holders of new
notes will not receive any payment in respect of accrued interest on old notes
otherwise payable on any interest payment date, the record date for which occurs
on or after the consummation of the exchange offer.
In all cases, issuance of new notes for old notes that are accepted for
exchange will be made only after timely receipt by the exchange agent of:
certificates for such old notes or a timely book-entry
confirmation of such old notes into the exchange agent's
account at DTC;
a properly completed and duly executed letter of transmittal
or an agent's message in lieu thereof; and
all other required documents.
If any tendered old notes are not accepted for any reason set forth in the
terms and conditions of the exchange offer or if old notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
non-exchanged old notes will be returned without expense to the tendering holder
(or, in the case of old notes tendered by book-entry transfer into the exchange
agent's account at DTC pursuant to the book-entry procedures described below,
such non-exchanged old notes will be credited to an account maintained with DTC)
promptly after the expiration or termination of the exchange offer.
BOOK-ENTRY TRANSFERS
For purposes of the exchange offer, the exchange agent will request that an
account be established with respect to the old notes at DTC within two business
days after the date of this prospectus, unless the exchange agent already has
established an account with DTC suitable for the exchange offer. Any financial
institution that is a participant in DTC may make book-entry delivery of old
notes by causing DTC to transfer such old notes into the exchange agent's
account at DTC in accordance with DTC's procedures for transfer. Although
delivery of old notes may be effected through book-entry transfer at DTC, the
letter of transmittal or facsimile thereof or an agent's message in lieu
thereof, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the exchange
agent at the address set forth under ' -- Exchange Agent' on or prior to the
expiration date or the guaranteed delivery procedures described below must be
complied with.
42
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your old notes and your old notes are not
immediately available, or time will not permit your old notes or other required
documents to reach the exchange agent before the expiration date, and the
procedure for book-entry transfer cannot be completed prior to the expiration or
termination or the exchange offer, a tender may be effected if:
prior to the expiration date, the exchange agent received
from an Eligible Institution a notice of guaranteed
delivery, substantially in the form Warnaco provides (by
telegram, telex, facsimile transmission, mail or hand
delivery), setting forth your name and address, the amount
of old notes tendered, stating that the tender is being made
thereby and guaranteeing that within three New York Stock
Exchange ('NYSE') trading days after the date of execution
of the notice of guaranteed delivery, the certificates for
all physically tendered old notes, in proper form for
transfer, or a book-entry confirmation, as the case may be,
together with a properly completed and duly executed
appropriate letter of transmittal or facsimile thereof or
agent's message in lieu thereof, with any required signature
guarantees and any other documents required by the letter of
transmittal will be deposited by such Eligible Institution
with the exchange agent; and
the certificates for all physically tendered old notes, in
proper form for transfer, or a book-entry confirmation, as
the case may be, together with a properly completed and duly
executed appropriate letter of transmittal or facsimile
thereof or agent's message in lieu thereof, with any
required signature guarantees and all other documents
required by the letter of transmittal, are received by the
exchange agent within three NYSE trading days after the date
of execution of the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
You may withdraw your tender of old notes at any time prior to the
expiration date. To be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses set forth under
' -- Exchange Agent.' This notice must specify:
the name of the person having tendered the old notes to be
withdrawn;
the old notes to be withdrawn (including the principal
amount of such old notes); and
where certificates for old notes have been transmitted, the
name in which such old notes are registered, if different
from that of the withdrawing holder.
If certificates for old notes have been delivered or otherwise identified to
the exchange agent, then, prior to the release of such certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an Eligible Institution, unless such holder is an Eligible
Institution. If old notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn old
notes and otherwise comply with the procedures of DTC.
Warnaco or the exchange agent will make a final and binding determination on
all questions as to the validity, form and eligibility (including time of
receipt) of such notices. Any old notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the exchange offer. Properly
withdrawn old notes may be retendered by following one of the procedures
described under ' -- Procedures for Tendering Old Notes' above at any time on or
prior to the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, Warnaco is not
required to accept for exchange, or to issue new notes in exchange for, any old
notes and may terminate or amend the exchange offer, if any of the following
events occur prior to the expiration date of the exchange offer (or, with
respect to governmental or regulatory approvals, prior to the acceptance of such
old notes):
43
the exchange offer violates any applicable law or applicable
interpretation of the staff of the SEC;
an action or proceeding shall have been instituted or
threatened in any court or by any governmental agency that
might materially impair Warnaco's or any guarantor's ability
to proceed with the exchange offer;
Warnaco shall not have received all governmental approvals
that it deems necessary to consummate the exchange offer; or
there has been proposed, adopted, or enacted any law,
statute, rule or regulation that, in Warnaco's reasonable
judgment, would materially impair its ability to consummate
the exchange offer.
The foregoing conditions are for Warnaco's sole benefit and may be asserted
by it regardless of the circumstances giving rise to any condition or may be
waived by Warnaco in whole or in part at any time in its reasonable discretion.
Warnaco's failure at any time to exercise any of the foregoing rights will not
be deemed a waiver of any such right and each such right will be deemed an
ongoing right which may be asserted at any time.
In addition, Warnaco will not accept for exchange any old notes tendered,
and no new notes will be issued in exchange for any such old notes, if at such
time any stop order is threatened or in effect with respect to the registration
statement of which this prospectus constitutes a part or the qualification of
the Indenture under the Trust Indenture Act.
EXCHANGE AGENT
Wells Fargo Bank Minnesota, National Association, has been appointed as the
exchange agent for the exchange offer. All executed letters of transmittal
should be directed to the exchange agent at the address set forth below.
Questions and requests for assistance, requests for additional copies of this
prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the exchange agent addressed as
follows:
Wells Fargo Corporate Trust
c/o The Depository Trust and Clearing Company
1st Floor -- TADS Dept.
55 Water Street
New York, NY 10041
Telephone Number: (800) 344-5128
Facsimile Number: (612) 667-4927
Attention: Warnaco Administrator
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF
TRANSMITTAL.
FEES AND EXPENSES
The principal solicitation is being made by mail by Wells Fargo Bank
Minnesota, National Association, as exchange agent. Warnaco will pay the
exchange agent customary fees for its services, reimburse the exchange agent for
its reasonable out-of-pocket expenses incurred in connection with the provision
of these services and pay other registration expenses, including fees and
expenses of the trustee under the Indenture relating to the new notes, filing
fees, blue sky fees and printing and distribution expenses. Warnaco will not
make any payment to brokers, dealers or others soliciting acceptances of the
exchange offer.
Additional solicitations may be made by telephone, facsimile or in person by
Warnaco and its affiliates' officers and regular employees and by persons so
engaged by the exchange agent.
44
ACCOUNTING TREATMENT
Warnaco will record the new notes at the same carrying value as the old
notes, as reflected in its accounting records on the date of the exchange.
Accordingly, Warnaco will not recognize any gain or loss for accounting
purposes. The expenses of the exchange offer will be amortized over the term of
the new notes.
TRANSFER TAXES
Warnaco will pay any transfer taxes in connection with the tender of old
notes in the exchange offer unless you instruct Warnaco to register new notes in
the name of, or request that old notes not tendered or not accepted in the
exchange offer be returned to, a person other than the registered tendering
holder. In those cases, you will be responsible for the payment of any
applicable transfer taxes.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES
If you do not exchange your old notes for new notes in the exchange offer,
your old notes will continue to be subject to the provisions of the Indenture
relating to the notes regarding transfer and exchange of the old notes and the
restrictions on transfer of the old notes described in the legend on your old
notes. These transfer restrictions are required because the old notes were
issued under an exemption from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the old notes may not be offered or sold unless registered
under the Securities Act, except under an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. Warnaco
does not plan to register the old notes under the Securities Act.
Under existing interpretations of the Securities Act by the SEC's staff
contained in several no-action letters to third parties, and subject to the
immediately following sentence, Warnaco believes that the new notes would
generally be freely transferable by holders after the exchange offer without
further registration under the Securities Act, subject to certain
representations required to be made by each holder of new notes, as set forth
below. However, any purchaser of new notes who is an 'affiliate' (as defined in
Rule 405 under the Securities Act) of Warnaco or any of the guarantors or who
intends to participate in the exchange offer for the purpose of distributing the
new notes:
will not be able to rely on the interpretation of the SEC's
staff;
will not be able to tender its old notes in the exchange
offer; and
must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any
sale or transfer of the new notes unless such sale or
transfer is made pursuant to an exemption from such
requirements. See 'Plan of Distribution.'
Warnaco does not intend to seek its own interpretation regarding the
exchange offer and there can be no assurance that the SEC's staff would make a
similar determination with respect to the new notes as it has in other
interpretations to other parties, although it has no reason to believe
otherwise.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where the old notes were acquired by it as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus that meets the requirements of the Securities Act in
connection with any resale of the new notes. The letter of transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an 'underwriter' within the meaning of the
Securities Act. See 'Plan of Distribution.'
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
We believe we are one of the world's leading apparel companies. We design,
manufacture, source and market a broad line of intimate apparel, sportswear and
swimwear worldwide. We sell our products under several highly recognized brand
names, including Warner's, Olga, Calvin Klein, Speedo, Chaps Ralph Lauren and
Lejaby. For Fiscal 2002, we generated net revenues of approximately $1.5 billion
and incurred net losses of $964.9 million.
We operate our business in three segments: Intimate Apparel, which includes
bras, panties, loungewear, sleepwear, shapewear and daywear for women, and
underwear and sleepwear for men; Sportswear for men, women and juniors, which
includes jeanswear, khakis, knit and woven shirts, tops and outerwear; and
Swimwear for men, women, juniors and children, which includes swim accessories
and fitness and active apparel. Through January 4, 2003, we also operated a
fourth segment, the Retail Stores Group, which was comprised of both outlet and
full price retail stores, however, beginning in Fiscal 2003, the results of
operations of the Retail Stores Group are allocated among our Intimate Apparel,
Sportswear and Swimwear Groups according to the type of product sold.
In this prospectus, 'Fiscal 2000' refers to the fiscal year ended on
December 30, 2000, 'Fiscal 2001' refers to the fiscal year ended on January 5,
2002, 'Fiscal 2002' refers to the fiscal year ended on January 4, 2003, 'Fiscal
2003' refers to the fiscal year ending January 3, 2004, 'First Quarter of Fiscal
2002' refers to the three month period ended April 6, 2002, 'First Quarter of
Fiscal 2003' refers to the one month period (the 'Stub Period') January 5, 2003
to February 4, 2003 (the date we emerged from bankruptcy) combined with the two
month period February 5, 2003 to April 5, 2003, 'Second Quarter of Fiscal 2002'
refers to the three month period ended July 6, 2002, 'Second Quarter of Fiscal
2003' refers to the three month period ended July 5, 2003, 'First Half of Fiscal
2002' refers to the six month period ended July 6, 2002 and 'First Half of
Fiscal 2003' refers to the one month period January 5, 2003 to February 4, 2003
combined with the five month period February 5, 2003 to July 5, 2003.
BANKRUPTCY REORGANIZATION AND TURNAROUND
On June 11, 2001, we filed a voluntary petition for relief under Chapter 11
of the U.S. Bankruptcy Code. A number of factors contributed to our decision to
file for reorganization, including our highly leveraged capital structure, the
impact of litigation with certain licensors and general operating problems. We
incurred substantial debt in part to finance and support our acquisition
strategy and share repurchase program during the period from 1994 to 2001, and
were unable to refinance our debt. In addition, Calvin Klein, Inc. and the
Calvin Klein Trademark Trust filed a lawsuit against us alleging our breach of a
license agreement by selling to retailers other than those permitted by the
agreement and by our use of the license. Although this lawsuit ultimately was
settled favorably and dismissed in January 2001, it generated adverse publicity
that we believe had a negative effect on our business. Additional factors
contributing to our deteriorating financial performance in Fiscal 2001 included:
increased competition in the apparel industry, the closings and/or bankruptcies
of a number of the stores that carried our product lines, escalating interest
rates under our then outstanding credit agreements, a softening retail
environment and a weak overall economy.
As part of our reorganization, we implemented a comprehensive turnaround
plan intended to stabilize and improve operations of our core business units and
sell or liquidate certain of our non-core businesses. We also explored the
potential sale of our core businesses.
As part of the reorganization plan, we:
Sold non-core business units and assets, including GJM
Manufacturing Ltd., a private label manufacturer of women's
sleepwear, and Penhaligon's Ltd., a United Kingdom-based
retailer of perfumes, soaps, toiletries and other products;
46
Closed 204 retail stores and terminated their related
leases;
Replaced certain members of our senior management and
recruited new leadership for our business groups; and
Instituted new financial controls and discipline.
In connection with the reorganization and our emergence from bankruptcy on
February 4, 2003 pursuant to the Plan, we have strengthened the overall
financial health of our company with a conservative capitalization that we
believe will provide us with significant operating and financial flexibility to
implement our business strategy. We have:
Increased our gross margin from 17.8% in Fiscal 2001 to
29.5% in Fiscal 2002;
Reduced our selling, general and administrative costs from
$598.2 million in Fiscal 2001 to $411.0 million in Fiscal
2002;
Decreased our operating loss from $580.9 million in Fiscal
2001 to $87.4 million in Fiscal 2002;
Generated Pro Forma EBITDA of $117.2 million in Fiscal 2002
(for a reconciliation of net income to EBITDA see 'EBITDA
and Other Data' on page 15);
Generated $226.2 million of cash flow from operating
activities in Fiscal 2002, reflecting substantial
improvements in operating earnings and working capital
management;
Restructured our balance sheet, including reducing
outstanding debt from $2.2 billion as of January 4, 2003 to
$212.8 million as of July 5, 2003;
Achieved a ratio of total debt to total capitalization of
28.7% as of July 5, 2003; and
Entered into a $275.0 million senior secured revolving
credit facility under which, as of September 30, 2003, we
had no borrowings outstanding and $149.6 million of
availability.
In connection with our emergence from bankruptcy on February 4, 2003, we
issued $200.9 million Second Lien Notes, primarily to our pre-petition lenders
(including affiliates of some of the initial purchasers of the old notes). We
repaid the Second Lien Notes, plus accrued interest of approximately $2.0
million, with the proceeds of the offering of the old notes.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to use judgment
in making estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses in our consolidated financial
statements and accompanying notes. The following critical accounting policies
are based on, among other things, judgments and assumptions made by us that
include inherent risks and uncertainties.
USE OF ESTIMATES
We use estimates and assumptions in the preparation of our 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 we make are based on historical factors, current circumstances and the
experience and judgment of our management. We evaluate our assumptions and
estimates on an ongoing basis and may employ outside experts to assist in our
evaluations. We believe that the use of estimates affects the application of all
of our accounting policies and procedures.
In connection with the adoption of 'Fresh Start' accounting in accordance
with the provisions of SOP 90-7, we obtained the assistance of third party
appraisers to help us determine the fair value of our fixed, intangible and
certain other assets. We also engaged a third party appraiser to help us
determine the reorganization (business enterprise) value of our company. Our
business
47
enterprise value, as approved by the Bankruptcy Court, was $750 million. Our
business enterprise value was determined using a combination of the market
approach and income approaches. The BEV appraiser made certain assumptions in
its work. The weighted average long-term debt interest rate was assumed to be
7.81% and the weighted average cost of capital was assumed to be 13.80%. The
appraiser used three years of financial projections in its evaluation and
determined the terminal value based upon our weighted average cost of capital
and expected free cash flow using a 5.00% growth rate per annum. The
determination of our projected income and free cash flow required the use of
significant judgments and estimates by us. Changes in economic conditions, the
cost of equity or debt financing and many other factors will have a significant
effect on our ability to earn the income or generate the free cash flow assumed
in our projections. As a result, variations in the amounts of income and cash
flow actually earned by us will have a significant effect on our business
enterprise value.
We considered many factors in determining our reorganization value,
including the amount and nature of our monetary assets, the future estimated
earnings and cash flow to be generated by us in the future, the enterprise value
of apparel companies selling similar products based on quoted market prices and
the value of recently completed transactions for the purchase and sale of
companies or parts of companies in the apparel industry. All of these factors
involved the use of judgments and estimates, the most significant of which
involve estimates of future earnings and cash flow that we will generate. We
also allocated the overall business enterprise value to our various business
units. The determination of the value of each of our business units was based
upon the estimated future earnings and cash flow to be generated by those
business units. We also considered the type and amount of assets held by each of
those units. In addition, we offered several of our business units for sale as
part of our reorganization under the bankruptcy code. We considered the prices
offered for those business units in allocating our business enterprise value to
our business units. We allocated the value of each business unit to the
individual assets and liabilities held by each business unit based on the fair
value of the specific assets. We used the work of third party appraisers to
assist us in allocating such fair value.
During the fourth quarter of Fiscal 2002, we completed a strategic review of
our 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. We expect 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 us to comply with certain procedures
and processes that are defined in French law and French labor regulations. We
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 we expect to 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, we 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 we will ultimately incur in connection with the consolidation and our other
restructuring initiatives involves the use of estimates and judgments by us and
our professional and legal advisors. The amount and timing of the final
settlement of such liabilities could differ from those estimates.
REVENUE RECOGNITION
We recognize revenue when goods are shipped to customers and title and risk
of loss has passed, net of estimated customer returns, allowances and other
discounts. We recognize revenue from our consignment accounts and retail stores
when goods are sold to consumers, net of allowances for future returns. The
determination of allowances and returns involves the use of significant judgment
and estimates by us. We base our estimates of allowance rates on past experience
by product line and account, the financial stability of our customers, the rate
(based on reorders and customer inventory levels) that our products are selling
to consumers, the expected rate of retail sales growth and general economic and
retail forecasts. We review and adjust our
48
accrual rates each month based on our current experience. During our monthly
review, we also consider our accounts receivable collection rate and the nature
and amount of customer deductions and requests for promotion assistance. We
believe it is likely that our accrual rates will vary over time and could change
materially if our mix of customers, channels of distribution or product mix
changes. Our current rates of accrual for sales allowances, returns and
discounts range from 5.0% to 20.0%.
COST OF GOODS SOLD
Cost of goods sold for the Successor consists of the cost of products
produced or purchased and certain period costs related to the production and
manufacturing process. Product costs include (i) material, direct labor and
overhead (including the costs incurred by external contractors), (ii) duty,
quota and related tariffs, (iii) in-bound freight and traffic costs, including
inter-plant freight, (iv) procurement and material handling costs, (v) indirect
production overhead including inspection, quality control, sample making/room,
production control and planning, cost accounting and engineering and
(vi) in-stocking costs in our warehouse (cost to receive, unpack and stock
product available for sale in our distribution center). Period costs included in
cost of goods sold include (i) royalty, (ii) design and merchandising, (iii)
samples, (iv) manufacturing variances (net of amounts capitalized), (v) loss on
seconds and (vi) provisions for inventory losses (including provisions for
shrinkage and losses on the disposition of excess and obsolete inventory). Costs
incurred to store, pick, pack and ship inventory to customers are included in
shipping and handling costs and are classified in selling, general and
administrative expenses. Our gross profit and gross margin may not be comparable
to those of other companies as some companies include shipping and handling
costs in cost of goods sold. The Predecessor included design, merchandising
and other product related costs in its determination of inventory value. We
expense such costs as incurred since February 4, 2003.
ACCOUNTS RECEIVABLE
We maintain reserves for estimated amounts that we do not expect to collect
from our trade customers. Accounts receivable reserves include amounts we expect
our customers to deduct for trade discounts, 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. Our estimate of the allowance amounts that
are necessary includes amounts for specific deductions we have authorized and an
amount for other estimated losses. Adjustments for specific account allowances
and negotiated settlements of customer deductions are recorded as deductions to
revenue in the period the specific adjustment is identified. We believe it is
likely that our accounts receivable reserves for individual accounts will vary
over time, however, we do not expect the overall level of reserves to increase
or decrease significantly unless our mix of customers, channels of distribution
or product mix changes. The provision for accounts receivable allowances is
affected by general economic conditions, the financial condition of our
customers, the inventory position of our customers, sell-through of our products
by these customers and many other factors most of which are not controlled by
us.
As of January 5, 2002, January 4, 2003 and July 5, 2003, we had $361.5
million, $276.9 million and $263.1 million of open trade invoices and other
accounts receivable and $33.8 million, $10.4 million and $13.4 million of
outstanding debit memos, respectively. Based upon our analysis of estimated
recoveries and collections associated with the related invoices and debit memos,
as of January 5, 2002, January 4, 2003 and July 5, 2003 we had $112.9 million,
$87.5 million and $71.6 million of accounts receivable reserves, respectively.
The determination of the amount of accounts receivable reserves is subject to
significant levels of judgment and estimation by us. If circumstances change or
economic conditions deteriorate, we may need to increase the reserve
significantly. We have purchased credit insurance to help mitigate the potential
losses we may incur from the bankruptcy, reorganization or liquidation of some
of our customers but we cannot be certain that it will be available or
sufficient to cover these losses.
49
INVENTORIES
We value our inventories at the lower of cost, determined on a first-in
first-out basis, or market value. We evaluate our 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 we believe we
have an excess supply or for styles or colors that are obsolete, we estimate the
net amount that we expect to realize from the sale of such items. Our objective
is to recognize projected inventory losses at the time the loss is evident
rather than when the goods are ultimately sold. Our calculation of the reserves
necessary for the disposition of excess inventory is highly dependent on our
projections of future sales of those products and the prices we are able to
obtain for such products. We review our inventory position monthly and adjust
our reserves for excess and obsolete goods based on revised projections and
current market conditions for the disposition of excess and obsolete inventory.
If economic conditions worsen we will have to increase our reserve estimates
substantially.
As of January 5, 2002, January 4, 2003 and July 5, 2003, we had identified
inventory with a carrying value of $88.3 million, $61.5 million and $64.6
million, respectively, as potentially excess and/or obsolete. Based upon the
estimated recoveries related to such inventory, as of January 5, 2002,
January 4, 2003 and July 5, 2003, we had $50.1 million, $33.8 million and $29.2
million, respectively, of inventory reserves for excess, obsolete and other
inventory adjustments. As of February 4, 2003, we adopted the fresh start
accounting provisions of SOP 90-7 and changed our inventory accounting policies.
As a result, we expense certain design, receiving, and other product related
costs as incurred. These costs were previously capitalized.
LONG-LIVED ASSETS
As of February 4, 2003, we adopted fresh start accounting and our long-lived
assets, including property, plant and equipment, were recorded at their fair
values based upon the preliminary appraised values of such assets. We determined
the fair value of our property, plant and equipment using the planned future use
of each asset or group of assets, quoted market prices for assets where a market
exists for such assets, the expected future revenue and profitability of the
business unit utilizing such assets and the expected future life of such assets.
In our determination of fair value, we also considered whether an asset would be
sold either individually or with other assets and the proceeds we expect to
receive from such a sale. We used the work of an independent third party
appraisal firm in determining the fair values of our property, plant and
equipment. Assumptions relating to the expected future use of individual assets
could affect the fair value of such assets and the depreciation expense recorded
related to such assets in the future.
Intangible assets consist primarily of licenses and trademarks. We
determined the fair value of our trademarks, licenses and other intangible
assets. The fair values were calculated using the discounted estimated future
cash flow to be generated from the sales of products utilizing such trademarks
and/or licenses. The determination of fair value considered the royalty rates
attributable to products of similar types, recent sales or licensing agreements
entered into by companies selling similar products and the expected term during
which we expect to earn cash flows from each license or trademark. The majority
of our license and trademark agreements cover periods of time in excess of forty
years. The estimates and assumptions used in the determination of the value of
these intangible assets will not have any effect on our future earnings unless a
future evaluation of trademark or license value indicates that such asset is
impaired. Identifiable intangible assets with finite useful lives are amortized
on a straight-line basis over the estimated useful lives of the assets. Pursuant
to the provisions of SFAS 142 we do not amortize assets with indefinite lives.
We review our long-lived assets for possible impairment in the fourth
quarter of each fiscal year or 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 our determination of the
estimated useful lives of the related assets. The estimated remaining useful
lives of our fixed assets and finite
50
lived intangible assets for periods after February 4, 2003 are based upon the
remaining useful lives as determined by independent third party appraisers and
us.
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 established to reduce the
amount of deferred tax assets to an amount that we believe, based upon
objectively verifiable evidence, is realizable. The only objectively verifiable
evidence we used in determining the need for a valuation allowance were the
future reversals of existing temporary differences. The future recognition of
deferred tax assets will first reduce goodwill. Should the recognition of
deferred tax assets result in the elimination of goodwill, 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.
PENSION PLAN
We have a defined benefit 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 us. The
assumptions used can have a significant effect on the amount of pension expense
and pension liability recorded by us. 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 5, 2002, January 4, 2003 and July 5, 2003. The pension plan and
our plan of reorganization contemplate that we will continue to fully fund our
minimum required contributions and any other premiums due under the Employee
Retirement Income Security Act of 1974, as amended and the United States
Internal Revenue Code of 1986, as amended. Effective January 1, 2003, the
pension plan was amended and, as a result, no future benefits will accrue to
participants of the pension plan. We have 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 July 5, 2003. Our cash contributions to the
pension plan for Fiscal 2003 will be $9.4 million. We estimate that our cash
contributions to the pension plan will be $46.3 million in the aggregate from
fiscal 2004 through fiscal 2008. The amount of estimated cash contributions that
we 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 $7.6
million are classified with accrued liabilities.
STOCK BASED COMPENSATION
Effective February 5, 2003, we adopted the fair value method of accounting
for stock options for all options granted by us after February 4, 2003 pursuant
to the prospective method provisions of Statement of Financial Accounting
Standards No. 148, Accounting for Stock Based Compensation, Transition and
Disclosure. We used the Black-Scholes model to calculate the fair value of stock
option awards. The Black-Scholes model requires us to make significant judgments
regarding the assumptions used within the Black-Scholes model, the most
significant of which are the stock price volatility, the expected life of the
option award and the risk free rate of return. We recently emerged from
bankruptcy, and as a result we do not have a relevant stock price history upon
which to base our volatility assumption. In determining the stock price
volatility assumption of 35% used in our model, we considered the volatility of
the stock prices of selected companies in the apparel industry, the nature of
those companies, our recent emergence from bankruptcy and other factors. We
based our estimate of the average life of a stock option of five years upon the
51
vesting period of 40 months and the option term of ten years. Our 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, we followed the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123 encourages, but
does not require, companies to adopt a fair value based method for determining
expense related to stock option compensation. We 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, or 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 to date has equaled the market price of the
underlying shares on the date of grant.
REORGANIZATION VALUE
Reorganization value in excess of the fair value of net assets represents
the amount by which our reorganization value exceeded the fair value of our
tangible assets, identified intangible assets minus our liabilities as of
February 4, 2003. We allocated reorganization value to our various assets in
accordance with the provisions of SFAS No. 141, Business Combinations.
Reorganization value is not amortized.
REORGANIZATION ITEMS
In connection with the Chapter 11 cases, we initiated several strategic and
organizational changes to streamline our operations, focus on our core
businesses and return us to profitability. Many of the strategic actions are
long-term in nature and, though initiated in Fiscal 2001 and Fiscal 2002, will
not be completed until the end of Fiscal 2003. In connection with these actions,
we have closed all of our domestic outlet retail stores and reorganized our
Speedo Authentic Fitness retail stores. We closed 204 of the 283 or 72.1% of the
retail stores we operated at the beginning of Fiscal 2001. We closed 86 stores
during Fiscal 2001 and 118 stores were closed during Fiscal 2002. In the First
Quarter of Fiscal 2003, we closed three additional Speedo Authentic Fitness
retail stores. The closing of the domestic outlet retail stores and the sale of
the related inventory generated net proceeds of $23.2 million in Fiscal 2002.
We wrote off $13.3 million of fixed assets and accrued $9.4 million of lease
termination costs related to rejected leases of the closed stores in Fiscal
2002. In October 2002, we agreed to settle certain lease obligations with
Bancomext related to certain leased facilities in Mexico. Under the terms of the
settlement agreement, we paid Bancomext $0.1 million in cash for outstanding
rent payments and other fees and granted an unsecured claim to Bancomext in the
amount of $9.5 million in consideration for (i) Bancomext's release of our lease
obligation on a closed facility and (ii) certain amendments to leases for two
other facilities. We had accrued $6.9 million in the fourth quarter of Fiscal
2001 as a reorganization item for our estimated obligations under the lease for
the closed facility. The additional accrual of $2.6 million for the total
unsecured claim pursuant to the settlement agreement is included in
reorganization items in Fiscal 2002. Lease termination costs are classified as
liabilities subject to compromise.
In the First Quarter of Fiscal 2002, we sold the assets of GJM and
Penhaligon's for net proceeds of $20.5 million in the aggregate. The net loss on
the sale of Penhaligon's and GJM was $2.9 million and is included in
reorganization items in Fiscal 2002. In Fiscal 2001, we recorded an impairment
loss related to the goodwill of GJM of $26.8 million.
On June 12, 2002, the Bankruptcy Court approved our settlement of certain
operating lease agreements with General Electric Capital Corporation ('GECC').
The leases had original terms from three to seven years and were secured by
certain equipment, machinery, furniture, fixtures and other assets. GECC's
claims under the leases totaled $51.2 million. Under the terms of the settlement
agreement GECC will receive $15.2 million payable as follows: (i) prior to the
Effective Date of the Plan, we paid GECC monthly installments of $0.55 million,
and, (ii) after the Effective Date, we are obligated to pay GECC monthly
installments of $0.75 million until the balance is paid in full. Through
June 12, 2002, we had paid GECC $5.5 million of the $15.2 million. The present
value of the remaining cash payments to GECC under the settlement
52
agreement of $5.6 million as of January 4, 2003 is included in the current
portion of long-term debt not subject to compromise. The remaining amount of the
GECC claim of $36.0 million is included in liabilities subject to compromise as
of January 4, 2003. Liabilities subject to compromise include debt, accounts
payable, accrued expenses and other liabilities that were settled as part of our
emergence from bankruptcy. Creditors received distributions consisting of cash,
debt securities and common stock in settlement of their bankruptcy claims. The
ratio of cash, debt securities and common stock that individual creditors
received depended upon the priority of the claim made by each creditor. We
recorded a gain on the final settlement of these liabilities of $1,692.7 million
in the period from January 5, 2003 to February 4, 2003. We had recorded accrued
liabilities related to the GECC leases of $13.0 million prior to the settlement
and recorded $22.9 million as reorganization items in Fiscal 2002. Lease expense
included in operating loss incurred prior to the settlement with GECC was $18.1
million, $16.5 million and $8.2 million in Fiscal 2000, 2001 and 2002,
respectively.
During Fiscal 2001 and Fiscal 2002, we sold certain personal property,
vacated buildings, surplus land and other assets generating net proceeds of $6.2
million and $6.8 million, respectively. The losses related to the write-down of
these assets were $3.7 million and $1.0 million for Fiscal 2001 and Fiscal 2002,
respectively. We vacated certain leased premises and rejected those leases (many
related to our Retail Stores Group) under the provisions of the Bankruptcy Code.
During the fourth quarter of Fiscal 2002, we completed a strategic review of
our Intimate Apparel operations in Europe and formalized a plan to consolidate
our European manufacturing operations and to restructure certain other
manufacturing, sales and administrative operations in Europe. We expect to incur
severance, outplacement, legal, accounting and other expenses associated with
the consolidation covering approximately 350 employees. We 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 we expect to incur related to the consolidation. Included in the
restructuring charge is $0.1 million of legal and other professional fees
incurred in Fiscal 2002 related to the consolidation. During the First Quarter
of Fiscal 2003, we 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. We expect that the ultimate costs of the
consolidation that have been incurred will be $15.2 million, including the $8.7
million recorded in Fiscal 2002.
As a direct result of the Chapter 11 cases, we have recorded certain
liabilities, incurred certain legal and professional fees, written-down certain
assets and accelerated the recognition of certain deferred charges. The
transactions were recorded in accordance with the provisions of SOP 90-7.
Reorganization items included in the consolidated condensed statement of
operations for the periods January 5, 2003 to February 4, 2003, the Second
Quarter of Fiscal 2002 and the First Half of Fiscal 2002 were $29.9 million,
$42.6 million and $58.1 million, respectively. Included in reorganization items
are certain non-cash asset impairment provisions and accruals for items that
have been, or will be, paid in cash. Certain accruals at January 4, 2003 were
subject to compromise under the provisions of the Bankruptcy Code. We 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 to the consolidated condensed financial statements included elsewhere
in this prospectus beginning on p. H-1. Subsequent to February 4, 2003, to the
extent that we have incurred reorganization items in respect of the Chapter 11
cases, these have been recorded in selling, general and administrative expenses.
Included in selling, general and administrative expenses for the Second Quarter
of Fiscal 2003 and period February 5, 2003 to July 5, 2003 are legal and
professional fees and certain employee related costs relating to the Chapter 11
cases of $2,702 and $4,016, respectively.
Restructuring items included in the consolidated condensed statements of
operations for the Second Quarter of Fiscal 2003 and the period February 5, 2003
to July 5, 2003 were $6.1 million. Included in restructuring items are certain
accruals for contract termination and employee
53
termination costs associated with the closing and consolidation of two sewing
facilities in Honduras and California, a warehousing and cutting facility in
Georgia and a distribution facility in New Jersey. The restructuring resulted in
the termination of approximately 670 employees.
Results of Operations
COMPARISON OF SECOND QUARTER OF FISCAL 2003 TO SECOND QUARTER OF FISCAL 2002
AND FIRST HALF OF FISCAL 2003 TO FIRST HALF OF FISCAL 2002
The following tables summarize our historical results of operations for the
Second Quarter of Fiscal 2002, the Second Quarter of Fiscal 2003, the Stub
Period, the period February 5, 2003 to July 5, 2003, the First Half of Fiscal
2002 and the First Half of Fiscal 2003.
The Second Quarter of Fiscal 2003 and Second Quarter of Fiscal 2002 each
included 13 weeks of operations, the Stub Period included four weeks of
operations and the period February 5, 2003 to July 5, 2003 included 22 weeks of
operations. The six months ended July 5, 2003 and July 6, 2002 each included 26
weeks of operations. References to the 'Predecessor' refer to us prior to
February 4, 2003. References to 'Successor' refer to us on and after February 4,
2003 after giving effect to the implementation of fresh start reporting.
<Table>
<Caption>
PREDECESSOR SUCCESSOR COMBINED
------------------ ------------------- ----------------
PERIOD PERIOD SIX MONTHS
JANUARY 5, 2003 TO FEBRUARY 5, 2003 TO ENDED
FEBRUARY 4, 2003 JULY 5, 2003 JULY 5, 2003
---------------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
Net revenues................................. $ 115,960 $662,168 $ 778,128
Cost of goods sold........................... 70,214 444,358 514,572
---------- -------- ----------
Gross profit................................. 45,746 217,810 263,556
Selling, general and administrative
expenses................................... 35,313 168,680 203,993
Amortization of sales order backlog.......... -- 10,500 10,500
Restructuring items.......................... -- 6,140 6,140
Reorganization items......................... 29,922 -- 29,922
---------- -------- ----------
Operating income (loss)...................... (19,489) 32,490 13,001
Gain on cancellation of pre-petition
indebtedness............................... (1,692,696) -- (1,692,696)
Fresh start adjustments...................... (765,726) -- (765,726)
Other (income) loss.......................... 359 (1,328) (969)
Interest expense............................. 1,887 9,851 11,738
---------- -------- ----------
Income before provision for income taxes..... 2,436,687 23,967 2,460,654
Provision for income taxes................... 78,150 9,792 87,942
---------- -------- ----------
Net income................................... $2,358,537 $ 14,175 $2,372,712
---------- -------- ----------
---------- -------- ----------
</Table>
54
<Table>
<Caption>
PREDECESSOR SUCCESSOR PREDECESSOR COMBINED
-------------------- --------------------- --------------------- ---------------------
SECOND SECOND SIX MONTHS SIX MONTHS
QUARTER % OF QUARTER % OF ENDED % OF ENDED % OF
OF FISCAL NET OF FISCAL NET JULY 6, NET JULY 5, NET
2002 REVENUES 2003 REVENUES 2002 REVENUES 2003 REVENUES
---- -------- ---- -------- ---- -------- ---- --------
(IN THOUSANDS OF DOLLARS)
Net revenues....................... $ 381,767 100.0% $ 335,844 100.0% $ 791,819 100.0% $ 778,128 100.0%
Cost of goods sold................. 265,919 69.7 239,440 71.3 557,559 70.4 514,572 66.1
--------- ----- ---------- ----- --------- ----- ---------- -----
Gross profit....................... 115,848 30.3 96,404 28.7 234,260 29.6 263,556 33.9
Selling, general and administrative
expenses.......................... 100,579 26.3 94,829 28.2 202,697 25.6 203,993 26.2
Amortization of sales order
backlog........................... -- n/m 6,300 1.9 -- n/m 10,500 1.3
Restructuring items................ -- n/m 6,071 1.8 -- n/m 6,140 0.8
Reorganization items............... 42,554 11.1 -- 0.0 58,085 7.3 29,922 3.8
--------- ----- ---------- ----- --------- ----- ---------- -----
Operating income (loss)............ (27,285) 7.1 (10,796) 3.2 (26,522) 3.3 13,001 1.7
Gain on cancellation of
pre-petition indebtedness......... -- -- -- -- -- n/m (1,692,696) n/m
Fresh start adjustments............ -- -- -- -- -- n/m (765,726) n/m
Other income....................... -- n/m (1,363) 0.4 -- n/m (969) 0.1
Interest expense................... 3,095 0.8 5,423 1.6 10,059 1.3 11,738 1.5
--------- ----- ---------- ----- --------- ----- ---------- -----
Income (loss) before provision for
income taxes and cumulative effect
of change in accounting
principle......................... (30,380) 8.0 (14,856) 4.4 (36,581) 4.6 2,460,654 316.2
Provision (benefit) for income
taxes............................. 1,609 0.4 (6,392) 1.9 51,538 6.5 87,942 11.3
--------- ----- ---------- ----- --------- ----- ---------- -----
Cumulative effect of change in
accounting principle, net......... -- -- -- -- (801,622) 101.2 -- --
--------- ----- ---------- ----- --------- ----- ---------- -----
Net income (loss).................. $ (31,989) 8.4% $ (8,464) 2.5% $(889,741) 112.4% $2,372,712 304.9%
--------- ----- ---------- ----- --------- ----- ---------- -----
--------- ----- ---------- ----- --------- ----- ---------- -----
</Table>
NET REVENUES
Net revenues were as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------- --------------------------------------------
JULY 6, JULY 5, INCREASE % JULY 6, JULY 5, INCREASE %
2002 2003 (DECREASE) CHANGE 2002 2003 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- ------
(IN THOUSANDS OF DOLLARS)
Intimate Apparel Group.......... $159,535 $ 134,82 $(24,711) - 15.5% $317,872 $285,884 $(31,988) - 10.1%
Sportswear Group................ 107,199 90,975 (16,224) - 15.1 236,403 230,121 (6,282) - 2.7
Swimwear Group.................. 115,033 110,045 (4,988) - 4.3 237,544 262,123 24,579 10.3
-------- -------- -------- --------- -------- -------- -------- ---------
Net Revenue(a).................. $381,767 $335,844 $(45,923) - 12.0% $791,819 $778,128 $(13,691) - 1.7%
-------- -------- -------- --------- -------- -------- -------- ---------
-------- -------- -------- --------- -------- -------- -------- ---------
</Table>
- ---------
(a) Consolidated net revenues for the three months and six
months ended July 6, 2002 included $13.7 million and $32.8
million, respectively, of revenues from GJM, Penhaligon's,
Fruit of the Loom, Weight Watchers, IZKA and domestic outlet
retail stores (the 'discontinued and sold units'). The
absence of net revenues from discontinued and sold units
accounted for a 3.6% decrease in net revenues in the Second
Quarter of Fiscal 2003 compared to the Second Quarter of
Fiscal 2002 and accounted for a 4.1% decrease in net
revenues for the First Half of Fiscal 2003 compared to the
First Half of Fiscal 2002.
We believe that one of our competitive strengths is that our products are
widely distributed through all major channels of trade. The following table
summarizes our net revenues by channel of trade for the First Half of Fiscal
2003 and for fiscal 2002:
55
<Table>
<Caption>
COMBINED
FIRST HALF
FISCAL FISCAL
2002 2003
---- ----
United States -- Wholesale
Department stores, independent retailers and specialty
stores................................................ 40% 36%
Chain stores............................................ 7 6
Mass merchandisers...................................... 6 10
Other................................................... 20 22
--- ---
Total United States -- wholesale.................... 73 74
International -- wholesale.................................. 21 23
Retail...................................................... 6 3
--- ---
Net revenues -- consolidated................................ 100% 100%
--- ---
--- ---
</Table>
Second Quarter
Net revenues decreased $45.9 million, or 12.0%, to $335.9 million for the
Second Quarter of Fiscal 2003 compared to $381.8 million for the Second Quarter
of Fiscal 2002. In the same period, the absence of net revenues from
discontinued and sold units accounted for a $13.7 million, or 3.6%, decrease in
net revenues for the Second Quarter of Fiscal 2003 compared to the Second
Quarter of Fiscal 2002. The remaining decrease in net revenues reflects strength
in Calvin Klein underwear and Lejaby offset by Warner's/Olga/Body Nancy Ganz
weakness. Sportswear Group net revenues decreased $16.2 million, or 15.1%, to
$91.0 million with strength in Chaps offset by weakness in Calvin Klein jeans.
Swimwear Group net revenues decreased by $5.0 million, or 4.3%, to $110.0
million.
First Half
Net revenues decreased $13.7 million, or 1.7%, to $778.1 million for the
First Half of Fiscal 2003 compared to $791.9 million for the First Half of
Fiscal 2002. In the same period, the absence of net revenues from discontinued
and sold units accounted for a $32.8 million, or 4.1%, decrease in net revenues
for the First Half of Fiscal 2003 compared to the First Half of Fiscal 2002. The
remaining change in net revenues reflects strength in Calvin Klein underwear and
Lejaby partially offset by Warner's/Olga/Body Nancy Ganz weakness. Sportswear
Group net revenues decreased $6.3 million, or 2.7%, to $230.1 million with
strong results from Chaps offset by weak results in Calvin Klein jeans. Swimwear
Group net revenues increased by $24.6 million, or 10.3%, to $262.1 million
reflecting strong Speedo results.
Intimate Apparel Group
Intimate Apparel Group net revenues were as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------- ---------------------------------------------
JULY 6, JULY 5, INCREASE % JULY 6, JULY 5, INCREASE %
2002 2003 (DECREASE) CHANGE 2002 2003 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- --------
(IN THOUSANDS OF DOLLARS)
Intimate Apparel
Continuing:
Warner's/Olga/Body Nancy
Ganz........................ $ 65,279 $ 46,849 $(18,430) - 28.2% $123,797 $ 95,190 $(28,607) - 23.1%
Calvin Klein underwear....... 50,911 59,727 8,816 17.3 103,686 127,933 24,247 23.4
Lejaby....................... 25,887 24,777 (1,110) - 4.3 50,412 56,662 6,250 12.4
Retail....................... 3,755 3,467 (288) - 7.7 7,153 6,083 (1,070) - 15.0
-------- -------- -------- ---------- -------- -------- -------- ----------
Total continuing business units. 145,832 134,820 (11,012) - 7.6 285,048 285,868 820 0.3
Discontinued/sold business
units.......................... 13,703 4 (13,699) - 100.0 32,824 16 (32,808) - 100.0
-------- -------- -------- ---------- -------- -------- -------- ----------
Intimate Apparel Group.......... $159,535 $134,824 $(24,711) - 15.5% $317,872 $285,884 $(31,988) - 10.1%
-------- -------- -------- ---------- -------- -------- -------- ----------
-------- -------- -------- ---------- -------- -------- -------- ----------
</Table>
56
Second Quarter
Intimate Apparel net revenues decreased $24.7 million, or 15.5%, to $134.8
million for the Second Quarter of Fiscal 2003, from $159.5 million for the
Second Quarter of Fiscal 2002. The absence of net revenues from discontinued and
sold units accounted for a $13.7 million, or 8.6%, decrease in net revenues for
the Second Quarter of Fiscal 2003 compared to the Second Quarter of Fiscal 2002.
Warner's/Olga/Body Nancy Ganz net revenues decreased $18.4 million, reflecting
slow sell through at retail, a less favorable reception of certain new products
at retail and the need to reduce an over-stock position at several key
retailers. Management is in the process of addressing product issues and
developing and repositioning the Warner's/Olga/Body Nancy Ganz brands. Net
revenues in Calvin Klein underwear increased 17.3% from $50.9 million for the
Second Quarter of Fiscal 2002 to $59.7 million for the Second Quarter of Fiscal
2003 primarily reflecting increased net revenues in Europe and Asia due to an
increased customer base and the positive effects of a stronger Euro. Lejaby net
revenues decreased $1.1 million, or 4.3% primarily reflecting a soft retail
market in Germany partially offset by a stronger Euro. Revenues from sold or
discontinued business units decreased $13.7 million primarily as a result of the
decision to close all domestic outlet retail stores.
First Half
Intimate Apparel net revenues decreased $32.0 million, or 10.1%, to $285.9
million for the First Half of Fiscal 2003, from $317.9 million for the First
Half of Fiscal 2002. The absence of net revenues from discontinued and sold
units accounted for a $32.8 million, or 10.3%, decrease in net revenues for the
First Half of Fiscal 2003 compared to the First Half of Fiscal 2002.
Warner's/Olga/Body Nancy Ganz net revenues decreased $28.6 million, or 23.1%,
reflecting slow sell through at retail, a less favorable reception of certain
new products and the reduction of over-stock positions at several key retailers.
As noted above, management is in the process of addressing product issues and
developing and repositioning the Warner's/Olga/Body Nancy Ganz brands. Net
revenues in Calvin Klein underwear increased 23.4% from $103.7 million for the
First Half of Fiscal 2002 to $127.9 million for the First Half of Fiscal 2003
reflecting increases in the United States, Europe and Asia due to improved
sell-through at retail, particularly in the women's business and the effect of a
strong Euro. Lejaby net revenues increased $6.3 million, or 12.4%, reflecting
good performance in a difficult market coupled with the positive effects of a
stronger Euro.
Sportswear Group
Sportswear Group net revenues were as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------- -------------------------------------------
JULY 6, JULY 5, INCREASE % JULY 6, JULY 5, INCREASE %
2002 2003 (DECREASE) CHANGE 2002 2003 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- ------
(IN THOUSANDS OF DOLLARS)
SPORTSWEAR GROUP
Chaps Ralph Lauren............... $ 24,345 $25,259 $ 914 3.8% $ 56,900 $ 58,741 $ 1,841 3.2%
Calvin Klein jeans............... 67,218 52,208 (15,010) - 22.3 146,433 138,984 (7,449) - 5.1
Calvin Klein accessories......... 2,700 1,859 (841) - 31.1 6,101 5,469 (632) - 10.4
A.B.S. by Allen Schwartz......... 9,815 8,211 (1,604) - 16.3 19,016 19,183 167 0.9
Mass sportswear licensing........ 3,121 3,438 317 10.2 7,953 7,744 (209) - 2.6
-------- ------- -------- --------- -------- -------- ------- ---------
Sportswear Group................. $107,199 $90,975 $(16,224) - 15.1% $236,403 $230,121 $(6,282) - 2.7%
-------- ------- -------- --------- -------- -------- ------- ---------
-------- ------- -------- --------- -------- -------- ------- ---------
</Table>
Second Quarter
Sportswear net revenues decreased by $16.2 million, or 15.1%, to $91.0
million for the Second Quarter of Fiscal 2003, from $107.2 million for the
Second Quarter of Fiscal 2002 reflecting strength in the Chaps business offset
by softness in the Calvin Klein jeans and A.B.S. by Allen Schwartz businesses
and the wind down of the Calvin Klein accessories business. A portion of the
decrease relates to certain programs in Calvin Klein jeans that were shipped in
the First Quarter of Fiscal 2003 while the corresponding programs in Fiscal 2002
were shipped in the second and
57
third quarters. In addition, the soft retail market has resulted in an increase
in markdowns and allowances for the Calvin Klein jeans business. The increase in
Chaps net revenues reflects better sell through at retail, despite an overall
softness in the men's sportswear business, as well as the effect of a stronger
Canadian dollar. Mass sportswear licensing net revenues increased 10.2% due to
better sell through at Wal-Mart during the Second Quarter of Fiscal 2003.
First Half
Sportswear net revenues decreased by $6.3 million, or 2.7%, to $230.1
million for the First Half of Fiscal 2003, from $236.4 million for the First
Half of Fiscal 2002. The increase in Chaps'r' net revenues reflects better sell
through at retail, despite an overall softness in the men's sportswear business,
as well as the effect of a stronger Canadian dollar. The decrease in Calvin
Klein jeans net revenues reflects a weak status denim market, particularly in
the juniors category, and lower sell through of Calvin Klein jeans at retail.
The weak retail environment has also contributed to higher than expected
customer requests for markdowns and allowances which have negatively affected
Calvin Klein jeans net revenues in the First Half of Fiscal 2003.
Swimwear Group
Swimwear Group net revenues were as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------- --------------------------------------------
JULY 6, JULY 5, INCREASE % JULY 6, JULY 5, INCREASE %
2002 2003 (DECREASE) CHANGE 2002 2003 (DECREASE) CHANGE
---- ---- ---------- ------ ---- ---- ---------- ------
(IN THOUSANDS OF DOLLARS)
SWIMWEAR GROUP
Speedo......................... $ 62,313 $ 61,725 $ (588) - 0.9% $132,548 $163,019 $30,471 23.0%
Designer....................... 42,378 41,610 (768) - 1.8 84,715 87,208 2,493 2.9
Retail......................... 10,342 6,710 (3,632) - 35.1 20,281 11,896 (8,385) - 41.3
-------- -------- ------- --------- -------- -------- ------- ---------
Swimwear Group................. $115,033 $110,045 $(4,988) - 4.3% $237,544 $262,123 $24,579 10.3%
-------- -------- ------- --------- -------- -------- ------- ---------
-------- -------- ------- --------- -------- -------- ------- ---------
</Table>
Second Quarter
Swimwear net revenues decreased $5.0 million, or 4.3%, to $110.0 million for
the Second Quarter of Fiscal 2003, from $115.0 million for the Second Quarter of
Fiscal 2002. The decrease in swimwear net revenues in the Second Quarter of
Fiscal 2003 reflects earlier shipment of orders in Fiscal 2003 compared to
Fiscal 2002 and the decrease in retail net revenues due to the closing of 50
stores in Fiscal 2002 and a decrease in same store sales of 10.1%.
First Half
Swimwear net revenues increased $24.6 million, or 10.3%, to $262.1 million
for the First Half of Fiscal 2003, from $237.5 million for the First Half of
Fiscal 2002. The increase in net revenues reflects a larger order of backlog
entering the Spring 2003 season, new product lines, an expanded customer base
and lower return levels. Speedo'r' net revenues increased $30.5 million, or
23.0%, to $163.0 million for the First Half of Fiscal 2003 compared to $132.5
million for the First Half of Fiscal 2002. The increase in Speedo'r' net
revenues primarily reflects increased sales of Speedo fitness swim products and
accessories to department stores, clubs and team dealers. In addition, Designer
swimwear net revenues increased $2.5 million, or 2.9%, to $87.2 million in the
First Half of Fiscal 2003 compared to $84.7 million in the First Half of Fiscal
2002 due to favorable reception at retail, primarily of the Anne Cole'r' line.
Speedo Authentic Fitness'r' retail net revenues decreased $8.4 million, or
41.3%, to $11.9 million for the First Half of Fiscal 2003 compared to $20.3
million for the First Half of Fiscal 2002 reflecting the closed stores noted
above and a decrease of 16.7% in same store sales due to poor weather conditions
and a depressed retail market during the First Half of Fiscal 2003.
58
GROSS PROFIT. Gross profit was as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------- ---------------------------------------
JULY 6, % OF JULY 5, % OF JULY 6, % OF JULY 5, % OF
2002 REVENUE 2003 REVENUE 2002 REVENUE 2003 REVENUE
---- ------- ---- ------- ---- ------- ---- -------
Intimate Apparel Group............ $ 54,741 34.3 $45,220 33.5 $ 99,899 31.4 $106,525 37.2
Sportswear Group.................. 23,214 21.7 14,938 16.4 53,928 22.8 57,165 24.8
Swimwear Group.................... 37,893 32.9 36,246 32.9 80,433 33.9 99,866 38.1
-------- ---- ------- ----- -------- ---- -------- -----
$115,848 30.3 $96,404 28.7 $234,260 29.6 $263,556 33.9
-------- ---- ------- ----- -------- ---- -------- -----
-------- ---- ------- ----- -------- ---- -------- -----
</Table>
Second Quarter
Gross profit decreased $19.4 million, or 16.8%, to $96.4 million (28.7% of
net revenues) for the Second Quarter of Fiscal 2003 from $115.9 million (30.3%
of net revenues) for the Second Quarter of Fiscal 2002. Gross profit for the
Second Quarter of Fiscal 2002 was reduced by $10.4 million (2.7% of net
revenues) of distribution and other product related expenses which items are
expensed in selling, general and administrative expenses commencing with the
adoption of fresh start reporting on February 4, 2003.
Intimate Apparel Group. Intimate Apparel Group gross profit decreased $9.5
million, or 17.4%, to $45.2 million for the Second Quarter of Fiscal 2003 from
$54.7 for the Second Quarter of Fiscal 2002. The decrease in gross profit
reflects a reduction in sales volume coupled with a less favorable sales mix of
$13.6 million offset partially by favorable manufacturing and product
procurement and distribution variances of $4.1 million. Gross margin decreased
from 34.3% for the Second Quarter of Fiscal 2002 to 33.5% for the Second Quarter
of Fiscal 2003. The decrease in the gross margin primarily reflects the less
favorable sales mix coupled with a 2.4% increase in the rate of allowances and
returns as a percentage of gross sales.
Sportswear Group. Sportswear Group gross profit decreased $8.3 million, or
35.8%, to $14.9 million for the Second Quarter of Fiscal 2003 from $23.2 million
for the Second Quarter of Fiscal 2002. Gross margin decreased from 21.7% for the
Second Quarter of Fiscal 2002 to 16.4% for the Second Quarter of Fiscal 2003.
The decrease in gross profit and gross margin reflects a reduction in sales
volume coupled with a less favorable sales mix of $14.5 million offset partially
by favorable manufacturing and product procurement and distribution variances of
$6.2 million.
Swimwear Group. Swimwear Group gross profit decreased $1.7 million, or 4.3%,
to $36.2 million for the Second Quarter of Fiscal 2003 from $37.9 million for
the Second Quarter of Fiscal 2002 primarily as a result of a less favorable
sales mix of $5.6 million partially offset by favorable manufacturing and
product procurement and distribution variances of $3.9 million. Gross margin
remained constant at 32.9% for the Second Quarter of Fiscal 2002 and Fiscal
2003.
First Half
Gross profit increased $29.3 million, or 12.5%, to $263.6 million (33.9% of
net revenues) for the First Half of Fiscal 2003 from $234.3 million (29.6% of
net revenues) for the First Half of Fiscal 2002. Gross profit for the First Half
of Fiscal 2002 was reduced by $23.3 million (2.9% of net revenues) of
distribution and other product related expenses, which items are expensed in
selling, general and administrative expenses commencing with the adoption of
fresh start reporting on February 4, 2003. The remaining increase in gross
profit reflects an improved regular to off-price sales mix, improved sales
allowance and markdown experience, improved inventory and accounts receivable
management and more efficient product sourcing.
Intimate Apparel. Intimate Apparel Group gross profit increased $6.6
million, or 6.6%, to $106.5 million for the First Half of Fiscal 2003 from $99.9
for the First Half of Fiscal 2002. Gross margin increased from 31.4% for the
First Half of Fiscal 2002 to 37.2% for the First Half of Fiscal 2003. The
increase in gross profit and gross margin reflects favorable manufacturing and
product procurement and distribution variances of $20.0 million, partially
offset by a reduction in sales volume coupled with a less favorable sales mix of
$13.4 million. The favorable manufacturing and product procurement and
distribution variances are primarily related to distribution and other
59
product related expenses, which items were included in cost of sales in the
First Half of Fiscal 2002 and which are expensed in selling, general and
administrative expenses commencing with the adoption of fresh start reporting on
February 4, 2003.
Sportswear Group. Sportswear Group gross profit increased $3.2 million, or
6.0%, to $57.2 million for the First Half of Fiscal 2003 from $53.9 million for
the First Half of Fiscal 2002. Gross margin increased from 22.8% for the First
Half of Fiscal 2002 to 24.8% for the First Half of Fiscal 2003. The increase in
gross profit and gross margin reflects favorable manufacturing and product
procurement and distribution variances of $14.9 million partially offset by a
less favorable sales mix of $11.7 million. The favorable manufacturing and
product procurement and distribution variances are primarily related to
distribution and other product related expenses, which items were included in
cost of sales in the First Half of Fiscal 2002 and which are expensed in
selling, general and administrative expenses commencing with the adoption of
fresh start reporting on February 4, 2003. In addition, the Sportswear Group
experienced favorable allowances of $5.5 million in the First Half of Fiscal
2003 compared to the First Half of Fiscal 2002.
Swimwear Group. Swimwear Group gross profit increased $19.4 million, or
24.2%, to $99.9 million for the First Half of Fiscal 2003 from $80.4 million for
the First Half of Fiscal 2002. Gross margin increased from 33.9% for the First
Half of Fiscal 2002 to 38.1% for the First Half of Fiscal 2003. The increase in
gross profit and gross margin reflects a more favorable sales mix of $9.5
million as a result of an increase in sales volume coupled with favorable
manufacturing and product procurement and distribution variances of $9.9
million. The favorable manufacturing and product procurement and distribution
variances are primarily related to distribution and other product related
expenses, which items were included in cost of sales in the First Half of Fiscal
2002 and which are expensed in selling, general and administrative expenses
commencing with the adoption of fresh start reporting on February 4, 2003. The
increase in the gross margin also reflects a 0.7% decrease in the rate of sales
allowances and returns as a percentage of gross sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Second Quarter
Selling, general and administrative expenses for the Second Quarter of
Fiscal 2003 decreased $5.8 million, or 5.7%, to $94.9 million (28.2% of net
revenues) compared to $100.6 million (26.3% of net revenues) for the Second
Quarter of Fiscal 2002. Selling, general and administrative expenses for the
Second Quarter of Fiscal 2002 did not include $10.4 million (2.7% of net
revenues) of distribution and other product related expenses, which items are
expensed in selling, general and administrative expenses commencing with the
adoption of fresh start reporting on February 4, 2003. Depreciation and
amortization expense decreased approximately $5.0 million in the Second Quarter
of Fiscal 2003 compared to the Second Quarter of Fiscal 2002, reflecting the
adjustments in the carrying value of our fixed assets to fair value in
connection with the adoption of fresh start reporting on February 4, 2003. The
Second Quarter of Fiscal 2002 includes $4.1 million of lease expense for certain
operating leases that were settled in connection with our bankruptcy. There is
no comparable expense in the Second Quarter of Fiscal 2003. In addition, legal
and professional fees and certain employee related costs relating to the Chapter
11 cases of $2.7 million were recorded in selling, general and administrative
expenses in the Second Quarter of Fiscal 2003. Comparable expenses in the Second
Quarter of Fiscal 2002 were included in reorganization items.
First Half
Selling, general and administrative expenses for the First Half of Fiscal
2003 increased $1.3 million, or 0.6%, to $204.0 million (26.2% of net revenues)
compared to $202.7 million (25.6% of net revenues) for the First Half of Fiscal
2002. Selling, general and administrative expenses in the First Half of Fiscal
2002 did not include $23.3 million (2.9% of net revenues) of distribution and
other product related expenses, which items are expensed in selling, general and
administrative expenses commencing with the adoption of fresh start reporting on
February 4,
60
2003. Depreciation and amortization expense decreased approximately
$8.7 million in the First Half of Fiscal 2003 compared to the First Half of
Fiscal 2002 reflecting the adjustments in the carrying value of our fixed assets
to fair value in connection with the adoption of fresh start reporting on
February 4, 2003. The First Half of Fiscal 2002 includes $8.2 million of lease
expense for certain operating leases that were settled in connection with our
bankruptcy. There is no comparable expense in the First Half of Fiscal 2003. In
addition, legal and professional fees and certain employee related costs
relating to the Chapter 11 cases of $4.0 million were recorded in selling,
general and administrative expenses in the First Half of Fiscal 2003. Comparable
expenses in the First Half of Fiscal 2002 were included in reorganization items.
AMORTIZATION OF SALES ORDER BACKLOG
Amortization of sales order backlog of $6.3 million and $10.5 million for
the Second Quarter of Fiscal 2003 and First Half of Fiscal 2003, respectively,
represents amortization expense of the appraised value of our existing order
backlog at February 4, 2003. Using the assistance of a third party appraiser, we
determined that the fair value of our order backlog at February 4, 2003 was
$12,600. We are amortizing the sales order backlog over six months using the
straight-line method. The unamortized balance of $2.1 million will be amortized
during the third quarter of Fiscal 2003.
REORGANIZATION ITEMS
Reorganization items were $29.9 million in the First Half of Fiscal 2003
reflecting the final settlement of bankruptcy claims and lease terminations of
$10.1 million, employee retention and severance claims of $14.5 million, legal
and professional fees of $4.5 million and other costs of $0.8 million.
Reorganization items for the First Half of Fiscal 2002 were $58.1 million
reflecting the GECC lease settlement of $22.9 million, losses and write downs
related to sales of fixed assets and sales of business units of $9.9 million and
employee retention and severance of $10.4 million and legal and professional
fees of $14.9 million.
RESTRUCTURING ITEMS
Included in restructuring items for the Second Quarter of Fiscal 2003 are
contract termination costs of $2.5 million and facility shutdown costs of $3.6
million relating to the closing of two sewing plants in Puerto Cortes, Honduras
and Los Angeles, CA, the closing of a cutting and warehousing facility in
Thomasville, GA and the consolidation of a distribution facility in Secaucus,
NJ.
OPERATING INCOME (LOSS)
The following table presents operating income by group, including
depreciation and amortization expense in each group.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------- ---------------------------------------
JULY 6, % OF JULY 5, % OF JULY 6, % OF JULY 5, % OF
2002 REVENUE 2003 REVENUE 2002 REVENUE 2003 REVENUE
---- ------- ---- ------- ---- ------- ---- -------
(IN THOUSANDS OF DOLLARS)
Intimate Apparel Group............ $ 16,078 10.1% $ 11,913 8.8% $ 20,929 6.6% $ 30,977 10.8%
Sportswear Group.................. 3,099 2.9 (3,692) 4.1 13,179 5.6 16,195 7.0
Swimwear Group.................... 13,356 11.6 14,276 13.0 33,635 14.2 52,679 20.1
-------- ---- -------- ---- -------- ---- -------- ----
Group operating income............ 32,533 8.5 22,497 6.7 67,743 8.6 99,851 12.8
Unallocated corporate expenses.... (17,038) 4.5 (20,513) 6.1 (35,728) 4.5 (39,531) 5.1
Amortization of intangibles....... (226) 0.1 (6,709) 2.0 (452) 0.1 (11,257) 1.4
Restructuring items............... -- 0.0 (6,071) 1.8 -- 0.0 (6,140) 0.8
Reorganization items.............. (42,554) 11.1 -- 0.0 (58,085) 7.3 (29,922) 3.8
-------- ---- -------- ---- -------- ---- -------- ----
Operating income (loss)........... $(27,285) 7.1% $(10,796) 3.2% $(26,522) 3.3% $ 13,001 1.7%
-------- ---- -------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ---- -------- ----
</Table>
61
Second Quarter
Operating loss decreased $16.5 million to $10.8 million for the Second
Quarter of Fiscal 2003 compared to an operating loss of $27.3 million for the
Second Quarter of Fiscal 2002. The decrease was primarily due to a decrease of
$36.5 million in reorganization and restructuring items from $42.6 million in
the Second Quarter of Fiscal 2002 to $6.1 million in the Second Quarter of
Fiscal 2003. The decrease in reorganization and restructuring items was offset
by a decrease in operating income by our business groups of $10.1 million and
the amortization of sales order backlog of $6.3 million. The increase in
corporate expenses reflects the recognition of stock compensation expense of
$2.2 million and legal and professional fees and certain employee costs relating
to the Chapter 11 cases of $2.7 million. Comparable expenses in the Second
Quarter of Fiscal 2002 were included in reorganization items.
First Half
Operating income increased $39.5 million to $13.0 million for the First Half
of Fiscal 2003 compared to an operating loss of $26.5 million for the First Half
of Fiscal 2002 primarily reflecting increased operating income by our business
groups of $32.1 million and a decrease in reorganization and restructuring items
of $22.0 million. Corporate expenses increased $3.8 million reflecting the
recognition of stock compensation expense of $2.5 million and legal and
professional fees and certain employee costs relating to the Chapter 11 cases of
$4.0 million. Comparable expenses in the First Half of Fiscal 2002 were included
in reorganization items.
Intimate Apparel Group
Intimate Apparel Group operating income was follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------- -------------------------------------
JULY 6, % OF JULY 5, % OF JULY 6, % OF JULY 5, % OF
2002 REVENUE 2003 REVENUE 2002 REVENUE 2003 REVENUE
---- ------- ---- ------- ---- ------- ---- -------
(IN THOUSANDS OF DOLLARS)
INTIMATE APPAREL
Continuing:
Warner's/Olga/Body Nancy Ganz..... $ 8,434 12.9% $ 997 2.1% $ 8,584 6.9% $ 4,394 4.6%
Calvin Klein underwear............ 6,603 13.0 8,942 15.0 10,738 10.4 19,203 15.0
Lejaby............................ 2,153 8.3 2,077 8.4 6,647 13.2 8,181 14.4
Retail............................ (1,040) 27.7 (80) 2.3 (1,289) 18.0 (436) 7.2
------- ---- ------- ----- ------- ---- ------- ------
Total continuing business units...... 16,150 11.1 11,936 8.9 24,680 8.7 31,342 11.0
Discontinued brands:
Discontinued/sold business........ (72) 0.5 (23) 575.0 (3,751) 11.4 (365) 2281.3
------- ---- ------- ----- ------- ---- ------- ------
Intimate Apparel Group............... $16,078 10.1% $11,913 8.8% $20,929 6.6% $30,977 10.8%
------- ---- ------- ----- ------- ---- ------- ------
------- ---- ------- ----- ------- ---- ------- ------
</Table>
Second Quarter
The Intimate Apparel Group's operating income decreased $4.2 million, or
26.1%, to $11.9 million (8.8% of net revenues) for the Second Quarter of Fiscal
2003 compared to operating income of $16.1 million (10.1% of net revenues) for
the Second Quarter of Fiscal 2002. The decrease in operating income and
operating income as a percentage of net revenues is primarily attributable to
the decreased revenues in Warner's/Olga/Body Nancy Ganz which resulted in
unfavorable manufacturing variances due to lower production levels.
First Half
The Intimate Apparel Group's operating income increased $10.1 million to
$31.0 million (10.8% of net revenues) for the First Half of Fiscal 2003 compared
to operating income of $20.9 million (6.6% of net revenues) for the First Half
of Fiscal 2002. Operating losses from discontinued and sold units were $0.4
million for the First Half of Fiscal 2003 compared to $3.8 million for the First
Half of Fiscal 2002. The improvement in operating margin is attributable to
increased revenues, primarily in Calvin Klein underwear and Lejaby partially
offset by lower operating margins in Warner's/Olga/Body Nancy Ganz.
62
Sportswear Group
Sportswear Group operating income was as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------- ----------------------------------------
JULY 6, % OF JULY 5, % OF JULY 6, % OF JULY 5, % OF
2002 REVENUE 2003 REVENUE 2002 REVENUE 2003 REVENUE
---- ------- ---- ------- ---- ------- ---- -------
(IN THOUSANDS OF DOLLARS)
SPORTSWEAR GROUP
Chaps Ralph Lauren...................... $2,074 8.5% $ 935 3.7% $ 5,826 10.2% $ 5,410 9.2%
Calvin Klein jeans...................... (1,724) 2.6 (6,656) 12.7 (66) 0.0 3,929 2.8
Calvin Klein accessories................ (573) 21.2 (95) 5.1 (462) 7.6 457 8.4
A.B.S. by Allen Schwartz................ 1,009 10.3 (360) 4.4 1,481 7.8 539 2.8
Mass sportswear licensing............... 2,313 74.1 2,484 72.3 6,400 80.5 5,860 75.7
------ ---- ------- ---- ------- ---- ------- ----
Sportswear Group........................ $3,099 2.9% $(3,692) 4.1% $13,179 5.6% $16,195 7.0%
------ ---- ------- ---- ------- ---- ------- ----
------ ---- ------- ---- ------- ---- ------- ----
</Table>
Second Quarter
The Sportswear Group's operating income decreased $6.8 million, or 219.1%,
to an operating loss of $3.7 million (4.1% of net revenues) for the Second
Quarter of Fiscal 2003 compared to operating income of $3.1 million (2.9% of net
revenues) for the Second Quarter of Fiscal 2002. The decrease in Calvin Klein
jeans operating income primarily reflects decreased revenues and lower gross
margins. The lower operating margin reflects an unfavorable mix of off-price to
regular sales and the timing of the shipments of certain programs in Calvin
Klein jeans that were shipped in the First Quarter of Fiscal 2003 while the
corresponding programs in Fiscal 2002 were shipped in the second and third
quarters. A.B.S by Allen Schwartz experienced lower revenues and operating
income as a result of a weak retail market.
First Half
The Sportswear Group's operating income increased $3.0 million, or 22.9%, to
$16.2 million (7.0% of net revenues) for the First Half of Fiscal 2003 compared
to operating income of $13.2 million (5.6% of net revenues) for the First Half
of Fiscal 2002. The increase in Calvin Klein jeans operating margin 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 Half of Fiscal 2003, were
sourced at lower costs from a third party. In addition, operating income in
Calvin Klein jeans Canada increased due to an improved sales mix, lower returns
and the effect of a stronger Canadian dollar.
Swimwear Group
Swimwear Group operating income was as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------- ----------------------------------------
JULY 6, % OF JULY 5, % OF JULY 6, % OF JULY 5, % OF
2002 REVENUE 2003 REVENUE 2002 REVENUE 2003 REVENUE
---- ------- ---- ------- ---- ------- ---- -------
(IN THOUSANDS OF DOLLARS)
SWIMWEAR GROUP
Speedo........................... $ 7,402 11.9% $10,349 16.8% $20,369 15.4% $38,320 23.5%
Designer......................... 5,322 12.6 3,528 8.5 13,525 16.0 14,568 16.7
Ubertech......................... (274) 0.0 (12) 0.0 (523) 0.0 (23) 0.0
Retail........................... 906 8.8 411 6.1 264 1.3 (186) 1.6
------- ---- ------- ---- ------- ---- ------- ----
Swimwear Group................... $13,356 11.6% $14,276 13.0% $33,635 14.2% $52,679 20.1%
------- ---- ------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ---- ------- ----
</Table>
Second Quarter
The Swimwear Group's operating income increased $0.9 million, or 6.9%, to
$14.3 million (13.0% of net revenues) for the Second Quarter of Fiscal 2003
compared to an operating income of $13.4 million (11.6% of net revenues) for the
Second Quarter of Fiscal 2002. The Swimwear Group's operating income for the
Second Quarter of Fiscal 2002 includes approximately $2.1 million of bad debt
expense associated with certain Speedo team dealers.
63
First Half
The Swimwear Group's operating income increased $19.1 million, or 56.6%, to
$52.7 million (20.1% of net revenues) for the First Half of Fiscal 2003 compared
to an operating income of $33.6 million (14.2% of net revenues) for the First
Half of Fiscal 2002. The increase in the Swimwear Group's operating income for
the First Half of Fiscal 2003 compared to the First Half of Fiscal 2002 reflects
increased operating margins in the Speedo business. Speedo increased operating
margin reflects a more efficient manufacturing operation and lower returns and
allowances.
REORGANIZATION ITEMS -- GAIN ON CANCELLATION OF DEBT AND FRESH START ADJUSTMENTS
The First Half of Fiscal 2003 includes a gain of $1,692.7 million related to
the cancellation of our 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 our 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 to the
consolidated condensed financial statements included elsewhere in this
prospectus beginning on p. H-1.
OTHER INCOME AND EXPENSE
Other income and expense for the Second Quarter of Fiscal 2003 reflects
translation gains on the current portion of amounts receivable from our European
and Canadian subsidiaries of $1.4 million. For the First Half of Fiscal 2003 the
translation gains are partially offset by losses on the sale of marketable
securities received on certain bankruptcy settlements of $0.4 million.
INTEREST EXPENSE
During the term of the Chapter 11 cases, we did not accrue interest on our
pre-petition debt and the only interest expense we incurred related to our
Debtor-in-Possession Financing Agreement, as amended and extended (the 'Amended
DIP'), and certain foreign debt agreements that were repaid in connection with
the settlement of the Chapter 11 cases. As a result of our emergence from
bankruptcy and the issuance of the Second Lien Notes (replaced by the old notes)
our interest expense for Fiscal 2003 will be higher than the amounts recorded in
Fiscal 2002.
Second Quarter
Interest expense increased $2.3 million, or 75.2%, to $5.4 million in the
Second Quarter of Fiscal 2003 compared with $3.1 million for the Second Quarter
of Fiscal 2002. Interest expense for the Second Quarter of Fiscal 2003 includes
interest on the Second Lien Notes of $3.5 million, interest on our $275 million
senior secured revolving credit facility of approximately $0.7 million, interest
on the old notes of $1.2 million and amortization of deferred financing costs of
$0.4 million partially offset by interest income of $0.4 million. Amortization
of deferred financing costs totaled $2.5 million in the Second Quarter of Fiscal
2002 related to fees and charges on the Amended DIP. In addition, interest
expense in the Second Quarter of Fiscal 2002 included approximately $2.9 million
of interest income related to the investment of cash balances held as collateral
against letters of credit and interest earned on certain income tax refunds
received in June 2002. Interest on foreign debt agreements was approximately
$1.6 million in the Second Quarter of Fiscal 2002.
First Half
Interest expense increased $1.7 million, or 16.7%, to $11.7 million for the
First Half of Fiscal 2003 compared with $10.1 million for the First Half of
Fiscal 2002. Interest expense for the First Half of Fiscal 2003 included
interest on foreign debt for one month of $1.1 million, interest on the
64
Second Lien Notes of $6.7 million, interest on our senior secured revolving
credit facility of $1.8 million, interest on the old notes of approximately $1.2
million and amortization of deferred financing fees of $1.0 partially offset by
interest income of approximately $0.1 million. Amortization of deferred
financing costs totaled $4.7 million in the First Half of Fiscal 2002 related to
fees and charges on the Amended DIP. Interest on foreign debt agreements was
approximately $3.2 million in the First Half of Fiscal 2002. Accrued interest
related to the foreign debt agreements was included as part of liabilities
subject to compromise at February 4, 2003 and was paid on the emergence date in
accordance with the provisions of the Plan. See Notes 1 and 5 to the
consolidated condensed financial statements included elsewhere in this
prospectus beginning on p. H-1.
INCOME TAXES
Second Quarter
The income tax benefit of $6.4 million in the Second Quarter of Fiscal 2003
reflects a benefit of $9.7 million on domestic losses offset by an income tax
expense of $3.3 million on foreign earnings as compared with a provision for
income taxes of $1.6 million on foreign earnings during the Second Quarter of
Fiscal 2002. During the Second Quarter of Fiscal 2003, we increased our
valuation allowance and decreased our deferred tax asset to an amount that will
more likely than not be realized. Both the increase in the valuation allowance
and the decrease in the deferred tax asset have been recorded against goodwill.
Similar to the Second Quarter of Fiscal 2002, we have not provided any tax
benefit for certain foreign losses incurred during the Second Quarter of Fiscal
2003 where it is more likely than not that we will not realize the income tax
benefit for these losses.
First Half
The provision for income taxes for the First Half of Fiscal 2003 of $87.9
million reflects accrued income taxes of $2.8 million on domestic earnings and
$7.5 million on foreign earnings, as well as deferred income taxes of $77.6
million related to the increase in asset values recorded as part of our adoption
of fresh start reporting. We recorded a valuation allowance against the deferred
tax assets created in the First Half 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. The provision for income
taxes for the First Half of Fiscal 2002 reflects accrued income taxes of $5.5
million on foreign earnings and an increase in our valuation allowance of $46.0
million associated with impairment losses recorded by us in connection with the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets ('SFAS 142').
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
As of January 5, 2002, we had goodwill and other indefinite lived intangible
assets net of accumulated amortization of approximately $940.1 million. We
adopted SFAS 142 effective January 6, 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. We
engaged a third party appraisal firm to assist in our determination of our
business enterprise value ('BEV') in connection with the preparation of the
Plan. We allocated the appraised BEV to our various reporting units and
determined that the value of certain of our indefinite lived intangible assets
and goodwill was impaired. As a result, we 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 our deferred tax asset resulting from the adoption
of SFAS 142 on January 6, 2002.
65
COMPARISON OF FISCAL 2002 TO FISCAL 2001
Our consolidated statements of operations are summarized below:
<Table>
<Caption>
FISCAL FISCAL FISCAL
2000 2001 2002
--------------------- --------------------- ---------------------
% OF NET % OF NET % OF NET
REVENUES REVENUES REVENUES
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Net revenues................. $2,249,936 100.0% $1,671,256 100.0% $1,492,956 100.0%
Cost of goods sold........... 1,845,389 82.0 1,374,382 82.2 1,052,661 70.5
---------- ------ ---------- ----- ---------- -----
Gross profit................. 404,547 18.0 296,874 17.8 440,295 29.5
Selling, general and
administrative expenses.... 625,014 27.8 598,186 35.8 410,954 27.5
Impairment charge............ -- -- 101,772 6.1 -- --
Reorganization items......... -- -- 177,791 10.6 116,682 7.8
---------- ------ ---------- ----- ---------- -----
Operating loss............... (220,467) n/m (580,875) n/m (87,341) n/m
Investment income (loss),
net........................ 36,882 (6,556) 62
Interest expense(a).......... 172,232 122,752 22,048
---------- ---------- ----------
Loss before provision for
income taxes and cumulative
effect of change in
accounting principle....... (355,817) (710,183) (109,327)
Provision for income taxes... 21,044 150,970 53,914
---------- ---------- ----------
Loss before cumulative effect
of change in accounting
principle.................. (376,861) (861,153) (163,241)
Cumulative effect of change
in accounting principle,
net of tax................. (13,110) -- (801,622)
---------- ---------- ----------
Net loss..................... $ (389,971) $ (861,153) $ (964,863)
---------- ---------- ----------
---------- ---------- ----------
</Table>
- ---------
<Table>
(a) Contractual interest was $221.6 million and $180.2 million
for Fiscal 2001 and Fiscal 2002, respectively.
</Table>
NET REVENUES. Net revenues were as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
---------- ---------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Intimate Apparel Group.................. $ 594,889 $ 570,694 $ (24,195) - 4.1%
Sportswear Group........................ 573,697 525,564 (48,133) - 8.4
Swimwear Group.......................... 311,802 304,994 (6,808) - 2.2
Retail Stores Group..................... 190,868 91,704 (99,164) - 52.0
---------- ---------- ---------
$1,671,256 $1,492,956 $(178,300) - 10.7
---------- ---------- ---------
---------- ---------- ---------
</Table>
Net revenues decreased $178.3 million, or 10.7%, to $1,493.0 million in
Fiscal 2002 compared to $1,671.3 million in Fiscal 2001. In the same period,
Intimate Apparel Group net revenues decreased $24.2 million, or 4.1%, to $570.7
million (excluding discontinued and sold business units, Intimate Apparel Group
net revenues increased $45.2 million, or 8.7%), Sportswear Group net revenues
decreased $48.1 million, or 8.4%, to $525.6 million, Swimwear Group net revenues
decreased $6.8 million, or 2.2%, to $305.0 million and Retail Stores Group net
revenues decreased $99.2 million, or 52.0%, to $91.7 million.
66
Intimate Apparel Group. Intimate Apparel Group net revenues were as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
-------- -------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Continuing:
Warner's/Olga/Body Nancy Ganz... $229,446 $235,893 $ 6,447 2.8%
Calvin Klein underwear.......... 211,141 239,662 28,521 13.5
Lejaby.......................... 80,201 90,468 10,267 12.8
-------- -------- --------
Total continuing.................... 520,788 566,023 45,235 8.7
Discontinued/sold business units.... 74,101 4,671 (69,430) - 93.7
-------- -------- --------
Intimate Apparel Group.............. $594,889 $570,694 $(24,195) - 4.1
-------- -------- --------
-------- -------- --------
</Table>
For Fiscal 2002, Intimate Apparel Group net revenues decreased $24.2
million, or 4.1%, to $570.7 million compared with $594.9 million in Fiscal 2001.
Excluding net revenues from sold and discontinued business units (GJM, Fruit of
the Loom and Weight Watchers), Intimate Apparel Group net revenues increased
$45.2 million, or 8.7%, to $566.0 million in Fiscal 2002 compared to $520.8
million in Fiscal 2001. Increases in Warner's, Olga and Lejaby net revenues
primarily reflect improved distribution fulfillment, favorable reception of
Lejaby products at retail and more favorable customer allowance and markdown
experience. Despite our decision to exit the J.C. Penney business, Calvin Klein
underwear net revenues increased $28.5 million due to improved sell-through at
the retail level, particularly in the women's business. J.C. Penney's business
decreased $9.7 million in Fiscal 2002 compared to Fiscal 2001. The decrease in
J.C. Penney's business was partially offset by a re-launch of Calvin Klein
underwear in Dillard's which accounted for $4.3 million of net revenues in the
fourth quarter of Fiscal 2002.
Sportswear Group. Sportswear Group net revenues were as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
-------- -------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Chaps Ralph Lauren.................. $190,896 $137,022 $(53,874) - 28.2%
Calvin Klein jeans.................. 325,168 317,167 (8,001) - 2.5
Calvin Klein accessories............ 14,049 14,404 355 2.5
A.B.S. by Allen Schwartz............ 27,453 42,888 15,435 56.2
White Stag/Catalina (licensed)...... 16,131 14,083 (2,048) - 12.7
-------- -------- --------
Sportswear Group.................... $573,697 $525,564 $(48,133) - 8.4
-------- -------- --------
-------- -------- --------
</Table>
For Fiscal 2002, Sportswear Group net revenues decreased $48.1 million, or
8.4%, to $525.6 million compared with $573.7 million in Fiscal 2001. The
decrease in Chaps net revenues reflects lower sales to warehouse clubs ($32.8
million), lower sales to department stores ($17.2 million), including the loss
of the Dillard's business ($4.2 million), lower sales in Mexico and the overall
softness in the men's sportswear business. Sales to military related retail
stores, which accounted for 9.8% of Chaps gross sales in Fiscal 2002, could be
negatively affected in 2003 with the deployment of troops in the Middle East and
the war with Iraq. The decrease in Calvin Klein jeans net revenues primarily
reflects softness in the sportswear business and the decision to exit the Calvin
Klein kids business. We are seeking to sublicense the rights to sell Calvin
Klein kids products in Fiscal 2003. A.B.S. by Allen Schwartz net revenues have
benefited from a favorable reception of our new styles at the retail level.
Swimwear Group. Swimwear Group net revenues were as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
-------- -------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Speedo.............................. $184,089 $200,376 $ 16,287 8.8%
Designer(a)......................... 127,626 104,618 (23,008) - 18.0
Ubertech............................ 87 -- (87) n/m
-------- -------- --------
Swimwear Group...................... $311,802 $304,994 $ (6,808) - 2.2
-------- -------- --------
-------- -------- --------
</Table>
- ---------
(a) Includes Catalina/White Stag wholesale swimwear.
67
For Fiscal 2002, Swimwear Group net revenues decreased $6.8 million, or
2.2%, to $305.0 million compared with $311.8 million in Fiscal 2001. The
increase in Speedo's net revenues of $16.3 million is primarily a result of more
favorable customer allowance and return experience due to improvements in
operations, order fulfillment rates and on-time deliveries. The increase in net
revenues was accomplished despite the strategic decision to reduce accounts
receivable exposure to certain swim team dealers, which resulted in a reduction
in shipments to team dealers in Fiscal 2002 compared to Fiscal 2001. The
decrease in Designer Swimwear's net revenues in Fiscal 2002 compared to Fiscal
2001 primarily reflects a decrease due to the reduction in the Victoria's Secret
catalog business ($8.8 million) and general softness in the department store
business.
Retail Stores Group. Retail Stores Group net revenues were as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
-------- -------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Outlet stores....................... $123,948 $ 56,033 $(67,915) - 54.8%
Speedo Authentic Fitness stores..... 54,277 34,658 (19,619) - 36.1
Penhaligon's........................ 11,511 676 (10,835) n/m
IZKA................................ 1,132 337 (795) n/m
-------- -------- --------
Retail Group........................ $190,868 $ 91,704 $(99,164) - 52.0
-------- -------- --------
-------- -------- --------
</Table>
In Fiscal 2001, we made a strategic decision to close all our domestic
outlet retail stores. During Fiscal 2002, we closed 64 domestic outlet stores
and 47 Speedo Authentic Fitness stores. We closed three additional Speedo
Authentic Fitness stores in January 2003. The closing of the domestic outlet
retail stores and the related sale of inventory generated net proceeds of $23.2
million through January 4, 2003. Beginning with the First Quarter of Fiscal
2003, the operating results of the remaining 45 Speedo Authentic Fitness stores
will be included in the Swimwear Group and the remaining 16 Calvin Klein full
price and 15 outlet stores will be included in the Intimate Apparel Group.
For Fiscal 2002, net revenues decreased $99.2 million, or 52.0%, to $91.7
million compared to $190.9 million in Fiscal 2001. The decrease in net revenues
reflects the reduction in the number of retail outlet stores and Speedo
Authentic Fitness stores we operate. Same store sales for the 45 Speedo
Authentic Fitness stores we continue to operate decreased 5.6% in Fiscal 2002
compared to the comparable period of Fiscal 2001. The Penhaligon's business was
sold in February 2002 and IZKA, a French retail subsidiary, was liquidated in
the third quarter of Fiscal 2002.
GROSS PROFIT. Gross profit was as follows:
<Table>
<Caption>
% OF % OF
FISCAL NET FISCAL NET
2001 REVENUES 2002 REVENUES
---- -------- ---- --------
Intimate Apparel Group....................... $ 76,221 12.8% $186,439 32.7%
Sportswear Group............................. 96,361 16.8 114,217 21.7
Swimwear Group............................... 55,093 17.7 97,628 32.0
Retail Stores Group.......................... 69,199 36.2 42,011 45.8
-------- ---- -------- ----
$296,874 17.8% $440,295 29.5%
-------- ---- -------- ----
-------- ---- -------- ----
</Table>
Gross profit for Fiscal 2002 increased $143.4 million, or 48.3%, to $440.3
million compared to $296.9 million in Fiscal 2001. Gross margin for Fiscal 2002
was 29.5% compared to 17.8% in Fiscal 2001. The improvement in gross margin
reflects the more favorable mix of full price sales, improved markdown and
allowance experience, improved manufacturing efficiencies and more efficient
product sourcing.
Intimate Apparel Group. Intimate Apparel Group gross profit increased
$110.2 million, or 144%, to $186.4 million in Fiscal 2002 from $76.2 million in
Fiscal 2001. The increase in gross profit reflects more favorable sales
allowance experience of $38.4 million, improved manufacturing efficiency,
including lower manufacturing and product procurement variances of $91.3
million and more favorable selling mix of $18.9 million, offset by lower
sales volume. The more efficient manufacturing operations include the effect
of closing
68
certain manufacturing operations and the elimination of excess production
capacity that was initiated as part of our restructuring efforts. Gross margin
increased from 12.8% in Fiscal 2001 to 32.7% in Fiscal 2002. The improved gross
margin primarily reflects the more favorable markdown experience, more efficient
manufacturing operations and the more favorable sales mix.
Sportswear Group. Sportswear Group gross profit increased $17.9 million, or
18.5%, to $114.2 million in Fiscal 2002 from $96.4 million in Fiscal 2001. The
increase in gross profit reflects improved sales allowance experience of
$20.0 million, favorable manufacturing and product procurement variances of
$16.9 million and a more favorable regular to off-price sales mix of
$1.0 million. The improved product procurement variances reflect the shift from
internally manufactured jeans products to third party sourced products and
tighter inventory controls resulting in lower write-downs for excess and
obsolete products. Gross margin increased from 16.8% in Fiscal 2001 to 21.7% in
Fiscal 2002 due primarily to the more favorable sales allowance experience, more
efficient product procurement operations and more favorable sales mix.
Swimwear Group. Swimwear Group gross profit increased $42.5 million, or
77.2%, to $97.6 million in Fiscal 2002 from $55.1 million in Fiscal 2001. The
increase in gross profit reflects more favorable sales allowance experience of
$23.5 million, more efficient manufacturing operations which resulted in
favorable manufacturing and product procurement variances of $40.8 million, and
more favorable sales mix of $1.7 million, offset by lower sales volume. The
improvement in manufacturing efficiency reflects a shift in manufacturing from
domestic to off-shore operations and better product sourcing from third parties.
Gross margin improved 17.7% in Fiscal 2001 to 32.0% in Fiscal 2002. The increase
in gross margin reflects improved sales allowance experience, more efficient
manufacturing operations and better sales mix.
Retail Stores Group. Retail Stores Group gross profit decreased
$27.2 million, or 39.2%, to $42.0 million in Fiscal 2002 from $69.2 million in
Fiscal 2001, primarily as a result of lower sales volume due to the closing of
the domestic outlet retail stores and the unprofitable Authentic Fitness retail
stores. Gross margin increased from 36.2% in Fiscal 2001 to 45.8% in Fiscal
2002. The improvement in gross margin primarily reflects the closing of
unprofitable outlet and Authentic Fitness stores and the elimination of the
related markdown expenses. The improved gross margin also reflects the higher
mix of full price stores. Our full price retail stores earn significantly higher
margins than our outlet retail stores earned.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for Fiscal 2002 decreased $187.2 million, or 31.3%, to
$411.0 million compared to $598.2 million in Fiscal 2001. Selling, general and
administrative expenses as a percentage of net revenues were 27.5% in Fiscal
2002 compared with 35.8% in Fiscal 2001. The decrease in selling, general and
administrative expenses reflects lower marketing expenses, lower amortization
expense of $36.0 million (due to the adoption of SFAS 142 effective January 6,
2002), lower retail expenses of $37.2 million due to the reduction in the number
of retail stores we operate, lower expenses in the Intimate Apparel Group of
$60.9 million related to lower distribution expenses due to the consolidation of
certain of our distribution facilities in Duncansville, Pennsylvania, cost
saving measures implemented as part of our restructuring efforts, the
discontinuance of the Fruit of the Loom and Weight Watchers business units and
the sale of GJM. Marketing expenses decreased approximately $30.3 million, or
from 8.3% of net revenues in Fiscal 2001, to 7.2% of net revenues in Fiscal
2002, due primarily to a decrease in cooperative advertising expenses of
$15.2 million and lower sales volume which decreased the amount we were required
to pay certain licensors for national advertising.
69
OPERATING LOSS. The following table presents operating loss by Group:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
--------- --------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Intimate Apparel Group............ $ (96,317) $ 48,386 $144,703 n/m
Sportswear Group.................. (15,868) 24,212 40,080 n/m
Swimwear Group.................... (9,933) 28,561 38,494 n/m
Retail Stores Group............... (20,270) (4,588) 15,682 n/m
--------- --------- --------
Group operating income (loss)..... (142,388) 96,571 238,959 n/m
Unallocated corporate expenses.... (158,924) (67,230) 91,694 n/m
Impairment charge................. (101,772) -- 101,772 n/m
Reorganization items.............. (177,791) (116,682) 61,109 n/m
--------- --------- --------
Operating loss.................... $(580,875) $ (87,341) $493,534 n/m
--------- --------- --------
--------- --------- --------
</Table>
Operating loss decreased $493.5 million to $87.3 million (-5.9% of net
revenues) in Fiscal 2002 compared to an operating loss of $580.9 million (-34.8%
of net revenues) in Fiscal 2001. The decrease in operating loss reflects the
increase in gross margin to 29.5% from 17.8% and the decrease in selling,
general and administrative expenses to 27.5% of net revenues from 35.8% of net
revenues. The improvement in gross margin reflects the better regular to
off-price sales mix, improved management of customer sales allowance and
markdown deductions and improved manufacturing efficiencies, as noted above. The
decrease in selling, general and administrative expenses reflects the lower
depreciation and amortization (due to the adoption of SFAS 142 in January 2002),
lower cooperative advertising expenses, lower retail selling costs and other
cost savings, as noted above. Operating income (loss) includes the impact of a
reduction in certain capitalized design, receiving and other product related
costs of $24.4 million and $9.8 million in Fiscal 2002 and Fiscal 2001,
respectively. Operating income also includes the impact of lease expenses
incurred prior to the GECC settlement of $8.2 million and $16.5 million in
Fiscal 2002 and Fiscal 2001, respectively.
Intimate Apparel Group. Intimate Apparel Group operating income (loss) was
as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
-------- ------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Continuing:
Warner's/Olga/Body Nancy Ganz.... $(83,259) $10,081 $ 93,340 n/m
Calvin Klein underwear........... (730) 27,736 28,466 n/m
Lejaby........................... 4,968 8,572 3,604 72.5%
-------- ------- --------
Total continuing business units...... (79,021) 46,389 125,410 n/m
Discontinued/sold business units..... (17,296) 1,997 19,293 n/m
-------- ------- --------
Intimate Apparel Group............... $(96,317) $48,386 $144,703 n/m
-------- ------- --------
-------- ------- --------
</Table>
The Intimate Apparel Group's operating income for Fiscal 2002 increased
$144.7 million to $48.4 million compared to an operating loss of $96.3 million
in Fiscal 2001. Warner's/Olga operating income for Fiscal 2002 increased $93.3
million, or 112.1%, to $10.1 million compared to an operating loss of $83.3
million in Fiscal 2001 reflecting more favorable experience related to customer
sales allowances and markdowns and improved manufacturing efficiencies.
Warner's/Olga also benefited from lower selling, general and administrative
expenses reflecting the consolidation of Warner's/Olga distribution in
Duncansville, Pennsylvania as well as other cost reduction efforts. The increase
in Calvin Klein underwear operating income reflects higher gross profit due to
higher sales volume and improved gross margins and lower selling, general and
administrative expenses. The improved gross margin reflects favorable markdown
and allowance experience. Selling, general and administrative expenses decreased
due to better bad debt experience and other cost saving measures. Fiscal 2001
includes a $17.3 million loss from the discontinued/sold GJM, Weight Watchers
and Fruit of the Loom businesses compared to operating income of $2.0 million in
Fiscal 2002. The operating income for Fiscal 2002 related to discontinued/sold
business units reflects the
70
settlement of final liabilities and sales of residual inventories for amounts
that were more favorable than originally anticipated.
Sportswear Group. Sportswear Group operating income (loss) was as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
-------- ------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Chaps Ralph Lauren................... $ 6,957 $ 8,947 $ 1,990 28.6%
Calvin Klein jeans................... (27,568) (147) 27,421 n/m
Calvin Klein accessories............. (1,746) 761 2,507 n/m
A.B.S. by Allen Schwartz............. (6,772) 4,027 10,799 n/m
White Stag/Catalina (licensed)....... 13,261 10,624 (2,637) - 19.9
-------- ------- -------
Sportswear Group..................... $(15,868) $24,212 $40,080 n/m
-------- ------- -------
-------- ------- -------
</Table>
The improvement in Chaps operating income in Fiscal 2002 compared to Fiscal
2001 reflects lower selling, general and administrative expenses due primarily
to lower sales volumes and cost saving measures that were implemented in the
second half of Fiscal 2001. Chaps gross margin improved 1.1% in Fiscal 2002 from
Fiscal 2001. The improved gross margin in Chaps reflects better markdown and
allowance experience. The increase in Calvin Klein jeans operating income
reflects higher gross profit (despite lower sales) and lower selling, general
and administrative expenses. The improvement in A.B.S. by Allen Schwartz
operating income reflects higher net revenues and higher gross margin.
Swimwear Group. Swimwear Group operating income (loss) was as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
------- ------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Speedo................................ $(9,873) $21,340 $31,213 n/m
Designer.............................. 1,443 7,875 6,432 445.7%
Ubertech.............................. (1,503) (654) 849 n/m
------- ------- -------
Swimwear Group........................ $(9,933) $28,561 $38,494 n/m
------- ------- -------
------- ------- -------
</Table>
The Swimwear Group's operating income for Fiscal 2002 increased $38.5
million to $28.6 million compared to an operating loss of $9.9 million in Fiscal
2001. The improvement in operating income reflects higher gross profit and lower
selling, general and administrative expenses in both Speedo and Designer
Swimwear. The improvement in gross profit primarily reflects better markdown and
allowance experience. Lower selling, general and administrative expenses
primarily reflect cost saving measures.
Retail Stores Group. Retail Stores Group operating loss was as follows:
<Table>
<Caption>
FISCAL FISCAL INCREASE
2001 2002 (DECREASE) % CHANGE
-------- ------- ---------- --------
(IN THOUSANDS OF DOLLARS)
Outlet retail stores................. $(15,593) $(3,755) $11,838 n/m
Speedo Authentic Fitness stores...... (3,565) 240 3,805 n/m
Penhaligon's......................... 729 (125) (854) n/m
IZKA................................. (1,841) (948) 893 n/m
-------- ------- -------
Retail Stores Group.................. $(20,270) $(4,588) $15,682 n/m
-------- ------- -------
-------- ------- -------
</Table>
The decrease in the Retail Stores Group's operating loss for Fiscal 2002
compared to Fiscal 2001 primarily reflects the closing of our outlet retail
stores and the liquidation of IZKA. The closing of the outlet retail stores
during the year resulted in a decrease in outlet retail stores operating losses
from $15.6 million in 2001 to $3.8 million in 2002. Speedo Authentic Fitness
stores' operating income improved $3.8 million in Fiscal 2002 compared to Fiscal
2001 due primarily to the closing of unprofitable and marginally profitable
stores during the first six months of Fiscal 2002. We closed three additional
Speedo Authentic Fitness stores in January 2003.
71
GENERAL CORPORATE EXPENSES AND AMORTIZATION OF INTANGIBLES. Operating income
also includes the impact of lease expenses incurred prior to the GECC settlement
of $16.5 million and $8.2 million in Fiscal 2001 and Fiscal 2002, respectively.
General corporate expenses represent corporate expenses that are not allocated
to individual operating groups. General corporate expenses and amortization of
intangibles decreased $91.7 million to $67.2 million in Fiscal 2002 from $158.9
million in Fiscal 2001. The decrease in general corporate expenses primarily
reflects cost savings measures implemented during the second half of Fiscal 2001
and in Fiscal 2002. Amortization expense for Fiscal 2002 was $36.0 million lower
than Fiscal 2001 due to the adoption of SFAS 142 on January 6, 2002.
IMPAIRMENT CHARGE. In the fourth quarter of Fiscal 2001 we recorded
impairment charges related to the write-down of certain intangible assets and
goodwill in the amount of $101.8 million.
REORGANIZATION ITEMS. Due to the Chapter 11 cases, we have recorded certain
items directly related to the Chapter 11 cases including legal and professional
fees, asset write-downs, lease termination costs, employee retention costs,
retail store closure provisions and other items totaling $177.8 million and
$116.7 million in Fiscal 2001 and Fiscal 2002, respectively. Reorganization
items are separately identified in operating loss in the consolidated statement
of operations. A summary of reorganization items is as follows:
<Table>
<Caption>
FISCAL FISCAL
2001 2002
---- ----
Legal & professional fees................................... $ 24,206 $ 27,734
Employee contracts and retention............................ 8,728 25,571
GECC lease settlement....................................... -- 22,898
Write-off of fixed assets related to retail stores closed... 6,105 13,250
Facility shutdown costs..................................... 8,440 9,201
Lease terminations.......................................... 20,591 9,352
Loss on the sales of Penhaligon's, GJM and Ubertech......... -- 4,262
Employee benefit costs related to plant closings............ 821 3,068
Losses on the sale of aviation and other assets............. 1,650 1,176
Losses from write-offs and sales of fixed assets............ 37,061 170
Acceleration of original issue discount on Company-obligated
mandatorily redeemable preferred securities............... 21,411 --
Systems development abandoned............................... 33,066 --
Write-off of deferred financing fees on pre-petition debt... 34,599 --
Gain on the termination of interest rate swaps.............. (18,887) --
-------- --------
Total reorganization items.............................. $177,791 $116,682
-------- --------
-------- --------
</Table>
The increase in employee contracts and retention costs to $25.6 million in
Fiscal 2002 from $8.7 million in Fiscal 2001 reflects a full 12 months of
retention accruals in Fiscal 2002 compared to six months in Fiscal 2001 and $8.7
million of employee termination costs related to the European consolidation
plan. Lease termination costs are primarily related to the closing of our
domestic outlet retail stores and the reorganization of our Speedo Authentic
Fitness full-price retail stores. Lease termination costs for Fiscal 2001
include $2.6 million related to the settlement of lease obligations related a
Mexican manufacturing facility. Losses from write-offs and sales of fixed assets
include the write off of goodwill related to our GJM and IZKA business units of
approximately $31.7 million in Fiscal 2001.
INVESTMENT LOSS. Investment loss for Fiscal 2001 was $6.5 million. The
investment loss reflects the adjustment of amounts due under the equity forward
purchase agreements ('Equity Agreements') entered into in connection with our
stock repurchase program based upon changes in the price of the old common
stock. No comparable adjustment was recorded in Fiscal 2002 because the Equity
Agreements are liabilities subject to compromise. Investment gain of $0.1
million for Fiscal 2002 represents the unrealized appreciation in the market
value of certain marketable securities received by us in various bankruptcy and
other settlements. Our practice with respect to such securities is to sell such
securities as soon as practicable.
72
INTEREST EXPENSE. Interest expense decreased $100.7 million to $22.1 million
in Fiscal 2002 compared with $122.8 million in Fiscal 2001. As of June 11, 2002,
we stopped accruing interest on $2.3 billion of pre-petition debt (not including
certain foreign debt agreements). Interest expense for Fiscal 2002 primarily
reflects interest and related fees on the Amended DIP and interest on certain
foreign debt. We had repaid all amounts borrowed under the Amended DIP prior to
the start of the third quarter of Fiscal 2002. Certain of our foreign debt
agreements were subject to standstill and inter-creditor agreements with our
pre-petition lenders. We continued to accrue interest on these foreign debt
agreements. We repaid the outstanding principal amount and accrued interest on
the foreign debt of $106.1 million as part of the consummation of the Plan on
February 4, 2003. Interest expense for Fiscal 2002 includes $9.8 million of
interest on these foreign debt agreements. Interest expense for Fiscal 2002
includes interest income of $3.0 million related to tax refunds received by us
in June 2002 and interest earned on cash balances held in our cash collateral
accounts.
INCOME TAXES. We have incurred operating losses in the United States in
Fiscal 2001 and 2002 and, as a result, do not owe federal income taxes. We have
taxable income in foreign countries and, as a result, pay foreign income taxes.
The income tax provision for Fiscal 2002 was $53.9 million, which consists
primarily of an increase in the valuation allowance of $50.1 million resulting
mainly from the adoption of SFAS 142, a tax provision of $32.8 million relating
to a distribution of foreign earnings and a tax provision of $6.5 million
relating to earnings from foreign operations, offset by a tax benefit of $38.3
million relating to our pre-tax operating loss of $109.3 million. This compares
to a provision for income taxes in Fiscal 2001 of $151.0 million, which consists
of an increase in the valuation allowance of $135.0 million and a tax provision
of $16.0 million relating to earnings from foreign operations. We file tax
returns in over 100 jurisdictions around the world. Such tax returns are the
subject of routine examinations by federal, state and local authorities on an
ongoing basis. We do not believe that any of the open examinations will result
in a material liability, either individually or in the aggregate, to our
financial position or results of operations.
The consummation of the Plan resulted in the forgiveness of $2.5 billion of
our pre-petition debt and other liabilities subject to compromise. We expect to
utilize virtually all of our U.S. net operating loss carryforwards to offset the
tax impact resulting from such debt forgiveness. As a result of the consummation
of the Plan, we anticipate that the 'change in ownership' rules as defined by
the Internal Revenue Code of 1986 will limit our ability to utilize any
remaining U.S. net operating loss carryforwards.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. As of January 5, 2002,
we had goodwill and other indefinite lived intangible assets net of accumulated
amortization of $940.1 million. We adopted SFAS 142 effective January 6, 2002.
Under the provisions of SFAS 142, goodwill is deemed potentially impaired if the
net book value of a business reporting unit exceeds the fair value of that
business reporting unit. Intangible assets may be deemed impaired if the
carrying amount exceeds the fair value of the assets. We engaged an independent
third party appraisal firm to assist us in evaluating our Business Enterprise
Value ('BEV') in connection with the preparation of the Plan. We allocated the
appraised BEV to our various reporting units and determined that the value of
certain of our indefinite lived intangible assets and goodwill was impaired. As
a result, we recorded a charge of $801.6 million net of income tax benefit of
$53.5 million as a cumulative effect of a change in accounting from the adoption
of SFAS 142 in the First Quarter of Fiscal 2002. The income tax benefit of $53.5
million includes a tax benefit of $81.7 million relating to tax deductible
goodwill of $206.8 million offset by an increase in the valuation allowance of
$28.2 million on our deferred tax asset resulting from the adoption of SFAS 142.
COMPARISON OF FISCAL 2001 TO FISCAL 2000
FISCAL 2000 -- SPECIAL CHARGES. We recorded special charges during Fiscal
2000 in an amount equal to $269.6 million, of which $171.3 million represents
non-cash asset write-downs. Of the total amount, $201.3 million is reflected in
cost of goods sold and $68.3 million is reflected in selling, general and
administrative expenses.
73
NET REVENUE. Net revenues in Fiscal 2001 decreased $578.7 million, or 25.7%,
to $1,671.3 million from $2,249.9 million in Fiscal 2000. The decrease reflects
a decrease in revenues from the Intimate Apparel Group of $174.4 million, a
decrease in Sportswear Group net revenues of $309.2 million, a decrease in
Swimwear Group net revenues of $43.4 million and a decrease in the Retail Stores
Group net revenues of $51.6 million. Net revenues for Fiscal 2001 were
negatively affected by the disruption in our business caused by the Chapter 11
cases and the overall decrease in retail traffic and sales experienced by our
core department and specialty store customers in part related to the events of
September 11, 2001 and the downturn in the United States economy. Due to the
poor retail selling environment, particularly in our core department and
specialty stores, and our deteriorating experience relating to discounts,
allowances and customer deductions, we increased our estimate of the reserves
required for expected sales returns, discounts and allowances. The increase in
our reserve estimate resulted in a decrease of $35 million in net revenues in
Fiscal 2001 compared to Fiscal 2000. We also made a strategic decision during
Fiscal 2001 to improve the quality of our sales to our customers. As a result of
this strategy our off-price sales volume for Fiscal 2001 decreased by $158.1
million compared to Fiscal 2000.
Intimate Apparel Group. Net revenues decreased $174.4 million, or 22.7%, to
$594.9 million in Fiscal 2001 compared to $769.3 million in Fiscal 2000. All
brands experienced significant sales declines. Overall retail sales in
department stores decreased significantly in Fiscal 2001 compared to Fiscal
2000, adversely affecting our intimate apparel business. The Intimate Apparel
Group increased our estimate of reserves necessary for customer returns and
allowances to 13.6% in Fiscal 2001 from 13.1% in Fiscal 2000. The increased
estimate resulted in a decrease of $4.0 million in net revenues compared to
Fiscal 2000. Excluding net revenues from sold and discontinued business units
(GJM, Fruit of the Loom and Weight Watchers), Intimate Apparel Group net
revenues decreased $150.0 million, or 22.4%, to $520.1 million in Fiscal 2001
compared to $670.7 million in Fiscal 1999. Calvin Klein underwear net revenues
decreased $55.5 million, or 20.8%, to $211.1 million from $266.6 million in
Fiscal 2000. Calvin Klein net revenues decreased in all geographic regions.
Lejaby net revenues were $80.2 million in Fiscal 2001 compared to $83.4 million
in Fiscal 2000. The decrease in Lejaby net revenues was primarily related to a
decrease of $2 million in Lejaby sales in the United States.
Sportswear Group. Net revenues decreased $309.2 million, or 35.0%, to $573.7
million in Fiscal 2001 from $882.9 million in Fiscal 2000. Consistent with the
Intimate Apparel Group, the Sportswear Group was also adversely affected by the
poor retail environment and our overall strategy to reduce off-price sales, as
noted above. The Sportswear Group increased its estimate of reserves necessary
for customer returns and allowances from 9.5% of gross sales in Fiscal 2000 to
12.6% of gross sales in Fiscal 2001. The increased reserves estimate resulted in
a decrease of $31.5 million in Fiscal 2001 net revenues compared to Fiscal 2000.
Calvin Klein jeans net revenues decreased $194.8 million, or 38.4%, to $312.5
million in Fiscal 2001 from $507.3 million in Fiscal 2000. The decrease in
Calvin Klein jeans net revenues includes a decrease in net revenues of $74.6
million in Fiscal 2001 compared to Fiscal 2000 to certain discount and
membership club customers. Calvin Klein kids net revenues decreased by $24.2
million in Fiscal 2001 compared to Fiscal 2000. Chaps net revenues decreased
$63.6 million, or 25.0%, to $190.9 million in Fiscal 2001 from $254.5 million in
Fiscal 2000. A.B.S. by Allen Schwartz net revenues decreased $16.9 million, or
38.0%, to $27.5 million in Fiscal 2001 from $44.4 million in Fiscal 2000. Chaps
and A.B.S. by Allen Schwartz were negatively affected by the overall poor retail
environment for department and specialty stores noted above. The White Stag unit
earned royalty income of $16.1 million in Fiscal 2001 compared to $15.7 million
in Fiscal 2000. The increase in royalty income in Fiscal 2001 compared to Fiscal
2000 reflected the relative strength of Wal-Mart's retail business. Wal-Mart
experienced same store sales growth in Fiscal 2001 compared to the substantial
same store sales decreases experienced by many of the Sportswear Group's
department store customers.
Swimwear Group. Net revenues decreased $43.4 million, or 12.2%, to $311.8
million in Fiscal 2001 from $355.2 million in Fiscal 2000. The decrease in
Swimwear net revenues is attributable to our inability to deliver customer
orders on a timely basis and to increased allowances to swim team dealers.
Designer Swimwear net revenues decreased $4.7 million, or 3.5%, to $127.6
million
74
in Fiscal 2001 compared to $132.3 million in Fiscal 2000 primarily from the
increase in returns and allowances reserves attributed to overall weakness of
the department store business.
Retail Stores Group. Net revenues decreased $51.6 million, or 21.3%, to
$190.9 million in Fiscal 2001 from $242.5 million in Fiscal 2000. During Fiscal
2001 we closed 86 of the 283, or 30.4%, of the retail stores we were operating
at the beginning of Fiscal 2001.
GROSS PROFIT. Gross profit decreased $107.6 million, or 26.6%, to $296.9
million in Fiscal 2001 from $404.5 million in Fiscal 2000. The Intimate Apparel
Group's gross profit increased $38.7 million, the Sportswear and Swimwear
Group's gross profit decreased $134.3 million and the Retail Stores Group's
gross profit decreased $12.0 million. Gross profit as a percentage of net
revenues was 17.8% in Fiscal 2001 compared to 18.0% in Fiscal 2000. The decrease
in gross profit primarily reflected the lower net revenues noted above. Gross
profit was adversely affected in both Fiscal 2001 and Fiscal 2000 by inventory
liquidations, plant closings, inventory markdown and other charges. We recorded
$36.0 million of additional inventory reserves in May and June of Fiscal 2001 to
reflect our revised strategy of disposing of our excess and obsolete inventory
at the end of each selling season.
Intimate Apparel Group. Gross profit increased $30.4 million, or 66.2%, to
$76.3 million in Fiscal 2001 from $45.9 million in Fiscal 2000 despite the 22.7%
decrease in net revenues. Gross profit as a percentage of net revenues was 12.8%
in Fiscal 2001 compared to 6.0% in Fiscal 2000. The increase in gross profit
included the effect of $143.1 million of restructuring charges incurred in
Fiscal 2000 related to plant closings, inventory markdowns and other items, as
well as improvements in the Calvin Klein underwear business where gross profit
as a percentage of net revenues increased by over 10 percentage points of net
revenue in Fiscal 2001 compared to Fiscal 2000.
Sportswear Group. Gross profit decreased $128.8 million, or 46.0%, in Fiscal
2001 to $151.4 million compared to $280.2 million in Fiscal 2000. Gross profit
as a percentage of net revenues decreased to 26.4% in Fiscal 2001 from 31.7% in
Fiscal 2000. The Chaps and Calvin Klein accessories businesses recorded higher
gross profit as a percentage of net revenues in Fiscal 2001 compared to Fiscal
2000 due primarily to reduced off-price sales. Calvin Klein jeans gross profit
as a percentage of net revenues decreased approximately 2% in Fiscal 2001
compared to Fiscal 2000 due primarily to lower sales volume and the reduction in
the Calvin Klein kids business noted above.
Swimwear Group. Gross profit decreased $68.7 million, or 50.3%, to $68.0
million in Fiscal 2001 from $136.7 million in Fiscal 2000. Gross profit as a
percentage of net revenues decreased to 21.8% in Fiscal 2001 from 38.5% in
Fiscal 2000. The gross profit decrease primarily reflects the generally weak
retail environment and the effect of inventory reserves of $9.2 million recorded
in the second quarter of Fiscal 2001.
Retail Stores Group. Gross profit decreased $9.2 million, or 11.7%, to $69.2
million in Fiscal 2001 compared to $78.4 million in Fiscal 2000. Gross profit as
a percentage of net revenues increased to 36.3% of net revenues in Fiscal 2001
from 32.3% in Fiscal 2000. The decrease in gross profit reflects the lower sales
volume. The improvement in gross profit as a percentage of net revenues in
Fiscal 2001 compared to Fiscal 2000 reflects our strategic decision to close
marginal retail outlet stores. Our decision to close 39 of our less profitable
Speedo Authentic Fitness stores in Fiscal 2001 also contributed to the Retail
Stores Group's improvement in gross profit as a percentage of net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $26.8 million, or 4.3%, to $598.2 million in
Fiscal 2001 compared to $625.0 million in Fiscal 2000. Marketing and advertising
expenses decreased slightly in Fiscal 2001 to $138.4 million, or 8.3%, of net
revenues compared to $141.3 million, or 6.3%, of net revenues in Fiscal 2000.
Marketing expense for Fiscal 2001 includes $15.7 million related to our review
of the amounts necessary for customer cooperative advertising claims. The
increase in cooperative advertising claims was caused, in part, by the decrease
in retail traffic and sales experienced by our core department and specialty
store customers due to the events of September 11, 2001 and the downturn in the
United States economy. Selling expenses decreased $23 million in Fiscal 2001
75
compared to Fiscal 2000. The decrease in selling expenses in Fiscal 2001
compared to Fiscal 2000 is primarily a result of lower variable selling costs on
the lower sales volumes noted above and the consolidation of our distribution
operations into our most efficient locations. Selling, general and
administrative expenses for Fiscal 2001 included the write-down of $30.7 million
related to certain barter assets. Depreciation and amortization expense was
$97.8 million in Fiscal 2001 compared to $102.1 million in Fiscal 2000.
OPERATING INCOME (LOSS). The operating loss for Fiscal 2001 was $580.9
million compared to an operating loss of $220.5 million in Fiscal 2000. The
increased operating loss was a result of the lower gross profit of $107.6
million discussed above, the effect of the impairment charge of $101.8 million
and reorganization items of $177.8 million also noted above, partially offset by
lower selling, general and administrative expenses.
Intimate Apparel Group. Operating loss decreased $40.7 million to $96.3
million in Fiscal 2001 from $137.0 million in Fiscal 2000 reflecting increased
gross profit of $30.4 million.
Sportswear Group. Operating income (loss) decreased $45.1 million to an
operating loss of $15.9 million in Fiscal 2001 from operating income of $29.3
million in Fiscal 2000. Operating loss for Fiscal 2001 reflected a gross profit
decline as noted above.
Swimwear Group. Operating income (loss) decreased $81.8 million to an
operating loss of $9.9 million in Fiscal 2001 from operating income of $71.9
million in Fiscal 2000. Operating loss for Fiscal 2001 reflected a gross profit
decline, as noted above.
Retail Stores Group. Operating loss improved $6.9 million to $20.3 million
in Fiscal 2001 compared to $27.1 million in Fiscal 2000. The reduction in
operating loss reflected our efforts to close less profitable retail doors,
which commenced in Fiscal 2000.
IMPAIRMENT CHARGE. In the fourth quarter of Fiscal 2001 we recorded
impairment charges related to the write-down of certain intangible assets and
goodwill in the amount of $101.8 million. The impairment charge is separately
identified in operating loss in the consolidated statement of operations.
REORGANIZATION ITEMS. Due to the Chapter 11 cases during Fiscal 2001, we
recorded certain items directly related to the Chapter 11 cases, including legal
and professional fees, asset write-downs, lease termination costs, employee
retention costs, retail store closure provisions and other items totaling $177.8
million. Reorganization items are separately identified in operating loss in the
consolidated statement of operations.
INTEREST EXPENSE. Interest expense decreased $49.4 million to $122.8 million
in Fiscal 2001 from $172.2 million recorded in Fiscal 2000. The reduction in
interest expense primarily reflected the impact of the Chapter 11 cases. We
stopped accruing interest in accordance with the provisions of SOP 90-7 on
June 11, 2001 on $2.2 billion (including $351.4 million of trade drafts payable)
of outstanding debt that is subject to compromise. Interest expense in Fiscal
2001 was also favorably affected by an overall decrease in market interest rates
since the beginning of Fiscal 2001. Certain of our foreign subsidiaries
(non-Debtor entities in the Chapter 11 cases) were parties to debt agreements
that are subject to standstill agreements and intercreditor agreements. We
recorded $4.1 million of interest on these debt agreements for the year ended
January 5, 2002.
INCOME TAXES. The provision for income taxes in Fiscal 2001 was $151.0
million, which consisted of foreign income taxes of $16.0 million and $135.0
million of domestic tax expense. The provision for domestic income taxes
primarily reflected an increase in the valuation allowance. The increase in the
valuation allowance related to an increase in the net operating loss and other
deferred tax assets that may not be realized. In addition, we were unable to
implement certain tax planning strategies resulting in a further increase to the
valuation allowance. At January 5, 2002, we estimated U.S. net operating loss
carryforwards of $1,173.2 million and foreign net operating loss carryforwards
of $95.3 million available to offset future taxable income. The estimated U.S.
net operating loss carryforwards were adjusted for certain carryback claims,
restatements and other adjustments. The U.S. and foreign net operating loss
carryforwards expire, in varying amounts, between 2003 and 2021.
76
NET LOSS BEFORE CUMULATIVE EFFECT. Net loss before cumulative effect of a
change in accounting principle increased to $861.2 million ($16.28 per common
share) in Fiscal 2001 compared to $376.9 million ($7.14 per common share) in
Fiscal 2000. The increased net loss in Fiscal 2001 is primarily a result of the
decreased gross profit of $107.6 million noted above, the impact of the
reorganization expenses of $177.8 million and the impairment loss of $101.8
million.
CAPITAL RESOURCES AND LIQUIDITY
LIQUIDITY
We emerged from bankruptcy on February 4, 2003. Initial borrowings under our
senior secured revolving credit facility were $39.2 million on February 4, 2003,
all of which had been repaid by July 5, 2003. As of September 30, 2003, we had
no borrowings outstanding and $149.6 million of availability under our senior
secured revolving credit facility. As of July 5, 2003, we had
approximately $51.1 million of cash available to collateralize $56.2 million of
letters of credit outstanding.
For the period February 4, 2003 (the date we emerged from bankruptcy) to
July 5, 2003, debt decreased $33.7 million to $212.8 million from $246.5 million
and cash increased $45.2 million to $65.9 from $20.7 million. The decrease in
debt and increase in cash reflect strong cash flow from operations in the First
Half of Fiscal 2003.
During Fiscal 2002, we operated under the provisions of the Bankruptcy Code
which directly affected our cash flows. Operating under the protection of the
Bankruptcy Court, we made improvements in our operations and sold certain
assets, thereby improving our cash position subsequent to June 11, 2001 through
February 4, 2003. We were not permitted to pay any pre-petition liabilities
without prior approval of the Bankruptcy Court, including interest or principal
on our pre-petition debt obligations. We had $2,486 million of pre-petition
liabilities outstanding at January 4, 2003, including $349.7 million of trade
drafts and $164.8 million of accounts payable and accrued liabilities. Since
June 11, 2001 through January 4, 2003, we sold certain personal property,
certain owned buildings and land and other assets for $36.2 million, including
$23.2 million from the sale of inventory associated with our closed outlet
retail stores. Substantially all of the net proceeds from these sales were used
to reduce outstanding borrowing under the Amended DIP or provide collateral for
outstanding trade and stand-by letters of credit. The Amended DIP terminated on
February 4, 2003.
In addition, during the First Quarter of Fiscal 2002, we sold the business
and substantially all of the assets of GJM and Penhaligon's. The sales of GJM
and Penhaligon's generated aggregate net proceeds of $20.5 million and an
aggregate net loss of $2.9 million. Proceeds from the sale of GJM and
Penhaligon's were used to: (i) reduce amounts outstanding under certain debt
agreements of our foreign subsidiaries which were not part of the Chapter 11
cases ($4.8 million); (ii) reduce amounts outstanding under the Amended DIP
($4.2 million); (iii) create an escrow fund (subsequently returned in June 2002)
for the benefit of pre-petition secured lenders ($9.4 million); and (iv) create
an escrow fund (subsequently returned to us in February 2003) for the benefit of
the purchasers of GJM and Penhaligon's for potential indemnification claims and
for any working capital valuation adjustments ($1.7 million).
At January 4, 2003, we had working capital of $470.6 million, excluding
$2,486.1 million of pre-petition liabilities that were subject to compromise.
The working capital calculation includes $94.1 million of excess cash at
January 4, 2003. This excess cash was distributed to our pre-petition secured
lenders in connection with the consummation of the Plan. At February 4, 2003 and
July 5, 2003, we had working capital of $327.7 million and $372.0 million,
respectively.
We believe that credit available under the senior secured revolving credit
facility combined with cash flow to be generated by operations will be
sufficient to fund our operating and capital expenditure requirements for at
least the next two to four years. If we require additional sources of capital,
we will consider reducing capital expenditures, seeking additional financing or
selling assets to meet such requirements.
77
CASH FLOWS
The following discussion of cash flows includes cash flows for the period
January 5, 2003 to February 4, 2003 combined with cash flows for the period
February 5, 2003 to July 5, 2003 in order to provide comparison to the First
Half of Fiscal 2002. The following table summarizes the cash flows from our
operating, investing and financing activities for the First Half of Fiscal 2003
and Fiscal 2002:
<Table>
<Caption>
PREDECESSOR SUCCESSOR PREDECESSOR COMBINED
---------------- ---------------- ----------- -----------
JANUARY 5, 2003 FEBRUARY 5, 2003
TO TO FIRST HALF FIRST HALF
FEBRUARY 4, 2003 JULY 5, 2003 FISCAL 2002 FISCAL 2003
---------------- ------------ ----------- -----------
(DOLLARS IN MILLIONS)
Net cash provided by (used in) operating
activities............................. $(24.9) $ 89.2 $ 218.5 $ 64.3
Net cash provided by (used in) investing
activities............................. (0.8) (6.2) 22.8 (7.0)
Net cash used in financing activities.... (67.6) (42.0) (166.5) (109.6)
Translation adjustments.................. -- 4.2 1.8 4.2
------ ------ ------- -------
Increase (decrease) in cash.............. $(93.3) $ 45.2 $ 76.6 $ (48.1)
------ ------ ------- -------
------ ------ ------- -------
</Table>
For the First Half of Fiscal 2003 cash provided by operating activities was
$64.3 million compared to $218.5 million in the First Half of Fiscal 2002. Cash
provided by operating activities for the First Half of Fiscal 2003 reflects
positive net income, improvements in accounts receivable and inventory
management partially offset by the seasonal reduction in accounts payable
primarily related to the purchase of swimwear inventory. Cash provided by
operating activities in the First Half of Fiscal 2002 reflects the clean-up of
excess and obsolete inventory and the collection of old accounts receivable
accomplished as part of our turnaround plan in Fiscal 2002 as well as the sale
of inventory related to the closing of our domestic outlet retail sales. For the
First Half of Fiscal 2003, cash used in investing activities was $7.0 million
compared to cash provided from investing activities of $22.8 million in the
First Half of Fiscal 2002. During the First Half of Fiscal 2003 cash used in
investing activities primarily reflects the purchase of property, plant and
equipment. Cash provided by investing activities during the First Half of Fiscal
2002 includes proceeds from the sales GJM and Penhaligon's business units of
$20.4 million and proceeds from the sale of other assets of $7.6 million
partially offset by capital expenditures of $5.2 million.
Cash used in financing activities for both the First Half of Fiscal 2002 and
Fiscal 2003 primarily reflects the repayment of amounts outstanding on our
revolving credit agreements. Financing activities for the First Half of Fiscal
2003 included the realization of gross proceeds of $210.0 million from the
issuance of the old notes in June 2003, offset by the repayment of the principal
balance of the Second Lien Notes of $200.9 million, and the payment of
underwriting and professional fees associated with the issuance of the old notes
of approximately $7.1 million. Cash used in financing activities for the period
January 5, 2003 to February 4, 2003 includes the payment of outstanding amounts
on certain foreign debt agreements of $106.1 million in connection with our
emergence from bankruptcy on February 4, 2003 partially offset by the initial
borrowing of $39.2 million under our senior secured revolving credit facility.
As of September 30, 2003, we had no borrowings outstanding and $149.6
million of availability under our senior secured revolving credit facility and
the asset based borrowing formula included therein. As of July 5, 2003 we had
repaid all amounts owing under the senior secured revolving credit facility and
had approximately $51.1 million of cash available as collateral against
outstanding letters of credit of $56.2 million. Cash in operating accounts
primarily represents lock-box receipts not yet cleared or available to us, cash
held by foreign subsidiaries and compensating balances required under various
trade, credit and other arrangements.
For Fiscal 2002, cash provided by operating activities was $226.2 million
compared to cash used in operating activities of $422.8 million in Fiscal 2001.
We repurchased $185.0 million of accounts receivable previously subject to a
securitization arrangement in June 2001 as part of the completion of the DIP
financing. The improvement in cash flow from operating activities (not
78
including the repurchase of the accounts receivable of $185.0 million) of $464.1
million in Fiscal 2002 compared to Fiscal 2001 reflects improved operating
income of $493.5 million (including reductions in amortization expenses of $36.0
million due to the adoption of SFAS 142), lower interest expense of $100.7
million, proceeds of $23.2 million from the sale of outlet retail store
inventory and improved working capital management. Better management of
inventory and accounts receivable contributed $173.9 million of improvement. The
reduction in inventory balances reflects improved inventory management including
a reduction in excess and obsolete inventory at January 4, 2003 to $61.5 million
from $88.3 million at January 5, 2002. Inventory turned 3.3 times in Fiscal 2002
compared to 2.7 times in Fiscal 2001. Improved accounts receivable collection
efforts have resulted in a reduction of 15 days of sales outstanding to 49 days
at January 4, 2003 compared to 64 days at January 5, 2002. Cash interest expense
for Fiscal 2002 was $13.5 million, $89.8 million lower than the $103.3 million
in Fiscal 2001. The decrease in cash interest is primarily a result of the
improved cash flow and the Chapter 11 cases. Amortization expense decreased
$36.0 million in Fiscal 2002 compared to Fiscal 2001, reflecting the adoption of
SFAS 142 effective with the First Quarter of Fiscal 2002.
Net cash provided from investing activities was $16.2 million in Fiscal 2002
compared to cash used in investing activities of $21.4 million in Fiscal 2001.
Cash provided from investing activities in Fiscal 2002 primarily reflects
proceeds from the sales of GJM, Penhaligon's and Ubertech Products, Inc. of
$20.6 million and proceeds from other asset dispositions of $6.8 million
partially offset by capital expenditures of $11.2 million. Cash used in
investing activities in Fiscal 2001 primarily reflects capital expenditures of
$24.7 million offset by the disposition of certain fixed assets of $6.2 million.
In general, our capital expenditures are limited to $25.0 million per year
through Fiscal 2006 due to restrictions contained in the senior secured
revolving credit facility.
Cash used in financing activities of $176.8 million in Fiscal 2002 reflects
the repayment of borrowing under the Amended DIP of $155.9 million, repayments
of other debt of $14.6 million consisting primarily of repayments of certain
pre-petition debt amounts with proceeds from the sales of GJM, Penhaligon's and
other assets and payments of amounts due to GECC under the settlement agreement
of $3.5 million. In Fiscal 2001, we financed our increase in working capital, as
noted above, by borrowing $474.6 million net of debt repayments and deferred
financing costs. Financing activity for Fiscal 2001 included the payment of
$19.9 million of amendment fees and deferred financing costs associated with our
pre-petition credit agreements and with the Amended DIP.
There were no loans outstanding under the Amended DIP at January 4, 2003. We
had stand-by and documentary letters of credit outstanding under the Amended DIP
at January 4, 2003 of $60.7 million. We had excess cash available as collateral
against outstanding trade and stand-by letters of credit of $94.1 million at
January 4, 2003. We also had cash in operating accounts of $19.9 million at
January 4, 2003, not including restricted cash held in escrow (subsequently
returned to us in February 2003) of $1.7 million related to the sale of
Penhaligon's and cash deposits of $4.4 million, subsequently returned to us.
Pursuant to the terms of the Plan, we distributed $106.1 million of cash to
our pre-petition secured creditors on February 4, 2003. The source of the cash
distribution was excess cash on hand of $75.5 million and borrowing of $39.2
million under the senior secured revolving credit facility. We also made $8.6
million of cash distributions for various administrative claims and expenses,
including bank fees associated with the senior secured revolving credit facility
on February 4, 2003.
We believe that our conservative capitalization and liquidity provides us
with significant operating and financial flexibility.
COMMITMENTS AND CONTINGENCIES
Prior to June 11, 2001, the Petition Date, we utilized a bankruptcy remote
special purpose entity for the purpose of securitizing our outstanding accounts
receivable. Pursuant to the terms of the Amended DIP, the securitization
facility was terminated and all outstanding amounts due under the securitization
facility were repaid on June 11, 2001. As of January 4, 2003, we are not engaged
in off-balance sheet arrangements through unconsolidated, limited purpose
entities. There are no
79
material guarantees of debt or other commitments, other than those mentioned
herein related to trade and standby letters of credit issued under the Amended
DIP, or otherwise reflected in the table below, existing at January 4, 2003.
We have entered into operating lease agreements for manufacturing,
distribution and administrative facilities and retail stores. We have provided
$20.6 million and $32.4 million for the estimated total amount of claims we
expected to receive related to rejected leases as of January 5, 2002 and
January 4, 2003, respectively. In addition, we have entered into operating
leases for equipment and other assets and have accepted certain lease agreements
pursuant to the Plan.
Our contractual obligations, including leases accepted as part of the Plan
as of January 4, 2003, are summarized below:
<Table>
<Caption>
PAYMENTS DUE BY YEAR(a)
-------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER
---- ---- ---- ---- ---- ----------
(IN THOUSANDS OF DOLLARS)
Senior secured revolving credit
facility(b)....................... $ -- $ -- $ -- $ -- $ -- $ --
Retention plan bonuses(c)........... 4,746 -- -- -- -- --
Severance obligations(d)............ 12,000 -- -- -- -- --
Pension plan funding(e)............. 9,320 10,854 11,196 9,506 10,472 3,548
GECC debt(f)........................ 5,603 -- -- -- -- --
Operating leases(g)................. 20,264 14,790 9,417 6,386 4,855 35,401
Minimum royalties(h)................ 19,828 20,403 22,603 22,803 23,003 205,840
Second Lien Notes(i)................ -- 40,188 40,188 40,188 40,188 40,188
Trade letters of credit(j).......... 45,504 -- -- -- -- --
Other long-term debt................ 475 313 313 313 -- --
-------- ------- ------- ------- ------- --------
Total........................... $117,740 $86,548 $83,717 $79,196 $78,518 $284,977
-------- ------- ------- ------- ------- --------
-------- ------- ------- ------- ------- --------
</Table>
- ---------
(a) Does not include $2.5 billion of liabilities subject to
compromise in the Chapter 11 cases (including $120.0 million
payable under our obligated mandatorily redeemable
convertible preferred securities).
(b) The senior secured revolving credit facility matures on
February 4, 2007. There were no amounts outstanding under
the senior secured revolving credit facility or the Amended
DIP as of January 4, 2003, therefore no maturity amount is
included in the commitments table. As of September 30, 2003,
we had no borrowings outstanding, and $149.6 million of
availability, under our senior secured revolving credit
facility.
(c) Reflects the liability for stay bonuses and discretionary
bonuses for key employees during the Chapter 11 cases.
(d) Reflects estimated severance and other obligations related
to our European consolidation.
(e) Estimates of total Pension Plan funding subject to final
calculation by actuaries based on assumptions and other
factors.
(f) Reflects remaining GECC settlement payments as approved by
the Bankruptcy Court in June 2002.
(g) Includes all operating leases which were accepted under the
provisions of the Bankruptcy and includes rent due under the
lease entered in March 2003 for office space in New York,
New York of $2.1 million -- 2003, $3.6 million -- 2004, $3.6
million -- 2005, $3.6 million -- 2006, $3.6 million -- 2007,
$33.5 million thereafter.
(h) Includes all minimum royalty obligations. Some of our
license agreements have no expiration date or extend beyond
20 years. The duration of these agreements for the purposes
of this item are assumed to be 20 years. Variable based
minimum royalty obligations are based upon payments for the
most recent fiscal year.
(i) Issued pursuant to the Plan on February 4, 2003 and repaid
on June 12, 2003.
80
(j) Trade letters of credit represent obligations to suppliers
for inventory purchases. The trade letters of credit
generally have maturities of six months or less and will
only be paid upon satisfactory delivery of the inventory by
the supplier. We also have contingent liabilities under
standby letters of credit in the amount of $15.2 million
representing guarantees of performance under various
contractual obligations. These commitments will only be
drawn if we fail to meet our obligations under the related
contract.
We paid a quarterly cash dividend on our common stock from June 1995 through
December 2000. Total dividends paid in Fiscal 2000 were $14.4 million. We
suspended payment of our cash dividend in December 2000. Under the terms of the
senior secured revolving credit facility, we are prohibited from paying
dividends or making distributions to stockholders.
SEASONALITY
Our operations are somewhat seasonal. In Fiscal 2002, 53.1% of our net
revenues were generated in the first half of the fiscal year. Our Swimwear
business is seasonal; 71.2% of the Swimwear Group's net revenues were generated
in the first half of the 2002 fiscal year. The working capital needs of the
Swimwear Group partially offset the working capital needs of our remaining
businesses. Sales and earnings from our other Groups and business units are
generally expected to be somewhat higher in the second half of the fiscal year.
The following table presents the net revenues, operating income and net cash
flow from operating activities generated for each quarter of Fiscal 2001 and
Fiscal 2002 and the First Quarter and Second Quarter of Fiscal 2003:
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
APRIL 7, JULY 7, OCT. 6, JAN. 5, APRIL 6, JULY 6, OCT. 5, JAN. 4, APRIL 5, JULY 5,
2001 2001 2001 2002 2002 2002 2002 2003 2003 2003
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS)
Net revenues.............. $ 499.2 $ 362.3 $397.7 $ 412.1 $410.1 $381.8 $345.5 $355.6 $442.3 $355.8
Operating income (loss)... 3.2 (216.5) (26.7) (163.1) 0.7 (27.3) (8.8) (51.9) 23.8 (10.8)
Cash flow provided by
(used in) operating
activities............... $(257.5) $(197.1) $ 15.8 $ 5.6 $ 43.0 $175.4 $(15.2) $ 29.2 $(37.1) $ 77.0
</Table>
INFLATION
We do not believe that the relatively moderate levels of inflation in the
United States, Canada and Western Europe have had a significant effect on our
net revenues or our profitability in any of the last three fiscal years. We
believe that, in the past, we have been able to offset such effects by
increasing prices or instituting improvements in productivity. Mexico
historically has been subject to high rates of inflation; however, the effects
of inflation on the operation of our Mexican subsidiaries have not had a
material effect on our results in any of the last three fiscal years.
NEW ACCOUNTING STANDARDS
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 our interim and annual
financial statements about our obligations under certain guarantees that we have
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. We do
not believe the adoption of the recognition and initial measurement requirements
of FIN 45 will have a material impact on our consolidated financial statements.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. FASB Statements No. 133, Accounting for
Derivative Instruments and Hedging Activities and No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging
81
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 FASB as part of the Derivatives
Implementation Group 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 our financial statements.
During May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ('SFAS 150'), 'Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity'. SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as
liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after
June 15, 2003. We do not believe the adoption of SFAS 150 will have a material
impact on our consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates and
foreign currency exchange rates. Prior to June 11, 2001, we selectively used
financial instruments to manage these risks. We have not entered any financial
instruments to manage these risks since June 11, 2001 and have sold or
terminated all such arrangements.
INTEREST RATE RISK
We are subject to market risk from exposure to changes in interest rates
based primarily on our financing activities. As of July 5, 2003, we did not have
any borrowings outstanding under the senior secured revolving credit facility,
however, if the initial borrowing of $39.2 million at February 4, 2003 had been
outstanding for the entire Second Quarter and First Half of Fiscal 2003, a
hypothetical 1% adverse change in interest rates as of February 4, 2003 (i.e.,
an increase from our actual interest rate of 3.6% at July 5, 2003 to 4.6%) would
have resulted in an increase of approximately $0.1 million and $0.2 million in
interest expense for the Second Quarter and First Half of Fiscal 2003,
respectively. A 1% change in interest rates would not have had any effect on
interest related to the Second Lien Notes or the old notes as the minimum
interest rate on the Second Lien Notes was significantly higher than current
variable interest rate plus the applicable margin and the interest rate on the
old notes is fixed.
FOREIGN EXCHANGE RISK
We have 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 June 11, 2001, we entered into foreign
currency forward and option contracts to mitigate the risk of doing business in
foreign currencies. As of July 5, 2003, we had no such financial instruments
outstanding.
82
BUSINESS
INTRODUCTION
We believe we are one of the world's leading apparel companies. We design,
manufacture, source and market a broad line of intimate apparel, sportswear and
swimwear worldwide. We sell our products under several highly recognized brand
names, including Warner's, Olga, Calvin Klein, Speedo, Chaps Ralph Lauren and
Lejaby. For Fiscal 2002, we generated net revenues of approximately $1.5 billion
and incurred net losses of $964.9 million.
Our products are distributed primarily to wholesale customers through
multiple distribution channels, including major department stores, independent
retailers, chain stores, membership clubs, specialty and other stores and mass
merchandisers, including such leading retailers as Macy's and other units of
Federated Department Stores, The May Department Stores, J.C. Penney, Kohl's,
Sears, Target and Wal-Mart. We also operate 80 retail stores throughout the
world. In Fiscal 2002, 93.9% of our net revenues were generated from sales to
our wholesale customers and 6.1% were generated by our direct retail sales. Also
in Fiscal 2002, 78.2% of our net revenues were generated from our domestic sales
and 21.8% were generated from our international sales.
We own and license a portfolio of highly recognized brand names. As
described below, the majority of trademarks used by us are either owned or
licensed in perpetuity, and have generated approximately 69% of our revenues
during Fiscal 2002, while brand names we license generated approximately 31% of
our revenues during that period. Our core brands have been established in their
respective markets for extended periods and have attained a high level of
consumer awareness.
The following table sets forth our trademarks and licenses:
<Table>
<Caption>
OWNED TRADEMARKS
- --------------------------------------------------------------------------------------------
Warner's'r' White Stag'r'(a)
Olga'r' Catalina'r'(b)
Body Nancy Ganz'TM'/Bodyslimmers'r' A.B.S. by Allen Schwartz'r' and related
Lejaby'r' trademarks
Rasurel'r' Cole of California'r'
Calvin Klein'r' (beneficially owned for men's Sunset Beach'r'
and women's underwear, loungewear and Sandcastle'r'
sleepwear)
</Table>
<Table>
<Caption>
TRADEMARKS LICENSED IN PERPETUITY
- --------------------------------------------------------------------------------------------
TRADEMARK TERRITORY
- --------------------------------------------- ---------------------------------------------
Speedo'r'/Speedo'r' Authentic Fitness'r'(c) United States, Canada, Mexico, Caribbean
Anne Cole'r' (for swimwear and sportswear)(d) Worldwide
</Table>
<Table>
<Caption>
TRADEMARKS LICENSED FOR A TERM
- --------------------------------------------------------------------------------------------
TRADEMARK TERRITORY EXPIRES(I)
- --------------------------------------- --------------------------------------- ----------
Calvin Klein'r' for jeans and North, South and Central America 12/31/2044
jeans-related products)(e)
Chaps Ralph Lauren'r' (for men's United States, Canada, Mexico 12/31/2018
sportswear)(f)
Nautica'r' (for women's swimwear, United States, Canada, Mexico, 6/30/2009
beachwear and accessories)(g) Caribbean
Lifeguard'r' (for swimwear and related Worldwide 6/30/2005
products)
Calvin Klein for women's and juniors Worldwide 12/31/2013
swimwear(h)
</Table>
- ---------
(a) Licensed to Wal-Mart Stores, Inc. for women's sportswear
through 2004.
(b) Licensed to Wal-Mart Stores, Inc. for sportswear through
2004. We also sell swimwear wholesale to Wal-Mart Stores,
Inc. using the Catalina trademark.
(footnotes continued on next page)
83
(footnotes continued from previous page)
(c) Licensed in perpetuity from Speedo International, Ltd.
(d) Licensed in perpetuity from Anne Cole and Anne Cole Design
Studio.
(e) Includes a renewal option which permits us to extend for an
additional 10-year term subject to compliance with certain
conditions.
(f) Includes two renewal options, each of which permits us to
extend for an additional 5-year term subject to compliance
with certain conditions.
(g) License executed in March 2003. We expect to begin shipments
in the fourth quarter of Fiscal 2003.
(h) License term commences January 2004. Initial term of license
expires on December 31, 2008.
(i) Assumes exercise of renewal option(s).
-------------------
We rely on our highly recognized brand names to appeal to a broad range of
consumers. We design products that address a wide range of price points and
strive to meet the needs and shopping preferences of male and female consumers
across a broad age spectrum. We believe that our ability to serve multiple
domestic and international distribution channels with a diversified portfolio of
products under widely recognized brand names at varying price points
distinguishes us from many of our competitors and reduces our reliance on any
single distribution channel, product, brand or price point.
In April 2001, we hired Alvarez & Marsal, Inc., the turnaround and crisis
management consulting firm, to advise us and evaluate our operations. On
June 11, 2001, The Warnaco Group, Inc. and certain of its subsidiaries
(including Warnaco Inc.) filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code. During the course of our reorganization, we developed a
turnaround plan that focused on three strategies intended to maximize our value:
(i) stabilize and improve the operations of our core business units;
(ii) pursue the sale or liquidation of certain non-core businesses; and
(iii) explore the sale of our main operating units, or the company and its
subsidiaries as a whole.
In connection with our reorganization, we:
Closed 204 retail stores and terminated their related leases;
Sold non-core business units and assets, including GJM Manufacturing
Ltd., a private label manufacturer of women's sleepwear, and Penhaligon's,
a United Kingdom-based retailer of perfumes, soaps, toiletries and other
products;
Replaced certain members of our senior management and recruited new
leadership for our business Groups; and
Restructured our balance sheet, including reducing our outstanding debt
from $2.2 billion as of January 4, 2003 to $212.8 million as of
July 5, 2003.
On February 4, 2003, we emerged from Chapter 11 bankruptcy protection and
our new common stock began trading on the NASDAQ National Stock Market on
February 5, 2003 under the ticker symbol 'WRNC.' We have since appointed a
permanent Chief Executive Officer and Chief Financial Officer to replace
previously serving interim executive officers.
The Warnaco Group, Inc., a Delaware corporation, was organized in 1986.
BUSINESS STRATEGY
Our strategy is to capitalize on our portfolio of highly recognized brands,
improved capital structure and improved operating efficiency and discipline to
provide consistent revenue and earnings growth. Principal elements of this
strategy are the following:
MAINTAINING OUR OPERATING DISCIPLINE WITH A FOCUS ON CONSUMER DEMAND
We believe that one of the keys to improving our operating performance is to
maintain the operating discipline developed and implemented since
December 2001. We intend to continue to:
84
Reduce manufacturing and distribution inefficiencies by manufacturing,
sourcing and selling only quantities of goods to retailers that retailers
are likely to sell, and by monitoring the performance of our products at
the retail level, thereby improving performance at the retail level by
minimizing retailers' requests for sales discounts, returns and allowances;
and
Conduct the monthly operating reviews of our business Groups, including
reviews monitoring purchasing and production levels, key retailer
sell-through and inventory positions, excess and obsolete inventory and
the collection of accounts receivable.
We believe that this operating discipline has contributed to an improvement
in our gross margin (from 17.8% in Fiscal 2001 to 29.5% in Fiscal 2002) and
liquidity position in Fiscal 2002.
FURTHER IMPROVING OUR COST STRUCTURE
Since December 2001, we have improved our operating margins and cost
structure by consolidating manufacturing and distribution operations and
reducing selling, general and administrative costs, and by actively seeking the
most efficient sources of production, whether through internal sources of supply
or though outsourced production. We intend to continue to:
Identify more efficient manufacturing operations and improved product
sourcing;
Further consolidate our European and North American Intimate Apparel
Group manufacturing operations; and
Maintain and enhance a low cost infrastructure and a flexible supply
chain, including by expanding our use of lower cost, third party
contractors, particularly in our Intimate Apparel and Swimwear Groups.
FOSTERING ORGANIC GROWTH WITHIN OUR OPERATING UNITS
We rely on our portfolio of highly recognized brand names to appeal to male
and female consumers in various age groups at varying price points. We believe
that the quality, strength and diversity of our brand portfolio enhance our
ability to achieve organic growth. We intend to continue to:
Introduce new products and product extensions;
Enter new channels of distribution; and
Further expand the international distribution of our brands.
CAPITALIZING ON LICENSING AND SUBLICENSING OPPORTUNITIES
We intend to seek to expand our business and enhance our profitability by
licensing additional brands to complement our current product portfolio and
licensing or sublicensing our existing brands in certain non-core products. For
example, we recently entered into:
An exclusive licensing agreement with Nautica Apparel, Inc., under which
we will manufacture, distribute and sell women's fashion swimwear and
related products bearing the Nautica brand name in the United States,
Canada, Mexico and the Caribbean Islands; and
A sublicense agreement with Riviera Trading Inc., under which Riviera will
develop and sell a line of Speedo sunglasses in North America.
PURSUING POTENTIAL STRATEGIC ACQUISITIONS TO COMPLEMENT OUR EXISTING BRAND
PORTFOLIO
We believe that, over the long-term, attractive opportunities will exist to
increase revenues and earnings in our core operating units with acquisitions of
complementary product lines and businesses. We intend to pursue these
opportunities, in a disciplined manner, to the extent that they become
available. As part of the active management of our brands, we will also continue
to assess our brand portfolio and may choose to rationalize certain assets over
time.
BUSINESS GROUPS
During Fiscal 2001, we operated in three business Groups: (i) Intimate
Apparel Group; (ii) Sportswear and Swimwear Group; and (iii) Retail Stores
Group. Commencing in Fiscal 2002, we operated in four business Groups:
(i) Intimate Apparel Group; (ii) Sportswear Group; (iii) Swimwear Group; and
(iv) Retail Stores Group. The Sportswear and Swimwear Groups
85
(previously combined as the Sportswear and Swimwear Group) were separated in
Fiscal 2002 to reflect the manner in which we currently evaluate our business.
Accordingly, certain financial information contained in this prospectus relating
to fiscal periods prior to Fiscal 2002 has been restated to correspond with our
revised reporting. Beginning in Fiscal 2003, we operated in three business
segments or Groups: (i) Intimate Apparel Group; (ii) Sportswear Group; and
(iii) Swimwear Group. Because we have closed more than 200 retail stores in the
last three years, the retail stores no longer represent a material portion of
our net revenues (retail stores accounted for 3.0% of consolidated net revenue
in the Second Quarter of Fiscal 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 our three wholesale business Groups.
Beginning in Fiscal 2003, the operations of the Retail Stores Group were
included with our three wholesale business Groups according to the type of
product sold. Certain financial information contained in this prospectus has
been restated to correspond to our current segment presentation. We believe that
in evaluating our operating results and the operating results of our Groups for
the past three years based on operating loss it is important to consider the
effect of depreciation and amortization on those results. Since June 11, 2001,
we have sold assets, written down impaired assets, recorded a transitional
impairment adjustment for the adoption of SFAS 142 and stopped amortizing
certain intangible assets that were previously amortized. As a result,
depreciation and amortization expense has decreased by approximately $40.3
million in Fiscal 2002 compared to Fiscal 2001 and by $44.7 million compared to
Fiscal 2000. For informational purposes, we have separately identified the
depreciation and amortization components of operating loss in the following
table.
The following table sets forth for each of the last three fiscal years net
revenues and operating income (loss) for each of our Groups and for our company
on a consolidated basis. We do not allocate interest expense, income taxes,
amortization of intangible assets and deferred financing costs, corporate
overhead (including depreciation of corporate assets), reorganization items or
impairment charges to our operating Groups:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
--------------------- --------------------- ---------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
----- ----- -----
(IN THOUSANDS OF DOLLARS)
NET REVENUES:
Intimate Apparel............. $ 769,326 34.2% $ 594,889 35.6% $ 570,694 38.2%
Sportswear................... 882,917 39.2 573,697 34.3 525,564 35.2
Swimwear..................... 355,199 15.8 311,802 18.7 304,994 20.4
Retail Stores................ 242,494 10.8 190,868 11.4 91,704 6.1
---------- ----- ---------- ----- ---------- -----
$2,249,936 100.0% $1,671,256 100.0% $1,492,956 100.0%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
OPERATING LOSS:
Intimate Apparel......... $ (114,791) $ (74,378) $ 64,126
Sportswear............... 39,638 (5,772) 33,592
Swimwear................. 81,323 (6,555) 34,124
Retail Stores............ (22,687) (13,019) 126
Group depreciation and
amortization........... (46,499) (42,664) (35,397)
---------- ---------- ----------
Group operating income
(loss)..................... (63,016) (142,388) 96,571
Unallocated corporate
expenses............... (101,871) (103,770) (45,208)
Corporate depreciation
and amortization of
intangibles............ (55,580) (55,154) (22,022)
Impairment charge........ -- (101,772) --
Reorganization items..... -- (177,791) (116,682)
---------- ---------- ----------
Operating loss............... $ (220,467) $ (580,875) $ (87,341)
---------- ---------- ----------
---------- ---------- ----------
</Table>
For additional information relating to our business groups, see Note 6 to
the consolidated financial statements included elsewhere in this prospectus
beginning on page F-2.
86
INTIMATE APPAREL
The Intimate Apparel Group designs, manufactures, sources and markets
moderate to premium priced intimate apparel and other products for women and
better to premium priced men's underwear and loungewear. The Intimate Apparel
Group also operates 29 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 11 Warnaco outlet
retail stores in Europe. Net revenues of the Intimate Apparel Group accounted
for approximately 38.2% of our net revenues in Fiscal 2002.
The following table sets forth the Intimate Apparel Group's brand names and
the apparel price ranges and types:
<Table>
<Caption>
BRAND NAME PRICE RANGE TYPE OF APPAREL
- ----------------------------------- ------------------ -----------------------------------
Warner's........................... Upper moderate to Women's intimate apparel
better
Olga............................... Better Women's intimate apparel
Body Nancy Ganz/Bodyslimmers....... Better to premium Women's intimate apparel
Calvin Klein....................... Better to premium Women's intimate apparel/men's
underwear
Lejaby/Rasurel..................... Better to premium Women's intimate apparel, swimwear
</Table>
According to a survey by The NPD Group, a market research firm, in Fiscal
2002, we owned or licensed three of the top ten selling intimate apparel brands
in participating U.S. department stores. Olga, Warner's and Calvin Klein were
the second, third and ninth leading sellers, respectively, of women's bras in
participating U.S. department stores in 2002. Our Calvin Klein, Warner's and
Olga brands were the third, fourth and ninth leading sellers, respectively, of
women's panties in participating U.S. department stores in 2002. Calvin Klein
men's underwear was the number two selling brand of men's underwear in
participating U.S. department stores in 2002. According to Mercier, a European
market research firm, during Fiscal 2001, Lejaby was the number two selling
intimate apparel brand in the better to premium category in Western Europe.
The Warner's, Olga and Lejaby lines consist primarily of bras, panties,
daywear and sleepwear. The Calvin Klein women's lines consist primarily of
women's underwear, bras, panties, daywear, loungewear and sleepwear. The Calvin
Klein men's lines consist primarily of men's underwear, briefs, boxers,
T-shirts, loungewear and sleepwear. The Body Nancy Ganz/Bodyslimmers line is
primarily a shapewear line. The Rasurel lines consist primarily of swimwear sold
in Europe.
The Intimate Apparel Group targets a broad range of consumers and provides
products at a wide range of price points. Our design team strives to design
products of a price, quality, fashion and style that meet our customers'
demands.
Our Intimate Apparel brands are distributed primarily through department
stores, independent retailers, chain stores and, to a lesser extent, specialty
stores.
87
The following table sets forth the Intimate Apparel Group's principal
distribution channels and customers:
<Table>
<Caption>
CHANNELS OF DISTRIBUTION CUSTOMERS BRANDS
- ------------------------ --------------------------------- ---------------------------------
UNITED STATES
Department Stores Federated Department Stores, The Warner's, Olga, Body Nancy
May Company, Saks Fifth Avenue Ganz/Bodyslimmers, Lejaby and
and Target Calvin Klein underwear
Independent Nordstrom, Dillard's, Neiman Warner's, Olga, Body Nancy
Retailers Marcus and Belk Ganz/Bodyslimmers, Lejaby and
Calvin Klein underwear
Chain Stores J.C. Penney, Kohl's, Sears and Warner's, Olga, Body Nancy
Target Ganz/Bodyslimmers and private
label
CANADA Hudson Bay Company, Zellers, Warner's, Olga, Body Nancy
Sears and Wal-Mart Ganz/Bodyslimmers, Calvin Klein
underwear and Lejaby
MEXICO Wal-Mart, Sears, Liverpool and Warner's, Olga, Body Nancy
Palacio de Hierro Ganz/Bodyslimmers and Calvin
Klein underwear
EUROPE Harrods, House of Fraser, Warner's, Body Nancy
Galeries Lafayette, Au Printemps, Ganz/Bodyslimmers, Lejaby,
Karstadt, Kaufhof and El Corte Rasurel and Calvin Klein
Ingles underwear
ASIA Distributors Calvin Klein underwear
</Table>
The Intimate Apparel Group generally markets its product lines for three
retail-selling seasons (spring, fall and holiday). Its revenues are generally
consistent throughout the year, with 49.8%, 45.8% and 49.3% of the Intimate
Apparel Group's net revenues recorded in the first half of Fiscal 2000, 2001 and
2002, respectively.
The Intimate Apparel Group has operations in the Americas (United States,
Canada, Costa Rica, Honduras and Mexico), Europe (Austria, Belgium, France,
Germany, Italy, the Netherlands, Spain, Switzerland and the United Kingdom) and
Asia (Hong Kong).
The following table sets forth the domestic and international net revenues
of the Intimate Apparel Group:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
---------------- ---------------- ----------------
NET % OF NET % OF NET % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS OF DOLLARS)
United States...................... $512,093 66.6% $372,149 62.6% $330,286 57.9%
International...................... 257,233 33.4 222,740 37.4 240,408 42.1
-------- ----- -------- ----- -------- -----
$769,326 100.0% $594,889 100.0% $570,694 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</Table>
Our intimate apparel products for the Warner's, Olga, Body Nancy
Ganz/Bodyslimmers and Lejaby labels are either manufactured in our facilities in
the United States, Costa Rica, Honduras, Mexico and France or sourced from third
parties located in Morocco, China and Tunisia. Calvin Klein underwear products
are sourced primarily from third parties located in Asia. Sourcing allows us to
maximize production flexibility while avoiding significant capital expenditures,
work-in-process inventory buildups and the costs of managing a large production
work force. We inspect products manufactured by contractors to ensure that they
meet our standards.
As part of our overall business strategies, the Intimate Apparel Group is
implementing the following specific strategic initiatives:
Further improving the cost structure of the Intimate Apparel Group and
reducing our manufacturing and product acquisition cost by:
Consolidating existing manufacturing facilities. We are consolidating
certain manufacturing operations in North America and Europe.
88
Strategically utilizing contractors. We intend to use contractors to:
(i) facilitate the consolidation of certain manufacturing operations in
North America and Europe; (ii) provide the Intimate Apparel Group with
greater flexibility in aligning its manufacturing capacity with the
changing demands of our customers; and (iii) reduce the Intimate Apparel
Group's manufacturing and product acquisition costs.
Consolidating distribution facilities in Canada. We intend to consolidate
all of our distribution facilities in Canada to reduce our selling and
distribution costs.
Fostering organic growth of existing businesses by:
Expanding distribution of our products outside existing geographic
territories. For example, we believe that there is an opportunity
to increase revenues by re-launching the Lejaby brand in the premium
priced distribution channel in North America.
Increasing penetration of our Calvin Klein men's and women's underwear
brands in Europe and Asia. For example, in Fiscal 2002, we signed new
distribution agreements with third parties in China, Korea, Malaysia and
Singapore.
Building our private label business. We believe that our design, product
manufacturing and sourcing expertise will enable us to build a private
label intimate apparel business. We believe that these private label
programs could provide incremental revenue and profitability and will
not directly compete with our existing branded product offerings
because the private label products will generally be offered at lower
price points and will be sold to customers that do not carry our branded
products.
Introducing products to the mass merchandise channels of distribution.
We believe that there is an opportunity to develop and introduce new
intimate apparel products to the growing chain and mass merchandise
market in the United States and to the comparable European mass
merchandise channel, the hyper-market channel of distribution.
SPORTSWEAR
The Sportswear Group designs, sources and markets mass market to premium
priced men's and women's sportswear. The Sportswear Group also operates four
full price A.B.S. by Allen Schwartz retail stores. Net revenues of the
Sportswear Group accounted for 35.2% of our net revenues in Fiscal 2002.
The following table sets forth the Sportswear Group's brand names and the
apparel price ranges and types:
<Table>
<Caption>
BRAND NAME PRICE RANGE TYPE OF APPAREL
- ------------------------------- ----------------- -----------------------------------------------
Calvin Klein................... Better to premium Men's, women's, junior's and children's
designer jeanswear, khakis and jeans-related
products and men's accessories
Chaps Ralph Lauren............. Upper moderate Men's knit and woven sport shirts, sweaters,
outerwear, sportswear and bottoms
A.B.S. by Allen Schwartz and
related brands............... Better to premium Women's and junior's casual sportswear and
dresses
Catalina....................... Mass market Men's and women's sportswear
White Stag..................... Mass market Women's sportswear, including tops, bottoms and
activewear
</Table>
The Sportswear Group benefits from our association with some of the best
known and most innovative American fashion designers. According to a
December 2001 Women's Wear Daily survey, the Calvin Klein and Ralph Lauren
trademarks were two of the most recognized brand names in the world. Moreover,
our A.B.S. by Allen Schwartz line of women's clothing provides us with a product
offering in the women's premium priced sportswear market.
89
We license the Catalina and White Stag brands on an exclusive basis to
Wal-Mart for women's sportswear. White Stag is one of Wal-Mart's leading women's
sportswear brands. We design products and receive royalty payments on sales by
Wal-Mart. We also assist Wal-Mart in sourcing products under the White Stag
brand.
The Calvin Klein line includes men's and women's jeans and jeans-related
products, including khakis, knit and woven tops and shirts. Chaps Ralph Lauren
is a main-floor brand, offering a moderately priced men's sportswear line
providing a more casual product offering to the consumer. Catalina and White
Stag are women's mass market sportswear lines with a full range of products. The
Catalina and White Stag lines include women's sportswear, including tops,
bottoms and activewear. The A.B.S. by Allen Schwartz line is a women's and
junior's better to premium sportswear line.
The Sportswear Group's products are distributed primarily through department
stores, independent retailers, membership clubs and mass merchandisers and, to a
lesser extent, specialty stores.
The following table sets forth the Sportswear Group's principal distribution
channels and customers:
<Table>
<Caption>
CHANNELS OF DISTRIBUTION CUSTOMERS BRANDS
- ----------------------------- ----------------------------- -----------------------------
United States
Department Stores Federated Department Calvin Klein jeans, Chaps
Stores, The May Company, Ralph Lauren and A.B.S. by
Saks Fifth Avenue and Allen Schwartz
Target
Independent Retailers Nordstrom, Dillard's, Calvin Klein jeans, Chaps
Neiman Marcus and Belk Ralph Lauren and A.B.S. by
Allen Schwartz
Other Military Chaps Ralph Lauren and
Calvin Klein jeans
Membership Clubs Costco and Sam's Club Calvin Klein jeans
Mass Merchandisers Wal-Mart Catalina/White Stag
(licensed)
CANADA Hudson Bay Company, Calvin Klein jeans and
Zellers, Sears and Wal-Mart Chaps Ralph Lauren
MEXICO Wal-Mart, Sears, Liverpool Calvin Klein jeans and Chaps
and Palacio de Hierro Ralph Lauren
</Table>
The Sportswear Group generally markets its products for four retail selling
seasons (spring, summer, fall and holiday). New styles, fabrics and colors are
introduced based upon consumer preferences and market trends, and to coincide
with the appropriate selling season. Sportswear Group recorded 49.6%, 44.8% and
45.0% of its net revenues in the first half of Fiscal 2000, 2001 and 2002,
respectively.
The Sportswear Group has operations in the United States, Canada and Mexico.
The following table sets forth the domestic and international net revenues
of the Sportswear Group:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
----------------- ----------------- -----------------
NET % OF NET % OF NET % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS OF DOLLARS)
Net revenues:
United States............... $823,064 93.2% $512,776 89.4% $472,214 89.8%
International............... 59,853 6.8 60,921 10.6 53,350 10.2
-------- ------ -------- ------ -------- ------
$882,917 100.0% $573,697 100.0% $525,564 100.0%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</Table>
The Sportswear Group's products are primarily sourced from third party
contractors in the United States, Mexico and Asia.
As part of our overall business strategies, the Sportswear Group is
implementing the following specific strategic initiatives:
90
Further improving the cost structure of the Sportswear Group and reducing
its manufacturing and product acquisition cost by:
Reducing product cost. The Sportswear Group seeks to reduce the costs
of its products by increasing the use of competitive sourcing. With
the shutdown of the domestic Calvin Klein jeans manufacturing facilities
in Fiscal 2002, we now source all of the Sportswear Group's products from
third party vendors.
Reducing our selling and distribution costs. The Sportswear Group seeks
to reduce its selling and distribution costs by consolidating certain
distribution operations in the United States and Canada.
Fostering organic growth of the Sportswear Group's business by:
Exploring product extensions and new channels of distribution. We
recently introduced a men's sportswear line under the Allen B'r'
trademark and are exploring the introduction of secondary brands for
women's sportswear to new channels of distribution.
Exploring potential sublicensing opportunities. We hold the rights
to distribute children's jeans and jeans-related apparel under the
Calvin Klein label. We do not believe that children's apparel is a core
business and are seeking to sublicense to a third party the right to sell
Calvin Klein children's products, which could provide incremental royalty
income for us.
SWIMWEAR GROUP
The Swimwear Group designs, manufactures, sources and markets mass market to
premium priced swimwear, fitness apparel, swim accessories and related products.
The Swimwear Group also operates 45 full price Speedo Authentic Fitness retail
stores (including one online store). Net revenues of the Swimwear Group
accounted for 20.4% of our net revenues in Fiscal 2002.
The following table sets forth the Swimwear Group's brand names and the
apparel price ranges and types:
<Table>
<Caption>
BRAND NAME PRICE RANGE TYPE OF APPAREL
- -------------------------------------- ---------------------------- ------------------------------
Speedo/Speedo Authentic Fitness....... Better Men's and women's competitive
swimwear and swim accessories,
men's swimwear and
coordinating T-shirts, women's
fitness swimwear, Speedo
Authentic Fitness activewear
and children's swimwear
Anne Cole............................. Better to premium Women's swimwear
Cole of California.................... Upper moderate to better Women's swimwear
Sunset Beach.......................... Upper moderate to better Junior's swimwear
Sandcastle............................ Upper moderate to better Women's swimwear
Catalina/White Stag................... Mass market Men's and women's swimwear
Lifeguard............................. Upper moderate to better Swimwear and related products
Nautica............................... Upper moderate to better Women's swimwear, beachwear
and accessories
Calvin Klein.......................... Better to premium Women's and juniors swimwear
</Table>
91
Speedo is the pre-eminent competitive swimwear brand in the world and
innovations by the Swimwear Group and its licensor, Speedo International, Ltd.
have led and continue to lead the competitive swimwear industry. For example, a
Speedo product innovation was the development of the Speedo Fastskin suit
(developed by the Swimwear Group and its licensor, Speedo International, Ltd.)
which was introduced in 2000 and mimics shark skin for maximum speed.
Eighty-nine percent of the 2003 United States individual swimming national
champions raced in Fastskin suits. Speedo competitive swimwear is primarily
distributed through sporting goods stores and swim specialty shops. Competitive
swimwear accounted for 10.0% of the Swimwear Group's net revenues in Fiscal
2002.
The Swimwear Group leverages the performance image of the Speedo competitive
swimwear brand to market its Speedo Authentic Fitness active and fitness
apparel. We also capitalize on this image in marketing our Speedo brand fitness
and fashion swimwear for both men and women by incorporating performance
elements in these more fashion oriented products. Speedo fitness and fashion
swimwear, Speedo swimwear for children and Speedo/Speedo Authentic Fitness
active apparel are distributed through department and specialty stores,
independent retailers, chain stores, sporting goods stores, catalog retailers
and membership clubs. Speedo fashion swimwear, active apparel and related
products accounted for 32.1% of the Swimwear Group's net revenues in Fiscal
2002.
Speedo accessories, including swim goggles, water shoes, water-based fitness
products, water toys, electronics and other swim and fitness-related products
for adults and children, are primarily distributed through sporting goods
stores, chain stores, swim specialty shops, membership clubs and mass
merchandisers. Speedo accessories accounted for 21.6% of the Swimwear Group's
net revenues in Fiscal 2002.
The Swimwear Group's Designer Swimwear business unit designs, manufactures,
sources and sells a broad range of fashion swimwear and beachwear for juniors
and women. Designer Swimwear products are distributed through all channels of
distribution in the United States and Canada including department stores,
independent retailers, chain stores, membership clubs, mass merchandisers and
swim specialty shops. Designer Swimwear accounted for 36.3% of the Swimwear
Group's net revenues in Fiscal 2002.
The Swimwear Group's products are distributed primarily through department
stores, independent retailers, chain stores, membership clubs, mass
merchandisers and swim specialty stores.
The following table sets forth the Swimwear Group's principal distribution
channels and customers:
<Table>
<Caption>
CHANNELS OF DISTRIBUTION CUSTOMERS BRANDS
- ----------------------------- ------------------------------ ------------------------------
UNITED STATES
Department Stores........ Federated Department Stores, Speedo fitness and active
The May Company, Saks Fifth apparel, Anne Cole, Cole of
Avenue and Target California, Sandcastle and
Sunset Beach
Independent Retailers.... Nordstrom, Dillard's, Neiman Anne Cole and Speedo fitness
Marcus and Belk and active apparel
Chain Stores............. J. C. Penney, Kohl's, Sears Speedo accessories and fitness
and Target and active apparel and private
label
Other.................... Military, Victoria's Secret Speedo performance, fitness
Catalog and The Sports and active apparel and
Authority accessories, Anne Cole and
private label
Membership Clubs......... Costco and Sam's Club Speedo fitness and active
apparel and accessories
Mass Merchandisers....... Wal-Mart Catalina/White Stag (wholesale
basis)
CANADA....................... Hudson Bay Company, Zellers, Speedo fitness and active
Sears and Wal-Mart apparel and accessories
MEXICO....................... Wal-Mart, Sears, Liverpool, Speedo fitness and active
and Palacio de Hierro apparel and accessories
</Table>
92
The Swimwear Group generally markets its products for three retail selling
seasons (spring, fall and holiday). New styles, fabrics and colors are
introduced based upon consumer preferences and market trends, and to coincide
with the appropriate selling season. The swimwear business is seasonal.
Approximately 76.5%, 78.1% and 71.2% of the Swimwear Group's net revenues were
recorded in the first halves of Fiscal 2000, 2001 and 2002, respectively.
The Swimwear Group has operations in the United States, Mexico and Canada.
The following table sets forth the domestic and international net revenues
of the Swimwear Group:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
---------------- ---------------- ----------------
NET % OF NET % OF NET % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS OF DOLLARS)
United States...................... $340,286 95.8% $297,174 95.3% $291,032 95.4%
International...................... 14,913 4.2 14,628 4.7 13,962 4.6
-------- ----- -------- ----- -------- -----
$355,199 100.0% $311,802 100.0% $304,994 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</Table>
The Swimwear Group's products are manufactured in our facilities in Mexico
and are sourced from third party contractors in the United States, Mexico and
Asia.
As part of our overall business strategies, the Swimwear Group has developed
the following specific strategic initiatives:
Further improving the cost structure of the Swimwear Group and reducing
our manufacturing and product acquisition cost by reducing manufacturing
costs. The Swimwear Group intends to reduce manufacturing costs through more
efficient plant capacity utilization, further cost cutting initiatives and
enhancements to its manufacturing planning and material requirements
planning software and practices.
Fostering organic growth of the Swimwear Group's business by:
Expanding distribution channels for its existing products to new
customers in new retail segments. The Swimwear Group seeks to market
Speedo accessories (such as swim goggles and water toys for children)
in grocery and drug store chains, market our electronic products (such
as Speedo timing watches and underwater radios) in electronics stores,
expand the department store distribution of our fashion swimwear
lines and expand the distribution of Speedo outerwear and fleece
products.
Developing new products. We believe that the Speedo brand can be further
expanded to move Speedo 'out of the water' through product offerings in
classifications such as fitness-related active sportswear.
Entering into new licensing agreements. In March 2003, we entered into
a license agreement with Nautica to manufacture, distribute and sell
women's fashion swimwear. The Nautica brand adds to our fashion swimwear
product portfolio.
Capitalizing on sublicensing opportunities. We believe that the Speedo
brand offers opportunities for sublicenses that can generate royalty
income. For example, the Swimwear Group recently entered into a
sublicense for the distribution of Speedo sunglasses with Riviera. We
believe that further sublicense opportunities exist in swim and
active-related consumer products.
RETAIL STORES
Beginning in Fiscal 2003, the operations of our remaining retail stores have
been combined with the operations of our three wholesale business Groups.
Through January 4, 2003, our Retail Stores Group was comprised of both outlet
and full price retail stores. As of January 5, 2002, we operated 95 Speedo
Authentic Fitness retail stores, 86 domestic and international outlet retail
stores and 16 full price Calvin Klein retail stores. During Fiscal 2002, we sold
the assets of, and closed, all of our domestic outlet retail stores. During
Fiscal 2002, we also closed 47 Speedo Authentic
93
Fitness full price retail stores. We closed three additional Speedo Authentic
Fitness full price retail stores in January 2003. The closing of our domestic
outlet retail stores and the sale of the related inventory generated $23.2
million of net proceeds through January 4, 2003. We no longer operate any
domestic outlet retail stores. As of July 5, 2003, we sold our products directly
through 78 retail stores, including two Warnaco outlet retail stores in Canada;
11 outlet retail stores in Europe; 45 Speedo Authentic Fitness full price retail
stores in North America (including one online store); four A.B.S. by Allen
Schwartz retail stores in North America; five Calvin Klein underwear full price
retail stores in Europe; and 11 full price Calvin Klein underwear retail stores
in Asia.
The following table sets forth the domestic and international net revenues
of the Retail Stores Group:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
---------------- ---------------- ----------------
NET % OF NET % OF NET % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS OF DOLLARS)
United States...................... $213,407 88.0% $160,621 84.2% $ 74,174 80.9%
International...................... 29,087 12.0 30,247 15.8 17,530 19.1
-------- ----- -------- ----- -------- -----
$242,494 100.0% $190,868 100.0% $ 91,704 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</Table>
Net revenues of our retail operations accounted for 6.1% of our net revenues
in Fiscal 2002 and are expected to account for approximately 3% of our net
revenues in Fiscal 2003. As a result, beginning in Fiscal 2003, the results of
operations of the Retail Stores Group have been allocated among our Intimate
Apparel, Sportswear and Swimwear Groups according to the type of product sold.
CUSTOMERS
Our products are widely distributed to department and specialty stores,
independent retailers, chain stores, membership clubs and mass merchandise
stores in North America and Europe. One customer, Federated Department Stores,
Inc., accounted for 10.5% of our net revenues in Fiscal 2002, and our top ten
customers accounted for 51.9% of our net revenues in Fiscal 2002. No customer
accounted for 10% or more of our net revenues in either Fiscal 2000 or Fiscal
2001.
We offer a diversified portfolio of brands across multiple distribution
channels to a wide range of customers. We utilize focus groups, market research
and in-house and licensor design staffs to align our brands with the preferences
of consumers. We believe that this strategy reduces our reliance on any single
distribution channel and allows us to market products with designs and features
that appeal to a wide range of consumers at varying price points.
ADVERTISING AND PROMOTION
We devote significant resources to advertising and promoting our various
brands. The goal of our advertising and promotional program is to increase
consumer awareness of our products with the retail consumer and, consequently,
to increase consumer demand.
Total advertising and promotion expense was $141.3 million, or 6.3% of net
revenues, in Fiscal 2000, compared with $138.4 million, or 8.3% of net revenues,
in Fiscal 2001, and $108.1 million, or 7.2% of net revenues, in Fiscal 2002. We
focus our advertising and promotional spending on brand and/or product specific
advertising, primarily through point of sale product displays, visuals and
individual in-store promotions. Some of our brands also advertise in national
print publications. Our Swimwear Group sponsors a number of world-class
swimmers, divers, volleyball players and triathletes that wear our products in
competition and participate in various promotional activities on behalf of the
Speedo brand.
We participate in cooperative advertising programs with many of our domestic
customers, reimbursing customers for a portion of the cost incurred by the
customer in placing print advertising featuring our products.
94
Our licenses to use the Calvin Klein, Nautica and Chaps Ralph Lauren
trademarks include provisions requiring us to spend a specified percentage
(ranging from 2% to 3%) of revenues on advertising and promotion related to the
licensed products. We also benefit from general advertising campaigns conducted
by our licensors. Though some of these advertising campaigns do not focus
specifically on our licensed products and often include the products of other
licensees in addition to ours, we benefit from the general brand recognition
that these campaigns generate.
SALES
Our wholesale customers are served by more than 300 salaried and
commissioned sales representatives, who are generally assigned to specific
brands and products. We also employ sales coordinators who assist our customers
in presenting our products effectively and in educating consumers about our
various products. In addition, we have customer service departments for each
business unit that assist our sales representatives and customers in tracking
goods available for sale, determining order and shipping lead times and tracking
the status of open orders.
We utilize Electronic Data Interchange programs, or EDI, wherever possible,
which permit us to receive purchase orders electronically from customers and, in
some cases, to transmit invoices electronically to customers. EDI helps us
ensure that our customers receive our products in a timely and efficient manner.
DISTRIBUTION
We distribute our products to our wholesale customers and our retail stores
from our various distribution facilities located in the United States (five
facilities including one third party logistics facility), Mexico (one facility),
Canada (three facilities) and the Netherlands (one facility managed through a
joint venture). Several of our facilities are shared by more than one of our
business units and/or operating segments. We currently subcontract the
distribution and logistics of our Calvin Klein jeans operation in the United
States pursuant to an agreement which expires in December 2003. We expect to
either extend the contract or consolidate our Calvin Klein jeans distribution in
other facilities. We own one of our distribution facilities and lease all of our
other distribution facilities, other than the joint venture and sub-contracted
facilities. We expect to consolidate our three Canadian distribution operations
in one facility in the fourth quarter of Fiscal 2003 in order to improve
operating efficiency.
RAW MATERIALS
Our raw materials are principally cotton, wool, silk, synthetic and
cotton-synthetic blends of fabrics and yarns. Raw materials are available from
multiple sources. We have not experienced any material shortage of raw
materials.
TRADEMARKS AND LICENSING AGREEMENTS
We own and license a portfolio of highly recognized brand names. Most of the
trademarks used by us are either owned or licensed in perpetuity. Our core
brands have been established in their respective markets for extended periods
and have attained a high level of consumer awareness. The Warner's and Olga
brands have been in existence for 130 and 63 years, respectively, Speedo has
been in existence for 75 years, Lejaby has been in existence for more than 50
years and Calvin Klein has been in existence for more than 25 years. Warner's,
Olga and Calvin Klein were three of the top ten selling intimate apparel brands
in U.S. department and specialty stores in Fiscal 2002 and we believe Speedo is
the dominant competitive swimwear brand in the United States.
95
The following table summarizes our principal trademarks and license
agreements:
<Table>
<Caption>
OWNED TRADEMARKS
- --------------------------------------------------------------------------------------------
Warner's'r' White Stag'r'(a)
Olga'r' Catalina'r'(b)
Body Nancy Ganz'TM'/Bodyslimmers'r' A.B.S. by Allen Schwartz'r' and related
Lejaby'r' trademarks
Rasurel'r' Cole of California'r'
Calvin Klein'r' (beneficially owned for men's Sunset Beach'r'
and women's underwear, loungewear and Sandcastle'r'
sleepwear)
</Table>
<Table>
<Caption>
TRADEMARKS LICENSED IN PERPETUITY
- --------------------------------------------------------------------------------------------
TRADEMARK TERRITORY
- --------------------------------------------- ---------------------------------------------
Speedo'r'/Speedo Authentic Fitness'r'(c) United States, Canada, Mexico, Caribbean
Anne Cole'r' (for swimwear and sportswear)(d) Worldwide
</Table>
<Table>
<Caption>
TRADEMARKS LICENSED FOR A TERM
- --------------------------------------------------------------------------------------------
TRADEMARK TERRITORY EXPIRES(i)
- --------------------------------------- --------------------------------------- ----------
Calvin Klein'r' (for jeans and North, South and Central America 12/31/2044
jeans-related products)(e)
Chaps Ralph Lauren'r' (for men's United States, Canada, Mexico 12/31/2018
sportswear)(f)
Nautica'r' (for women's swimwear, United States, Canada, Mexico, 6/30/2009
beachwear and accessories)(g) Caribbean
Lifeguard'r' (for swimwear and related Worldwide 6/30/2005
products)
Calvin Klein for women's and juniors Worldwide 12/13/2013
swimwear(h)
</Table>
- ---------
(a) Licensed to Wal-Mart Stores, Inc. for women's sportswear
through 2004.
(b) Licensed to Wal-Mart Stores, Inc. for sportswear through
2004. We also sell swimwear wholesale to Wal-Mart Stores,
Inc. using the Catalina trademark.
(c) Licensed in perpetuity from Speedo International, Ltd.
(d) Licensed in perpetuity from Anne Cole and Anne Cole Design
Studio.
(e) Includes a renewal option which permits us to extend for an
additional 10-year term subject to compliance with certain
conditions.
(f) Includes two renewals options, each of which permits us to
extend for an additional 5-year term subject to compliance
with certain conditions.
(g) License executed in March 2003. We expect to begin shipments
in the fourth quarter of Fiscal 2003.
(h) License term commences January 2004. Initial term of license
expires on December 31, 2008.
(i) Assumes exercise of renewal option(s).
-------------------
We regard our intellectual property in general, and in particular our owned
trademarks and licenses, as our most valuable assets. We believe the trademarks
and licenses have substantial value in the marketing of our products. We protect
our trademarks by registering them with the U.S. Patent and Trademark Office and
with governmental agencies in other countries where our products are
manufactured and sold. We work vigorously to enforce and protect our trademark
rights by engaging in regular market reviews, helping local law enforcement
authorities detect and prosecute counterfeiters, issuing cease-and-desist
letters against third parties infringing or denigrating our trademarks and
initiating litigation as necessary. We also work with trade groups and industry
participants seeking to strengthen laws relating to the protection of
intellectual property rights in markets around the world.
96
Although the specific terms of each of our license agreements vary,
generally the agreements provide for minimum royalty payments and/or royalty
payments based on a percentage of net sales. The license agreements generally
also grant the licensor the right to approve any designs marketed by us.
We license the White Stag and Catalina brand names to Wal-Mart for
sportswear and other products. The agreements require the licensee to pay
royalties and fees to us. The license with Wal-Mart for the use of the White
Stag and Catalina names expires on December 31, 2004. On an ongoing basis, we
evaluate entering into distribution or license agreements with other companies
that would permit those companies to market products under our trademarks. In
evaluating a potential distributor or licensee, we generally consider the
experience, financial stability, manufacturing performance and marketing ability
of the proposed licensee. Royalty income derived from licensing was $14.1
million, $16.1 million and $16.5 million in Fiscal 2002, 2001 and 2000,
respectively.
We have license agreements in perpetuity with Speedo International, Ltd.
which permit us to design, manufacture and market certain men's, women's and
children's apparel including swimwear, sportswear and a wide variety of other
products using the Speedo trademark and certain other trademarks, including
Speedo, Surf Walker'r' and Speedo Authentic Fitness. Our license to use the
Speedo and other trademarks was granted in perpetuity subject to certain
conditions and is exclusive in the United States, its territories and
possessions, Canada, Mexico and the Caribbean. The agreements provide for
minimum royalty payments to be credited against future royalty payments based on
a percentage of net sales. The license agreements may be terminated with respect
to a particular territory in the event we do not pay royalties or abandon the
trademark in such territory. Moreover, the license agreements may be terminated
in the event we manufacture, or are controlled by a company that manufactures,
racing/competitive swimwear, swimwear caps or swimwear accessories under a
different trademark, as specifically defined in the license agreements. We
generally may sublicense the Speedo trademark within the geographic regions
covered by the licenses. Speedo International, Ltd. retains the right to use or
license our brand names in other jurisdictions and actively uses or licenses the
brand names throughout the world outside of our licensed territory.
In 1992, we entered into an agreement with Speedo Holdings B.V. and its
successor, Speedo International, Ltd., granting certain additional irrevocable
rights to us relating to the use of the Authentic Fitness name and service mark,
which rights are in addition to the rights under the license agreements with
Speedo International, Ltd.
We have an exclusive worldwide license agreement with Anne Cole and Anne
Cole Design Studio Ltd. Under the license agreement, we have the right to use,
in perpetuity, the Anne Cole trademark for women's swimwear, activewear and
beachwear and children's swimwear, subject to certain terms and conditions.
Under the license agreement, we are required to pay certain minimum guaranteed
annual royalties, to be credited against earned royalties, based on a percentage
of net sales. Anne Cole and Anne Cole Design Studio Ltd. have the right to
approve products bearing the licensed trademark, as set forth in the license.
We have a license to develop, manufacture and market designer jeanswear and
jeans-related products under the Calvin Klein trademark in North, South and
Central America. The initial term of the license expires on December 31, 2034
and is extendable by us for a further 10-year term expiring on December 31, 2044
if we achieve certain sales targets in the United States, Mexico and Canada. Our
exclusive worldwide license agreement with Calvin Klein, Inc. to produce Calvin
Klein men's accessories expires on June 30, 2004. We do not expect to extend
this license agreement.
All of the Calvin Klein trademarks (including all variations and formatives
thereof) for all products and services are owned by the Calvin Klein Trademark
Trust. The trust is co-owned by Calvin Klein, Inc. and us. The Class B and C
Series Estates of the trust correspond to the Calvin Klein trademarks for men's,
women's and children's underwear, intimate apparel and sleepwear, and are owned
by us. Accordingly, as owner of the Class B and C Estate Shares of the trust
corresponding to these products categories, we are the beneficial owner of the
Calvin Klein
97
trademarks for men's, women's and children's underwear, intimate apparel,
loungewear and sleepwear throughout the entire world.
We have the exclusive right to use the Chaps Ralph Lauren trademark for high
quality men's sportswear, jeanswear, activewear, sports shirts and swimwear in
the United States, its territories and possessions, including Puerto Rico; the
Caribbean Islands; Mexico; and Canada; and rights of first refusal with respect
to Europe. The license extends through December 31, 2008, subject to our right
to renew for two additional 5-year terms beyond the expiration date up to and
including December 31, 2013 and December 31, 2018, as the case may be, provided
that we have achieved certain levels of minimum earned royalties.
In March 2003, the Swimwear Group entered into a license agreement with
Nautica. Under the license agreement, we have the exclusive right to
manufacture, distribute and sell Nautica women's swimwear and related products
in the United States, Canada, Mexico and the Caribbean Islands for an initial
term of four years. The license agreement may be renewed at our option for two
additional years if we achieve certain sales targets.
In July 1995, the Swimwear Group entered into a license agreement with
Lifeguard Licensing Corp. Under the license agreement, we have the exclusive
right to manufacture, source, sublicense, distribute, promote and advertise
Lifeguard apparel worldwide and the non-exclusive right to manufacture, source,
sublicense, distribute, promote and advertise certain sporting accessories
(other than sunglasses, watches and soap). The initial term of the license
agreement was five years expiring on June 30, 2000. The agreement has been
renewed through June 30, 2005.
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.
INTERNATIONAL OPERATIONS
We have operations in the Americas (Canada, Mexico, Costa Rica and
Honduras), Europe (Austria, Belgium, France, Germany, Italy, the Netherlands,
Portugal, Spain, Switzerland and the United Kingdom) and Asia (Hong Kong and
Singapore), which engage in sales, manufacturing and/or marketing activities.
International operations generated $357.7 million, or 15.9% of our net revenues,
in Fiscal 2000 compared with $328.4 million, or 19.6% of our net revenues, in
Fiscal 2001 and $325.3 million, or 21.8% of our net revenues, in Fiscal 2002.
Export sales are not significant.
The movement of foreign currency exchange rates influence our results of
operations. With the exception of the fluctuation in the rates of exchange of
the local currencies in which our subsidiaries in Canada, Western Europe and
Hong Kong conduct their business, we do not believe that our operations in
Canada, Western Europe or Hong Kong are subject to risks that are significantly
different from those of our domestic operations. Mexico historically has been
subject to high rates of inflation and currency restrictions that may, from time
to time, adversely affect our Mexican operation. However, fluctuation of the
Peso against the United States dollar is not expected to have a material effect
on our consolidated financial position or results of operations.
We have manufacturing facilities in Costa Rica, Honduras, Mexico and France.
We have warehousing facilities in Canada, Mexico, France and the Netherlands
(through a joint venture). The Intimate Apparel and Swimwear Groups operate
manufacturing facilities in Costa Rica, Honduras and Mexico pursuant to
duty-advantaged (commonly referred to as 'Item 807') programs. Substantially all
of our Warner's, Olga and Body Nancy Ganz/Bodyslimmers products are manufactured
in our facilities in Honduras. A sustained loss of production from these
facilities could have an adverse effect on our ability to deliver these products
to our customers. We maintain insurance policies designed to substantially
mitigate the financial effects of any disruption in our sources of supply. We
believe that there is ample production capacity available to us worldwide to
offset any loss in its Honduran production within three months. We have many
potential sources of manufacturing, and, except with respect to the facility in
Honduras, a disruption at any one facility would not have a material adverse
effect on us.
98
The majority of our purchases which are imported into the United States are
invoiced in United States dollars or Hong Kong dollars (which currently
fluctuate in tandem with the United States dollar) and, therefore, are not
subject to currency fluctuations.
Substantially all of our products are imported and are subject to federal
customs laws, which impose tariffs as well as import quota restrictions
established by the United States Department of Commerce. Importation of goods
from some countries may be subject to embargo by United States Customs
authorities if shipments exceed quota limits. We closely monitor import quotas
and can, in most cases, shift production to contractors located in countries
with available quotas or to domestic manufacturing facilities. As a result,
existence of import quotas has not had a material effect on our business. Our
policy is to have many manufacturing sources so that a disruption at any one
facility will not significantly affect us; however, there can be no guarantee
that a disruption will not occur in the future.
The following table sets forth our domestic and international net revenues:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
------------------ ------------------ ------------------
NET % OF NET % OF NET % OF
REVENUES TOTAL REVENUES TOTAL REVENUES TOTAL
---------- ----- ---------- ----- ---------- -----
(IN THOUSANDS OF DOLLARS)
United States.................... $1,892,219 84.1% $1,342,903 80.4% $1,167,706 78.2%
Canada........................... 96,840 4.3 82,897 4.9 83,185 5.6
Europe........................... 199,736 8.9 185,570 11.1 195,529 13.1
Mexico........................... 45,112 2.0 41,896 2.5 25,971 1.7
Asia............................. 16,029 0.7 17,990 1.1 20,565 1.4
---------- ----- ---------- ----- ---------- -----
$2,249,936 100.0% $1,671,256 100.0% $1,492,956 100.0%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</Table>
The following table summarizes our property, plant and equipment, net,
located worldwide:
<Table>
<Caption>
DECEMBER 30, 2000 JANUARY 5, 2002 JANUARY 4, 2003
------------------ ------------------ ------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
----- ----- -----
(IN THOUSANDS OF DOLLARS)
United States.................... $ 293,384 89.0% $ 173,569 81.8% $ 137,351 87.6%
Canada........................... 6,888 2.1 4,638 2.2 3,452 2.2
All other........................ 29,242 8.9 33,922 16.0 15,909 10.2
---------- ----- ---------- ----- ---------- -----
$ 329,514 100.0% $ 212,129 100.0% $ 156,712 100.0%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</Table>
COMPETITION
The apparel industry is highly competitive. We compete with many domestic
and foreign apparel manufacturers, some of which are larger and more diversified
and have greater financial and other resources than us. In addition to
competition from other branded apparel manufacturers, we compete in certain
product lines with department and specialty store private label programs. We
also compete with both domestic and foreign manufacturers.
We offer a diversified portfolio of brands across a wide range of price
points in many channels of distribution in an effort to appeal to all consumers.
We compete on the basis of product quality, brand recognition, price, product
differentiation, marketing and advertising, customer service and other factors.
Although some of our competitors have greater sales, we do not believe that any
single competitor dominates any channel in which we operate. We believe that our
ability to serve multiple distribution channels with a diversified portfolio of
products under widely recognized brand names distinguishes us from many of our
competitors.
GOVERNMENT REGULATIONS
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
99
regulations of the Consumer Products Safety Commission and various environmental
laws and regulations. Our international businesses are subject to similar
regulations in the countries where they operate. We believe that we are in
compliance in all material respects with all applicable governmental
regulations.
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 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 from
a particular country. We monitor trade-related matters pending with the United
States government for potential positive or negative effects on our operations.
EMPLOYEES
As of January 4, 2003, we employed 13,536 employees. Approximately 4% of our
employees, all of whom are engaged in the manufacture and distribution of our
products, are represented by labor unions. We consider labor relations with
employees to be satisfactory and have not experienced any significant
interruption of our operations due to labor disagreements.
BACKLOG
Open orders for shipments by our Swimwear Group totaled $153.7 million and
$213.1 million as of January 5, 2002 and January 4, 2003, respectively. A
substantial portion of net revenues of our other businesses is based on orders
for immediate delivery and therefore backlog is not necessarily indicative of
future net revenues.
PROPERTIES
Our principal executive offices are located at 501 Seventh Avenue, New York,
New York, which we lease pursuant to a 14-year lease that we entered into in
March 2003. In addition to our executive offices, we lease offices in
California, Connecticut and New York, pursuant to leases that expire between
2003 and 2008.
We have five domestic manufacturing and warehouse facilities located in
California, Georgia and Pennsylvania and 23 international manufacturing and
warehouse facilities in Canada, Costa Rica, France, Honduras, Mexico, the
Netherlands (through a joint venture) and the United Kingdom. Some of our
manufacturing and warehouse facilities are also used for administrative and
retail functions. We own two of our domestic and three of our international
facilities. The domestic owned facilities are subject to liens in favor of the
lenders under our senior secured revolving credit facility. The rest of our
facilities are leased with terms (except for month-to-month leases) expiring
between 2003 and 2020.
We lease sales offices in a number of major cities, including Atlanta,
Dallas, Los Angeles and New York in the United States; Brussels, Belgium;
Toronto, Canada; Paris, France; Cologne, Germany; Hong Kong; Milan, Italy;
Mexico City, Mexico; and Lausanne, Switzerland. The sales office leases expire
between 2003 and 2008 and are generally renewable at our option. We currently
lease 44 Speedo Authentic Fitness retail store sites, four A.B.S. by Allen
Schwartz stores and 29 retail store sites in Canada, Europe and Asia. Retail
leases expire between 2003 and 2008 and are generally renewable at our option.
All of our production and warehouse facilities are located in appropriately
designed buildings, which are kept in good repair. All such facilities have
well-maintained equipment and sufficient capacity to handle present and expected
future volumes.
100
LEGAL PROCEEDINGS
SHAREHOLDER CLASS ACTIONS
Between August 22, 2000 and October 26, 2000, seven putative class action
complaints were filed in the U.S. District Court for the Southern District of
New York (the 'District Court') against us and certain of our officers and
directors (the 'Shareholder I Class Action'). The complaints, on behalf of a
putative class of our 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 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 us 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. On July 7, 2003, the United States Court of Appeals for the Second
Circuit reversed and remanded 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 us and certain of our 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 our 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 us 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 our current
independent auditors as a defendant. On June 2, 2003, the District Court granted
the outside directors' motion to dismiss and dismissed the motions to dismiss of
the other individual defendants.
Neither the Shareholder I Class Action nor the Shareholder II Class Action
has had, or will have, a material adverse effect on our financial condition,
results of operations or business.
SEC INVESTIGATION
The staff of the Division of Enforcement of the SEC 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 Reports
on Form 10-K for Fiscal 1998, Fiscal 1999 and Fiscal 2000 and our Quarterly
101
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 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 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 do
not expect the resolution of this matter to have a material effect on our
business, financial condition or results of operations.
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.
OTHER
In addition to the above, from time to time, we are involved in arbitrations
or legal proceedings that arise in the ordinary course of our business. We
cannot predict the timing or outcome of these claims and proceedings. Currently,
we are not involved in any arbitration and/or legal proceeding that we expect to
have a material effect on our financial condition, results of operations or
business.
102
MANAGEMENT
DIRECTORS AND OFFICERS OF THE WARNACO GROUP, INC.
Except as otherwise indicated, the information in this section relates
solely to The Warnaco Group, Inc. The directors and executive officers, their
age and their position as of September 15, 2003 are set forth below.
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
Stuart D. Buchalter....................... 66 Non-Executive Chairman of the Board
Joseph R. Gromek.......................... 56 Director, President and Chief Executive
Officer
Lawrence R. Rutkowski..................... 45 Senior Vice President -- Finance and Chief
Financial Officer
Stanley P. Silverstein.................... 51 Senior Vice President -- Corporate
Development and Chief Administrative
Officer
Jay A. Galluzzo........................... 29 Vice President, General Counsel and
Secretary
Antonio C. Alvarez II..................... 55 Director(a)
David A. Bell............................. 60 Director
Richard Karl Goeltz....................... 61 Director
Sheila A. Hopkins......................... 48 Director
Charles R. Perrin......................... 58 Director
</Table>
- ---------
(a) Mr. Alvarez served as our President and Chief Executive Officer through
mid-April 2003.
Mr. Buchalter currently serves as our Non-Executive Chairman of the Board of
Directors. Mr. Buchalter was elected to our Board of Directors in February 2000
and served as a member of the Board's Restructuring Committee from June 2001 to
February 2003. Mr. Buchalter is Of Counsel to the California law firm of
Buchalter, Nemer, Fields & Younger P.C. Mr. Buchalter serves as a director of
City National Corporation. He also serves as the Chairman of the Board of
Trustees of Otis College of Art & Design.
Mr. Gromek was elected our President and Chief Executive Officer in April
2003, at which time he was also elected to the Board of Directors. From 1996 to
January 2002, Mr. Gromek served as President and Chief Executive Officer of
Brooks Brothers, Inc. From January 2002 until he joined us in April 2003, Mr.
Gromek worked as an independent consultant. Over the last 25 years, Mr. Gromek
has held senior management positions with Saks Fifth Avenue, Limited Brands,
Inc. and Ann Taylor Stores Corporation. Mr. Gromek is the Vice Chairman of the
Board of Trustees of Volunteers of America.
Mr. Rutkowski was elected our Senior Vice President -- Finance and Chief
Financial Officer in September 2003. Over the last 20 years, Mr. Rutkowski has
held senior management positions at National Broadcasting Company/General
Electric and Walt Disney Studios. From December 1999 to June 2003, he served as
Executive Vice President and Chief Financial Officer at Primedia, Inc. From
November 1993 to December 1999 he served at National Broadcasting
Company/General Electric as Senior Vice President and Chief Financial
Officer -- Strategic Business Development and Controller of Corporate Finance.
Mr. Silverstein has served as our Senior Vice President-Corporate
Development since March 2003 and as our Chief Administrative Officer since
December 2001. Mr. Silverstein served as our Vice President and General Counsel
from December 1990 until February 2003. Mr. Silverstein served as our Assistant
Secretary from June 1986 to January 1987 and as our Secretary from January 1987
until May 2003.
Mr. Galluzzo has served as our Vice President and General Counsel since
March 2003 and as our Secretary since May 2003. Mr. Galluzzo was associated with
the law firm of Skadden, Arps,
103
Slate, Meagher & Flom LLP from October 2000 to March 2003. From September 1999
to September 2000, Mr. Galluzzo served as a law clerk to the Hon. Charles L.
Brieant, United States District Judge for the Southern District of New York. Mr.
Galluzzo received a J.D. from Columbia Law School in May 1999.
Mr. Alvarez was elected our President and Chief Executive Officer in
November 2001 and was elected to the Board of Directors in March 2002.
Mr. Alvarez served as a member of the Board's Restructuring Committee from March
2002 until February 2003. Mr. Alvarez served as our Chief Restructuring Officer
from June 2001 to November 2001 and as our Chief Restructuring Advisor while
employed by Alvarez & Marsal, Inc., a leading turnaround and crisis management
consulting firm, from April 2001 to June 2001. Mr. Alvarez is a co-founding
Managing Director of Alvarez & Marsal. Over the last 18 years, Mr. Alvarez has
served as restructuring officer, consultant or operating officer of numerous
troubled companies. Following the April 2003 election of Mr. Gromek as our
President and Chief Executive Officer and an orderly transition, Mr. Alvarez
returned to Alvarez & Marsal.
Mr. Bell has served as a member of our Board of Directors since April 2003.
In February 2003, Mr. Bell was named Chairman and Chief Executive Officer of The
Interpublic Group of Companies. Previously, he served as Interpublic's Vice
Chairman. From March 1999 to 2001, he served as Chairman and Chief Executive
Officer of True North Communications, Inc. From 1992 to March 1999, he served as
Chairman and Chief Executive Officer of Bozell World Wide. He is currently
Chairman of the Advertising Educational Foundation, PRO-AD PAC and the Ad
Council. Mr. Bell also serves on the Board of Directors of Primedia Inc. and The
New York City Partnership. He is a Trustee of the Convent of the Sacred Heart
School in New York City and the Pittsburgh Theological Seminary.
Mr. Goeltz has served as a member of our Board of Directors since July 2002.
Mr. Goeltz served as Vice Chairman and Chief Financial Officer of the American
Express Company from 1996 to 2000. Previously, Mr. Goeltz was Group Chief
Financial Officer and a member of the Board of Directors of NatWest Group, the
parent company of National Westminister Bank PLC. Prior to joining NatWest,
Mr. Goeltz served The Seagram Company for over 20 years in a variety of
management positions. Mr. Goeltz previously held various financial positions in
the treasurer's department of Exxon Corporation in New York and Central America.
Mr. Goeltz is a director of the New Germany Fund, a member of the Board of
Overseers of Columbia Business School, a director of Opera Orchestra of New
York, a member of the Council on Foreign Relations and a member of the Court of
Governors of the London School of Economics and Political Science.
Ms. Hopkins has served as a member of our Board of Directors since July
2003. Ms. Hopkins currently serves as Vice President and General Manager of U.S.
Personal Care at Colgate-Palmolive Company. Previously, Ms. Hopkins served as
Vice President of U.S. Marketing at Tambrands and in various marketing positions
at Procter & Gamble Company.
Mr. Perrin has served as a member of our Board of Directors since April
2003. Mr. Perrin served as Chairman of Avon Products, Inc. from May 1999 to
November 1999 and Chief Executive Officer of Avon from July 1998 to November
1999. He served as Avon's Vice Chairman from January 1998 to May 1999 and Avon's
Chief Operating Officer from January 1998 to July 1998. Mr. Perrin served as
Chairman and Chief Executive Officer of Duracell International, Inc. from 1994
to 1996. He is a Trustee of Trinity College, Vice Chairman of Ability Beyond
Disability, Chairman of Clearpool, Inc. and currently serves as a director of
Campbell Soup Company.
DIRECTORS AND OFFICERS OF WARNACO INC.
The directors and executive officers of Warnaco Inc. are identical to those
of The Warnaco Group, Inc., except that the position of Secretary is currently
vacant and Mr. Galluzzo serves as Warnaco Inc.'s Vice President, General Counsel
and Assistant Secretary. Upon the appointment of Mr. Galluzzo as Secretary of
Warnaco Inc. (which management intends to recommend to the
104
Board of Directors of Warnaco Inc. at its November meeting), the executive
officers of Warnaco Inc. will be identical to those of The Warnaco Group, Inc.
DIRECTORS AND OFFICERS OF OTHER GUARANTORS
The directors and executive officers of each of the guarantors (other than
The Warnaco Group, Inc.) are: Stanley P. Silverstein, Director, President and
Secretary; Lawrence R. Rutkowski, Director, Vice President and Treasurer; Wallis
H. Brooks, Director; and Jay A. Galluzzo, Vice President.
EXECUTIVE COMPENSATION
Except as otherwise indicated, the information in this section relates
solely to The Warnaco Group, Inc. The following table discloses summary
information regarding the compensation of (i) Antonio C. Alvarez II, the Chief
Executive Officer serving at January 4, 2003 and (ii) the two most highly
compensated officers serving at January 4, 2003 other than Mr. Alvarez, namely
James P. Fogarty, Senior Vice President -- Finance and Chief Financial Officer
and Stanley P. Silverstein, Senior Vice President -- Corporate Development,
Chief Administrative Officer and Secretary (collectively, the 'Named
Executives').
<Table>
<Caption>
LONG-TERM AWARDS
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- --------------------
SECURITIES
UNDER-
OTHER LYING ALL
ANNUAL OPTIONS/ OTHER
COMPEN- SARS COMPEN-
YEAR SALARY BONUS SATION (SHARES) SATION
---- ---------- ----- ------ -------- ------
NAME OF OFFICER AND POSITION(S):
Antonio C. Alvarez II (a)........... 2002 $1,500,058 $ -- $ (b) $ -- $ --
President and Chief Executive 2001 1,152,927 -- (b) -- --
Officer 2000 -- -- -- -- --
James P. Fogarty (c)................ 2002 375,014 -- (b) -- 1,530(e)
Senior Vice President -- Finance 2001 210,344 -- (b) -- --
and Chief Financial Officer 2000 -- -- -- -- --
Stanley P. Silverstein (f).......... 2002 450,018 187,500(d) (b) -- --
Senior Vice 2001 450,018 187,500(d) (b) -- --
President -- Corporate
Development and Chief 2000 525,061 -- (b) 100,000 --
Administrative Officer
</Table>
- ---------
(a) Mr. Alvarez was elected our President and Chief Executive
Officer on November 16, 2001. Mr. Alvarez continues to serve
as a director; however, in connection with Mr. Gromek's
election as the President and Chief Executive Officer on
April 15, 2003, Mr. Alvarez no longer serves as our
President and Chief Executive Officer.
(b) Other annual compensation was less than $50,000 or 10% of
such officer's annual salary and bonus for such year.
(c) Mr. Fogarty was elected our Chief Financial Officer on
December 20, 2001. Prior to his election to this position,
Mr. Fogarty served as our Senior Vice President from
June 11, 2001 to December 20, 2001 and served as an advisor
to us (while employed by Alvarez & Marsal) from April 30,
2001 to June 11, 2001. Following the election of
Lawrence R. Rutkowski on September 11, 2003, Mr. Fogarty no
longer serves as our Senior Vice President -- Finance and
Chief Executive Officer. Following an orderly transition,
Mr. Fogarty returned to Alvarez & Marsal.
(d) Represents retention bonus paid pursuant to our Key Domestic
Employee Retention Plan implemented as a result of the
Chapter 11 cases.
(e) Represents employer matching contributions under our
Employee Savings Plan.
(f) In March 2003, Mr. Silverstein was appointed our Senior Vice
President -- Corporate Development and continues to serve as
our Chief Administrative Officer. Prior to March 2003,
(footnotes continued on next page)
105
(footnotes continued from previous page)
Mr. Silverstein served as our Vice President, General
Counsel and Chief Administrative Officer. In addition,
Mr. Silverstein served as our Secretary from January 1987
until May 2003.
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
There were no Option/SAR grants to any employee, including the Named
Executives, in Fiscal 2002.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
There were no Option/SAR exercises by any employee or Named Executive in
Fiscal 2002. Pursuant to the terms of the Plan, the old common stock was
cancelled and holders of the old common stock received no distribution. As of
January 4, 2003, all options (including Mr. Silverstein's options) were
out-of-the money and were cancelled pursuant to the Plan on February 4, 2003.
Aggregated Options/SAR Exercises in
Last Fiscal Year and Fiscal Year-End Options/SAR Values
<Table>
<Caption>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS/SARS AT
FISCAL YEAR-END
(#) EXERCISABLE/
UNEXERCISABLE
-------------
Antonio C. Alvarez II....................................... 0/0
James P. Fogarty............................................ 0/0
Stanley P. Silverstein...................................... 792,077/50,000
</Table>
PENSION PLAN
PENSION PLAN TABLE
<Table>
<Caption>
YEARS OF SERVICE
AVERAGE ANNUAL COMPENSATION ---------------------------------------------------------
BEST 12 YEARS 5 10 15 20 25 30
- ------------- ------- ------- ------- ------- ------- -------
$100,000.............................. $ 6,884 $13,767 $20,651 $27,535 $34,418 $41,302
$150,000.............................. 10,884 21,767 32,651 43,535 54,418 65,302
$200,000.............................. 11,350 22,701 34,051 45,401 56,752 68,102
$250,000.............................. 11,350 22,701 34,051 45,401 56,752 68,102
$300,000.............................. 11,350 22,701 34,051 45,401 56,752 68,102
</Table>
The preceding table sets forth the annual pension benefit payable at age 65
pursuant to our pension plan, which provides such pension benefit to all
qualified personnel based on the average highest twelve consecutive calendar
years' compensation multiplied by the years of credited service. Such benefits
payable are expressed as straight life annuity amounts and are not subject to
reduction for social security or other offset. Benefits under our pension plan
were frozen effective December 31, 2002, and as a result no future benefits will
be earned by any participant in the Plan. As of January 4, 2003, the credited
years of service under the plan for the Named Executives were: Mr. Fogarty, one
year, seven months; and Mr. Silverstein, 18 years, nine months. Pursuant to the
terms of his employment agreement, Mr. Alvarez was not eligible to participate
in our pension plan. The current maximum remuneration covered by our Employee
Retirement Plan for each such individual is $170,000. Such amounts are included
in the Summary Compensation Table under 'Salary' and 'Bonus.'
106
COMPENSATION OF DIRECTORS
We do not pay any additional remuneration to employees for serving as our
directors. For his service as Non-Executive Chairman of the Board from November
2001 through February 4, 2003, Mr. Buchalter was paid an annual fee of $500,000,
payable semi-monthly. As reported in the Plan, Mr. Buchalter received $500,000
per year for his continued service as Non-Executive Chairman of the Board. Upon
the hiring of Mr. Gromek and the appointment of Messrs. Bell and Perrin,
Mr. Buchalter's compensation for his service as Non-Executive Chairman of the
Board was reduced to $250,000 per year. In connection with the consummation of
the Plan on February 4, 2003, Mr. Buchalter was paid a cash bonus of $210,004.
In addition, Mr. Buchalter received 12,975 shares of new common stock upon the
approval by the stockholders of our 2003 Stock Incentive Plan.
In Fiscal 2002, other directors who were not employees received an annual
retainer fee of $50,000, payable in cash, plus fees of $1,500 per day for
attendance at meetings of the board of directors and $1,000 per day for
attendance at meetings of our committees. In addition, the Chairmen of the
Audit, Restructuring, Compensation and Pension Committees were paid additional
fees of $4,375, $4,375, $1,458 and $1,458, respectively. Directors were also
reimbursed for out-of-pocket expenses incurred in connection with attendance at
meetings of the board of directors and its committees.
Effective February 4, 2003, our other directors who are not employees
receive an annual retainer fee of $65,000, payable 60% in cash and 40% in
equity, plus fees of $2,500 per day for attendance at meetings of the board of
directors and $1,000 per day for attendance at meetings of our committees, and
the Chairmen of the Audit, Compensation and Nominating and Corporate Governance
Committees are paid additional annual fees of $10,000, $5,000 and $5,000,
respectively. Directors are also reimbursed for out-of-pocket expenses incurred
in connection with attendance at meetings of the board of directors and its
committees.
EMPLOYMENT AGREEMENTS
Antonio C. Alvarez II. Mr. Alvarez's services to us were
initially governed by a contract with Alvarez & Marsal,
Inc., dated April 30, 2001, pursuant to which Mr. Alvarez
served as our Chief Restructuring Advisor. We then entered
into an employment agreement with Mr. Alvarez, effective
June 11, 2001, pursuant to which Mr. Alvarez served as our
Chief Restructuring Officer. The employment agreement was
amended in connection with his election to the positions of
President and Chief Executive Officer in November 2001.
Mr. Alvarez's employment agreement, as further amended, was
subsequently approved by the Bankruptcy Court on
February 21, 2002. The term of the employment agreement was
further amended as of July 16, 2002 to extend through the
earlier of April 30, 2003 or consummation of a plan of
reorganization for all or substantially all of the debtors
in the Chapter 11 cases. The employment agreement provided
for Mr. Alvarez's employment as our President and Chief
Executive Officer at a monthly base salary of $0.125
million. Under the employment agreement, Mr. Alvarez was not
entitled to participate in our benefit plans or programs,
including our pension or group health care programs. The
employment agreement provided that Mr. Alvarez would be
entitled to earn an incentive bonus of not less than $2.25
million, payable following the 'final payment date,' which
was defined as the earlier of (i) the expiration of
Mr. Alvarez's employment agreement, (ii) the date on which
there is a complete disposition of our company (whether by a
sale of substantially all of our stock or assets or
otherwise), (iii) the date on which a plan of reorganization
is consummated or (iv) the date on which Mr. Alvarez's
employment is terminated either by us without 'cause' or by
Mr. Alvarez for 'Good Reason' (each term as defined in Mr.
Alvarez's employment agreement). All or part of
Mr. Alvarez's bonus could have become payable earlier than
the final payment date of the bonus if certain financial
targets were met. Mr. Alvarez was also entitled to earn an
incremental bonus based upon the value of the pool of funds
available for distribution to creditors under the plan of
reorganization. No incremental bonus was payable until the
pool available for distribution to creditors exceeded
107
$625.0 million. The amount of the incremental bonus was to
be calculated as an escalating percentage of the amount by
which the pool available for distribution to creditors
exceeded $625.0 million. The incremental bonus, if earned,
was payable following the final payment date of the bonus,
but portions of the incremental bonus may have been paid
earlier than the final payment date of the bonus if certain
financial targets were met. Mr. Alvarez's employment
agreement provided that the incremental bonus was to be paid
in cash, debt or securities in the same proportions as the
pool available for distribution to creditors, except that no
less than $2.25 million of the incremental bonus was to be
paid in cash. Pursuant to the Plan and pursuant to Mr.
Alvarez's employment agreement, as modified, on February 4,
2003, Mr. Alvarez received an incentive bonus in an
aggregate amount of $5.873 million, comprising $1.950
million in cash, Second Lien Notes in the principal amount
of $0.942 million (which, together with accrued interest
thereon, was repaid in connection with the issuance of the
old notes) and 0.59% of the new common stock (266,400 shares
of common stock valued at $11.19 per share, for an aggregate
value of $2.981 million). Effective as of February 4, 2003,
the Alvarez agreement was replaced with, and superceded by,
the January 29, 2003 agreement with Alvarez & Marsal (as
described below). In April of 2003, we recruited Joseph R.
Gromek to be our President and Chief Executive Officer.
Following an orderly transition, Mr. Alvarez returned to
Alvarez & Marsal.
James P. Fogarty. Mr. Fogarty's services to us were
initially governed by the contract with Alvarez & Marsal,
dated April 30, 2001, pursuant to which Mr. Fogarty served
as an advisor to us. On June 11, 2001, we entered into an
employment agreement with Mr. Fogarty which set forth the
terms and conditions of Mr. Fogarty's employment. The term
of the Fogarty agreement was amended as of July 16, 2002 to
extend through the earlier of April 30, 2003 or consummation
of a plan of reorganization for all or substantially all of
the Debtors in the Chapter 11 cases. The Fogarty agreement
could have been terminated by either party upon 30 days'
written notice. The Fogarty agreement provided for
Mr. Fogarty's employment as Senior Vice President -- Finance
at an annual base salary of $0.375 million as well as
certain other benefit and reimbursement of expenses.
Mr. Fogarty was elected to the additional position of Chief
Financial Officer on December 20, 2001. Mr. Fogarty was
entitled to participate in all of our employee benefit plans
and programs, including our pension and group health benefit
plans. Effective as of February 4, 2003, the Fogarty
agreement was replaced with, and superceded by, the
Alvarez & Marsal agreement (as described below). Following
the election of Lawrence R. Rutkowski on September 11, 2003,
Mr. Fogarty no longer serves as our Senior Vice
President -- Finance and Chief Executive Officer. Following
an orderly transition, Mr. Fogarty returned to Alvarez &
Marsal.
Joseph R. Gromek. In connection with Mr. Gromek's
employment, we entered into an employment agreement, dated
April 14, 2003, with Mr. Gromek. The Gromek agreement has an
initial two-year term which commenced on April 15, 2003,
with automatic one-year renewals thereafter unless notice of
termination is given at least 180 days prior to the date on
which the term would otherwise expire. Under the Gromek
agreement, Mr. Gromek will receive a base salary of $900,000
per year for the initial two-year term and employee benefits
and perquisites consistent with those provided to our other
senior executives. In addition, Mr. Gromek's agreement
provides for a target bonus opportunity equal to 100% of his
base salary (pro-rated for partial years) and a guaranteed
bonus for the 2003 fiscal year of no less than 50% of his
base salary. Pursuant to the terms of the Gromek agreement,
we granted to Mr. Gromek 150,000 restricted shares of common
stock and a 10-year option to purchase 600,000 shares of
common stock, each award to be made under the 2003 Stock
Incentive Plan and subject to the terms and conditions set
forth in the agreements evidencing the awards. Each of these
equity awards will vest with respect to 25% of the shares on
each September 12, beginning in 2003, provided Mr. Gromek is
employed by us on each date, and will become fully vested if
a Change in Control (as defined in the Gromek agreement)
occurs during the term of the Gromek agreement. If
Mr. Gromek's employment with us is terminated either by us
without Cause (as defined in the Gromek agreement) or by
Mr. Gromek for Good Reason (as defined in the Gromek
agreement), Mr. Gromek will be entitled to (1) salary
continuation and participation in welfare benefit plans for
12 months, (2) a pro rata bonus for the fiscal year in which
the termination occurs
108
and (3) immediate vesting of 50% of the remaining unvested
shares of the restricted stock award that are outstanding as
of the date of such termination. If Mr. Gromek is terminated
because we choose not to renew a term, Mr. Gromek will be
entitled to salary continuation and participation in welfare
benefit plans for six months. If Mr. Gromek's employment
with us is terminated by us without Cause or by Mr. Gromek
for Good Reason within one year following a Change in
Control, Mr. Gromek is entitled to (1) salary continuation
and participation in welfare benefit plans for 18 months and
(2) a pro rata bonus for the fiscal year in which such
termination occurs. In order for Mr. Gromek to receive
severance benefits, he will be required to execute a release
of claims against us and our affiliates, and we will execute
a release (with certain exceptions) of claims against
Mr. Gromek. Under the terms of the Gromek agreement,
Mr. Gromek is bound by a perpetual confidentiality covenant,
a post-termination non-competition covenant and a
post-termination non-solicitation covenant.
Lawrence R. Rutkowski. In connection with Mr. Rutkowski's
employment, we entered into an employment agreement with Mr.
Rutkowski effective September 11, 2003. Mr. Rutkowski's
agreement has an initial two-year term commencing
September 15, 2003, with automatic one-year renewals
thereafter unless notice of termination is given at least
120 days prior to the date on which the term would otherwise
expire. Under Mr. Rutkowski's agreement, he will receive a
base salary of $550,000 (which may be reviewed annually for
increase by Mr. Gromek) and employee benefits and
perquisites consistent with those provided to our other
senior executives. In addition, Mr. Rutkowski's agreement
provides for a target bonus opportunity of 70% of his base
salary (pro-rated for fiscal year 2003). Mr. Rutkowski's
agreement also provides for a grant of 50,000 shares of
restricted stock (the 'Initial RS Grant') and an option to
purchase 200,000 shares of our common stock (the 'Initial
Option'), in each case, generally subject to the terms and
conditions set forth under our 2003 Stock Incentive Plan and
the agreement evidencing the award. Each of these equity
awards will vest with respect to 25% of the shares covered
thereby on each of February 29, 2004, February 28, 2005,
February 28, 2006 and February 28, 2007, provided that Mr.
Rutkowski is employed by us on such date. If Mr. Rutkowski's
employment is terminated by us without Cause or by Mr.
Rutkowski for Good Reason (each term as defined in Mr.
Rutkowski's agreement), he is entitled to (i) salary
continuation and participation in our medical and dental
plans for the remainder of the term of the agreement (but
not less than 12 months), (ii) a pro-rata bonus for the
fiscal year during which he is terminated and
(iii) immediate vesting of that portion of the Initial RS
Grant that would have vested if he had remained employed on
the vesting date immediately following the date of his
termination. In addition, that portion of the Initial Option
that is vested on the date of his termination will remain
exercisable for two years following the date of his
termination. If Mr. Rutkowski's employment is terminated
because of his death or disability, he (or his estate or
legal representative) is entitled to (i) a pro-rata bonus
for the fiscal year during which his employment terminates,
(ii) immediate vesting of 50% of the remaining shares
subject to the Initial RS Award and full vesting of the
Initial Option, which will remain exercisable for 12 months
following the date of termination. If Mr. Rutkowski is
terminated because we choose not to renew the term of his
agreement, Mr. Rutkowski will be entitled to salary
continuation and participation in medical and dental plans
for six months, and the vested portion of the Initial Option
will remain exercisable for nine months following the date
of termination. If Mr. Rutkowski's employment is terminated
by us without Cause or by Mr. Rutkowski for Good Reason
within one year following a Change in Control, Mr. Rutkowski
is entitled to (i) salary continuation and participation in
the Company's medical and dental plans for the remainder of
the term of the agreement (but not less than 12 months),
(ii) a pro-rata bonus for the fiscal year during which he is
terminated and (iii) full vesting of the Initial RS Award
and the Initial Option, with the option remaining
exercisable for six months following the date of
termination. If Mr. Rutkowski's employment is terminated by
us for Cause or if he voluntarily resigns, he will forfeit
any remaining shares subject to the Initial RS Award and the
unvested portion of the
109
Initial Option. In addition, if Mr. Rutkowski is terminated
by us for Cause, he will be required to return to us any
shares of common stock that were previously subject to the
Initial RS Award and which had vested within six months
prior to the date of termination, and to sell back to the
Company any shares purchased pursuant to the Initial Option
within six months prior to the date of termination; if any
such shares have been sold or otherwise disposed of, Mr.
Rutkowski will be required to repay to us the aggregate fair
market value of such shares (less, if applicable, the
exercise price) on the date of the sale or other
disposition. In order to receive severance benefits, Mr.
Rutkowski will be required to execute a release of claims
against us and our affiliates. Mr. Rutkowski's agreement
contains a perpetual confidentiality covenant and
post-termination non-competition and non-solicitation
covenants.
KEY DOMESTIC EMPLOYEE RETENTION PLAN
In connection with the Chapter 11 cases, we instituted a Key Domestic
Employee Retention Plan which was approved by the Bankruptcy Court. The
retention plan provided for stay bonuses, enhanced severance protection and
discretionary transaction bonus opportunities during the Chapter 11 cases. The
stay bonuses provided under the retention plan replaced our existing bonus and
other cash incentive compensation programs for the participants. The retention
plan covered approximately 245 key domestic employees, including
Mr. Silverstein. One-third of the total stay bonus was paid to Mr. Silverstein
on December 10, 2001, one-third was paid on June 10, 2002 and one-third was paid
on February 7, 2003. No severance or discretionary transaction bonus was paid to
Mr. Silverstein.
As a condition to participating in the retention plan, all participants were
required to execute an Employee Waiver, Release and Discharge of Claims which
released us and our affiliates from claims by the participants against us
(except with respect to certain indemnification rights and claims arising under
our retirement and savings plans).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During Fiscal 2002, the members of the Compensation Committee were
Mr. Joseph A. Califano, Jr., Mr. Donald G. Drapkin and Mr. Harvey Golub,
Chairman, all of whom were non-employee directors.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of January 4, 2003 with respect
to our old common stock issuable under our equity compensation plans:
<Table>
<Caption>
NUMBER OF SECURITIES
REMAINING AVAILABLE
NUMBER OF FOR FUTURE ISSUANCE
SECURITIES WEIGHTED-AVERAGE UNDER EQUITY
TO BE ISSUED UPON EXERCISE PRICE OF COMPENSATION PLANS
EXERCISE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a))(2)
------------- ------------------- ------------------- --------------
(a) (b)
Equity Compensation Plans approved by
stockholders:
1991 Stock Option Plan............... 59,900 $26.74 143,025
1993 Stock Plan...................... 1,177,613 22.54 12,954,701
1993 Non-Employee Director Stock
Plan............................... 70,000 20.21 330,000
1998 Stock Plan for Non-Employee
Directors.......................... 340,000 12.45 11,902,629
Equity Compensation Plans not approved by
stockholders:
1988 Employee Stock Purchase Plan.... -- n/a 278,700
1997 Stock Option Plan(1)............ 2,044,850 19.03 9,844,515
</Table>
- ---------
(1) Provided for issuance of shares up to the number of shares held in our
treasury.
(2) Pursuant to the terms of the Plan, the old common stock and derivative
securities relating to the old common stock, including all outstanding
options, were cancelled on February 4, 2003.
110
As of January 4, 2003, there remained outstanding options to purchase shares
of old common stock and restricted shares of old common stock that were
previously granted to employees and directors under various of our management
incentive plans. Pursuant to the terms of the Plan, the old common stock and
derivative securities relating to the old common stock, including all
outstanding options, were cancelled on February 4, 2003.
On March 12, 2003, our board of directors approved the adoption of the 2003
Stock Incentive Plan and also approved the granting of an aggregate of 750,000
shares of restricted stock and options to purchase 3,000,000 shares of new
common stock at fair market value. On May 28, 2003, our stockholders approved
the Stock Incentive Plan.
111
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the new common stock as of April 25, 2003 (except as
otherwise noted) by (i) each of our directors, (ii) each of our executive
officers, (iii) all directors and executive officers as a group and (iv) each
person who is known by us to own five percent or more of any class of our voting
securities.
<Table>
<Caption>
SHARES BENEFICIALLY
OWNED
--------------------------
NUMBER OF PERCENT
NAME SHARES OF SHARES
- ---- -------------- ---------
Antonio C. Alvarez II(a).................................... 266,400 *
David A. Bell(a)............................................ -- *
Stuart D. Buchalter(a)(b)................................... 12,975 *
James P. Fogarty(a)......................................... -- *
Jay A. Galluzzo(a)(c)....................................... 3,000 *
Richard Karl Goeltz(a)...................................... -- *
Harvey Golub(a)(k).......................................... -- *
Joseph R. Gromek(a)(c)...................................... 150,000 *
Charles R. Perrin(a)........................................ -- *
Stanley P. Silverstein(a)(c)................................ 33,000 *
All directors and executive officers as a group............. 465,375 *
OTHER 5% STOCKHOLDERS
The Bank of Nova Scotia(d).................................. 4,407,211 9.8%
Bank of America Corporation(e).............................. 2,692,655 6.0
Chesapeake Partners Management Co., Inc.(f)................. 2,597,613 5.8
Commerzbank Aktiengesellschaft(g)........................... 4,240,252 9.4
General Electric Capital Corporation(h)..................... 3,939,786 8.8
JPMorgan Chase Bank(i)...................................... 2,773,494 6.2
Societe Generale(j)......................................... 4,425,436 9.8
</Table>
- ---------
* Less than 1%
(a) The business address of each of the directors and officers
is c/o The Warnaco Group, Inc., 501 Seventh Avenue, New
York, New York 10018.
(b) Shares to be issued pursuant to the 2003 Stock Incentive
Plan.
(c) Shares of restricted stock to be issued pursuant to the 2003
Stock Incentive Plan. Restrictions lapse with respect to 25%
of such shares on September 12, 2003 and with respect to an
additional 25% of such shares on each of the first, second
and third anniversaries of September 12, 2003.
(d) Information based solely on a Schedule 13G dated February
10, 2003 filed with the SEC by The Bank of Nova Scotia
('Scotiabank'), 44 West King Street West, Toronto, Ontario,
Canada, M5H 1H1, reporting the beneficial ownership of the
shares of new common stock set forth in the table. According
to the Schedule 13G, Scotiabank has sole voting power and
sole dispositive power with respect to all such shares.
(e) Information based solely on a Schedule 13G, dated February
13, 2003, filed with the SEC by Bank of America Corporation,
100 North Tryon Street, Charlotte, North Carolina 28255,
reporting the beneficial ownership of the shares of new
common stock held by Bank of America Corporation ('BAC') and
its affiliates and subsidiaries: (i) NB Holdings Corporation
('NB'); (ii) Bank of America, N.A. ('BACNA'); (iii) BANA
(#1) LLC ('LLC'); (iv) Banc of America Strategic Solutions,
Inc. ('BASS'); (v) NationsBank Montgomery Holdings
Corporation ('NBC'); and (vi) Banc of America Securities LLC
('BACLLC'). According to the Schedule 13G (i) BAC has shared
voting power and shared dispositive power with respect to
2,692,655 shares; (ii) NB has shared voting power and shared
dispositive power with respect to 2,692,655 shares;
(iii) BACNA has sole voting power and sole dispositive power
with
(footnotes continued on next page)
112
(footnotes continued from previous page)
respect to 8,500 shares and has shared voting power and
shared dispositive power with respect to 2,286,453 shares;
(iv) LLC has shared voting power and shared dispositive
power with respect to 2,286,453 shares; (v) BASS has sole
voting power and sole dispositive power with respect to
2,286,453 shares; (vi) NBC has shared voting power and
shared dispositive power with respect to 397,702 shares; and
(vii) BACLLC has sole voting power and sole dispositive
power with respect to 397,702 shares. On June 23, 2003, Bank
of America Corporation filed an Amendment No. 1 to their
Schedule 13G, reporting that they had ceased to be the
beneficial owner of more than five percent of our new common
stock.
(f) Information based solely on a Schedule 13G, dated February
5, 2003, filed with the SEC by Chesapeake Partners
Management Co., Inc. ('CPMC'), 1829 Reisterstown Road, Suite
220, Baltimore, Maryland, 21208, reporting the beneficial
ownership of the shares of new common stock held by CPMC and
its affiliates and subsidiaries (i) Chesapeake Partners
Limited Partnership ('CPLP'); (ii) Chesapeake Partners
Institutional Fund Limited Partnership ('CPIFLP');
(iii) Chesapeake Partners International Ltd. ('CPINTL'); and
(iv) Barclay's Global Investors Event Driven Fund II
('Barclays'). According to the Schedule 13G (i) CPMC has
shared voting and shared dispositive power with respect to
2,597,613 shares; (ii) CPLP has shared voting power and
shared dispositive power with respect to 1,487,253 shares;
(iii) CPIFLP has shared voting power and shared dispositive
power with respect to 52,045 shares; (iv) CPINTL has shared
voting power and shared dispositive power with respect to
977,015 shares; and (v) Barclays has shared voting power and
shared dispositive power with respect to 81,300 shares.
(g) Information based solely on a letter dated March 25, 2003
from Commerzbank Aktiengesellschaft to us.
(h) Total represents the number of shares of new common stock
distributed to General Electric Capital Corporation on
February 4, 2002 pursuant to the terms of the Plan.
Information based on a Schedule 13D, dated April 8, 2003,
filed with the SEC by GE Capital CFE, Inc. ('CFE'), 201 High
Ridge Road, Stamford, CT 06927, General Electric Capital
Corporation ('GECC'), 260 Long Ridge Road, Stamford, CT
06927, General Electric Capital Services, Inc. ('GECS'), 260
Long Ridge Road, Stamford, CT 06927, and General Electric
Company ('GEC'), 3135 Easton Turnpike, Fairfield, CT 06431,
reporting beneficial ownership of the shares of Common Stock
set forth in the table. According to the Schedule 13D, CFE
has sole voting power and sole dispositive power with
respect to all such shares, and each of GECC, GECS and GEC
disclaim voting and dispositive power for such shares.
(i) Information based solely on a Schedule 13F dated May 14,
2003 (reporting information as of March 31, 2003) filed with
the SEC by J.P. Morgan Chase & Co, 270 Park Avenue, New
York, New York 10017. According to the Schedule 13F, J.P.
Morgan Chase & Co has sole voting power with respect to all
such shares.
(j) Total represents the number of shares of new common stock
distributed to Societe Generale on February 4, 2003 pursuant
to the terms of the Plan.
(k) Mr. Golub did not stand for re-election to our Board of
Directors at our 2003 Annual Meeting of Stockholders.
113
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
From April 30, 2001 to June 11, 2001, we paid consulting fees to Alvarez &
Marsal, Inc. of $1,256,000 pursuant to a consulting agreement. Under this
agreement, several individuals who held executive positions with us (including
Messrs. Alvarez and Fogarty) provided services as advisors to us. The Alvarez &
Marsal consulting agreement was terminated on June 11, 2001 and certain Alvarez
& Marsal employees became our employees.
In connection with our emergence from Chapter 11 bankruptcy protection, we
entered into a second consulting agreement with Alvarez & Marsal on January 29,
2003, which was supplemented by a March 18, 2003 letter agreement, pursuant to
which Mr. Alvarez and Mr. Fogarty continued serving us as Chief Executive
Officer and Chief Financial Officer, respectively, and certain other Alvarez &
Marsal affiliated persons continued serving us in a consulting capacity. The
Alvarez & Marsal agreement was effective as of February 4, 2003 and replaced and
superceded the Alvarez and Fogarty agreements. The Alvarez & Marsal agreement
may be terminated by either party, without cause, upon 30 days' written notice.
Upon the commencement of employment of a permanent Chief Executive Officer ('New
CEO') or Chief Financial Officer ('New CFO'), Mr. Alvarez and Mr. Fogarty were
obligated to provide transitional assistance to the New CEO and New CFO,
respectively, as reasonably required by us. The Alvarez & Marsal agreement
provides that we would pay Alvarez & Marsal on account of Mr. Alvarez's service
as follows: (i) $0.125 million per month until commencement of employment of the
New CEO; (ii) $0.125 million per month for 15 days after the commencement of
employment of the New CEO; and (iii) after the period described in (ii) above,
$750 per hour of transition services provided by Mr. Alvarez. The Alvarez &
Marsal agreement further provides that we would pay Alvarez & Marsal on account
of Mr. Fogarty's service at a rate of $475 per hour. Moreover, Alvarez & Marsal
is eligible to receive the following incentive compensation under the terms of
the agreement: (i) additional payments upon the consummation of certain
transactions, including $0.2 million which was paid to Alvarez & Marsal
following the consummation of the offering of the old notes, and
(ii) participation in our incentive compensation program for the periods
Mr. Alvarez and Mr. Fogarty served as Chief Executive Officer and Chief
Financial Officer, respectively. Mr. Alvarez, Mr. Fogarty and Alvarez & Marsal
are bound by certain confidentiality, indemnification and non-solicitation
obligations under the terms of the Alvarez & Marsal Agreement. Prior to entering
into these transactions, we determined that the terms of these transactions were
as favorable to us as could be obtained with unrelated third parties.
In connection with the repayment of the Second Lien Notes with the proceeds
of the offering of the old notes, amounts, including accrued interest, was paid
to Mr. Alvarez on account of the $942,000 aggregate principal amount of Second
Lien Notes then owned by Mr. Alvarez. In addition, amounts, including accrued
interest, were paid to affiliates of some of the initial purchasers of the old
notes on account of Second Lien Notes then owned by such affiliates.
Mr. Alvarez is a co-founding Managing Director and Mr. Fogarty is a Managing
Director of Alvarez & Marsal.
In April 2003, we recruited Joseph R. Gromek to be our President and Chief
Executive Officer. Following an orderly transition, Mr. Alvarez returned to
Alvarez & Marsal. In September 2003, we recruited Lawrence R. Rutkowski to be
our Senior Vice President -- Finance and Chief Financial Officer. Following an
orderly transition, Mr. Fogarty returned to Alvarez & Marsal.
We lease certain real property from an entity controlled by an employee who
is the former owner of A.B.S. by Allen Schwartz. The lease expires on May 31,
2005 and includes four five-year renewal options. Rent expense related to this
lease for Fiscal 2002 was $0.5 million. We believe that the lease payments for
this property are at or below fair market values for similar property in that
geographic area. Prior to entering into this transaction, we determined that the
terms of the transaction were as favorable to us as could be obtained with
unrelated third parties.
114
DESCRIPTION OF MATERIAL DEBT
CREDIT FACILITY
On February 4, 2003, we entered into a senior secured revolving credit
facility with a syndicate of financial institutions, for which Citicorp North
America, Inc. is acting as administrative agent, JPMorgan Chase Bank is acting
as syndication agent, Bank of America, NA, The CIT Group/Commercial Services,
Inc. and Congress Financial Corporation (Central) are acting as co-
documentation agents, and Citigroup Global Markets Inc. and J.P. Morgan
Securities Inc. are acting as joint lead arrangers and joint lead book managers.
Proceeds from the initial borrowings under the senior secured revolving credit
facility were used by us (a) to fund costs and expenses of the consummation of
the Plan, (b) to provide working capital from time to time for us and our
subsidiaries and (c) for us and our subsidiaries' other general and corporate
purposes. The following discussion summarizes the material terms (including all
material covenants) of this agreement.
LOANS
The senior secured revolving credit facility provides for initial
commitments by the lenders for up to $275.0 million in revolving loans, with
sub-limits of $150.0 million for letters of credit and $20.0 million for
swingline loans.
INTEREST
We may choose Eurodollar rate loans or base rate loans pricing, and may
elect interest periods of one, two, three or six months for Eurodollar
borrowings, except that all swingline loans will have base rate pricing.
The revolving loans under the senior secured revolving credit facility
accrue interest in the following manner:
through February 4, 2004, for base rate loans, at Citibank's
base rate plus 1.50% or, for Eurodollar rate loans, at LIBOR
plus 2.50%; and
thereafter through the term of the senior secured revolving
credit facility, for base rate loans:
if the ratio of debt to EBITDAR (the 'Leverage Ratio') is
greater than or equal to 1.5 to 1 and no Margin Reduction
Event (as defined below) has occurred, at Citibank's base
rate plus 1.50%;
if the Leverage Ratio is greater than or equal to 1.5 to 1
and after the occurrence of a Margin Reduction Event; at
Citibank's base rate plus 1.25%;
if the Leverage Ratio is less than 1.5 to 1 and equal to or
greater than 1.0 to 1, at Citibank's base rate plus 1.25%;
or
if the Leverage Ratio is less than 1.0 to 1, at Citibank's
base rate plus 1.00%; or
thereafter through the term of the senior secured revolving
credit facility, for Eurodollar rate loans:
if the Leverage Ratio is greater than or equal to 1.5 to 1
and no Margin Reduction Event has occurred, at LIBOR plus
2.50%;
if the Leverage Ratio is greater than or equal to 1.5 to 1
and after the occurrence of a Margin Reduction Event; at
LIBOR plus 2.25%;
if the Leverage Ratio is less than 1.5 to 1 and equal to or
greater than 1.0 to 1, at LIBOR plus 2.25%; or
if the Leverage Ratio is less than 1.0 to 1, at LIBOR plus
2.00%.
A 'Margin Reduction Event' is the refinancing or repurchase of all
outstanding Second Lien Notes from the proceeds of unsecured debt securities and
the release of all liens in favor of the
115
holders of the Second Lien Notes. Upon the issuance of the notes and the
consummation of all conditions to closing thereof, a Margin Reduction Event will
have occurred.
GUARANTEES
Our obligations under the senior secured revolving credit facility are
guaranteed by our parent company, Holdco and all of our domestic subsidiaries
other than Warnaco Operations Corporation.
SECURITY
The senior secured revolving credit facility and the related guarantees are
secured by a first priority lien on substantially all of our and the guarantors'
tangible and intangible assets, including, without limitation, their equity
ownership in domestic subsidiaries and 65% of their equity ownership in
first-tier foreign subsidiaries and their intellectual property rights.
MATURITY
The senior secured revolving credit facility will mature on February 4,
2007. The outstanding principal amount of all revolving loans and swingline
loans shall be repaid on or prior to that date. No letters of credit may have a
maturity later than five days prior to February 4, 2007.
PREPAYMENTS
MANDATORY PREPAYMENTS. The senior secured revolving credit facility requires
that in the event of certain asset dispositions, the receipt by us, Holdco or
any other guarantor of certain insurance proceeds and the issuance of certain
debt or equity securities, the proceeds of such event shall be applied first to
repay outstanding principal swingline loans until all outstanding swingline
loans shall have been repaid in full; second, to repay the other outstanding
loans until all outstanding loans shall have been repaid in full; and third, to
provide cash collateral for any issued letters of credit until all such letters
of credit have been fully cash collateralized. Subject to certain limited
exceptions, such prepayments of the loans and cash collateralization of the
letters of credit will reduce the commitments.
VOLUNTARY PREPAYMENTS. At any time during the term of the senior secured
revolving credit facility, we may voluntarily prepay outstanding loans
thereunder, in whole or in part.
COVENANTS
The senior secured revolving credit facility contains affirmative and
negative covenants customary for facilities and transactions of this type,
including, but not limited to:
limitations on the incurrence of indebtedness, which permit
only certain limited indebtedness, including indebtedness
with respect to:
the senior secured revolving credit facility;
the notes;
certain existing indebtedness;
(i) guarantee obligations incurred in respect of permitted
indebtedness, (ii) guarantee obligations incurred by a
foreign subsidiary in respect of permitted indebtedness of a
foreign subsidiary and (iii) unsecured guarantee obligations
in respect of the indebtedness of permitted foreign
subsidiary debt;
capital lease obligations and purchase money indebtedness
incurred to finance the acquisition or construction of fixed
assets in an aggregate amount of up to $20,000,000;
renewals of existing indebtedness, purchase money
indebtedness and capital lease obligations;
indebtedness of foreign subsidiaries in an aggregate amount
of up to $25,000,000;
116
indebtedness with respect to permitted sale and leaseback
transactions;
indebtedness arising from intercompany loans, to the extent
that it qualifies as permitted investments;
indebtedness incurred to finance the payment of insurance
premiums in the ordinary course of business, in an aggregate
amount not to exceed $15,000,000;
indebtedness arising under any performance or surety bond
entered into in the ordinary course of business;
obligations under permitted hedging contracts; and
other indebtedness in the aggregate amount of up to
$5,000,000.
limitations on acquisitions and investments, permitting
only:
certain investments in other Warnaco entities;
investments in cash and cash equivalents held in restricted
accounts;
existing investments;
investments in payment intangibles, chattel paper, accounts,
notes receivable and similar items arising or acquired in
the ordinary course of business;
investments consisting of stock, obligations, securities or
other property received in a bankruptcy proceeding or in
settlement of claims arising in the ordinary course of
business;
advances or loans to directors or employees that do not
exceed $1,000,000 and advances for employee travel,
relocation and other similar expenses incurred in the
ordinary course of business in an aggregate amount of up to
$2,500,000;
investments consisting of promissory notes received in
connection with a permitted asset sale;
permitted guarantee obligations; and
other investments in an aggregate amount invested not to
exceed $1,000,000.
limitations on any dividend or other distributions from
Holdco or any of its subsidiaries, permitting only:
distributions by any direct or indirect subsidiary to
Warnaco or its other subsidiaries;
distributions to stockholders of, and payable only in common
stock of, Holdco; and
limited cash dividends by Warnaco to Holdco.
limitations on liens, permitting only:
liens created pursuant to the loan documents related to the
senior secured revolving credit facility;
liens granted by a foreign subsidiary securing permitted
foreign subsidiary indebtedness;
certain existing liens;
customary permitted liens;
purchase money liens securing permitted purchase money
indebtedness;
renewals of existing liens and purchase money liens;
liens in favor of lessors securing operating leases and
permitted sale and leaseback transactions;
certain judgment liens;
liens on any documents of title delivered with respect to
letters of credit issued for the benefit of suppliers of
inventory pursuant to facilities provided to a foreign
subsidiary and in respect of which all inventory and goods
are located outside the United States;
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liens securing indebtedness incurred to finance the payment
of insurance premiums in the ordinary course of business not
in excess of $15,000,000; and
other liens not to exceed $5,000,000 in an aggregate amount
outstanding at any time.
limitations on sale of assets, permitting only:
the sale or disposition of inventory in the ordinary course
of business;
the sale of assets within certain guidelines and as long as
the aggregate purchase price paid to all Warnaco entities
for all assets sold pursuant to this clause will not exceed
$20,000,000;
certain asset transfers between Warnaco entities;
certain licensing or sublicensing of trademarks and trade
names;
the rental by the Warnaco entities, as lessors or
sub-lessors, in the ordinary course of their respective
businesses, on an arm's length basis, of real property and
personal property, under leases;
the disposition of obsolete machinery and equipment;
any sale of fixed assets not in connection with a sale and
leaseback transaction that were purchased in connection with
a proposed lease financing transaction within 45 days of
such asset sale, which assets are subsequently leased back
by Warnaco or one of its subsidiaries;
any asset sale permitted in connection with certain
permitted fundamental changes; and
any asset sale in connection with a permitted sale and
leaseback transaction.
The senior secured revolving credit facility includes other covenants and
limitations, including certain reporting requirements; restrictions on
fundamental changes or changes in the nature of Holdco's, our or Holdco's other
subsidiaries' businesses; and restrictions on transactions with affiliates.
In addition, the senior secured revolving credit facility contains financial
covenants requiring Holdco to maintain a leverage ratio, as determined as of the
last day of each fiscal quarter set forth below, for the previous four quarters
ending on such day, of not more than the maximum ratio set forth below:
<Table>
<Caption>
MAXIMUM
LEVERAGE
FISCAL QUARTERS ENDING ON OR ABOUT RATIO
---------------------------------- -----
Fiscal quarters June 30, 2003 through December 31, 2003..... 2.75 to 1
March 31, 2004 through December 31, 2004.................... 2.50 to 1
March 31, 2005 and each fiscal quarter ending thereafter,... 2.25 to 1
</Table>
Subject to certain exceptions, Holdco is also required to maintain a fixed
charge coverage ratio, as determined as of the last day of each fiscal quarter
set forth below, for the four fiscal quarters ending on such day of at least the
minimum ratio set forth below opposite such fiscal quarter:
<Table>
<Caption>
MINIMUM
FIXED CHARGE
FISCAL QUARTERS ENDING ON OR ABOUT COVERAGE RATIO
---------------------------------- --------------
June 30, through December 31, 2003.......................... 1.75 to 1
March 31, through December 31, 2004......................... 1.15 to 1
March 31, through June 30, 2005............................. 1.25 to 1
September 30, 2005 through June 30, 2006.................... 1.30 to 1
September 30, 2006 and each fiscal quarter ending
thereafter................................................ 1.40 to 1
</Table>
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Holdco and its subsidiaries are permitted to make capital expenditures
during each of the fiscal years below up to the maximum amount set forth below
(subject to certain adjustments):
<Table>
<Caption>
MAXIMUM
CAPITAL
FISCAL YEARS ENDING ON OR ABOUT EXPENDITURES
------------------------------- ------------
December 31, 2003........................................... $25,000,000
December 31, 2004........................................... $25,800,000
December 31, 2005........................................... $24,200,000
December 31, 2006........................................... $24,200,000
</Table>
As of July 5, 2003, we were in compliance with the provisions of the senior
secured revolving credit facility.
EVENTS OF DEFAULT
The senior secured revolving credit facility contains events of default
provisions that are customary for facilities and transactions of this type,
including, without limitation:
failure to pay principal when and as due;
failure to pay interest or fees or any other amount under
the senior secured revolving credit facility within three
days after such failure;
representations or warranties incorrect in any material
respect when made;
failure to comply with covenants;
cross-default to certain other indebtedness;
bankruptcy or insolvency;
invalidity or unenforceability of any loan document;
material judgments;
ERISA events; and
change of control of ownership of Holdco or us.
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DESCRIPTION OF THE NOTES
The terms of the new notes Warnaco is issuing in this exchange offer and the
old notes that are outstanding are identical in all material respects, except:
the new notes will have been registered under the Securities
Act;
the new notes will not contain transfer restrictions and
registration rights that relate to the old notes; and
the new notes will not contain provisions relating to the
payment of special interest to be made to the holders of the
old notes under certain circumstances related to the timing
of the exchange offer.
You can find the definitions of certain terms used in this description under
the subheading 'Certain Definitions.' In this description, 'old notes' refers to
the 8 7/8% Senior Notes due 2013 issued on June 12, 2003, 'new notes' refers to
the 8 7/8% Senior Notes due 2013 offered hereby and 'Notes' refers to the old
notes and/or the new notes, as the case may be. In this description, 'Warnaco'
refers only to Warnaco Inc., the issuer of the Notes, and not to Holdco or any
of their other Subsidiaries, and 'Holdco' refers to The Warnaco Group, Inc. (the
owner of 100% of the outstanding common stock of Warnaco), and not to any of its
Subsidiaries. We refer to any direct or indirect Subsidiary of Holdco that is
not an Unrestricted Subsidiary, including Warnaco, as a 'Restricted Subsidiary.'
We also refer collectively to Holdco, each Domestic Restricted Subsidiary (other
than Warnaco) and any other Person that becomes a Guarantor pursuant to the
terms of the Indenture as the 'Guarantors.'
Warnaco will issue the new notes under the indenture dated as of June 15,
2003 (the 'Indenture'), among Warnaco and the Guarantors and Wells Fargo Bank
Minnesota, National Association, as trustee (the 'Trustee'). The Indenture will
comply with the Trust Indenture Act of 1939 (the 'Trust Indenture Act'). The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act.
We urge you to read the Indenture because it, and not this description,
defines your rights as a Holder. A copy of the Indenture is available upon
request to Warnaco at the address indicated under 'Where You Can Find More
Information.'
PRINCIPAL, MATURITY AND INTEREST
Warnaco issued $210.0 million aggregate principal amount of old notes in the
offering and, subject to compliance with the limitations described under
' -- Certain Covenants -- Limitation on Debt,' may issue an unlimited amount of
additional Notes at later dates under the same Indenture (the 'Additional
Notes'). Warnaco can issue the Additional Notes as part of the same series or as
an additional series. Any Additional Notes that Warnaco issues in the future
will be identical in all respects to the Notes that Warnaco has issued, except
that notes issued in the future will have different issuance dates and may have
different issuance prices. Warnaco will issue Notes only in fully registered
form without coupons, in denominations of $1,000 and integral multiples of
$1,000.
The Notes will mature on June 15, 2013.
Interest on the Notes will accrue at a rate of 8 7/8% per annum and will be
payable semi-annually in arrears on June 15 and December 15, commencing on
December 15, 2003. Warnaco will pay interest to those persons who were holders
of record on the June 1 or December 1 immediately preceding each interest
payment date.
Interest on the Notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
RANKING
The Notes will be:
senior, unsecured obligations of Warnaco;
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equal in right of payment ('pari passu') with all existing
and future senior debt of Warnaco;
senior in right of payment to all future subordinated debt
of Warnaco; and
guaranteed on a senior, unsecured basis by the Guarantors.
As of July 5, 2003, Warnaco and the Guarantors on a consolidated basis had
212.8 million of senior debt (excluding unused commitments made by lenders and
intercompany debt) that is pari passu with the Notes or the Note Guarantees, as
applicable, none of which was secured and none of Warnaco's or any Guarantor's
debt were subordinated to the Notes or Note Guaranties.
Substantially all of the assets of Warnaco and the Guarantors are pledged to
secure our obligations to the lenders under the senior secured revolving credit
facility. In the event that these lenders exercise their rights with respect to
the pledged assets, the secured creditors would be entitled to be repaid in full
from the proceeds of the liquidation of those assets before those assets would
be available for distribution to other creditors, including holders of the
Notes. Holders of the Notes will participate in Warnaco's and the Guarantors'
remaining assets ratably with all of their other unsubordinated creditors. We
advise you that there may not be sufficient assets remaining to pay amounts due
on any or all of the Notes and the Guarantees then outstanding.
A substantial portion of the operations of Warnaco are conducted through its
Subsidiaries. Therefore, Warnaco's ability to service its debt, including the
Notes, is partially dependent upon the cash flows of its Subsidiaries and their
ability to distribute those cash flows as dividends, loans or other payments to
Warnaco. Certain laws restrict the ability of Warnaco's Subsidiaries to pay it
dividends or make loans and advances to it. If these restrictions are applied to
Subsidiaries, then Warnaco would not be able to use the cash flows of those
Subsidiaries to make payments on the Notes. Furthermore, under certain
circumstances, bankruptcy 'fraudulent conveyance' laws or other similar laws
could invalidate the Note Guaranties of the Guarantors that are Subsidiaries of
Warnaco. Any of the situations described above could make it more difficult for
Warnaco to service its debt.
In addition, Warnaco has only a stockholder's claim in the assets of its
Subsidiaries (except in the case where there is also an intercompany loan,
Guarantee or other obligation payable to it by the Subsidiaries). The
stockholder's claim is junior to the claims that creditors of Warnaco's
Subsidiaries have against those Subsidiaries. Holders will only be creditors of
Warnaco and the Guarantors. In the case of Subsidiaries of Holdco that are not
Guarantors, all the existing and future liabilities of those Subsidiaries,
including any claims of trade creditors and preferred stockholders, will be
effectively senior to the Notes.
The total balance sheet liabilities of (i) Warnaco and the Guarantors and
(ii) Holdco's non-Guarantor Subsidiaries, as of July 5, 2003, excluding unused
commitments made by lenders and any intercompany debt, were as follows:
<Table>
$513.8 million approximate total balance sheet
liabilities of Warnaco and the
Guarantors
$ 94.9 million approximate total balance sheet
liabilities of all Holdco's non-
Guarantor Subsidiaries
</Table>
Warnaco, the Guarantors and Holdco's non-Guarantor Subsidiaries have other
liabilities including contingent liabilities, that are significant. The
Indenture contains limitations on the amount of additional Debt that Holdco and
the Restricted Subsidiaries may Incur. However, the amounts of such Debt could
nevertheless be substantial and may be Incurred either by Guarantors or by
Holdco's non-Guarantor Subsidiaries.
See 'Risk Factors -- 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
121
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,'
' -- Our ability to service our debt and meet our cash requirements depends on
many factors, some of which are beyond our control' and ' -- A subsidiary
guarantee could be voided or subordinated because of federal bankruptcy law or
comparable state law provisions.'
GUARANTIES
The obligations of Warnaco under the Indenture, including the repurchase
obligation resulting from a Change of Control, will be fully and unconditionally
guaranteed, jointly and severally, on a senior unsecured basis, by Holdco and
all the existing and future Domestic Restricted Subsidiaries of Holdco other
than Securitization Entities. See ' -- Certain Covenants -- Future Guarantors.'
The Subsidiaries of Holdco that are not Guarantors (currently consisting of
all Holdco's foreign Subsidiaries) currently generate a significant portion of
Holdco's net revenues and net income and own a significant portion of Holdco's
total assets. The Subsidiaries of Holdco that are not Guarantors (other than
Warnaco, which as issuer of the Notes is not a Guarantor), represented the
following approximate percentages of Holdco's consolidated net revenues, net
income and total assets:
23.4% of Holdco's consolidated net revenues for the period February 5,
2003 to July 5, 2003,
98.1% of Holdco's consolidated net income for the period February 5,
2003 to July 5, 2003 and
19.8% of Holdco's consolidated total assets as of July 5, 2003.
If Warnaco or a Guarantor sells or otherwise disposes of either:
(1) its ownership interest in a Guarantor, or
(2) all or substantially all the assets of a Guarantor,
then the transferred Guarantor will be released from all its obligations under
its Note Guaranty. In addition, a Guarantor will be released from its
obligations under the Indenture, the Guarantee and the Registration Rights
Agreement if Warnaco designates such Subsidiary as an Unrestricted Subsidiary
and such designation complies with the other applicable provisions of the
Indenture.
If any Guarantor fails to make payments under its Note Guaranty, each of
Warnaco and the other Guarantors must contribute their share of such payments.
Warnaco's and the other Guarantors' shares of such payment will be computed
based on the proportion that the net worth of Warnaco or the relevant Guarantor
represents relative to the aggregate net worth of Warnaco and all such other
Guarantors combined.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option of
Warnaco prior to June 15, 2008. Starting on that date, Warnaco may redeem all or
any portion of the Notes, at once or over time, after giving the required notice
under the Indenture. The Notes may be redeemed at the redemption prices set
forth below, plus accrued and unpaid interest, including Special Interest, if
any, to but excluding the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date). The following prices are for Notes redeemed during the
12-month period commencing on June 15 of the years set forth below, and are
expressed as percentages of principal amount:
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<Table>
<Caption>
REDEMPTION
YEAR PRICE
---- -----
2008........................................................ 104.438%
2009........................................................ 102.958%
2010........................................................ 101.479%
2011 and thereafter......................................... 100.000%
</Table>
At any time prior to June 15, 2008, Warnaco may redeem all or any portion of
the Notes, at once or over time, after giving the required notice under the
Indenture, at a redemption price equal to the greater of:
(a) 100% of the principal amount of the Notes to be redeemed, and
(b) the sum of the present values of (1) the redemption price of the
Notes at June 15, 2008 (as set forth in the preceding paragraph) and (2) the
remaining scheduled payments of interest from the redemption date through
June 15, 2008, but excluding accrued and unpaid interest through the
redemption date, discounted to the redemption date (assuming a 360-day year
consisting of twelve 30-day months), at the Treasury Rate plus 75 basis
points,
plus, in either case, accrued and unpaid interest, including Special Interest,
if any, to but excluding the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date).
In addition, at any time and from time to time prior to June 15, 2006,
Warnaco may redeem up to a maximum of 35% of the aggregate principal amount of
the Notes (including any Additional Notes) with the proceeds of one or more
Public Equity Offerings, at a redemption price equal to 108.875% of the
principal amount thereof, plus accrued and unpaid interest, including Special
Interest thereon, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that after giving effect to
any such redemption, at least 65% of the aggregate principal amount of the Notes
(including any Additional Notes) remains outstanding. Any such redemption shall
be made within 90 days of such Public Equity Offering upon not less than 30 nor
more than 60 days' prior notice.
Any notice to Holders of such a redemption shall include the appropriate
calculation of the redemption price, but need not include the redemption price
itself. The actual redemption price, calculated as described above, shall be set
forth in an Officers' Certificate delivered to the Trustee no later than two
business days prior to the redemption date unless clause (b) of the definition
of 'Comparable Treasury Price' is applicable, in which case such Officer's
Certificate should be delivered on the redemption date.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require Warnaco to repurchase all or any part of such Holder's Notes pursuant
to the offer described below (the 'Change of Control Offer') at a purchase price
(the 'Change of Control Purchase Price') equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, including Special Interest, if any,
to the repurchase date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date).
Within 30 days following any Change of Control, Warnaco shall:
(a) cause a notice of the Change of Control Offer to be sent at least
once to the Dow Jones News Service or similar business news service in the
United States; and
(b) send, by first-class mail, with a copy to the Trustee, to each
Holder, at such Holder's address appearing in the security register, a
notice stating:
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(1) that a Change of Control has occurred and a Change of Control
Offer is being made pursuant to the covenant entitled 'Repurchase at the
Option of Holders Upon a Change of Control' and that all Notes timely
tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the repurchase date,
which shall be, subject to any requirements of applicable law, a business
day no earlier than 30 days nor later than 60 days from the date such
notice is mailed;
(3) the circumstances and relevant facts regarding the Change of
Control; and
(4) the procedures that Holders must follow in order to tender their
Notes (or portions thereof) for payment, and the procedures that Holders
must follow in order to withdraw an election to tender Notes (or portions
thereof) for payment.
Warnaco will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by Warnaco and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Warnaco will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to a Change of Control
Offer. To the extent that the provisions of any securities laws or regulations
conflict with the provisions of this covenant, Warnaco will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under this covenant by virtue of such compliance.
Management has no present intention to engage in a transaction involving a
Change of Control, although it is possible that it will decide to do so in the
future. Subject to certain covenants described below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of debt outstanding at such time
or otherwise affect our capital structure or credit ratings.
The definition of Change of Control includes a phrase relating to the sale,
transfer, assignment, lease, conveyance or other disposition of 'all or
substantially all' the Property of Holdco and the Restricted Subsidiaries,
considered as a whole. Although there is a developing body of case law
interpreting the phrase 'substantially all,' there is no precise established
definition of the phrase under applicable law. Accordingly, if Holdco and the
Restricted Subsidiaries, considered as a whole, dispose of less than all their
Property by any of the means described above, the ability of a Holder to require
Warnaco to repurchase its Notes may be uncertain. In such a case, Holders may
not be able to resolve this uncertainty without resorting to legal action.
The Senior Credit Facility provides that the occurrence of certain of the
events that would constitute a Change of Control would constitute a default
under the Senior Credit Facility. Additionally, our future debt may contain
prohibitions of certain events which would constitute a Change of Control or
require such debt to be repurchased or repaid upon a Change of Control.
Moreover, the exercise by Holders of their right to require us to repurchase
such Notes could cause a default under debt of Warnaco, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
relevant Person. Finally, Warnaco's ability to pay cash to Holders upon a
repurchase may be limited by Warnaco's then existing financial resources.
Warnaco cannot assure you that sufficient funds will be available when necessary
to make any required repurchases. Warnaco's failure to repurchase Notes in
connection with a Change of Control would result in a default under the
Indenture. Such a default would, in turn, constitute a default under the Senior
Credit Facility and may constitute a default under future debt as well.
Warnaco's obligation to make an offer to repurchase the Notes as a result of a
Change of Control may be waived or modified at any time prior to the occurrence
of such Change of Control with the written consent of the Holders of at least a
majority in aggregate principal amount of the Notes. See ' -- Amendments and
Waivers.'
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CERTAIN COVENANTS
For the purposes of determining compliance with any covenant, the U.S.
Dollar Equivalent will be used, if and to the extent relevant.
LIMITATION ON DEBT
Holdco and Warnaco shall not, and shall not permit any of their respective
Restricted Subsidiaries to, Incur, directly or indirectly, any Debt unless,
after giving effect to the application of the proceeds thereof, no Default or
Event of Default would occur as a consequence of such Incurrence or be
continuing following such Incurrence and either:
(1) such Debt is Debt of Warnaco or a Guarantor and after giving effect
to the Incurrence of such Debt and the application of the proceeds thereof,
the Consolidated Interest Coverage Ratio would be greater than 2.25 to 1.00
or
(2) such Debt is Permitted Debt.
The term 'Permitted Debt' is defined to include the following:
(a) (1) Debt of Warnaco evidenced by the Notes issued in the offering of
the old notes and the new notes issued in exchange for such notes and in
exchange for any Additional Notes and (2) Debt of the Guarantors evidenced
by Note Guaranties relating to the Notes issued in the offering of the old
notes and the new notes issued in exchange for such notes and in exchange
for any Additional Notes;
(b) Debt of Warnaco or a Guarantor under Credit Facilities or Debt
Incurred by a Securitization Entity in a Qualified Securitization
Transaction that is not recourse to Holdco or any Restricted Subsidiary
(except for Standard Securitization Undertakings), provided that the
aggregate principal amount of all such Debt under this clause (b) at any one
time outstanding shall not exceed the greater of:
(1) $325.0 million, which amount shall be permanently reduced by the
amount of proceeds from Asset Sales used to Repay Senior Debt, and not
subsequently reinvested in Additional Assets or used to purchase Notes or
Repay other Debt, pursuant to the covenant described under
' -- Limitation on Asset Sales' and
(2) the sum of the amounts equal to
(A) 85% of the book value of the accounts receivable of Holdco
and the Restricted Subsidiaries, plus
(B) 50% of the book value of the inventory of Holdco and the
Restricted Subsidiaries,
minus, in the case of each of subsections (1) and (2) under this clause (b),
the Debt of any Foreign Restricted Subsidiary Incurred under clause (j) below
that is then outstanding;
(c) Debt of Warnaco or a Guarantor in respect of Capital Lease
Obligations, Purchase Money Debt and (without double counting) Attributable
Debt in respect of Sale and Leaseback Transactions otherwise permitted by
the Indenture, provided that
(1) the aggregate principal amount of such Debt does not exceed the Fair
Market Value (on the date of the Incurrence thereof) of the Property
acquired, constructed or leased, and
(2) the aggregate principal amount of all Debt Incurred and then
outstanding pursuant to this clause (c) (together with all Permitted
Refinancing Debt Incurred and then outstanding in respect of Debt previously
Incurred pursuant to this clause (c)) does not exceed $25.0 million
aggregate principal amount outstanding at any one time;
(d) Debt of Holdco owing to and held by any Restricted Subsidiary and
Debt of a Restricted Subsidiary owing to and held by Holdco or any
Restricted Subsidiary, provided, however, that any subsequent issue or
transfer of Capital Stock or other event that results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer
of any such Debt (except to Holdco or a Restricted Subsidiary) shall be
deemed, in
125
each case, to constitute the Incurrence of such Debt by the obligor thereof,
and provided, that for purposes of this provision, a pledge or collateral
assignment shall not be deemed to constitute a transfer until the
disposition of the collateral upon foreclosure thereon), and provided,
further, that if Warnaco or any Guarantor is the obligor on such Debt, such
Debt must be expressly subordinated in right of payment to the prior payment
in full in cash of all obligations with respect to the Notes, in the case of
Warnaco, or the Note Guaranty, in the case of a Guarantor;
(e) Debt of a Restricted Subsidiary outstanding on the date on which
such Restricted Subsidiary is acquired by Holdco or a Restricted Subsidiary
or otherwise becomes a Restricted Subsidiary (other than Debt Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of transactions
pursuant to which such Restricted Subsidiary became a Subsidiary of Holdco
or was otherwise acquired by Holdco), provided that at the time such
Restricted Subsidiary is acquired by Holdco or a Restricted Subsidiary or
otherwise becomes a Restricted Subsidiary and after giving effect to the
Incurrence of such Debt, Holdco would have been able to Incur $1.00 of
additional Debt pursuant to clause (1) of the first paragraph of this
covenant, or the incurrence of such Debt is otherwise permitted by this
covenant;
(f) Debt of Holdco or any Restricted Subsidiary under Interest Rate
Agreements entered into for the purpose of limiting interest rate risks in
the ordinary course of the financial management of Holdco or such Restricted
Subsidiary and not for speculative purposes, provided that the obligations
under such agreements are, at the time of Incurrence thereof, related to
payment obligations on Debt otherwise permitted by the terms of this
covenant;
(g) Debt of Holdco or any Restricted Subsidiary under Currency Exchange
Protection Agreements entered into for the purpose of limiting currency
exchange rate risks in the ordinary course of the financial management of
Holdco or such Restricted Subsidiary and not for speculative purposes;
(h) Debt of Holdco or any Restricted Subsidiary (1) under Commodity
Price Protection Agreements entered into in the ordinary course of the
financial management of Holdco or such Restricted Subsidiary and not for
speculative purposes, and (2) in respect of ordinary course of business cash
management services provided by lenders under Credit Facilities;
(i) Debt in connection with one or more standby letters of credit or
surety or performance bonds issued by Holdco or any Restricted Subsidiary in
the ordinary course of business or pursuant to self-insurance obligations
and not in connection with the borrowing of money or the obtaining of
advances or credit;
(j) Debt of Foreign Restricted Subsidiaries in an aggregate principal
amount outstanding at any one time not to exceed the Foreign Borrowing Base;
(k) Debt of Holdco or any Restricted Subsidiary outstanding on the Issue
Date, after giving effect to the offering and the application of the net
proceeds therefrom not otherwise described in clauses (a) through (j) above;
(l) Debt of Holdco, Warnaco or a Restricted Subsidiary in an aggregate
principal amount outstanding at any one time not to exceed $30.0 million;
and
(m) Permitted Refinancing Debt Incurred in respect of Debt Incurred
pursuant to clause (1) of the first paragraph of this covenant and clauses
(a), (c), (e) and (k) above.
Notwithstanding anything to the contrary contained in this covenant,
(a) Holdco and Warnaco shall not, and shall not permit any Guarantors
to, Incur any Debt pursuant to this covenant if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Debt unless such
Debt shall be subordinated to the Notes or the applicable Note Guaranty, as
the case may be, to at least the same extent as such Subordinated Debt; and
126
(b) accrual of interest, accretion or amortization of original issue
discount and the payment of interest or dividends in the form of additional
Debt will be deemed not to be an Incurrence of Debt for purposes of this
covenant.
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories of
Permitted Debt described in clauses (a) through (m) above or is entitled to be
incurred pursuant to clause (1) of the first paragraph of this covenant, Warnaco
shall, in its sole discretion, classify (or later reclassify in whole or in
part, in its sole discretion) such item of Debt in any manner that complies with
this covenant.
LIMITATION ON RESTRICTED PAYMENTS
Holdco and Warnaco shall not, and shall not permit any of their respective
Restricted Subsidiaries to, make, directly or indirectly, any Restricted Payment
if at the time of, and after giving effect to, such proposed Restricted Payment,
(a) a Default or Event of Default shall have occurred and be continuing,
(b) Holdco could not Incur at least $1.00 of additional Debt pursuant to
clause (1) of the first paragraph of the covenant described under
' -- Limitation on Debt,' or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made since the Issue Date (the amount of any
Restricted Payment, if made in Property other than in cash, to be based upon
Fair Market Value of such Property at the time such Restricted Payment is
paid) would exceed an amount equal to the sum of:
(1) 50% of the aggregate amount of Consolidated Net Income accrued
during the period (treated as one accounting period) from the beginning
of the fiscal quarter in which the Issue Date occurs to the end of the
most recent fiscal quarter in respect of which financial statements have
been delivered in accordance with the terms of the Indenture (or if the
aggregate amount of Consolidated Net Income for such period shall be a
deficit, minus 100% of such deficit), plus
(2) 100% of Capital Stock Sale Proceeds, plus
(3) the sum of:
(A) the aggregate net cash proceeds received by Holdco or any
Restricted Subsidiary from the issuance or sale after the Issue Date
of convertible or exchangeable Debt that has been converted into or
exchanged for Capital Stock (other than Disqualified Stock) of
Holdco, and
(B) the aggregate amount by which Debt (other than Subordinated
Debt) of Holdco or any Restricted Subsidiary is reduced on Holdco's
consolidated balance sheet on or after the Issue Date upon the
conversion or exchange of any Debt issued or sold on or prior to the
Issue Date into Capital Stock (other than Disqualified Stock) of
Holdco,
excluding, in the case of clause (A) or (B):
(x) any such Debt issued or sold to Holdco or a Subsidiary of Holdco or
an employee stock ownership plan or trust established by Holdco or any such
Subsidiary for the benefit of their employees, and
(y) the aggregate amount of any cash or other Property distributed by
Holdco or any Restricted Subsidiary upon any such conversion or exchange,
plus
(4) an amount equal to the sum of:
(A) the aggregate reduction in Investments in any Person other
than Holdco or a Restricted Subsidiary resulting from dividends,
returns of capital, repayments of loans or advances, interest or
other transfers of Property, in each case to Holdco or any Restricted
Subsidiary from such Person, and
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(B) the portion (proportionate to Holdco's equity interest in
such Unrestricted Subsidiary) of the Fair Market Value of the net
worth of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; plus
(C) $10.0 million.
Notwithstanding the foregoing limitation, Holdco may:
(a) pay dividends on its Capital Stock within 60 days of the declaration
thereof if, on the declaration date, such dividends could have been paid in
compliance with the Indenture; provided, however, that at the time of such
payment of such dividend, no Event of Default shall have occurred and be
continuing (or result therefrom); provided further, however, that such
dividend shall be included in the calculation of the amount of Restricted
Payments;
(b) purchase, repurchase, redeem, legally defease, acquire or retire for
value Capital Stock of Holdco or Subordinated Debt in exchange for, or out
of the proceeds of the substantially concurrent sale of, Capital Stock of
Holdco (other than Disqualified Stock and other than Capital Stock issued or
sold to a Subsidiary of Holdco or an employee stock ownership plan or trust
established by Holdco or any such Subsidiary for the benefit of their
employees); provided, however, that
(1) such purchase, repurchase, redemption, legal defeasance,
acquisition or retirement shall be excluded in the calculation of the
amount of Restricted Payments and
(2) the Capital Stock Sale Proceeds from such exchange or sale shall
be excluded from the calculation pursuant to clause (c)(2) above;
(c) purchase, repurchase, redeem, legally defease, acquire or retire for
value any Subordinated Debt in exchange for, or out of the proceeds of the
substantially concurrent sale of, Permitted Refinancing Debt; provided,
however, that such purchase, repurchase, redemption, legal defeasance,
acquisition or retirement shall be excluded in the calculation of the amount
of Restricted Payments;
(d) so long as no Default or Event of Default has occurred and is
continuing,
(1) purchase, repurchase, redeem, legally defease, acquire or retire
for value Capital Stock, or any options, warrants or other rights to
acquire Capital Stock, from any officer, director or employee of Holdco
or its Restricted Subsidiaries for an amount not to exceed $2.0 million
per year, and
(2) purchase, repurchase, redeem, legally defease, retire, refinance
or acquire for value shares of Capital Stock upon a change of control if
required pursuant to director and employee equity incentive plans for an
amount not to exceed $10.0 million; provided, however, in the event that,
in connection with the events giving rise to such change of control,
there shall have occurred a Change of Control pursuant to which Warnaco
is required to make a Change of Control Offer, then no purchase,
repurchase, redemption, legal defeasance, retirement, refinancing or
acquisition for value shall be made pursuant to this clause (d)(2) until
the completion of such Change of Control Offer and the repurchase of the
Notes validly tendered for payment in connection with such Change of
Control Offer; and
provided, however, that any such purchase, repurchase, redemption, legal
defeasance, retirement, refinancing or acquisition for value under
subsections (1) and (2) of this clause (d) shall be excluded in the
calculation of the amount of Restricted Payments; and
(e) purchase, repurchase, redeem, legally defease, retire, refinance or
acquire for value Subordinated Debt at a purchase price not greater than
101% of the principal amount of such Subordinated Debt in the event of a
change of control under the terms of such Subordinated Debt pursuant to a
provision similar to the ' -- Repurchase at the Option of Holders Upon a
Change of Control' provision above; provided, however, that prior to any
such purchase, repurchase, redemption, legal defeasance, retirement,
refinancing or acquisition for value, Warnaco has consummated a Change of
Control Offer with respect to the Notes as provided in ' -- Repurchase at
the Option of Holders Upon a Change of Control' above and has
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repurchased all Notes validly tendered for payment in connection with such
Change of Control Offer; and provided, further, however, that any
repurchase, redemption, defeasance, retirement, refinancing or acquisition
for value of Subordinated Debt pursuant to this clause (e) shall be included
in subsequent calculations of the amount of Restricted Payments.
LIMITATION ON LIENS
Holdco and Warnaco shall not, and shall not permit any of their respective
Restricted Subsidiaries to, directly or indirectly, Incur or suffer to exist,
any Lien (other than Permitted Liens) upon any of their Property (including
Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or
thereafter acquired, or any interest therein or any income or profits therefrom,
unless it has made or will make effective provision whereby the Notes or the
applicable Note Guaranty will be secured by such Lien equally and ratably with
(or, if such other Debt constitutes Subordinated Debt, prior to) all other Debt
of Holdco or any Restricted Subsidiary secured by such Lien for so long as such
other Debt is secured by such Lien.
LIMITATION ON ASSET SALES
Holdco and Warnaco shall not, and shall not permit any of their respective
Restricted Subsidiaries to, directly or indirectly, consummate any Asset Sale
unless:
(a) Holdco, Warnaco or such Restricted Subsidiary receives consideration
at the time of such Asset Sale at least equal to the Fair Market Value of
the Property subject to such Asset Sale; and
(b) at least 75% of the consideration paid to Holdco, Warnaco or their
respective Restricted Subsidiaries in connection with such Asset Sale is in
the form of cash or Temporary Cash Investments (or securities, notes or
other obligations received by Holdco, Warnaco or such Restricted Subsidiary
that are converted within 90 days by Holdco, Warnaco or the Restricted
Subsidiary into cash) or the assumption by the purchaser of liabilities of
Holdco, Warnaco or any of their respective Restricted Subsidiaries (other
than contingent liabilities or liabilities that are by their terms
subordinated to the Notes or the applicable Note Guaranty) as a result of
which Holdco, Warnaco and the Restricted Subsidiaries are no longer
obligated with respect to such liabilities.
The Net Available Cash (or any portion thereof) from Asset Sales may be
applied by Holdco or a Restricted Subsidiary, to the extent Holdco or a
Restricted Subsidiary elects (or is required by the terms of any Debt):
(i) to Repay Senior Debt of Warnaco or any Guarantor (excluding, in any
such case, any Debt owed to Holdco or Warnaco); or
(ii) to reinvest in Additional Assets (including by means of an
Investment in Additional Assets by a Restricted Subsidiary with Net
Available Cash received by Holdco or another Restricted Subsidiary).
Any Net Available Cash from an Asset Sale not applied in accordance with the
preceding paragraph within 365 days from the date of the receipt of such Net
Available Cash or that is not segregated from the general funds of Warnaco for
investment in identified Additional Assets in respect of a project that shall
have been commenced (including by paydown of revolving loans without a related
commitment reduction), and for which binding contractual commitments have been
entered into, prior to the end of such 365-day period and that shall not have
been abandoned shall constitute 'Excess Proceeds'; provided, however,that the
amount of any Net Available Cash that ceases to be so segregated as contemplated
above and any Net Available Cash that is segregated in respect of a project that
is abandoned or completed shall also constitute 'Excess Proceeds' at the time
any such Net Available Cash ceases to be so segregated or at the time the
relevant project is so abandoned or completed, as applicable.
When the aggregate amount of Excess Proceeds exceeds $15.0 million (taking
into account income earned on such Excess Proceeds, if any), Warnaco will be
required to make an offer to
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repurchase (the 'Prepayment Offer') the Notes, which offer shall be in the
amount of the Allocable Excess Proceeds (rounded to the nearest $1,000), on a
pro rata basis according to principal amount, at a purchase price equal to 100%
of the principal amount thereof, plus accrued and unpaid interest, including
Special Interest, if any, to the repurchase date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the Indenture. To the
extent that any portion of the amount of Net Available Cash remains after
compliance with the preceding sentence and provided that all Holders have been
given the opportunity to tender their Notes for repurchase in accordance with
the Indenture, Holdco or such Restricted Subsidiary may use such remaining
amount for any purpose permitted by the Indenture, and the amount of Excess
Proceeds will be reset to zero.
The term 'Allocable Excess Proceeds' shall mean the product of:
(a) the Excess Proceeds and
(b) a fraction,
(1) the numerator of which is the aggregate principal amount of the
Notes outstanding on the date of the Prepayment Offer, and
(2) the denominator of which is the sum of the aggregate principal
amount of the Notes outstanding on the date of the Prepayment Offer and the
aggregate principal amount of other Debt of Holdco, Warnaco or a Restricted
Subsidiary outstanding on the date of the Prepayment Offer that is pari
passu in right of payment with the Notes and subject to terms and conditions
in respect of Asset Sales similar in all material respects to this covenant
and requiring Holdco, Warnaco or such Restricted Subsidiary to make an offer
to repurchase such Debt at substantially the same time as the Prepayment
Offer.
Within 30 business days after Warnaco is obligated to make a Prepayment
Offer as described in the preceding paragraph, Warnaco shall send a written
notice, by first-class mail, to the Holders, accompanied by such information
regarding the Asset Sale as Warnaco in good faith believes will enable such
Holders to make an informed decision with respect to such Prepayment Offer. Such
notice shall state, among other things, the purchase price and the repurchase
date, which shall be, subject to any contrary requirements of applicable law, a
business day no earlier than 30 days nor later than 60 days from the date such
notice is mailed.
Warnaco will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, Warnaco will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
under this covenant by virtue thereof.
Notwithstanding the foregoing, any disposition of the Properties
constituting all or a portion of the A.B.S. by Allen Schwartz and White Stag
businesses shall not be subject to the requirements of the first clause (b) of
this 'Limitation on Asset Sales' covenant above, provided, however, that the
aggregate consideration paid to Holdco or any Restricted Subsidiary for all such
dispositions shall not exceed $70.0 million.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
Holdco and Warnaco shall not, and shall not permit any of their respective
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist any consensual restriction on the right of any of their
respective Restricted Subsidiaries to:
(a) pay dividends, in cash or otherwise, or make any other distributions
on or in respect of its Capital Stock, or pay any Debt or other obligation
owed, to Holdco or any Restricted Subsidiaries,
(b) make any loans or advances to Holdco or any Restricted Subsidiary,
or
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(c) transfer any of its Property to Holdco or any Restricted Subsidiary.
The foregoing limitations will not apply:
(1) with respect to clauses (a), (b) and (c) to:
(i) any encumbrance or restriction pursuant to an agreement in effect on
the Issue Date,
(ii) restrictions arising under Debt of a Restricted Subsidiary and
existing at the time it became a Restricted Subsidiary if such restriction
was not created in connection with or in anticipation of the transaction or
series of transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by Holdco or Warnaco,
(iii) any encumbrance or restriction pursuant to an agreement effecting
a Refinancing of Debt Incurred pursuant to an agreement referred to in
clause (i) or (ii) of clause (1) of this covenant or this clause (iii) or
contained in any amendment to an agreement referred to in clause (i) or (ii)
of clause (1) of this covenant or this clause (iii); provided, however, that
the encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such Refinancing or amendment are no less favorable in any
material respect to the holders of the Notes than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in such
predecessor agreements,
(iv) any customary encumbrance or restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into for the
sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such sale or
disposition and provided, that the consummation of such transaction would
not result in a Default or Event of Default,
(v) any encumbrance or restriction under applicable corporate law or
regulation relating to the payment of dividends or distributions,
(vi) any encumbrance or restriction arising under Debt or other
contractual requirements of a Securitization Entity in connection with a
Qualified Securitization Transaction; provided that such restrictions apply
only to such Securitization Entity and
(vii) any encumbrance with respect to Debt described in clause (j) under
the definition of 'Permitted Debt' in the covenant described under
' -- Limitation on Debt,' or
(2) with respect to clause (c) only, to:
(i) any encumbrance or restriction consisting of customary nonassignment
provisions in leases governing leasehold interests or in licenses or similar
contracts entered into in the ordinary course of business to the extent such
provisions restrict the transfer of the lease or license or the property
leased or licensed thereunder or pursuant to customary provisions
restricting dispositions of real property interest set forth in any
reciprocal easement agreement of Holdco, Warnaco or a Restricted Subsidiary,
(ii) any encumbrance or restriction contained in security agreements or
mortgages securing Debt of a Restricted Subsidiary otherwise permitted under
the Indenture to the extent such encumbrance or restriction restricts the
transfer of the property subject to such security agreements or mortgages,
(iii) restrictions relating to Debt that is permitted to be Incurred and
secured without also securing the Notes or the applicable Note Guaranty
pursuant to the covenants described under ' -- Limitation on Debt' and
' -- Limitation on Liens' that limit the right of the debtor to dispose of
or transfer the Property securing such Debt, and
(iv) encumbering Property at the time such Property was acquired by
Holdco or any Restricted Subsidiary, so long as such restrictions relate
solely to the Property so acquired and were not created in connection with
or in anticipation of such acquisition.
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LIMITATION ON TRANSACTIONS WITH AFFILIATES
Holdco and Warnaco shall not, and shall not permit any of their respective
Restricted Subsidiaries to, directly or indirectly, conduct any business or
enter into or suffer to exist any transaction or series of transactions
(including the purchase, sale, transfer, assignment, lease, conveyance or
exchange of any Property or the rendering of any service) with, or for the
benefit of, any Affiliate of Holdco or Warnaco (an 'Affiliate Transaction'),
unless:
(a) the terms of such Affiliate Transaction are:
(1) set forth in writing, and
(2) no less favorable to Holdco, Warnaco or such Restricted Subsidiary,
as the case may be, than those that could be obtained in a comparable
arm's-length transaction with a Person that is not an Affiliate of Holdco,
Warnaco or such Restricted Subsidiary,
(b) if such Affiliate Transaction involves aggregate payments or value
in excess of $10.0 million, the Board of Directors (including at least a
majority of the disinterested members of the Board of Directors) approves
such Affiliate Transaction and, in its good faith judgment, concludes that
such Affiliate Transaction complies with clause (a)(2) of this paragraph as
evidenced by a Board Resolution promptly delivered to the Trustee, and
(c) if such Affiliate Transaction involves aggregate payments or value
in excess of $25.0 million, Holdco or Warnaco obtains a written opinion from
an Independent Financial Advisor to the effect that the consideration to be
paid or received in connection with such Affiliate Transaction is fair, from
a financial point of view, to Holdco, Warnaco or such Restricted Subsidiary,
as the case may be.
Notwithstanding the foregoing limitation, Holdco, Warnaco or any of their
respective Restricted Subsidiaries may enter into, suffer to exist and perform
its obligations under the following:
(a) any transaction or series of transactions between Holdco and one or
more Restricted Subsidiaries or between two or more Restricted Subsidiaries
in the ordinary course of business;
(b) any Restricted Payment permitted to be made pursuant to the covenant
described under ' -- Limitation on Restricted Payments' or any Permitted
Investment;
(c) the payment of compensation (including amounts paid pursuant to
employee benefit plans) for the personal services of officers, directors and
employees of Holdco, Warnaco or any of their respective Restricted
Subsidiaries, so long as the Board of Directors in good faith shall have
approved the terms thereof and deemed the services theretofore or thereafter
to be performed for such compensation to be fair consideration therefor;
(d) loans and advances to employees made in the ordinary course of
business and consistent with the past practices of Holdco or such Restricted
Subsidiary, provided that such loans and advances do not exceed $2.5 million
in the aggregate at any one time outstanding;
(e) agreements in effect on the Issue Date and described in this
prospectus (including but not limited to the Equity Registration Rights
Agreement and any modifications, extensions or renewals thereto that are no
less favorable in any material respect to Holdco, Warnaco or any Restricted
Subsidiary than such agreements as in effect on the Issue Date);
(f) any transactions between or among any of Holdco, Warnaco, any
Restricted Subsidiary and any Securitization Entity in connection with a
Qualified Securitization Transaction, in each case provided that such
transactions are not otherwise prohibited by terms of the Indenture; and
(g) any agreements for the provision of commercial or investment banking
or consulting services entered into in good faith and approved by the Board
of Directors (including at least a majority of the disinterested members of
the Board of Directors).
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LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
Holdco and Warnaco shall not, and shall not permit any of their respective
Restricted Subsidiaries, to enter into any Sale and Leaseback Transaction with
respect to any Property unless:
(a) Holdco, Warnaco or such Restricted Subsidiary would be entitled to:
(1) Incur Debt in an amount equal to the Attributable Debt with
respect to such Sale and Leaseback Transaction pursuant to the covenant
described under ' -- Limitation on Debt,' and
(2) create a Lien on such Property securing such Attributable Debt
without also securing the Notes or the applicable Note Guaranty pursuant
to the covenant described under ' -- Limitation on Liens,' and
(b) such Sale and Leaseback Transaction is effected in compliance
with the covenant described under ' -- Limitation on Asset Sales.'
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Subsidiary of Holdco other than
Warnaco to be an Unrestricted Subsidiary if such Subsidiary:
(a) does not own any Capital Stock or Debt of, or own or hold any Lien
on any Property of, Holdco or any Restricted Subsidiary;
(b) has no Debt other than Debt:
(1) as to which neither Holdco nor any of its Restricted Subsidiaries
(A) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Debt), (B) is directly or
indirectly liable as a Guarantor or otherwise, or (C) constitutes the
lender, provided, however, that Holdco or a Restricted Subsidiary may
loan, advance or extend credit to, or Guarantee the Debt of, an
Unrestricted Subsidiary concurrently with or after the designation of
such Subsidiary as an Unrestricted Subsidiary in accordance with the
covenant described under ' -- Limitation on Restricted Payments,'
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or both
any holder of any Debt (other than any Guarantee permitted by the proviso
to the preceding clause (1)) of Holdco or any Restricted Subsidiaries to
declare a default on such Debt or cause the payment thereof to be
accelerated or payable prior to its Stated Maturity, and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or other Property of Holdco or
any Restricted Subsidiaries, except for Debt that has been Guaranteed as
permitted by the proviso to the preceding clause (1);
(c) is not party to any agreement, contract, arrangement or
understanding with Holdco or any Restricted Subsidiary unless the terms of
any such agreement, contract, arrangement or understanding are no less
favorable to Holdco or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of Holdco;
(d) is a Person with respect to which neither Holdco nor any Restricted
Subsidiaries has any direct or indirect obligation (1) to subscribe for
additional Capital Stock or (2) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels
of operating results; and
(e) has not Guaranteed or otherwise directly or indirectly provided
credit support for any Debt of Holdco or any Restricted Subsidiaries.
Unless so designated as an Unrestricted Subsidiary, any Person that becomes
a Subsidiary of Holdco will be classified as a Restricted Subsidiary; provided,
however, that such Subsidiary shall not be designated a Restricted Subsidiary
and shall be automatically classified as an Unrestricted
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Subsidiary if either of the requirements set forth in clauses (x) and (y) of the
second immediately following paragraph will not be satisfied after giving pro
forma effect to such classification or if such Person is a Subsidiary of an
Unrestricted Subsidiary.
Except as provided in the first sentence of the preceding paragraph, no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary, and
none of Holdco, Warnaco nor any Restricted Subsidiary shall at any time be
directly or indirectly liable for any Debt that provides that the holder thereof
may (with the passage of time or notice or both) declare a default thereon or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity upon the occurrence of a default with respect to any Debt, Lien or
other obligation of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary). Upon designation of a
Restricted Subsidiary as an Unrestricted Subsidiary in compliance with this
covenant, such Restricted Subsidiary shall, by execution and delivery of a
supplemental indenture in form satisfactory to the Trustee in its reasonable
judgment, be released from any Note Guaranty previously made by such Restricted
Subsidiary.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation,
(x) Holdco could Incur at least $1.00 of additional Debt pursuant to
clause (1) of the first paragraph of the covenant described under
' -- Limitation on Debt,' and
(y) no Default or Event of Default shall have occurred and be continuing
or would result therefrom.
Any such designation or redesignation by the Board of Directors will be
evidenced to the Trustee by filing with the Trustee a Board Resolution giving
effect to such designation or redesignation and an Officers' Certificate of
Warnaco that:
(a) certifies that such designation or redesignation complies with the
foregoing provisions, and
(b) gives the effective date of such designation or redesignation,
such filing with the Trustee to occur within 45 days after the end of the fiscal
quarter of Warnaco in which such designation or redesignation is made (or, in
the case of a designation or redesignation made during the last fiscal quarter
of Holdco's fiscal year, within 90 days after the end of such fiscal year).
LIMITATION ON WARNACO'S AND HOLDCO'S BUSINESSES
Warnaco shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, engage in any business other than the Permitted
Business. Holdco shall not engage in any business other than the Permitted
Holdco Business.
FUTURE GUARANTORS
Holdco and Warnaco shall cause each Person that becomes a Domestic
Restricted Subsidiary following the Issue Date, other than any Securitization
Entities, to execute and deliver to the Trustee a Note Guaranty at the time such
Person becomes a Domestic Restricted Subsidiary.
In addition, Holdco and Warnaco will cause each of their existing
non-Guarantor Subsidiaries and each of their Foreign Restricted Subsidiaries
created or acquired after the Issue Date which has Guaranteed or which
Guarantees any Debt of Holdco or any Domestic Restricted Subsidiary, to execute
and deliver to the Trustee a Guarantee agreement pursuant to which such non-
Guarantor or Foreign Restricted Subsidiary will Guarantee payment of Warnaco's
obligations under the Notes on the same terms and conditions as set forth in the
Guarantee of such other Debt of Holdco or any Domestic Restricted Subsidiary
given by such non-Guarantor or Foreign Restricted Subsidiary.
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MERGER, CONSOLIDATION AND SALE OF PROPERTY
Warnaco shall not merge, consolidate or amalgamate with or into any other
Person (other than a merger of a Wholly Owned Restricted Subsidiary into
Warnaco) or sell, transfer, assign, lease, convey or otherwise dispose of all or
substantially all its Property in any one transaction or series of transactions
unless:
(a) Warnaco shall be the Surviving Person in such merger, consolidation
or amalgamation, or the Surviving Person (if other than Warnaco) formed by
such merger, consolidation or amalgamation or to which such sale, transfer,
assignment, lease, conveyance or disposition is made shall be a corporation
organized and existing under the laws of the United States of America, any
State thereof or the District of Columbia;
(b) the Surviving Person (if other than Warnaco) expressly assumes, by
supplemental indenture in form reasonably satisfactory to the Trustee in its
reasonable judgment, executed and delivered to the Trustee by such Surviving
Person, the due and punctual payment of the principal of, and premium, if
any, and interest on, all the Notes, according to their tenor, and the due
and punctual performance and observance of all the covenants and conditions
of the Indenture to be performed by Warnaco;
(c) in the case of a sale, transfer, assignment, lease, conveyance or
other disposition of all or substantially all the Property of Warnaco, such
Property shall have been transferred as an entirety or substantially as an
entirety to one Person or a group of related persons;
(d) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (and treating, for purposes of this clause
(d) and clause (e) below, any Debt that becomes, or is anticipated to
become, an obligation of the Surviving Person or any Restricted Subsidiary
as a result of such transaction or series of transactions as having been
Incurred by the Surviving Person or such Restricted Subsidiary at the time
of such transaction or series of transactions), no Default or Event of
Default shall have occurred and be continuing;
(e) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, either Warnaco or the Surviving Person,
as the case may be, would be able to Incur at least $1.00 of additional Debt
under clause (1) of the first paragraph of the covenant described under
' -- Certain Covenants -- Limitation on Debt'; and
(f) Warnaco shall deliver, or cause to be delivered, to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
transaction or series of transactions and the supplemental indenture, if
any, in respect thereto comply with this covenant and that all conditions
precedent herein provided for relating to such transaction or series of
transactions have been satisfied.
Holdco shall not, and Holdco and Warnaco shall not permit any other
Guarantor to, merge, consolidate or amalgamate with or into any other Person
(other than a merger of a Wholly Owned Restricted Subsidiary into Warnaco or a
Guarantor) or sell, transfer, assign, lease, convey or otherwise dispose of all
or substantially all of its Property in any one transaction or series of
transactions unless:
(a) the Surviving Person (if other than such Guarantor) formed by such
merger, consolidation or amalgamation or to which such sale, transfer,
assignment, lease, conveyance or disposition is made shall be a corporation,
limited liability company or partnership organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia;
(b) the Surviving Person (if other than such Guarantor) expressly
assumes, by supplemental indenture in form reasonably satisfactory to the
Trustee in its reasonable judgment, executed and delivered to the Trustee by
such Surviving Person, the due and punctual performance and observance of
all the obligations of such Guarantor under its Note Guaranty and, in the
case of Holdco, due and punctual performance and observance of all the
covenants and conditions of the Indenture to be performed by Holdco;
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(c) in the case of a sale, transfer, assignment, lease, conveyance or
other disposition of all or substantially all the Property of such
Guarantor, such Property shall have been transferred as an entirety or
substantially as an entirety to one Person;
(d) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (and treating, for purposes of this clause
(d) and clause (e) below, any Debt that becomes, or is anticipated to
become, an obligation of the Surviving Person, Warnaco or any Guarantor as a
result of such transaction or series of transactions as having been Incurred
by the Surviving Person, Warnaco or such Guarantor at the time of such
transaction or series of transactions), no Default or Event of Default shall
have occurred and be continuing;
(e) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, Holdco would be able to Incur at least
$1.00 of additional Debt under clause (1) of the first paragraph of the
covenant described under ' -- Certain Covenants -- Limitation on Debt'; and
(f) Warnaco shall deliver, or cause to be delivered, to the Trustee an
Officers' Certificate and an Opinion of Counsel of Warnaco, each stating
that such transaction or series of transactions and such Note Guaranty, if
any, in respect thereto comply with this covenant and that all conditions
precedent herein provided for relating to such transaction or series of
transactions have been satisfied.
The foregoing provisions (other than clause (d)) shall not apply to any
transaction or series of transactions which constitute an Asset Sale if Holdco
has complied with the covenant described under ' -- Certain
Covenants -- Limitation on Asset Sales.'
The Surviving Person shall succeed to, and be substituted for, and may
exercise every right and power of Holdco and Warnaco under the Indenture (or of
the Guarantor under the Note Guaranty, as the case may be), but the predecessor
of Holdco or Warnaco, as the case may be, in the case of:
(a) a sale, transfer, assignment, conveyance or other disposition
(unless such sale, transfer, assignment, conveyance or other disposition is
of all the assets of Holdco or Warnaco as an entirety or substantially as an
entirety), or
(b) a lease,
shall not be released from any of the obligations or covenants under the
Indenture, including with respect to the payment of the Notes.
Notwithstanding the preceding clause (e), any Restricted Subsidiary of
Holdco may consolidate with, merge into or transfer all or substantially all its
Property to Warnaco or a Subsidiary Guarantor.
PAYMENT FOR CONSENTS
Holdco and Warnaco will not, and will not permit any of their respective
Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered to
be paid or is paid to all Holders that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
SEC REPORTS
Notwithstanding that Warnaco may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, Warnaco shall file with
the SEC and provide the Trustee and Holders with such annual reports and such
information, documents and other reports as are specified in Sections 13 and
15(d) of the Exchange Act and applicable to a U.S. corporation subject to such
Sections, such information, documents and reports to be so filed with the SEC
and provided at the times specified for the filing of such information,
documents and reports under
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such Sections; provided, however, that Warnaco shall not be so obligated to file
such information, documents and reports with the SEC if the SEC does not permit
such filings.
In addition, Warnaco shall furnish to Holders and to prospective investors,
upon the request of such Holders, any information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act so long as the Notes are
'restricted securities' within the meaning of Rule 144(a)(3) under the
Securities Act.
EVENTS OF DEFAULT
Events of Default in respect of the Notes include:
(1) failure to make the payment of any interest, including Special
Interest, if any, on the Notes when the same becomes due and payable, and
such failure continues for a period of 30 days;
(2) failure to make the payment of any principal of, or premium, if any,
on, any of the Notes when the same becomes due and payable at its Stated
Maturity, upon acceleration, redemption, optional redemption, required
repurchase or otherwise;
(3) failure to comply with the covenant described under ' -- Merger,
Consolidation and Sale of Property';
(4) failure to comply with any other covenant or agreement in the Notes
or in the Indenture (other than a failure that is the subject of the
foregoing clause (1), (2) or (3)), and such failure continues for 30 days
after written notice is given to Warnaco as provided below;
(5) a default under any Debt in an aggregate amount in excess of $25.0
million by Holdco or any Restricted Subsidiary that results in acceleration
of the maturity of such Debt, or failure to pay any such Debt within any
applicable grace period at maturity (the 'cross acceleration provisions');
(6) any judgment or judgments for the payment of money in an aggregate
amount in excess of $25.0 million (net of applicable insurance, if any, that
is not subject to any reservation of rights by the insurer) that shall be
rendered against Holdco or any Restricted Subsidiaries and that shall not be
waived, satisfied, vacated, bonded or discharged for any period of 60
consecutive days during which a stay of enforcement shall not be in effect
(the 'judgment default provisions');
(7) certain events involving bankruptcy, insolvency or reorganization of
Holdco, Warnaco, any Significant Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant Subsidiary
(the 'bankruptcy provisions');
(8) the Note Guaranty of Holdco or any Note Guaranty of a Significant
Subsidiary or a group of Subsidiary Guarantors that, taken as a whole, would
constitute a Significant Subsidiary, ceases to be in full force and effect
(other than in accordance with the terms of such Note Guaranty), or Holdco,
any Guarantor that is a Significant Subsidiary or a group of Subsidiary
Guarantors that, taken together, would constitute a Significant Subsidiary
denies or disaffirms its obligations under its Note Guaranty (the 'guaranty
provisions'); and
(9) any security interest securing the notes shall, at any time, cease
to be in full force and effect for any reason other than the satisfaction in
full of all obligations under the Indenture and discharge of the Indenture,
the release of the security interest in accordance with its terms or the
release of the Lien securing such other Debt as gave rise to the granting of
the security interest securing the notes (the 'other lien'), or any security
interest created thereunder shall be declared invalid or unenforceable or
Warnaco or any Guarantor shall assert, in any pleading in any court of
competent jurisdiction, that any such security interest is invalid or
unenforceable (the 'security default provisions'), except that no Event of
Default under this clause (9) shall occur to the extent that (a) the other
lien also ceases to be in full force and effect, (b) the other lien shall be
declared invalid or unenforceable or (c) Warnaco or the applicable Guarantor
shall assert that the other lien is invalid or unenforceable.
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A Default under clause (4) is not an Event of Default until the Trustee or
the Holders of not less than 25% in aggregate principal amount of the Notes and
any Additional Notes then outstanding notify Warnaco of the Default and Warnaco
does not cause such Default to be cured within the time specified after receipt
of such notice. Such notice must specify the Default, demand that it be remedied
and state that such notice is a 'Notice of Default.'
Warnaco shall deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event that with the giving of notice or the lapse
of time or both would become an Event of Default, its status, and what action
Warnaco is taking or proposes to take with respect thereto, provided, however,
that if the event giving rise to the requirement to deliver such notice is
cured, the failure to give notice shall not, in and of itself, constitute an
Event of Default.
If an Event of Default with respect to the Notes (other than an Event of
Default resulting from certain events involving bankruptcy, insolvency or
reorganization with respect to Warnaco) shall have occurred and be continuing,
the Trustee or the registered Holders of not less than 25% in aggregate
principal amount of the Notes and any Additional Notes then outstanding may
declare to be immediately due and payable the principal amount of all the Notes
then outstanding, plus accrued but unpaid interest to the date of acceleration.
In case an Event of Default resulting from certain events of bankruptcy,
insolvency or reorganization with respect to Warnaco shall occur, such amount
with respect to all the Notes shall be due and payable immediately without any
declaration or other act on the part of the Trustee or the Holders. After any
such acceleration, but before a judgment or decree based on acceleration is
obtained by the Trustee, the registered Holders of at least a majority in
aggregate principal amount of the Notes then outstanding may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, premium or interest, have
been cured or waived as provided in the Indenture.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
shall have offered to the Trustee reasonable indemnity. Subject to such
provisions for the indemnification of the Trustee, the Holders of at least a
majority in aggregate principal amount of the Notes then outstanding will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee with respect to the Notes.
No Holder will have any right to institute any proceeding with respect to
the Indenture, or for the appointment of a receiver or trustee, or for any
remedy thereunder, unless:
(a) such Holder has previously given to the Trustee written notice of a
continuing Event of Default;
(b) the registered Holders of at least 25% in aggregate principal amount
of the Notes then outstanding have made a written request and offered
reasonable indemnity to the Trustee to institute such proceeding as trustee;
and
(c) the Trustee shall not have received from the registered Holders of
at least a majority in aggregate principal amount of the Notes then
outstanding a direction inconsistent with such request and shall have failed
to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a Holder of any
Note for enforcement of payment of the principal of, and premium, if any, or
interest, including Special Interest, if any, on, such Note on or after the
respective due dates expressed in such Note.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, Warnaco and the Trustee with the consent of
the registered Holders of at least a majority in aggregate principal amount of
the Notes then outstanding (including consents obtained in connection with a
tender offer or exchange offer for the Notes) may amend the Indenture and the
Notes, and the registered Holders of at least a majority in
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aggregate principal amount of the Notes outstanding may waive any past default
or compliance with any provisions of the Indenture and the Notes (except a
default in the payment of principal, premium, interest, including Special
Interest, if any, and certain covenants and provisions of the Indenture which
cannot be amended without the consent of each Holder of an outstanding Note).
However, without the consent of each Holder of an outstanding Note, no amendment
may, among other things,
(1) reduce the amount of Notes whose Holders must consent to an
amendment or waiver,
(2) reduce the rate of, or extend the time for payment of, interest,
including Special Interest, if any, on, any Note,
(3) reduce the principal of, or extend the Stated Maturity of, any Note,
(4) make any Note payable in money other than that stated in the Note,
(5) impair the right of any Holder to receive payment of principal of,
premium, if any, and interest, including Special Interest, if any, on, such
Holder's Notes on or after the due dates therefor or to institute suit for
the enforcement of any payment on or with respect to such Holder's Notes or
any Note Guaranty,
(6) subordinate the Notes or any Note Guaranty to any other obligation
of Warnaco or the applicable Guarantor,
(7) release any security interest that may have been granted in favor of
the Holders other than pursuant to the terms of such security interest,
(8) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed, as described under ' -- Optional
Redemption,'
(9) reduce the premium payable upon a Change of Control or, at any time
after a Change of Control has occurred, change the time at which the Change
of Control Offer relating thereto must be made or at which the Notes must be
repurchased pursuant to such Change of Control Offer,
(10) at any time after Warnaco is obligated to make a Prepayment Offer
with the Excess Proceeds from Asset Sales, change the time at which such
Prepayment Offer must be made or at which the Notes must be repurchased
pursuant thereto, or
(11) make any change in any Note Guaranty that would adversely affect
the rights of Holders to receive payments under the Note Guaranty other than
any release of a Note Guaranty in accordance with the provisions of the
Indenture.
The Indenture and the Notes may be amended by Warnaco and the Trustee
without the consent of any Holder to:
(1) cure any ambiguity, omission, defect or inconsistency,
(2) provide for the assumption by a Surviving Person of the obligations
of Holdco or Warnaco under the Indenture,
(3) provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) and all other applicable
sections of the Code, or, with respect to Section 163(f), in a manner such
that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code),
(4) add additional Guarantors with respect to the Notes or release
Guarantors from Note Guaranties as provided or permitted by the terms of the
Indenture,
(5) secure the Notes, release all or any portion of any security
interest, add to the covenants of Holdco or Warnaco for the benefit of the
Holders or surrender any right or power conferred upon Holdco or Warnaco,
(6) make any change that does not adversely affect the rights of any
Holder,
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(7) comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act, or
(8) provide for the issuance of additional Notes in accordance with the
Indenture.
The consent of the Holders is not necessary to approve the particular form
of any proposed amendment. It is sufficient if such consent approves the
substance of the proposed amendment. After an amendment becomes effective,
Warnaco is required to mail to each registered Holder at such Holder's address
appearing in the security register a notice briefly describing such amendment.
However, the failure to give such notice to all Holders, or any defect therein,
will not impair or affect the validity of the amendment.
DEFEASANCE
Holdco or Warnaco may, at any time, terminate all their obligations under
the Notes and the Indenture ('legal defeasance'), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes. Holdco or Warnaco may, at any time, terminate:
(1) Warnaco's and Holdco's obligations under the covenants described
under ' -- Repurchase at the Option of Holders Upon a Change of Control' and
' -- Certain Covenants,'
(2) the operation of the cross acceleration provisions, the judgment
default provisions, the bankruptcy provisions with respect to Significant
Subsidiaries, the guaranty provisions and the security default provisions
described under ' -- Events of Default' above, and
(3) the limitations contained in clause (e) under the first paragraph
of, and in the second paragraph of, ' -- Merger, Consolidation and Sale of
Property' above ('covenant defeasance').
Holdco or Warnaco may exercise their legal defeasance option notwithstanding
their prior exercise of the covenant defeasance option.
If Holdco or Warnaco exercises their legal defeasance option, payment of the
Notes may not be accelerated because of an Event of Default with respect
thereto. If Holdco or Warnaco exercises their covenant defeasance option,
payment of the Notes may not be accelerated because of an Event of Default
specified in clause (4) (with respect to the covenants described under
' -- Certain Covenants'), (5), (6), (7) (with respect only to Significant
Subsidiaries), (8) or (9) under ' -- Events of Default' above or because of the
failure of Warnaco to comply with clause (e) under the first paragraph of, or
with the second paragraph of, ' -- Merger, Consolidation and Sale of Property'
above. If Holdco or Warnaco exercises their legal defeasance option or covenant
defeasance option, any collateral will be released and each Guarantor will be
released from all its obligations under its Note Guaranty.
The legal defeasance option or the covenant defeasance option may be
exercised only if:
(a) Warnaco irrevocably deposits in trust with the Trustee money or U.S.
Government Obligations for the payment of principal of, premium, if any, and
interest, including Special Interest, if any, on the Notes to maturity or
redemption, as the case may be;
(b) Warnaco delivers to the Trustee a certificate from a nationally
recognized firm of independent certified public accountants expressing their
opinion that the payments of principal, premium, if any, and interest when
due and without reinvestment on the deposited U.S. Government Obligations
plus any deposited money without investment will provide cash at such times
and in such amounts as will be sufficient to pay principal, premium, if any,
and interest when due on all the Notes to be defeased to maturity or
redemption, as the case may be;
(c) 123 days pass after the deposit is made, and during the 123-day
period, no Default described in clause (7) under ' -- Events of Default'
occurs with respect to Warnaco or any other Person making such deposit which
is continuing at the end of the period;
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(d) no Default or Event of Default has occurred and is continuing on the
date of such deposit and after giving effect thereto;
(e) such deposit does not constitute a default under any other agreement
or instrument binding on Warnaco;
(f) Warnaco delivers to the Trustee an Opinion of Counsel to the effect
that the trust resulting from the deposit does not constitute, or is
qualified as, a regulated investment company under the Investment Company
Act of 1940;
(g) in the case of the legal defeasance option, Warnaco delivers to the
Trustee an Opinion of Counsel stating that:
(1) Warnaco has received from the Internal Revenue Service a ruling,
or
(2) since the date of the Indenture there has been a change in the
applicable Federal income tax law, to the effect, in either case, that,
and based thereon such Opinion of Counsel shall confirm that, the Holders
will not recognize income, gain or loss for Federal income tax purposes
as a result of such defeasance and will be subject to Federal income tax
on the same amounts, in the same manner and at the same time as would
have been the case if such defeasance has not occurred;
(h) in the case of the covenant defeasance option, Warnaco delivers to
the Trustee an Opinion of Counsel to the effect that the Holders will not
recognize income, gain or loss for Federal income tax purposes as a result
of such covenant defeasance and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such covenant defeasance had not occurred; and
(i) Warnaco delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Notes have been complied with as required by
the Indenture.
SATISFACTION AND DISCHARGE
Warnaco may discharge the Indenture such that it will cease to be of further
effect, except as to surviving rights of registration of transfer or exchange of
the Notes, as to all outstanding Notes when:
(1) either
(a) all the Notes previously authenticated (except lost, stolen or
destroyed Notes that have been replaced or paid and Notes for whose payment
money has previously been deposited in trust or segregated and held in trust
by Warnaco and is thereafter repaid to Warnaco or discharged from the trust)
have been delivered to the Trustee for cancellation; or
(b) all Notes not previously delivered to the Trustee for cancellation
(A) have become due and payable, or
(B) will become due and payable at their maturity within one year, or
(C) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of a
redemption by the Trustee, and
in the case of (A), (B) or (C), Warnaco has deposited or caused to be
deposited with the Trustee as trust funds in trust solely for the benefit
of the holders, cash in U.S. dollars, non-callable U.S. Government
Obligations, or a combination of such cash and non-callable U.S.
Government Obligations, in such amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and discharge the
entire Debt on the Notes not previously delivered to the Trustee for
cancellation for principal, premium, if any, and interest and Special
Interest, if any, on the Notes to the date of deposit, in the case of
Notes that have become due and payable, or to the stated maturity or
redemption date, as the case may be;
141
(2) Warnaco has paid or caused to be paid all other sums payable by it under
the Indenture; and
(3) if required by the Trustee, Warnaco delivers to the Trustee an Officers'
Certificate and Opinion of Counsel stating that all conditions precedent under
the Indenture relating to the satisfaction and discharge of the Indenture have
been satisfied.
GOVERNING LAW
The Indenture and the Notes are governed by the internal laws of the State
of New York without reference to principles of conflicts of law.
THE TRUSTEE
Wells Fargo Bank Minnesota, National Association, is the Trustee under the
Indenture.
Except during the continuance of an Event of Default, the Trustee will
perform only such duties as are specifically set forth in the Indenture. During
the existence of an Event of Default, the Trustee will exercise such of the
rights and powers vested in it under the Indenture and use the same degree of
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided. Unless the context otherwise requires, an accounting
term not otherwise defined has the meaning assigned to it in accordance with
GAAP.
'Additional Assets' means:
(a) any Property (other than cash, Temporary Cash Investments and
securities) owned by Holdco or any Restricted Subsidiary and used in a
Permitted Business; or
(b) Capital Stock of a Person that is or becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by Holdco or another
Restricted Subsidiary from any Person other than Holdco or a controlled
Affiliate of Holdco; provided, however, that, in the case of clause (b),
such Restricted Subsidiary is primarily engaged in a Permitted Business.
'Affiliate' of any specified Person means:
(a) any other Person directly or indirectly controlling or controlled by
or under direct or indirect common control with such specified Person, or
(b) any other Person who is a director or officer of:
(1) such specified Person,
(2) any Subsidiary of such specified Person, or
(3) any Person described in clause (a) above.
For the purposes of this definition, 'control,' when used with respect to any
Person, means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms 'controlling' and 'controlled' have
meanings correlative to the foregoing. For purposes of the covenants described
under ' -- Certain Covenants -- Limitation on Transactions with Affiliates' and
' -- Certain Covenants -- Limitation on Asset Sales' and the definition of
'Additional Assets' only, 'Affiliate' shall also mean any beneficial owner of
shares representing 10% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of Holdco or of rights or warrants to purchase such
Voting Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof.
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'Asset Sale' means any sale, lease, transfer, issuance or other disposition
(or series of related sales, leases, transfers, issuances or dispositions) by
Holdco or any Restricted Subsidiary, including any disposition by means of a
merger, consolidation or similar transaction (each referred to for the purposes
of this definition as a 'disposition'), of
(a) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be held
by a person other than Holdco or a Restricted Subsidiary), or
(b) any other Property of Holdco or any Restricted Subsidiary outside of
the ordinary course of business of Holdco or such Restricted Subsidiary,
other than,
(1) any disposition by a Restricted Subsidiary to Warnaco or by Holdco
or a Restricted Subsidiary to a Restricted Subsidiary,
(2) any disposition that constitutes a Permitted Investment or
Restricted Payment permitted by the covenant described under ' -- Certain
Covenants -- Limitation on Restricted Payments,'
(3) any disposition effected in compliance with the first or second
paragraph of the covenant described under ' -- Merger, Consolidation and
Sale of Property,'
(4) any disposition in a single transaction or a series of related
transactions of assets for aggregate consideration of less than $2.5
million,
(5) any disposition of obsolete, damaged or worn-out equipment or
property, or property that is no longer useful in the conduct of the
business of Holdco and its Restricted Subsidiaries,
(6) any disposition of cash or Temporary Cash Investments, and
(7) any sale of accounts receivable and related assets (including
contract rights) of the type specified in the definition of 'Qualified
Securitization Transaction' to or by a Securitization Entity for the fair
market value thereof.
For the avoidance of doubt, the sale or disposition of inventory in the
ordinary course of business shall be considered dispositions not outside of the
ordinary course of business.
'Attributable Debt' in respect of a Sale and Leaseback Transaction means, at
any date of determination,
(a) if such Sale and Leaseback Transaction is a Capital Lease
Obligation, the amount of Debt represented thereby according to the
definition of 'Capital Lease Obligations,' and
(b) in all other instances, the greater of:
(1) the Fair Market Value of the Property subject to such Sale and
Leaseback Transaction at the time of the consummation thereof, and
(2) the present value (discounted at the interest rate borne by the
Notes, compounded annually) of the total obligations of the lessee for
rental payments during the remaining term of the lease included in such
Sale and Leaseback Transaction at the time of consummation thereof
(including any period for which such lease has been extended).
'Average Life' means, as of any date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing:
(a) the sum of the product of the numbers of years (rounded to the
nearest one-twelfth of one year) from the date of determination to the dates
of each successive scheduled principal payment of such Debt or redemption or
similar payment with respect to such Preferred Stock multiplied by the
amount of such payment by
(b) the sum of all such payments.
'Board of Directors' means the board of directors of Warnaco or any duly
authorized committee thereof.
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'Capital Lease Obligations' means any obligation under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance with GAAP; and
the Stated Maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty. For purposes of
' -- Certain Covenants -- Limitation on Liens,' a Capital Lease Obligation shall
be deemed secured by a Lien on the Property being leased.
'Capital Stock' means, with respect to any Person, any shares or other
equivalents (however designated) of any class of corporate stock or partnership
interests or any other participations, rights, warrants, options or other
interests in the nature of an equity interest in such Person, including
Preferred Stock, but excluding any debt security convertible or exchangeable
into such equity interest.
'Capital Stock Sale Proceeds' means the aggregate cash proceeds received by
Holdco from the issuance or sale (other than to a Subsidiary of Holdco or an
employee stock ownership plan or trust established by Holdco or any such
Subsidiary for the benefit of their employees) by Holdco of its Capital Stock
(other than Disqualified Stock) after the Issue Date, net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
'Change of Control' means the occurrence of any of the following events:
(a) Holdco shall at any time cease to be the beneficial owner (as
defined in Rule 13d-3 of the Exchange Act) of 100% of the Capital Stock of
Warnaco; or
(b) any 'person' or 'group' (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act or any successor provisions to either of the
foregoing), including any group acting for the purpose of acquiring,
holding, voting or disposing of securities within the meaning of
Rule 13d-5(b)(1) under the Exchange Act, becomes the 'beneficial owner' (as
defined in Rule 13d-3 under the Exchange Act, except that a person will be
deemed to have 'beneficial ownership' of all shares that any such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 50% of the
total voting power of the Voting Stock of Holdco (for purposes of this
clause (b), such person or group shall be deemed to beneficially own any
Voting Stock of a corporation held by any other corporation (the 'parent
corporation') so long as such person or group beneficially owns, directly or
indirectly, in the aggregate at least a majority of the total voting power
of the Voting Stock of such parent corporation); or
(c) the sale, transfer, assignment, lease, conveyance or other
disposition, directly or indirectly, of all or substantially all the
Property of Holdco, Warnaco and their Restricted Subsidiaries, considered as
a whole (other than a disposition of such Property as an entirety or
virtually as an entirety to a Wholly Owned Restricted Subsidiary), shall
have occurred, or Holdco or Warnaco merges, consolidates or amalgamates with
or into any other Person or any other Person merges, consolidates or
amalgamates with or into Holdco or Warnaco, in any such event pursuant to a
transaction in which the outstanding Voting Stock of Holdco or Warnaco is
reclassified into or exchanged for cash, securities or other Property, other
than any such transaction where:
(1) the outstanding Voting Stock of Holdco or Warnaco is reclassified
into or exchanged for other Voting Stock of Holdco or Warnaco or for
Voting Stock of the Surviving Person, and
(2) the holders of the Voting Stock of Holdco or Warnaco immediately
prior to such transaction own, directly or indirectly, not less than a
majority of the Voting Stock of Holdco or Warnaco or the Surviving Person
immediately after such transaction and in substantially the same
proportion as before the transaction; or
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(d) during any period of two consecutive years, individuals who at the
beginning of such period constituted the board of directors of, as relevant,
Holdco or Warnaco (together with any new directors whose election or
appointment by such board or whose nomination for election by the
shareholders of, as relevant, Holdco or Warnaco was approved by a vote of
not less than a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute at least a majority of the relevant board of directors then in
office; or
(e) the shareholders of Holdco or Warnaco shall have approved any plan
of liquidation or dissolution of Holdco or Warnaco, as applicable.
'Code' means the Internal Revenue Code of 1986, as amended.
'Commodity Price Protection Agreement' means, in respect of a Person, any
forward contract, commodity swap agreement, commodity option agreement or other
similar agreement or arrangement designed to protect such Person against
fluctuations in commodity prices.
'Comparable Treasury Issue' means the United States treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Notes that would be utilized, at the time of selection
and in accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining term of such
Notes. 'Independent Investment Banker' means one of the Reference Treasury
Dealers appointed by the Trustee after consultation with Warnaco.
'Comparable Treasury Price' means, with respect to any redemption date:
(a) the average of the bid and ask prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) on
the third business day preceding such redemption date, as set forth in the
most recently published statistical release designated 'H.15(519)' (or any
successor release) published by the Board of Governors of the Federal
Reserve System and which establishes yields on actively traded United States
treasury securities adjusted to constant maturity under the caption
'Treasury Constant Maturities,' or
(b) if such release (or any successor release) is not published or does
not contain such prices on such business day, the average of the Reference
Treasury Dealer Quotations for such redemption date.
'Consolidated Interest Coverage Ratio' means, as of any date of
determination, the ratio of:
(a) the aggregate amount of EBITDA for the most recent four consecutive
fiscal quarters in respect of which financial statements are publicly
available on or prior to the date of determination to
(b) Consolidated Interest Expense for such four fiscal quarters;
provided, however, that:
(1) if
(A) since the beginning of such period Holdco or any Restricted
Subsidiary has Incurred any Debt that remains outstanding or Repaid any
Debt, or
(B) the transaction giving rise to the need to calculate the
Consolidated Interest Coverage Ratio is an Incurrence or Repayment of
Debt,
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Incurrence or Repayment as if
such Debt was Incurred or Repaid on the first day of such period, provided
that the amount of Debt Incurred under revolving credit facilities shall be
deemed to be the average daily balance of such Debt during such four-
quarter period (or any shorter period in which such facilities are in
effect) and, provided further, in the event of any such Repayment of Debt,
EBITDA for such period shall be calculated as if Holdco or such Restricted
Subsidiary had not earned any interest income actually earned during such
period in respect of the funds used to Repay such Debt, and
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(2) if
(A) since the beginning of such period Holdco or any Restricted
Subsidiary shall have made any Asset Sale or an Investment (by merger or
otherwise) in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary) or an acquisition of Property which constitutes
all or substantially all of an operating unit of a business,
(B) the transaction giving rise to the need to calculate the
Consolidated Interest Coverage Ratio is such an Asset Sale, Investment or
acquisition, or
(C) since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into Holdco or any
Restricted Subsidiary since the beginning of such period) shall have made
such an Asset Sale, Investment or acquisition,
then EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect to such Asset Sale, Investment or
acquisition as if such Asset Sale, Investment or acquisition had occurred on
the first day of such period.
If any Debt bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Debt shall be calculated as if the interest
rate in effect for such floating rate of interest on the date of determination
had been the applicable interest rate for the entire period (taking into account
any Interest Rate Agreement applicable to such Debt if such Interest Rate
Agreement has a remaining term in excess of 12 months). In the event the Capital
Stock of any Restricted Subsidiary is sold during the period, Holdco shall be
deemed, for purposes of clause (1) above, to have Repaid during such period the
Debt of such Restricted Subsidiary to the extent Holdco and its continuing
Restricted Subsidiaries are no longer liable for such Debt after such sale.
'Consolidated Interest Expense' means, for any period, the total interest
expense of Holdco and its consolidated Restricted Subsidiaries (net of interest
income and payments received in respect of Interest Rate Agreements), plus, to
the extent not included in such total interest expense, and to the extent
Incurred by Holdco or its Restricted Subsidiaries,
(a) interest expense attributable to leases constituting part of a Sale
and Leaseback Transaction and to Capital Lease Obligations,
(b) amortization of debt discount and debt issuance cost, including
commitment fees,
(c) capitalized interest,
(d) non-cash interest expense,
(e) commissions, discounts and other fees and charges owed with respect
to letters of credit and banker's acceptance financing,
(f) costs associated with Interest Rate Agreements (including
amortization of fees),
(g) Disqualified Stock Dividends,
(h) Preferred Stock Dividends,
(i) interest Incurred in connection with Investments in discontinued
operations,
(j) interest accruing on any Debt of any other Person to the extent such
Debt is Guaranteed by Holdco or any of its Restricted Subsidiaries, and
(k) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than Holdco) in
connection with Debt Incurred by such plan or trust.
Notwithstanding the foregoing, there shall be excluded from Consolidated
Interest Expense the interest expense attributable to any Debt of a Foreign
Restricted Subsidiary, but only if (x) the Debt of the Foreign Restricted
Subsidiary giving rise to such interest expense is without recourse to or
guaranteed by Holdco, Warnaco, any Subsidiary Guarantor or any other Domestic
Restricted Subsidiary of Holdco and (y) the net income of such Foreign
Restricted Subsidiary is not included in the calculation of Consolidated Net
Income for the same period.
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'Consolidated Net Income' means, for any period, the net income (loss) of
Holdco and its consolidated Restricted Subsidiaries; provided, however, that
there shall not be included in such Consolidated Net Income:
(a) any net income (loss) of any Person if such Person is not Holdco or
a Restricted Subsidiary, except that:
(1) subject to the exclusion contained in clause (c) below, equity of
Holdco and its consolidated Restricted Subsidiaries in the net income of
any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash distributed by such Person
during such period to Holdco or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in
clause (b) below), and
(2) the equity of Holdco and its consolidated Restricted Subsidiaries
in a net loss of any such Person other than an Unrestricted Subsidiary
for such period shall be included in determining such Consolidated Net
Income to the extent such loss has been funded with cash or other
property from Holdco, or a Restricted Subsidiary,
(b) any net income (loss) of any Restricted Subsidiary to the extent
that such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions,
directly or indirectly, to Holdco or Warnaco, except that:
(1) subject to the exclusion contained in clause (c) below, the
equity of Holdco and its consolidated Restricted Subsidiaries in the net
income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of
cash distributed by such Restricted Subsidiary during such period to
Holdco or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution to
another Restricted Subsidiary, to the limitation contained in this
clause), and
(2) the equity of Holdco and its consolidated Restricted Subsidiaries
in a net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income,
(c) any gain or loss realized upon the sale or other disposition of any
Property of Holdco or any of its consolidated Restricted Subsidiaries
(including pursuant to any Sale and Leaseback Transaction) that is not sold
or otherwise disposed of in the ordinary course of business,
(d) any extraordinary gain or loss,
(e) the cumulative effect of a change in accounting principles and
(f) any non-cash compensation expense realized for grants of performance
shares, stock options or other rights to officers, directors and employees
of Holdco or any Restricted Subsidiary, provided that such shares, options
or other rights can be redeemed at the option of the holder only for Capital
Stock of Holdco (other than Disqualified Stock).
Notwithstanding the foregoing, for purposes of the covenant described under
' -- Certain Covenants -- Limitation on Restricted Payments' only, there shall
be excluded from Consolidated Net Income any dividends, returns of capital,
repayments of loans or advances, interest or other transfers of Property from
Unrestricted Subsidiaries to Holdco or a Restricted Subsidiary to the extent
such dividends, returns, repayments, interest or transfers increase the amount
of Restricted Payments permitted under such covenant pursuant to clause (c)(4)
thereof.
'Credit Facilities' means, with respect to Holdco or any Restricted
Subsidiary, one or more debt or credit facilities with banks or other lenders
(including the Senior Credit Facility) providing for revolving credit loans,
term loans, notes, receivables or inventory financing (including through the
sale of receivables or inventory to such lenders or to special purpose,
bankruptcy remote entities formed to borrow from such lenders against such
receivables or inventory) or trade or standby letters of credit, in each case as
such facility may be amended (including any amendment and restatement thereof),
supplemented or otherwise modified from time to time, including any
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agreements extending the maturity of, refinancing, replacing (whether or not
contemporaneously) or otherwise restructuring (including increasing the amount
of available borrowings thereunder (provided that such increase in borrowings is
permitted by the covenant described under ' -- Certain Covenants -- Limitation
on Debt') or adding Restricted Subsidiaries as additional borrowers or
collateral guarantors thereunder) all or any portion of the Debt under such
agreement or any successor or replacement agreements and whether by the same or
any other agent, lender or group of lenders or investors and whether such
refinancing or replacement is under one or more debt facilities or commercial
paper facilities, indentures or other agreements, in each case with banks or
other lenders or trustees or investors providing for revolving credit loans,
term loans, notes or letters or credit, together with related documents thereto
(including, without limitation, any guaranty agreements and security documents).
'Currency Exchange Protection Agreement' means, in respect of a Person, any
foreign exchange contract, currency swap agreement, currency option, forward
contract or other similar agreement or arrangement, in each case, including any
Guarantee and collateral documents referred to therein, designed to protect such
Person against fluctuations in currency exchange rates.
'Debt' means, with respect to any Person on any date of determination
(without duplication):
(a) the principal of and premium (if any) in respect of:
(1) debt of such Person for money borrowed, and
(2) debt evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or
liable;
(b) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale and Leaseback Transactions entered into by such
Person;
(c) all obligations of such Person representing the deferred purchase
price of Property, all conditional sale obligations of such Person and all
obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business
and other accrued liabilities arising in the ordinary course of business
that are not overdue or are being contested in good faith and are not
required to be reflected as debt in Holdco's consolidated financial
statements under GAAP);
(d) all obligations of such Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance (other than obligations with
respect to letters of credit securing obligations (other than obligations
described in (a) through (c) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not drawn
upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the third business day following receipt by such Person of a
demand for reimbursement following payment on the letter of credit);
(e) the amount of all obligations of such Person with respect to the
Repayment of any Disqualified Stock or, with respect to any Subsidiary of
such Person, any Preferred Stock (but excluding, in each case, any accrued
dividends);
(f) all obligations of the type referred to in clauses (a) through (e)
above of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(g) all obligations of the type referred to in clauses (a) through (f)
above of other Persons secured by any Lien on any Property of such Person
(whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the Fair Market Value of
such Property and the amount of the obligation so secured; and
(h) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Debt of any Person at any date shall be the outstanding balance,
or the accreted value of such Debt in the case of Debt issued with original
issue discount, at such date of all
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unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date. The amount of Debt represented by a Hedging Obligation
shall be equal to:
(1) zero if such Hedging Obligation has been Incurred pursuant to clause
(f), (g) or (h) of the second paragraph of the covenant described under
' -- Certain Covenants -- Limitation on Debt,' or
(2) the notional amount of such Hedging Obligation if not Incurred
pursuant to such clauses.
'Default' means any event which is, or after notice or passage of time or
both would be, an Event of Default.
'Disqualified Stock' means any Capital Stock of Holdco or any of its
Restricted Subsidiaries that by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable, in either case at the
option of the holder thereof) or otherwise:
(a) matures or is mandatorily redeemable (other than redeemable only for
Capital Stock of such Person which is not itself Disqualified Stock)
pursuant to a sinking fund obligation or otherwise,
(b) is or may become redeemable or repurchaseable at the option of the
holder thereof, in whole or in part, including upon a change of control,
provided, however, that such Capital Stock shall not constitute Disqualified
Stock if the terms of such Capital Stock (and any such securities into which
it is directly or indirectly convertible or exchangeable) provide that
Holdco or any of its Restricted Subsidiaries may not repurchase or redeem
any such Capital Stock (and any such securities into which it is directly or
indirectly convertible or exchangeable) pursuant to a change of control
provision:
(1) unless the events giving rise to such change of control would
constitute a Change of Control pursuant to which Warnaco is required to
make a Change of Control Offer, and
(2) prior to any such repurchase or redemption of any such Capital
Stock (and any such securities into which it is convertible or
exchangeable), Warnaco shall have completed such Change of Control Offer
and repurchased all Notes validly tendered for payment in connection with
such Change of Control Offer, or
(c) is convertible or exchangeable at the option of the holder thereof
for Debt or Disqualified Stock,
on or prior to, in the case of clause (a), (b) or (c), the first anniversary of
the Stated Maturity of the Notes.
'Disqualified Stock Dividends' means all dividends with respect to
Disqualified Stock of Holdco held by Persons other than a Wholly Owned
Restricted Subsidiary. The amount of any such dividend shall be equal to the
quotient of such dividend divided by the difference between one and the maximum
statutory federal income tax rate (expressed as a decimal number between 1 and
0) then applicable to Holdco.
'Domestic Restricted Subsidiary' means any Restricted Subsidiary other than
(a) a Foreign Restricted Subsidiary or (b) a Subsidiary of a Foreign Restricted
Subsidiary.
'EBITDA' means, for any period, an amount equal to, for Holdco and its
consolidated Restricted Subsidiaries:
(a) the sum of Consolidated Net Income for such period, plus the
following to the extent deducted in determining Consolidated Net Income for
such period:
(1) the provision for taxes based on income or profits or utilized in
computing net loss,
(2) Consolidated Interest Expense,
(3) depreciation,
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(4) amortization of intangibles,
(5) any other non-cash items (other than any such non-cash item to
the extent that it represents an accrual of, or reserve for, cash
expenditures in any future period), and
(6) any one-time, non-recurring expenses or charges relating to, or
arising from the recapitalization and restructuring of Holdco, Warnaco
and certain other Subsidiaries in proceedings under Chapter 11 of the
U.S. Bankruptcy Code, minus
(b) all non-cash items increasing Consolidated Net Income for such
period.
Notwithstanding the foregoing clause (a), the provision for taxes and the
depreciation, amortization and non-cash items of a Restricted Subsidiary shall
be added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Restricted Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to
Holdco by such Restricted Subsidiary.
'Equity Registration Rights Agreement' means the Registration Rights
Agreement, dated as of February 4, 2003, among Holdco and certain former
creditors of Warnaco.
'Event of Default' has the meaning set forth under ' -- Events of Default.'
'Exchange Act' means the Securities Exchange Act of 1934, as amended.
'Fair Market Value' means, with respect to any Property, the price that
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value shall be
determined, except as otherwise provided,
(a) if such Property has a Fair Market Value equal to or less than $10.0
million, by any Officer of Warnaco, or
(b) if such Property has a Fair Market Value in excess of $10.0 million,
by at least a majority of the Board of Directors and evidenced by a Board
Resolution, dated within 30 days of the relevant transaction.
'Foreign Borrowing Base' means the sum of the amounts equal to (a) 85% of
the book value of the accounts receivable of all Foreign Restricted Subsidiaries
plus (b) 50% of the book value of the inventory of such Foreign Restricted
Subsidiaries.
'Foreign Restricted Subsidiary' means any Restricted Subsidiary which is
(a) not organized under the laws of the United States of America or any State
thereof or the District of Columbia or (b) any other Restricted Subsidiary whose
assets consist, directly or indirectly, solely of the Capital Stock of one or
more Subsidiaries which are not organized under the laws of the United States of
America or any State thereof or the District of Columbia.
'GAAP' means United States generally accepted accounting principles as in
effect on the Issue Date, including those set forth in:
(a) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants,
(b) the statements and pronouncements of the Financial Accounting
Standards Board,
(c) such other statements by such other entity as approved by a
significant segment of the accounting profession, and
(d) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
'Guarantee' means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
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(a) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt of such other Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial
statement conditions or otherwise), or
(b) entered into for the purpose of assuring in any other manner the
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term 'Guarantee' shall not include:
(1) endorsements for collection or deposit in the ordinary course of
business, or
(2) a contractual commitment by one Person to invest in another Person
for so long as such Investment is reasonably expected to constitute a
Permitted Investment under clause (a), (b) or (c) of the definition of
'Permitted Investment.'
The term 'Guarantee' used as a verb has a corresponding meaning.
'Guarantor' means Holdco, each Domestic Restricted Subsidiary (other than
Warnaco and any Securitization Entity) and any other Person that becomes a
Guarantor pursuant to the covenant described under ' -- Certain
Covenants -- Future Guarantors' or who otherwise executes and delivers a
supplemental indenture to the Trustee providing for a Note Guaranty.
'Hedging Obligation' of any Person means any obligation or liability, direct
or indirect, contingent or otherwise, of such Person in respect of any Interest
Rate Agreement, Currency Exchange Protection Agreement, Commodity Price
Protection Agreement or any other similar agreement or arrangement.
'Holder' means a Person in whose name a Note is registered in the Notes'
security register.
'Incur' means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by merger, conversion, exchange or otherwise), extend,
assume, Guarantee or become liable in respect of such Debt or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such Debt or
obligation on the balance sheet of such Person (and 'Incurrence' and 'Incurred'
shall have meanings correlative to the foregoing); provided, however, that a
change in GAAP that results in an obligation of such Person that exists at such
time, and is not theretofore classified as Debt, becoming Debt shall not be
deemed an Incurrence of such Debt; provided further, however, that any Debt or
other obligations of a Person existing at the time such Person becomes a
Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be
deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary.
'Independent Financial Advisor' means an investment banking firm of national
standing or any third party appraiser of national standing, provided that such
firm or appraiser is not an Affiliate of Holdco.
'Interest Rate Agreement' means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement, in each case, including any Guarantee and collateral
documents referred to therein designed to protect such Person against
fluctuations in interest rates and including, without limitation, any such
arrangement whereby, directly or indirectly, such Person is entitled to receive
from time to time periodic payments calculated by applying either a fixed or
floating rate of interest on a stated notional amount in exchange for periodic
payments made by such Person calculated by applying a fixed or floating rate of
interest on the same notional amount.
'Investment' by any Person means any direct or indirect loan (other than
advances to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of such Person), advance or other
extension of credit or capital contribution (by means of transfers of cash or
other Property to others or payments for Property or services for the account or
use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation,
or purchase or acquisition of Capital Stock, bonds, notes, debentures or other
securities or evidence of Debt issued by, any other Person, provided, that none
of the following will be deemed to be an Investment:
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(1) Hedging Obligations entered into in the ordinary course of business
and in compliance with the indenture;
(2) endorsements of negotiable instruments and documents in the ordinary
course of business; and
(3) an acquisition of assets, Capital Stock or other securities by
Holdco, Warnaco or a Restricted Subsidiary for consideration to the extent
such consideration consists of Capital Stock of Warnaco or Holdco, other
than Disqualified Stock.
For purposes of the covenants described under ' -- Certain
Covenants -- Limitation on Restricted Payments' and ' -- Designation of
Restricted and Unrestricted Subsidiaries' and the definition of 'Restricted
Payment,' the term 'Investment' shall include the portion (proportionate to
Holdco's beneficial equity interest in such Subsidiary) of the Fair Market Value
of the net worth of any Subsidiary of Holdco at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, Holdco shall be
deemed to continue to have a permanent 'Investment' in an Unrestricted
Subsidiary of an amount (if positive) equal to:
(a) Holdco's 'Investment' in such Subsidiary at the time of such
redesignation, less
(b) the portion (proportionate to Holdco's equity interest in such
Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at
the time of such redesignation.
In determining the amount of any Investment made by transfer of any Property
other than cash, such Property shall be valued at its Fair Market Value at the
time of such Investment.
'Issue Date' means the date on which the Notes (other than any Additional
Notes) are initially issued.
'Lien' means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including any Capital Lease
Obligation, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing or any Sale and
Leaseback Transaction).
'Moody's' means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
'Net Available Cash' from any Asset Sale means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Debt or other obligations relating to the
Property that is the subject of such Asset Sale or received in any other
non-cash form), in each case net of:
(a) all legal, accounting, financial advisory, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be accrued as a
liability under GAAP, as a consequence of such Asset Sale,
(b) all payments made on or in respect of any Debt that is secured by
any Property subject to such Asset Sale, in accordance with the terms
thereof, or which must by its terms, or in order to obtain a necessary
consent to such Asset Sale, or by applicable law, be repaid out of the
proceeds of such Asset Sale,
(c) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Sale, and
(d) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the Property disposed of in such Asset Sale and retained by Holdco or any
Restricted Subsidiary after such Asset Sale.
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'Note Guaranty' means a Guarantee of Warnaco's obligations with respect to
the Notes on the terms set forth in the Indenture.
'Obligations' means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Debt.
'Officer' means the Chief Executive Officer, the President, the Chief
Financial Officer or any Executive Vice President of Warnaco.
'Officers' Certificate' means a certificate signed by two Officers of
Warnaco, at least one of whom shall be the principal executive officer or
principal financial officer of Warnaco, and delivered to the Trustee.
'Opinion of Counsel' means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to
Warnaco or the Trustee.
'Permitted Business' means the business conducted on the date hereof by
Holdco and its Subsidiaries and businesses that are similar, ancillary,
complementary or related thereto.
'Permitted Holdco Business' means (a) holding shares of Capital Stock of
Warnaco or any other Restricted Subsidiary, (b) paying taxes, (c) preparing
proper reports to governmental authorities, including the SEC, the Nasdaq
National Market and to its stockholders, (d) being a party to, and taking all
actions required to be taken under, the Indenture and any Credit Facilities and
(e) holding meetings of the Board of Directors and of the stockholders of
Holdco, preparing corporate records and other corporate activities required to
maintain its separate corporate structure.
'Permitted Investment' means any Investment by Holdco, Warnaco or any of
their Restricted Subsidiaries in:
(a) Holdco or any Restricted Subsidiary,
(b) any Person that will, upon the making of such Investment, become a
Restricted Subsidiary, provided that the primary business of such Restricted
Subsidiary is a Permitted Business;
(c) any Person if as a result of such Investment such Person is merged
or consolidated with or into, or transfers or conveys all or substantially
all its Property to, Holdco or a Restricted Subsidiary, provided that such
Person's primary business is a Permitted Business;
(d) Cash and Temporary Cash Investments;
(e) receivables owing to Holdco or a Restricted Subsidiary, if created
or acquired in the ordinary course of business and payable or dischargeable
in accordance with customary trade terms; provided, however, that such trade
terms may include such concessionary trade terms as Holdco or such
Restricted Subsidiary deems reasonable under the circumstances;
(f) payroll, travel, relocation and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business;
(g) loans and advances to employees made in the ordinary course of
business consistent with past practices of Holdco or such Restricted
Subsidiary, as the case may be, provided that such loans and advances do not
exceed $2.5 million in the aggregate at any one time outstanding;
(h) stock, obligations or other securities received in settlement of
obligations created in the ordinary course of business and owing to Holdco
or a Restricted Subsidiary or in satisfaction of judgments or pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of a debtor;
(i) any Person to the extent such Investment represents the non-cash
portion of the consideration received in connection with (A) an Asset Sale
consummated in compliance with
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the covenant described under ' -- Certain Covenants -- Limitation on Asset
Sales,' or (B) any disposition of Property not constituting an Asset Sale;
(j) a Securitization Entity or any Investment by a Securitization Entity
in any other Person in connection with a Qualified Securitization
Transaction provided that any Investment in a Securitization Entity is in
the form of a Purchase Money Note, contribution of additional receivables
and related assets or any equity interests;
(k) Investments by Warnaco or any Restricted Subsidiary in any
Unrestricted Subsidiary or joint venture the primary business of which is a
Permitted Business, provided that the amount of all Investments made
pursuant to this clause (k) in the aggregate does not exceed $15.0 million
outstanding at any one time;
(l) Currency Exchange Protection Agreements, Interest Rate Agreements
and Guarantees to the extent otherwise permitted under the Indenture;
(m) any Debt or extension of credit represented by a bank deposit other
than a time deposit; and
(n) other Investments made for Fair Market Value that do not exceed
$20.0 million in the aggregate outstanding at any one time.
'Permitted Liens' means:
(a) Liens to secure Debt permitted to be Incurred under clauses (b) and
(j) of the definition of 'Permitted Debt' in the second paragraph of the
covenant described under ' -- Certain Covenants -- Limitation on Debt,'
including, in the case of such clause (b), any related hedging or cash
management services provided by the lenders under the Credit Facilities;
(b) Liens to secure Debt permitted to be Incurred under clause (c) of
the second paragraph of the covenant described under ' -- Certain
Covenants -- Limitation on Debt,' provided that any such Lien may not extend
to any Property of Holdco or any Restricted Subsidiary, other than the
Property acquired, constructed or leased with the proceeds of such Debt and
any improvements or accessions to such Property;
(c) Liens for taxes, assessments or governmental charges or levies on
the Property of Holdco or any Restricted Subsidiary if the same shall not at
the time be delinquent or thereafter can be paid without penalty, or are
being contested in good faith and by appropriate proceedings, provided that
any reserve or other appropriate provision that shall be required in
conformity with GAAP shall have been made therefor;
(d) Liens imposed by law, such as carriers', supplier's, workmen's,
warehousemen's, landlord's, materialmen's and mechanics' Liens and other
similar Liens and judgment liens on the Property of Holdco or any Restricted
Subsidiary arising in the ordinary course of business and securing payment
of obligations that are not more than 60 days past due or are being
contested in good faith and by appropriate proceedings;
(e) Liens on the Property of Holdco or any Restricted Subsidiary
Incurred in the ordinary course of business to secure performance of
obligations with respect to statutory or regulatory requirements,
performance or return-of-money bonds, surety bonds or other obligations of a
like nature and Incurred in a manner consistent with industry practice, in
each case which are not Incurred in connection with the borrowing of money,
the obtaining of advances or credit or the payment of the deferred purchase
price of Property and which do not in the aggregate impair in any material
respect the use of Property in the operation of the business of Holdco and
the Restricted Subsidiaries taken as a whole;
(f) Liens on Property at the time Holdco or any Restricted Subsidiary
acquired such Property, including any acquisition by means of a merger or
consolidation with or into Holdco or any Restricted Subsidiary; provided,
however, that any such Lien may not extend to any other Property of Holdco
or any Restricted Subsidiary; provided further, however, that such Liens
shall not have been Incurred in anticipation of or in connection with the
transaction or
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series of transactions pursuant to which such Property was acquired by
Holdco or any Restricted Subsidiary;
(g) Liens on the Property of a Person at the time such Person becomes a
Restricted Subsidiary; provided, however, that any such Lien may not extend
to any other Property of Holdco or any other Restricted Subsidiary that is
not a direct Subsidiary of such Person; provided further, however, that any
such Lien was not Incurred in anticipation of or in connection with the
transaction or series of transactions pursuant to which such Person became a
Restricted Subsidiary;
(h) pledges or deposits by Holdco or any Restricted Subsidiary under
workers' compensation laws, unemployment insurance laws or similar
legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Debt) or leases to which Holdco or
any Restricted Subsidiary is party, or deposits to secure public or
statutory obligations of Holdco, or deposits for the payment of rent, in
each case Incurred in the ordinary course of business;
(i) utility easements, building and zoning restrictions and such other
encumbrances or charges against real Property as are of a nature generally
existing with respect to properties of a similar character;
(j) Liens on the Capital Stock of any joint venture that is not a
Subsidiary of Holdco or any Restricted Subsidiary, provided, that such Lien
secures only obligations of Holdco or any Restricted Subsidiary to such
joint venture or the obligations of such joint venture;
(k) Liens existing on the Issue Date not otherwise described in clauses
(a) through (j) above;
(l) Liens not otherwise described in clauses (a) through (k) above on
the Property of any Restricted Subsidiary that is not a Guarantor to secure
any Debt permitted to be Incurred by such Restricted Subsidiary pursuant to
the covenant described under ' -- Certain Covenants -- Limitation on Debt';
(m) Liens on the Property of Holdco or any Restricted Subsidiary to
secure any Refinancing, in whole or in part, of any Debt secured by Liens
referred to in clause (b), (f), (g) or (k) above; provided, however, that
any such Lien shall be limited to all or part of the same Property that
secured the original Lien (together with improvements and accessions to such
Property), and the aggregate principal amount of Debt that is secured by
such Lien shall not be increased to an amount greater than the sum of:
(1) the outstanding principal amount, or, if greater, the committed
amount, of the Debt secured by Liens described under clause (b), (f), (g)
or (k) above, as the case may be, at the time the original Lien became a
Permitted Lien under the Indenture;
(2) an amount necessary to pay any fees and expenses, including
premiums and defeasance costs related to such Refinancing; and
(3) accrued and unpaid interest on the Debt being Refinanced;
(n) Liens on accounts receivable and related assets (including contract
rights) of the type specified in the definition of 'Qualified Securitization
Transaction' transferred to a Securitization Entity in a Qualified
Securitization Transaction;
(o) Liens on amounts payable to Holdco or any Restricted Subsidiary
under any insurance policy (including any gross unearned premiums and any
payment on account of loss which results in a reduction of an earned premium
with respect to the underlying policy), provided that such Liens secure
solely Debt Incurred solely for the purpose of financing the payment of
insurance premiums for such insurance policy in the ordinary course of
business and, provided, further, that such Debt is permitted to be Incurred
under the covenant described under ' -- Certain Covenants -- Limitations on
Debt' and the amount of Debt secured by a Lien pursuant to this clause (o)
does not exceed $15.0 million outstanding at any time;
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(p) encumbrances consisting of leases or subleases of real property
owned by Holdco or any Restricted Subsidiary which do not in the aggregate
materially detract from the value of such real property or interfere with
the ordinary conduct of the business conducted and proposed to be conducted
at such real property;
(q) financing statements reflecting a lessor's rights in and to personal
property leased to Holdco or any Restricted Subsidiary in the ordinary
course of such lessor's business;
(r) Liens in favor of lessors under operating leases with respect to any
property leased by Holdco or any Restricted Subsidiary to the extent such
Liens relate solely to the lessors' interest in the leased property;
(s) Liens on any bills of lading, airway bills, receipts and other
applicable documents of title (and inventory and goods covered thereby)
delivered with respect to letters of credit issued for the benefit of
suppliers of inventory pursuant to facilities provided to a Foreign
Subsidiary provided that such inventory is located outside the United
States; and
(t) Liens not otherwise permitted by clauses (a) through (s) above
encumbering Property having an aggregate Fair Market Value not in excess of
$5.0 million.
'Permitted Refinancing Debt' means any Debt that Refinances any other Debt,
including any successive Refinancings, so long as:
(a) such Debt is in an aggregate principal amount (or if Incurred with
original issue discount, an aggregate issue price) not in excess of the sum
of:
(1) the aggregate principal amount (or if Incurred with original
issue discount, the aggregate accreted value) then outstanding of the
Debt being Refinanced plus accrued and unpaid interest, and
(2) an amount necessary to pay any fees and expenses, including
premiums and defeasance costs, related to such Refinancing,
(b) the Average Life of such Debt is equal to or greater than the
Average Life of the Debt being Refinanced, and
(c) the Stated Maturity of such Debt is no earlier than the Stated
Maturity of the Debt being Refinanced or after maturity of the Notes;
provided, however, that Permitted Refinancing Debt shall not include:
(x) Debt of a Subsidiary of Holdco other than Warnaco that is not a
Guarantor that Refinances Debt of Warnaco or a Guarantor, or
(y) Debt of Holdco or a Restricted Subsidiary that Refinances Debt of an
Unrestricted Subsidiary.
'Person' means any individual, corporation, company (including any limited
liability company), association, partnership, joint venture, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
'Preferred Stock' means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to the payment of
dividends, or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of any other class of
Capital Stock issued by such Person.
'Preferred Stock Dividends' means all dividends with respect to Preferred
Stock of Restricted Subsidiaries held by Persons other than Holdco or a Wholly
Owned Restricted Subsidiary. The amount of any such dividend shall be equal to
the quotient of such dividend divided by the difference between one and the
maximum statutory federal income rate (expressed as a decimal number between 1
and 0) then applicable to the issuer of such Preferred Stock.
'pro forma' means, with respect to any calculation made or required to be
made pursuant to the terms hereof, a calculation performed in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act, as
interpreted in good faith by the Board of Directors after consultation with the
independent certified public accountants of Warnaco, or otherwise a
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calculation made in good faith by the Board of Directors after consultation with
the independent certified public accountants of Warnaco, as the case may be.
'Property' means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the Indenture, the
value of any Property shall be its Fair Market Value.
'Public Equity Offering' means an underwritten public offering of common
stock of Holdco pursuant to an effective registration statement under the
Securities Act.
'Purchase Money Debt' means Debt:
(a) consisting of the deferred purchase price of Property, conditional
sale obligations, obligations under any title retention agreement, other
purchase money obligations and obligations in respect of industrial revenue
bonds, and
(b) Incurred to finance the acquisition, construction or lease by
Warnaco or a Guarantor of Property, including additions and improvements
thereto;
provided, however, that such Debt is Incurred within 180 days after the
acquisition, construction or lease of such Property by Warnaco or such
Guarantor.
'Purchase Money Note' means a promissory note evidencing a line of credit,
or evidencing other Debt owed to Holdco or any Restricted Subsidiary in
connection with a Qualified Securitization Transaction, which note shall be
repaid from cash available to the maker of such note, other than amounts
required to be established as reserves, amounts paid to investors in respect of
interest, principal and other amounts owing to such investors and amounts paid
in connection with the purchase of newly generated accounts receivable.
'Qualified Securitization Transaction' means any transaction or series of
transactions that may be entered into by Holdco or any Restricted Subsidiary
pursuant to which Holdco or any Restricted Subsidiary may sell, convey or
otherwise transfer pursuant to customary terms to (a) a Securitization Entity
(in the case of a transfer by Holdco or any Restricted Subsidiary) and (b) any
other Person (in the case of transfer by a Securitization Entity), or may grant
a security interest in any accounts receivable (whether now existing or arising
or acquired in the future) of Holdco or any Restricted Subsidiary, and any
assets related thereto including all collateral securing such accounts
receivable, all contracts and contract rights and all guarantees or other
obligations in respect of such accounts receivable, proceeds of such accounts
receivable and other assets (including contract rights) which are customarily
transferred or in respect of which security interests are customarily granted in
connection with asset securitization transactions involving accounts receivable.
'Reference Treasury Dealer' means Citigroup Global Markets Inc. and its
successors; provided, however, that if the foregoing shall cease to be a primary
U.S. Government securities dealer in New York City (a 'Primary Treasury
Dealer'), Warnaco shall substitute therefor another Primary Treasury Dealer.
'Reference Treasury Dealer Quotations' means, with respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
Trustee, of the bid and ask prices for the Comparable Treasury Issue (expressed
in each case as a percentage of its principal amount) quoted in writing to the
Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day
preceding such redemption date.
'Refinance' means, in respect of any Debt, to refinance, extend, renew,
refund or Repay, or to issue other Debt, in exchange or replacement for, such
Debt. 'Refinanced' and 'Refinancing' shall have correlative meanings.
'Repay' means, in respect of any Debt, to repay, prepay, repurchase, redeem,
legally defease or otherwise retire such Debt. 'Repayment' and 'Repaid' shall
have correlative meanings. For purposes of the covenant described under
' -- Certain Covenants -- Limitation on Asset Sales' and the definition of
'Consolidated Interest Coverage Ratio,' Debt shall be considered to have been
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Repaid only to the extent the related loan commitment, if any, shall have been
permanently reduced in connection therewith.
'Restricted Payment' means:
(a) any dividend or distribution (whether made in cash, securities or
other Property) declared or paid on or with respect to any shares of Capital
Stock of Holdco or any Restricted Subsidiary (including any payment in
connection with any merger or consolidation with or into Holdco or any
Restricted Subsidiary), except for any dividend or distribution that is made
solely to Holdco or a Restricted Subsidiary (and, if such Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, to the other
shareholders of such Restricted Subsidiary on a pro rata basis or on a basis
that results in the receipt by Holdco or a Restricted Subsidiary of
dividends or distributions of greater value than it would receive on a pro
rata basis) or any dividend or distribution payable solely in shares of
Capital Stock (other than Disqualified Stock) of Holdco;
(b) the purchase, repurchase, redemption, acquisition or retirement for
value of any Capital Stock of Holdco or any Restricted Subsidiary or any
securities exchangeable for or convertible into any such Capital Stock
(other than from Holdco or a Restricted Subsidiary), including the exercise
of any option to exchange any Capital Stock (other than for or into Capital
Stock of Holdco that is not Disqualified Stock), but excluding net
settlements to satisfy tax withholding in connection with vesting of
restricted shares and delivery of shares in connection with the exercise of
options granted to employees pursuant to an equity incentive plan;
(c) the purchase, repurchase, redemption, acquisition or retirement for
value, prior to the date for any scheduled maturity, sinking fund or
amortization or other installment payment, of any Subordinated Obligation
(other than the purchase, repurchase or other acquisition of any
Subordinated Obligation purchased in anticipation of satisfying a scheduled
maturity, sinking fund or amortization or other installment obligation, in
each case due within one year of the date of acquisition);
(d) any Investment (other than Permitted Investments) in any Person; or
(e) the issuance, sale or other disposition of Capital Stock of any
Restricted Subsidiary to a Person other than Holdco or a Restricted
Subsidiary if the result thereof is that such Restricted Subsidiary shall
cease to be a Restricted Subsidiary, in which event the amount of such
'Restricted Payment' shall be the Fair Market Value of the remaining
interest, if any, in such former Restricted Subsidiary held by Holdco and
the other Restricted Subsidiaries.
'Restricted Subsidiary' means Warnaco and any other Subsidiary of Holdco
other than an Unrestricted Subsidiary.
'S&P' means Standard & Poor's Ratings Services or any successor to the
rating agency business thereof.
'Sale and Leaseback Transaction' means any direct or indirect arrangement
relating to Property now owned or hereafter acquired whereby Holdco or a
Restricted Subsidiary transfers such Property to another Person and Holdco or a
Restricted Subsidiary leases it from such Person, provided, however, that a Sale
and Leaseback Transaction shall not include any transfer and leaseback of any
Property completed within 90 days of the acquisition of such Property by Holdco
or any Restricted Subsidiary.
'SEC' means the U.S. Securities and Exchange Commission.
'Securities Act' means the Securities Act of 1933, as amended.
'Securitization Entity' means any wholly owned Subsidiary of Holdco or any
Restricted Subsidiary (or another Person in which Holdco or any Restricted
Subsidiary make an Investment and to which Holdco or any Restricted Subsidiary
transfers accounts receivable and related assets) (a) which engages in no
activities other than in connection with the financing of accounts receivable or
related assets, (b) which is designated by the Board of Directors (as provided
below) as a Securitization Entity, (c) no portion of the Debt or any other
Obligations (contingent or
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otherwise) of which (i) is guaranteed by Holdco or any Restricted Subsidiary
(excluding guarantees of Obligations (other than the principal of, and interest
on, Debt) pursuant to Standard Securitization Undertakings and guarantees by the
Securitization Entity, (ii) is recourse to or obligates Holdco or any Restricted
Subsidiary (other than the Securitization Entity) in any way other than pursuant
to Standard Securitization Undertakings or (iii) subjects any property or asset
of Holdco or any Restricted Subsidiary (other than the Securitization Entity),
directly or indirectly, contingently or otherwise, to the satisfaction thereof,
other than pursuant to Standard Securitization Undertakings and other than any
interest in the accounts receivable and related assets being financed (whether
in the form of any equity interest in such assets or subordinated indebtedness
payable primarily from such financed assets) retained or acquired by Holdco or
any Restricted Subsidiary, (d) with which none of Holdco nor any Restricted
Subsidiary has any material contract, agreement, arrangement or understanding
other than those customary for a Qualified Securitization Transaction and, in
any event, on terms no less favorable to Holdco or such Restricted Subsidiary
than those that might be obtained at the time from Persons that are not
Affiliates of Holdco or such Restricted Subsidiary, and (e) to which none of
Holdco nor any Restricted Subsidiary has any obligation to maintain or preserve
such entity's financial condition or cause such entity to achieve certain levels
of operating results. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
resolution of the Board of Directors giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing conditions.
'Senior Credit Facility' means the facility provided by the Senior Secured
Revolving Credit Agreement, dated as of February 4, 2003, among Warnaco, Holdco,
the Administrative Agent, the Lenders, the Issuing Banks, the Syndication Agent,
Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead
arrangers and joint lead book managers, and the several banks and other
financial institutions or entities from time to time parties thereto, including
any related notes, collateral documents, letters of credit and documentation and
guarantees and any appendices, exhibits or schedules to any of the preceding, as
any or all of such agreements may be in effect from time to time, in each case,
as any or all of such agreements (or any other agreement that Refinances any or
all of such agreements) may be amended, restated, modified, or supplemented from
time to time, or renewed, refunded, refinanced, restructured, replaced, repaid
or extended from time to time, whether with the original agents and lenders or
other agents or lenders (including increasing the available borrowings
thereunder to the extent permitted under the Indenture).
'Senior Debt' of Warnaco means:
(a) all obligations consisting of the principal, premium, if any, and
accrued and unpaid interest (including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to
Warnaco to the extent post-filing interest is allowed in such proceeding) in
respect of:
(1) Debt of Warnaco for borrowed money, and
(2) Debt of Warnaco evidenced by notes, debentures, bonds or other
similar instruments permitted under the Indenture for the payment of
which Warnaco is responsible or liable;
(b) all Capital Lease Obligations of Warnaco and all Attributable Debt
in respect of Sale and Leaseback Transactions entered into by Warnaco;
(c) all obligations of Warnaco
(1) for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction or to provide cash
collateral in respect of any undrawn letter of credit, banker's
acceptance or similar credit transaction,
(2) under Hedging Obligations, or
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(3) issued or assumed as the deferred purchase price of Property and
all conditional sale obligations of Warnaco and all obligations under any
title retention agreement permitted under the Indenture; and
(d) all obligations of other Persons of the type referred to in clauses
(a), (b) and (c) for the payment of which Warnaco is responsible or liable
as Guarantor;
provided, however, that Senior Debt shall not include:
(A) Debt of Warnaco that is by its terms subordinate in right of
payment to the Notes, including any Subordinated Debt;
(B) any Debt Incurred in violation of the provisions of the
Indenture;
(C) accounts payable or any other obligations of Warnaco to trade
creditors created or assumed by Warnaco in the ordinary course of
business in connection with the obtaining of materials or services
(including Guarantees thereof or instruments evidencing such
liabilities);
(D) any liability for Federal, state, local or other taxes owed or
owing by Warnaco;
(E) any obligation of Warnaco to any of its Subsidiaries; or
(F) any obligations with respect to any Capital Stock of Warnaco.
'Senior Debt' of any Guarantor shall have a correlative meaning.
'Significant Subsidiary' means any 'significant Subsidiary' of Holdco within
the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.
'Special Interest' means the additional interest, if any, to be paid on the
Notes as described under 'Exchange Offer; Registration Rights.'
'Standard Securitization Undertakings' means representations, warranties,
covenants and indemnities entered into by Holdco or any Restricted Subsidiary
which are reasonably customary in an accounts receivable securitization
transaction so long as none of the same constitute Debt, a Guarantee or
otherwise require the provision of credit support.
'Stated Maturity' means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
'Subordinated Debt' means any Debt of Warnaco or any Guarantor (whether
outstanding on the Issue Date or thereafter Incurred) that is expressly
subordinate or junior in right of payment to the Notes or the applicable Note
Guaranty pursuant to a written agreement to that effect.
'Subsidiary' means, in respect of any Person, any corporation, company
(including any limited liability company), association, partnership, joint
venture or other business entity of which at least a majority of the total
voting power of the Voting Stock is at the time owned or controlled, directly or
indirectly, by:
(a) such Person,
(b) such Person and one or more Subsidiaries of such Person, or
(c) one or more Subsidiaries of such Person.
'Surviving Person' means the surviving Person formed by a merger,
consolidation or amalgamation and, for purposes of the covenant described under
' -- Merger, Consolidation and Sale of Property,' a Person to whom all or
substantially all of the Property of Warnaco or a Guarantor is sold,
transferred, assigned, leased, conveyed or otherwise disposed.
'Temporary Cash Investments' means any of the following:
(a) any investment in direct obligations of the United States or any
agency thereof or obligations guaranteed by the United States or any agency
thereof maturing within 365 days of the date of acquisition thereof;
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(b) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 365 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States, any State thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $250.0 million (or the foreign
currency equivalent thereof) and has outstanding debt which is rated 'A' (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act);
(c) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (a) above entered
into with a bank meeting the qualifications described in clause (b) above;
(d) investments in commercial paper, maturing not more than 270 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of Holdco or Warnaco) organized and in existence under the laws of
the United States with a rating at the time as of which any investment
therein is made of 'P-1' (or higher) according to Moody's Investors Service,
Inc. or 'A-1' (or higher) according to Standard & Poor's Ratings Group; and
(e) investments in securities with maturities of 270 days or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States, or by any political
subdivision or taxing authority thereof, and rated at least 'A' by Standard
& Poor's Ratings Group or 'A' by Moody's Investors Service, Inc.
'Treasury Rate' means, with respect to any redemption date, the rate per
annum equal to the yield to maturity of the Comparable Treasury Issue,
compounded semi-annually, assuming a price for such Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
'Unrestricted Subsidiary' means:
(a) any Subsidiary of Holdco that is designated after the Issue Date as
an Unrestricted Subsidiary as permitted or required pursuant to the covenant
described under ' -- Certain Covenants -- Designation of Restricted and
Unrestricted Subsidiaries' and is not thereafter redesignated as a
Restricted Subsidiary as permitted pursuant thereto; and
(b) any Subsidiary of an Unrestricted Subsidiary.
'U.S. Dollar Equivalent' means, with respect to any monetary amount in a
currency other than U.S. dollars, at any time of determination thereof, the
amount of U.S. dollars obtained by converting such foreign currency involved in
such computation into U.S. dollars at the spot rate for purchase of U.S. dollars
with the applicable foreign currency as published in the Financial Times on the
date two business days prior to such determination, provided, that if any such
amount is subject to at least a coterminous Currency Exchange Protection
Agreement with respect to U.S. dollars covering all principal, premium, if any,
and interest payable on such amount, the amount of such currency will be as
provided in the Currency Exchange Protection Agreement.
Whenever it is necessary to determine whether Holdco or a Restricted
Subsidiary has complied with any covenant in the Indenture or a Default has
occurred or is continuing and an amount is expressed in a currency other than
U.S. dollars, such amount will be treated as the U.S. Dollar Equivalent
determined as of the date such amount is initially determined in such currency.
'U.S. Government Obligations' means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
'Voting Stock' of any Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
'Wholly Owned Restricted Subsidiary' means, at any time, a Restricted
Subsidiary all the Voting Stock of which (except directors' qualifying shares
and other de minimis amounts of shares
161
required to be issued to third parties pursuant to local law requirements) is at
such time owned, directly or indirectly, by Holdco and its other Wholly Owned
Subsidiaries.
BOOK-ENTRY SYSTEM
The Notes will be initially issued in the form of one or more Global
Securities registered in the name of The Depository Trust Company ('DTC') or its
nominee.
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of Persons holding through it with the respective principal amounts of
the Notes represented by such Global Security purchased by such Persons in the
offering. Such accounts shall be designated by the initial purchasers of the old
notes. Ownership of beneficial interests in a Global Security will be limited to
Persons that have accounts with DTC ('participants') or Persons that may hold
interests through participants. Any Person acquiring an interest in a Global
Security through an offshore transaction in reliance on Regulation S of the
Securities Act may hold such interest through Clearstream Banking, S.A. or
Euroclear Bank S.A./N.V., as operator of the Euroclear System. Ownership of
beneficial interests in a Global Security will be shown on, and the transfer of
that ownership interest will be effected only through, records maintained by DTC
(with respect to participants' interests) and such participants (with respect to
the owners of beneficial interests in such Global Security other than
participants). The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
Payment of principal of and interest on Notes represented by a Global
Security will be made in immediately available funds to DTC or its nominee, as
the case may be, as the sole registered owner and the sole Holder represented
thereby for all purposes under the Indenture. Warnaco has been advised by DTC
that upon receipt of any payment of principal of or interest on any Global
Security, DTC will immediately credit, on its book-entry registration and
transfer system, the accounts of participants with payments in amounts
proportionate to their respective beneficial interests in the principal or face
amount of such Global Security as shown on the records of DTC. Payments by
participants to owners of beneficial interests in a Global Security held through
such participants will be governed by standing instructions and customary
practices as is now the case with securities held for customer accounts
registered in 'street name' and will be the sole responsibility of such
participants.
A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable
for certificated Notes only if:
(a) DTC notifies Warnaco that it is unwilling or unable to continue as a
depositary for such Global Security or if at any time DTC ceases to be a
clearing agency registered under the Exchange Act,
(b) Warnaco in its discretion at any time determines not to have all the
Notes represented by such Global Security, or
(c) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes represented by such Global Security.
Any Global Security that is exchangeable for certificated Notes pursuant to the
preceding sentence will be exchanged for certificated Notes in authorized
denominations and registered in such names as DTC or any successor depositary
holding such Global Security may direct. Subject to the foregoing, a Global
Security is not exchangeable, except for a Global Security of like denomination
to be registered in the name of DTC or any successor depositary or its nominee.
In the event that a Global Security becomes exchangeable for certificated Notes,
(a) certificated Notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples thereof,
(b) payment of principal of, and premium, if any, and interest on, the
certificated Notes will be payable, and the transfer of the certificated
Notes will be registrable, at the office or agency of Warnaco maintained for
such purposes, and
162
(c) no service charge will be made for any registration of transfer or
exchange of the certificated Notes, although Warnaco may require payment of
a sum sufficient to cover any tax or governmental charge imposed in
connection therewith.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
Holder represented by such Global Security for all purposes under the Indenture
and the Notes. Except as set forth above, owners of beneficial interests in a
Global Security will not be entitled to have the Notes represented by such
Global Security registered in their names, will not receive or be entitled to
receive physical delivery of certificated Notes in definitive form and will not
be considered to be the owners or Holders of any Notes under such Global
Security. Accordingly, each Person owning a beneficial interest in a Global
Security must rely on the procedures of DTC or any successor depositary, and, if
such Person is not a participant, on the procedures of the participant through
which such Person owns its interest, to exercise any rights of a Holder under
the Indenture. Warnaco understands that under existing industry practices, in
the event that Warnaco requests any action of Holders or that an owner of a
beneficial interest in a Global Security desires to give or take any action
which a Holder is entitled to give or take under the Indenture, DTC or any
successor depositary would authorize the participants holding the relevant
beneficial interest to give or take such action and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
DTC has advised Warnaco that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a 'clearing corporation' within the meaning of the New
York Uniform Commercial Code and a 'clearing agency' registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the initial purchasers of the old notes), banks,
trust companies, clearing corporations and certain other organizations some of
whom (or their representatives) own DTC. Access to DTC's book-entry system is
also available to others, such as banks, brokers, dealers and trust companies,
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of Warnaco, the Trustee or the
initial purchasers of the old notes will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
163
EXCHANGE OFFER; REGISTRATION RIGHTS
We have filed the registration statement (the 'Exchange Offer Registration
Statement') of which this prospectus forms a part and are conducting the
exchange offer in accordance with our obligations under a Registration Rights
Agreement (the 'Registration Rights Agreement') between Warnaco, the guarantors
and the initial purchasers of the old notes. Holders of the new notes will not
be entitled to any registration rights with respect to the new notes.
The Registration Rights Agreement provides, inter alia, that in the event
that (i) applicable interpretations of the staff of the SEC do not permit
Warnaco to effect the exchange offer, (ii) for any other reason the Exchange
Offer Registration Statement is not declared effective within 210 days after the
date of the original issuance of the old notes the exchange offer is not
consummated within 240 days after the original issuance of the old notes,
(iii) the initial purchasers of the old notes so request with respect to old
notes not eligible to be exchanged for new notes in the exchange offer or
(iv) any holder (other than an initial purchaser of the old notes) is not
eligible to participate in the exchange offer or does not receive freely
tradeable new notes in the exchange offer other than by reason of such holder
being an affiliate of Warnaco or any of the guarantors (it being understood that
the requirement that a participating broker-dealer deliver the prospectus
contained in the Exchange Offer Registration Statement in connection with sales
of new notes shall not result in such new notes being not 'freely tradeable'),
Warnaco would, at its cost, (a) as promptly as practicable, file a registration
statement (the 'Shelf Registration Statement') covering resales of the old notes
or the new notes, as applicable, (b) use reasonable efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act and
(c) use its best efforts to keep the Shelf Registration Statement effective
until the earlier of the disposition of the notes covered by the Shelf
Registration Statement or two years after its effective date (or such earlier
time as the notes are eligible for resale under Rule 144(c)). Warnaco would, in
the event a Shelf Registration Statement is filed, among other things, provide
to each holder for whom such Shelf Registration Statement was filed copies of
the prospectus which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the old
notes or the new notes, as the case may be. A holder selling such old notes or
new notes pursuant to the Shelf Registration Statement generally would be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, would be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
would be bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
The Registration Rights Agreement also provides that, if (a) on or prior to
the 60th day following the date of original issuance of the old notes, neither
the Exchange Offer Registration Statement nor the Shelf Registration Statement
has been filed with the SEC, (b) on or prior to the 210th day following the date
of original issuance of the old notes, neither the Exchange Offer Registration
Statement nor the Shelf Registration Statement has been declared effective,
(c) on or prior to the 240th day following the date of original issuance of the
old notes, neither the exchange offer has been consummated nor the Shelf
Registration Statement has been declared effective, or (d) after either the
Exchange Offer Registration Statement or the Shelf Registration Statement has
been declared effective, such registration statement thereafter ceases to be
effective or usable (subject to certain exceptions) in connection with resales
of old notes or new notes in accordance with and during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d), a 'Registration Default'), interest ('Special Interest') would
accrue on the principal amount of the affected old notes or new notes (in
addition to the stated interest on the old notes and new notes) from and
including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured. Special
Interest would accrue at a rate of 0.25% per annum during the 90-day period
immediately following the occurrence of such Registration Default and would
increase by 0.25% per annum at the end of each subsequent 90-day period, but in
no event would such rate exceed 1.00% per annum.
164
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is included as an exhibit to the Exchange Offer
Registration Statement of which this prospectus is a part.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal income
tax considerations of (i) the exchange of outstanding old notes for the new
notes in this exchange offer, and (ii) the acquisition, ownership and
disposition of the new notes for Non-U.S. Persons (as defined below). The
summary is based on the Internal Revenue Code of 1986, as amended (the 'Code'),
and regulations, rulings and judicial decisions as of the date hereof, all of
which may be repealed, revoked or modified with possible retroactive effect.
This discussion does not deal with holders that may be subject to special tax
rules (including, but not limited to, insurance companies, tax-exempt
organizations or private foundations, financial institutions, dealers in
securities or currencies, holders whose functional currency is not the United
States dollar or holders who hold the notes as a hedge against currency risks or
as part of a straddle, synthetic security, conversion transaction or other
integrated investment comprising of the notes and one or more other investments,
or certain expatriates or former long-term residents of the United States). This
summary deals only with persons who hold the new notes and old notes as capital
assets within the meaning of Section 1221 of the Code. This summary is for
general information only and does not address all aspects of United States
federal income taxation that may be relevant to holders of the notes in light of
their particular circumstances, and it does not address any tax consequences
arising under the laws of any state, local or foreign taxing jurisdiction.
Holders should consult their own tax advisors as to the particular tax
consequences to them of acquiring, holding or disposing of the notes.
As used herein, the term 'United States Holder' means a beneficial owner of
a note that is (i) a citizen or resident of the United States for United States
federal income tax purposes, (ii) a corporation or partnership (or any entity
treated as a corporation or partnership for United States federal income tax
purposes) created or organized under the laws of the United States, any state
thereof or the District of Columbia, (iii) an estate the income of which is
subject to United States federal income tax without regard to its source or
(iv) a trust if (x) a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust or
(y) the trust has a valid election in effect under applicable United States
Treasury regulations to be treated as a United States Holder. If a partnership
(including any entity treated as a partnership or other pass through entity for
United States federal income tax purposes) is a holder of the notes, the United
States federal income tax treatment of a partner in such a partnership will
generally depend on the status of the partner and the activities of the
partnership. Partners and partnerships should consult their own tax advisors as
to the particular federal income tax consequences applicable to them.
A 'Non-United States Holder' is any beneficial holder of a note that is not
a United States Holder.
THE EXCHANGE OFFER
The exchange of old notes for new notes pursuant to the exchange offer will
not be a taxable event for U.S. federal income tax purposes. Consequently, you
will not recognize taxable gain or loss as a result of exchanging notes pursuant
to the exchange offer. Your holding period for the new notes will include your
holding period of your old notes surrendered in the exchange, and your tax basis
in your new notes will be the same as your tax basis in your old notes
immediately before the exchange. There will be no federal income tax
consequences of the exchange offer to a holder who does not tender the old notes
pursuant to the exchange offer.
165
NON-UNITED STATES HOLDERS
Under present United States federal income tax law, subject to the
discussion of backup withholding and information reporting below:
(a) payments of interest on the notes to any Non-United States Holder
will not be subject to United States federal income, branch profits or
withholding tax provided that (i) the Non-United States Holder does not
actually or constructively own 10% or more of the total combined voting
power of all classes of our stock entitled to vote, (ii) the Non-United
States Holder is not a bank receiving interest on an extension of credit
pursuant to a loan agreement entered into in the ordinary course of its
trade or business, (iii) the Non-United States Holder is not a controlled
foreign corporation that is related to us (directly or indirectly) through
stock ownership, (iv) such interest payments are not effectively connected
with a United States trade or business and (v) certain certification
requirements are met. Such certification will be satisfied if the beneficial
owner of the note certifies on IRS Form W-8 BEN or a substantially similar
substitute form, under penalties of perjury, that it is not a United States
person and provides its name and address, and, prior to the payment of
interest, (x) such beneficial owner files such form with the withholding
agent or (y) in the case of a note held through a foreign partnership or
intermediary, the beneficial owner and the foreign partnership or
intermediary satisfy certification requirements of applicable United States
Treasury regulations; and
(b) a Non-United States Holder will not be subject to United States
federal income or branch profits tax on gain realized on the sale, exchange,
redemption, retirement or other disposition of a note, unless (i) the gain
is effectively connected with a trade or business carried on by such holder
within the United States or, if a treaty applies (and the holder complies
with applicable certification and other requirements to claim treaty
benefits), is generally attributable to a United States permanent
establishment maintained by the holder, or (ii) the holder is an individual
who is present in the United States for 183 days or more in the taxable year
of disposition and certain other requirements are met.
A new note held by an individual who at the time of death is not a citizen
or resident of the United States will not be subject to United States federal
estate tax with respect to a new note as a result of such individual's death,
provided that (i) the individual does not actually or constructively own 10% or
more of the total combined voting power of all classes of our stock entitled to
vote and, (ii) the interest accrued on the note was not effectively connected
with the conduct of a United States trade or business.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, proceeds of the sale, exchange, redemption, retirement or other
disposition of the new notes payable by a United States paying agent or other
United States intermediary, as well as interest payments on the new notes, will
be subject to information reporting. In addition, backup withholding at the
applicable rate (currently 28%) will generally apply to these amounts if (i) in
the case of a United States Holder, the holder fails to provide an accurate
taxpayer identification number, or fails to certify that such holder is not
subject to backup withholding or fails to report all interest and dividends
required to be shown on its United States federal income tax returns, or
(ii) in the case of a Non-United States Holder, the holder fails to provide the
certification on IRS Form W-8 BEN described above or otherwise does not provide
evidence of exempt status. Certain United States Holders (including, among
others, corporations) and Non-United States Holders that comply with certain
certification requirements are not subject to backup withholding. Any amount
paid as backup withholding will be creditable against the holder's United States
federal income tax liability provided that the required information is timely
furnished to the IRS. Holders of new notes should consult their tax advisors as
to their qualification for exemption from backup withholding and the procedure
for obtaining such an exemption.
166
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. Warnaco and the guarantors have agreed that, starting on the
expiration date and ending on the close of business 180 days after the
expiration date (or such shorter period during which participating
broker-dealers are required by law to deliver such prospectus), they will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until ,
all dealers effecting transactions in the new notes may be required to deliver a
prospectus.
Neither Warnaco nor any of the guarantors will receive any proceeds from any
sale of new notes by broker-dealers. New notes received by broker-dealers for
their own account pursuant to the exchange offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the new notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such new notes. Any
broker-dealer that resells new notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
'underwriter' within the meaning of the Securities Act and any profit of any
such resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver, and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an 'underwriter' within the meaning of the Securities Act.
For a period of 180 days after the expiration date, Warnaco and the
guarantors will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. Warnaco has agreed to pay all
expenses incident to the exchange offer (including the expenses of one counsel
for the holder of the old notes) other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the old notes (including
any broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
167
LEGAL MATTERS
The validity of the new notes and related guarantees offered by this
prospectus will be passed on for us by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York. Certain matters of Nevada law will be passed on for us by
Schreck Brignone, Las Vegas, Nevada.
EXPERTS
The consolidated financial statements of The Warnaco Group, Inc. and its
subsidiaries (the 'Company') as of January 4, 2003 and January 5, 2002, and for
each of the three years in the period ended January 4, 2003, and the related
financial statement schedule included in this registration statement on Form S-4
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein (which report expresses an unqualified opinion and
includes explanatory paragraphs referring to 1) the Company's bankruptcy
proceedings and confirmation of the Company's plan of reorganization, 2) the
change in the Company's method of accounting for goodwill and other intangible
assets, and 3) the change in the Company's method of accounting for its retail
outlet store inventory).
The consolidated balance sheet as of February 4, 2003, included in this
registration statement has been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph related to the
Company's adoption of fresh-start reporting following the confirmation of its
plan of reorganization by the bankruptcy court and emergence from Chapter 11).
Such financial statements and financial statement schedule have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
168
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INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<Table>
Independent auditors' report................................ F-2
Consolidated balance sheets as of January 5, 2002 and
January 4, 2003........................................... F-3
Consolidated statements of operations for fiscal years ended
December 30, 2000, January 5, 2002 and January 4, 2003.... F-4
Consolidated statements of stockholders' deficiency and
comprehensive loss for fiscal years ended December 30,
2000, January 5, 2002 and January 4, 2003................. F-5
Consolidated statements of cash flows for fiscal years ended
December 30, 2000, January 5, 2002 and January 4, 2003.... F-6
Notes to consolidated financial statements.................. F-7
Independent auditors' report................................ G-1
Consolidated balance sheet as of February 4, 2003........... G-2
Notes to consolidated balance sheet......................... G-3
Consolidated condensed balance sheets as of January 4, 2003,
February 4, 2003 and July 5, 2003 (unaudited)............. H-1
Consolidated condensed statements of operations for the
three months ended July 6, 2002 and July 5, 2003.......... H-2
Consolidated condensed statements of operations for the six
months ended July 6, 2002, for the period January 5, 2003
to February 4, 2003 and for the period February 5, 2003 to
July 5, 2003 (unaudited).................................. H-3
Consolidated condensed statements of cash flows for the six
months ended July 6, 2002, for the period January 5, 2003
to February 4, 2003 and for the period February 5, 2003 to
July 5, 2003 (unaudited).................................. H-4
Notes to consolidated condensed financial statements
(unaudited)............................................... H-5
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
THE WARNACO GROUP, INC.
We have audited the accompanying consolidated balance sheets of The Warnaco
Group, Inc. (Debtor-in-Possession) and its subsidiaries (the 'Company') as of
January 4, 2003 and January 5, 2002, and the related consolidated statements of
operations, stockholders' deficiency and comprehensive loss and of cash flows
for each of the three years in the period ended January 4, 2003. Our audits also
included the financial statement schedule listed in the Index at Item 21(b).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Warnaco Group, Inc.
(Debtor-in-Possession) and its subsidiaries as of January 4, 2003 and January 5,
2002, and the results of their operations and their cash flows for each of the
three years in the period ended January 4, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
January 5, 2002, the Company changed its method of accounting for goodwill and
other intangible assets to conform to Statement of Financial Accounting
Standards No. 142, 'Goodwill and Other Intangible Assets'.
As discussed in Note 1 to the consolidated financial statements, effective
January 2, 2000, the Company changed its method of accounting for its retail
outlet store inventory.
As discussed in Note 1, The Warnaco Group, Inc. and certain of its
subsidiaries have filed for reorganization under Chapter 11 of the Federal
Bankruptcy Code. The accompanying consolidated financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such financial statements do not purport to show (a)
as to assets, their net realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to pre-petition liabilities, the
amounts that may be allowed for claims or contingencies, or the status or
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company or; (d) as to operations, the
effect of any changes that may be made in its business. On January 16, 2003, the
Bankruptcy Court entered an order confirming the plan of reorganization which
became effective on February 4, 2003. Under the plan of reorganization, the
Company is required to comply with certain terms and conditions as more fully
described in Note 1.
DELOITTE & TOUCHE LLP
New York, New York
March 12, 2003
(August 1, 2003 as to Note 23)
F-2
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCLUDING SHARE DATA)
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
ASSETS
Current assets:
Cash.................................................... $ 39,558 $ 114,025
Restricted cash......................................... -- 6,100
Accounts receivable, less reserves of $112,918 -- 2001
and $87,512 -- 2002................................... 282,387 199,817
Inventories, less reserves of $50,097 -- 2001 and
$33,816 -- 2002....................................... 418,902 345,268
Prepaid expenses and other current assets............... 36,988 31,438
Assets held for sale.................................... 31,066 1,458
Deferred income taxes................................... -- 2,972
----------- -----------
Total current assets................................ 808,901 701,078
----------- -----------
Property, plant and equipment -- net........................ 212,129 156,712
Other assets:
Licenses, trademarks, intangible and other assets, at
cost, less accumulated amortization of
$108,067 -- 2001 and $19,069 -- 2002.................. 271,500 90,090
Goodwill, less accumulated amortization of
$101,094 -- 2001...................................... 692,925 --
----------- -----------
Total other assets.................................. 964,425 90,090
----------- -----------
$ 1,985,455 $ 947,880
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt....................... $ 2,111 $ 5,765
Debtor-in-possession revolving credit facility.......... 155,915 --
Accounts payable........................................ 84,764 103,630
Accrued liabilities..................................... 105,278 102,026
Accrued income taxes payable............................ 14,505 28,420
----------- -----------
Total current liabilities........................... 362,573 239,841
----------- -----------
Other long-term liabilities............................... 31,754 71,837
Long-term debt............................................ 2,207 1,252
Liabilities subject to compromise........................... 2,435,075 2,486,082
Deferred income taxes....................................... 5,130 4,964
Commitments and Contingencies
Stockholders' deficiency:
Class A Common Stock, $0.01 par value, 130,000,000
shares authorized, 65,232,594 issued in 2001 and
2002.................................................. 654 654
Additional paid-in capital.............................. 909,054 908,939
Accumulated other comprehensive loss.................... (53,016) (93,223)
Deficit................................................. (1,393,674) (2,358,537)
Treasury stock, at cost -- 12,242,629 shares -- 2001 and
2002.................................................. (313,889) (313,889)
Unearned stock compensation............................. (413) (40)
----------- -----------
Total stockholders' deficiency...................... (851,284) (1,856,096)
----------- -----------
$ 1,985,455 $ 947,880
----------- -----------
----------- -----------
</Table>
See Notes to Consolidated Financial Statements
F-3
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
<Table>
<Caption>
FOR THE YEARS ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Net revenues............................................. $2,249,936 $1,671,256 $1,492,956
Cost of goods sold....................................... 1,845,389 1,374,382 1,052,661
---------- ---------- ----------
Gross profit............................................. 404,547 296,874 440,295
Selling, general and administrative expenses............. 625,014 598,186 410,954
Impairment charge........................................ -- 101,772 --
Reorganization items..................................... -- 177,791 116,682
---------- ---------- ----------
Operating loss........................................... (220,467) (580,875) (87,341)
Investment income (loss), net............................ 36,882 (6,556) 62
Interest expense (contractual interest of
$221,557 -- 2001 and $180,237 -- 2002)................. 172,232 122,752 22,048
---------- ---------- ----------
Loss before provision for income taxes and cumulative
effect of change in accounting principle............... (355,817) (710,183) (109,327)
Provision for income taxes............................... 21,044 150,970 53,914
---------- ---------- ----------
Loss before cumulative effect of a change in accounting
principle.............................................. (376,861) (861,153) (163,241)
Cumulative effect of change in accounting principle (net
of income tax benefits of $8,577 -- 2000 and
$53,513 -- 2002)....................................... (13,110) -- (801,622)
---------- ---------- ----------
Net loss................................................. $ (389,971) $ (861,153) $ (964,863)
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted loss per common share:
Loss before accounting change........................ $ (7.14) $ (16.28) $ (3.08)
Cumulative effect of accounting change............... (0.25) -- (15.13)
---------- ---------- ----------
Net loss............................................. $ (7.39) $ (16.28) $ (18.21)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares outstanding used in
computing loss per common share:
Basic and diluted.................................... 52,783 52,911 52,990
---------- ---------- ----------
---------- ---------- ----------
</Table>
See Notes to Consolidated Financial Statements
F-4
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCLUDING SHARE DATA)
<Table>
<Caption>
ACCUMULATED
CLASS A ADDITIONAL OTHER UNEARNED
COMMON PAID-IN COMPREHENSIVE TREASURY STOCK
STOCK CAPITAL INCOME/(LOSS) DEFICIT STOCK COMPENSATION TOTAL
----- ------- ------------- ------- ----- ------------ -----
Balance at January 1, 2000......... $654 $961,368 $ 24,877 $ (129,592) $(313,138) $(10,984) $ 533,185
Net loss........................... (389,971) (389,971)
Foreign currency translation
adjustments....................... (4,618) (4,618)
Unfunded minimum pension
liability......................... (14,648) (14,648)
Unrealized loss on marketable
securities net of tax............. (680) (680)
-----------
Comprehensive loss................. (409,917)
Adjustment for items included in
net income, net of tax............ (38,681) (38,681)
Shares tendered for withholding tax
on restricted stock............... -- (702) (702)
Dividends declared................. (12,958) (12,958)
Amortization of unearned stock
compensation...................... 787 4,643 5,430
Equity Forward Contract............ (49,172) (49,172)
---- -------- ----------- ----------- --------- -------- -----------
Balance at December 30, 2000....... 654 912,983 (33,750) (532,521) (313,840) (6,341) 27,185
---- -------- ----------- ----------- --------- -------- -----------
Transition adjustments related to
the adoption of accounting
principle......................... 21,744 21,744
Recognition of deferred gain on
interest rate swap................ (21,744) (21,744)
Net loss........................... (861,153) (861,153)
Foreign currency translation
adjustments....................... (1,854) (1,854)
Unrealized gain on marketable
securities, net of tax............ 434 434
Unfunded minimum pension
liability......................... (17,846) (17,846)
-----------
Comprehensive loss................. (880,419)
Shares tendered for withholding tax
on restricted stock............... (49) (49)
Restricted shares forfeited........ (3,929) 3,929 --
Amortization of unearned stock
compensation...................... -- 1,999 1,999
---- -------- ----------- ----------- --------- -------- -----------
Balance at January 5, 2002......... 654 909,054 (53,016) (1,393,674) (313,889) (413) (851,284)
---- -------- ----------- ----------- --------- -------- -----------
Net loss........................... (964,863) (964,863)
Foreign currency translation
adjustments....................... 153 153
Unrealized loss on marketable
securities, net of tax............ (195) (195)
Unfunded minimum pension
liability......................... (40,165) (40,165)
-----------
Comprehensive loss................. (1,005,070)
Restricted shares forfeited........ (115) 115 --
Amortization of unearned stock
compensation...................... 258 258
---- -------- ----------- ----------- --------- -------- -----------
Balance at January 4, 2003......... $654 $908,939 $ (93,223) $(2,358,537) $(313,889) $ (40) $(1,856,096)
---- -------- ----------- ----------- --------- -------- -----------
---- -------- ----------- ----------- --------- -------- -----------
</Table>
See Notes to Consolidated Financial Statements
F-5
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
FOR THE YEARS ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Cash flow from operating activities:
Net loss................................................. $(389,971) $(861,153) $(964,863)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Pre-tax gain on sale of investment.................... (42,782) -- --
Net loss on sale of GJM, Penhaligon's and Ubertech.... -- -- 4,262
Loss on sale of fixed assets.......................... -- 37,061 170
Depreciation and amortization......................... 102,079 97,818 57,419
Provision for receivable allowances................... 262,641 253,943 188,771
Provision for inventory reserves...................... 179,254 74,786 42,354
Cumulative effect of accounting change, net of
taxes............................................... 13,110 -- 801,622
Amortization of deferred financing costs.............. 12,353 19,414 8,508
Interest rate swap income............................. (4,064) (21,355) --
Preferred stock accretion............................. 483 16,613 --
Market value adjustment to Equity Agreements.......... 5,900 6,556 --
Non-cash reorganization items and asset write-downs... 22,704 236,585 52,531
Amortization of unearned stock compensation........... 4,643 1,999 258
Deferred income taxes................................. 17,343 149,691 53,347
Sale of accounts receivable.............................. 53,700 -- --
Repurchase of accounts receivable........................ -- (185,000) --
Accounts receivable...................................... (204,603) (229,306) (109,759)
Inventories.............................................. 38,857 (21,647) 32,731
Prepaid expenses and other current and long term
assets.................................................. 32,401 (5,087) 7,556
Accounts payable and accrued expenses.................... (114,748) 6,241 51,341
--------- --------- ---------
Net cash provided by (used in) operating activities......... (10,700) (422,841) 226,248
--------- --------- ---------
Cash flows from investing activities:
Disposal of fixed assets................................. 2,599 6,213 6,814
Increase in intangibles and other assets................. (9,976) (1,427) --
Purchase of property, plant and equipment................ (110,062) (24,727) (11,238)
Acquisition of businesses, net of cash acquired.......... (2,585) (1,492) --
Proceeds from sale of business units..................... -- -- 20,609
Proceeds from sale of marketable securities.............. 50,432 -- --
--------- --------- ---------
Net cash provided by (used in) investing activities......... (69,592) (21,433) 16,185
--------- --------- ---------
Cash flows from financing activities:
Proceeds from the termination of interest rate swaps..... 26,076 -- --
Borrowings under revolving credit facilities............. 133,724 303,377 --
Borrowings under term loan agreements.................... 15,499 -- --
Borrowings under acquisition loan facility............... 13,800 -- --
Borrowings under foreign credit facilities............... -- 72,842 --
Repayments of acquisition loan facility.................. (12,452) -- --
Repayments of term loan and other pre-petition debt...... (22,079) (36,195) (14,554)
Repayments of foreign credit facilities.................. (18,720) -- --
Repayments of GECC debt.................................. -- -- (3,458)
Repayments of capital lease obligations.................. (2,762) (938) (2,902)
Borrowings (repayments) under DIP facility............... -- 155,915 (155,915)
Cash dividends paid...................................... (14,362) -- --
Payment of withholding taxes on option exercises and
restricted stock vesting................................ (702) (49) --
Purchase of treasury shares and net cash settlements
under Equity Arrangements............................... 1,404 -- --
Deferred Financing Costs................................. (37,314) (19,852) --
Other.................................................... -- (490) --
--------- --------- ---------
Net cash provided by (used in) financing activities......... 82,112 474,610 (176,829)
--------- --------- ---------
Translation adjustment...................................... (72) (1,854) 8,863
--------- --------- ---------
Increase in cash............................................ 1,748 28,482 74,467
Cash at beginning of year................................... 9,328 11,076 39,558
--------- --------- ---------
Cash at end of year......................................... $ 11,076 $ 39,558 $ 114,025
--------- --------- ---------
--------- --------- ---------
</Table>
See Notes to Consolidated Financial Statements
F-6
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Note 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: The Warnaco Group, Inc. was incorporated in Delaware on
March 14, 1986 and on May 10, 1986 acquired substantially all of the outstanding
shares of Warnaco Inc. ('Warnaco'). Warnaco is the principal operating
subsidiary. The Warnaco Group, Inc. and Warnaco were reorganized under
Chapter 11 of the Bankruptcy Code effective February 4, 2003.
Nature of Operations: The Warnaco Group, Inc. and its subsidiaries
(collectively, the 'Company') design, manufacture, source and market a broad
line of (i) intimate apparel (including bras, panties, sleepwear, loungewear,
shapewear and daywear for women, and underwear and sleepwear for men);
(ii) sportswear for men, women and juniors (including jeanswear, khakis, knit
and woven shirts, tops and outerwear); and (iii) swimwear for men, women,
juniors and children (including swim accessories and fitness and active
apparel). The Company's products are sold under a number of internationally
known owned or licensed brand names. The Company offers a diversified portfolio
of brands across multiple distribution channels to a wide range of customers.
The Company distributes its products worldwide to wholesale customers through a
variety of channels, including department and specialty stores, independent
retailers, chain stores, membership clubs and mass merchandisers. The Company
also sells its products directly to consumers through 76 retail stores,
including 45 Company-operated Speedo Authentic Fitness full price retail stores
in North America, two outlet retail stores in Canada, five Calvin Klein
underwear full price retail stores in Europe, 11 Calvin Klein underwear full
price retail stores in Asia and 13 Warnaco outlet retail stores in Europe.
Basis of Consolidation and Presentation: The accompanying consolidated
financial statements include the accounts of the Company for the years ended
December 30, 2000 ('Fiscal 2000'), January 5, 2002 ('Fiscal 2001') and
January 4, 2003 ('Fiscal 2002'). All inter-company accounts and transactions are
eliminated in consolidation. The accompanying consolidated financial statements
have been prepared in accordance with the American Institute of Certified Public
Accountants Statement of Position No. 90-7 Financial Reporting by Entities in
Reorganization under the Bankruptcy Code ('SOP 90-7').
Chapter 11 Cases. On June 11, 2001 (the 'Petition Date'), The Warnaco Group,
Inc. and certain of its subsidiaries (each a 'Debtor' and, collectively, the
'Debtors') each filed a voluntary petition for relief under Chapter 11 of the
U.S. Bankruptcy Code, 11 U.S.C. 'SS' 101-1330, as amended (the 'Bankruptcy
Code'), in the United States Bankruptcy Court for the Southern District of New
York (the 'Bankruptcy Court') (collectively the 'Chapter 11 Cases'). The Warnaco
Group, Inc., 36 of its 37 U.S. subsidiaries and one of the Company's Canadian
subsidiaries, Warnaco of Canada Company ('Warnaco Canada') were Debtors in the
Chapter 11 Cases. The remainder of the Company's foreign subsidiaries were not
debtors in the Chapter 11 Cases, nor were they subject to foreign bankruptcy or
insolvency proceedings.
As a result of the Chapter 11 Cases and the circumstances leading to the
filing thereof, as of January 4, 2003, the Company was not in compliance with
certain financial and bankruptcy covenants contained in certain of its license
agreements. Under applicable provisions of the Bankruptcy Code, compliance with
such terms and conditions in executory contracts generally were either excused
or suspended during the Chapter 11 Cases. Upon the Company's emergence from
bankruptcy, the Company was in compliance with the terms and covenants of its
license and other agreements.
In the Chapter 11 Cases, substantially all of the Debtors' unsecured
liabilities as of the Petition Date are subject to compromise or other treatment
under a plan or plans of reorganization which must be confirmed by the
Bankruptcy Court after obtaining the requisite amount of votes from affected
parties. For financial reporting purposes, those liabilities have been
F-7
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
segregated and classified as liabilities subject to compromise in the
consolidated condensed balance sheets.
On November 8, 2002, the Debtors filed the First Amended Joint Plan of
Reorganization of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtor-In-Possession Under Chapter 11 of the Bankruptcy Code (the 'Plan'). On
January 16, 2003, the Bankruptcy Court entered its (i) Findings of Fact to and
Conclusions of Law Re: Order and Judgment Confirming The First Amended Joint
Plan of Reorganization of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtors-In-Possession Under Chapter 11 of Title 11 of the United States Code,
dated November 8, 2002, and (ii) an Order and Judgment Confirming The First
Amended Joint Plan of Reorganization of The Warnaco Group, Inc. and Its
Affiliated Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of the
United States Code, dated November 8, 2002, and Granting Related Relief (the
'Confirmation Order').
In accordance with the provisions of the Plan and the Confirmation Order,
the Plan became effective on February 4, 2003 and the Company entered into the
$275,000 Senior Secured Revolving Credit Facility (the 'Exit Financing
Facility'). The Exit Financing Facility provides for a four-year, non-amortizing
revolving credit facility. The Exit Financing Facility includes provisions that
allow the Company to increase the maximum available borrowing from $275,000 to
$325,000, subject to certain conditions (including obtaining the agreement of
existing or new lenders to commit to lend the additional amount). Borrowings
under the Exit Financing Facility currently bear interest at Citibank's base
rate plus 1.50% or at the London Interbank Offered Rate ('LIBOR') plus 2.50%.
Pursuant to the terms of the Exit Financing Facility, the interest rate the
Company will pay on its outstanding loans will decrease by as much as 1/2% in
the event the Company achieves certain defined ratios. The Exit Financing
Facility contains financial covenants that, among other things, require the
Company to maintain a fixed charged coverage ratio above a minimum level, a
leverage ratio below a maximum level and limit the amount of the Company's
capital expenditures. In addition, the Exit Financing Facility contains certain
covenants that, among other things, limit investments and asset sales, prohibit
the payment of dividends and prohibit the Company from incurring material
additional indebtedness. Initial borrowings under the Exit Financing Facility on
February 4, 2003 were $39,200. The Exit Financing Facility is secured by
substantially all of the domestic assets of the Company. The Exit Financing
Facility replaced the Amended DIP (as defined below) which is discussed in
Note 14.
In accordance with the Plan, on February 4, 2003, the Company issued Second
Lien Notes to pre-petition creditors and others in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 1145(a) of the Bankruptcy Code. The aggregate principal amount of the
New Warnaco Second Lien Notes due 2008 (the 'Second Lien Notes') issued totaled
$200,942. The Second Lien Notes mature on February 4, 2008, subject, in certain
instances, to earlier repayment in whole or in part. The Second Lien Notes bear
a per annum interest rate which is the higher of (i) 9.5% plus a margin
(initially 0% and beginning on July 4, 2003, 0.5% is added to the margin every
six months) and (ii) LIBOR plus a margin (initially 5%, and beginning on
July 4, 2003, 0.5% is added to the margin every six months). The indenture
pursuant to which the Second Lien Notes were issued contains certain covenants
that, among other things, limit investments and asset sales, prohibits the
payment of cash dividends and prohibit the Company from incurring material
additional indebtedness. The Second Lien Notes are guaranteed by most of the
Company's domestic subsidiaries, and the obligations under such guarantee,
together with the Company's obligations under the Second Lien Notes, are secured
by a second priority lien on substantially the same assets which secure the Exit
Financing Facility.
Set forth below is a summary of certain material provisions of the Plan.
Among other things, as described below, the Plan resulted in the cancellation of
the Company's Class A Common
F-8
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Stock, par value $0.01 per share (the 'Old Common Stock'), issued prior to the
Petition Date. The holders of Old Common Stock did not receive any distribution
on account of the Old Common Stock under the Plan. The Company, as reorganized
under the Plan, issued 45,000,000 shares of common stock, par value $0.01 per
share (the 'New Common Stock'), which was distributed to pre-petition creditors
as specified below. In addition, 5,000,000 shares of New Common Stock of the
Company were reserved for issuance pursuant to management incentive stock
grants. On March 12, 2003, subject to approval by the stockholders of the
Company's proposed 2003 Management Incentive Plan, the Company authorized the
grant of 750,000 shares of restricted stock and options to purchase 3,000,000 of
New Common Stock at the fair market value on the date of grant. The Plan also
provided for the issuance by the Company of $200,942 of New Warnaco Second Lien
Notes due 2008 (the 'Second Lien Notes') to pre-petition creditors and others as
specified below, secured by a second priority security interest in substantially
all of the Debtors' domestic assets and guaranteed by the Company and its
domestic subsidiaries.
The following is a summary of distributions pursuant to the Plan:
(i) the Old Common Stock, including all stock options and restricted
shares, was extinguished, and holders of the Old Common Stock
received no distribution on account of the Old Common Stock;
(ii) general unsecured claimants will receive approximately 2.55%
(1,147,050 shares) of the New Common Stock which the Company expects
to distribute in the second quarter of fiscal 2003;
(iii) the Company's pre-petition secured lenders received their pro-rata
share of approximately $106,112 in cash, Second Lien Notes in the
principal amount of $200,000 and approximately 96.26% (43,318,350
shares) of the New Common Stock;
(iv) holders of claims arising from or related to certain preferred
securities received approximately 0.60% of the New Common Stock
(268,200 shares);
(v) pursuant to the terms of his employment agreement, as modified by the
Plan, Antonio C. Alvarez II, the President and Chief Executive Officer
of the Company, received an incentive bonus consisting of
approximately $1,950 in cash, Second Lien Notes in the principal
amount of approximately $942 and approximately 0.59% of the New Common
Stock (266,400 shares); and
(vi) in addition to the foregoing, allowed administrative and certain
priority claims were paid in full in cash.
Reorganization and administrative expenses related to the Chapter 11 Cases
have been separately identified in the consolidated statement of operations as
reorganization items through January 4, 2003. The Company expects to recognize
additional reorganization items in fiscal 2003.
During the course of the Chapter 11 Cases, the Company obtained Bankruptcy
Court authorization to sell assets and settle liabilities for amounts other than
those reflected in the consolidated financial statements. Management evaluated
the Company's operations and identified assets for potential disposition. From
the Petition Date, through January 4, 2003, the Company sold certain personal
property, certain owned buildings and land and other assets, including certain
inventory of its domestic outlet retail stores, generating net proceeds of
approximately $36,256 of which approximately $30,043 was generated during Fiscal
2002 (collectively, the 'Asset Sales'). The Asset Sales did not result in a
material gain or loss since the Company had previously written-down assets
identified for potential disposition to their estimated net realizable value.
Substantially all of the net proceeds from the Asset Sales were used to reduce
outstanding borrowings under the Amended DIP or provide collateral for
outstanding trade and standby letters of credit. In
F-9
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Fiscal 2002, the Company closed all of its domestic outlet retail stores. The
closing of the outlet retail stores and the related sale of inventory at
approximately net book value generated approximately $23,200 of net proceeds
through January 4, 2003, which were used to reduce amounts outstanding under the
Amended DIP or to provide collateral for outstanding trade letters of credit.
In addition, during the first quarter of Fiscal 2002, the Company sold the
business and substantially all of the assets of GJM Manufacturing Ltd. ('GJM'),
a private label manufacturer of women's sleepwear, and Penhaligon's Ltd.
('Penhaligon's'), a United Kingdom-based retailer of perfumes, soaps, toiletries
and other products. The sales of GJM and Penhaligon's generated aggregate net
proceeds of approximately $20,459 and an aggregate net loss on the sales of
approximately $2,897. Proceeds from the sale of GJM and Penhaligon's were used
to: (i) reduce amounts outstanding under certain debt agreements of the
Company's foreign subsidiaries which were not part of the Chapter 11 Cases
(approximately $4,800); (ii) reduce amounts outstanding under the Amended DIP
(approximately $4,200); (iii) create an escrow fund (subsequently disbursed in
June 2002) for the benefit of pre-petition secured lenders (approximately
$9,400); and (iv) create an escrow fund (subsequently returned to the Company in
February 2003) for the benefit of the purchasers of GJM and Penhaligon's for
potential indemnification claims and for any working capital valuation
adjustments (approximately $1,700). In September 2002, the Company sold other
assets generating approximately $150 of net proceeds and a loss on the sale of
approximately $1,365.
Changes in accounting principles: Effective January 6, 2002, the Company
adopted Statement of Financial Accounting Standards ('SFAS') No. 142 Goodwill
and Other Intangible Assets ('SFAS 142'). SFAS 142 addresses the financial
accounting and reporting for acquired goodwill and other intangible assets with
indefinite lives. As a result of adopting SFAS 142, goodwill and a substantial
amount of the Company's intangible assets are no longer amortized. During Fiscal
2002, the Company completed its impairment review (see Note 12).
Effective January 2, 2000, the Company changed its accounting method for
valuing its retail outlet store inventory. Prior to the change, the Company
valued its retail inventory using average cost. Under its new method, the
Company values its retail inventory using the actual cost method. The Company
believes its new method is preferable because it results in a better matching of
revenue and expense and is consistent with the method used for its other
inventories. The cumulative effect of the change as of January 1, 2000 was to
increase net loss by $13,110, net of tax of $8,577.
Use of Estimates: The Company uses estimates and assumptions in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements. These estimates and assumptions also affect the reported amounts of
revenues and expenses. Actual results could materially differ from these
estimates. The estimates the Company makes are based upon historical factors,
current circumstances and the experience and judgment of the Company's
management. The Company evaluates its assumptions and estimates on an ongoing
basis and may employ outside experts to assist in the Company's evaluations. The
Company believes that the use of estimates affects the application of all of the
Company's accounting policies and procedures.
Revenue Recognition. The Company recognizes revenue when goods are shipped
to customers and title and risk of loss has passed, net of estimated customer
returns, allowances and other discounts. The Company recognizes revenue from its
consignment accounts and retail stores when
F-10
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
goods are sold to consumers, net of allowances for future returns. The
determination of allowances and returns involves the use of significant judgment
and estimates by the Company. The Company bases its estimates of allowance rates
on past experience by product line and account, the financial stability of its
customers, the rate (based on reorders and customer inventory levels) that its
products are selling to consumers, the expected rate of retail sales growth and
general economic and retail forecasts. The Company reviews and adjusts its
accrual rates each month based on its current experience. During the Company's
monthly review, the Company also considers its accounts receivable collection
rate and the nature and amount of customer deductions and requests for promotion
assistance. The Company believes it is likely that its accrual rates will vary
over time and could change materially if the Company's mix of customers,
channels of distribution or product mix changes. The Company's current rates of
accrual for sales allowances, returns and discounts range from 5.0% to 20.0%.
Cost of Goods Sold. Cost of goods sold for the Successor consists of the
cost of products produced or purchased and certain period costs related to the
production and manufacturing process. Product costs include (i) material, direct
labor and overhead (including the costs incurred by external contractors), (ii)
duty, quota and related tariffs, (iii) in-bound freight and traffic costs,
including inter-plant freight, (iv) procurement and material handling costs, (v)
indirect production overhead including inspection, quality control, sample
making/room, production control and planning, cost accounting and engineering
and (vi) in-stocking costs in our warehouse (cost to receive, unpack and stock
product available for sale in our distribution center). Period costs included in
cost of goods sold include (i) royalty, (ii) design and merchandising, (iii)
samples, (iv) manufacturing variances (net of amounts capitalized), (v) loss on
seconds and (vi) provisions for inventory losses (including provisions for
shrinkage and losses on the disposition of excess and obsolete inventory). Costs
incurred to store, pick, pack and ship inventory to customers are included in
shipping and handling costs and are classified in selling, general and
administrative expenses. The Company's gross profit and gross margin may not be
comparable to those of other companies as some companies include shipping and
handling costs in cost of goods sold. The Predecessor included design,
merchandising and other product related costs in its determination of inventory
value. The Company expenses such costs as incurred since February 4, 2003.
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, 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. Adjustments for specific account
allowances and negotiated settlements of customer deductions are recorded as
deductions to revenue in the period the specific adjustment is identified. The
provision for accounts receivable allowances is affected by general economic
conditions, the financial condition of the Company's customers, the inventory
position of the Company's customers, sell-through of the Company's products by
these customers and many other factors most of which are not controlled by the
Company or its management. As of January 4, 2003, the Company had $276,889 of
open trade invoices and other receivables and $10,440 of outstanding debit
memos. Based upon the Company's analysis of estimated recoveries and
collections associated with the related invoices and debit memos, the Company
had $87,512 of accounts receivable reserves. As of January 5, 2002, the
Company had $361,530 of open trade invoices and other receivables and $33,775
of outstanding debit memos. Based upon the Company's analysis of estimated
recoveries and collections associated with the
F-11
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
related invoices and debit memos, the Company had $112,918 of accounts
receivable reserves. The determination of the amount of the accounts receivable
reserve is subject to significant levels of judgment and estimation by the
Company's management. If circumstances change or economic conditions
deteriorate, the Company may need to increase the reserve significantly. The
Company has purchased credit insurance to help mitigate the potential losses it
may incur from the bankruptcy, reorganization or liquidation of some of its
customers.
Inventories. The Company values its inventories at the lower of cost,
determined on a first-in first-out basis, or market value. The Company includes
certain design, procurement, receiving and other product-related costs in its
determination of inventory cost. Such costs amounted to approximately $54,600
and $30,200 at January 5, 2002 and January 4, 2003, respectively. The Company
evaluates its inventories to determine excess units or slow-moving styles based
upon quantities on hand, orders in house and expected future orders. For those
items for which the Company believes it has an excess supply or for styles or
colors that are obsolete, the Company estimates the net amount that the Company
expects to realize from the sale of such items. The Company's objective is to
recognize projected inventory losses at the time the loss is evident rather than
when the goods are ultimately sold. The Company's calculation of the reserves
necessary for the disposition of excess inventory is highly dependent on its
projections of future sales of those products and the prices it is able to
obtain for such products. The Company reviews its inventory position monthly and
adjusts its reserves for excess and obsolete goods based on revised projections
and current market conditions for the disposition of excess and obsolete
inventory. If economic conditions worsen the Company will have to increase its
reserve estimates substantially. As of January 4, 2003, the Company had
identified inventory with a carrying value of approximately $61,500 as
potentially excess and/or obsolete. Based upon the estimated recoveries related
to such inventory, as of January 4, 2003, the Company had approximately $33,816
of inventory reserves for excess, obsolete and other inventory adjustments. As
of January 5, 2002, the Company had identified inventory with a carrying value
of approximately $88,300 as potentially excess and/or obsolete. Based upon the
estimated recoveries related to such inventory, as of January 5, 2002, the
Company had approximately $50,097 of inventory reserves for excess, obsolete and
other inventory adjustments.
Long-Lived Assets. The Company reviews its long-lived assets for possible
impairment when events or circumstances indicate that the carrying value of the
assets may not be recoverable. Assumptions and estimates used in the evaluation
of impairment may affect the carrying value of long-lived assets, which could
result in impairment charges in future periods. In addition, depreciation and
amortization expense is affected by the Company's determination of the estimated
useful lives of the related assets.
Income Taxes: 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 established to
reduce the amount of deferred tax assets to an amount that the Company believes,
based upon objectively verifiable evidence, is realizable. The only objectively
verifiable evidence the Company used in determining the need for a valuation
allowance were the future reversals of existing temporary differences. The
future recognition of deferred tax assets will first reduce goodwill. Should the
recognition of deferred tax assets result in the elimination of goodwill, 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.
F-12
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Provision for U.S. income taxes on unremitted earnings of foreign
subsidiaries is made only on those amounts in excess of the funds considered to
be permanently reinvested.
Pension Plan. The Company has a defined benefit pension plan (the 'Pension
Plan') covering substantially all full-time non-union and certain union domestic
employees. The determination of the total amount of liability attributable to
benefits owed to participants covered by the Pension Plan and the amount of
pension expenses recorded by the Company related to the Pension Plan are
determined by the Pension Plan's third party actuary as of the first day of the
fiscal year using assumptions provided by the Company. The assumptions used can
have a significant impact on the amount of pension expense and pension liability
recorded by the Company. The Pension Plan actuary also determines the annual
cash contribution to the Pension Plan using assumptions defined by the Pension
Benefit Guaranty Corporation (the 'PBGC'). The Pension Plan was under-funded as
of January 4, 2003 and January 5, 2002. The Pension Plan contemplates that the
Company will continue to fully fund its minimum required contributions and any
other premiums due under ERISA and the Internal Revenue Code. The amount of
pension contributions that is deductible for Federal income tax purposes is also
determined by the Pension Plan actuary using assumptions defined by the Internal
Revenue Service (the 'IRS') and other regulatory agencies. Effective January 1,
2003, the Pension Plan was amended and as a result no future benefits will
accrue to participants under the Pension Plan. This amendment resulted in a
curtailment of the Pension Plan and a reduction in the total liability
determined by the Pension Plan actuary of approximately $8,897 as of January 4,
2003. The Company's cash contribution to the Pension Plan for fiscal 2003 will
be approximately $9,320 and is estimated to be approximately $27,704 over the
next five years. The amount of cash contribution the Company will be required to
make to the Pension Plan could increase or decrease depending upon the actual
return that the Pension Plan assets earn compared to the estimated rate of
return on Pension Plan assets of 7%.
Translation of Foreign Currencies: Cumulative translation adjustments,
arising primarily from consolidating the net assets and liabilities of the
Company's foreign operations at current rates of exchange as of the respective
balance sheet date, are applied directly to stockholders' deficiency and are
included as part of accumulated other comprehensive loss. Income and expense
items for the Company's foreign operations are translated using monthly average
exchange rates.
Marketable Securities: Marketable securities are stated at fair value based
on quoted market prices. Marketable securities are classified as
available-for-sale with any unrealized gains or losses, net of tax, included as
a component of stockholders' deficiency and included in other comprehensive
loss.
Assets held for sale: The Company classifies assets to be sold as assets
held for sale. Assets held for sale are reported at the lower of their carrying
amount or estimated fair value less selling costs. Assets held for sale at
January 5, 2002 include accounts receivable, inventories, prepaid expenses,
fixed assets and other assets of GJM and Penhaligon's and other assets
identified for disposition. Assets held for sale at January 4, 2003 include
certain land, buildings and other assets identified for disposition.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided over the lesser of the estimated useful lives of the
asset or terms of the lease, using the straight-line method, as summarized
below:
F-13
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
Buildings...................................... 20 - 40 years
Building improvements.......................... 2 - 20 years
Machinery and equipment........................ 3 - 10 years
Furniture and fixtures......................... 7 - 10 years
Computer hardware.............................. 3 - 5 years
Computer software.............................. 3 - 7 years
</Table>
Depreciation and amortization expense was $62,148, $60,890 and $56,497 for
Fiscal 2000, 2001 and 2002, respectively.
Computer Software Costs: Internal and external costs incurred in developing
or obtaining computer software for internal use are capitalized in property,
plant and equipment in accordance with SOP 98-1 'Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use' and related guidance
and are amortized on a straight-line basis, over the estimated useful life of
the software (3 to 7 years). General and administrative costs related to
developing or obtaining such software are expensed as incurred.
Intangible and Other Assets: Intangible and other assets consisted of
goodwill, licenses, trademarks, deferred financing costs and other intangible
assets as of January 5, 2002. Intangible assets consist of licenses and
trademarks at January 4, 2003. Goodwill represents the excess of cost over net
assets acquired from business acquisitions. The Company performs an annual
impairment test for goodwill and intangible assets in the fourth quarter of each
fiscal year. Goodwill was allocated to various reporting units, which are either
the operating segment or one reporting level below the operating segment. The
Company's reporting units for purposes of applying the provisions of SFAS 142
are: Warner's'r'/Olga'r'/Body by Nancy Ganz'TM'/Bodyslimmers'r', Calvin Klein'r'
underwear, Lejaby'r', White Stag'r'/Catalina'r', Calvin Klein'r' jeans, A.B.S.
by Allen Schwartz'r', Chaps Ralph Lauren'r' and Swimwear. SFAS 142 requires the
Company to compare the fair value of the reporting unit to its carrying amount
on an annual basis to determine if there is potential impairment. If the fair
value of the reporting unit is less than its carrying value, an impairment loss
is recorded to the extent that the implied fair value of the goodwill within the
reporting unit is less than its carrying value. If the carrying amount of the
intangible asset with an indefinite life exceeds its fair value, an impairment
loss is recognized. Fair values for goodwill and intangible assets are
determined based on discounted cash flows, market multiples or appraised values
as appropriate.
Identified intangible assets with finite lives are amortized on a
straight-line basis over their estimated useful lives. Deferred financing costs
are amortized over the life of the related debt, using the interest method and
included in interest expense.
Prior to the adoption of SFAS 142, the Company amortized its license
agreements on a straight-line basis over the remaining term of the license
ranging from five to 40 years. Trademarks were amortized on a straight-line
basis over their estimated remaining useful lives ranging from 20 to 40 years.
Other intangible assets were amortized over their estimated useful lives ranging
from eight to 20 years.
Advertising Costs: Advertising costs are included in selling, general and
administrative expenses and are expensed when the advertising or promotion is
published or presented to consumers. Cooperative advertising allowances provided
to customers are charged to operations as incurred and included in selling,
general and administrative expenses. The amounts charged to operations for
advertising (including cooperative advertising), marketing and promotion
expenses during Fiscal 2000, 2001 and 2002 were $141,340, $138,407 and $108,076,
respectively.
Shipping and Handling Costs: Shipping and handling costs in selling, general
and administrative expenses, which includes the costs of the Company's
distribution network to pick,
F-14
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
pack and ship goods to customers, are expensed as incurred. The amounts charged
to operations for shipping and handling costs during Fiscal 2000, 2001 and 2002
were $64,888, $76,085 and $71,510, respectively.
Reorganization Items: Reorganization items relate to expenses incurred and
amounts accrued as a direct result of the Chapter 11 Cases and include certain
impairment losses, professional fees, facility shutdown costs, employee
severance payments, employee retention payments, lease termination accruals, and
other items. Reorganization items are separately identified on the consolidated
statement of operations.
Stock Based Compensation: The Company follows the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, 'Accounting for
Stock-Based Compensation' ('SFAS 123'). SFAS 123 encourages, but does not
require, companies to adopt a fair value based method for determining expense
related to stock option compensation. The Company continues to account for
stock-based compensation for employees using the intrinsic value method as
prescribed by Accounting Principles Board Opinion No. 25, 'Accounting for Stock
Issued to Employees ('APB 25')' and related Interpretations. Under APB 25, no
compensation expense is recognized for employee share option grants because the
exercise price of the options granted to date has equaled the market price of
the underlying shares on the date of grant (the 'intrinsic value method'). The
following table illustrates the effect on net loss and net loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation for the years ended December 30, 2000,
January 5, 2002 and January 4, 2003, respectively.
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Reported net loss................................. $(389,971) $(861,153) $(964,863)
Less: Total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of tax:............. (18,267) (12,250) (6,996)
--------- --------- ---------
Pro forma net loss................................ $(408,238) $(873,403) $(971,859)
--------- --------- ---------
--------- --------- ---------
Net loss per share
Reported
Basic and diluted......................... $ (7.39) $ (16.28) $ (18.21)
--------- --------- ---------
--------- --------- ---------
Pro forma
Basic and diluted......................... $ (7.73) $ (16.51) $ (18.34)
--------- --------- ---------
--------- --------- ---------
</Table>
The fair values of these stock options were estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions:
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Risk-free interest rate............................ 5.24% 4.50% n/a
Dividend yield..................................... -- -- n/a
Expected volatility of market price of Company's
Common Stock..................................... 54.50% 104.64% n/a
Expected option life............................... 5 years 5 years n/a
</Table>
Pro forma compensation expense reflected for prior periods is not indicative
of future compensation expense that would be recorded by the Company if it
adopted the fair value based
F-15
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
recognition provisions of SFAS 123. Future pro forma expense may vary based upon
factors such as the number of awards granted by the Company and the then-current
fair market value of such awards.
Detailed information for activity in the Company's stock plans can be found
in Note 17.
Financial Instruments: Derivative financial instruments were used by the
Company in the management of its interest rate and foreign currency exposures
prior to the Petition Date. The Company also used derivative financial
instruments to execute purchases of its shares under its stock buyback program.
The Company does not use derivative financial instruments for speculation or for
trading purposes. Gains and losses realized prior to the Petition Date on
termination of interest rate swap contracts were deferred and amortized over the
remaining terms of the original hedging relationship.
A number of major international financial institutions are counterparties to
the Company's financial instruments and letters of credit. The Company monitors
its positions with, and the credit quality of, these counterparty financial
institutions and does not anticipate non-performance of these counter parties.
Management believes that the Company would not suffer a material loss in the
event of nonperformance by these counterparties.
Equity Instruments Indexed to the Company's Common Stock: Prior to
September 19, 2000, equity instruments indexed to the Company's Old Common Stock
(the 'Equity Agreements') were recorded at fair value. Proceeds received under
net share settlements or amounts paid upon the purchase of such equity
instruments were recorded as a component of stockholders' deficiency. Subsequent
changes in the fair value of the Equity Agreements were not recorded.
Repurchases of common stock pursuant to the terms of the Equity Agreements were
recorded as treasury stock. On September 19, 2000, the Company amended its
Equity Agreements and elected to cash settle a portion of its obligation to the
bank through notes payable. As a result, the Company recorded notes payable
('Equity Agreement Notes') in an amount equal to the difference between the
forward equity price of the Company's Old Common Stock and the fair value of the
Company's Old Common Stock. The recognition of the Equity Agreement Notes was
recorded as an adjustment to stockholders' deficiency. On October 6, 2000, the
Company amended its outstanding credit agreements and recorded an adjustment to
increase the balance of the Equity Agreement Notes based upon the change in fair
value of the Company's Old Common Stock. Changes in the fair value of the equity
instruments after October 6, 2000 through the Petition Date were recorded as a
component of operating loss and as a change in the carrying amount of the
related Equity Agreement Notes. Subsequent to October 6, 2000, the Company was
required to cash settle the Equity Agreements. Since the Petition Date, no
changes in the fair value of the Equity Agreement Notes have been recorded.
Equity Agreement Notes are classified in liabilities subject to compromise as of
January 5, 2002 and January 4, 2003 (see Note 15).
Comprehensive Loss: Comprehensive loss consists of net loss, unrealized
gain/(loss) on marketable securities (net of tax), unfunded minimum pension
liability and cumulative foreign currency translation adjustments. Because such
cumulative translation adjustments are considered a component of permanently
invested earnings of foreign subsidiaries, no income taxes are provided on such
amounts.
Start-Up Costs: Pre-operating costs relating to the start-up of new
manufacturing facilities, product lines and businesses are expensed as incurred.
Recent accounting pronouncements: In June 2001, the FASB issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial
accounting and reporting obligations associated with the retirement of tangible
long-lived assets and the associated retirement costs. The Company will adopt
the provisions of SFAS 143 for its 2003 fiscal year and does not expect the
F-16
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
adoption of SFAS 143 to have a material impact on the Company's consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections
('SFAS 145'). SFAS 145 rescinds the provisions of SFAS 4 that require companies
to classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS 44 regarding transition to the Motor
Carrier Act of 1980 and amends the provisions of SFAS 13 to require that certain
lease modifications be treated as sale leaseback transactions. The provisions of
SFAS 145 related to the classification of debt extinguishment are effective for
the period beginning after May 15, 2002. The provisions of SFAS 145 related to
lease modifications are effective for transactions occurring after May 15, 2002.
The adoption of SFAS 145 did not have a material impact on the financial
position or results of operations of the Company's consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ('SFAS 146'). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ('EITF') Issue No. 94-3, 'Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring).' SFAS 146
requires that a liability for costs associated with the exit or disposal of an
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002.
The FASB has issued SFAS No. 148 Accounting for Stock-Based Compensation,
Transition and Disclosure ('SFAS 148'). SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has adopted the disclosure requirements of SFAS 148. As of January 4, 2003, the
Company accounts for stock-based employee compensation in accordance with APB
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations.
In November 2002, the FASB issued Interpretation Number 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees. Including Indirect
Guarantees of Indebtedness of Others ('FIN 45'). This interpretation requires
certain disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
interim and annual period beginning after December 15, 2002. The initial
recognition and initial measurement requirements of FIN 45 are effective
prospectively for guarantees issued or modified after December 31, 2002. The
Company does not believe the adoption of the recognition and initial measurement
requirements of FIN 45 will have a material impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51 ('FIN 46'). FIN
46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 explains
how to identify variable interest entities and
F-17
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
how an enterprise assesses its interests in a variable interest entity to decide
whether to consolidate that entity. It requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. It also
requires certain disclosures by the primary beneficiary of a variable interest
entity and by an enterprise that holds significant variable interests in a
variable interest entity where the enterprise is not the primary beneficiary.
FIN 46 is effective for variable interest entities created after January 31,
2003 and to variable interest entities in which an enterprise obtains an
interest after that date, and effective for the first fiscal year or interim
period beginning after June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 requires an entity to disclose certain information regarding a variable
interest entity, if, when the Interpretation becomes effective, it is reasonably
possible that an enterprise will consolidate or have to disclose information
about that variable interest entity, regardless of the date on which the
variable entity interest was created. The Company currently does not have any
interest in any unconsolidated entity for which variable interest entity
accounting is required and therefore does not expect FIN 46 to have a material
affect on the Company's consolidated financial statements.
Reclassifications: Certain Fiscal 2000 and 2001 amounts have been
reclassified to conform to the current year presentation.
NOTE 2 -- REORGANIZATION ITEMS
In connection with the Chapter 11 Cases, the Company initiated several
strategic and organizational changes to streamline the Company's operations,
focus on its core businesses, and return the Company to profitability. Many of
the strategic actions are long-term in nature and, though initiated in Fiscal
2001 and Fiscal 2002, will not be completed until the end of fiscal 2003. In
connection with these actions, the Company has closed all of its domestic outlet
retail stores and reorganized its Speedo Authentic Fitness retail stores. The
Company closed 204 of the 283 or 72% of the retail stores it operated at the
beginning of Fiscal 2001. In Fiscal 2001, the Company closed 86 stores and 118
stores were closed during Fiscal 2002. In the first quarter of fiscal 2003, the
Company closed three additional Speedo Authentic Fitness retail stores. The
closing of the domestic outlet retail stores and the sale of the related
inventory generated net proceeds of approximately $23,200 in Fiscal 2002.
In the first quarter of Fiscal 2002, the Company sold the assets of GJM and
Penhaligon's for net proceeds of approximately $20,459 in the aggregate. The net
loss on the sale of GJM and Penhaligon's was approximately $2,897 and is
included in reorganization items in Fiscal 2002. In Fiscal 2001, the Company
recorded an impairment loss related to the goodwill of GJM of approximately
$26,842.
During Fiscal 2001 and Fiscal 2002, the Company sold certain personal
property, vacated buildings, surplus land and other assets generating net
proceeds of approximately $6,213 and $6,814 respectively, since the Petition
Date. The losses related to the write-down of these assets was approximately
$3,656 and $1,035 for the fiscal years ended January 5, 2002 and January 4,
2003, respectively. The Company has vacated certain leased premises, and
rejected those leases (many related to its Retail Stores Division) under the
provisions of the Bankruptcy Code.
During the fourth quarter of Fiscal 2002, the Company completed a strategic
review of its Intimate Apparel operations in Europe and formalized a plan to
consolidate its European manufacturing operations and to restructure certain
other manufacturing, sales and back office operations in Europe. The Company
expects to incur severance, outplacement, legal, accounting and other expenses
associated with the consolidation covering approximately 350 employees. The
consolidation includes the consolidation of certain manufacturing operations in
France which
F-18
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
requires that the Company comply with certain procedures and processes that are
defined in French law and French labor regulations. The Company has recorded a
restructuring charge of $8,657 in the fourth quarter of Fiscal 2002 reflecting
the statutory and regulatory defined severance and other obligations that the
Company will incur related to the consolidation. Included in the restructuring
charge is approximately $113 of legal and other professional fees incurred in
Fiscal 2002 related to the consolidation. Additional severance costs
attributable to negotiated settlements with individual employees are subject to
final negotiation. The Company expects that all severance, outplacement, legal
and other costs attributable to the consolidation will be fully paid by the end
of fiscal 2003. The Company expects that the ultimate cost of the consolidation
that have been incurred and will be incurred in fiscal 2003 will be between
$12,000 and $15,000 including the $8,657 recorded in Fiscal 2002.
As a direct result of the Chapter 11 Cases, the Company has recorded certain
liabilities, incurred certain legal and professional fees, written-down certain
assets and accelerated the recognition of certain deferred charges. The
transactions were recorded in accordance with the provisions of SOP 90-7.
Reorganization items included in the consolidated statements of operations
in Fiscal 2001 and Fiscal 2002 were $177,791 and $116,682, respectively.
Included in reorganization items are certain non-cash asset impairment
provisions and accruals for items that have been, or will be, paid in cash. In
addition, certain accruals are subject to compromise under the provisions of the
Bankruptcy Code. The Company has recorded these accruals at the estimated amount
the creditor is entitled to claim under the provisions of the Bankruptcy Code.
The ultimate amount of and settlement terms for such liabilities are detailed in
the Plan.
<Table>
<Caption>
FISCAL YEARS ENDED
-----------------------
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Legal & professional fees................................... $ 24,206 $ 27,734
Employee contracts and retention............................ 8,728 25,571
GECC lease settlement....................................... -- 22,898
Write-off of fixed assets related to retail stores closed... 6,105 13,250
Facility shutdown costs..................................... 8,440 9,201
Lease terminations.......................................... 20,591 9,352
Sales of Penhaligon's, GJM and Ubertech..................... -- 4,262
Employee benefit costs related to plant closings............ 821 3,068
Aviation and other assets................................... 1,650 1,176
Losses from write-offs and sales of fixed assets............ 37,061 170
Company-obligated mandatorily redeemable preferred
securities(a)............................................. 21,411 --
Systems development abandoned............................... 33,066 --
Deferred financing fees..................................... 34,599 --
Interest rate swap gain..................................... (18,887) --
-------- --------
$177,791 $116,682
-------- --------
-------- --------
Cash portion of reorganization items........................ $ 36,893 $ 59,719
Non-cash portion of reorganization items.................... $140,898 $ 56,963
</Table>
- ---------
(a) Includes original issue discount and deferred bond issue
costs of $4,798 net of accumulated amortization.
Certain accruals are included in liabilities subject to compromise. The Plan
was consummated on February 4, 2003. Pursuant to the Plan, unsecured
pre-petition claimants will receive their pro-rata share of 1,147,050 shares of
New Common Stock. The number of shares to be distributed to each claimant is
subject to the final approval and reconciliation of all of the unsecured
pre-petition
F-19
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
claims. The Company expects that such distribution will take place in the second
quarter of fiscal 2003.
NOTE 3 -- SPECIAL CHARGES -- FISCAL 2000
The Company performed a strategic review of its worldwide businesses,
manufacturing, distribution and other facilities, and product lines and styles
and initiated a global implementation of programs designed to create cost
efficiencies through plant consolidations, workforce reductions and
consolidation of the finance, manufacturing and operations organizations within
the Company and the discontinuation of product lines and styles that were
unprofitable. As a result of these initiatives which commenced in Fiscal 2000,
the Company recorded special charges of $269,626 during Fiscal 2000 related to
costs to exit certain facilities and activities and consolidate such operations,
including charges related to inventory write-downs and other asset write-offs,
facility shutdown and lease obligation costs, employee termination and severance
costs, retail outlet store closings and other related costs. The non-cash
portion of the charge was originally estimated to be $171,317 and the cash
portion was originally estimated to be $98,309. As of January 4, 2003, $3,332 of
accruals remained related primarily to severance obligations and expected
payments under discontinued licenses. Actual cash charges through January 4,
2003 were $93,593. Non-cash charges were $172,574. Of the total amount of
charges, $201,279 is reflected in cost of goods sold and $68,347 is reflected in
selling, general and administrative expenses in the Fiscal 2000. The detail of
the charge, including costs incurred and reserves remaining for costs the
Company expects to incur through completion of the aforementioned programs are
summarized below:
<Table>
<Caption>
FACILITY
INVENTORY SHUTDOWN EMPLOYEE
WRITE-DOWNS AND AND CONTRACT TERMINATION LEGAL AND
OTHER ASSET TERMINATION AND SEVERANCE RETAIL OUTLET OTHER RELATED
WRITE-OFFS COSTS COSTS STORE CLOSINGS COSTS TOTAL
---------- ----- ----- -------------- ----- -----
Provisions............ $ 154,851 $ 53,261 $ 25,772 $ 20,037 $ 15,705 $ 269,626
Cash Reductions --
2000................ -- (41,456) (19,117) (2,969) (10,909) (74,451)
Non-cash reductions --
2000................ (125,350) -- -- (12,357) (976) (138,683)
--------- -------- -------- -------- -------- ---------
Balance as of Dec. 30,
2000................ 29,501 11,805 6,655 4,711 3,820 56,492
Cash Reductions --
2001................ -- (3,998) (6,376) (1,578) (4,186) (16,138)
Non-cash reductions --
2001................ (29,501) (1,257) -- (3,133) -- (33,891)
Other adjustments --
2001(a)............. -- (493) -- -- 366 (127)
--------- -------- -------- -------- -------- ---------
Balance as of Jan 5,
2002................ -- 6,057 279 -- -- 6,336
Cash Reductions --
2002................ -- (2,743) (261) -- -- (3,004)
--------- -------- -------- -------- -------- ---------
Balance as of Jan 4,
2003................ $ -- $3,314(b) $ 18 $-- $ -- $ 3,332
--------- -------- -------- -------- -------- ---------
--------- -------- -------- -------- -------- ---------
</Table>
- ---------
(a) Other adjustments represent reversals of over accruals
related to facility shutdowns and additional legal costs.
The net effect of other adjustments is included in selling,
general and administrative expenses in Fiscal 2001 and
Fiscal 2002.
(b) Includes $2,923 of liabilities subject to compromise.
F-20
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
INVENTORY WRITE-DOWNS AND OTHER ASSET WRITE-OFFS $(154,851)
Management's strategic review of the Company's manufacturing, distribution
and administrative facilities and product lines and styles resulted in the
decision to close seven manufacturing plants, twelve distribution facilities and
two administrative facilities as well as the closure of 26 outlet stores. In
addition, the Company discontinued the manufacturing of certain raw materials
and product styles and wrote-off shop and fixture costs no longer in service at
certain of its customer's retail locations. Included in the above amount are
charges for inventory write-downs of $127,825 and write-off of fixed assets and
other assets of $27,026. Of the total charge, $134,901 is included in cost of
sales and $19,950 is included in selling, general and administrative expenses.
FACILITY SHUTDOWN AND CONTRACT TERMINATION COSTS $(53,261)
Costs associated with the shutdown of the facilities mentioned above include
plant reconfiguration and shutdown costs of $47,751, which were expensed as
incurred and lease obligation costs of $5,510. Of the total charge, $40,281 is
included in cost of sales and $12,980 is included in selling, administrative and
general expenses in Fiscal 2000. Accruals amounting to $3,314 for future lease
and contract payments remain at January 4, 2003.
EMPLOYEE TERMINATION AND SEVERANCE COSTS $(25,772)
The Company recorded charges of $11,729 to cost of goods sold related to
providing severance and benefits to 3,589 manufacturing related employees
terminated as a result of the closure of certain facilities in Fiscal 2000. The
Company also recorded charges of $14,043 to selling, administrative and general
expenses related to providing severance and benefits to 816 distribution and
administrative employees who were terminated in Fiscal 2000. Remaining severance
amounts at January 4, 2003 were $18, and are expected to be paid in fiscal 2003.
RETAIL OUTLET STORE CLOSINGS $(20,037)
During Fiscal 2000, the Company announced plans to close 26 retail outlet
stores. Included in the charge are costs for the write-down of inventory of
discontinued product lines and styles which the Company intends to liquidate
through these stores of $13,697, the write-off of fixed assets associated with
these stores of $1,793 and the costs of terminating leases of $1,653. Of the
total charge, $13,697 is included in cost of sales and $6,340 is included in
selling, general and administrative expenses in Fiscal 2000.
LEGAL AND OTHER RELATED COSTS $(15,705)
Also included in the charge are $12,490 of legal expenses related to the
Calvin Klein litigation and global initiatives mentioned above and $3,215 of
other costs in Fiscal 2000. Of the total charge, $671 is included in cost of
sales and $15,034 is included in selling, general and administrative expenses in
Fiscal 2000.
NOTE 4 -- ACCOUNTS RECEIVABLE SECURITIZATION
In October 1998, the Company entered into a revolving accounts receivable
securitization facility, to mature on August 12, 2002, whereby it could obtain
up to $200,000 of funding from the securitization of eligible United States
trade accounts receivable through a bankruptcy remote special purpose
subsidiary. The facility was amended in March 2000 to provide up to $300,000 of
funding. In Fiscal 1999 the Company securitized $383,827 of accounts receivable
(gross) for which
F-21
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
it received cash proceeds of $195,900. In Fiscal 2000, the Company securitized
$454,862 of accounts receivable (gross) for which it received cash proceeds of
$249,600. In Fiscal 2001, prior to the Petition Date, the Company securitized
$366,233 of accounts receivable (gross) for which it received cash proceeds of
approximately $185,000. The Company retained the interest in and subsequent
realization of the excess of amounts securitized over the proceeds received and
provided allowances as appropriate on the entire balance. The proceeds received
are included in cash flows from operating activities in the consolidated
statement of cash flows. Fees for this program were paid monthly and were based
on variable rates indexed to commercial paper and are included in selling,
general and administrative expense. On June 11, 2001, concurrent with the
completion of the DIP, the Company terminated the revolving accounts receivable
securitization agreement by repaying $186,214 previously received under the
account receivable securitization facility. The repayment of the accounts
receivable securitization facility included $1,214 of fees and accrued interest.
Consequently, none of the Company's outstanding trade accounts receivable were
securitized at January 5, 2002 or January 4, 2003.
NOTE 5 -- RELATED PARTY TRANSACTIONS
A former director of the Company is the sole stockholder, President and a
director of The Spectrum Group, Inc. ('Spectrum'). The Company recognized
consulting expenses of $560 in Fiscal 2000 pursuant to a consulting agreement
with Spectrum that was terminated effective December 31, 2000.
The Company leases certain real property from an entity controlled by an
employee and the former owner of A.B.S. by Allen Schwartz. The lease expires on
May 31, 2005 and includes four five-year renewal options. Rent expense related
to this lease for Fiscal 2000, Fiscal 2001 and Fiscal 2002 was $345, $458 and
$470, respectively.
From April 30, 2001 to June 11, 2001, the Company incurred consulting fees
to Alvarez & Marsal, Inc. ('A&M') of $1,256 pursuant to a consulting agreement.
The President and Chief Executive Officer and the Chief Financial Officer of the
Company are affiliated with A&M. The A&M consulting agreement was terminated on
June 11, 2001. In connection with the Company's emergence from bankruptcy on
February 4, 2003 and as contemplated by the Plan, the Company entered into a new
consulting agreement with A&M. Pursuant to the terms of his Employment
Agreement, as adjusted under the Plan, Antonio C. Alvarez II, the President and
Chief Executive Officer of the Company, received an incentive bonus consisting
of $1,950 in cash, Second Lien Notes in the principal amount of $942 and 0.59%
of the New Common Stock (266,400 shares) of the reorganized Company.
The Company entered into a second consulting agreement with A&M on January
29, 2003 (as supplemented by the March 18, 2003 letter agreement, the 'A&M
Agreement'), pursuant to which Mr. Alvarez and Mr. Fogarty will continue serving
the Company as Chief Executive Officer and Chief Financial Officer,
respectively, and certain other A&M affiliated persons will continue serving the
Company in a consulting capacity. The A&M Agreement was effective as of February
4, 2003 and replaced and superceded the Alvarez and Fogarty Agreements. The A&M
Agreement may be terminated by either party, without cause, upon 30 days'
written notice. Upon the commencement of employment of a new Chief Executive
Officer ('New CEO') or Chief Financial Officer ('New CFO'), Mr. Alvarez and Mr.
Fogarty are obligated to provide transitional assistance to the New CEO and New
CFO, respectively, as reasonably required by the Company. The A&M Agreement
provides that the Company will pay A&M on account of Mr. Alvarez's service as
follows: (i) $125 per month until commencement of employment of the New CEO;
(ii) $125 per month for 15 days after the commencement of employment of the New
CEO; and (iii) after the period described in
F-22
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(ii) above, $.750 per hour of transition services provided by Mr. Alvarez. The
A&M Agreement further provides that the Company will pay A&M on account of Mr.
Fogarty's service at a rate of $.475 per hour. Moreover, A&M is eligible to
receive the following incentive compensation under the terms of the agreement:
(i) additional payments upon the consummation of certain transactions and
(ii) participation in the Company's incentive compensation program for the
periods Mr. Alvarez and Mr. Fogarty serve as Chief Executive Officer and Chief
Financial Officer, respectively. Incentive compensation payable to A&M upon the
consummation of certain transactions is not currently determinable because it is
contingent upon future events which may or may not occur. Mr. Alvarez, Mr.
Fogarty and A&M are bound by certain confidentiality, indemnification and non-
solicitation obligations under the terms of the A&M Agreement.
The Company believes that the terms of the relationships and transactions
described above are at least as favorable to the Company as could have been
obtained from a third party.
NOTE 6 -- BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
BUSINESS SEGMENTS
During Fiscal 2001, the Company operated in three business segments or
groups: (i) Intimate Apparel Group; (ii) Sportswear and Swimwear Group; and
(iii) Retail Stores. During Fiscal 2002, the Company operated in four business
segments: (i) Intimate Apparel Group; (ii) Sportswear Group; (iii) Swimwear
Group; and (iv) Retail Stores Group. The Sportswear and Swimwear Groups
(previously combined as the Sportswear and Swimwear Group) were separated in
Fiscal 2002 to reflect the manner in which management currently evaluates the
Company's business. Accordingly, certain financial information contained in this
Annual Report on Form 10-K relating to fiscal periods prior to Fiscal 2002 has
been restated to correspond with the Company's four segment business operations.
The Groups currently operate as separate business segments. Moreover, the
Company expects that, because of the retail store closings during Fiscal 2001
and Fiscal 2002, the Retail Stores Group's net revenues will not represent a
material portion of the Company's net revenues in fiscal 2003. The Company does
not intend to operate any retail outlet stores in fiscal 2003. As a result,
beginning in fiscal 2003, the results of operations of the Retail Stores Group
will be included with the Company's three wholesale Groups according to the type
of product sold.
The Company designs, manufactures and markets apparel within the Sportswear,
Swimwear and Intimate Apparel markets and operates a Retail Stores Group, with
stores under the Speedo'r' Authentic Fitness'r' and Calvin Klein names.
The Intimate Apparel Group designs, manufactures, sources and markets
moderate to premium priced intimate apparel and other products for women and
better to premium priced men's underwear and sleepwear under the Warner's'r',
Olga'r', Body by Nancy Ganz'TM'/Bodyslimmers'r', Calvin Klein'r', Lejaby'r' and
Rasurel'r' names.
The Sportswear Group designs, sources, and markets moderate to premium
priced men's and women's sportswear under the Calvin Klein'r', Chaps Ralph
Lauren'r', A.B.S. by Allen Schwartz'r', Catalina'r' and White Stag'r' names.
The Swimwear Group designs, manufactures, sources and sells moderate to
premium priced swimwear, fitness apparel, swim accessories and related products
under the Speedo'r'/Speedo Authentic Fitness'r', Anne Cole'r', Cole of
California'r', Sunset Beach'r', SandCastle'r', Catalina'r', White Stag'r',
Lifeguard'r', Nautica'r' and Ralph Lauren'r' names.
The Retail Stores Group principally sells the Company's products to the
general public through stores under the Speedo'r' Authentic Fitness'r' and
Calvin Klein names. As of January 5,
F-23
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2002, the Company operated 95 Speedo Authentic Fitness retail stores, 16 Calvin
Klein full-price underwear stores, 86 domestic and international outlet retail
stores. During Fiscal 2002, the Company closed 47 Speedo Authentic Fitness full
price retail stores and all 64 of its domestic outlet retail stores leaving 48
Speedo Authentic Fitness, 15 international outlet retail stores and 16 full
price international Calvin Klein underwear stores operating as of January 4,
2003. The closing of the domestic outlet retail stores and the related sale of
inventory generated approximately $23,200 of net proceeds in Fiscal 2002. During
Fiscal 2002, the Company accrued approximately $22,889 related to rejected
leases and wrote-off approximately $13,250 of fixed assets related to the
above-mentioned store closures. The Company closed 3 additional Speedo Authentic
Fitness retail stores in the first quarter of fiscal 2003.
Net revenues for the closed domestic outlet retail stores for Fiscal 2000,
2001 and 2002 were $153,049, $107,775 and $40,505, respectively.
Net revenues for the 47 Speedo Authentic Fitness stores closed during Fiscal
2000, Fiscal 2001 and Fiscal 2002 were $18,563, $17,596 and $7,482,
respectively.
The accounting policies of the segments are the same as those described in
the 'Summary of Significant Accounting Policies' in Note 1. Transfers to the
Retail Stores Group are made at standard cost and are not reflected in net
revenues of the Intimate Apparel, Sportswear or Swimwear segments. Management
evaluates the performance of its segments based on operating income (loss)
before depreciation, interest, taxes, amortization of intangibles and deferred
financing costs, impairment charges, reorganization items and certain general
corporate expenses not allocated to segments, as well as the effect of the
adoption of new accounting pronouncements or other changes in accounting ('Group
EBITDA'). The table below also presents group operating income (loss) which
includes depreciation of property, plant and equipment. The Company believes
that an evaluation of the Company's operating results and the operating results
of its segments for the past three years based solely on operating income (loss)
is not complete without considering the effect of depreciation and amortization
on those results. Since the Petition Date, the Company has sold assets, written
down impaired assets, recorded a transitional impairment adjustment for the
adoption of SFAS 142 and stopped amortizing certain intangible assets that were
previously amortized. As a result, depreciation and amortization expense has
decreased by approximately $40.3 million in Fiscal 2002 compared to Fiscal 2001
and by approximately $44.7 million compared to Fiscal 2000. For informational
purposes, the Company has separately identified the depreciation and
amortization components of operating income (loss) in the following table. The
presentation of segment information in prior years has been restated to reflect
current year classification of the segments. Information by business segment is
set forth below:
<Table>
<Caption>
INTIMATE APPAREL SPORTSWEAR SWIMWEAR RETAIL TOTAL
---------------- ---------- -------- ------ -----
Fiscal 2002
Net revenues................... $ 570,694 $525,564 $304,994 $ 91,704 $1,492,956
Group EBITDA................... 64,126 33,592 34,124 126 131,968
Group operating income
(loss)....................... 48,386 24,212 28,561 (4,588) 96,571
Fiscal 2001
Net revenues................... $ 594,889 $573,697 $311,802 $190,868 $1,671,256
Group EBITDA................... (74,378) (5,772) (6,555) (13,019) (99,724)
Group operating loss........... (96,317) (15,868) (9,933) (20,270) (142,388)
Fiscal 2000
Net revenues................... $ 769,326 $882,917 $355,199 $242,494 $2,249,936
Group EBITDA................... (114,791) 39,638 81,323 (22,687) (16,517)
Group operating income
(loss)....................... (137,023) 29,269 71,868 (27,130) (63,016)
</Table>
F-24
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
A reconciliation of Group operating income (loss) to consolidated loss
before provision for income taxes and cumulative effect of a change in
accounting principle for fiscal years ended December 30, 2000, January 5, 2002
and January 4, 2003, is as follows:
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Group EBITDA.............................................. (16,517) (99,724) 131,968
Group depreciation........................................ 46,499 42,664 35,397
--------- --------- ---------
Group operating income (loss)............................. (63,016) (142,388) 96,571
General corporate expenses not allocated.................. 101,871 103,770 45,208
Depreciation of corporate assets and amortization of
intangibles (a)......................................... 55,580 55,154 22,022
Impairment charge......................................... -- 101,772 --
Reorganization items...................................... -- 177,791 116,682
--------- --------- ---------
Consolidated operating loss............................... (220,467) (580,875) (87,341)
Investment income (loss).................................. 36,882 (6,556) 62
Interest expense.......................................... 172,232 122,752 22,048
--------- --------- ---------
Loss before provision for income taxes and cumulative
effect of a change in accounting principle.............. $(355,817) $(710,183) $(109,327)
--------- --------- ---------
--------- --------- ---------
</Table>
- ---------
(a) Includes amortization of intangibles of $39,931, $36,928 and
$922 for the years ended December 30, 2000, January 5, 2002
and January 4, 2003, respectively, which is a corporate item
not allocated to business segments.
<Table>
<Caption>
INTIMATE RETAIL RECONCILING
APPAREL SPORTSWEAR SWIMWEAR STORES ITEMS(a) CONSOLIDATED
------- ---------- -------- ------ -------- ------------
Year Ended January 4, 2003
Total Assets................ $296,365 $147,815 $194,634 $ 18,186 $290,880 $ 947,880
Depreciation and
amortization.............. 15,740 9,380 5,563 4,714 22,022 57,419
Capital expenditures(b)..... 6,233 2,357 1,423 132 10,164 20,309
Year Ended January 5, 2002
Total Assets................ $415,965 $544,078 $605,238 $ 87,613 $332,561 $1,985,455
Depreciation and
amortization.............. 21,939 10,096 3,378 7,251 55,154 97,818
Capital expenditures........ 8,463 2,005 2,947 1,187 10,125 24,727
Year Ended December 30, 2000
Total Assets................ $616,228 $739,171 $637,484 $116,735 $232,531 $2,342,149
Depreciation and
amortization.............. 22,232 10,369 9,455 4,443 55,580 102,079
Capital expenditures........ 33,043 15,195 2,513 10,089 49,222 110,062
</Table>
- ---------
(a) Includes corporate items not allocated to business segments,
primarily fixed assets related to the Company's management
information systems and corporate facilities and goodwill,
intangible and other assets.
(b) Includes assets acquired pursuant to the GECC lease
settlement of $9,071.
F-25
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
GEOGRAPHIC INFORMATION
Included in the consolidated financial statements are the following amounts
relating to geographic locations:
<Table>
<Caption>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 % 2002 % 2003 %
---- - ---- - ---- -
Net revenues:
United States............. $1,892,219 84.1 $1,342,903 80.4 $1,167,706 78.2
Canada.................... 96,840 4.3 82,897 4.9 83,185 5.6
Europe.................... 199,736 8.9 185,570 11.1 195,529 13.1
Mexico.................... 45,112 2.0 41,896 2.5 25,971 1.7
Asia...................... 16,029 0.7 17,990 1.1 20,565 1.4
---------- ----- ---------- ----- ---------- -----
$2,249,936 100.0 $1,671,256 100.0 $1,492,956 100.0
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Property, plant and equipment,
net
United States............. $ 293,384 89.0 $ 173,569 81.8 $ 137,351 87.6
Canada.................... 6,888 2.1 4,638 2.2 3,452 2.2
All other................. 29,242 8.9 33,922 16.0 15,909 10.2
---------- ----- ---------- ----- ---------- -----
$ 329,514 100.0 $ 212,129 100.0 $ 156,712 100.0
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</Table>
INFORMATION ABOUT MAJOR CUSTOMERS
In Fiscal 2000 and 2001 no customer accounted for more than 10% of the
Company's net revenues. In Fiscal 2002, one customer, Federated Department
Stores, Inc., accounted for approximately 10.5% of the Company's net revenues.
NOTE 7 -- INCOME TAXES
The following presents the United States and foreign components of income
from continuing operations before income taxes and cumulative effect of change
in accounting principle and the total provision for United States federal and
other income taxes:
F-26
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Loss before provision for income taxes and cumulative
effect of change in accounting principle:
Domestic.............................................. $(337,394) $(659,321) $(101,925)
Foreign............................................... (18,423) (50,862) (7,402)
--------- --------- ---------
Total............................................. $(355,817) $(710,183) $(109,327)
--------- --------- ---------
--------- --------- ---------
Current tax provision:
Federal............................................... $ -- $ -- $ --
State and local....................................... 588 600 600
Foreign............................................... 410 17,946 9,506
--------- --------- ---------
Total current tax provision............................... 998 18,546 10,106
--------- --------- ---------
Deferred tax provision:
Federal............................................... (106,864) (202,150) 1,510
State and local....................................... (20,189) (44,543) 325
Foreign............................................... (4,901) (14,201) (8,097)
Valuation allowance increase.......................... 152,000 393,318 50,070
--------- --------- ---------
Total deferred tax provision.............................. 20,046 132,424 43,808
--------- --------- ---------
Provision for income taxes................................ $ 21,044 $ 150,970 $ 53,914
--------- --------- ---------
--------- --------- ---------
</Table>
The following presents the reconciliation of the provision for income taxes
to United States federal income taxes computed at the statutory rate:
<Table>
<Caption>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Loss before provision for income taxes and cumulative
effect of change in accounting principle................ $(355,817) $(710,183) $(109,327)
--------- --------- ---------
--------- --------- ---------
Benefit for income taxes at the statutory rate............ $(124,536) $(248,564) $ (38,265)
State income taxes benefit, net of federal tax benefit.... (18,947) (28,353) 835
Impact of foreign taxes accrued........................... 1,344 3,899 4,000
Net U.S. tax on distribution of foreign earnings.......... -- -- 32,846
Non-deductible intangible amortization and impairment
charges................................................. 6,504 16,297 --
Increase in valuation allowance........................... 152,000 393,318 50,070
Other, net................................................ 4,679 14,373 4,428
--------- --------- ---------
Provision for income taxes................................ $ 21,044 $ 150,970 $ 53,914
--------- --------- ---------
--------- --------- ---------
</Table>
F-27
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The components of deferred tax assets and liabilities as of January 5, 2002
and January 4, 2003 are as follows:
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Deferred Tax Assets:
Discounts and sales allowances.......................... $ 2,060 $ 1,857
Inventory............................................... 22,594 20,559
Postretirement benefits................................. 16,721 30,507
Alternative minimum tax credit carryovers............... 5,245 2,270
Advertising credits..................................... 13,219 13,219
Reserves and accruals................................... 88,666 94,606
Depreciation and amortization........................... -- 10,951
Net operating losses and tax credits.................... 501,432 502,197
--------- ---------
Gross deferred tax assets............................... 649,937 676,166
Valuation allowances.................................... (582,249) (670,772)
--------- ---------
Deferred tax assets -- net.......................... 67,688 5,394
--------- ---------
Deferred Tax Liabilities:
Prepaid and other assets................................ 3,280 3,057
Depreciation and amortization........................... 48,509 --
Bond discount........................................... 6,865 --
Other................................................... 14,164 4,329
--------- ---------
Deferred tax liabilities............................ 72,818 7,386
--------- ---------
Net deferred tax asset (liability).................. $ (5,130) $ (1,992)
--------- ---------
--------- ---------
</Table>
During Fiscal 2002, the Company repatriated approximately $98,000 of foreign
earnings. No U.S. income taxes were incurred in connection with the repatriation
since those earnings were completely offset by the Company's U.S. operating
losses. At January 4, 2003, unremitted earnings of foreign subsidiaries were
approximately $62,500. Since it is the Company's intention to permanently
reinvest these earnings, no U.S. income taxes have been provided. Management
believes that there would be no additional liability on the statutory earnings
of foreign subsidiaries, if remitted.
The Company and its subsidiaries' income tax returns are routinely examined
by various tax authorities. In connection with such examinations, tax
authorities have raised issues and proposed tax adjustments. The Company is
reviewing the issues raised and will contest any adjustments it deems
appropriate. In management's opinion, adequate provision for income taxes have
been made for all open years.
The Company has estimated United States net operating loss carryforwards of
approximately $1,166,500 and foreign net operating loss carryforwards of
approximately $85,400 at January 4, 2003. The United States net operating loss
carryforwards, if they remain unused, expire as follows:
<Table>
<Caption>
YEAR AMOUNT
- ---- ------
2003 - 2010........................................ $ 119,000
2011 - 2017........................................ 46,300
2018 - 2022........................................ 1,001,200
----------
$1,166,500
----------
----------
</Table>
F-28
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized. The valuation allowance
increased to $670,772 (of which $29,334 relates to foreign entities) in Fiscal
2002 from $582,249 (of which $28,041 relates to foreign entities) in Fiscal
2001. The increase in the valuation allowance results from the Fiscal 2002
operating loss and other deferred tax assets that may not be realized.
A portion of the valuation allowance in the amount of approximately $19,026
(of which $4,841 relates to foreign entities) and approximately $14,185 at
January 5, 2002 and January 4, 2003, respectively, relates to net deferred tax
assets which were recorded in purchase accounting. The realization of such
amount in future years will be allocated to reduce other non-current intangible
assets.
The consummation of the Plan resulted in the forgiveness of approximately
$2,486,000 of the Company's pre-petition debt and other liabilities subject to
compromise. The Company expects to utilize virtually all of its U.S. net
operating loss carryforwards to offset the tax impact resulting from such debt
forgiveness. As a result of the Chapter 11 Cases, the Company anticipates that
the 'change in ownership' rules as defined by the Internal Revenue Code of 1986
will limit the Company's ability to utilize any remaining net operating loss
carryforwards.
At January 5, 2002 and January 4, 2003, prepaid expenses and other current
assets includes current income taxes receivable of $19,500 (of which $3,200
relates to foreign entities) and $10,031 (of which $6,896 relates to foreign
entities), respectively, and current liabilities include income taxes payable of
$14,505 (of which $13,900 relates to foreign entities) and $28,420 (of which
$18,371 relates to foreign entities), respectively.
NOTE 8 -- EMPLOYEE RETIREMENT PLANS
The Company has a defined benefit pension plan, which covers substantially
all full time domestic employees (the 'Pension Plan'). The Pension Benefit Plan
is noncontributory and benefits are based upon years of service. The Company
also has defined benefit health care and life insurance plans that provide
postretirement benefits to retired employees and former directors ('Other
Benefit Plans'). The Other Benefit Plans are, in most cases, contributory with
retiree contributions adjusted annually.
The components of net periodic benefit cost is as follows:
<Table>
<Caption>
PENSION BENEFIT PLAN OTHER BENEFIT PLANS
FOR THE YEAR ENDED FOR THE YEAR ENDED
-------------------------------------- --------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4, DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003 2000 2002 2003
---- ---- ---- ---- ---- ----
Service Cost............... $ 2,640 $ 2,658 $ 2,845 $ 143 $ 163 $ 223
Interest Cost.............. 9,307 9,316 9,155 424 283 259
Expected return on plan
assets................... (11,252) (9,645) (8,797) -- -- --
Amortization of prior
service cost............. (74) (74) (49) (33) (33) (33)
Net actuarial gain
(loss)................... -- 684 2,245 (263) (133) (107)
-------- ------- ------- ----- ----- -----
Net benefit cost........... $ 621 $ 2,939 $ 5,399 $ 271 $ 280 $ 342
-------- ------- ------- ----- ----- -----
-------- ------- ------- ----- ----- -----
</Table>
F-29
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
A reconciliation of the balance of the benefit obligations is as follows:
<Table>
<Caption>
PENSION BENEFIT PLAN OTHER BENEFIT PLANS
----------------------- -----------------------
JANUARY 5, JANUARY 4, JANUARY 5, JANUARY 4,
2002 2003 2002 2003
---- ---- ---- ----
Change in benefit obligations
Benefit obligation at beginning of year......... $126,676 $134,073 $5,296 $ 5,204
Settlements..................................... -- -- -- (1,899)
Service cost.................................... 2,658 2,845 163 223
Interest cost................................... 9,316 9,155 283 259
Change in actuarial assumptions................. 5,015 31,142 (233) 1,093
Curtailment..................................... -- (8,897) -- --
Benefits paid................................... (9,592) (9,785) (305) (255)
-------- -------- ------ -------
Benefit obligation at end of year............... $134,073 $158,533 $5,204 $ 4,625
-------- -------- ------ -------
-------- -------- ------ -------
</Table>
A reconciliation of the change in the fair value of plan assets is as
follows:
<Table>
<Caption>
PENSION BENEFIT PLAN OTHER BENEFIT PLANS
----------------------- -----------------------
JANUARY 5, JANUARY 4, JANUARY 5, JANUARY 4,
2002 2003 2002 2003
---- ---- ---- ----
Fair value of plan assets at beginning of
year.......................................... $104,249 $ 95,858 $ -- $ --
Actual return on plan assets.................... (2,985) (5,314) -- --
Employer's contributions........................ 4,186 2,606 305 255
Benefits paid................................... (9,592) (9,785) (305) (255)
-------- -------- ------- -------
Fair value of plan assets at end of year........ $ 95,858 $ 83,365 $ -- $ --
-------- -------- ------- -------
-------- -------- ------- -------
Funded status................................... $(38,215) $(75,168) $(5,204) $(4,625)
Unrecognized prior service cost................. (48) -- (406) (373)
Unrecognized net actuarial (gain) loss.......... 38,547 72,659 (3,588) (991)
-------- -------- ------- -------
Net amount recognized........................... $ 284 $ (2,509) $(9,198) $(5,989)
-------- -------- ------- -------
-------- -------- ------- -------
</Table>
Effective January 1, 2003 the Pension Plan was amended such that
participants in the Pension Plan will not earn any additional pension benefits
after December 31, 2002. The amendment to the Pension Plan resulted in a
curtailment gain of $8,897 in the fourth quarter of Fiscal 2002. As a result of
the curtailment, the Company's pension liability was reduced by $8,897. The
curtailment gain reduced the unrecognized net actuarial (gain) loss component of
the Company's accrued pension liability which was recorded in other
comprehensive loss in the fourth quarter of Fiscal 2002. In addition, the
Pension Plan was underfunded at January 5, 2002 and January 4, 2003,
respectively. The Company will make cash contributions to the Pension Plan of
approximately $9,320 in fiscal 2003 and approximately $27,704 over the next five
years.
Pension Plan assets include fixed income securities and marketable equity
securities, including 673,100 shares of the Company's Old Common Stock, which
had a fair market value of $37 and $2 at January 5, 2002 and January 4, 2003,
respectively. The Company's Old Common Stock was cancelled on February 4, 2003
pursuant to the Plan. Holders of the Old Common Stock, including the Pension
Plan did not receive any distribution under the terms of the Plan and as a
result, the Pension Plan's investment in such Old Common Stock was written off
in February 2003. The Company contributes to multi-employer defined benefit
pension plans on behalf of union employees of two manufacturing facilities and a
warehouse and distribution facility, which amounts are not significant for the
periods presented. The Company closed the two manufacturing facilities in Fiscal
2002 and recorded a termination liability of $2,317 related to the
multi-employer plans
F-30
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
associated with the closed plants during Fiscal 2002. The accrued liability of
$2,317 is included in liabilities subject to compromise at January 4, 2003.
The weighted-average assumptions used in the actuarial calculations were as
follows:
<Table>
<Caption>
FISCAL FISCAL FISCAL FISCAL
2000 2001 2002 2003(a)
---- ---- ---- --------
Discount rate............................... 7.75% 7.25% 5.30% 5.30%
Expected return on plan assets.............. 9.50% 9.50% 9.50% 7.00%
Rate of compensation increase............... 5.00% 5.00% 5.00% N/A
</Table>
- ---------
(a) The Company evaluated its assumptions related to the
expected return on plan assets in the fourth quarter of
Fiscal 2002 and revised the expected return on plan assets
for future valuations to 7% effective with the Pension
Plan's fiscal 2003 year. The rate of compensation increase
is not applicable because no future benefits will be earned
by Pension Plan participants.
For measurement purposes, the weighted average annual assumed rate of
increase in the per capita cost of covered benefits (health care cost trend
rate) was 11.5% for 2002 and decreases by 0.5% each year from 2003 to 2014 to
5.5%. Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<Table>
<Caption>
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components..... $ 43 $ (37)
Effect on health care component of the accumulated
post-retirement benefit obligation........................ $307 $(256)
</Table>
The Company also sponsors a defined contribution plan for substantially all
of its domestic employees. Employees can contribute to the plan, on a pre-tax
and after-tax basis, a percentage of their qualifying compensation up to the
legal limits allowed. The Company contributes amounts equal to 15.0% of the
first 6.0% of employee contributions to the defined contribution plan. The
Company increased the Company's contribution to 35.0% of the first 6.0% of
employee contributions effective January 1, 2003. The maximum Company
contribution on behalf of any employee was $1.530, $1.530 and $1.800 for Fiscal
2000, Fiscal 2001 and Fiscal 2002, respectively. Employees vest in the Company
contribution over four years. Company contributions to the defined contribution
plan totaled $552, $483 and $377 for Fiscal 2000, 2001 and 2002, respectively.
NOTE 9 -- MARKETABLE SECURITIES
During 1998 and 1999, the Company made investments, aggregating $7,650, to
acquire an interest in InterWorld Corporation, a provider of E-Commerce software
systems and other applications for electronic commerce sites. These investments
were classified as available-for-sale securities and recorded at fair value
based on quoted market prices at January 1, 2000. In the first quarter of Fiscal
2000, the Company sold its investment in InterWorld resulting in a realized pre-
tax gain of $42,782 ($25,862 net of taxes), which is recorded as investment
income.
F-31
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 10 -- INVENTORIES
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Finished goods.......................................... $375,956 $281,610
Work in process......................................... 47,325 51,792
Raw materials........................................... 45,718 45,682
-------- --------
468,999 379,084
Less: reserves.......................................... 50,097 33,816
-------- --------
$418,902 $345,268
-------- --------
-------- --------
</Table>
NOTE 11 -- PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Land and land improvements............................ $ 573 $ 1,223
Building and building improvements.................... 70,428 51,513
Furniture and fixtures................................ 102,833 101,861
Machinery and equipment............................... 76,711 73,104
Computer hardware and software........................ 169,811 169,194
Construction in progress.............................. 1,101 435
--------- ---------
$ 421,457 $ 397,330
Less: Accumulated depreciation and amortization....... (209,328) (240,618)
--------- ---------
Property, plant and equipment, net.................... $ 212,129 $ 156,712
--------- ---------
--------- ---------
</Table>
NOTE 12 -- INTANGIBLE ASSETS AND GOODWILL
Prior to the adoption of SFAS 142, the Company reviewed any potential
impairment of long-lived assets when changes in circumstances, which include,
but are not limited to, the historical and projected operating performance of
business operations, specific industry trends and general economic conditions,
indicated that the carrying value of business specific intangibles or goodwill
may not be recoverable. Under these circumstances, the Company estimates future
undiscounted cash flows as a basis for determining any impairment loss. If
undiscounted cash flows are less than the carrying amount of the asset then
impairment charges are recorded to adjust the carrying value of long-lived
assets to the estimated fair value. The Company recorded an impairment charge of
$101,772 for the write-off of goodwill related to Bodyslimmers, CK Kids and ABS
of $96,171 and the write-off of certain other intangible assets of $5,601 in the
fourth quarter of Fiscal 2001.
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets. SFAS 142 eliminates the amortization of goodwill and certain other
intangible assets with indefinite lives and was effective for the Company's 2002
fiscal year. SFAS 142 requires that indefinite lived intangible assets be tested
for impairment at least annually. Intangible assets with finite useful lives are
to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS 144, Accounting for Impairment or Disposal of Long-Lived
Assets.
As of January 5, 2002, the Company had intangible assets with indefinite
useful lives and goodwill net of accumulated amortization of approximately
$940,065. The Intimate Apparel Group's intangible assets consisted of goodwill
of $136,960 and indefinite lived intangible assets (primarily owned trademarks)
of $64,992. The Sportswear Group's and Swimwear Group's intangible assets
F-32
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
consisted of goodwill of $551,864 and indefinite lived intangible assets
(primarily owned trademarks and license rights for periods exceeding forty
years) of $172,683. The Retail Stores Group had intangible assets consisting of
goodwill of $3,616 (subsequently written-off in connection with the sale of
Penhaligon's). The Company also had other indefinite lived intangible assets
consisting of owned trademarks of $9,950. In addition, the Sportswear Group had
finite lived intangible assets consisting of certain license rights of $6,316
net of accumulated amortization.
Under the provisions of SFAS 142, goodwill is deemed potentially impaired if
the net book value of a business reporting unit exceeds the fair value of that
business reporting unit. As of January 5, 2002, the Company had incurred losses
in each of its previous two fiscal years and had filed bankruptcy on June 11,
2001. As a result the Company's 'Business Enterprise Value' ('BEV') decreased.
Intangible assets are deemed impaired if the carrying amount exceeds the fair
value of the assets. The Company utilized the work of an independent third party
appraiser to determine its BEV in connection with the preparation of the Plan.
The appraiser determined the Company's business enterprise value using a
combination of the market approach and income approaches. The BEV appraiser made
certain assumptions in its work. The weighted average long-term debt interest
rate was assumed to be 7.81% and the weighted average cost of capital was
assumed to be 13.80%. The appraiser used three years of financial projections in
its evaluation and determined the terminal value based upon the Company's
weighted average cost of capital and expected free cash flow using a 5.00%
growth rate per annum. The determination of the Company's projected income and
free cash flow required the use of significant judgments and estimates by the
Company. Changes in economic conditions, the cost of equity or debt financing
and many other factors will have a significant effect on the Company's ability
to earn the income or generate the free cash flow assumed in its projections. As
a result, variations in the amounts of income and cash flow actually earned by
the Company will have a significant effect on its business enterprise value. The
Company allocated the BEV to its various reporting units and determined that the
value of certain of the Company's intangible assets and goodwill were impaired.
As a result, the Company recorded a charge of $801,622 net of income tax benefit
of $53,513 as a cumulative effect of a change in accounting from the adoption of
SFAS 142 on January 6, 2002. The income tax benefit of $53,513 includes a tax
benefit of $81,657 relating to tax deductible goodwill of $206,811 offset by an
increase in valuation allowance of $28,144 on the Company's deferred tax asset
resulting from the adoption of SFAS 142. The remaining value of intangible
assets with indefinite useful lives after the adoption of SFAS 142 is $81,305.
The Intimate Apparel Group has indefinite lived intangible assets of $52,037
related to certain owned trademarks. The Sportswear Group has indefinite lived
intangible assets of $19,327 related to certain licensed trademarks. The Company
also has other indefinite lived intangible assets of $9,941 related to certain
owned trademarks. The Retail Stores Group had goodwill of $3,616 (subsequently
written-off in connection with the sale of Penhaligon's). In addition, the
Sportswear Group, as of January 5, 2002 and January 4, 2003 had finite lived
intangible assets of $6,316 and $5,522, net of accumulated amortization of
$2,712 and $2,494, respectively, with a remaining useful life of six years as of
January 4, 2003 related to certain licensed trademarks. Future amortization
expense of finite lived intangible assets will be approximately $925 per year
through 2008.
Amortization expense related to goodwill and intangible assets, included in
selling, general and administrative expenses was, $39,931, $36,928 and $922 for
Fiscal 2000, Fiscal 2001 and Fiscal 2002, respectively. Net loss for Fiscal 2000
and Fiscal 2001, assuming SFAS No. 142 had been adopted effective January 1,
2000 is as follows:
F-33
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FISCAL YEAR ENDED
-------------------------
DECEMBER 30, JANUARY 5,
2000 2002
---- ----
Net loss -- as reported.......................... $(389,971) $(861,153)
Decrease in amortization expense................. 39,009 36,006
--------- ---------
Net loss -- as adjusted.......................... $(350,962) $(825,147)
--------- ---------
--------- ---------
Basic and diluted loss per weighted average share
outstanding:
As reported.................................. $ (7.39) $ (16.28)
--------- ---------
--------- ---------
As adjusted.................................. $ (6.65) $ (15.59)
--------- ---------
--------- ---------
</Table>
Deferred financing costs, net of accumulated amortization, were $8,971 and
$463 as of January 5, 2002 and January 4, 2003, respectively. Deferred financing
costs relating to pre-petition debt of the Company were written-off as of the
Petition Date resulting in a charge to reorganization items of $34,599 in the
second quarter of Fiscal 2001. Other assets of $11,612 at January 5, 2002 and
$2,800 at January 4, 2003 include long-term investments, other non-current
assets and deposits. The Company reviews other long-term assets for potential
impairment, annually or when circumstances indicate that a long-term asset may
be impaired. As a result of this review, in the fourth quarter of Fiscal 2001,
the Company wrote down the carrying amount of certain barter credits by $30,734
to $2,006 based upon the Company's plans to utilize such credits in the future.
Barter credits included in other assets amounted to $2,006 and $683 as of
January 5, 2002 and January 4, 2003, respectively.
NOTE 13 -- ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as of December 30,
2000, January 5, 2002 and January 4, 2003 are summarized below:
<Table>
<Caption>
FOR THE YEAR ENDED
-----------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Foreign currency translation adjustments.......... $(18,707) $(20,561) $(20,408)
Unfunded minimum pension liability................ (14,648) (32,494) (72,659)
Unrealized holding (loss) gain -- net............. (395) 39 (156)
-------- -------- --------
Total accumulated other comprehensive loss........ $(33,750) $(53,016) $(93,223)
-------- -------- --------
-------- -------- --------
</Table>
F-34
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 14 -- DEBT
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003(a)
---- -------
Amended DIP..................................... $ 155,915 $ --
GECC lease settlement (b)....................... -- 5,603
$600 million term loan.......................... 587,548 584,824
Revolving credit facilities..................... 1,018,719 1,013,995
Term loan agreements............................ 27,161 27,034
Capital lease obligations....................... 5,582 2,679
Foreign credit facilities (c)................... 143,439 146,958
Equity Agreement Notes (d)...................... 56,677 56,506
----------- -----------
1,995,041 1,837,599
Current portion................................. (158,026) (5,765)
Reclassified to liabilities subject to
compromise.................................... (1,834,808) (1,830,582)
----------- -----------
Total long-term debt........................ $ 2,207 $ 1,252
----------- -----------
----------- -----------
</Table>
- ---------
(a) The reduction in pre-petition credit facilities primarily
reflects the pro-rata repayment of certain amounts from the
proceeds generated from the sale of GJM and Penhaligon's and
certain other assets.
(b) Represents amounts due pursuant to the GECC lease
settlement, net of payments made through January 4, 2003.
(c) Includes the impact of fluctuations in foreign currency
exchange rates.
(d) Interest bearing notes payable to certain banks related to
the settlement of equity forward purchase agreements
('Equity Agreements') entered into in connection with the
Company's stock repurchase program.
Total debt does not include pre-petition trade drafts outstanding as of
January 5, 2002 and January 4, 2003 of $351,367 and $349,737, respectively, that
are included in liabilities subject to compromise.
DEBTOR-IN-POSSESSION FINANCING
On June 11, 2001, the Company entered into a Debtor-In-Possession Financing
Agreement ('DIP') with a group of banks, which was approved by the Bankruptcy
Court in an interim amount of $375,000. On July 9, 2001, the Bankruptcy Court
approved an increase in the amount of borrowing available to the Company to
$600,000. The DIP was subsequently amended on August 27, 2001, December 27,
2001, February 5, 2002 and May 15, 2002. In addition, certain extensions were
granted under the DIP on April 12, 2002, June 19, 2002, July 18, 2002,
August 22, 2002 and September 30, 2002 (the DIP, subsequent to such extensions
and amendments, is referred to as the 'Amended DIP'). The amendments and
extensions, among other things, amended certain definitions and covenants,
permitted the sale of certain of the Company's assets and businesses, extended
deadlines with respect to certain asset sales and filing requirements with
respect to a plan of reorganization and reduced the size of the facility to
reflect the Debtor's revised business plan. The Amended DIP (when originally
executed) provided for a $375,000 non-amortizing revolving credit facility
(which includes a letter of credit facility of up to $200,000) ('Tranche A') and
a $225,000 revolving credit facility ('Tranche B'). On December 27, 2001 the
Tranche B commitment was reduced to $100,000. On April 19, 2002, the Company
voluntarily elected to eliminate Tranche B based upon its determination that the
Company's liquidity position had
F-35
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
improved significantly since the Petition Date and Tranche B would not be needed
to fund the Company's on-going operations. On May 28, 2002, the Company
voluntarily reduced the amount of borrowing available to the Company under the
Amended DIP to $325,000. On October 8, 2002, the Company voluntarily reduced the
amount of borrowing available to the Company under the Amended DIP to $275,000.
Borrowing under the Amended DIP bore interest at either the London Inter Bank
Offering Rate (LIBOR) plus 2.75% (approximately 4.25% at January 4, 2003) or at
the Citibank N.A. Base Rate plus 1.75% (6.5% at January 4, 2003). The Amended
DIP contained restrictive covenants which required the Company to achieve
$70,800 of earnings before interest, income taxes, depreciation, amortization
and restructuring charges, as defined ('EBITDAR') and limited capital
expenditures. As of January 4, 2003, the Company was in compliance with all of
the covenants under the Amended DIP.
All outstanding borrowings under the Amended DIP had been repaid as of
January 4, 2003. Loans outstanding under the Amended DIP at January 5, 2002 and
January 4, 2003 were $155,915 and $0, respectively with a weighted average
interest rate of 4.8% for Fiscal 2001. In addition, the Company had stand-by and
documentary letters of credit outstanding under the Amended DIP at January 5,
2002 and January 4, 2003 of approximately $60,031 and $60,672, respectively. The
total amount of additional credit available to the Company at January 5, 2002
and January 4, 2003 was $159,054 and $160,906, respectively. In addition, at
January 4, 2003, the Company had approximately $94,059 of excess cash available
as collateral against outstanding stand-by and trade letters of credit.
The Amended DIP was secured by substantially all of the domestic assets of
the Company. The Amended DIP terminated on the Effective Date and was replaced
by the Exit Financing Facility.
GECC SETTLEMENT
On June 12, 2002, the Bankruptcy Court approved the Company's settlement of
certain operating lease agreements with General Electric Capital Corporation
('GECC'). The leases had original terms from three to seven years and were
secured by certain equipment, machinery, furniture, fixtures and other assets.
GECC's claims under the leases totaled approximately $51,152. Under the terms of
the settlement agreement GECC will receive $15,200 payable as follows:
(i) prior to the Effective Date of the Plan, the Company paid GECC monthly
installments of $550; and (ii) after the Effective Date, the Company is
obligated to pay GECC monthly installments of $750 until the balance is paid in
full. Through June 12, 2002, the Company had paid GECC $5,500 of the $15,200.
The present value of the remaining cash payments to GECC under the settlement
agreement of $5,603 as of January 4, 2003 are included in the current portion of
long-term debt not subject to compromise. The remaining amount of the GECC claim
of approximately $35,952 is included in liabilities subject to compromise as of
January 4, 2003. The Company had recorded accrued liabilities related to the
GECC leases of approximately $13,045 prior to the settlement and recorded
approximately $22,907 as reorganization items in Fiscal 2002. GECC retains a
perfected security interest in the leased assets equal to the outstanding cash
settlement payments due under the settlement agreement until all such amounts
are paid. Lease expenses related to the GECC leases was $18,011, $16,504 and
$8,228 for Fiscal 2000, 2001 and 2002, respectively.
The assets acquired pursuant to the terms of the settlement agreement were
recorded at their estimated fair value, which was estimated to be equal to the
present value of payments due to GECC under the terms of the settlement
agreement. Such assets are being depreciated using the straight-line method over
their estimated remaining useful lives of two to four years.
F-36
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRE-PETITION DEBT
The Company was in default of substantially all of its U.S. pre-petition
credit agreements as of January 4, 2003. All pre-petition debt of the Debtors
has been classified as liabilities subject to compromise in the consolidated
balance sheet at January 4, 2003 and January 5, 2002. In addition, the Company
stopped accruing interest on all domestic pre-petition credit facilities and
outstanding balances on June 11, 2001. The Company continued to accrue interest
on certain foreign credit agreements that are subject to standstill and
inter-creditor agreements. Such interest of approximately $14,844 was paid
pursuant to the Plan on February 4, 2003. Such interest is included in
liabilities subject to compromise at January 4, 2003. A brief description of
each pre-petition credit facility and the terms thereof is included below.
A brief description of each pre-petition credit facility and its terms is
included below.
AMENDMENT AGREEMENT
On October 6, 2000, the Company and the lenders under its credit facilities
entered into an Amendment, Modification, Restatement and General Provisions
Agreement (the 'Amendment Agreement') and an Inter-creditor Agreement. Pursuant
to the Amendment Agreement, the Company's credit facilities were modified so
that each contained identical representations and warranties, covenants,
mandatory prepayment obligations and events of default. The Amendment Agreement
also amended uncommitted credit facilities and those which matured prior to
August 12, 2002 so that they would mature on August 12, 2002 (maturity dates of
the credit facilities due after August 12, 2002 were unaffected).
The Amendment Agreement made the margins added to a base rate or Eurodollar
rate loan uniform under the credit facilities with such rate determined
according to the debt rating of the Company. As of December 30, 2000, the
applicable margin for base rate advances under the credit facilities was 2.5%
and the applicable margin for Eurodollar rate advances under the credit
facilities was 3.5%. The Amendment Agreement also made the fee charged based on
the letters of credit outstanding and a commitment fee charged based on the
undrawn amount of the credit facilities consistent across the credit facilities.
Both of these fees also varied according to the Company's debt rating.
As part of the signing of the Amendment Agreement, obligations under each of
the credit facilities were guaranteed by the Company and by all of its domestic
subsidiaries. Additionally, on a limited basis, several foreign subsidiaries
cross guaranteed the foreign obligations. The Company and each of such entities
have granted liens on substantially all of their assets to secure these
obligations. As a result of the Amendment Agreement, as of December 30, 2000,
the Company had committed to credit facilities in an aggregate amount of
$2,609,000, all of which were to mature on or after August 12, 2002 with
substantially no debt amortization until then. All obligations under the
Amendment Agreement were in default under the Chapter 11 Cases. The Company did
not accrue interest on these obligations since the Petition Date, except for
interest on certain foreign credit agreements, as previously noted. Creditors
under the Amendment Agreement were considered secured creditors in the
Chapter 11 Cases, and as such, in accordance with applicable bankruptcy law,
received a higher priority than other classes of creditors. Amounts outstanding
under the Amendment Agreement, not including accrued interest, at January 5,
2002 and January 4, 2003 were approximately $2,184,911, including trade drafts
of $351,367, and $2,179,054, including trade drafts of $349,737 respectively.
The Company has classified these obligations as liabilities subject to
compromise. The Amendment Agreement and Amended DIP required that the proceeds
from certain asset sales be used to repay amounts outstanding under
F-37
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
the Company's pre-petition debt agreements. Such repayments were approximately
$14,500 in Fiscal 2002.
$600,000 REVOLVING CREDIT FACILITY
The Company was the borrower under a $600,000 Revolving Credit Facility,
which included a $100,000 sub-facility available for letters of credit. This
facility was scheduled to expire on August 12, 2002 in accordance with the terms
of the Amended and Restated Credit Agreement, dated November 17, 1999, which
governed the facility. Amounts borrowed under this facility were borrowed at
either base rate or at an interest rate based on the Eurodollar rate plus a
margin determined under the Amendment Agreement. As of January 5, 2002 and
January 4, 2003, $595,119 and $592,359, respectively, was outstanding under this
facility, all of which is included in liabilities subject to compromise.
$450,000 REVOLVING CREDIT FACILITY
The Company was also a borrower under a $450,000 Revolving Credit Facility,
which was reduced to $423,600 under the Amendment Agreement. The credit
agreement governing this facility, dated November 17, 1999, provided that the
term of the facility will expire on November 17, 2004. Amounts borrowed under
this facility were subject to interest at a base rate or at an interest rate
based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. As of January 5, 2002, and January 4, 2003, $423,600 and $421,636,
respectively, was outstanding under this facility, all of which is included in
liabilities subject to compromise.
$587,548 TERM LOAN
The Company was a borrower under a $600,000 Term Loan, dated November 17,
1999, which was reduced to approximately $587,548 under the Amendment Agreement.
The maturity of this loan was also extended until August 12, 2002 in connection
with the Amendment Agreement. Amounts borrowed under this facility were subject
to interest at a base rate or an interest rate based on the Eurodollar rate plus
a margin determined under the Amendment Agreement. As of January 5, 2002 and
January 4, 2003, $587,548 and $584,824, respectively, was outstanding under this
facility all of which is included in liabilities subject to compromise.
FRENCH FRANC FACILITIES
The Company and its subsidiaries entered into French Franc facilities in
July and August 1996 relating to its acquisition of Lejaby. These facilities,
which were amended in April 1998 and in August and November 1999, included a
term loan facility in an original amount of 370 million French Francs and a
revolving credit facility of 480 million French Francs, which was reduced to
441.6 million French Francs pursuant to the Amendment Agreement. Amounts
borrowed under these facilities were subject to interest at an interest rate
based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. Beginning in July 1997, the Company began repaying the term loan in
annual installments, with a final installment due on December 31, 2001. In
conjunction with the Amendment Agreement the annual installments were eliminated
and the maturity of the loan was extended to August 12, 2002. The revolving
portion of this facility provided for multi-currency revolving loans to be made
to the Company and a number of its European subsidiaries. As of January 5, 2002
and January 4, 2003, the total amount outstanding
F-38
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
under these facilities was $59,545 and $55,424 equivalent, respectively, all of
which is included in liabilities subject to compromise.
$400,000 TRADE CREDIT FACILITY
On October 6, 2000, in conjunction with signing the Amendment Agreement, the
Company entered into a new $400,000 Trade Credit Facility which provided
commercial letters of credit for the purchase of inventory from suppliers and
offered the Company extended terms for periods of up to 180 days ('Trade
Drafts'). Amounts drawn under this facility were subject to interest at an
interest rate based on the Eurodollar rate plus a margin determined under the
Amendment Agreement. The Company classified the 180-day Trade Drafts in trade
accounts payable. At January 5, 2002 and January 4, 2003, the Company had
approximately $351,367 and $349,737, respectively of Trade Drafts outstanding
under this facility, all of which is included in liabilities subject to
compromise.
OTHER FACILITIES
In July 1998, the Company entered into a term loan agreement with a member
of its existing bank group. This loan was due to be repaid in equal installments
with a final maturity date of July 4, 2002. Amounts outstanding under this
agreement as of January 5, 2002 and January 4, 2003 were $27,161 and $27,034,
respectively, and are included in liabilities subject to compromise.
The Company issued $40,372 of notes in conjunction with the amendment of its
Equity Agreements with two of its banks. Amounts borrowed under these notes were
subject to interest at a rate based on the Eurodollar rate plus a margin
determined under the Amendment Agreement. These notes were to mature on
August 12, 2002. As of January 5, 2002 and January 4, 2003, the total amount
outstanding under the Equity Agreements, including Equity Adjustments was
$56,677 and $56,506, respectively. Loans related to the Equity Agreements
outstanding are included in liabilities subject to compromise.
FOREIGN CREDIT FACILITIES
The Company and certain of its foreign subsidiaries entered into credit
agreements that provided for revolving lines of credit and issuance of letters
of credit ('Foreign Credit Facilities'). At January 5, 2002 and January 4, 2003,
the total outstanding amounts of the Foreign Credit Facilities were
approximately $83,894 equivalent and $91,534 equivalent, respectively. The
increase in the Foreign Credit Facilities outstanding balance from the end of
Fiscal 2001 to the end of Fiscal 2002 reflects unfavorable exchange rate
movement in the Euro, Pound Sterling and Canadian dollar compared to the United
States dollar. The foreign subsidiaries were not parties to the Chapter 11
Cases. The Foreign Credit Facilities are subject to standstill and
inter-creditor agreements. The Company recorded interest expense of $4,110 and
$9,833 in Fiscal 2001 and Fiscal 2002, respectively, on certain of these foreign
credit facilities. The Plan required the payment of such interest and, as a
result, the Company repaid the outstanding principal amount and accrued interest
totaling $106,112 pursuant to the terms of the Plan on February 4, 2003.
RESTRICTIVE COVENANTS -- AMENDMENT AGREEMENT
Pursuant to the terms of the Amendment Agreement, the Company was required
to maintain certain financial ratios and was prohibited from paying dividends.
On March 29, 2001, lenders under the Amendment Agreement waived compliance with
the financial ratios until April 16, 2001. On April 13, 2001, the lenders
extended this waiver until May 16, 2001 and on May 16, 2001, the
F-39
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
lenders extended the waiver to June 15, 2001. The Company filed for protection
under Chapter 11 of the Bankruptcy Code on June 11, 2001.
RESTRICTIVE COVENANTS -- AMENDED DIP
The Amended DIP contained financial and restrictive covenants that, among
other things, required the Company to achieve a minimum level of EBITDAR, as
defined, restricted the amount of capital expenditures the Company could incur
and prohibited the Company from incurring additional indebtedness and paying
dividends. As of January 5, 2002 and January 4, 2003, the Company was in
compliance with all covenants of the Amended DIP.
LEASE REJECTIONS
The Company has entered into operating lease agreements for manufacturing,
distribution and administrative facilities and retail stores. The Company has
provided approximately $20,600 and $32,389 for the estimated total amount of
claims the Company expected to receive related to rejected leases as of
January 5, 2002 and January 4, 2003, respectively. In addition, the Company has
entered into operating leases for equipment and other assets and has accepted
certain lease agreements pursuant to the Plan.
INTEREST RATE SWAPS
As of December 30, 2000, the Company had four interest rate swap agreements
in place which were used to convert variable interest rate borrowings of
$329,500 to fixed interest rates. The counter-parties to all of the Company's
interest rate swap agreements were banks who were lenders in the Company's bank
credit agreements. The fair value of these swaps based on quoted market prices
at December 30, 2000 was $512 less than the carrying amount. Due to the
Chapter 11 Cases, the Company's outstanding swap agreement maturing in June 2006
were cancelled as of the Petition Date resulting in a loss $420 in Fiscal 2001.
The Company's agreements in place as of January 1, 2000 in the amounts of
$75,000, $210,000, $150,000 and $250,000 were terminated in March 2000 for a
cash gain of $26,076, which was being amortized over the life of the agreements.
Unamortized deferred swap income of $21,744 was reclassified to other
comprehensive income as a transition adjustment upon the adoption of SFAS 133 in
the first quarter of Fiscal 2001. In conjunction with the Chapter 11 Cases, the
Company suspended interest payments on the outstanding debt obligations of the
Debtors, and as a result, realized the deferred income as of the Petition Date.
The unamortized amount of $18,887 was included in reorganization items for the
year ended January 5, 2002.
Differences between the fixed interest rate on each swap and the one-month
or three-month LIBOR rate were settled at least quarterly between the Company
and each counter-party. Pursuant to its interest rate swap agreements, the
Company made payments totaling $372 in the year ended December 30, 2000 (none in
Fiscal 2001 and Fiscal 2002).
NOTE 15 -- LIABILITIES SUBJECT TO COMPROMISE
The principal categories of obligations classified as liabilities subject to
compromise are identified below. The amounts set forth below may vary
significantly from the stated amounts of proofs of claim as filed with the
Bankruptcy Court and may be subject to future adjustments depending on the final
settlement of certain unsecured pre-petition obligations prior to the final
distributions of shares of New Common Stock to unsecured creditors. The Company
expects to
F-40
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
make such final distributions in April 2003. The following summarizes the amount
of liabilities subject to compromise:
<Table>
<Caption>
FISCAL YEARS ENDED
-----------------------
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Current liabilities:
Accounts payable(a)..................................... $ 386,711 $ 385,931
Accrued liabilities, including unsecured GECC claim..... 66,070 128,567
Debt:
$600 million term loan(b)............................... 587,548 584,824
Revolving credit facilities(b).......................... 1,018,719 1,013,995
Term loan agreements(b)................................. 27,161 27,034
Capital lease obligations............................... 1,265 1,265
Foreign credit facilities(b)............................ 143,439 146,958
Equity Agreement Notes(b)............................... 56,677 56,506
Company-obligated mandatorily redeemable convertible
preferred securities.................................. 120,000 120,000
Other liabilities....................................... 27,485 21,002
---------- ----------
$2,435,075 $2,486,082
---------- ----------
---------- ----------
</Table>
- ---------
(a) Accounts payable includes $351,367 and $349,737 of trade drafts payable at
January 5, 2002 and January 4, 2003, respectively. As a result of the
Chapter 11 Cases, no principal or interest payments were made on unsecured
pre-petition debt.
(b) Changes due to pro-rata repayments and fluctuations in foreign currency
exchange rates.
NOTE 16 -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES
In 1996, Designer Holdings, Ltd. ('Designer Holdings') issued 2.4 million
Company-obligated mandatorily redeemable convertible preferred securities of a
wholly owned subsidiary (the 'Preferred Securities') for aggregate gross
proceeds of $120,000. The Preferred Securities represented preferred undivided
beneficial interests in the assets of Designer Finance Trust ('Trust'), a
statutory business trust formed under the laws of the State of Delaware in 1996.
Designer Holdings owned all of the common securities representing undivided
beneficial interests of the assets of the Trust. Accordingly, the Trust is
included in the consolidated financial statements of the Company. The Trust
exists for the sole purpose of (i) issuing the Preferred Securities and common
securities (together with the Preferred Securities, the 'Trust Securities'),
(ii) investing the gross proceeds of the Trust Securities in 6% Convertible
Subordinated Debentures of Designer Holdings due 2016 ('Convertible Debentures')
and (iii) engaging in only those other activities necessary or incidental
thereto. The Company indirectly owns 100% of the voting common securities of the
Trust, which is equal to 3% of the Trust's total capital.
Each Preferred Security was convertible at the option of the holder thereof
into 0.6888 of a share of Old Common Stock of the Company, or 1,653,177 shares
of the Company's Old Common Stock in the aggregate, at an effective conversion
price of $72.59 per share of Old Common Stock, subject to adjustments in certain
circumstances.
The holders of the Preferred Securities were entitled to receive cumulative
cash distributions at an annual rate of 6% of the liquidation amount of $50.00
per Preferred Security, payable quarterly in arrears. The distribution rate and
payment dates correspond to the interest rate and interest payment dates on the
Convertible Debentures, which were the sole assets of the Trust. As a result of
the acquisition of Designer Holdings by the Company, the Preferred Securities
were
F-41
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
adjusted to their estimated fair value at the date of acquisition of $100,500,
resulting in a decrease in their recorded value of approximately $19,500. This
decrease was being amortized, using the effective interest rate method to
maturity of the Preferred Securities. Such distributions and accretion to
redeemable value were included in interest expense. As of the Petition Date the
Company suspended payments due under the Convertible Debentures and wrote off
the original issue discount related to the Convertible Debentures and the
related bond issue costs, net of accumulated amortization, as of the Petition
Date totaling $21,411. This amount is included in reorganization items and the
nominal value of the Convertible Debentures of $120,000 is included in
liabilities subject to compromise as of January 5, 2002 and January 4, 2003.
The Company had the right to defer payments of interest on the Convertible
Debentures and distributions on the Preferred Securities for up to twenty
consecutive quarters (five years), provided such deferral did not extend past
the maturity date of the Convertible Debentures. Upon the payment, in full, of
such deferred interest and distributions, the Company may defer such payments
for additional five-year periods. The Company deferred the interest payments
under these instruments that were due on December 31, 2000 and March 31, 2001.
The deferred interest and distributions through the Petition Date amounting to
$4,975 are included in liabilities subject to compromise at January 5, 2002 and
January 4, 2003.
The Preferred Securities were mandatorily redeemable upon the maturity of
the Convertible Debentures on December 31, 2016, or earlier to the extent of any
redemption by the Company of any Convertible Debenture, at a redemption price of
$50.00 per share plus accrued and unpaid distributions to the date fixed for
redemption. In addition, there are certain circumstances wherein the Trust will
be dissolved, with the result that the Convertible Debentures will be
distributed pro-rata to the holders of the Trust Securities.
The Company guaranteed, on a subordinated basis, distributions and other
payments due on the Preferred Securities ('Guarantee'). In addition, the Company
entered into a supplemental indenture pursuant to which it has assumed, as a
joint and several obligor with Designer Holdings, liability for the payment of
principal, premium, if any, and interest on the Convertible Debentures, as well
as the obligation to deliver shares of Old Common Stock, par value $.01 per
share, of the Company upon conversion of the Preferred Securities as described
above. The claims of the holders of the Convertible Debentures are subordinate
to the secured creditors and other preferred creditors under the Chapter 11
Cases and are structurally subordinated to general unsecured claims. Holders of
the Convertible Debentures received 268,200 shares of New Common Stock on
February 4, 2003, pursuant to the terms of the Plan.
The following is summarized financial information of Designer Holdings and
its subsidiaries as of January 5, 2002 and January 4, 2003 and for each of the
three fiscal years in the period ended January 4, 2003.
<Table>
<Caption>
JANUARY 5, JANUARY 4,
2002 2003
---- ----
Current assets.............................................. $ 96,536 $ 70,605
Non-current assets.......................................... 421,955 111,117
Current liabilities......................................... 24,684 25,335
Non-current liabilities..................................... 39,562 --
Liabilities subject to compromise:
Current liabilities..................................... 8,564 8,595
Redeemable preferred securities......................... 120,000 120,000
Stockholder's equity........................................ 325,681 27,792
</Table>
F-42
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 30, JANUARY 5, JANUARY 4,
2000(a) 2002(a) 2003(a)
------- ------- -------
Net revenues................................ $481,835 $287,655 $ 282,861
Cost of goods sold.......................... 374,221 236,675 214,757
Net loss.................................... (43,171)(b) (97,129)(b) (297,889)(b),(c)
</Table>
- ---------
(a) Excludes Retail Store Group net revenues of $72,456, $53,146 and $31,063
for Fiscal 2000, 2001 and Fiscal 2002, respectively, and cost of goods sold
of $49,025, $38,643 and $17,238 for Fiscal 2000, Fiscal 2001 and Fiscal
2002, respectively. As a result of the integration of Designer Holdings
into the operations of the Company, net income associated with these
revenues cannot be separately identified. Excludes special charges of
$18,074 in Fiscal 2000 as described in Note 5.
(b) Net loss includes a charge of $54,752, $38,842 and $16,702 of general
corporate expenses for Fiscal 2000, Fiscal 2001 and Fiscal 2002,
respectively.
(c) Includes the cumulative effect of a change in accounting policy of $294,497
in Fiscal 2002 related to the adoption of SFAS No. 142.
NOTE 17 -- STOCKHOLDERS' DEFICIENCY
Total dividends declared during Fiscal 2000 was $12,958 ($0.27 per share).
In December 2000, the Company suspended payment of its quarterly cash dividend.
The Amended DIP and the Exit Financing Facility prohibits the Company from the
paying dividends or making distributions to the holders of common stock.
The Company has 10,000,000 shares of authorized and unissued preferred stock
with a par value of $0.01 per share.
In August 1999, the Board of Directors of the Company adopted a rights
agreement (the 'Old Rights Agreement'). Under the terms of the Old Rights
Agreement, the Company declared a dividend distribution of one right for each
outstanding share of Old Common Stock to stockholders of record on August 31,
1999. Each right entitled the holder to purchase from the Company a unit
consisting of one one-thousandth of a Series A Junior Participating Preferred
Stock, par value $.01 per share, at a purchase price of $100 per unit. The
rights only became exercisable, if not redeemed, ten days after a person or
group has acquired 15% or more of the Company's Old Common Stock or the
announcement of a tender offer that would result in a person or group acquiring
15% or more of the Old Common Stock. The Old Rights Agreement expired on
February 4, 2003 in conjunction with the consummation of the Plan.
On the Effective Date, pursuant to the Plan and a rights agreement (the 'New
Rights Agreement'), the Company distributed one Right (a 'Right') for each
outstanding share of Company New Common Stock to stockholders of record at the
Effective Date and authorized the issuance of one Right for each share of New
Common Stock issued thereafter and prior to the Distribution Date (as defined in
the New Rights Agreement). Each Right entitles the registered holder to purchase
from the Company one one-thousandth of a share (a 'Unit') of Series A Preferred
Stock, par value $0.01 per share, at a purchase price of $45.00 per Unit,
subject to adjustment. Subject to the terms and conditions of the New Rights
Agreement, if not earlier redeemed upon the approval of the holders of 55% of
the New Common Stock, the Rights only become exercisable upon the occurrence of
certain events as set forth in the New Rights Agreement.
F-43
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The plans described below relate to Old Common Stock that was cancelled in
connection with the Plan.
STOCK COMPENSATION PLANS
The Board of Directors and Compensation Committee thereof are responsible
for administration of the Company's compensation plans and determine, subject to
the provisions of the plans, the number of shares to be issued, the terms of
awards, the sale or exercise price, the number of shares awarded and the rate at
which awards vest or become exercisable. A summary of option and other stock
awards outstanding under the Company's various stock compensation plans as of
January 4, 2003 are summarized below. All such options and the related stock
were cancelled in connection with the Plan.
1988 EMPLOYEE STOCK PURCHASE PLAN
In 1988, the Company adopted the 1988 Employee Stock Purchase Plan ('Stock
Purchase Plan'), which provides for sales of up to 4,800,000 shares of Old
Common Stock of the Company to certain key employees. At December 31, 2000,
January 5, 2002 and January 4, 2003, 4,521,300 shares were issued and
outstanding pursuant to grants under the Stock Purchase Plan. All shares were
sold at amounts determined to be equal to the fair market value.
1991 STOCK OPTION PLAN
In 1991, the Company established The Warnaco Group, Inc. 1991 Stock Option
Plan ('Option Plan') and authorized the issuance of up to 1,500,000 shares of
Old Common Stock pursuant to incentive and non-qualified option grants to be
made under the Option Plan. The exercise price on any stock option award may not
be less than the fair market value of the Company's Common Stock at the date of
the grant. The Option Plan limits the amount of qualified stock options that may
become exercisable by any individual during a calendar year. Options generally
expire ten years from the date of grant and vest ratably over four years.
1993 STOCK PLAN
On May 14, 1993, the stockholders approved the adoption of The Warnaco
Group, Inc. 1993 Stock Plan ('Stock Plan') which provided for the issuance of up
to 2,000,000 shares of Old Common Stock of the Company through awards of stock
options, stock appreciation rights, performance awards, restricted stock units
and stock unit awards. On May 12, 1994, the stockholders approved an amendment
to the Stock Plan whereby the number of shares issuable under the Stock Plan was
to be automatically increased each year by 3% of the number of outstanding
shares of Old Common Stock of the Company as of the beginning of each fiscal
year. The exercise price of any stock option award may not be less than the fair
market value of the Old Common Stock at the date of the grant. Options generally
expire ten years from the date of grant and vest ratably over four years.
In accordance with the provisions of the Stock Plan, the Company granted
190,680 shares of restricted stock to certain employees, including certain
officers of the Company, during the fiscal year ended January 1, 2000. During
Fiscal 2000, 2001 and 2002, there were no restricted stock grants. The
restricted shares vest over four years. The fair market value of the restricted
shares was $5,458 at the date of grant. The Company recognizes compensation
expense equal to the fair value of the restricted shares over the vesting
period. Compensation expense for the 2000, 2001 and 2002 fiscal years was
$4,643, $1,999 and $258, respectively. During Fiscal 2000, there were no
F-44
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
restricted shares cancelled. During Fiscal 2001, 119,250 unvested restricted
shares were cancelled and the unearned stock compensation of $3,929 was reversed
in stockholders' equity (deficiency). During Fiscal 2002, 4,000 unvested
restricted shares were cancelled and the unearned stock compensation of $115 was
reversed in stockholders' deficiency. Unearned stock compensation at December
30, 2000, January 5, 2002 and January 4, 2003 was $6,341, $413 and $40
respectively, and is included in stockholders' deficiency.
1993 NON-EMPLOYEE DIRECTOR STOCK PLAN AND 1998 DIRECTOR PLAN
In May 1994, the Company's stockholders approved the adoption of the 1993
Non-Employee Director Stock Plan ('Director Plan'). The Director Plan provides
for awards of non-qualified options to non-employee directors of the Company.
Options granted under the Director Plan are exercisable in whole or in part
until the earlier of ten years from the date of the grant or one year from the
date on which an option holder ceases to be a Director eligible for grants.
Options are granted at the fair market value of the Company's Common Stock at
the date of the grant. In May 1998, the Board of Directors approved the adoption
of the 1998 Stock Plan for Non-Employee Directors ('1998 Director Plan', and
together with the Director Plan, 'Combined Director Plan'). The 1998 Director
Plan includes the same features as the Director Plan and provides for issuance
of the Company's Common Stock held in treasury. The Combined Director Plan
provides for the automatic grant of options to purchase (i) 30,000 shares of
Common Stock upon a Director's election to the Company's Board of Directors and
(ii) 20,000 shares of Common Stock immediately following each annual
shareholder's meeting as of the date of such meeting.
1997 STOCK OPTION PLAN
In 1997, the Company's Board of Directors approved the adoption of The
Warnaco Group, Inc. 1997 Stock Option Plan ('1997 Plan') which provides for the
issuance of incentive and non-qualified stock options and restricted stock up to
the number of shares of common stock held in treasury. The exercise price on any
stock option award may not be less than the fair market value of the Company's
common stock on the date of grant. The Plan limits the amount of qualified stock
options that may become exercisable by any individual during a calendar year and
limits the vesting period for options awarded under the 1997 Plan.
F-45
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
A summary of the status of the Company's stock option plans are presented
below:
<Table>
<Caption>
FISCAL 2000 FISCAL 2001 FISCAL 2002
--------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Outstanding at beginning of
year........................ 13,857,346 $29.85 15,741,796 $26.03 6,011,639 $20.92
Granted....................... 2,718,750 10.73 430,000 3.52 --
Exercised..................... -- -- -- -- --
Cancelled..................... (834,300) 24.10 (10,160,157) 28.85 (2,319,276) 22.87
---------- ----------- ----------
Outstanding at end of year.... 15,741,796 26.03 6,011,639 20.92 3,692,363 19.69
---------- ----------- ----------
---------- ----------- ----------
Options exercisable at end of
year........................ 12,237,437 28.62 3,793,572 23.00 2,887,229 10.34
---------- ----------- ----------
---------- ----------- ----------
Weighted average fair value of
options granted............. $ 5.66 $ 2.75 $--
------ ------ ------
------ ------ ------
Options available for future
grant....................... 2,788,611 14,226,104 16,545,380
---------- ----------- ----------
---------- ----------- ----------
</Table>
In Fiscal 2000, Fiscal 2001 and Fiscal 2002, in exchange for shares received
from option holders with a fair value of $702, $49 and $0, respectively, the
Company paid $702, $49 and $0, respectively, of withholding taxes on options
that were exercised during the year. Such shares have been included in treasury
at cost, which equals fair value at date of option exercise or vesting.
Summary information related to options outstanding and exercisable at
January 4, 2003 is as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
AT CONTRACTUAL AVERAGE AT AVERAGE
JANUARY 4, LIFE EXERCISE JANUARY 4, EXERCISE
RANGE OF EXERCISE PRICES 2003 (YEARS) PRICE 2003 PRICE
------------------------ ---- ------- ----- ---- -----
$ 0.67 - $10.00.......................... 427,500 8.04 $ 3.94 181,250 $ 4.44
$10.01 - $20.00.......................... 1,335,250 4.98 12.27 880,125 13.12
$20.01 - $30.00.......................... 1,219,538 5.44 25.18 1,115,779 25.19
$30.01 - $40.00.......................... 655,075 4.72 33.01 655,075 33.01
$40.01 - $50.00.......................... 55,000 5.32 41.85 55,000 41.85
--------- ---------
3,692,363 2,887,229
--------- ---------
--------- ---------
</Table>
The Company reserved 16,545,380 shares of Old Common Stock for issuance
under the Director Plan, Stock Plan and Option Plan as of January 4, 2003. In
addition, as of January 4, 2003 there were 12,242,629 shares of Old Common Stock
in treasury stock available for issuance under the 1997 Plan.
The following are the number of shares of Old Common Stock and treasury
stock outstanding as of December 30, 2000, January 5, 2002 and January 4, 2003.
F-46
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
NUMBER OF SHARES
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Common Stock:
Balance at beginning of year......................... 65,393,038 65,232,594 65,232,594
Shares issued under restricted stock grants, net of
cancellations...................................... (160,444) -- --
---------- ---------- ----------
Balance at end of year............................... 65,232,594 65,232,594 65,232,594
---------- ---------- ----------
---------- ---------- ----------
Treasury Stock:
Balance at beginning of year......................... 12,163,650 12,063,672 12,242,629
Net additions/returned............................... (99,978) 178,957 --
---------- ---------- ----------
Balance at end of year............................... 12,063,672 12,242,629 12,242,629
---------- ---------- ----------
---------- ---------- ----------
</Table>
STOCK BUYBACK PROGRAM
On November 14, 1996, the Board of Directors approved a stock buyback
program of up to 2.0 million shares. On May 14, 1997, the Company's Board of
Directors approved an increase of this program to 2,420,000 shares. On February
19, 1998 and on March 1, 1999, the Company's Board of Directors authorized the
repurchase of an additional 10,000,000 shares, resulting in a total
authorization of 22.42 million shares. During Fiscal 1999, the Company
repurchased 6,182,088 shares of its Old Common Stock under the repurchase
programs at a cost of $144,688. At January 4, 2003, there were 10,353,894 shares
available for repurchase under this program.
The Company has used a combined put-call option contract to facilitate the
repurchase of its common stock. This contract provides for the sale of a put
option giving the counter-party the right to sell the Company's shares to the
Company at a preset price at a future date and for the simultaneous purchase of
a call option giving the Company the right to purchase its shares from the
counter-party at the same price at the same future date.
In connection with the Company's stock repurchase program, the Company
entered into Equity Forward Purchase Agreements ('Equity Agreements') on
December 10, 1999 and February 10, 2000, with two banks for terms of up to two
and one-half years. The Equity Agreements provided for the purchase by the
Company of up to 5.2 million shares of the Company's Old Common Stock. The
Equity Agreements were required to be settled by the Company, in a manner
elected by the Company, on a physical settlement, cash settlement or net share
settlement basis within the duration of the Equity Agreements. As of
December 30, 2000, the banks had purchased 5.2 million shares under the Equity
Agreements. On September 19, 2000, the Equity Agreements were amended and
supplemented to reduce the price at which the Equity Agreements could be settled
from $12.90 and $10.90, respectively, to $4.50 a share. In return for this
reduction, the banks received interest-bearing notes payable on August 12, 2002
in an aggregate amount of $40,372 which resulted in a corresponding charge to
shareholders equity. As of January 5, 2002 and January 4, 2003, the price at
which the Company could affect physical settlement or settle in cash or net
shares with the two banks under the Equity Agreements was $4.50. Losses related
to the Equity Agreements are included with investment income (loss) in the
consolidated statements of operations for the years ended January 5, 2002 and
January 4, 2003 were $6,556 and $0, respectively. Amounts due to the banks under
these agreements totaled $56,677 and $56,506, respectively, at January 5, 2002
and January 4, 2003 and are included in liabilities subject to compromise.
F-47
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 18 -- LOSS PER SHARE
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Numerator for basic and diluted loss per share:
Loss before cumulative effect of change in
accounting....................................... $(376,861) $(861,153) $(163,241)
Cumulative effect of change in accounting, net of
taxes............................................ (13,110) -- (801,622)
--------- --------- ---------
Net loss............................................... $(389,971) $(861,153) $(964,863)
--------- --------- ---------
--------- --------- ---------
Denominator for basic and diluted loss per
share -- Weighted average shares..................... 52,783 52,911 52,990 (a)
--------- --------- ---------
Basic and diluted loss per share before cumulative
effect of change in accounting....................... $ (7.14) $ (16.28) $ (3.08)
--------- --------- ---------
--------- --------- ---------
</Table>
- ---------
(a) The effect of dilutive securities was not included in the computation of
diluted loss per share for the fiscal years ended December 30, 2000,
January 5, 2002 and January 4, 2003 because the effect would have been
anti-dilutive. Dilutive securities included options outstanding to purchase
15,741,796, 6,011,639 and 3,692,363 shares of Old Common Stock, unvested
restricted stock of 260,950, 19,424 and 5,200, and 5,200,000 of shares
under Equity Agreements at December 30, 2000, January 5, 2002 and
January 4, 2003, respectively. Additionally, incremental shares issuable on
the assumed conversion of the Preferred Securities of 1,653,177 were not
included in the Fiscal 2000, 2001 or 2002 computation of diluted earnings
per share as the impact would have been anti-dilutive for each period
presented. There are no outstanding in-the-money stock options at or for
the years ended December 30, 2000, January 5, 2002 and January 4, 2003
NOTE 19 -- LEASE AND OTHER COMMITMENTS
The Company is a party to various lease agreements for equipment, real
estate, furniture, fixtures and other assets, which expire at various dates
through 2020. Under these agreements, the Company is required to pay various
amounts including property taxes, insurance, maintenance fees, and other costs.
The following is a schedule of future minimum rental payments required under
operating leases with terms in excess of one year, as of January 4, 2003:
<Table>
<Caption>
RENTAL PAYMENTS
-----------------------
YEAR REAL ESTATE EQUIPMENT
- ---- ----------- ---------
2003........................................................ $17,206 $947
2004........................................................ 11,116 55
2005........................................................ 5,763 35
2006........................................................ 2,742 25
2007........................................................ 1,223 13
2008 and thereafter......................................... 1,887 --
</Table>
Rent expense included in the consolidated statements of operations for the
years ended December 31, 2000, January 5, 2002 and January 4, 2003 was $70,827,
$56,519 and $38,401, respectively.
F-48
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
In March 2003, the Company entered into a 14 year operating lease for office
space in New York City. Minimum lease commitments under the lease are:
<Table>
<Caption>
RENTAL
YEAR PAYMENTS
- ---- --------
2003........................................................ $ 2,111
2004........................................................ 3,619
2005........................................................ 3,619
2006........................................................ 3,619
2007........................................................ 3,619
2008 and thereafter......................................... 33,514
</Table>
The Company's domestic lease agreements are subject to the provisions of the
Bankruptcy Code. Accrued rent for leases rejected pursuant to the bankruptcy
proceedings totaled $20,600 and $32,389 at January 5, 2002 and January 4, 2003,
respectively. The accrual for rejected leases is included in liabilities subject
to compromise at January 5, 2002 and January 4, 2003. Lease rejection accruals
represent general unsecured claims. All general unsecured claimants will receive
their pro-rata share of 1,147,050 shares of New Common Stock pursuant to the
Company's plan of reorganization. The number of shares that each claimant will
ultimately receive is subject to the final reconciliation of all unsecured
claims. The Company expects that all distributions to unsecured claimants will
be completed in the second quarter of fiscal 2003.
As discussed in Note 14, on June 9, 2002, the Bankruptcy Court approved the
Company's settlement of certain operating lease agreements with GECC. The leases
had original terms of from three to seven years and were secured by certain
equipment, machinery, furniture, fixtures and other assets. The total amount
payable to GECC under the settlement agreement was $15,200 of which $5,500 had
been paid by the Company, via operating lease payments, through June 12, 2002.
The present value of the remaining liability was $9,071 and this amount was
capitalized on June 12, 2002. The Company made principal payments of $3,458
against this liability and at January 4, 2003 the amount outstanding was $5,603.
This liability is to be settled by the Company in equal installments of $750
inclusive of finance charges.
The Company has license agreements with the following minimum guaranteed
royalty payments:
<Table>
<Caption>
MINIMUM
YEAR ROYALTY
- ---- -------
2003........................................................ $ 19,828
2004........................................................ 20,403
2005........................................................ 22,603
2006........................................................ 22,803
2007........................................................ 23,003
2008 and thereafter(a)...................................... 205,840
</Table>
- ---------
(a) Includes all minimum royalty obligations. Some of the Company's license
agreements have no expiration date or extend beyond 20 years. The duration
of these agreements for the purposes of this item are assumed to be 20
years. Variable based minimum royalty obligations are based upon payments
for the most recent fiscal year.
Although the specific terms of each of the Company's license agreements
vary, generally such agreements provide for minimum royalty payments and/or
royalty payments based upon a percentage of net sales. Such license agreements
also generally grant the licensor the right to approve any designs marketed by
the licensee.
F-49
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Certain of the Company's license agreements with third parties will expire
by their terms over the next several years. There can be no assurance that the
Company will be able to negotiate and conclude extensions of such agreements on
similar economic terms.
In connection with the Chapter 11 Cases, the Company instituted a Key
Domestic Employee Retention Plan (the 'Retention Plan'), which was approved by
the Bankruptcy Court. The Retention Plan provided for stay bonuses, severance
protection and discretionary bonuses during the Chapter 11 Cases. Approximately
245 domestic employees are covered under the Retention Plan. Participants must
meet certain criteria to receive payments under the Retention Plan. The Company
incurred $5,982 of expenses related to the Retention Plan in the year ended
January 4, 2003, representing approximately one-third of the total amount due
under the Retention Plan. Retention Plan payments are included in reorganization
items for the year ended January 4, 2003. On June 10, 2002 the Company made the
second payment of $4,654 amounting to one-third of amounts due to employees
under the Retention Plan. The Company paid the final Retention Plan payment in
the amount of $4,746 on February 7, 2003.
During Fiscal 2001, the Company entered into an employment agreement with
the President and Chief Executive Officer of the Company. The employment
agreement, as amended, provided for a monthly salary of $125 payable through
April 30, 2003 or the consummation of a plan of reorganization for all or
substantially all of the Debtors in the Chapter 11 Cases. In conjunction with
the consummation of the Plan, the employee received (i) a cash bonus in the
amount of $1,950; (ii) 266,400 shares of New Common Stock; and (iii) $942 of
Second Lien Notes. Based upon the assumed BEV in the Plan ('implied equity
value') of $10.79 per share of the Company's New Common Stock on February 5,
2003, the total amount of bonus received by the employee is estimated to be
approximately $5,766. The employment agreement was terminated on February 4,
2003 and replaced by a consulting agreement as described in Note 5.
NOTE 20 -- FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Accounts Receivable. The carrying amount of the Company's accounts
receivables approximates fair value.
Marketable Securities. Marketable securities are stated at fair value based
on quoted market prices.
Pre-petition revolving loans, term loans and other borrowings. The carrying
amounts of the Company's outstanding balances under its various pre-petition
Bank Credit Agreements are recorded at the nominal amount plus accrued interest
and fees through the Petition Date less pro-rata repayments from the proceeds of
certain asset sales and are included in liabilities subject to compromise at
January 5, 2002 and January 4, 2003. Pursuant to the terms of the Plan, the
Company's pre-petition secured lenders received their pro-rata share of (i)
$106,112 in cash; (ii) $200,000 in Second Lien Notes; and (iii) 43,318,350
shares of New Common Stock. The estimated fair value of all distributions is
approximately $773,517 based upon the cash of $106,112, $200,000 nominal amount
of the Second Lien Notes and New Common Stock valued at approximately $467,405.
The value of the Company's New Common Stock is estimated at $10.79 per share
based upon the Company's BEV as described in the Plan.
Amended DIP. The carrying amounts under the Amended DIP, if any are recorded
at the nominal amount which approximates its fair value because the interest
rate on the outstanding debt is variable and there are no prepayment penalties.
F-50
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Redeemable preferred securities. These securities were publicly traded on
the New York Stock Exchange prior to the petition date. At January 5, 2002 the
redeemable preferred securities are recorded at their nominal value of $120,000
and are included in liabilities subject to compromise. Pursuant to the Company's
plan of reorganization, holders of redeemable preferred securities received
268,200 shares of New Common Stock valued at approximately $2,894 based on the
implied equity value of $10.79 per share.
Letters of credit -- post petition. Letters of credit collateralize the
Company's obligations to third parties and have terms ranging from 30 days to
one year. The face amounts of the letters of credit are a reasonable estimate of
the fair value since the value for each is fixed over its relatively short
maturity.
Letters of credit -- pre-petition. Letters of credit collateralize the
Company's obligations to third parties and have terms ranging from 30 days to
one year. The face amounts of the letters of credit are a reasonable estimate of
the fair value since the value for each is fixed over its relatively short
maturity. Pre-petition letters of credit are recorded at their face amount.
Pre-petition letters of credit were satisfied by the Company's lenders or by the
Company during Fiscal 2001.
Equity agreements. These arrangements could be settled, at the Company's
option, by the purchase of shares, on a net basis in shares of the Company's Old
Common Stock or on a net cash basis prior to Petition Date. To the extent that
the market price of the Company's Old Common Stock on the settlement date was
higher or lower than the forward purchase price, the net differential could have
been paid or received by the Company in cash or in the Company's common stock.
Amounts payable under the Equity Agreements are included in liabilities subject
to compromise at January 5, 2002 and January 4, 2003. Equity Agreements were
included with the Company's other secured pre-petition lenders in the Plan.
Holders of the Equity Agreements received their pro-rata share of cash, New
Common Stock and Second Lien Notes.
Foreign currency transactions. Prior to the Petition Date, the Company
entered into various foreign currency forward and option contracts to hedge
certain commercial transactions. The fair value of open foreign currency forward
and option contracts was based upon quotes from brokers and reflects the cash
benefit if the existing contracts had been sold. The Company has no foreign
currency forward contracts outstanding as of January 5, 2002 and January 4,
2003. The Company had no foreign currency option contracts outstanding at
January 5, 2002 and January 4, 2003.
The carrying amounts and fair value of the Company's financial instruments
as of January 5, 2002 and January 4, 2003, are as follows:
<Table>
<Caption>
JANUARY 5, 2002 JANUARY 4, 2003
--------------------- -----------------------
CARRYING FAIR CARRYING
AMOUNT VALUE AMOUNT FAIR VALUE
------ ----- ------ ----------
Accounts receivable..................... $ 282,387 $282,387 $ 199,817 $ 199,817
Marketable securities................... 155 155 156 156
Amended DIP............................. 155,915 155,915 -- --
Revolving loans......................... 1,162,158 (a) 1,160,953 412,113
Acquisition term loan................... 587,548 (a) 584,824 207,600
Term loans.............................. 27,161 (a) 27,034 9,596
Other long term debt.................... 5,582 4,317 2,679 1,414
GECC lease settlement................... -- -- 5,603 5,603
Redeemable preferred securities......... 120,000 (a) 120,000 2,894
Equity agreements....................... 56,677 (a) 56,506 20,058
Letters of credit....................... -- 60,031 -- 60,672
</Table>
- ---------
(a) Amounts outstanding under these debt agreements were subject to compromise
under the Chapter 11 Cases and as a result the fair value could not be
estimated at January 5, 2002.
F-51
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOREIGN CURRENCY-RISK MANAGEMENT
The Company's international operations are subject to certain risks,
including currency fluctuations and government actions. The Company closely
monitors its operations in each country so that it can respond to changing
economic and political environments and to fluctuations in foreign currencies.
Accordingly, prior to the Petition Date the Company utilized foreign currency
option contracts and forward contracts to hedge its exposure on anticipated
transactions and firm commitments, primarily for receivables and payables
denominated in currencies other than the entities' functional currencies.
Foreign currency instruments generally had maturities that did not exceed twelve
months.
The Company had foreign currency instruments, primarily denominated in
Canadian dollars, British pounds, Euros and Mexican pesos. At December 30, 2000,
the Company had $4,996 in foreign currency instruments outstanding. For Fiscal
2000, the net realized gains or losses associated with these types of
instruments were not material.
The Company did not have any foreign currency hedge contracts at January 5,
2002 or January 4, 2003.
NOTE 21 -- CASH FLOW INFORMATION
The following table sets forth supplemental cash flow information for Fiscal
2000, 2001 and 2002:
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 30, JANUARY 5, JANUARY 4,
2000 2002 2003
---- ---- ----
Cash paid (received) during the year for:
Interest....................................... 166,523 85,957 6,228
Income taxes, net of refunds received.......... (10,008) 6,148 (7,519)
Supplemental Non-Cash Investing and Financing
Activities:
Debt issued for purchase of fixed assets(a).... -- -- 9,071
</Table>
- ---------
(a) Represents debt incurred and assets purchased under the GECC lease
settlement -- Note 14.
NOTE 22 -- LEGAL MATTERS
Shareholder Class Actions. Between August 22, 2000 and October 26, 2000,
seven putative class action complaints were filed in the U.S. District Court for
the Southern District of New York (the 'District Court') against the Company and
certain of its officers and directors (the 'Shareholder I Class Action'). The
complaints, on behalf of a putative class of shareholders of the Company who
purchased the Old Common Stock between September 17, 1997 and July 19, 2000 (the
'Class Period'), allege, inter alia, that the defendants violated the Exchange
Act by artificially inflating the price of the Old Common Stock and failing to
disclose certain information during the Class Period.
On November 17, 2000, the District Court consolidated the complaints into a
single action, styled In Re The Warnaco Group, Inc. Securities Litigation, No.
00-Civ-6266 (LMM), and appointed a lead plaintiff and approved a lead counsel
for the putative class. A second amended consolidated complaint was filed on
May 31, 2001. On October 5, 2001, the defendants other than the Company filed a
motion to dismiss based upon, among other things, the statute of limitations,
failure to state a claim and failure to plead fraud with the requisite
particularity. On April 25, 2002, the District Court granted the motion to
dismiss this action based on the statute of limitations. On May 10, 2002, the
plaintiffs filed a motion for reconsideration in the District Court.
F-52
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
On May 24, 2002, the plaintiffs filed a notice of appeal with respect to such
dismissal. On July 23, 2002, plaintiffs' motion for reconsideration was denied.
On July 30, 2002, the plaintiffs voluntarily dismissed, without prejudice, their
claims against the Company. On October 2, 2002, the plaintiffs filed a notice of
appeal with respect to the District Court's entry of a final judgment in favor
of the individual defendants.
Between April 20, 2001 and May 31, 2001, five putative class action
complaints against the Company and certain of its officers and directors were
filed in the District Court (the 'Shareholder II Class Action'). The complaints,
on behalf of a putative class of shareholders of the Company who purchased the
Old Common Stock between September 29, 2000 and April 18, 2001 (the 'Second
Class Period'), allege, inter alia, that defendants violated the Exchange Act by
artificially inflating the price of the Old Common Stock and failing to disclose
negative information during the Second Class Period.
On August 3, 2001, the District Court consolidated the actions into a single
action, styled In Re The Warnaco Group, Inc. Securities Litigation (II), No. 01
CIV 3346 (MCG), and appointed a lead plaintiff and approved a lead counsel for
the putative class. A consolidated amended complaint was filed against certain
current and former officers and directors of the Company, which expanded the
Second Class Period to encompass August 16, 2000 to June 8, 2001. The amended
complaint also dropped the Company as a defendant, but added as defendants
certain outside directors. On April 18, 2002, the District Court dismissed the
amended complaint, but granted plaintiffs leave to replead. On June 7, 2002, the
plaintiffs filed a second amended complaint, which again expanded the Second
Class Period to encompass August 15, 2000 to June 8, 2001. On June 24, 2002, the
defendants filed motions to dismiss the second amended complaint. On August 21,
2002, the plaintiffs filed a third amended complaint adding the Company's
current independent auditors as a defendant.
Neither the Shareholder I Class Action nor Shareholder II Class Action has
had, or will have, a material adverse effect on the Company's financial
condition, results of operations or business.
Speedo Litigation. On September 14, 2000, Speedo International, Ltd. filed a
complaint in the U.S. District Court for the Southern District of New York,
styled Speedo International Limited v. Authentic Fitness Corp., et al., No. 00
Civ. 6931 (DAB) (the 'Speedo Litigation'), against The Warnaco Group, Inc. and
various other Warnaco entities (the 'Warnaco Defendants') alleging claims, inter
alia, for breach of contract and trademark violations (the 'Speedo Claims'). The
complaint sought, inter alia, termination of certain licensing agreements,
injunctive relief and damages.
On November 8, 2000, the Warnaco Defendants filed an answer and
counterclaims against Speedo International, Ltd. seeking, inter alia, a
declaration that the Warnaco Defendants have not engaged in trademark violations
and are not in breach of the licensing agreements, and that the licensing
agreements in issue (the 'Speedo Licenses') may not be terminated.
On or about October 30, 2001, Speedo International, Ltd. filed a motion in
the Bankruptcy Court seeking relief from the automatic stay to pursue the Speedo
Litigation in the District Court, and have its rights determined there through a
jury trial (the 'Speedo Motion'). The Debtors opposed the Speedo Motion, and
oral argument was held on February 21, 2002. On June 11, 2002, the Bankruptcy
Court denied the Speedo Motion on the basis that inter alia, (i) the Speedo
Motion was premature and (ii) the Bankruptcy Court has core jurisdiction over
resolution of the Speedo Claims.
On November 25, 2002, the Warnaco Defendants entered into a settlement
agreement with Speedo International, Ltd. to resolve the Speedo Claims on a
final basis (the 'Speedo Settlement Agreement'). On December 13, 2002, the
Bankruptcy Court entered an order approving the
F-53
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Speedo Settlement Agreement and the Speedo Litigation was subsequently dismissed
with prejudice.
The Speedo Settlement Agreement provided for (a) a total payment by the
Company to Speedo International, Ltd. in the amount of $2,558 in settlement of
disputed claims; (b) the assignment to Speedo International, Ltd. of certain
domain names; (c) an amendment to the Speedo Licenses and related agreements
(which remain in full force and effect for a perpetual term) to clarify certain
contractual provisions therein; (d) the execution of a separate Web Site
Agreement to govern the use of the Speedo mark in connection with the web site
operated by the Company; and (e) full mutual releases in favor of each of the
parties. The settlement of the Speedo Litigation did not have a material adverse
effect on the Company's financial condition, results of operations or business.
Wachner Claim. On January 18, 2002, Mrs. Linda J. Wachner, former President
and Chief Executive Officer of the Company, filed a proof of claim in the
Chapter 11 Cases related to the post-petition termination of her employment with
the Company asserting an administrative priority claim in excess of $25,000 (the
'Wachner Claim'). The Debt Coordinators for the Company's pre-petition lenders,
the Official Committee of Unsecured Creditors and the Company have objected to
the Wachner Claim. On November 15, 2002, the parties entered into a settlement
agreement (the 'Wachner Settlement'), pursuant to which Mrs. Wachner would
receive, in full settlement of the Wachner Claim, the following: (a) an Allowed
Unsecured Claim in connection with the termination of her employment agreement
in the amount of $3,500 (which would be satisfied under the Plan by a
distribution of its pro rata share of New Common Stock having a value of
approximately $250 at the time of distribution; and (b) an Allowed
Administrative Claim of $200 (which was satisfied by a cash payment of such
amount upon confirmation of the Plan). The Wachner Settlement Agreement was
approved by the Bankruptcy Court on December 13, 2002.
SEC Investigation. As previously disclosed, the staff of the Securities and
Exchange Commission (the 'SEC') has been conducting an investigation to
determine whether there have been any violations of the Exchange Act in
connection with the preparation and publication by the Company of various
financial statements and other public statements. On July 18, 2002, the SEC
staff informed the Company that it intends to recommend that the SEC authorize
an enforcement action against the Company and certain persons who have been
employed by or affiliated with the Company since prior to the periods covered by
the Company's previous restatements of its financial results alleging violations
of the federal securities laws. The SEC staff invited the Company to make a
Wells Submission describing the reasons why no such action should be brought. On
September 3, 2002, the Company filed its Wells Submission and is continuing
discussions with the SEC staff as to a settlement of this investigation. The
Company does not expect the resolution of this matter as to the Company to have
a material effect on the Company's financial condition, results of operation or
business.
Chapter 11 Cases. For a discussion of proceedings under Chapter 11 of the
Bankruptcy Code, see Note 1.
In addition to the above, from time to time, the Company is involved in
arbitrations or legal proceedings that arise in the ordinary course of its
business. The Company cannot predict the timing or outcome of these claims and
proceedings. Currently, the Company is not involved in any arbitration and/or
legal proceeding that it expects to have a material effect on its business,
financial condition or results of operations.
F-54
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 23 -- SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION
The following tables set forth supplemental consolidating condensed
financial information as of January 5, 2002 and January 4, 2003 and for the
fiscal years ended December 30, 2000, January 5, 2002 and January 4, 2003 for
(i) The Warnaco Group, Inc., (ii) Warnaco Inc., (iii) the Guarantor
Subsidiaries, (iv) the Non-Guarantor Subsidiaries and (v) The Warnaco Group,
Inc. on a consolidated basis.
<Table>
<Caption>
JANUARY 5, 2002
--------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash............................. $ -- $ 16,652 $ 1,042 $ 21,864 $ -- $ 39,558
Accounts receivable, net......... -- -- 213,844 68,543 -- 282,387
Inventories, net................. -- 175,321 157,813 85,768 -- 418,902
Prepaid expenses and other
current assets................. -- 23,304 8,143 5,541 -- 36,988
Assets held for sale............. -- 2,895 519 27,652 -- 31,066
--------- ----------- ---------- --------- --------- ----------
Total current assets..... -- 218,172 381,361 209,368 -- 808,901
Property, plant and equipment, net... -- 151,489 34,867 25,773 -- 212,129
Investment in subsidiaries........... (202,084) 301,409 354,001 (28,454) (424,872) --
Other assets......................... -- 73,045 808,022 83,358 -- 964,425
--------- ----------- ---------- --------- --------- ----------
$(202,084) $ 744,115 $1,578,251 $ 290,045 $(424,872) $1,985,455
--------- ----------- ---------- --------- --------- ----------
--------- ----------- ---------- --------- --------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Liabilities not subject to
compromise:
Current liabilities:
Current portion of long-term
debt....................... $ -- $ -- $ 55 $ 2,056 $ -- $ 2,111
Debtor-in-possession
revolving credit
facility................... -- 155,915 -- -- -- 155,915
Accounts payable and accrued
liabilities................ -- 70,059 66,043 68,445 -- 204,547
--------- ----------- ---------- --------- --------- ----------
Total current
liabilities............ -- 225,974 66,098 70,501 -- 362,573
Intercompany accounts.............. 649,200 (467,956) (234,261) 53,017 -- --
Long-term debt..................... -- -- -- 2,207 -- 2,207
Other long-term liabilities........ -- 32,262 (526) 18 -- 31,754
Deferred income taxes.............. -- (41,670) 46,800 -- -- 5,130
Liabilities subject to compromise.... -- 2,258,157 120,029 56,889 -- 2,435,075
Stockholders' equity (deficiency).... (851,284) (1,262,652) 1,580,111 107,413 (424,872) (851,284)
--------- ----------- ---------- --------- --------- ----------
$(202,084) $ 744,115 $1,578,251 $ 290,045 $(424,872) $1,985,455
--------- ----------- ---------- --------- --------- ----------
--------- ----------- ---------- --------- --------- ----------
</Table>
F-55
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
JANUARY 4, 2003
--------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash........................... $ -- $ 93,676 $ 340 $ 20,009 $ -- $ 114,025
Accounts receivable, net....... -- 7,498 134,053 58,266 -- 199,817
Inventories, net............... -- 142,108 132,752 70,408 -- 345,268
Prepaid expenses and other
current assets............... -- 21,216 7,086 12,208 -- 40,510
Assets held for sale........... -- 332 -- 1,126 -- 1,458
----------- ----------- ---------- --------- --------- -----------
Total current assets... -- 264,830 274,231 162,017 -- 701,078
Property, plant and equipment,
net.............................. -- 100,346 23,427 32,939 -- 156,712
Investment in subsidiaries......... (1,140,116) 293,909 380,371 (21,054) 486,890 --
Other assets....................... -- 1,852 81,923 6,315 -- 90,090
----------- ----------- ---------- --------- --------- -----------
$(1,140,116) $ 660,937 $ 759,952 $ 180,217 $ 486,890 $ 947,880
----------- ----------- ---------- --------- --------- -----------
----------- ----------- ---------- --------- --------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Liabilities not subject to
compromise:
Current liabilities:
Current portion of long-
term debt................ $ -- $ 4,265 $ -- $ 1,500 $ -- $ 5,765
Accounts payable and
accrued liabilities...... -- 67,869 79,262 86,945 -- 234,076
----------- ----------- ---------- --------- --------- -----------
Total current
liabilities.......... -- 72,134 79,262 88,445 -- 239,841
Intercompany accounts............ 622,756 (319,199) (394,409) 90,852 -- --
Long-term debt................... -- -- -- 1,252 -- 1,252
Other long-term liabilities...... -- 71,790 29 18 -- 71,837
Deferred income taxes............ -- (1,290) -- 6,254 -- 4,964
Liabilities subject to
compromise....................... -- 2,310,063 120,010 56,009 -- 2,486,082
Stockholders' equity
(deficiency)..................... (1,762,872) (1,472,561) 955,060 (62,613) 486,890 (1,856,096)
----------- ----------- ---------- --------- --------- -----------
$(1,140,116) $ 660,937 $ 759,952 $ 180,217 $ 486,890 $ 947,880
----------- ----------- ---------- --------- --------- -----------
----------- ----------- ---------- --------- --------- -----------
</Table>
F-56
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 30, 2000
--------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
(IN THOUSANDS OF DOLLARS)
Net revenues........................ $ -- $ 964,584 $ 926,856 $ 358,496 $ -- $2,249,936
Cost of goods sold.................. -- 901,463 687,965 255,961 -- 1,845,389
--------- ----------- ---------- --------- --------- ----------
Gross profit........................ -- 63,121 238,891 102,535 -- 404,547
Selling, general and administrative
expenses.......................... -- 359,383 149,763 115,868 -- 625,014
--------- ----------- ---------- --------- --------- ----------
Operating income (loss)............. -- (296,262) 89,128 (13,333) -- (220,467)
Equity in loss of subsidiaries...... (389,971) -- -- -- 389,971 --
Royalty and management fees......... -- 48,394 (52,011) 3,617 -- --
Investment (income) loss, net....... -- (67,858) 30,976 -- -- (36,882)
Interest expense.................... -- 130,522 35,479 6,231 -- 172,232
--------- ----------- ---------- --------- --------- ----------
Income (loss) before provision for
income taxes and cumulative effect
of change in accounting
principle......................... (389,971) (407,320) 74,684 (23,181) 389,971 (355,817)
Provision for income taxes.......... -- (4,339) 29,874 (4,491) -- 21,044
--------- ----------- ---------- --------- --------- ----------
Income (loss) before cumulative
effect of change in accounting
principle......................... (389,971) (402,981) 44,810 (18,690) 389,971 (376,861)
Cumulative effect of change in
accounting principle.............. -- -- (13,110) -- -- (13,110)
--------- ----------- ---------- --------- --------- ----------
Net income (loss)................... $(389,971) $ (402,981) $ 31,700 $ (18,690) $ 389,971 $ (389,971)
--------- ----------- ---------- --------- --------- ----------
--------- ----------- ---------- --------- --------- ----------
</Table>
F-57
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR ENDED JANUARY 5, 2002
-----------------------------------------------------------------------------------
THE WARNACO WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ---- ------------ ------------ ------- ------------
(IN THOUSANDS OF DOLLARS)
Net revenues........................... $ -- $ 677,775 $ 665,128 $328,353 $ -- $1,671,256
Cost of goods sold..................... -- 613,226 558,831 202,325 -- 1,374,382
--------- --------- --------- -------- -------- ----------
Gross profit........................... -- 64,549 106,297 126,028 -- 296,874
Selling, general and administrative
expenses............................. -- 244,313 193,478 160,395 -- 598,186
Impairment charge...................... -- 59,369 42,403 -- -- 101,772
Reorganization items................... -- 107,080 58,401 12,310 -- 177,791
--------- --------- --------- -------- -------- ----------
Operating loss......................... -- (346,213) (187,985) (46,677) -- (580,875)
Equity in loss of subsidiaries......... (861,153) -- -- -- 861,153 --
Royalty and management fees............ -- 24,592 (36,736) 12,144 -- --
Investment loss, net................... -- (6,552) -- (4) -- (6,556)
Interest expense....................... -- 120,280 (2,161) 4,633 -- 122,752
--------- --------- --------- -------- -------- ----------
Loss before provision for income
taxes................................ (861,153) (497,637) (149,088) (63,458) 861,153 (710,183)
Provision for income taxes............. -- 152,879 (8,502) 6,593 -- 150,970
--------- --------- --------- -------- -------- ----------
Net loss............................... $(861,153) $(650,516) $(140,586) $(70,051) $861,153 $ (861,153)
--------- --------- --------- -------- -------- ----------
--------- --------- --------- -------- -------- ----------
</Table>
F-58
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR ENDED JANUARY 4, 2003
--------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
(IN THOUSANDS OF DOLLARS)
Net revenues........................ $ -- $ 518,590 $ 650,449 $ 323,917 $ -- $1,492,956
Cost of goods sold.................. -- 377,722 477,646 197,293 -- 1,052,661
--------- ----------- ---------- --------- --------- ----------
Gross profit........................ -- 140,868 172,803 126,624 -- 440,295
Selling, general and administrative
expenses.......................... -- 166,123 132,027 112,804 -- 410,954
Reorganization items................ -- 100,437 2,735 13,510 -- 116,682
--------- ----------- ---------- --------- --------- ----------
Operating income (loss)............. -- (125,692) 38,041 310 -- (87,341)
Equity in loss of subsidiaries...... (964,863) -- -- -- 964,863 --
Royalty and management fees......... -- -- -- -- -- --
Investment income, net.............. -- 62 -- -- -- 62
Interest expense.................... -- 22,048 -- -- -- 22,048
--------- ----------- ---------- --------- --------- ----------
Income (loss) before provision for
income taxes and cumulative effect
of change in accounting
principle......................... (964,863) (147,678) 38,041 310 964,863 (109,327)
Provision for income taxes.......... -- (588) 42,982 11,520 -- 53,914
--------- ----------- ---------- --------- --------- ----------
Loss before cumulative effect of
change in accounting principle.... (964,863) (147,090) (4,941) (11,210) 964,863 (163,241)
Cumulative effect of change in
accounting principle.............. -- (84,532) (651,663) (65,427) -- (801,622)
--------- ----------- ---------- --------- --------- ----------
Net loss............................ $(964,863) $ (231,622) $ (656,604) $ (76,637) $ 964,863 $ (964,863)
--------- ----------- ---------- --------- --------- ----------
--------- ----------- ---------- --------- --------- ----------
</Table>
F-59
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 30, 2000
----------------------------------------------------------------------------------
THE WARNACO WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ---- ------------ ------------ ------- ------------
(IN THOUSANDS OF DOLLARS)
Net cash provided by (used in) operating
activities............................. $ 13,660 $(77,630) $ 14,143 $ 39,127 $ -- $ (10,700)
-------- -------- -------- -------- --------- ---------
Cash flows from investing activities:
Disposal of fixed assets............. -- 2,599 -- -- -- 2,599
Increase in intangibles and other
assets............................. -- (8,007) (1,924) (45) -- (9,976)
Purchase of property, plant and
equipment.......................... -- (81,823) (14,241) (13,998) -- (110,062)
Acquisition of businesses, net of
cash acquired...................... -- 1,656 -- (4,241) -- (2,585)
Proceeds from sale of marketable
securities......................... -- 50,432 -- -- -- 50,432
-------- -------- -------- -------- --------- ---------
Net cash used in investing activities.... -- (35,143) (16,165) (18,284) -- (69,592)
-------- -------- -------- -------- --------- ---------
Cash flows from financing activities:
Proceeds from the termination of
interest rate swaps................ -- 26,076 -- -- -- 26,076
Borrowings under revolving credit
facilities......................... -- 133,724 -- -- -- 133,724
Borrowings under term loan and other
debt agreements.................... -- 29,299 -- -- -- 29,299
Repayments of debt, including capital
lease obligations.................. -- (37,293) -- (18,720) -- (56,013)
Cash dividends paid.................. (14,362) -- -- -- -- (14,362)
Purchase of treasury shares and net
cash settlements under Equity
Arrangements....................... 1,404 -- -- -- -- 1,404
Deferred Financing Costs............. -- (37,260) -- (54) -- (37,314)
Other................................ (702) -- -- -- -- (702)
-------- -------- -------- -------- --------- ---------
Net cash provided by (used in) financing
activities............................. (13,660) 114,546 -- (18,774) -- 82,112
-------- -------- -------- -------- --------- ---------
Translation adjustment................... -- -- -- (72) -- (72)
-------- -------- -------- -------- --------- ---------
Increase (decrease) in cash.............. -- 1,773 (2,022) 1,997 -- 1,748
Cash at beginning of year................ -- 5,650 2,237 1,441 -- 9,328
-------- -------- -------- -------- --------- ---------
Cash at end of year...................... $ -- $ 7,423 $ 215 $ 3,438 $ -- $ 11,076
-------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- --------- ---------
</Table>
F-60
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEAR ENDED JANUARY 5, 2002
-----------------------------------------------------------------------------------
THE WARNACO WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ---- ------------ ------------ ------- ------------
(IN THOUSANDS OF DOLLARS)
Net cash provided by (used in) operating
activities.............................. $ 49 $(383,628) $ 7,293 $(46,555) $ -- $(422,841)
---- --------- ------- -------- --------- ---------
Cash flows from investing activities:
Disposal of fixed assets.............. -- 6,213 -- -- -- 6,213
Increase in intangibles and other
assets.............................. -- (1,427) -- -- -- (1,427)
Purchase of property, plant and
equipment........................... -- (15,052) (4,548) (5,127) -- (24,727)
Acquisition of businesses, net of cash
acquired............................ -- -- (1,492) -- -- (1,492)
---- --------- ------- -------- --------- ---------
Net cash used in investing activities..... -- (10,266) (6,040) (5,127) -- (21,433)
---- --------- ------- -------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving credit
facilities.......................... -- 459,292 -- -- -- 459,292
Borrowings under term loan and other
debt agreements..................... -- -- -- 72,842 -- 72,842
Repayments of debt, including capital
lease obligations................... -- (36,317) (426) (390) -- (37,133)
Deferred Financing Costs.............. -- (19,852) -- -- -- (19,852)
Other................................. (49) -- -- (490) -- (539)
---- --------- ------- -------- --------- ---------
Net cash provided by (used in) financing
activities.............................. (49) 403,123 (426) 71,962 -- 474,610
---- --------- ------- -------- --------- ---------
Translation adjustment.................... -- -- -- (1,854) -- (1,854)
---- --------- ------- -------- --------- ---------
Increase in cash.......................... -- 9,229 827 18,426 -- 28,482
Cash at beginning of year................. -- 7,423 215 3,438 -- 11,076
---- --------- ------- -------- --------- ---------
Cash at end of year....................... $ -- $ 16,652 $ 1,042 $ 21,864 $ -- $ 39,558
---- --------- ------- -------- --------- ---------
---- --------- ------- -------- --------- ---------
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED JANUARY 4, 2003
-----------------------------------------------------------------------------------
THE WARNACO WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ---- ------------ ------------ ------- ------------
(IN THOUSANDS OF DOLLARS)
Net cash provided by (used in) operating
activities.............................. $ -- $ 250,446 $ 2,365 $(26,563) $ -- $ 226,248
Cash flows from investing activities:
Disposal of fixed assets.............. -- 6,814 -- -- -- 6,814
Purchase of property, plant and
equipment........................... -- (4,001) (3,172) (4,065) -- (11,238)
Proceeds from sale of business units.. -- -- 150 20,459 -- 20,609
---- --------- ------- -------- --------- ---------
Net cash provided by (used in) investing
activities.............................. -- 2,813 (3,022) 16,394 -- 16,185
Cash flows from financing activities:
Borrowings (repayments) under revolving
credit facilities................... -- (155,915) -- -- -- (155,915)
Repayments of debt, including capital
lease obligations................... -- (20,313) (47) (554) -- (20,914)
---- --------- ------- -------- --------- ---------
Net cash used in financing activities..... -- (176,228) (47) (554) -- (176,829)
---- --------- ------- -------- --------- ---------
Translation adjustment.................... -- -- -- 8,863 -- 8,863
---- --------- ------- -------- --------- ---------
Increase (decrease) in cash............... -- 77,031 (704) (1,860) -- 74,467
Cash at beginning of year................. -- 16,652 1,042 21,864 -- 39,558
---- --------- ------- -------- --------- ---------
Cash at end of year....................... $ -- $ 93,683 $ 338 $ 20,004 $ -- $ 114,025
---- --------- ------- -------- --------- ---------
---- --------- ------- -------- --------- ---------
</Table>
F-61
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 24 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
YEAR ENDED JANUARY 5, 2002
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenues....................................... $499,219 $ 362,270 $397,664 $ 412,103
Gross profit (loss)................................ 145,277 (24,313) 87,512 88,398
Impairment charges................................. -- -- -- 101,772
Reorganization items............................... -- 78,202 25,735 73,854
Net loss........................................... (63,618) (338,418) (64,171) (394,946)
Basic loss per common share........................ (1.20) (6.40) (1.21) (7.46)
Diluted loss per common share...................... (1.20) (6.40) (1.21) (7.46)
</Table>
<Table>
<Caption>
YEAR ENDED JANUARY 4, 2003
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenues...................................... $ 410,052 $ 381,767 $345,458 $ 355,679
Gross profit...................................... 118,412 115,848 99,296 106,739
Reorganization items.............................. 15,531 42,554 21,122 37,475
Loss before cumulative effect of accounting
change.......................................... (56,130) (31,989) (15,631) (59,491)
Cumulative effect of accounting change, net of
taxes........................................... (801,622) -- --
--------- --------- -------- ---------
Net loss.......................................... $(857,752) $ (31,989) $(15,631) $ (59,491)
--------- --------- -------- ---------
--------- --------- -------- ---------
Basic and diluted loss per common share:
Loss before accounting change................. $ (1.06) $ (0.60) $ (0.30) $ (1.12)
Cumulative effect of accounting change, net of
taxes....................................... (15.14) -- -- --
--------- --------- -------- ---------
Net loss...................................... $ (16.20) $ (0.60) $ (0.30) $ (1.12)
--------- --------- -------- ---------
--------- --------- -------- ---------
</Table>
NOTE 25 -- FRESH START ACCOUNTING (UNAUDITED)
The Company's emergence from Chapter 11 proceedings on February 4, 2003 will
result in a new reporting entity and adoption of fresh start accounting as of
that date, in accordance with SOP 90-7. The consolidated financial statements as
of January 4, 2003 do not give effect to any adjustments in the carrying value
of assets or the amounts of liabilities that will be recorded upon
implementation of the Company's plan of reorganization.
The following unaudited pro forma financial information reflects the
implementation of the Plan as if the Plan had been effective on January 4, 2003.
Reorganization adjustments have been estimated in the pro forma financial
information to reflect the discharge of debt and the adoption of fresh start
reporting in accordance with SOP 90-7. Accordingly, the estimated reorganization
value of the Company of $750,000 and equity value of $485,500, which served as
the basis for the Plan as approved by the Bankruptcy Court, has been used to
determine the pro forma value allocated to the assets and liabilities of the
Company in proportion to their relative fair values in conformity with SFAS No.
141 'Business Combinations.'
Estimated reorganization adjustments in the Pro Forma Balance Sheet result
primarily from the:
(i) reduction of property, plant and equipment carrying values;
(ii) reduction in the carrying value of inventory;
F-62
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(iii) increase in the carrying value of the Company's various
trademarks and license agreements;
(iv) forgiveness of the Company's pre-petition debt;
(v) issuance of New Common Stock and Second Lien Notes pursuant to the
Plan;
(vi) payment of various administrative and other claims associated with
the Company's emergence from Chapter 11; and
(vii) distribution of cash of $106,112 to the Company's pre-petition
secured lenders.
These adjustments were based upon the preliminary work of outside appraisers
and financial consultants, as well as other valuation estimates to determine the
relative fair values of the Company's assets and liabilities. The allocation of
the reorganization value to individual assets and liabilities will change based
upon facts present at the actual effective date of the Company's plan of
reorganization and will result in differences to the fresh start adjustments and
allocated values estimated in this pro forma information.
F-63
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
PRO-FORMA
JANUARY 4, DISCHARGE OF ISSUANCE OF FRESH START JANUARY 4,
2003 INDEBTEDNESS SECURITIES ADJUSTMENTS 2003
---- ------------ ---------- ----------- ----
ASSETS
Current assets:
Cash................................ $ 114,025 $ (94,059)(a) $ -- $ -- $ 19,966
Restricted cash..................... 6,100 6,100
Accounts receivable................. 199,817 199,817
Inventories, net.................... 345,268 (22,494)(d) 322,774
Prepaid expenses and other current
assets............................. 31,438 31,438
Assets held for sale................ 1,458 1,458
Deferred income taxes............... 2,972 2,972
------------ ---------- ----------- -------- ----------
Current assets......................... 701,078 (94,059) -- (22,494) 584,525
------------ ---------- ----------- -------- ----------
Property, plant and equipment -- net... 156,712 (26,712)(d) 130,000
Other assets:
Licenses, trademarks and other
intangible assets.................. 87,031 213,169 (d) 300,200
Other assets........................ 3,059 4,158 (e) 7,217
Reorganization value in excess of
net assets......................... -- (537,577)(a)(b) 686,492 (c) (97,755)(d)(e) 51,160
------------ ---------- ----------- -------- ----------
Total other assets............ 90,090 (537,577) 686,492 119,572 358,577
------------ ---------- ----------- -------- ----------
$ 947,880 $ (631,636) $ 686,492 $ 70,366 $1,073,102
------------ ---------- ----------- -------- ----------
------------ ---------- ----------- -------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Current portion of long-term debt... $ 5,765 $ 5,765
Debtor-in-possession revolving
credit facility.................... -- --
Revolving credit facility........... -- 12,052 (a) -- 14,561 (e) 26,613 (f)
Accounts payable.................... 103,630 -- 103,630
Accrued liabilities................. 102,026 (13,702)(a) -- (9,203)(e) 79,121
Accrued income taxes payable........ 28,420 28,420
------------ ---------- ----------- -------- ----------
Total current liabilities..... 239,841 (1,650) -- 5,358 243,549
------------ ---------- ----------- -------- ----------
Other long term liabilities...... 71,837 -- -- -- 71,837
Long-term debt:
Second Lien Notes due 2008.......... -- (a) 200,942 (c) -- 200,942
Other............................... 1,252 1,252
Liabilities subject to compromise...... 2,486,082 (2,486,082)(b) -- -- --
Deferred income taxes.................. 4,964 65,008 (d) 69,972
Stockholders' equity (deficiency):
Class A Common Stock, $0.01 par
value.............................. 654 (654)(b) 450 (c) -- 450
Additional paid-in capital.......... 908,939 (908,939)(b) 485,100 (c) -- 485,100
Accumulated other comprehensive
loss............................... (93,223) 93,223 (b) -- -- --
Deficit............................. (2,358,537) 2,358,537 (b) -- -- --
Treasury stock, at cost............. (313,889) 313,889 (b) -- -- --
Unearned stock compensation......... (40) 40 (b) -- -- --
------------ ---------- ----------- -------- ----------
Total stockholders' equity
(deficiency)................ (1,856,096) 1,856,096 485,550 -- 485,550
------------ ---------- ----------- -------- ----------
$ 947,880 $ (631,636) $ 686,492 $ 70,366 $1,073,102
------------ ---------- ----------- -------- ----------
------------ ---------- ----------- -------- ----------
</Table>
(footnotes on next page)
F-64
THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(footnotes from previous page)
(a) Borrowed $12,052 under the Exit Financing Facility and together with
excess cash of $94,059 paid $106,111 (including accrued interest of
$13,702) to the Company's pre-petition secured creditors.
(b) Reflects the discharge of prepetition indebtedness and cancellation of all
outstanding shares of Old Common Stock, including all options and
restricted stock, additional paid-in capital, treasury stock, unearned
stock compensation and other accumulated comprehensive loss.
(c) Reflects the issuance of 45,000,000 shares of New Common Stock and $200,942
principal amount of Second Lien Notes pursuant to the terms of the Plan.
(d) Reflects the adjustment of fixed assets to estimated fair value of
$130,000, licenses and trademarks to fair value of $300,200, and the
recognition of a deferred income tax liability primarily related to the
adjustment to fair value of certain intangible assets of $69,972. Reflects
the elimination of certain design, procurement, receiving and other
inventory related costs of approximately $22,494.
(e) Borrowed $14,561 under the Exit Financing Facility to pay deferred
financing fees of $4,158, cash bonuses of $7,896 and other administrative
claims of $2,507.
(f) Actual borrowing under the Exit Financing Facility on February 4, 2003 was
$39,200 reflecting changes in the Company's cash position from January 4,
2003 through February 4, 2003.
F-65
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
THE WARNACO GROUP, INC.
We have audited the accompanying consolidated balance sheet of The Warnaco
Group, Inc. and its subsidiaries (the 'Company') as of February 4, 2003. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated balance sheet is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated balance sheet. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated balance sheet presentation. We believe that
our audit of the consolidated balance sheet provides a reasonable basis for our
opinion.
As discussed in Note 1 to the financial statement, on January 16, 2003, the
Bankruptcy Court entered an order confirming the Company's plan of
reorganization which became effective on February 4, 2003. Accordingly the
accompanying financial statement has been prepared in conformity with AICPA
Statement of Position 90-7 'Financial Reporting for Entities in Reorganization
Under the Bankruptcy Code,' for The Warnaco Group, Inc. as a new entity with
assets, liabilities and a capital structure having carrying values not
comparable with prior periods as described in Note 2.
In our opinion, such consolidated balance sheet presents fairly, in all
material respects, the financial position of The Warnaco Group, Inc. and its
subsidiaries as of February 4, 2003 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
May 5, 2003
G-1
THE WARNACO GROUP, INC.
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
FEBRUARY 4,
2003
----
(IN THOUSANDS,
EXCLUDING SHARE DATA)
ASSETS
Current assets:
Cash.................................................... $ 20,706
Restricted cash......................................... 6,200
Accounts receivable..................................... 213,048
Inventories............................................. 348,033
Prepaid expenses and other current assets............... 30,890
Assets held for sale.................................... 1,485
Deferred income taxes................................... 7,399
----------
Total current assets................................ 627,761
----------
Property, plant and equipment............................... 129,357
Other assets:
Licenses, trademarks and other intangible assets........ 364,700
Deferred financing costs................................ 5,286
Other assets............................................ 2,703
Reorganization value in excess of fair value of net
assets................................................ 34,142
----------
Total other assets.................................. 406,831
----------
$1,163,949
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................... $ 5,050
Revolving credit facility............................... 39,200
Accounts payable........................................ 122,376
Accrued liabilities..................................... 105,302
Accrued income taxes payable............................ 28,140
----------
Total current liabilities........................... 300,068
----------
Long-term debt:
Second Lien Notes....................................... 200,942
Capital lease obligations............................... 1,260
Deferred income taxes....................................... 86,975
Other long-term liabilities................................. 71,156
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized Series A preferred stock, $0.01 par value,
112,500 shares authorized............................. --
Common stock, $0.01 par value, 112,500,000 shares
authorized; 45,000,000 shares issued and
outstanding........................................... 450
Additional paid-in capital.............................. 503,098
----------
Total stockholders' equity.......................... 503,548
----------
$1,163,949
----------
----------
</Table>
See Notes to Consolidated Balance Sheet.
G-2
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1 -- NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Organization: The Warnaco Group, Inc. (the 'Predecessor') was incorporated
in Delaware on March 14, 1986 and, on May 10, 1986, acquired substantially all
of the outstanding shares of Warnaco Inc. ('Warnaco'). Warnaco is the principal
operating subsidiary. The Predecessor and Warnaco were reorganized under Chapter
11 of the Bankruptcy Code effective February 4, 2003.
Nature of Operations: The Warnaco Group, Inc. and its subsidiaries
(collectively, the 'Company') design, manufacture, source and market a broad
line of (i) intimate apparel (including bras, panties, sleepwear, loungewear,
shapewear and daywear for women and underwear and sleepwear for men); (ii)
sportswear for men, women and juniors (including jeanswear, khakis, knit and
woven shirts, tops and outerwear); and (iii) swimwear for men, women, juniors
and children (including swim accessories and fitness and active apparel). The
Company's products are sold under a number of internationally known owned 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 76 retail stores, including 45
Company-operated Speedo Authentic Fitness 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.
Basis of Consolidation and Presentation: The accompanying consolidated
balance sheet includes the accounts of the Company at February 4, 2003 (the
'Emergence Date'). All inter-company accounts and transactions are eliminated in
consolidation.
Upon emergence from bankruptcy, the Company implemented fresh start
reporting under the provisions of the American Institute of Certified Public
Accountants Statement of Position No. 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code ('SOP 90-7'). Under the provisions of
SOP 90-7, the reorganization value of the Company of $750,000 was allocated to
the fair value of the Company's assets, the Company's accumulated deficit was
eliminated and the Company's existing Class A Common Stock, par value $0.01 per
share (the 'Old Common Stock') was cancelled. In addition, approximately
$2,499,385 of the Company's outstanding pre-petition debt and liabilities was
discharged.
Chapter 11 Cases: On June 11, 2001 (the 'Petition Date'), the Predecessor
and certain of its subsidiaries (each a 'Debtor' and, collectively, the
'Debtors') each filed a voluntary petition for relief under Chapter 11 of the
U.S. Bankruptcy Code, 11 U.S.C. ss.ss. 101-1330, as amended (the 'Bankruptcy
Code'), in the United States Bankruptcy Court for the Southern District of New
York (the 'Bankruptcy Court') (collectively the 'Chapter 11 Cases'). The
Predecessor, 36 of its 37 U.S. subsidiaries and one of the Company's Canadian
subsidiaries, Warnaco of Canada Company were Debtors in the Chapter 11 Cases.
The remainder of the Company's foreign subsidiaries were not debtors in the
Chapter 11 Cases, nor were they subject to foreign bankruptcy or insolvency
proceedings.
On January 16, 2003, the Bankruptcy Court entered its (i) Findings of Fact
to and Conclusions of Law Re: Order and Judgment Confirming The First Amended
Joint Plan of Reorganization of The Warnaco Group, Inc. and Its Affiliated
Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of the United
States Code, dated November 8, 2002, and (ii) an Order and Judgment Confirming
The First Amended Joint Plan of Reorganization of The Warnaco Group, Inc. and
Its Affiliated Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of
the United States Code, dated November 8, 2002 (the 'Plan'), and Granting
Related Relief (the 'Confirmation Order').
G-3
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (Continued)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
In accordance with the provisions of the Plan and the Confirmation Order,
the Plan became effective on the Emergence 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 12. In accordance with the Plan, on the
Emergence 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
12.
Set forth below is a summary of certain material provisions of the Plan.
Among other things, as described below, the Plan resulted in the cancellation of
the Old Common Stock, issued prior to the Petition Date. The holders of Old
Common Stock did not receive any distribution on account of the Old Common Stock
under the Plan. The Company, as reorganized under the Plan, issued 45,000,000
shares of common stock, par value $0.01 per share (the 'New Common Stock'),
which was distributed to pre-petition creditors as specified below. In addition,
5,000,000 shares of New Common Stock of the Company were reserved for issuance
pursuant to management incentive stock grants. On March 12, 2003, subject to
approval by the stockholders of the Company's proposed 2003 Management Incentive
Plan, the Company authorized the grant of 750,000 shares of restricted stock and
options to purchase 3,000,000 shares of New Common Stock at the fair market
value on the date of grant. The Plan also provided for the issuance by the
Company of the Second Lien Notes in the principal amount of $200,942 to
pre-petition creditors and others as specified below, secured by a second
priority security interest in substantially all of the Debtors' domestic assets
and guaranteed by the Company and its domestic subsidiaries.
The following is a summary of distributions pursuant to the Plan:
(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 approximately 2.55% (1,147,050
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 approximately $106,112 in cash, Second Lien Notes in the principal
amount of $200,000 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 approximately 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, then President and Chief Executive Officer
of the Company, received an incentive bonus consisting of approximately
$1,950 in cash, Second Lien Notes in the principal amount of
approximately $942 and approximately 0.59% of the New Common Stock
(266,400 shares valued at $11.19 per share); and
(f) in addition to the foregoing, allowed administrative and certain
priority claims were paid in full in cash.
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 financial
statements. These estimates and assumptions also affect the reported amounts of
revenues and
G-4
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (Continued)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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' 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, net of estimated customer
returns, allowances and other discounts. The Company recognizes revenue from
consignment accounts and its retail stores when goods are sold to consumers, net
of allowances for future returns. The determination of allowances and returns
involves the use of significant judgment and estimates. Such estimates of
allowance rates are based on past experience by product line and account, the
financial stability of the Company's customers, the rate (based on reorders and
customer inventory levels) that the Company's products are selling to consumers,
the expected rate of retail sales growth and general economic and retail
forecasts. The Company reviews and adjusts its accrual rates each month based
upon its current experience. During its monthly review, the Company also
considers its accounts receivable collection rate and the nature and amount of
customer deductions and requests for promotion assistance. It is likely that the
accrual rates for allowances will vary over time and could change materially if
the Company's mix of customers, the channels of trade the Company's products are
distributed in or the Company's product mix changes.
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, 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 February 4, 2003, the Company had approximately $281,917 of open trade
invoices and other receivables and $10,836 of outstanding debit memos. Based
upon the Company's analysis of estimated recoveries and collections associated
with the related invoices and debit memos, the Company reduced its gross
accounts receivable balance of $213,048 which is estimated to be the fair value
of the Company's accounts receivable at February 4, 2003. Adjustments for
specific account allowances and negotiated settlements of customer deductions
are recorded as deductions to revenue in the period the specific adjustment
is identified. The fair value adjustment at February 4, 2003 is consistent
with the Company's determination of accounts receivable reserves on an ongoing
basis. 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
G-5
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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. The Company's calculation of the reserves necessary for the disposition of
excess inventory is highly dependent on its projections of future sales of those
products and the prices it is able to obtain for such products. The Company
reviews its inventory position monthly and adjusts its reserves for excess and
obsolete goods based on revised projections and current market conditions for
the disposition of excess and obsolete inventory. If economic conditions worsen
the Company will have to increase its reserve estimates substantially. 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 reduced the carrying value of such goods by $32,800. The Company
believes that the carrying value of its inventory, net of the adjustments noted,
is equal to its fair value at the Emergence Date.
Long-lived assets: Property, plant and equipment are recorded in the
consolidated balance sheet at their fair values based upon the appraised values
of such assets. See Notes 3 and 4. The Company will review its long-lived assets
for possible impairment when events or circumstances indicate that the carrying
value of the assets may not be recoverable. The Company determined the fair
value of its property, plant and equipment using the planned future use of each
asset or group of assets, quoted market prices for assets where a market exists
for such assets, the expected future revenue and profitability of the business
unit utilizing such assets and the expected future life of such assets. In its
determination of fair value, the Company also considered whether an asset would
be sold either individually or with other assets and the proceeds the Company
expects to receive from such a sale. The Company used the work of an independent
third party appraisal firm in determining the fair values of its property, plant
and equipment. Assumptions relating to the expected future use of individual
assets could affect the fair value of such assets and the depreciation expense
recorded related to such assets in the future.
Intangible assets consist primarily of licenses and trademarks. The Company
determined the fair value of its trademarks, licenses and other intangible
assets. The fair values were calculated using the discounted estimated future
cash flow to be generated from the sales of products utilizing such trademarks
and/or licenses. The determination of fair value considered the royalty rates
attributable to products of similar types, recent sales or licensing agreements
entered into by companies selling similar products and the expected term during
which it expects to earn cash flows from each license or trademark. The majority
of the Company's license and trademark agreements cover periods of time in
excess of forty years. The estimates and assumptions used in the determination
of the value of these intangible assets will not have any effect on the
Company's future earnings unless a future evaluation of trademark or license
value indicates that such asset is impaired.
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 are based upon the remaining useful
lives as determined by the 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 established to
reduce the amount of deferred tax assets to an amount that the Company believes,
based upon objectively verifiable evidence, is realizable. The only objectively
verifiable evidence the Company used in determining the need for a valuation
allowance were the future reversals of existing
G-6
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
temporary differences. The future recognition of deferred tax assets will first
reduce goodwill. Should the recognition of deferred tax assets result in the
elimination of goodwill, 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.
Pension Plan: The Company has a defined benefit pension plan (the 'Pension
Plan') covering substantially all 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 February 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 ERISA and the Internal Revenue
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 February
4, 2003, 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 over the next five years. The amount of
estimated cash contributions 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 balance sheet at February 4, 2003. Contributions to the Pension
Plan to be paid in the current year are classified with accrued liabilities. See
Note 8.
Translation of Foreign Currencies: Assets and liabilities of the Company's
foreign operations are recorded at current rates of exchange at February 4,
2003.
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 at February 4, 2003 include certain
property and equipment of closed facilities identified for disposition.
Property, Plant and Equipment: Property, plant and equipment are stated at
preliminary estimated fair values based upon an independent third party
appraisal of such assets. Adjustments to the preliminary fair values of fixed
assets will be reflected as adjustments in reorganization value in excess of
fair value of net assets (goodwill). The estimated useful lives of such assets
based upon the work of the independent third party appraiser 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>
G-7
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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
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 will be amortized on a straight-line basis over the
estimated useful lives of the asset. See Note 11.
Reorganization value in excess of fair value of net assets: 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, identified intangible assets minus its liabilities as of February 4,
2003 allocated in accordance with the provisions of Statement of Financial
Accounting Standards ('SFAS') No. 141, Business Combinations ('SFAS 141').
Reorganization value in excess of the fair value of net assets (goodwill, after
February 4, 2003) will not be amortized in accordance with the provision of SFAS
142. The Company will test goodwill for impairment annually in the fourth
quarter of each fiscal year or when events and circumstances indicate that such
value may be impaired.
Deferred financing costs: Deferred financing costs represent legal, other
professional and bank underwriting fees incurred related to the Company's Exit
Financing Facility and Second Lien Notes. Such fees will be amortized over the
life of the related debt, using the interest method. Amortization expense will
be included in interest expense.
Other assets: Other assets include certain barter credits and long-term rent
receivable related to certain subleases. Barter assets amounting to $683 are
recognized when realized, 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 the Emergence Date.
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 non-performance 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.
Recent accounting pronouncements: The FASB has issued SFAS No. 148,
Accounting for Stock Based Compensation, Transition and Disclosure ('SFAS 148').
SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation ('SFAS
123'), to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has adopted the disclosure
requirements of SFAS 148.
In November 2002, the Financial Accounting Standards Board ('FASB') issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect
G-8
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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
Company does not believe that the adoption of FIN 45 will have a material effect
on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 ('FIN 46'). FIN
46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 explains
how to identify variable interest entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to consolidate that
entity. It requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. It also requires certain disclosures by
the primary beneficiary of a variable interest entity and by an enterprise that
holds significant variable interests in a variable interest entity where the
enterprise is not the primary beneficiary. FIN 46 is effective for variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date, and
effective for the first fiscal year or interim period beginning after June 15,
2003 to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. FIN 46 requires an entity to
disclose certain information regarding a variable interest entity, if, when the
Interpretation becomes effective, it is reasonably possible that an enterprise
will consolidate or have to disclose information about that variable interest
entity, regardless of the date on which the variable entity interest was
created. The Company currently does not have any interest in any unconsolidated
entity for which variable interest entity accounting is required and therefore
does not expect FIN 46 to have a material effect on the Company's consolidated
financial statements.
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 longer term risks and
opportunities and 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. The appraiser determined the Company's business enterprise value
using a combination of the market approach and income approaches. The BEV
appraiser made certain assumptions in its work. The weighted average long-term
debt interest rate was assumed to be 7.81% and the weighted average cost of
capital was assumed to be 13.80%. The appraiser used three years of financial
projections in its evaluation and determined the terminal value based upon the
Company's weighted average cost of capital and expected free cash flow using a
5.00% growth rate per annum. The determination of the Company's projected income
and free cash flow required the use of significant judgments and estimates by
the Company. Changes in
G-9
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
economic conditions, the cost of equity or debt financing and many other factors
will have a significant effect on the Company's ability to earn the income or
generate the free cash flow assumed in its projections. As a result, variations
in the amounts of income and cash flow actually earned by the Company will have
a significant effect on the Company's business enterprise value. Based upon its
analysis the BEV Appraiser determined that the Business Enterprise Value of the
reorganized Company was between $730,000 and $770,000. Based upon the timing of
the Company's emergence from bankruptcy, market conditions at the time of
emergence and the net assets of the Company at the Emergence Date, the Company
determined its reorganization equity value of $503,548 by subtracting the
Company's debt on the Emergence 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. 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 Notes 6, 10 and 11.
NOTE 5 -- FRESH START ACCOUNTING
The Company's emergence from Chapter 11 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 balance sheet as of
February 4, 2003 gives effect to 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:
(i) adjustment of property, plant and equipment carrying values to fair
value;
(ii) adjustment of the carrying value of the Company's various trademarks
and license agreements to fair value;
(iii) forgiveness of the Company's pre-petition debt;
(iv) issuance of New Common Stock and Second Lien Notes pursuant to the
Plan;
(v) payment of various administrative and other claims associated with
the Company's emergence from Chapter 11; and
(vi) distribution of cash of $106,112 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 preliminary fresh start
adjustments and the resulting fresh start consolidated balance sheet.
G-10
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
PREDECESSOR REORGANIZED
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)(a)(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)
Current liabilities:
Current portion of long-term
debt......................... $ 5,050 $ 5,050
Revolving credit facility..... -- $ 30,579(a) 1,950(d) $ 2,244(f) 39,200
4,427(d)
Accounts payable.............. 123,235 (859)(f) 122,376
Accrued liabilities........... 109,530 -- (1,950)(d) 1,645(f)(g) 105,302
(2,981)(d)
(942)(d)
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):
Class A 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>
- ---------
(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 45,000,000 shares of New Common
Stock and recognition of reorganization equity value of
$503,548 as determined by the Company pursuant to the
provisions of the Plan.
(footnotes continued on next page)
G-11
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(footnotes continued from previous page)
(d) Reflects the issuance of $200,000 principal amount of Second
Lien Notes to creditors pursuant to the terms of the Plan,
payment of $1,950 in cash bonus 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. The
Company also issued $942 in Second Lien Notes and 266,400
shares of common stock (representing value of $2,981) to its
former Chief Executive Officer in payment of a bonus
pursuant to the terms of the Plan. The total accrued bonus
to the former Chief Executive Officer was $5,873.
(e) Reflects the adjustment of fixed assets to fair value of
$129,357, intangible assets to fair value of $364,700, 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. The deferred tax balance as of
February 4, 2003 reflects a valuation allowance of $126,654
which was established in connection with fresh start
reporting.
(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 accrual of a minimum lease commitment of $2,801
related to one of the Company's distribution facilities
which the Company will vacate prior to the expiration of the
lease.
(h) Reflects adjustments of $22,494 to adjust inventory to fair
value.
NOTE 6 -- 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.
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 by 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 the United Kingdom, 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 by Ralph
Lauren'r', A.B.S. by Allen Schwartz'r', Catalina'r' and White Stag'r' brand
names.
The Swimwear Group designs, manufactures, sources and markets moderate to
premium priced swimwear, fitness apparel, swim accessories and related products
under the Speedo'r'/Speedo Authentic Fitness'r', Anne Cole'r', Cole of
California'r', Sunset Beach'r', Sandcastle'r', Catalina'r', White Stag'r',
Lifeguard'r', Nautica'r' and Ralph Lauren'r' brand names. The Swimwear Group
also operates 45 full price Speedo Authentic Fitness retail stores.
The accounting policies of the segments are the same as those described in
Note 2 -- 'Significant Accounting Policies'. Balance sheet information by
business segment is set forth below:
<Table>
<Caption>
INTIMATE CORPORATE/
APPAREL SPORTSWEAR SWIMWEAR OTHER TOTAL
------- ---------- -------- ----- -----
Total assets............................ $376,574 $343,666 $294,622 $149,087 $1,163,949
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Property, plant and equipment........... $ 27,406 $ 15,288 $ 29,551 $ 57,112 $ 129,357
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Intangible assets:
Finite lived........................ $ 2,500 $ 11,300 $ 8,500 $ -- $ 22,300
Indefinite lived.................... 116,800 174,100 51,500 -- 342,400
Reorganization value in excess of
fair value of net assets.......... -- -- -- 34,142 34,142
</Table>
G-12
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
FEBRUARY 4,
GEOGRAPHIC INFORMATION: 2003
- ----------------------- ----
Property, plant and equipment:
United States....................................... $118,548
Canada.............................................. 3,000
Europe.............................................. 5,922
All other........................................... 1,887
--------
$129,357
--------
--------
</Table>
NOTE 7 -- DEFERRED INCOME TAXES
The components of deferred tax assets and liabilities as of February 4, 2003
are as follows:
<Table>
Deferred Tax Assets:
Inventory........................................... $ 17,766
Post Retirement Benefits............................ 32,409
Advertising Credits................................. 12,155
Reserves and Accruals............................... 52,373
Net Operating Losses................................ 29,334
--------
Subtotal........................................ 144,037
Valuation Allowances................................ (126,654)
--------
Subtotal........................................ $ 17,383
--------
--------
Deferred Tax Liabilities:
Depreciation and Amortization....................... $ 90,681
Other............................................... 6,278
--------
Subtotal........................................ 96,959
--------
--------
Total........................................... $(79,576)
--------
--------
</Table>
The net deferred tax liability of $79,576 consisted of net deferred tax
assets of $7,399 and net deferred tax liabilities of $86,975 at February 4,
2003.
As of February 4, 2003, the Company had recorded a valuation allowance of
$126,654 to reduce the amount of deferred tax assets created as a result of the
fresh start accounting adjustments 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.
In connection with the Company's emergence from bankruptcy, the Company
realized an extraordinary gain on the extinguishment of debt of approximately
$2,499,385. 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, the Company will be required as of the beginning of its 2004
taxable year to reduce certain tax attributes, including (a) net operating loss
carryforwards, (b) certain tax credit carryforwards, and (c) tax bases in
assets, in a total amount equal to the gain on the extinguishment of debt. The
reorganization of the Company on the Emergence Date constituted an ownership
change under Section 382 of the Internal Revenue 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 of approximately
$23,400. The actual
G-13
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 the amounts
disclosed in this note to the consolidated balance sheet.
Before considering any reductions and limitations discussed above, at
February 4, 2003, the Company has U.S. net operating loss carryforwards of
$1,166,500 with expiration dates from 2003 through 2022. In addition, the
Company has alternative minimum tax credits of $2,270 which have no expiration
date. The Company's $630 of other tax credit carryforwards will expire in years
2005 through 2007.
At February 4, 2003, the Company has foreign net operating loss
carryforwards of approximately $85,400. A valuation allowance of $29,334 has
been established against these net operating loss carryforwards to reduce them
to the amount that will more likely than not be realized.
At February 4, 2003, prepaid expenses and other current assets includes
current income taxes receivable of $10,031 (of which $6,896 relates to foreign
entities), and current liabilities include income taxes payable of $28,140 (of
which $14,781 relates to foreign entities).
NOTE 8 -- EMPLOYEE RETIREMENT PLANS
The Pension Plan covers substantially all full time non-union domestic
employees and certain domestic employees covered by a collective bargaining
agreement. The Pension Plan is noncontributory and benefits are based upon years
of service. The Company also has defined benefit health care and life insurance
plans that provide postretirement benefits to certain retired employees ('Other
Benefit Plans'). The Other Benefit Plans are, in most cases, contributory with
retiree contributions adjusted annually. Effective January 1, 2003, the Pension
Plan was amended such that participants in the Pension Plan will not earn any
additional pension benefits after December 31, 2002. The Pension Plan was
under-funded at February 4, 2003. The accrued Pension Plan liability of $75,955
(of which $66,635 is included in other long-term liabilities and $9,320 is
included in current accrued liabilities at February 4, 2003) represents the
present value of the future benefit obligations in excess of the fair value of
plan assets at February 4, 2003. Contributions to the Pension Plan will be
$9,320 in fiscal 2003 which is included in accrued liabilities and are estimated
to be approximately $45,576 over the next five years.
A summary of Pension Plan and Other Benefit Plan liabilities as of February
4, 2003 is as follows:
<Table>
<Caption>
PENSION OTHER BENEFIT
PLAN PLANS
---- -----
Benefit obligation.......................................... $157,717 $4,521
Plan assets................................................. 81,762 --
-------- ------
Accrued benefit cost........................................ $ 75,955 $4,521
-------- ------
-------- ------
</Table>
A summary of the assumptions used to determine the Pension Plan and Other
Benefit Plan liabilities are as follows:
<Table>
Discount rate............................................... 5.3%
Expected return on plan assets.............................. 7.0%
</Table>
The Company also sponsors a defined contribution plan for substantially all
of its domestic employees. Employees can contribute to the plan, on a pre-tax
and after-tax basis, a percentage of their qualifying compensation up to the
allowable legal limits. The Company contributes amounts equal to 35.0% of the
first 6.0% of employee contributions effective January 1, 2003.
G-14
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 9 -- INVENTORIES
<Table>
<Caption>
FEBRUARY 4,
2003
----
Finished goods........................................... $266,061
Work in process.......................................... 68,914
Raw materials............................................ 45,843
--------
380,818
Less: reserves........................................... (32,785)
--------
$348,033
--------
--------
</Table>
NOTE 10 -- PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
FEBRUARY 4,
2003
----
Land and land improvements.................................. $ 1,305
Building and building improvements.......................... 23,071
Furniture and fixtures...................................... 15,813
Machinery and equipment..................................... 32,072
Computer hardware and software.............................. 56,778
Construction in progress.................................... 318
--------
Property, plant and equipment............................... $129,357
--------
--------
</Table>
NOTE 11 -- INTANGIBLE ASSETS
<Table>
<Caption>
FEBRUARY 4,
2003 USEFUL LIFE
---- -----------
Indefinite lived intangible assets:
Trademarks....................................... $202,500
Licenses in perpetuity........................... 139,900
Finite lived intangible assets:
Licenses for a term.............................. 9,700 71 months
Sales order backlog.............................. 12,600 6 months
--------
Intangible assets.................................... $364,700
--------
--------
</Table>
Amortization expense related to finite lived intangible assets for fiscal
2003 will be approximately $14,102 and will be $1,639 for each of the next five
years.
NOTE 12 -- DEBT
<Table>
Exit Financing Facility..................................... $ 39,200
GECC debt................................................... 4,890
Second Lien Notes........................................... 200,942
Capital lease obligations................................... 1,420
--------
246,452
Current portion............................................. (44,250)
--------
Total long-term debt.................................... $202,202
--------
--------
</Table>
G-15
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Stated maturities of long-term debt at February 4, 2003 were:
<Table>
<Caption>
EXIT SECOND CAPITALIZED
FINANCING LIEN GECC LEASE
YEAR TOTAL FACILITY NOTES DEBT OBLIGATIONS
- ---- ----- -------- ----- ---- -----------
2003........................ $ 5,050 $ -- $ -- $4,890 $ 160
2004........................ 40,502 -- 40,189 -- 313
2005........................ 40,502 -- 40,189 -- 313
2006........................ 40,501 -- 40,188 -- 313
2007........................ 79,709 39,200 40,188 -- 321
2008 and thereafter......... 40,188 -- 40,188 -- --
-------- ------- -------- ------ ------
$246,452 $39,200 $200,942 $4,890 $1,420
-------- ------- -------- ------ ------
-------- ------- -------- ------ ------
</Table>
EXIT FINANCING FACILITY
On the Emergence 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's base rate plus 1.50% (5.75% at February 4,
2003) or at the London Interbank Offered Rate ('LIBOR') plus 2.50%
(approximately 3.9% at February 4, 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 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
Emergence Date were $39,200. The Exit Financing Facility is secured by
substantially all of the domestic assets of the Company.
SECOND LIEN NOTES
In accordance with the Plan, on the Emergence 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 February 4,
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 $40,188 beginning in April 2004
G-16
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 $75,000 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
$4,890 is classified with the current portion of long-term debt at February 4,
2003. The Company determined the fair value of the remaining payments due to
GECC based upon the monthly payments of $750 per month discounted at 8% and a
final payment of $181.5. Remaining amounts payable to GECC will be paid in
monthly installments of $750 including interest through September 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 February 4, 2003 related to these
leases was approximately $1,420, of which $160 and $1,260 are included with
short-term and long-term debt, respectively.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
LICENSE AGREEMENTS
The Company has license agreements with the following minimum guaranteed
royalty payments:
<Table>
<Caption>
MINIMUM
YEAR ROYALTY(a)
- ---- ----------
2003...................................................... $ 22,044
2004...................................................... 22,789
2005...................................................... 25,527
2006...................................................... 25,961
2007...................................................... 24,718
2008 and thereafter....................................... 261,255
</Table>
- ---------
(a) Includes all minimum royalty obligations. Some of the
Company's license agreements have no expiration date or
extend beyond 20 years. The duration of these agreements for
purposes of this item is assumed to be 20 years. Variable
based minimum royalty obligations are based upon payments
for the most recent fiscal year.
-------------------
Although the specific terms of each of the Company's license agreements
vary, generally such agreements provide for minimum royalty payments and/or
royalty payments based upon a percentage of net sales. Such license agreements
also generally grant the licensor the right to approve any designs marketed by
the licensee.
Certain of the Company's license agreements with third parties will expire
by their terms over the next several years. There can be no assurance that the
Company will be able to negotiate and conclude extensions of such agreements on
similar economic terms.
G-17
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
EMPLOYMENT AGREEMENT
On April 15, 2003, the Company announced that it had named Joseph R. Gromek
as its President and Chief Executive Officer and that it had elected him to the
Board of Directors, effective as of the date of such announcement. Mr. Gromek
succeeded Mr. Alvarez who had served as the Company's President and Chief
Executive Officer since November 16, 2001.
In connection with Mr. Gromek's employment, the Company entered into an
employment agreement, dated April 14, 2003 (the 'Gromek Agreement'), with Mr.
Gromek. The Gromek Agreement has an initial two-year term which commenced on
April 15, 2003, with automatic one-year renewals thereafter unless notice of
termination is given at least 180 days prior to the date on which the term would
otherwise expire. Under the Gromek Agreement, Mr. Gromek will receive a base
salary of $900 per year for the initial two-year term and employee benefits and
perquisites consistent with those provided to other senior executives of the
Company. In addition, Mr. Gromek's agreement provides for a target bonus
opportunity equal to 100% of his base salary (prorated for partial years) and a
guaranteed bonus for the 2003 fiscal year of no less than 50% of his base
salary. Pursuant to the terms of the Gromek Agreement, the Company granted to
Mr. Gromek 150,000 restricted shares of New Common Stock and a ten-year option
to purchase 600,000 shares of New Common Stock, each award to be made under the
Company's equity incentive plan and subject to the terms and conditions set
forth in the agreements evidencing the awards. Each of these equity awards will
vest with respect to 25% of the shares on each September 12, provided Mr. Gromek
is employed by the Company on each date, and will become fully vested if a
Change in Control (as defined in the Gromek Agreement) occurs during the term of
the Gromek Agreement. If Mr. Gromek's employment with the Company is terminated
either by the Company without Cause (as defined in the Gromek Agreement) or by
Mr. Gromek for Good Reason (as defined in the Gromek Agreement), Mr. Gromek will
be entitled to (1) salary continuation and participation in welfare benefit
plans for 12 months, (2) a pro rata bonus for the fiscal year in which the
termination occurs and (3) immediate vesting of 50% of the remaining unvested
shares of the restricted stock award that are outstanding as of the date of such
termination. If Mr. Gromek is terminated because the Company chooses not to
renew a term, Mr. Gromek will be entitled to salary continuation and
participation in welfare benefit plans for six months. If Mr. Gromek's
employment with the Company is terminated by the Company without Cause or by Mr.
Gromek for Good Reason within one year following a Change in Control, Mr. Gromek
is entitled to (1) salary continuation and participation in welfare benefit
plans for 18 months and (2) a pro rata bonus for the fiscal year in which such
termination occurs. In order for Mr. Gromek to receive severance benefits, he
will be required to execute a release of claims against the Company and its
affiliates, and the Company will execute a release (with certain exceptions) of
claims against Mr. Gromek. Under the terms of the Gromek Agreement, Mr. Gromek
is bound by a perpetual confidentiality covenant, a post-termination
non-competition covenant and a post-termination non-solicitation covenant.
CONSULTING AGREEMENT
During Fiscal 2001, the Predecessor entered into an employment agreement
with its President and Chief Executive Officer, Mr. Antonio C. Alvarez II. The
employment agreement, as amended, was replaced in conjunction with the
consummation of the Plan by a consulting agreement with Alvarez & Marsal Inc.
('A&M'). On January 29, 2003, the Predecessor entered a consulting agreement
with A&M (as supplemented by a March 18, 2003 letter agreement, the 'Consulting
Agreement') pursuant to which Mr. Alvarez and Mr. James P. Fogarty will continue
to serve the Company as Chief Executive Officer and Chief Financial Officer,
respectively. Certain other A&M affiliated persons will continue serving the
Company in a consulting capacity. The Consulting Agreement was effective on
February 4, 2003 and may be terminated by either party, without
G-18
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
cause, upon 30 days' written notice. Upon commencement of employment of a New
Chief Executive Officer ('New CEO') or Chief Financial Officer ('New CFO'), Mr.
Alvarez and Mr. Fogarty are obligated to provide transitional assistance to the
New CEO and New CFO, respectively, as reasonably required by the Company. The
Consulting Agreement provides that the Company will pay A&M on account of Mr.
Alvarez's service as follows: (i) $125 per month for 15 days after the
commencement of the employment of the New CEO; and (ii) after the period
described above $0.750 per hour of transition services provided by Mr. Alvarez.
The Consulting Agreement further provides that the Company will pay A&M on
account of Mr. Fogarty's service at the rate of $0.475 per hour. Moreover, A&M
is eligible to receive the following incentive compensation under terms of the
Consulting Agreement: (i) additional payments upon the consummation of certain
transactions and (ii) participation in the Company's incentive compensation
program for the periods Mr. Alvarez and Mr. Fogarty serve as Chief Executive
Officer and Chief Financial Officer, respectively. Incentive compensation
payable to A&M upon the consummation of certain transactions is not currently
determinable because it is contingent upon future events which may or may not
occur. Mr. Fogarty and Mr. Alvarez are bound by certain confidentiality,
indemnification and non-solicitation obligations under the terms of the
Consulting Agreement.
OPERATING LEASES
The Company is a party to various lease agreements for equipment, real
estate, furniture, fixtures and other assets, which expire at various dates
through 2020. Under these agreements, the Company is required to pay various
amounts including property taxes, insurance, maintenance fees and other costs.
The following is a schedule of future minimum rental payments required under
operating leases with terms in excess of one year, as of February 4, 2003:
<Table>
<Caption>
RENTAL PAYMENTS
-----------------------
YEAR REAL ESTATE EQUIPMENT
- ---- ----------- ---------
2003............................................... $17,883 $868
2004............................................... 14,735 55
2005............................................... 9,382 35
2006............................................... 6,361 25
2007............................................... 4,842 13
2008 and thereafter................................ 35,401 --
</Table>
The Company leases certain real property from an entity controlled by an
employee who is the former owner of A.B.S. by Allen Schwartz. The lease expires
on May 31, 2005 and includes four five-year renewal options. Minimum rental
obligations under this lease total approximately $500 per year through May 2005
and are included in the future minimum real estate rental payments above.
NOTE 14 -- FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Accounts Receivable: The carrying amount of the Company's accounts
receivable approximates fair value.
Marketable Securities: Marketable securities are stated at fair value based
on quoted market prices.
Exit Financing Facility: The carrying amounts under the Exit Financing
Facility are recorded at the nominal amount which approximates its fair value
because of the short-term nature of the obligation and variable interest rate.
G-19
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Second Lien Notes: The carrying amount of the Second Lien Notes approximates
the fair value as the Second Lien Notes have traded in certain secondary trading
markets at approximately par value following the Emergence Date.
Other long-term debt: The carrying amount of the Company's other long-term
debt (other than GECC debt) is recorded at the nominal amount which approximates
its fair value because the interest rate on the outstanding debt is variable,
there are no prepayment penalties. In the case of the GECC debt, the obligation
is valued at the total of its cash flow obligations discounted at 8.0%.
Letters of credit: Letters of credit collateralize the Company's obligations
to third parties and have terms ranging from 30 days to one year. The fees
payable related to such letters of credit are reasonable estimates of their fair
value since the Company is not obligated to perform under the letters of credit
unless the beneficiary performs under the terms of the letters of credit. At
February 4, 2003, the Company had standby and outstanding letters of credit of
$14,566 and $73,264, respectively. Fees related to the letters of credit are
charged at 2.5% of the average balance of standby and outstanding letters of
credit.
The carrying amounts and fair value of the Company's financial instruments
as of February 4, 2003, are as follows:
<Table>
<Caption>
FEBRUARY 4, 2003
-------------------
CARRYING FAIR
AMOUNT VALUE
------ -----
Accounts receivable.................................. $213,048 $213,048
Exit Financing Facility.............................. 39,200 39,200
Second Lien Notes.................................... 200,942 200,942
Other long-term debt................................. 6,310 6,310
Fees on letters of credit............................ -- 2,196
</Table>
NOTE 15 -- LEGAL MATTERS
Shareholder Class Actions: Between August 22, 2000 and October 26, 2000,
seven putative class action complaints were filed in the U.S. District Court for
the Southern District of New York (the 'District Court') against the Company and
certain of its officers and directors (the 'Shareholder I Class Action'). The
complaints, on behalf of a putative class of shareholders of the Company who
purchased the Old Common Stock between September 17, 1997 and July 19, 2000 (the
'Class Period'), allege, inter alia, that the defendants violated the Exchange
Act by artificially inflating the price of the Old Common Stock and failing to
disclose certain information during the Class Period.
On November 17, 2000, the District Court consolidated the complaints into a
single action, styled In Re The Warnaco Group, Inc. Securities Litigation, No.
00-Civ-6266 (LMM), and appointed a lead plaintiff and approved a lead counsel
for the putative class. A second amended consolidated complaint was filed on May
31, 2001. On October 5, 2001, the defendants other than the Company filed a
motion to dismiss based upon, among other things, the statute of limitations,
failure to state a claim and failure to plead fraud with the requisite
particularity. On April 25, 2002, the District Court granted the motion to
dismiss this action based on the statute of limitations. On May 10, 2002, the
plaintiffs filed a motion for reconsideration in the District Court. On May 24,
2002, the plaintiffs filed a notice of appeal with respect to such dismissal. On
July 23, 2002, plaintiffs' motion for reconsideration was denied. On July 30,
2002, the plaintiffs voluntarily dismissed, without prejudice, their claims
against the Company. On October 2, 2002, the plaintiffs filed a notice of appeal
with respect to the District Court's entry of a final judgment in favor of the
individual defendants.
G-20
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Between April 20, 2001 and May 31, 2001, five putative class action
complaints against the Company and certain of its officers and directors were
filed in the District Court (the 'Shareholder II Class Action'). The complaints,
on behalf of a putative class of shareholders of the Company who purchased the
Old Common Stock between September 29, 2000 and April 18, 2001 (the 'Second
Class Period'), allege, inter alia, that defendants violated the Exchange Act by
artificially inflating the price of the Old Common Stock and failing to disclose
negative information during the Second Class Period.
On August 3, 2001, the District Court consolidated the actions into a single
action, styled In Re The Warnaco Group, Inc. Securities Litigation (II), No. 01
CIV 3346 (MCG), and appointed a lead plaintiff and approved a lead counsel for
the putative class. A consolidated amended complaint was filed against certain
current and former officers and directors of the Company, which expanded the
Second Class Period to encompass August 16, 2000 to June 8, 2001. The amended
complaint also dropped the Company as a defendant, but added as defendants
certain outside directors. On April 18, 2002, the District Court dismissed the
amended complaint, but granted plaintiffs leave to replead. On June 7, 2002, the
plaintiffs filed a second amended complaint, which again expanded the Second
Class Period to encompass August 15, 2000 to June 8, 2001. On June 24, 2002, the
defendants filed motions to dismiss the second amended complaint. On August 21,
2002, the plaintiffs filed a third amended complaint adding the Company's
current independent auditors as a defendant.
Neither the Shareholder I Class Action nor Shareholder II Class Action has
had, or will have, a material adverse effect on the Company's financial
condition, results of operations or business.
Speedo Litigation: On September 14, 2000, Speedo International, Ltd. filed a
complaint in the U.S. District Court for the Southern District of New York,
styled Speedo International Limited v. Authentic Fitness Corp., et. al., No. 00
Civ. 6931 (DAB) (the 'Speedo Litigation'), against The Warnaco Group, Inc. and
various other Warnaco entities (the 'Warnaco Defendants') alleging claims, inter
alia, for breach of contract and trademark violations (the 'Speedo Claims'). The
complaint sought, inter alia, termination of certain licensing agreements,
injunctive relief and damages.
On November 8, 2000, the Warnaco Defendants filed an answer and
counterclaims against Speedo International, Ltd. seeking, inter alia, a
declaration that the Warnaco Defendants have not engaged in trademark violations
and are not in breach of the licensing agreements, and that the licensing
agreements in issue (the 'Speedo Licenses') may not be terminated.
On or about October 30, 2001, Speedo International, Ltd. filed a motion in
the Bankruptcy Court seeking relief from the automatic stay to pursue the Speedo
Litigation in the District Court, and have its rights determined there through a
jury trial (the 'Speedo Motion'). The Debtors opposed the Speedo Motion, and
oral argument was held on February 21, 2002. On June 11, 2002, the Bankruptcy
Court denied the Speedo Motion on the basis that inter alia, (i) the Speedo
Motion was premature and (ii) the Bankruptcy Court has core jurisdiction over
resolution of the Speedo Claims.
On November 25, 2002, the Warnaco Defendants entered into a settlement
agreement with Speedo International, Ltd. to resolve the Speedo Claims on a
final basis (the 'Speedo Settlement Agreement'). On December 13, 2002, the
Bankruptcy Court entered an order approving the Speedo Settlement Agreement and
the Speedo Litigation was subsequently dismissed with prejudice.
The Speedo Settlement Agreement provided for (a) a total payment by the
Company to Speedo International, Ltd. in the amount of $2,558 in settlement of
disputed claims; (b) the assignment by the Company to Speedo International, Ltd.
of certain domain names; (c) an amendment to the Speedo Licenses and related
agreements (which remain in full force and effect for a perpetual term) to
clarify certain contractual provisions therein; (d) the execution of a
G-21
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
separate Web Site Agreement to govern the use of the Speedo mark in connection
with the web site operated by the Company; and (e) full mutual releases in favor
of each of the parties. The settlement of the Speedo Litigation did not have a
material adverse effect on the Company's financial condition, results of
operations or business.
Wachner Claim: On January 18, 2002, Mrs. Linda J. Wachner, former President
and Chief Executive Officer of the Company, filed a proof of claim in the
Chapter 11 Cases related to the post-petition termination of her employment with
the Company asserting an administrative priority claim in excess of $25,000 (the
'Wachner Claim'). The Debt Coordinators for the Company's pre-petition lenders,
the Official Committee of Unsecured Creditors and the Company objected to the
Wachner Claim. On November 15, 2002, the parties entered into a settlement
agreement (the 'Wachner Settlement'), pursuant to which Mrs. Wachner would
receive, in full settlement of the Wachner Claim, the following: (a) an Allowed
Unsecured Claim in connection with the termination of her employment agreement
in the amount of $3,500 (which would be satisfied under the Plan by a
distribution of its pro rata share of New Common Stock having a value of
approximately $250 at the time of distribution); and (b) an Allowed
Administrative Claim of $200 (which was satisfied by a cash payment of such
amount upon confirmation of the Plan). The Wachner Settlement Agreement was
approved by the Bankruptcy Court on December 13, 2002.
SEC Investigation: As previously disclosed, the staff of the Securities and
Exchange Commission (the 'SEC') has been conducting an investigation to
determine whether there have been any violations of the Exchange Act in
connection with the preparation and publication by the Company of various
financial statements and other public statements. On July 18, 2002, the SEC
staff informed the Company that it intends to recommend that the SEC authorize
an enforcement action against the Company and certain persons who have been
employed by or affiliated with the Company since prior to the periods covered by
the Company's previous restatements of its financial results alleging violations
of the federal securities laws. The SEC staff invited the Company to make a
Wells Submission describing the reasons why no such action should be brought. On
September 3, 2002, the Company filed its Wells Submission and is continuing
discussions with the SEC staff as to a settlement of this investigation. The
Company does not expect the resolution of this matter as to the Company to have
a material effect on the Company's financial condition, results of operation or
business.
Chapter 11 Cases: For a discussion of proceedings under Chapter 11 of the
Bankruptcy Code, see Note 1.
In addition to the above, from time to time, the Company is involved in
arbitrations or legal proceedings that arise in the ordinary course of its
business. The Company cannot predict the timing or outcome of these claims and
proceedings. Currently, the Company is not involved in any arbitration and/or
legal proceeding that it expects to have a material effect on its business,
financial condition or results of operations.
G-22
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------ -----------
JULY 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---- ---- ----
ASSETS
Current assets:
Cash..................................................... $ 65,925 $ 20,706 $ 114,025
Restricted cash.......................................... -- 6,200 6,100
Accounts receivable, less reserves of $71,643 as of July
5, 2003, $79,705 as of February 4, 2003 and $87,512 as
of January 4, 2003..................................... 204,860 213,048 199,817
Inventories, net......................................... 288,703 348,033 345,268
Prepaid expenses and other current assets................ 29,808 30,890 31,438
Assets held for sale..................................... 1,050 1,485 1,458
Deferred income taxes.................................... 7,399 7,399 2,972
---------- ---------- -----------
Total current assets................................. 597,745 627,761 701,078
---------- ---------- -----------
Property, plant and equipment--net.......................... 111,452 129,357 156,712
Other assets:
Licenses, trademarks and other intangible assets, at
cost, less accumulated amortization of $11,179 as of
July 5, 2003, $0 as of February 4, 2003 and $19,069 as
of January 4, 2003..................................... 321,266 364,700 86,827
Deferred financing costs................................. 12,921 5,286 463
Other assets............................................. 4,197 2,703 2,800
Goodwill................................................. 89,963 34,142 --
---------- ---------- -----------
Total other assets................................... 428,347 406,831 90,090
---------- ---------- -----------
$1,137,544 $1,163,949 $ 947,880
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt........................ $ 1,512 $ 5,050 $ 5,765
Revolving credit facility................................ -- 39,200 --
Accounts payable......................................... 86,391 122,376 103,630
Accrued liabilities...................................... 115,565 105,302 102,026
Accrued income tax payable............................... 22,315 28,140 28,420
---------- ---------- -----------
Total current liabilities............................ 225,783 300,068 239,841
---------- ---------- -----------
Long-term debt............................................. 211,274 202,202 1,252
Deferred income taxes...................................... 99,798 86,975 4,964
Other long-term liabilities................................ 71,899 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 July 5, 2003
and February 4, 2003................................... -- -- --
Successor common stock: $.01 par value, 112,500,000
shares authorized, 45,023,513 and 44,999,973 issued and
outstanding as of July 5, 2003 and February 4, 2003,
respectively........................................... 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............................... 505,742 503,098 908,939
Accumulated other comprehensive income (loss)............ 8,423 -- (93,223)
Retained earnings (deficit).............................. 14,175 -- (2,358,537)
Predecessor treasury stock, at cost 12,242,629 shares as
of January 4, 2003..................................... -- -- (313,889)
Unearned stock compensation.............................. -- -- (40)
---------- ---------- -----------
Total stockholders' equity (deficiency).............. 528,790 503,548 (1,856,096)
---------- ---------- -----------
$1,137,544 $1,163,949 $ 947,880
---------- ---------- -----------
---------- ---------- -----------
</Table>
See Notes to Consolidated Condensed Financial Statements.
H-1
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------------- --------------
THREE MONTHS THREE MONTHS
ENDED ENDED
JULY 5, 2003 JULY 6, 2002
------------ ------------
Net revenues............................................. $335,844 $ 381,767
Cost of goods sold....................................... 239,440 265,919
-------- ---------
Gross profit............................................. 96,404 115,848
Selling, general and administrative expenses............. 94,829 100,579
Amortization of sales order backlog...................... 6,300 --
Restructuring items...................................... 6,071 --
Reorganization items..................................... -- 42,554
-------- ---------
Operating loss........................................... (10,796) (27,285)
Other income............................................. (1,363) --
Interest expense......................................... 5,423 3,095
-------- ---------
Loss before provision (benefit) for income taxes......... (14,856) (30,380)
Provision (benefit) for income taxes..................... (6,392) 1,609
-------- ---------
Net loss................................................. $ (8,464) $ (31,989)
-------- ---------
-------- ---------
Basic and diluted loss per common share.................. $ (0.19) $ (0.60)
-------- ---------
-------- ---------
Weighted average number of shares outstanding used in
computing basic and diluted loss per common share...... 45,010 52,936
-------- ---------
-------- ---------
</Table>
See Notes to Consolidated Condensed Financial Statements.
H-2
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------------- -----------------------------------
PERIOD PERIOD SIX MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO JULY 5, 2003 TO FEBRUARY 4, 2003 JULY 6, 2002
--------------- ------------------- ------------
Net revenues................................ $662,168 $ 115,960 $ 791,819
Cost of goods sold.......................... 444,358 70,214 557,559
-------- ----------- ---------
Gross profit................................ 217,810 45,746 234,260
Selling, general and administrative
expenses.................................. 168,680 35,313 202,697
Amortization of sales order backlog......... 10,500 -- --
Restructuring items......................... 6,140 -- --
Reorganization items........................ -- 29,922 58,085
-------- ----------- ---------
Operating income (loss)..................... 32,490 (19,489) (26,522)
Gain on cancellation of pre-petition
indebtedness.............................. -- (1,692,696) --
Fresh start adjustments..................... -- (765,726) --
Other (income) loss......................... (1,328) 359 --
Interest expense............................ 9,851 1,887 10,059
-------- ----------- ---------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting principle...................... 23,967 2,436,687 (36,581)
Provision for income taxes.................. 9,792 78,150 51,538
-------- ----------- ---------
Income (loss) before cumulative effect of a
change in accounting principle............ 14,175 2,358,537 (88,119)
Cumulative effect of change in accounting
principle (net of income tax benefit of
$53,513 -- six months ended July 6,
2002)..................................... -- -- (801,622)
-------- ----------- ---------
Net income (loss)........................... $ 14,175 $ 2,358,537 $(889,741)
-------- ----------- ---------
-------- ----------- ---------
Basic and diluted income (loss) per common
share:
Income (loss) before accounting
change................................ $ 0.31 $ 44.51 $ (1.66)
Cumulative effect of accounting
change................................ -- -- (15.14)
-------- ----------- ---------
Net income (loss)....................... $ 0.31 $ 44.51 $ (16.81)
-------- ----------- ---------
-------- ----------- ---------
Weighted average number of shares
outstanding used in computing income
(loss) per common share:
Basic................................... 45,006 52,990 52,936
-------- ----------- ---------
-------- ----------- ---------
Diluted................................. 45,154 52,990 52,936
-------- ----------- ---------
-------- ----------- ---------
</Table>
See Notes to Consolidated Condensed Financial Statements.
H-3
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------------- ------------------------------------
PERIOD PERIOD SIX MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO JULY 5, 2003 TO FEBRUARY 4, 2003 JULY 6, 2002
--------------- ------------------- ------------
Net income (loss)...................................... $ 14,175 $ 2,358,537 $(889,741)
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................ 70,546 15,206 95,443
Provision for inventory reserves................... 11,748 3,484 27,474
Net loss on sale of GJM, Penhaligon's and
Ubertech......................................... -- -- 2,100
Gain on sale of property, plant and equipment...... (105)
Cumulative effect of change in accounting
principle, net of taxes.......................... -- -- 801,622
Provision for deferred income tax.................. -- 77,584 46,058
Depreciation and amortization...................... 26,326 4,511 29,011
Stock compensation................................. 2,523 8 217
Amortization of deferred financing costs........... 686 463 4,731
Non-cash restructuring items....................... 166 -- --
Non-cash reorganization items...................... -- 15,561 31,994
Change in operating assets and liabilities:
Accounts receivable................................ (62,358) (28,437) (28,826)
Inventories........................................ 47,582 (28,520) 56,703
Prepaid expenses and other assets.................. 5,909 (142) 18,570
Accounts payable, accrued expenses and other
liabilities...................................... (24,417) 14,948 19,359
Accrued income taxes............................... (3,690) 293 3,835
-------- ----------- ---------
Net cash provided by (used in) operating activities.... 89,196 (24,926) 218,445
-------- ----------- ---------
Cash flows from investing activities:
Disposals of property, plant and equipment......... 142 -- 7,564
Purchase of property, plant and equipment.......... (6,351) (745) (5,214)
Proceeds from sale of business units, net of cash
balances......................................... -- -- 20,459
-------- ----------- ---------
Net cash provided by (used in) investing activities.... (6,209) (745) 22,809
-------- ----------- ---------
Cash flows from financing activities:
Repayments of GECC debt............................ (3,430) (715) (490)
Repayments of capital lease obligations............ (94) -- --
Repayments of pre-petition debt.................... -- (106,112) (10,054)
Repayments under Amended DIP....................... -- -- (155,915)
Repayments of Second Lien Notes.................... (200,942)
Payment of deferred financing costs................ (8,321)
Proceeds from the issuance of Senior Notes due
2013............................................. 210,000
Borrowings (repayments) under revolving credit
facility......................................... (39,200) 39,200 --
Other.............................................. -- -- --
-------- ----------- ---------
Net cash used in financing activities.................. (41,987) (67,627) (166,459)
-------- ----------- ---------
Translation adjustments................................ 4,219 (21) 1,811
-------- ----------- ---------
Increase (decrease) in cash............................ 45,219 (93,319) 76,606
Cash, excluding restricted cash, at beginning of
period............................................... 20,706 114,025 39,558
-------- ----------- ---------
Cash at end of period.................................. $ 65,925 $ 20,706 $ 116,164
-------- ----------- ---------
-------- ----------- ---------
</Table>
See Notes to Consolidated Condensed Financial Statements.
H-4
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
Warnaco's subsidiaries were reorganized under Chapter 11 of the U.S. Bankruptcy
Code, 11 U.S.C. 'SS' 'SS'101-1330, as amended (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, 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 to
customers, both domestically and internationally, through a variety of channels,
including department and specialty stores, Company-owned retail stores,
independent retailers, chain stores, membership clubs and mass merchandisers.
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 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 Group'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 15. 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 (the 'Securities Act'), pursuant to Section 1145(a) of the
Bankruptcy Code. The Second Lien Notes were 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 Second Lien
Notes and the accrued interest thereon were repaid in full on June 12, 2003 with
the proceeds of the offering of the 8 7/8% Senior Notes due 2013 (the 'Senior
Notes'). See Note 15.
H-5
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 were distributed to pre-petition creditors as described below. In
addition, 5,000,000 shares of New Common Stock 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 Stock Incentive Plan
(the 'Stock 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 of the New Common Stock on the date of grant. On May
28, 2003, the stockholders of the Company approved the Stock Incentive Plan. 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 in connection with 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;
(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 inter-company accounts have been eliminated in consolidation.
The accompanying consolidated condensed financial statements of the
Predecessor for the periods April 7, 2002 to July 6, 2002 (the 'Second Quarter
of Fiscal 2002'), January 6, 2002 to July 6, 2002 (the 'Six Months Ended July 6,
2002') and January 5, 2003 to February 4, 2003 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 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
H-6
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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 being 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 reporting 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 Second Quarter of Fiscal 2002 contained 13 weeks of
operations of the Predecessor and the Six Months Ended July 6, 2002 contained 26
weeks of operations of the Predecessor. The period January 5, 2003 to
February 4, 2003 contained four weeks of operations of the Predecessor. The
period April 6, 2003 to July 5, 2003 (the 'Second Quarter of Fiscal 2003')
contained 13 weeks of operations of the Successor and the period February 5,
2003 to July 5, 2003 contained 22 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, net of estimated customer
returns, allowances and other discounts. The Company recognizes revenue from its
consignment accounts and retail stores when goods are sold to consumers, net of
allowances for future returns. The determination of allowances and returns
involves the use of significant judgment and estimates by the Company. The
Company bases its estimates of allowance rates on past experience by product
line and account, the financial stability of its customers, the rate (based on
reorders and customer inventory levels) that its products are selling to
consumers, the expected rate of retail sales growth and general economic and
retail forecasts. The Company reviews and adjusts its accrual rates each month
based on its current experience. During the Company's monthly review, the
Company also considers its accounts
H-7
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
receivable collection rate and the nature and amount of customer deductions and
requests for promotion assistance. The Company believes it is likely that its
accrual rates will vary over time and could change materially if the Company's
mix of customers, channels of distribution or product mix changes. The Company's
current rates of accrual for sales allowances, returns and discounts range from
5.0% to 20.0%.
Cost of Goods Sold. Cost of goods sold for the Successor consists of the
cost of products produced or purchased and certain period costs related to the
production and manufacturing process. Product costs include (i) material, direct
labor and overhead (including the costs incurred by external contractors),
(ii) duty, quota and related tariffs, (iii) in-bound freight and traffic costs,
including inter-plant freight, (iv) procurement and material handling costs,
(v) indirect production overhead including inspection, quality control, sample
making/room, production control and planning, cost accounting and engineering
and (vi) in-stocking costs in our warehouse (cost to receive, unpack and stock
product available for sale in our distribution center). Period costs included in
cost of goods sold include (i) royalty, (ii) design and merchandising,
(iii) samples, (iv) manufacturing variances (net of amounts capitalized),
(v) loss on seconds and (vi) provisions for inventory losses (including
provisions for shrinkage and losses on the disposition of excess and obsolete
inventory). Costs incurred to store, pick, pack and ship inventory to customers
are included in shipping and handling costs and are classified in selling,
general and administrative expenses. The Company's gross profit and gross margin
may not be comparable to those of other companies as some companies include
shipping and handling costs in cost of goods sold. The Predecessor included
design, merchandising and other product related costs in its determination of
inventory value. The Company expenses such costs as incurred since February 4,
2003.
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, 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. Adjustments for specific account allowances
and negotiated settlements of customer deductions are recorded as deductions to
revenue in the period the specific adjustment is identified. 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. As of July 5, 2003 the Company had approximately
$263,103 of open trade invoices and other receivables and $13,400 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 $71,643 of
accounts receivable reserves at July 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 reduced its accounts receivable balance by $79,705 to reflect its
accounts receivable at fair value. 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
H-8
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
deteriorate, the Company may need to increase the reserves 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. The Company's calculation of the reserves necessary
for the disposition of excess inventory is highly dependent on its projections
of future sales of those products and the prices it is able to obtain for such
products. The Company reviews its inventory position monthly and adjusts its
reserves for excess and obsolete goods based on revised projections and current
market conditions for the disposition of excess and obsolete inventory. If
economic conditions worsen the Company will have to increase its reserve
estimates substantially. At July 5, 2003, the Company had identified inventory
with a carrying value of approximately $64,600 as potentially excess and/or
obsolete. Based upon the estimated recoveries related to such inventory, as of
July 5, 2003, the Company had approximately $29,155 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 reduced its
inventory by $32,785 to reflect such inventory at fair value. 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 adjustments 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, the Company adopted fresh start
accounting and its long-lived assets, including property, plant and equipment,
were recorded at their fair values based upon the preliminary appraised values
of such assets. The Company determined the fair value of its property, plant and
equipment using the planned future use of each asset or group of assets, quoted
market prices for assets where a market exists for such assets, the expected
future revenue and profitability of the business unit utilizing such assets and
the expected future life of such assets. In its determination of fair value, the
Company also considered whether an asset would be sold either individually or
with other assets and the proceeds the Company expects to receive from such a
sale. The Company used the work of an independent third party appraisal firm in
determining the fair values of its property, plant and equipment. Assumptions
relating to the expected future use of individual assets could affect the fair
value of such assets and the depreciation expense recorded related to such
assets in the future.
Intangible assets consist primarily of licenses and trademarks. The Company
determined the fair value of its trademarks, licenses and other intangible
assets. The fair values were calculated using the discounted estimated future
cash flow to be generated from the sales of products utilizing such trademarks
and/or licenses. The determination of fair value considered the royalty rates
attributable to products of similar types, recent sales or licensing agreements
entered into by companies selling similar products and the expected term during
which the Company expects to earn cash flows from each license or trademark. The
majority of the Company's license and
H-9
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
trademark agreements cover periods of time in excess of forty years. The
estimates and assumptions used in the determination of the value of these
intangible assets will not have any effect on the Company's future earnings
unless a future evaluation of trademark or license value indicates that such
asset is impaired. Identifiable intangible assets with finite useful lives are
amortized on a straight-line basis over the estimated useful lives of the
assets. Pursuant to the provisions of SFAS 142 the Company does not amortize
assets with indefinite lives.
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 established to
reduce the amount of deferred tax assets to an amount that the Company believes,
based upon objectively verifiable evidence, is realizable. The only objectively
verifiable evidence the Company used in determining the need for a valuation
allowance were the future reversals of existing temporary differences. The
future recognition of deferred tax assets will first reduce goodwill. Should the
recognition of deferred tax assets result in the elimination of goodwill, 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.
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 Pension
Plan's third party actuary has determined the total liability attributable to
benefits owed to participants covered by the Pension Plan 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 set forth by the Pension Benefit Guaranty
Corporation. The Pension Plan was under-funded as of January 4, 2003,
February 4, 2003 and July 5, 2003. The Pension Plan and the Company's plan of
reorganization contemplate that the Company will continue to 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 July 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 $9,380 and will be
approximately $46,293 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.
H-10
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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 July 5, 2003. Cash contributions to the
Pension Plan were $1,720 for the period February 5, 2003 to July 5, 2003. The
remaining contributions to the Pension Plan to be paid in fiscal 2003 of $7,600
are classified with accrued liabilities at July 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 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 emerged from bankruptcy on February 4,
2003, and as a result, the Company does not have sufficient 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 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% for options granted in fiscal 2003 is equal to the quoted
yield for five-year U.S. treasury bonds as of March 12, 2003. The Company will
re-evaluate its risk free rate of return assumptions and volatility assumptions
annually in the first quarter of the fiscal year for options granted during that
fiscal year.
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 equaled the market price of the underlying
shares on the date of grant (the 'intrinsic value method'). Compensation expense
related to restricted stock grants is recognized over the vesting period of the
grants.
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 period January 5, 2003 to February 4, 2003, for the Second Quarter
of Fiscal 2002 and for the Six Months Ended July 6, 2002, respectively:
H-11
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
PREDECESSOR
------------------------------------------------
PERIOD SIX MONTHS
JANUARY 5, 2003 THREE MONTHS ENDED
TO FEBRUARY 4, ENDED JULY 6, JULY 6,
2003 2002 2002
---- ---- ----
Net income (loss) as reported....................... $2,358,537 $(31,989) $(889,741)
Add: Stock-based employee compensation cost included
in reported net income net of related income tax
effects........................................... 8 108 217
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............................................ (252) (1,857) (3,715)
---------- -------- ---------
Net income (loss) -- pro forma...................... $2,358,293 $(33,738) $(893,239)
---------- -------- ---------
---------- -------- ---------
Earnings per share:
Basic -- as reported............................ $ 44.51 $ (0.60) $ (16.81)
---------- -------- ---------
---------- -------- ---------
Basic -- pro forma.............................. $ 44.50 $ (0.64) $ (16.87)
---------- -------- ---------
---------- -------- ---------
Diluted -- as reported.......................... $ 44.51 $ (0.60) $ (16.81)
---------- -------- ---------
---------- -------- ---------
Diluted -- pro forma............................ $ 44.50 $ (0.64) $ (16.87)
---------- -------- ---------
---------- -------- ---------
Weighted average number of shares outstanding:
Basic........................................... 52,990 52,936 52,936
---------- -------- ---------
---------- -------- ---------
Diluted......................................... 52,990 52,936 52,936
---------- -------- ---------
---------- -------- ---------
</Table>
Stock-based compensation expense included in the consolidated condensed
statement of operations for the Second Quarter of Fiscal 2003 was $765 (net of
income tax benefit of $510) related to stock options and $527 (net of income tax
benefit of $352) related to restricted stock grants. For the period February 5,
2003 to July 5, 2003, stock compensation expense related to stock options was
$843 (net of income tax benefit of $562) and $581 (net of income tax benefit of
$387) related to restricted stock grants. Included in stock-based compensation
expense, for the period February 5, 2003 to July 5, 2003, is $150 related to the
issue of shares of common stock to the directors for serving as members on the
Board of Directors of the Company. The Company expects that total stock-based
compensation expense for fiscal 2003 will be approximately $3,720 (net of income
tax benefit of $2,480). See Note 18.
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 THREE FOR THE PERIOD
MONTHS ENDED FEBRUARY 5, 2003
JULY 5, 2003 TO JULY 5, 2003
------------ ---------------
Risk free rate of return............................... 2.55% 2.55%
Dividend yield(a)...................................... -- --
Expected volatility of the market price of the
Company's common stock............................... 35.0% 35.0%
Expected option life................................... 5 years 5 years
</Table>
- --------
(a) the Company is restricted from paying dividends under the terms of the Exit
Financing Facility and the terms of the indenture governing the Senior
Notes.
The Predecessor did not grant any stock-based compensation or stock options
during the Six Months Ended July 6, 2002 or during the period January 5, 2003 to
February 4, 2003.
H-12
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Shipping and Handling Costs: Costs to warehouse, pick, pack and ship
merchandise to customers are expensed as incurred and are classified in selling,
general and administrative expenses. The amounts charged to shipping and
handling costs were $20,416, $3,721 and $30,311 for the period from February 5,
2003 to July 5, 2003, the period from January 4, 2003 to February 4, 2003 and
the Six Months Ended July 6, 2002, respectively.
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 July 5,
2003 is stated at estimated fair value, net of accumulated depreciation, for the
assets in existence at February 4, 2003 and at historical costs, net of
accumulated depreciation, for additions during the period February 5, 2003 to
July 5, 2003. As of January 4, 2003, property, plant and equipment is stated at
historical costs 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 was based upon the preliminary appraised values of such
assets as determined by an independent third party appraiser and the Company.
Adjustments to the preliminary appraised amounts are recorded as adjustments to
goodwill. Identifiable intangible assets with finite lives are amoritzed 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 12.
Goodwill: Goodwill represents the amount by which the Company's
reorganization value exceeded the preliminary 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, goodwill is not amortized and is subject to an annual
impairment test which the Company will perform in the fourth quarter of each
fiscal year.
Deferred Financing Costs: Deferred financing costs represent legal, other
professional and bank underwriting fees incurred in connection with the
Company's Exit Financing Facility and the issuance of the Senior Notes. Such
fees are amortized over the life of the related debt using the interest method.
Amortization of deferred financing costs is included in interest expense.
H-13
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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 does not use derivative financial
instruments for speculation or for trading purposes and has not done so since
the Petition Date. The Company had no hedging financial instruments outstanding
at July 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 consist primarily of
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 translation adjustments are applied directly to
stockholders' equity (deficiency) and are included as part of other
comprehensive income (loss). Gains and losses related to the translation of
current amounts due from foreign subsidiaries are included in other income and
expense in the period incurred. Translation gains and losses related to
long-term and permanently invested inter-company balances are recorded in
cumulative translation adjustments. 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 November 2002, the Financial Accounting
Standards Board (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.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ('SFAS 149'). FASB Statements
No. 133, Accounting for
H-14
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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
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
consolidated financial statements.
During May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ('SFAS
150'). SFAS 150 clarifies the accounting for certain financial instruments that
could previously be accounted for as equity. SFAS 150 requires those instruments
be classified as liabilities in statements of financial position and is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of
SFAS 150 to have a material effect on the Company's consolidated financial
statements.
NOTE 3 -- BUSINESS ENTERPRISE VALUE
In conjunction with the preparation of the Plan, the Company engaged an
independent third party appraisal and consulting firm (the 'BEV Appraiser') to
assist the Company in preparing a valuation analysis of the reorganized Company.
The appraiser determined the Company's business enterprise value using a
combination of the market approach and income approaches. The BEV appraiser made
certain assumptions in its work. The weighted average long-term debt interest
rate was assumed to be 7.81% and the weighted average cost of capital was
assumed to be 13.80%. The appraiser used three years of financial projections in
its evaluation and determined the terminal value based upon the Company's
weighted average cost of capital and expected free cash flow using a 5.00%
growth rate per annum. The determination of the Company's projected income and
free cash flow required the use of significant judgments and estimates by the
Company. Changes in economic conditions, the cost of equity or debt financing
and many other factors will have a significant effect on the Company's ability
to earn the income or generate the free cash flow assumed in its projections. As
a result, variations in the amounts of income and cash flow actually earned by
the Company will have a significant effect on its business enterprise value.
The Company considered many factors in determining its reorganization value,
including the amount and nature of its monetary assets, the future estimated
earnings and cash flow to be generated by the Company in the future, the
enterprise value of apparel companies selling similar products based on quoted
market prices and the value of recently completed transactions for the purchase
and sale of companies or parts of companies in the apparel industry. All of
these factors involved the use of judgments and estimates, the most significant
of which involve estimates of future earnings and cash flow that the Company
will generate. The Company also allocated the overall business enterprise value
to its various business units. The determination of the value of each of the
Company's business units was based upon the estimated future earnings and cash
flow to be generated by those business units. The Company also considered the
type and amount of assets held by each of those units. In addition, the Company
offered several of its business units
H-15
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
for sale as part of our reorganization under the bankruptcy code. The Company
considered the prices offered for those business units in allocating its
business enterprise value to its business units. The Company allocated the value
of each business unit to the individual assets and liabilities held by each
business unit based on the fair value of the specific assets. The Company used
the work of third party appraisers to assist it in allocating such fair value.
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
In order to implement the provisions of SFAS 141, the Company engaged an
independent third party to appraise its various business units and long-term
tangible and intangible assets and to assist the Company in allocating 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 (the 'Asset Appraiser') separate from the BEV Appraiser to
assist the Company in determining the fair value of the Company's long-term
tangible assets and identifiable intangible assets. Based upon the
reorganization value of the Company as determined by the BEV Appraiser, the
Asset Appraiser provided detailed analysis of certain of the Company's long-term
tangible and intangible assets. See Note 12.
NOTE 5 -- FRESH START REPORTING
The Debtors' emergence from bankruptcy proceedings on February 4, 2003
resulted in a new reporting entity and adoption of fresh start reporting as of
that date in accordance with SOP 90-7. The consolidated condensed balance sheet
as of February 4, 2003 gives effect to 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) distribution of cash of $106,112 (including accrued interest of $14,844)
to the Company's pre-petition secured lenders;
(b) forgiveness of the Debtors' pre-petition debt;
(c) issuance of New Common Stock and Second Lien Notes pursuant to the Plan;
(d) payment of various administrative and other claims associated with the
Company's emergence from bankruptcy;
(e) adjustment of property, plant and equipment carrying values to fair
value; and
(f) adjustment of the carrying value of the Company's various trademarks and
license agreements to fair value.
These adjustments were based upon the work of the BEV Appraiser, Asset
Appraiser and the Company, as well as other valuation estimates to determine the
preliminary 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.
H-16
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
Goodwill............................. -- (515,659)(b) (176,175)(e) 34,142
503,548 (c) 114 (f)
197,019 (d) 2,801 (g)
22,494 (h)
----------- ---------- -------- --------- ----------
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) $ 1,950 (d) $ 2,244 (f) 39,200
4,427 (d)
Accounts payable..................... 123,235 (859)(f) 122,376
Accrued liabilities.................. 109,530 -- (1,950)(d) (1,156)(f) 105,302
(2,871)(d) 2,801 (g)
(942)(d)
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 (106,112)(a) -- -- --
(2,393,273)(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)
H-17
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; such amounts were included
in liabilities subject to compromise.
(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 ($654),
including all options and restricted stock, additional paid-in capital
($908,939), treasury stock ($313,889), unearned stock compensation ($32)
and elimination of accumulated other comprehensive loss ($92,671) and
deficit ($2,380,615). A corresponding amount of $515,659 was recorded as a
decrease in goodwill.
(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. A corresponding
amount of $503,548 was recorded as an increase in goodwill.
(d) Reflects the issuance of $200,000 principal amount of Second Lien Notes to
creditors pursuant to the terms of the Plan, payment of $1,950 in cash
bonus 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. The
Company also issued $942 in Second Lien Notes and 266,400 shares of common
stock (representing value of $2,981) to its former Chief Executive Officer
in payment of a bonus pursuant to the terms of the Plan. The total accrued
bonus to the former Chief Executive Officer was $5,873. A corresponding
amount of $197,019 was recorded as an increase in goodwill.
(e) Reflects $24,037 adjustment to fixed assets to their fair value of $129,357
as determined by the Asset Appraiser, $277,796 to intangible assets to
reflect their fair value of $364,700 as determined by the Asset Appraiser,
the recognition of deferred income tax liability of $82,011 and the
recognition of deferred tax assets of $4,427 related to the preliminary
fair value adjustments noted above. The deferred tax balance as of
February 4, 2003 reflects a valuation allowance of $126,654 which was
established in connection with first start reporting. A corresponding
amount of $176,175 was recorded as a decrease in goodwill.
(f) Borrowed $2,244 under the Exit Financing Facility to pay certain
administrative and priority claims aggregating $859 and $1,156, unaccrued
tax claims of $114, the translation escrow account (subsequently released
to the Company) of $100 and provide additional cash funds at closing of
$15. A corresponding amount of $114 was recorded as an increase in
goodwill.
(g) Reflects the recording of an unfavorable contract commitment of $2,801
related to one of the Company's distribution facilities. A corresponding
amount of $2,801 was recorded as an increase in goodwill.
(h) Reflects adjustments of $22,494 to adjust inventory to its fair value of
$348,033. A corresponding amount of $22,494 was recorded as an increase in
goodwill.
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.
H-18
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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:
<Table>
<Caption>
PREDECESSOR
-----------------------------------------
PERIOD
JANUARY 5, SIX MONTHS
THREE MONTHS 2003 TO ENDED
ENDED FEBRUARY 4, JULY 6,
JULY 6, 2002 2003 2002
------------ ---- ----
Legal and professional fees....................... $ 7,737 $ 4,501 $14,918
Lease and contract terminations................... -- 10,098 --
Employee contracts and retention.................. 5,261 14,540 10,424
Facility shutdown costs........................... -- 82 --
Loss from sale of Penhaligon's and GJM............ (39) -- 2,100
GECC lease settlement............................. 22,907 -- 22,907
Write-off of fixed assets related to retail stores
closed.......................................... 4,990 -- 4,990
Employee benefit costs related to plant
closings........................................ 979 -- 979
Loss from sales of fixed and other assets......... (231) 70 (105)
Other............................................. 950 631 1,872
------- ------- -------
$42,554 $29,922 $58,085
------- ------- -------
------- ------- -------
Cash portion of reorganization items.............. $13,948 $14,361 $26,091
Non-cash portion of reorganization items.......... 28,606 15,561 31,994
</Table>
NOTE 7 -- RESTRUCTURING ITEMS
In the Second Quarter of Fiscal 2003, the Company continued the process of
consolidating its manufacturing and distribution operations in accordance with
the Plan. Included in restructuring charges are accruals for closing and or
consolidating two sewing plants located in Puerto Cortes, Honduras and Los
Angeles, CA, one cutting and warehousing facility in Thomasville, GA and a
distribution facility in Secaucus, NJ, of $6,071 and $6,140 for the Second
Quarter of Fiscal 2003 and the period February 5, 2003 to July 5, 2003,
respectively. Facility shutdown costs primarily relate to severance and other
benefits payable to approximately 670 terminated employees. The Company expects
that substantially all payments to terminated employees will be completed by the
end of fiscal 2003. A summary of restructuring items is as follows:
<Table>
<Caption>
SUCCESSOR
---------------------------------
PERIOD
THREE MONTHS FEBRUARY 5, 2003
ENDED TO JULY 5,
JULY 5 2003 2003
----------- ----
Contract termination costs...................... $2,500 $2,500
Facility shutdown costs......................... 3,571 3,590
Other........................................... -- 50
------ ------
$6,071 $6,140
------ ------
------ ------
Cash portion of restructuring items............. $5,905 $5,974
Non-cash portion of restructuring items......... 166 166
</Table>
H-19
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 8 -- 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 since
January 1999, the retail stores no longer represent a material portion of the
Company's net revenues (retail stores accounted for 2.56% of consolidated net
revenue in the period February 5, 2003 to July 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 are being 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 29 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 11 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', Nautica'r' and Calvin Klein'r' brand names. The Swimwear Group
also operates 45 full price Speedo Authentic Fitness retail stores (including
one online store).
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 reporting in accordance with the provisions
of SOP 90-7. The adoption of fresh start reporting 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:
H-20
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
INTIMATE
APPAREL SPORTSWEAR SWIMWEAR GROUP CORPORATE/
GROUP GROUP GROUP TOTAL OTHER ITEMS TOTAL
----- ----- ----- ----- ----------- -----
Successor
---------
For the three months ended
July 5, 2003
Net revenues................ $134,824 $ 90,975 $110,045 $ 335,844 $ -- $ 335,844
Operating income (loss)..... 11,913 (3,692) 14,276 22,497 (33,293) (10,796)
Depreciation and
amortization.............. 3,580 1,895 1,053 6,528 9,752 16,280
Restructuring items......... -- -- -- -- 6,071 6,071
For the period February 5, 2003
to July 5, 2003
Net revenues................ $249,228 $189,030 $223,910 $ 662,168 $ -- $ 662,168
Operating income............ 28,469 10,285 44,236 82,990 (50,500) 32,490
Depreciation and
amortization.............. 4,704 2,419 2,056 9,179 17,147 26,326
Restructuring items......... -- -- -- -- 6,140 6,140
- ----------------------------------------------------------------------------------------------------------
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 (loss)..... 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
July 6, 2002
Net revenues................ $159,535 $107,199 $115,033 $ 381,767 $ -- $ 381,767
Operating income (loss)..... 16,078 3,099 13,356 32,533 (59,818) (27,285)
Depreciation and
amortization.............. 5,721 2,555 2,022 10,298 4,701 14,999
Reorganization items........ -- -- -- -- 42,554 42,554
For the six months ended
July 6, 2002
Net revenues................ $317,872 $236,403 $237,544 $ 791,819 $ -- $ 791,819
Operating income (loss)..... 20,929 13,179 33,635 67,743 (94,265) (26,522)
Depreciation and
amortization.............. 10,441 4,935 4,071 19,447 9,564 29,011
Reorganization items........ -- -- -- -- 58,085 58,085
Total Assets
Successor
---------
July 5, 2003................ $389,415 $225,300 $290,417 $ 905,132 $232,412 $1,137,544
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>
A reconciliation of total group operating income (loss) to total
consolidated income (loss) before the provision for income taxes and the
cumulative effect of a change in accounting principle for the Second Quarter of
Fiscal 2003, the Second Quarter of Fiscal 2002, the period
H-21
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
February 5, 2003 to July 5, 2003, the period January 5, 2003 to February 4, 2003
and the Six Months Ended July 6, 2002 is as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------- -------------
THREE MONTHS THREE MONTHS
ENDED JULY 5, ENDED JULY 6,
2003 2002
------------- -------------
Operating loss............................................. $(10,796) $(27,285)
Other (income) loss income................................. (1,363) --
Interest expense........................................... 5,423 3,095
-------- --------
Loss before provision (benefit) for income taxes........... $(14,856) $(30,380)
-------- --------
-------- --------
</Table>
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- -------------------------------
PERIOD PERIOD SIX MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO JULY 5, TO FEBRUARY 4, JULY 6,
2003 2003 2002
---------------- --------------- -------------
Operating income (loss).................... $32,490 $ (19,489) $(26,522)
Gain on cancellation of pre-petition
indebtedness............................. -- (1,692,696) --
Fresh start adjustments.................... -- (765,726) --
Other (income) loss........................ (1,328) 359 --
Interest expense........................... 9,851 1,887 10,059
------- ---------- --------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting principle..................... $23,967 $2,436,687 $(36,581)
------- ---------- --------
------- ---------- --------
</Table>
GEOGRAPHIC INFORMATION
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------- -------------
THREE MONTHS THREE MONTHS
ENDED JULY 5, ENDED JULY 6,
2003 2002
------------- -------------
Net revenues:
United States.......................................... $250,269 $304,773
Canada................................................. 23,079 19,834
Europe................................................. 52,339 47,186
Mexico................................................. 5,013 6,038
Asia................................................... 5,144 3,936
-------- --------
$335,844 $381,767
-------- --------
-------- --------
</Table>
H-22
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- -------------------------------
PERIOD PERIOD SIX MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO JULY 5, TO FEBRUARY 4, JULY 6,
2003 2003 2002
---------------- --------------- -------------
Net revenues
United States.......................... $507,229 $ 87,247 $635,842
Canada................................. 40,127 5,872 41,684
Europe................................. 95,918 19,205 94,292
Mexico................................. 8,880 1,849 11,811
Asia................................... 10,014 1,787 8,190
-------- -------- --------
$662,168 $115,960 $791,819
-------- -------- --------
-------- -------- --------
</Table>
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------------- ----------------
JULY 5, 2003 FEBRUARY 4, 2003 JANUARY 4, 2003
------------ ---------------- ----------------
Property, plant and equipment, net
United States........................... $101,224 $118,548 $137,351
All other............................... 10,228 10,809 19,361
-------- -------- --------
$111,452 $129,357 $156,712
-------- -------- --------
-------- -------- --------
</Table>
INFORMATION ABOUT MAJOR CUSTOMERS
In the First Half of Fiscal 2003 one customer, Wal-Mart, accounted for
approximately 11.8% of the Company's net revenues. In the First Half of Fiscal
2002 two customers, Wal-Mart and Federated Department Stores, Inc., accounted
for approximately 11.74% and 10.24%, respectively, of the Company's net
revenues.
NOTE 9 -- COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------- -------------
THREE MONTHS THREE MONTHS
ENDED JULY 5, ENDED JULY 6,
2003 2002
------------- -------------
Net loss................................................... $ (8,464) $(31,989)
Other comprehensive income (loss):
Foreign currency translation adjustments............... 8,513 126
Change in unfunded minimum pension liability........... -- (2,000)
Unrealized gain (loss) on marketable securities........ (56) 67
-------- --------
8,457 (1,807)
-------- --------
Total comprehensive income (loss).................. $ (7) $(33,796)
-------- --------
-------- --------
</Table>
H-23
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- -------------------------------
PERIOD PERIOD SIX MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO JULY 5, TO FEBRUARY 4, JULY 6,
2003 2003 2002
---------------- --------------- -------------
Net income (loss).......................... $14,175 $2,358,537 $(889,741)
Other comprehensive income (loss):
Foreign currency translation
adjustments.......................... 8,398 244 1,856
Change in unfunded minimum pension
liability............................ -- -- (4,000)
Unrealized gain on marketable
securities........................... 25 308 22
------- ---------- ---------
8,423 552 (2,122)
------- ---------- ---------
Total comprehensive income
(loss)........................... $22,598 $2,359,089 $(891,863)
------- ---------- ---------
------- ---------- ---------
</Table>
The components of accumulated other comprehensive loss are as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------------------- ------------
JULY 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
------- ----------- ------------
Foreign currency translation adjustments.............. $8,398 $ -- $(20,408)
Change in unfunded minimum pension liability.......... -- -- (72,659)
Unrealized gain (loss) on marketable securities,
net................................................. 25 -- (156)
------ ------ --------
Total accumulated other comprehensive income (loss)... $8,423 $ -- $(93,223)
------ ------ --------
------ ------ --------
</Table>
NOTE 10 -- INCOME TAXES
PREDECESSOR COMPANY
The provision for income taxes of $78,150 for the period January 5, 2003 to
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 reporting and accrued
income taxes on foreign earnings of $566.
As of February 4, 2003, the Company had recorded a valuation allowance of
$126,654 against deferred tax assets to reduce the amount of deferred tax assets
created as a result of the adoption of fresh start reporting to an amount that
the Company believes, based upon objectively verifiable evidence, is realizable.
The future recognition of such amount will first reduce goodwill. Should the
recognition of net deferred tax assets result in the elimination of goodwill,
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 carry-forwards to reduce them to the amount that will
more likely than not be realized.
SUCCESSOR COMPANY
The income tax benefit of $6,392 for the Second Quarter of Fiscal 2003
consists of an income tax benefit of $9,654 on domestic losses offset by an
income tax expense of $3,262 on foreign earnings. The provision for income taxes
of $9,792 for the period February 5, 2003 to July 5, 2003 consists of income
taxes of $2,800 on domestic earnings and income taxes of $6,992 on foreign
earnings.
H-24
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
During the Second Quarter of Fiscal 2003, the Company increased its
valuation allowance by $34,448 to $156,800, and decreased its deferred tax asset
by $5,717 to an amount that will, more likely than not, be realized. The
increase in the valuation allowance resulted from adjustments to the preliminary
estimates of the fair value of fixed and intangible assets and the
classification of the intangible assets. The decrease in the deferred tax asset
(established during the First Quarter of Fiscal 2003 for the utilization of
domestic tax losses carried forward for U.S. tax purposes) resulted from a
decrease in the Company's domestic taxable income through the Second Quarter of
Fiscal 2003. Both the increase in the Company's valuation allowance and the
decrease in the deferred tax asset have been recorded against goodwill. See
Note 12. Additionally the Company has not provided any tax benefit for certain
foreign losses incurred in the Second Quarter of Fiscal 2003.
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.
NOTE 11 -- INVENTORIES
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------------- -----------
JULY 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
-------- ----------- -----------
Finished goods...................................... $219,359 $266,061 $281,610
Work in process..................................... 53,439 68,914 51,792
Raw materials....................................... 45,060 45,843 45,682
-------- -------- --------
317,858 380,818 379,084
Less: reserves(a)................................... 29,155 32,785 33,816
-------- -------- --------
$288,703 $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 July 5, 2003, February 4, 2003 and January 4, 2003 the Company had
identified inventory with a carrying value of $64,600, $57,200 and $61,500,
respectively, as potentially excess and/or obsolete.
H-25
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 12 -- GOODWILL AND INTANGIBLE ASSETS
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------------- -----------
JULY 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
-------- ----------- -----------
Indefinite lived intangible assets:
Trademarks...................................... $168,988 $202,500 $61,978
Licenses in perpetuity.......................... 139,900 139,900 19,327
Finite lived assets:
Licenses for a term, at cost, net of accumulated
amortization.................................. 10,278 9,700 5,522
Sales order backlog, at cost, net of accumulated
amortization.................................. 2,100 12,600 --
-------- -------- -------
Intangible assets, net.............................. $321,266 $364,700 $86,827
-------- -------- -------
-------- -------- -------
</Table>
Accumulated amortization related to finite lived licenses for a term at
July 5, 2003, February 4, 2003 and January 4, 2003 was $679, $0 and $2,494,
respectively. Accumulated amortization of sales order backlog was $10,500 at
July 5, 2003. Amortization expense for the Second Quarter of Fiscal 2003 and
Second Quarter of Fiscal 2002 was $6,709 and $226, respectively. Amortization
expense for the period February 5, 2003 to July 5, 2003 was $11,179 and
amortization expense for the Six Months Ended July 6, 2002 was $452.
Amortization expense is expected to be $14,102 for fiscal 2003 and $1,639 in
each of fiscal 2004 through fiscal 2008. The following table summarizes
intangible assets since February 4, 2003:
<Table>
<Caption>
LICENSES
IN LICENSES FOR SALES ORDER
TRADEMARKS PERPETUITY A TERM BACKLOG TOTAL
---------- ---------- ------ ------- -----
Balance at February 4, 2003......... $202,500 $139,900 $ 9,700 $ 12,600 $364,700
Amortization expense............ -- -- (679) (10,500) (11,179)
Adjustments to preliminary fair
value......................... (34,500) -- -- -- (34,500)
Translation adjustments......... 988 -- 1,257 -- 2,245
-------- -------- ------- -------- --------
Balance at July 5, 2003............. $168,988 $139,900 $10,278 $ 2,100 $321,266
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
</Table>
The following table summarizes the changes in the carrying amount of
goodwill for the period February 5, 2003 to July 5, 2003:
<Table>
Goodwill balance at February 4, 2003....................... $34,142
Adjustments:
Fixed assets -- fair value............................. 9,722
Trademarks -- fair value............................... 34,500
Deferred income taxes.................................. 9,999
Other.................................................. 1,600
-------
Goodwill balance at July 5, 2003........................... $89,963
-------
-------
</Table>
H-26
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
In June 2001, the FASB issued 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 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 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
intangible assets and goodwill were impaired. As a result, the Company recorded
a charge of $801,622 (net of income tax benefit of $53,513) as a cumulative
effect of a change in accounting from the adoption of SFAS 142 on January 6,
2002. The 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.
The Company performed a detailed review of the preliminary work of the asset
appraisers during the second and third quarters of fiscal 2003. During the
course of the review the Company made adjustments and corrections to the
preliminary appraisals for intangible assets, property, plant and equipment,
other assets and deferred income tax liability, as appropriate. The Company will
complete its reviews of the preliminary appraisals and allocation for fair value
during the third quarter of fiscal 2003.
Goodwill at July 5, 2003 reflects adjustments of $55,821 to the preliminary
estimates of the fair value of fixed and intangible assets, and accrued
liabilities and the related deferred income taxes and valuation allowance as a
result of changes in the preliminary fair values of fixed assets, trademarks and
accrued liabilities. The reductions in fixed and intangible assets resulted in a
corresponding increase in the valuation allowance related to deferred taxes
which increased goodwill.
NOTE 13 -- PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------ -----------
JULY 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---------- ----------- -----------
Land and land improvements.................................. $ 1,373 $ 1,305 $ 1,223
Building and building improvements.......................... 19,366 23,071 51,513
Furniture and fixtures...................................... 14,834 15,813 101,861
Machinery and equipment..................................... 32,059 32,072 73,104
Computer hardware and software.............................. 57,162 56,778 169,194
Construction in progress.................................... 1,805 318 435
-------- -------- ---------
$126,599 $129,357 $ 397,330
Less: Accumulated depreciation and amortization............. (15,147) -- (240,618)
-------- -------- ---------
Property, plant and equipment, net.......................... $111,452 $129,357 $ 156,712
-------- -------- ---------
-------- -------- ---------
</Table>
H-27
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 14 -- LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise include debt, accounts payable, accrued
expenses and other liabilities that were settled as part of the Company's
emergence from bankruptcy. Creditors received distributions consisting of cash,
debt securities and common stock in settlement of their bankruptcy claims. The
ratio of cash, debt securities and common stock that individual creditors
received depended upon the priority of the claim made by each creditor. The
Company recorded a gain on the final settlement of these liabilities of $1,692.7
million in the period from January 5, 2003 to February 4, 2003. The following
table summarizes liabilities subject to compromise at January 4, 2003, all of
which were discharged upon the Company's emergence from bankruptcy on
February 4, 2003:
<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
----------
Liabilities subject to compromise (c)............... $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 15.
(c) Due to the settlement of final claims in connection with the
consummation of the Plan, the total amount of liabilities
subject to compromise discharged on February 4, 2003 was
$2,499,385. See Note 5.
H-28
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 15 -- DEBT
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------ -----------
JULY 5, FEBRUARY 4, JANUARY 4,
2003 2003 2003
---------- ----------- -----------
Exit Financing Facility.................................... $ -- $ 39,200 $ --
GECC debt.................................................. 1,460 4,890 5,603
Second Lien Notes.......................................... -- 200,942 --
8.78% Senior Notes due 2013................................ 210,000 -- --
Capital lease obligations.................................. 1,326 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
-------- -------- -----------
212,786 246,452 1,837,599
Current portion............................................ (1,512) (44,250) (5,765)
Reclassified to liabilities subject to compromise.......... -- -- (1,830,582)
-------- -------- -----------
Total long-term debt................................... $211,274 $202,202 $ 1,252
-------- -------- -----------
-------- -------- -----------
</Table>
SENIOR NOTES
On June 12, 2003 Warnaco completed the sale of $210,000 Senior Notes at par.
The Senior Notes mature on June 15, 2013. The Senior Notes bear interest at
8 7/8% payable semi-annually beginning December 15, 2003. The Senior Notes are
unconditionally guaranteed, jointly and severally, by Warnaco Group and
substantially all of Warnaco's domestic subsidiaries (all of which are 100%
owned, either directly or indirectly, by Warnaco). The Senior Notes are
effectively subordinate in right of payment to existing and future secured debt
(including the Exit Financing Facility) and to the obligations (including trade
accounts payable) of the subsidiaries that are not guarantors of the Senior
Notes. The guarantees of each guarantor are effectively subordinate to that
guarantor's existing and future secured debt (including guarantees of the Exit
Financing Facility) to the extent of the value of the assets securing that debt.
There are no restrictions that prevent the guarantor subsidiaries from
transferring funds or paying dividends to Warnaco. The indenture pursuant to
which the Senior Notes were issued contains covenants which, among other things,
restrict the Company's ability to incur additional debt, pay dividends and make
restricted payments, create or permit certain liens, use the proceeds of sales
of assets and subsidiaries' stock, create or permit restrictions on the ability
of certain of Warnaco's subsidiaries to pay dividends or make other
distributions to Warnaco or to Warnaco Group, enter into transactions with
affiliates, engage in certain business activities, engage in sale and leaseback
transactions and consolidate or merge or sell all or substantially all of its
assets. The Company was in compliance with the covenants of the Senior Notes at
July 5, 2003. Redemption of the Senior Notes prior to their maturity is subject
to premiums as set forth in the indenture. Proceeds from the sale of the Senior
Notes were used to repay the outstanding principal balance on the Second Lien
Notes of $200,942 and accrued interest thereon of $1,987. The proceeds were also
used to pay underwriting fees, legal and professional fees and other expenses
associated with the offering of approximately $7,071. In connection with the
offering of the Senior Notes, the Company entered into a registration rights
agreement with the initial purchasers of the Senior Notes. The registration
rights agreement grants the holders of the Senior Notes certain exchange and
registration rights that required the Company to file a registration statement
with the SEC within 60 days after the issuance of the
H-29
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Senior Notes. If, within the time periods specified in the registration rights
agreement, the Company is unable to complete a registration and exchange of the
Senior Notes or, alternatively, cause to be declared effective a shelf
registration statement for the resale of the Senior Notes, the Company will be
required to pay special interest to the holders of the Senior Notes. Special
interest will accrue at a rate of 0.25% per annum during the 90 day period
immediately following the occurrence of a registration default and will increase
by 0.25% per annum at the end of each subsequent 90 day period, but in no event
shall exceed 1.0% per annum. The Company filed the required registration
statement on August 8, 2003. No principal payments prior to the maturity date
are required.
EXIT FINANCING FACILITY
On the Effective Date the Company entered into the $275,000 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% (5.50% at July 5, 2003) or at the London Interbank Offered Rate
('LIBOR') plus 2.50% (approximately 3.6% at July 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. As of July 5, 2003, the Company was
in compliance with the covenants of the Exit Financing Facility. Initial
borrowings under the Exit Financing Facility on the Effective Date were $39,200.
The Exit Financing Facility is guaranteed by Warnaco Group and substantially all
of Warnaco'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 July 5, 2003, the Company had repaid all
amounts owing under the Exit Financing Facility and had approximately $51,108 of
cash available as collateral against outstanding letters of credit of $56,211.
At July 5, 2003, the Company had $150,788 of credit available under the Exit
Financing Facility.
SECOND LIEN NOTES
In accordance with the Plan, on the Effective Date, the Company issued
$200,942 Second Lien Notes to certain pre-petition creditors and others in a
transaction exempt from the registration requirements of the Securities Act,
pursuant to Section 1145(a) of the Bankruptcy Code. The Second Lien Notes were
scheduled to mature on February 4, 2008, subject to, in certain instances,
earlier repayment in whole or in part. The Second Lien Notes bore an annual
interest rate (9.5% at July 5, 2003) which was the greater of (i) 9.5% plus a
margin (initially 0%, and beginning on August 4, 2003, 0.5% would have been
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% would have been added to
the margin every six months). The indenture pursuant to which the Second Lien
Notes were issued contained certain covenants that, among other things, limited
investments and asset sales, and prohibited the Company from paying dividends
(subject to limited exceptions) and
H-30
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
incurring material additional indebtedness. The Second Lien Notes were
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, were secured by a second priority lien on substantially the same
assets which secured the Exit Financing Facility. The Second Lien Notes were
payable in equal annual installments of $40,188 beginning in April 2004 through
April 2008. Second Lien Note principal payments could only be made if the
Company achieved a defined fixed charge coverage ratio and had additional
borrowing availability, after the principal payment, of $75,000 or more under
the Exit Financing Facility.
All outstanding principal and accrued interest on the Second Lien Notes of
$202,929 was repaid with the proceeds of the Company's offering, on June 12,
2003, of the $210,000 Senior Notes.
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
discounted at 8% of $1,460 is classified with the current portion of long-term
debt at July 5, 2003. Remaining amounts payable to GECC will be paid in monthly
installments of $750 including interest through September 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 July 5, 2003, February 4, 2003 and
January 4, 2003 related to these leases were approximately $1,326, $1,420 and
$2,679, of which $52, $160 and $162 are included with the current portion of
long-term debt, respectively.
NOTE 16 -- RELATED PARTY TRANSACTIONS
In anticipation of the Company's emergence from bankruptcy protection, the
Company entered into a consulting agreement with Alvarez & Marsal, Inc. ('A&M')
on January 29, 2003 (as supplemented by a March 18, 2003 letter agreement,
collectively the 'A&M Agreement'). The A&M Agreement provides, among other
things, for certain executive services to be provided to the Company (including
but not limited to the services of Antonio C. Alvarez as President and Chief
Executive Officer of the Company through April 30, 2003, James P. Fogarty as
Chief Financial Officer of the Company and other personnel) as well as the
payment of additional fees upon the consummation of certain transactions
involving the Company and, upon certain conditions, the right to participate in
the Company's Incentive Compensation Plan for certain periods in fiscal 2003.
Pursuant to the A&M Agreement, during the Second Quarter of Fiscal 2003, the
Company paid A&M a total amount of $1,174, consisting of payments for executive
services in the amount of $514 and $660 of transaction bonuses. For the period
February 5, 2003 to July 5, 2003, total payments to A&M under the A&M Agreement
were $1,731, consisting of payments for executive services in the amount of
$1,071 and $660 of transaction bonuses. Pursuant to the terms of the Plan,
Mr. Alvarez received Second Lien Notes in the principal amount of $942 in
connection with the Company's emergence from bankruptcy on February 4, 2003.
Such notes, with accrued interest thereon, were repaid with proceeds from the
sale of the Senior Notes on June 12, 2003.
H-31
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 17 -- SUPPLEMENTAL CASH FLOW INFORMATION
<Table>
<Caption>
SUCCESSOR PREDECESSOR
---------------- ------------------------------
PERIOD PERIOD SIX MONTHS
FEBRUARY 5, 2003 JANUARY 5, 2003 ENDED
TO JULY 5, TO FEBRUARY 4, JULY 6,
2003 2003 2002
---------------- --------------- ------------
Cash paid during the year for:
Interest....................................... 8,435 14,844 5,802
Income taxes, net of refunds received.......... 11,370 273 (12,037)
Supplemental non cash investing and financing
activities:
Debt issued for purchase of fixed assets(a).... -- -- 9,071
</Table>
- ---------
(a) Represents debt incurred and assets purchased under the GECC lease
settlement. See Note 15.
NOTE 18 -- 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 New Common Stock of which the Successor
issued 44,999,973 shares pursuant to the terms of the Plan. A further 23,540
shares were issued to the Company's directors on May 28, 2003 as partial
compensation for serving as members on the Board of Directors of the Company.
The total number of shares of New Common Stock issued and outstanding at July 5,
2003 was 45,023,513. On March 12, 2003, pursuant to the terms of the 2003 Stock
Incentive Plan (the 'Stock Incentive Plan'), the Company issued 498,500 shares
of restricted stock to certain of its employees. A further 153,500 shares of
restricted stock, net of cancellations, were issued during the Second Quarter of
Fiscal 2003. The Stock Incentive Plan was approved by shareholders on May 28,
2003. The fair market value of the New Common Stock at the date of the grants
ranged from $10.12 to $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 2,608,000 shares, net of
cancellations, of New Common Stock at exercise prices between of $8.78 and
$12.54 per share, which represents the price per share of the New Common Stock
at 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
$2,154 for the Second Quarter of Fiscal 2003 and $2,523 for the period
February 5, 2003 to July 5, 2003. The total fair value of the options and
restricted share grants was $16,482. Stock-based compensation expense for the
period February 5, 2003 to July 5, 2003 includes $150 of compensation expense
for shares issued to the members of the Company's Board of Directors as
compensation for their service.
H-32
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
A summary of the options outstanding under the Stock Incentive Plan is
presented below:
<Table>
<Caption>
PERIOD FEBRUARY 4, 2003 TO
JULY 5, 2003
----------------------------
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding at February 4, 2003........................... -- --
Granted................................................... 2,652,000 $10.25
Exercised................................................. -- --
Canceled.................................................. (44,000) 10.46
---------
Outstanding at July 5, 2003............................... 2,608,000 10.25
---------
---------
</Table>
The Company had no exercisable options outstanding at July 5, 2003.
Summary information related to options outstanding at July 5, 2003 is as
follows:
<Table>
<Caption>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED
AVERAGE WEIGHTED
OUTSTANDING REMAINING AVERAGE
AT JULY 5, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 2003 LIFE PRICE
- ------------------------ ---- ---- -----
(YEARS)
$8.78 -- $10.03............................................. 610,000 9.8 $ 9.55
$10.04 -- $11.28............................................ 1,994,000 9.7 10.45
$11.29 -- $12.54............................................ 4,000 9.9 12.54
---------
2,608,000
---------
---------
</Table>
The Company has reserved 5,000,000 shares of New Common Stock for
stock-based compensation awards.
The Predecessor had various stock-based incentive plans in place prior to
February 4, 2003 including 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. 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.
H-33
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 19 -- INCOME (LOSS) PER SHARE
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------------- ------------
THREE MONTHS THREE MONTHS
ENDED ENDED
JULY 5, 2003 JULY 6, 2002
------------ ------------
Numerator for basic and diluted loss per share:
Net loss................................................ $(8,464) $(31,989)
------- --------
------- --------
Denominator for basic and diluted loss per share:
Weighted average shares outstanding -- basic and
diluted............................................... 45,010 52,936
------- --------
------- --------
Loss per share -- basic and diluted......................... $ (0.19) $ (0.60)
------- --------
------- --------
</Table>
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------------- ------------------------------
PERIOD PERIOD
FEBRUARY 5, JANUARY 5, 2003 SIX MONTHS
2003 TO FEBRUARY 4, ENDED
TO JULY 5, 2003 2003 JULY 6, 2002
--------------- ---- ------------
Net income (loss).................................. $14,175 $2,358,537 $(889,741)
------- ---------- ---------
------- ---------- ---------
Denominator for basic and diluted income (loss) per
share:
Weighted average shares outstanding -- basic... 45,006 52,990 52,936
------- ---------- ---------
------- ---------- ---------
Weighted average shares
outstanding -- diluted....................... 45,154 52,990 52,936
------- ---------- ---------
------- ---------- ---------
Income (loss) per share before cumulative effect of
change in accounting -- basic.................... $ 0.31 $ 44.51 $ (1.66)
------- ---------- ---------
------- ---------- ---------
Income (loss) per share before cumulative effect of
change in accounting -- diluted (a).............. $ 0.31 $ 44.51 $ (1.66)
------- ---------- ---------
------- ---------- ---------
</Table>
- ---------
(a) Stock options to purchase 2,608,000 shares of New Common Stock have been
excluded from the computation of income per share for the period February 5,
2003 to July 5, 2003 because the effect, under the treasury method, would
have been anti-dilutive. The denominator for the weighted average diluted
shares outstanding at July 5, 2003 includes the effect of 652,000 shares of
unvested restricted stock. The effect of potentially dilutive securities has
been excluded from the computation of loss per share for the Six Months
Ended July 6, 2002 because the effect would have been anti-dilutive.
Dilutive securities at July 6, 2002 included options to purchase 5,293,342
shares of Old Common Stock, unvested restricted stock of 19,424 shares and
5,200,000 shares issuable pursuant to the Equity Agreements.
Options to purchase shares of New Common Stock outstanding were not included
in the computation of diluted earnings per share because the number of assumed
shares that would be repurchased, using the treasury method, was greater than
the weighted average in-the-money options outstanding at July 5, 2003. Options
to purchase shares of common stock outstanding at July 6, 2002 were not included
in the computation of diluted earnings per share because the option exercise
price was greater than the average market price of the common shares. In
addition, at July 6, 2002 incremental shares issuable on the assumed conversion
of the Preferred Securities amounting to 1,653,177 shares were not included in
the computation of diluted earnings per share for any of the periods presented,
as the impact would have been anti-dilutive.
H-34
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 20 -- LEGAL MATTERS
SHAREHOLDER CLASS ACTIONS
Between August 22, 2000 and October 26, 2000, seven putative class action
complaints were filed in the U.S. District Court for the Southern District of
New York (the 'District Court') against the Company and certain of its officers
and directors (the 'Shareholder I Class Action'). The complaints, on behalf of a
putative class of 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 the Company. On October 2, 2002, the plaintiffs filed a notice of appeal
with respect to the District Court's entry of a final judgment in favor of the
individual defendants. On July 7, 2003, the United States Court of Appeals for
the Second Circuit reversed and remanded 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. On June 2, 2003, the District Court
granted the outside directors' motion to dismiss and dismissed the motion to
dismiss of the other individual defendants.
H-35
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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 Division of Enforcement of the Securities and Exchange
Commission ('SEC') 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 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 financial
condition, results of operations or business.
NOTE 21 -- SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION
The following tables set forth supplemental consolidating condensed
financial information as of July 5, 2003, February 4, 2003 and January 4, 2003,
for the periods January 5, 2003 to February 4, 2003, February 5, 2003 to July 5,
2003 and for the Six Months Ended July 6, 2002 for (i) Warnaco Group (the
'Parent Guarantor'), (ii) Warnaco (the 'Issuer'), (iii) the subsidiaries of
Warnaco that guarantee the Senior Notes (the 'Guarantor Subsidiaries'),
(iv) the subsidiaries of Warnaco other than the Guarantor Subsidiaries (the
'Non-Guarantor Subsidiaries') and (v) the Company on a consolidated basis.
H-36
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
JULY 5, 2003
-------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
ASSETS
Current assets:
Cash................................. $ -- $ 46,275 $ 609 $ 19,041 $ -- $ 65,925
Accounts receivable, net............. -- -- 142,219 62,641 -- 204,860
Inventories, net..................... -- 99,934 108,545 80,224 -- 288,703
Prepaid expenses and other current
assets.............................. -- 8,189 7,481 21,537 -- 37,207
Assets held for sale................. -- 2 -- 1,048 -- 1,050
-------- --------- -------- -------- ----------- ----------
Total current assets.............. -- 154,400 258,854 184,491 -- 597,745
Property, plant and equipment, net...... -- 65,225 22,489 23,738 -- 111,452
Investment in subsidiaries.............. 763,175 558,800 -- -- (1,321,975) --
Other assets............................ 89,469 158,325 163,057 17,496 -- 428,347
-------- --------- -------- -------- ----------- ----------
852,644 $ 936,750 $444,400 $225,725 $(1,321,975) $1,137,544
-------- --------- -------- -------- ----------- ----------
-------- --------- -------- -------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.... $ -- $ 1,512 $ -- $ -- $ -- $ 1,512
Accounts payable and accrued
liabilities......................... -- 107,516 34,524 82,231 -- 224,271
-------- --------- -------- -------- ----------- ----------
Total current liabilities......... -- 109,028 34,524 82,231 -- 225,783
Intercompany accounts................... 332,278 (273,529) (14,449) (44,300) -- --
Long-term debt.......................... -- 210,000 -- 1,274 -- 211,274
Other long-term liabilities............. -- 160,256 18 11,423 -- 171,697
Stockholders' equity.................... 520,366 730,995 424,307 175,097 (1,321,975) 528,790
-------- --------- -------- -------- ----------- ----------
$852,644 $ 936,750 $444,400 $225,725 $(1,321,975) $1,137,544
-------- --------- -------- -------- ----------- ----------
-------- --------- -------- -------- ----------- ----------
</Table>
<Table>
<Caption>
FEBRUARY 4, 2003
--------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
ASSETS
Current assets:
Cash................................. $ -- $ 6,610 $ 339 $ 13,757 $ -- $ 20,706
Restricted cash...................... -- 4,500 -- 1,700 -- 6,200
Accounts receivable, net............. -- -- 151,317 61,731 -- 213,048
Inventories, net..................... -- 128,256 142,133 77,644 -- 348,033
Prepaid expenses and other current
assets.............................. -- 18,905 6,901 12,483 -- 38,289
Assets held for sale................. -- 332 -- 1,153 -- 1,485
-------- --------- -------- -------- ----------- ----------
Total current assets.............. -- 158,603 300,690 168,468 -- 627,761
Property, plant and equipment, net...... -- 83,126 20,695 25,536 -- 129,357
Investment in subsidiaries.............. 749,000 558,800 -- -- (1,307,800) --
Other assets............................ 34,142 186,916 169,985 15,788 -- 406,831
-------- --------- -------- -------- ----------- ----------
$783,142 $ 987,445 $491,370 $209,792 $(1,307,800) $1,163,949
-------- --------- -------- -------- ----------- ----------
-------- --------- -------- -------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.... $ -- $ 5,050 $ -- $ -- $ -- $ 5,050
Revolving credit facility............ -- 39,200 -- -- -- 39,200
Accounts payable and accrued
liabilities......................... -- 119,796 50,300 85,722 -- 255,818
-------- --------- -------- -------- ----------- ----------
Total current liabilities......... -- 164,046 50,300 85,722 -- 300,068
Intercompany accounts................... 279,594 (278,374) 35,043 (36,263) -- --
Long-term debt.......................... -- 200,942 -- 1,260 -- 202,202
Other long-term liabilities............. -- 151,831 27 6,273 -- 158,131
Stockholders' equity.................... 503,548 749,000 406,000 152,800 (1,307,800) 503,548
-------- --------- -------- -------- ----------- ----------
$783,142 $ 987,445 $491,370 $209,792 $(1,307,800) $1,163,949
-------- --------- -------- -------- ----------- ----------
-------- --------- -------- -------- ----------- ----------
</Table>
H-37
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
JANUARY 4, 2003
---------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
ASSETS
Current assets:
Cash................................ $ -- $ 93,676 $ 340 $ 20,009 $ -- $ 114,025
Accounts receivable, net............ -- 7,498 134,053 58,266 -- 199,817
Inventories, net.................... -- 142,108 132,752 70,408 -- 345,268
Prepaid expenses and other current
assets............................. -- 21,216 7,086 12,208 -- 40,510
Assets held for sale................ -- 332 -- 1,126 -- 1,458
----------- ----------- --------- -------- -------- -----------
Total current assets............. -- 264,830 274,231 162,017 -- 701,078
Property, plant and equipment, net..... -- 100,346 23,427 32,939 -- 156,712
Investment in subsidiaries............. (1,140,116) 293,909 380,371 (21,054) 486,890 --
Other assets........................... -- 1,852 81,923 6,315 -- 90,090
----------- ----------- --------- -------- -------- -----------
$(1,140,116) $ 660,937 $ 759,952 $180,217 $486,890 $ 947,880
----------- ----------- --------- -------- -------- -----------
----------- ----------- --------- -------- -------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Liabilities not subject to compromise
Current liabilities:
Current portion of long-term debt... $ -- $ 4,265 $ -- $ 1,500 $ -- $ 5,765
Accounts payable and accrued
liabilities........................ -- 67,869 79,262 86,945 -- 234,076
----------- ----------- --------- -------- -------- -----------
Total current liabilities........ -- 72,134 79,262 88,445 -- 239,841
Intercompany accounts.................. 622,756 (319,199) (394,409) 90,852 -- --
Long-term debt......................... -- -- -- 1,252 -- 1,252
Other long-term liabilities............ -- 70,500 29 6,272 -- 76,801
Liabilities subject to compromise...... -- 2,310,063 120,010 56,009 -- 2,486,082
Stockholders' equity (deficiency)...... (1,762,872) (1,472,561) 955,060 (62,613) 486,890 (1,856,096)
----------- ----------- --------- -------- -------- -----------
$(1,140,116) $ 660,937 $ 759,952 $180,217 $486,890 $ 947,880
----------- ----------- --------- -------- -------- -----------
----------- ----------- --------- -------- -------- -----------
</Table>
H-38
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
FOR THE PERIOD JANUARY 5, 2003 TO FEBRUARY 4, 2003
-------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
Net revenues............................. $ -- $ 25,673 $ 61,573 $ 28,714 $ -- $ 115,960
Cost of goods sold....................... -- 15,268 39,667 15,279 -- 70,214
----------- ----------- --------- -------- ----------- -----------
Gross profit............................. -- 10,405 21,906 13,435 -- 45,746
Selling, general and administrative
expenses -- 14,591 10,741 9,981 -- 35,313
Reorganization items..................... -- 29,922 -- -- -- 29,922
----------- ----------- --------- -------- ----------- -----------
Operating income (loss).................. -- (34,108) 11,165 3,454 -- (19,489)
Equity in income of subsidiaries......... (2,358,537) -- -- -- 2,358,537 --
Gain on cancellation of pre-petition
indebtedness............................ (1,567,721) (124,975) -- -- (1,692,696)
Fresh start adjustments.................. (765,726) -- -- (765,726)
Investment loss, net..................... -- 359 -- -- -- 359
Interest expense......................... -- 1,887 -- -- -- 1,887
----------- ----------- --------- -------- ----------- -----------
Income before provision for income
taxes................................... 2,358,537 2,297,093 136,140 3,454 (2,358,537) 2,436,687
Provision for income taxes............... -- 77,603 -- 547 -- 78,150
----------- ----------- --------- -------- ----------- -----------
Net income............................... $2,358,537 $ 2,219,490 $ 136,140 $ 2,907 $(2,358,537) $ 2,358,537
----------- ----------- --------- -------- ----------- -----------
----------- ----------- --------- -------- ----------- -----------
</Table>
<Table>
<Caption>
FOR THE PERIOD FEBRUARY 5, 2003 TO JULY 5, 2003
------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
Net revenues............................. $ -- $ 172,235 $ 334,823 $155,110 $ -- $ 662,168
Cost of goods sold....................... -- 122,628 232,308 89,422 -- 444,358
----------- ----------- --------- -------- -------- -----------
Gross profit............................. -- 49,607 102,515 65,688 -- 217,810
Selling, general and administrative
expenses................................ -- 62,151 63,467 43,062 -- 168,680
Amortization of sales order backlog...... -- 2,750 7,750 -- -- 10,500
Restructuring items...................... -- 2,243 3,329 568 -- 6,140
----------- ----------- --------- -------- -------- -----------
Operating income (loss).................. -- (17,537) 27,969 22,058 -- 32,490
Equity in (income) loss of
subsidiaries............................ (14,175) -- -- -- 14,175 --
Royalty and management fees.............. -- 24 (2,542) 2,518 -- --
Other (income) loss, net................. -- 25 -- (1,353) -- (1,328)
Interest expense......................... -- 9,851 -- -- -- 9,851
----------- ----------- --------- -------- -------- -----------
Income (loss) before provision (benefit)
for income taxes........................ 14,175 (27,437) 30,511 20,893 (14,175) 23,967
Provision (benefit) for income taxes..... -- (9,404) 12,204 6,992 -- 9,792
----------- ----------- --------- -------- -------- -----------
Net income (loss)........................ $ 14,175 $ (18,033) $ 18,307 $ 13,901 $(14,175) $ 14,175
----------- ----------- --------- -------- -------- -----------
----------- ----------- --------- -------- -------- -----------
</Table>
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JULY 6, 2002
-------------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
Net revenues............................. $ -- $ 257,129 $ 377,631 $ 157,059 $ -- $ 791,819
Cost of goods sold....................... -- 187,704 277,551 92,304 -- 557,559
--------- --------- --------- --------- -------- ---------
Gross profit............................. -- 69,425 100,080 64,755 -- 234,260
Selling, general and administrative
expenses................................ -- 85,642 66,528 50,527 -- 202,697
Reorganization items..................... -- 55,292 -- 2,793 -- 58,085
--------- --------- --------- --------- -------- ---------
Operating income (loss).................. -- (71,509) 33,552 11,435 -- (26,522)
Equity in loss of consolidated
subsidiaries............................ 889,741 -- -- -- (889,741) --
Intercompany royalty and management
fees.................................... -- (504) (1,349) 1,853 -- --
Other (income) loss, net................. -- (17,395) 17,389 6 -- --
Interest (income) expense................ -- 33,840 (24,324) 543 -- 10,059
--------- --------- --------- --------- -------- ---------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting principle.................... (889,741) (87,450) 41,836 9,033 889,741 (36,581)
Provision for income taxes............... -- 888 42,965 7,685 -- 51,538
--------- --------- --------- --------- -------- ---------
Income (loss) before cumulative effect of
change in accounting principle.......... (889,741) (88,338) (1,129) 1,348 889,741 (88,119)
Cumulative effect of change in accounting
principle, net.......................... -- (84,532) (651,663) (65,427) -- (801,622)
--------- --------- --------- --------- -------- ---------
Net loss................................. $(889,741) $(172,870) $(652,792) $ (64,079) $889,741 $(889,741)
--------- --------- --------- --------- -------- ---------
--------- --------- --------- --------- -------- ---------
</Table>
H-39
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
FOR THE PERIOD JANUARY 5, 2003 TO FEBRUARY 4, 2003
-----------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
Net cash provided by (used in) operating
activities.............................. $ -- $(126,583) $ 260 $ 101,397 $ -- $ (24,926)
-------- --------- ----- --------- -------- ---------
Cash flows from investing activities:
Purchase of property, plant and
equipment............................ -- (468) (261) (16) -- (745)
-------- --------- ----- --------- -------- ---------
Net cash used in investing activities.... -- (468) (261) (16) -- (745)
-------- --------- ----- --------- -------- ---------
Cash flows from financing activities:
Borrowings under revolving credit
facility............................. -- 39,200 -- -- -- 39,200
Borrowings (repayments) under term
loan and other debt agreements....... -- 785 -- (1,500) -- (715)
Repayments of debt.................... -- -- -- (106,112) -- (106,112)
-------- --------- ----- --------- -------- ---------
Net cash provided by (used in) financing
activities.............................. -- 39,985 -- (107,612) -- (67,627)
-------- --------- ----- --------- -------- ---------
Translation adjustments.................. -- -- -- (21) -- (21)
-------- --------- ----- --------- -------- ---------
Decrease in cash......................... -- (87,066) (1) (6,252) -- (93,319)
Cash at beginning of period.............. -- 93,676 340 20,009 -- 114,025
-------- --------- ----- --------- -------- ---------
Cash at end of period.................... $ -- $ 6,610 $ 339 $ 13,757 $ -- $ 20,706
-------- --------- ----- --------- -------- ---------
-------- --------- ----- --------- -------- ---------
</Table>
<Table>
<Caption>
FOR THE PERIOD FEBRUARY 5, 2003 TO JULY 5, 2003
-----------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
Net cash provided by operating
activities.............................. $ -- $ 85,003 $ 2,096 $ 2,097 $ -- $ 89,196
-------- --------- ------- ------- -------- ---------
Cash flows from investing activities:
Disposal of fixed assets.............. -- 142 -- -- -- 142
Purchase of property, plant and
equipment............................ -- (3,479) (1,826) (1,046) -- (6,351)
-------- --------- ------- ------- -------- ---------
Net cash used in investing activities.... -- (3,337) (1,826) (1,046) -- (6,209)
-------- --------- ------- ------- -------- ---------
Cash flows from financing activities:
Repayment of revolving credit
facility............................. -- (39,200) -- -- -- (39,200)
Proceeds from issuance of Senior
Notes................................ -- 210,000 -- -- -- 210,000
Repayment of Second Lien Notes........ -- (200,942) -- -- -- (200,942)
Repayments of debt, including capital
lease obligations.................... -- (3,538) -- 14 -- (3,524)
Payment of deferred financing costs... -- (8,321) -- -- -- (8,321)
-------- --------- ------- ------- -------- ---------
Net cash provided by (used in) financing
activities.............................. -- (42,001) -- 14 -- (41,987)
-------- --------- ------- ------- -------- ---------
Translation adjustments.................. -- -- -- 4,219 -- 4,219
-------- --------- ------- ------- -------- ---------
Increase in cash......................... -- 39,665 270 5,284 -- 45,219
Cash at beginning of period.............. -- 6,610 339 13,757 -- 20,706
-------- --------- ------- ------- -------- ---------
Cash at end of period.................... $ -- $ 46,275 $ 609 $19,041 $ -- $ 65,925
-------- --------- ------- ------- -------- ---------
-------- --------- ------- ------- -------- ---------
</Table>
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JULY 6, 2002
-----------------------------------------------------------------------------------
THE WARNACO GUARANTOR NON-GUARANTOR ELIMINATION
GROUP, INC. WARNACO INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- ------------ ------------ ------------ ------- ------------
Net cash provided by (used in) operating
activities.............................. $ -- $ 234,582 $ 1,170 $ (17,307) $ -- $ 218,445
-------- --------- ------- --------- -------- ---------
Cash flows from investing activities:
Disposal of fixed assets.............. -- 7,564 -- -- -- 7,564
Purchase of property, plant and
equipment............................ -- (2,593) (1,249) (1,372) -- (5,214)
Proceeds from sale of business
units................................ -- -- -- 20,459 -- 20,459
-------- --------- ------- --------- -------- ---------
Net cash provided by (used in) investing
activities.............................. -- 4,971 (1,249) 19,087 -- 22,809
-------- --------- ------- --------- -------- ---------
Cash flows from financing activities:
Repayments under revolving credit
facilities........................... -- (155,915) -- -- -- (155,915)
Repayments of debt.................... -- (8,456) (34) (2,054) -- (10,544)
-------- --------- ------- --------- -------- ---------
Net cash provided by (used in) financing
activities.............................. -- (164,371) (34) (2,054) -- (166,459)
-------- --------- ------- --------- -------- ---------
Translation adjustment................... -- -- -- 1,811 -- 1,811
-------- --------- ------- --------- -------- ---------
Increase (decrease) in cash.............. -- 75,182 (113) 1,537 -- 76,606
Cash at beginning of period.............. -- 16,652 1,042 21,864 -- 39,558
-------- --------- ------- --------- -------- ---------
Cash at end of period.................... $ -- $ 91,834 $ 929 $ 23,401 $ -- $ 116,164
-------- --------- ------- --------- -------- ---------
-------- --------- ------- --------- -------- ---------
</Table>
H-40
________________________________________________________________________________
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON
ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS DOES NOT OFFER
TO SELL OR ASK FOR OFFERS TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH THIS
PROSPECTUS RELATES AND IT DOES NOT CONSTITUTE AN OFFER TO SELL OR ASK FOR OFFERS
TO BUY ANY OF THE SECURITIES IN ANY JURISDICTION WHERE IT IS UNLAWFUL, WHERE THE
PERSON MAKING THE OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON WHO CANNOT
LEGALLY BE OFFERED THE SECURITIES. THE INFORMATION CONTAINED IN THIS PROSPECTUS
IS CURRENT ONLY AS OF ITS DATE.
Until , 2003, all dealers that effect transactions in these
securities, whether or not participating in this exchange offer, may be required
to deliver a prospectus. Each broker-dealer that receives new notes for its own
account pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. Warnaco and the
guarantors have agreed that, starting on the expiration date and ending on the
close of business 180 days after the expiration date (or such shorter period
during which participating broker-dealers are required by law to deliver such
prospectus), they will make this prospectus available to any broker-dealer for
use in connection with any such resale.
------------------------
PROSPECTUS
------------------------
[WARNACO LOGO]
WARNACO INC.
A WHOLLY OWNED SUBSIDIARY OF
THE WARNACO GROUP, INC.
OFFER TO EXCHANGE $210,000,000 AGGREGATE PRINCIPAL AMOUNT OF 8 7/8% SENIOR NOTES
DUE 2013 CUSIPS 934391 AE3 AND U93439 AA2 FOR $210,000,000 AGGREGATE PRINCIPAL
AMOUNT OF 8 7/8% SENIOR NOTES DUE 2013
CUSIP WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED
Prospectus dated , 2003
________________________________________________________________________________
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
REGISTRANTS THAT ARE DELAWARE CORPORATIONS
Under Section 145 of the Delaware General Corporation Law ('DGCL'), a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
or she is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding (i) if such person acted in
good faith and in a manner that such person reasonably believed to be in or not
opposed to the best interests of the corporation and (ii) with respect to any
criminal action or proceeding, if he or she had no reasonable cause to believe
such conduct was unlawful. In actions brought by or in the right of the
corporation, a corporation may indemnify such person against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner that such person reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be made in respect of any claim, issue or matter as to which that person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnification for such expenses
which the Court of Chancery or other such court shall deem proper. To the extent
that such person has been successful on the merits or otherwise in defending any
such action, suit or proceeding referred to above or any claim, issue or matter
therein, he or she is entitled to indemnification for expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith. A corporation may pay expenses (including attorneys' fees) incurred
by an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the
corporation. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate. The
indemnification and advancement of expenses provided for or granted pursuant to
Section 145 is not exclusive of any other rights of indemnification or
advancement of expenses to which those seeking indemnification or advancement of
expenses may be entitled, and a corporation may purchase and maintain insurance
against liabilities asserted against any former or current, director, officer,
employee or agent of the corporation, or a person who is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, whether or
not the power to indemnify is provided by the statute.
Article VII of the Amended and Restated Certificate of Incorporation of The
Warnaco Group, Inc. and Article VIII of the Bylaws of each of Abbeville
Manufacturing Company, Authentic Fitness Corporation, CCC Acquisition Corp.,
Calvin Klein Jeanswear Company, CKJ Holdings, Inc., Designer Holdings Ltd.,
Gregory Street, Inc., Jeanswear Holdings, Inc., Kai Jay Manufacturing Company,
Myrtle Avenue, Inc., Outlet Holdings, Inc., Outlet Stores, Inc., Penhaligon's by
Request, Inc., Rio Sportswear, Inc., Ubertech Products, Inc., Warnaco Puerto
Rico, Inc. and Warnaco U.S., Inc. contain provisions that grant indemnification
rights to the fullest extent authorized under DGCL Section 145.
II-1
Article VIII of the Bylaws of Warnaco Inc., Article Fourteenth of the
Amended Certificate of Incorporation of each of 184 Benton Street Inc., Warnaco
Sourcing Inc. and Warner's de Costa Rica Inc., Article Ninth of the Amended
Certificate of Incorporation of Authentic Fitness Retail Inc., and Article III,
Section 13 of the Bylaws of Authentic Fitness Products Inc. states that the
company will provide indemnification to the fullest extent permitted under
Delaware law.
Article Eleventh of the Amended Certificate of Incorporation of each of C.F.
Hathaway Company and Warnaco Men's Sportswear Inc. provides for indemnification
as follows:
'Any person made a party to any action, suit or proceeding by reason of
the fact that he, his testator or intestate, is or was a director, officer,
or employee of the corporation, or of any corporation which he served as
such at the request of the corporation, shall be indemnified by the
corporation against the reasonable expenses, including attorneys' fees,
actually and necessarily incurred by him in connection with the defense of
such action, suit or proceeding, or in connection with any appeal therein,
except in relation to matters as to which it shall be adjudged in such
action, suit or proceeding that such officer, director or employee is liable
for negligence or misconduct in the performance of his duties. Such right of
indemnification shall not be deemed exclusive of any other rights to which
such director, officer or employee may be entitled.'
REGISTRANTS THAT ARE DELAWARE LIMITED LIABILITY COMPANIES
Section 18-108 of the Delaware Limited Liability Company Act permits limited
liability companies to indemnify and hold harmless any member or manager or
other person from and against any and all claims and demands. However, a limited
liability company may set forth restrictions on and standards for
indemnification in its limited liability company operating agreement.
Article XI of the Amended and Restated Limited Liability Company Agreement of
Warnaco International, L.L.C. contains provisions that grant indemnification
rights to the extent authorized under DGCL Section 145.
REGISTRANTS THAT ARE CALIFORNIA CORPORATIONS
Section 317 of the General Corporation Law of California provides that a
corporation has the power to indemnify any person who was or is a party or is
threatened to be made a party to any proceeding, other than in an action by or
in the right of the corporation to obtain a favorable judgment for itself, by
reason of the fact that such person is or was an agent of the corporation,
against expenses actually and reasonably incurred in connection with the
proceeding, if the person acted in good faith and in a manner the person
reasonably believed to be in the best interests of the corporation and, in the
case of criminal proceedings, had no reasonable cause to believe that the
conduct was unlawful. In the case of suits by or on behalf of a corporation to
obtain a judgment in its favor, a corporation has the power to indemnify any
person who was or is a party or is threatened to be made a party to such
proceeding by reason of the fact that the person is or was the corporation's
agent, against expenses actually and reasonably incurred, if the person acted in
good faith in a manner the person believed to be in the best interests of the
corporation and its shareholders, except that no such indemnification may be
made for claims as to which the person shall have been adjudged to be liable to
the corporation in the performance of that person's duty to the corporation
(unless and then only to the extent a court determines otherwise), for amounts
paid in settling a pending action without court approval or for expenses
incurred in defending a pending action which is settled without court approval.
A corporation may pay expenses incurred in defending any proceeding in advance
of the final disposition of such proceeding upon receipt of an undertaking by or
on behalf of the agent to repay that amount if it shall be determined ultimately
that the agent is not entitled to be indemnified. A corporation shall have power
to purchase and maintain insurance on behalf of any agent of the corporation
against any liability asserted against or incurred by the agent in that capacity
or arising out of the agent's status as such whether or not the corporation
would have the power to indemnify the agent against that liability.
II-2
Article II, Section 5 of the Bylaws of A.B.S. Clothing Collection, Inc.
provides that the corporation may indemnify any director, officer, agent or
employee as to those liabilities and on those terms and conditions as are
specified in Section 317 of the General Corporation Law of California.
REGISTRANTS THAT ARE NEVADA CORPORATIONS
Section 78.7502 of the Nevada Revised Statutes permits a corporation to
indemnify any person who was or is a party or is threatened to be made a party
in any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (except an action by or in the
right of the corporation), by reason of being or having been an officer,
director, employee or agent of the corporation or serving in certain capacities
at the request of the corporation. Indemnification may include attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the person to be indemnified. The person to be indemnified must not be found
to have breached his or her fiduciary duties with such breach involving
intentional misconduct, fraud or a knowing violation of the law and must have
acted in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, such person must have had no reasonable cause to
believe his or her conduct was unlawful. A corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of being or having been an officer,
director, employee or agent of the corporation or serving in certain capacities
at the request of the corporation except that indemnification may not be made
for any claim, issue or matter as to which such a person has been finally
adjudged by a court of competent jurisdiction to be liable to the corporation or
for amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that in view of all the
circumstances the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper. Section 78.7502 also provides that to the
extent a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any such action, he or she
must be indemnified by the corporation against expenses, including attorneys'
fees actually and reasonably incurred in connection with the defense.
Section 78.751 permits a corporation, in its articles of incorporation, bylaws
or other agreement, to provide for the payment of expenses incurred by an
officer or director in defending any civil or criminal action, suit or
proceeding as they are incurred and in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking to repay the amount
if it is ultimately determined by a court of competent jurisdiction that the
person is not entitled to indemnification. Section 78.752 permits a corporation
to purchase and maintain insurance or make other financial arrangements on
behalf of the corporation's officers, directors, employees or agents, or any
persons serving in certain capacities at the request of the corporation, for any
liability and expenses incurred by them in their capacities as officers,
directors, employees or agents or arising out of their status as such, whether
or not the corporation has the authority to indemnify him, her or them against
such liability and expenses.
Article IX of the Bylaws of Authentic Fitness On-line, Inc. provide for
indemnification to the fullest extent permitted under Nevada law and for the
advance payment of expenses incurred by officers and directors as permitted by
Section 78.751 of the Nevada Revised Statutes.
In addition, The Warnaco Group, Inc. has entered into separate
Indemnification Agreements with each of its directors and officers and has
purchased and maintains insurance for its directors and officers against
liabilities that they may incur in their capacity as such.
II-3
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
2.1 Sale and Purchase Agreement, dated December 18, 2001,
between Mullion International Limited and Royal Holdings,
Inc. (incorporated herein by reference to Exhibit 2.3 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
2.2 Deed of Variation, dated February 8, 2002, among Mullion
International Limited, Royal Holdings, Inc. and Cradle
Penhaligon's Limited (incorporated herein by reference to
Exhibit 2.4 to The Warnaco Group, Inc.'s Form 10-K filed
July 31, 2002).*
2.3 Stock and Asset Sale Agreement, dated as of December 21,
2001, by and among Warnaco Inc., Warner's (U.K.) Ltd.,
Warnaco (HK) Ltd. and Luen Thai Overseas Limited
(incorporated herein by reference to Exhibit 2.5 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
2.4 Consent and Waiver, dated as of January 21, 2002, by and
among Warnaco Inc., Warner's (U.K.) Ltd., Warnaco (HK) Ltd.
and Luen Thai Overseas Limited (incorporated herein by
reference to Exhibit 2.6 to The Warnaco Group, Inc.'s
Form 10-K filed July 31, 2002).*
2.5 Consent and Waiver, dated as of February 1, 2002, by and
among Warnaco Inc., Warner's (U.K.) Ltd., Warnaco (HK) Ltd.
and Luen Thai Overseas Limited (incorporated herein by
reference to Exhibit 2.7 to The Warnaco Group, Inc.'s
Form 10-K filed July 31, 2002).*
2.6 First Amended Joint Plan of Reorganization of The Warnaco
Group, Inc. and its Affiliated Debtors in Possession Under
Chapter 11 of the Bankruptcy Code (incorporated herein by
reference to Exhibit 99.2 to The Warnaco Group, Inc.'s
Form 10-Q filed on November 18, 2002).*
2.7 Disclosure Statement with respect to the First Amended Joint
Plan of Reorganization of The Warnaco Group, Inc. and its
Affiliated Debtors and Debtors in Possession Under
Chapter 11 of the Bankruptcy Code (incorporated herein by
reference to Exhibit 99.3 to The Warnaco Group, Inc.'s
Form 10-Q filed November 18, 2002).*
3.1 Restated Certificate of Incorporation of Warnaco Inc.
(incorporated by reference to Exhibit T3A-1 to the Form T-3
filed by The Warnaco Group, Inc. on January 17, 2003), as
amended by the Certificate of Amendment to Certificate of
Incorporation of Warnaco Inc. (incorporated by reference to
Exhibit T3A-2 to the Form T-3 filed by The Warnaco Group,
Inc. on January 17, 2003).*
3.2 Bylaws of Warnaco Inc. (incorporated by reference to
Exhibit T3B to the Form T-3 filed by The Warnaco Group,
Inc. on January 17, 2003).*
3.3 Amended and Restated Certificate of Incorporation of The
Warnaco Group, Inc. (incorporated by reference to Exhibit 1
to the Form 8-A/A filed by The Warnaco Group, Inc. on
February 4, 2003).*
3.4 Bylaws of The Warnaco Group, Inc. (incorporated by reference
to the Annual Report on Form 10-K filed by The Warnaco
Group, Inc. on April 4, 2003).*
3.5 Certificate of Incorporation of 184 Benton Street Inc.
(incorporated by reference to Exhibit T3A-5 to the Amendment
No. 1 to Form T-3 filed by The Warnaco Group, Inc. on
February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of 184 Benton
Street Inc. (incorporated by reference to Exhibit T3A-6 to
the Amendment No. 1 to Form T-3 filed by The Warnaco Group,
Inc. on February 3, 2003).*
3.6 Bylaws of 184 Benton Street Inc. (incorporated by reference
to Exhibit T3B-3 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
</Table>
II-4
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.7 Articles of Incorporation of A.B.S. Clothing Collection,
Inc. (incorporated by reference to Exhibit T3A-7 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Articles of Incorporation of A.B.S. Clothing
Collection, Inc. (incorporated by reference to
Exhibit T3A-8 to the Amendment No. 1 to Form T-3 filed by
The Warnco Group, Inc. on February 3, 2003).*
3.8 Bylaws of A.B.S. Clothing Collection, Inc. (incorporated by
reference to Exhibit T3B-4 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.9 Certificate of Incorporation of Abbeville Manufacturing
Company (incorporated by reference to Exhibit T3A-9 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Abbeville
Manufacturing Company (incorporated by reference to
Exhibit T3A-10 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.10 Bylaws of Abbeville Manufacturing Company (incorporated by
reference to Exhibit T3B-5 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003),* as amended by the Amendment to the Bylaws of
Abbeville Manufacturing Company.**
3.11 Restated Certificate of Incorporation of Authentic Fitness
Corporation,** as amended by the Certificate of Amendment to
Certificate of Incorporation of Authentic Fitness
Corporation (incorporated by reference to Exhibit T3A-12 to
the Amendment No. 1 to Form T-3 filed by The Warnaco Group,
Inc. on February 3, 2003).*
3.12 Bylaws of Authentic Fitness Corporation.**
3.13 Restated Certificate of Incorporation of Authentic Fitness
On-Line, Inc. (incorporated by reference to Exhibit T3A-13
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003), as amended by the
Certificate of Amendment to Certificate of Incorporation of
Authentic Fitness On-Line, Inc. (incorporated by reference
to Exhibit T3A-14 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.14 Bylaws of Authentic Fitness On-Line, Inc. (incorporated by
reference to Exhibit T3B-7 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003),* as amended by the Amendment to By-laws of Authentic
Fitness On-Line, Inc.**
3.15 Amended Certificate of Incorporation of Authentic Fitness
Products Inc. (incorporated by reference to Exhibit T3A-15
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003), as amended by the
Certificate of Amendment to Certificate of Incorporation of
Authentic Fitness Products Inc. (incorporated by reference
to Exhibit T3A-16 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.16 Bylaws of Authentic Fitness Products Inc. (incorporated by
reference to Exhibit T3B-8 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.17 Certificate of Incorporation of Authentic Fitness Retail
Inc. (incorporated by reference to Exhibit T3A-17 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Authentic
Fitness Retail Inc. (incorporated by reference to
Exhibit T3A-18 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
</Table>
II-5
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.18 Bylaws of Authentic Fitness Retail Inc. (incorporated by
reference to Exhibit T3B-9 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.19 Certificate of Incorporation of CCC Acquisition Corp.
(incorporated by reference to Exhibit T3A-19 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of CCC Acquisition
Corp. (incorporated by reference to Exhibit T3A-20 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.20 Bylaws of CCC Acquisition Corp. (incorporated by reference
to Exhibit T3B-10 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.21 Amended Certificate of Incorporation of C.F. Hathaway
Company (incorporated by reference to Exhibit T3A-21 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of C.F. Hathaway
Company (incorporated by reference to Exhibit T3A-22 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.22 Bylaws of C.F. Hathaway Company (incorporated by reference
to Exhibit T3B-11 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.23 Certificate of Incorporation of Calvin Klein Jeanswear
Company (incorporated by reference to Exhibit T3A-23 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Calvin Klein
Jeanswear Company (incorporated by reference to
Exhibit T3A-24 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.24 Bylaws of Calvin Klein Jeanswear Company (incorporated by
reference to Exhibit T3B-12 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.25 Certificate of Incorporation of CKJ Holdings, Inc.
(incorporated by reference to Exhibit T3A-25 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of CKJ Holdings,
Inc. (incorporated by reference to Exhibit T3A-26 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.26 Bylaws of CKJ Holdings, Inc. (incorporated by reference to
Exhibit T3B-13 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.27 Certificate of Incorporation of Designer Holdings Ltd.
(incorporated by reference to Exhibit T3A-27 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Designer
Holdings Ltd. (incorporated by reference to Exhibit T3A-28
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.28 Bylaws of Designer Holdings Ltd. (incorporated by reference
to Exhibit T3B-14 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
</Table>
II-6
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.29 Certificate of Incorporation of Gregory Street, Inc.
(incorporated by reference to Exhibit T3A-29 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Gregory Street,
Inc. (incorporated by reference to Exhibit T3A-30 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.30 Bylaws of Gregory Street, Inc. (incorporated by reference to
Exhibit T3B-15 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.31 Certificate of Incorporation of Jeanswear Holdings, Inc.
(incorporated by reference to Exhibit T3A-31 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Jeanswear
Holdings, Inc. (incorporated by reference to Exhibit T3A-32
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.32 Bylaws of Jeanswear Holdings, Inc. (incorporated by
reference to Exhibit T3B-16 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.33 Amended Certificate of Incorporation of Kai Jay
Manufacturing Company (incorporated by reference to
Exhibit T3A-33 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003), as amended by
the Certificate of Amendment to Certificate of Incorporation
of Kai Jay Manufacturing Company (incorporated by reference
to Exhibit T3A-34 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.34 Bylaws of Kai Jay Manufacturing Company (incorporated by
reference to Exhibit T3B-17 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.35 Certificate of Incorporation of Myrtle Avenue, Inc.
(incorporated by reference to Exhibit T3A-35 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Myrtle Avenue,
Inc. (incorporated by reference to Exhibit T3A-36 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.36 Bylaws of Myrtle Avenue, Inc. (incorporated by reference to
Exhibit T3B-18 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.37 Certificate of Incorporation of Outlet Holdings, Inc.
(incorporated by reference to Exhibit T3A-37 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Outlet
Holdings, Inc. (incorporated by reference to Exhibit T3A-38
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.38 Bylaws of Outlet Holdings, Inc. (incorporated by reference
to Exhibit T3B-19 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.39 Certificate of Incorporation of Outlet Stores, Inc.
(incorporated by reference to Exhibit T3A-39 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Outlet Stores,
Inc. (incorporated by reference to Exhibit T3A-40 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
</Table>
II-7
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.40 Bylaws of Outlet Stores, Inc. (incorporated by reference to
Exhibit T3B-20 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.41 Certificate of Incorporation of Penhaligon's by Request,
Inc. (incorporated by reference to Exhibit T3A-41 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Penhaligon's by
Request, Inc. (incorporated by reference to Exhibit T3A-42
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.42 Bylaws of Penhaligon's by Request, Inc. (incorporated by
reference to Exhibit T3B-21 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.43 Amended Certificate of Incorporation of Rio Sportswear, Inc.
(incorporated by reference to Exhibit T3A-43 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Rio Sportswear,
Inc. (incorporated by reference to Exhibit T3A-44 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.44 Bylaws of Rio Sportswear, Inc. (incorporated by reference to
Exhibit T3B-22 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.45 Amended Certificate of Incorporation of Ubertech Products,
Inc. (incorporated by reference to Exhibit T3A-45 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Ubertech
Products, Inc. (incorporated by reference to Exhibit T3A-46
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.46 Bylaws of Ubertech Products, Inc. (incorporated by reference
to Exhibit T3B-23 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.47 Amended Certificate of Formation of Warnaco International,
L.L.C. (incorporated by reference to Exhibit T3A-47 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.48 Amended and Restated Limited Liability Company Agreement of
Warnaco International, L.L.C. (incorporated by reference to
Exhibit T3B-24 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.49 Amended Certificate of Incorporation of Warnaco Men's
Sportswear Inc. (incorporated by reference to
Exhibit T3A-49 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003), as amended by
the Certificate of Amendment to Certificate of Incorporation
of Warnaco Men's Sportswear Inc. (incorporated by reference
to Exhibit T3A-50 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.50 Bylaws of Warnaco Men's Sportswear Inc. (incorporated by
reference to Exhibit T3B-25 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.51 Amended Certificate of Incorporation of Warnaco Puerto Rico,
Inc. (incorporated by reference to Exhibit T3A-51 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Warnaco Puerto
Rico, Inc. (incorporated by reference to Exhibit T3A-52 to
the Amendment No. 1 to Form T-3 filed by The Warnaco Group,
Inc. on February 3, 2003).*
</Table>
II-8
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.52 Bylaws of Warnaco Puerto Rico, Inc. (incorporated by
reference to Exhibit T3B-26 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.53 Certificate of Incorporation of Warnaco Sourcing Inc.
(incorporated by reference to Exhibit T3A-53 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Warnaco
Sourcing Inc. (incorporated by reference to Exhibit T3A-54
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.54 Bylaws of Warnaco Sourcing Inc. (incorporated by reference
to Exhibit T3B-27 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.55 Amended Certificate of Incorporation of Warnaco U.S., Inc.
(incorporated by reference to Exhibit T3A-55 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Warnaco U.S.,
Inc. (incorporated by reference to Exhibit T3A-56 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.56 Bylaws of Warnaco U.S., Inc. (incorporated by reference to
Exhibit T3B-28 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.57 Amended Certificate of Incorporation of Warner's de Costa
Rica Inc. (incorporated by reference to Exhibit T3A-57 to
the Amendment No. 1 to Form T-3 filed by The Warnaco Group,
Inc. on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Warner's de
Costa Rica Inc. (incorporated by reference to
Exhibit T3A-58 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.58 Bylaws of Warner's de Costa Rica Inc. (incorporated by
reference to Exhibit T3B-29 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
4.1 Registration Rights Agreement, dated as of June 12, 2003,
among Warnaco Inc., the Guarantors (as defined therein) and
the Initial Purchasers (as defined therein).**
4.2 Indenture, dated as of June 12, 2003, among Warnaco Inc.,
the Guarantors (as defined therein) and the Trustee (as
defined therein).**
4.3 Rights Agreement, dated as of February 4, 2003, between The
Warnaco Group, Inc. 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 (incorporated by reference to Exhibit 4 to the
Form 8-A/A filed by The Warnaco Group, Inc. on February 4,
2003).*
4.4 Registration Rights Agreement, dated as of February 4, 2003,
among The Warnaco Group, Inc. and certain creditors thereof
(as described in the Registration Rights Agreement)
(incorporated herein by reference to Exhibit 4.5 to The
Warnaco Group, Inc.'s Form 8-K filed February 10, 2003).*
5.1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
regarding the legality of the notes being offered hereby.'D'
5.2 Form of Opinion of Schreck Brignone, regarding the legality
of certain of the guarantees being offered hereby.'D'
</Table>
II-9
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.1 Senior Secured Revolving Credit Agreement, dated as of
February 4, 2003, among Warnaco Inc., The Warnaco Group,
Inc., 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 managers and
joint lead book managers (incorporated herein by reference
to Exhibit 99.2 to The Warnaco Group, Inc.'s Form 8-K filed
February 10, 2003).*
10.2 Pledge and Security Agreement, dated as of February 4, 2003,
among Warnaco Inc., as a grantor, the Guarantors and
Citicorp North America, Inc., as administrative agent
(incorporated herein by reference to Exhibit 99.3 to The
Warnaco Group, Inc.'s Form 8-K filed February 10, 2003).*
10.3 Intercreditor Agreement, dated as of February 4, 2003, among
the Administrative Agent, the Indenture Trustee, the
Collateral Trustee, Warnaco and the Guarantors (incorporated
herein by reference to Exhibit 99.4 to The Warnaco Group,
Inc.'s Form 8-K filed February 10, 2003).*
10.4 Warnaco Employee Retirement Plan (incorporated herein by
reference to Exhibit 10.11 to The Warnaco Group, Inc.'s
Registration Statement on Form S-1, No. 33-4587).*
10.5 The Warnaco Group, Inc. 2003 Stock Incentive Plan
(incorporated herein by reference to Appendix D to The
Warnaco Group, Inc.'s Proxy Statement filed April 29,
2003).*
10.6 The Warnaco Group, Inc. Incentive Compensation Plan
(incorporated herein by reference to Appendix E to The
Warnaco Group, Inc.'s Proxy Statement filed April 29,
2003).*
10.7 Summary of Key Domestic Employee Retention Plan
(incorporated herein by reference to Exhibit 10.51 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
10.8 Letter Agreement, dated April 30, 2001, between The Warnaco
Group, Inc. and Alvarez & Marsal, Inc. (incorporated herein
by reference to Exhibit 10.52 to The Warnaco Group, Inc.'s
Form 10-K filed July 31, 2002).*
10.9 Employment Agreement, dated as of June 11, 2001, between The
Warnaco Group, Inc. and Antonio Alvarez (incorporated herein
by reference to Exhibit 10.53 to The Warnaco Group, Inc.'s
Form 10-K filed July 31, 2002).*
10.10 Amended Employment Agreement, dated as of June 11, 2001,
between The Warnaco Group, Inc. and Antonio Alvarez
(incorporated herein by reference to Exhibit 10.42 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
10.11 Offer Letter and Employee Waiver, Release and Discharge of
Claims pursuant to the Key Domestic Employee Retention Plan
for Stanley Silverstein, dated November 26, 2001
(incorporated herein by reference to Exhibit 10.41 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
10.12 Agreement to Extend Amended Employment Agreement between The
Warnaco Group, Inc. and Antonio Alvarez, dated July 16, 2002
(incorporated herein by reference to Exhibit 10.54 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
10.13 Letter Agreement, dated January 29, 2003, by and between
Alvarez & Marsal, Inc. and The Warnaco Group, Inc.
(incorporated by reference to Exhibit 10.26 to the Annual
Report on Form 10-K filed by The Warnaco Group, Inc. on
April 4, 2003).*
10.14 Letter Agreement, dated March 18, 2003, by and between
Alvarez & Marsal, Inc. and The Warnaco Group, Inc.
(incorporated by reference to Exhibit 10.17 to the Annual
Report on Form 10-K filed by The Warnaco Group, Inc. on
April 4, 2003).*#
10.15 Employment Agreement, dated as of April 14, 2003, by and
between The Warnaco Group, Inc. and Joseph R. Gromek
(incorporated by reference to Exhibit 10.7 to the Quarterly
Report on Form 10-Q filed by The Warnaco Group, Inc. on May
20, 2003).*
</Table>
II-10
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.16 Amended and Restated License Agreement, dated as of
January 1, 1996, between Polo Ralph Lauren, L.P. and Warnaco
Inc. (incorporated herein by reference to Exhibit 10.4 to
The Warnaco Group, Inc.'s Form 10-Q filed November 14,
1997).*
10.17 Amended and Restated Design Services Agreement, dated as of
January 1, 1996, between Polo Ralph Lauren Enterprises, L.P.
and Warnaco Inc. (incorporated herein by reference to
Exhibit 10.5 to The Warnaco Group, Inc.'s Form 10-Q filed
November 14, 1997).*
10.18 License Agreement, dated as of August 4, 1994, between
Calvin Klein, Inc. and Calvin Klein Jeanswear Company
(incorporated by reference to Exhibit 10.20 to Designer
Holdings, Ltd.'s Registration Statement on Form S-1 (File
No. 333-02236)).*
10.19 Amendment to the Calvin Klein License Agreement, dated as of
December 7, 1994 (incorporated by reference to
Exhibit 10.21 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-02236)).*
10.20 Amendment to the Calvin Klein License Agreement, dated as of
January 10, 1995 (incorporated by reference to
Exhibit 10.22 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-02236)).*
10.21 Amendment to the Calvin Klein License Agreement, dated as of
February 28, 1995 (incorporated by reference to
Exhibit 10.23 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-02236)).*
10.22 Amendment to the Calvin Klein License Agreement, dated as of
April 22, 1996 (incorporated by reference to Exhibit 10.38
to Designer Holdings, Ltd.'s Registration Statement on
Form S-1 (File No. 333-02236)).*
10.23 Amendment and Agreement, dated June 5, 2003, by and among
Calvin Klein, Inc., Phillips-Van Heusen Corporation, Warnaco
Inc., Calvin Klein Jeanswear Company, and CKJ Holdings
Inc.**#
10.24 Consent and Amendment No. 1 to the Facility Agreement, dated
as of February 5, 2002 (incorporated herein by reference to
Exhibit 10.49 to The Warnaco Group, Inc.'s Form 10-K filed
July 31, 2002).*
10.25 Speedo Settlement Agreement, dated November 25, 2002, by and
between Speedo International Limited and Authentic Fitness
Corporation, Authentic Fitness Products, Inc., The Warnaco
Group, Inc. and Warnaco Inc. (incorporated herein by
reference to Exhibit 10.28 to The Warnaco Group, Inc.'s
Annual Report on Form 10-K filed April 4, 2003).*
10.26 Amendment to the Speedo Licenses, dated as of November 25,
2002, by and among Speedo International Limited, Authentic
Fitness Corporation and Authentic Fitness Products, Inc.
(incorporated herein by reference to Exhibit 10.29 to The
Warnaco Group, Inc.'s Annual Report on Form 10-K filed
April 4, 2003).*#
10.27 Settlement Agreement, dated January 22, 2001, by and between
Calvin Klein Trademark Trust, Calvin Klein, Inc. and Calvin
Klein and Linda Wachner, The Warnaco Group, Inc., Warnaco
Inc., Designer Holdings, Ltd, CKJ Holdings, Inc., Jeanswear
Holdings Inc., Calvin Klein Jeanswear Company and Outlet
Holdings, Inc. (incorporated herein by reference to
Exhibit 10.57 to The Warnaco Group, Inc.'s Form 10-K filed
July 31, 2002).*#
10.28 License Agreement, dated as of March 1, 2003, by and between
Nautica Apparel, Inc. and Authentic Fitness Corporation.
(incorporated herein by reference to Exhibit 10.31 to The
Warnaco Group, Inc.'s Annual Report on Form 10-K filed
April 4, 2003).*#
10.29 Amended and Restated Master Agreement of Sale, dated as of
September 30, 1998, among Warnaco Inc., as Originator, and
Gregory Street, Inc., as Buyer and Servicer (incorporated
herein by reference to Exhibit 10.4 to The Warnaco Group,
Inc.'s Form 10-Q filed November 16, 1998).*
</Table>
II-11
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.30 Master Agreement of Sale, dated as of September 30, 1998,
among Calvin Klein Jeanswear Company, as Originator, and
Gregory Street, Inc., as Buyer and Servicer (incorporated
herein by reference to Exhibit 10.5 to The Warnaco Group,
Inc.'s Form 10-Q filed November 16, 1998).*
10.31 Purchase and Sale Agreement, dated as of September 30, 1998,
among Gregory Street, Inc., as Seller and initial Servicer
and Warnaco Operations Corporation, as Buyer (incorporated
herein by reference to Exhibit 10.6 to The Warnaco Group,
Inc.'s Form 10-Q filed November 16, 1998).*
10.32 Parallel Purchase Commitment, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller and
certain commercial lending institutions, as the Banks, and
Gregory Street, Inc., as the initial Servicer and The Bank
of Nova Scotia, as Agent (incorporated herein by reference
to Exhibit 10.7 to The Warnaco Group, Inc.'s Form 10-Q filed
November 16, 1998).*
10.33 Receivables Purchase Agreement, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller,
Gregory Street, Inc., as Servicer, Liberty Street Funding
Corp., and Corporate Asset Funding Company, Inc. as
Investors and The Bank of Nova Scotia, as Agent, and
Citicorp North America, Inc., as Co-Agent (incorporated
herein by reference to Exhibit 10.8 to The Warnaco Group,
Inc.'s Form 10-Q filed November 16, 1998).*
10.34 Settlement Agreement, dated November 15, 2002, by and among
Linda J. Wachner, the Debtors, the Bank of Nova Scotia and
Citibank, N.A. in their capacity as Debt Coordinators for
the Debtors' Prepetition Secured Lenders and the Official
Committee of Unsecured Creditors of the Debtors
(incorporated herein by reference to Exhibit 10.38 to The
Warnaco Group, Inc.'s Annual Report on Form 10-K filed
April 4, 2003).*
10.35 Acquisition Agreement, dated as of March 14, 1994, by and
among Calvin Klein, Inc., The Warnaco Group, Inc. and
Warnaco Inc. (incorporated herein by reference to
Exhibit 10.6 to The Warnaco Group, Inc.'s Form 10-Q filed on
May 24, 1994).*
10.36 Letter Agreement, dated as of September 11, 2003, by and
between The Warnaco Group, Inc. and Lawrence R.
Rutkowski.'D'
12.1 Computation of Ratio of Earnings to Fixed Charges.'D'
21.1 Subsidiaries of The Warnaco Group, Inc.**
23.1 Consent of Deloitte & Touche LLP.'D'
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included as Exhibit 5.1 hereto).
24.1 Powers of Attorney.**
25.1 Statement of Eligibility on Form T-1 of Wells Fargo Bank
Minnesota, National Association, as Trustee.**
99.1 Form of Letter of Transmittal.'D'
99.2 Form of Notice of Guaranteed Delivery.'D'
99.3 Form of Letter to Clients.'D'
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.'D'
</Table>
- ---------
* Incorporated herein by reference.
** Previously filed.
'D' Filed herewith.
# Certain information omitted pursuant to a request for
confidential treatment filed separately with the Securities
and Exchange Commission.
II-12
(b) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts and Reserves
THE WARNACO GROUP, INC.
VALUATION & QUALIFYING ACCOUNTS & RESERVES(5)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
ADDITIONS
BALANCE AT CHARGES TO OTHER BALANCE
BEGINNING COST AND ADDITIONS/ AT END OF
DESCRIPTION OF YEAR EXPENSES(1) RECLASSIFICATION DEDUCTIONS(4) YEAR
----------- ------- ----------- ---------------- ------------- ----
Year ended December 30, 2000
Receivable allowances.......... $ 93,872 $262,641 $ 6,993 (2) $(267,837) $ 95,669
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
Inventory reserves............. $ 14,374 $179,254 $ 4,076 (2) $(168,408) $ 29,296
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
Year Ended January 5, 2002
Receivable allowances.......... $ 95,669 $253,943 $(1,344)(3) $(235,350) $112,918
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
Inventory reserves............. $ 29,296 $ 74,786 $ (627)(3) $ (53,358) $ 50,097
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
Year Ended January 4, 2003
Receivable allowances.......... $112,918 $188,771 -- $(214,177) $ 87,512
-------- -------- ------- --------- --------
Inventory reserves............. $ 50,097 $ 42,354 $(2,981) $ (55,654) $ 33,816
-------- -------- ------- --------- --------
-------- -------- ------- --------- --------
</Table>
- ---------
(1) Includes bad debts, cash discounts, allowances and sales
returns.
(2) Reserves related to assets acquired including fair value
adjustments.
(3) Reclassifications of reserve amounts for assets held for
sale.
(4) Credits issued and amounts written-off, net of recoveries.
(5) See Note 7 of Notes to Consolidated Financial Statements for
income tax valuation allowance information.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission which are not included
with this additional financial data have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
Item 22. Undertakings.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of a prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the 'Calculation of Registration Fee' table
in the effective registration statement;
II-13
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of New York, State of New
York, on this 29th day of October, 2003.
THE WARNACO GROUP, INC.
By: /S/ JOSEPH R. GROMEK*
..................................
Name: Joseph R. Gromek
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/S/ JOSEPH R. GROMEK* Director, President and Chief October 29, 2003
......................................... Executive Officer (Principal
(JOSEPH R. GROMEK) Executive Officer)
/S/ LAWRENCE R. RUTKOWSKI Senior Vice President and Chief October 29, 2003
......................................... Financial Officer (Principal
(LAWRENCE R. RUTKOWSKI) Financial and Accounting Officer)
/S/ STUART D. BUCHALTER* Non-Executive Chairman of the Board October 29, 2003
......................................... of Directors
(STUART D. BUCHALTER)
/S/ ANTONIO C. ALVAREZ II* Director October 29, 2003
.........................................
(ANTONIO C. ALVAREZ II)
/S/ DAVID A. BELL* Director October 29, 2003
.........................................
(DAVID A. BELL)
/S/ RICHARD KARL GOELTZ* Director October 29, 2003
.........................................
(RICHARD KARL GOELTZ)
/S/ SHEILA A. HOPKINS* Director October 29, 2003
.........................................
(SHEILA A. HOPKINS)
/S/ CHARLES R. PERRIN* Director October 29, 2003
.........................................
(CHARLES R. PERRIN)
*/S/ JAY A. GALLUZZO
.........................................
(JAY A. GALLUZZO)
ATTORNEY-IN-FACT
</Table>
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of New York, State of
New York, on this 29th day of October, 2003.
WARNACO INC.
By: /S/ JOSEPH R. GROMEK*
...........................................
Name: Joseph R. Gromek
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/S/ JOSEPH R. GROMEK* Director, President and Chief October 29, 2003
......................................... Executive Officer (Principal
(JOSEPH R. GROMEK) Executive Officer)
/S/ LAWRENCE R. RUTKOWSKI Senior Vice President and Chief October 29, 2003
......................................... Financial Officer (Principal
(LAWRENCE R. RUTKOWSKI) Financial and Accounting Officer)
/S/ STUART D. BUCHALTER* Non-Executive Chairman of the Board October 29, 2003
......................................... of Directors
(STUART D. BUCHALTER)
/S/ ANTONIO C. ALVAREZ II* Director October 29, 2003
.........................................
(ANTONIO C. ALVAREZ II)
/S/ DAVID A. BELL* Director October 29, 2003
.........................................
(DAVID A. BELL)
/S/ RICHARD KARL GOELTZ* Director October 29, 2003
.........................................
(RICHARD KARL GOELTZ)
/S/ SHEILA A. HOPKINS* Director October 29, 2003
.........................................
(SHEILA A. HOPKINS)
/S/ CHARLES R. PERRIN* Director October 29, 2003
.........................................
(CHARLES R. PERRIN)
*/S/ JAY A. GALLUZZO
.........................................
(JAY A. GALLUZZO)
ATTORNEY-IN-FACT
</Table>
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of New York, State of
New York, on this 29th day of October, 2003.
184 BENTON STREET INC.
A.B.S. CLOTHING COLLECTION, INC.
ABBEVILLE MANUFACTURING COMPANY
AUTHENTIC FITNESS CORPORATION
AUTHENTIC FITNESS ON-LINE, INC.
AUTHENTIC FITNESS PRODUCTS INC.
AUTHENTIC FITNESS RETAIL INC.
CCC ACQUISITION CORP.
C.F. HATHAWAY COMPANY
CALVIN KLEIN JEANSWEAR COMPANY
CKJ HOLDINGS, INC.
DESIGNER HOLDINGS LTD.
GREGORY STREET, INC.
JEANSWEAR HOLDINGS, INC.
KAI JAY MANUFACTURING COMPANY
MYRTLE AVENUE, INC.
OUTLET HOLDINGS, INC.
OUTLET STORES, INC.
PENHALIGON'S BY REQUEST, INC.
RIO SPORTSWEAR, INC.
UBERTECH PRODUCTS, INC.
WARNACO INTERNATIONAL, L.L.C.
WARNACO MEN'S SPORTSWEAR INC.
WARNACO PUERTO RICO, INC.
WARNACO SOURCING INC.
WARNACO U.S., INC.
WARNER'S DE COSTA RICA INC.
BY: /S/ STANLEY P. SILVERSTEIN*
.................................
Name: Stanley P. Silverstein
Title: President and Secretary
II-17
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/S/ STANLEY P. SILVERSTEIN* Director, President and Secretary October 29, 2003
......................................... (Principal Executive Officer)
(STANLEY P. SILVERSTEIN)
/S/ LAWRENCE R. RUTKOWSKI Director, Vice President and October 29, 2003
......................................... Treasurer (Principal Financial and
(LAWRENCE R. RUTKOWSKI) Accounting Officer)
/S/ WALLIS H. BROOKS* Director October 29, 2003
.........................................
(WALLIS H. BROOKS)
*/S/ JAY A. GALLUZZO
.........................................
(JAY A. GALLUZZO)
ATTORNEY-IN-FACT
</Table>
II-18
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
2.1 Sale and Purchase Agreement, dated December 18, 2001,
between Mullion International Limited and Royal Holdings,
Inc. (incorporated herein by reference to Exhibit 2.3 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
2.2 Deed of Variation, dated February 8, 2002, among Mullion
International Limited, Royal Holdings, Inc. and Cradle
Penhaligon's Limited (incorporated herein by reference to
Exhibit 2.4 to The Warnaco Group, Inc.'s Form 10-K filed
July 31, 2002).*
2.3 Stock and Asset Sale Agreement, dated as of December 21,
2001, by and among Warnaco Inc., Warner's (U.K.) Ltd.,
Warnaco (HK) Ltd. and Luen Thai Overseas Limited
(incorporated herein by reference to Exhibit 2.5 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
2.4 Consent and Waiver, dated as of January 21, 2002, by and
among Warnaco Inc., Warner's (U.K.) Ltd., Warnaco (HK) Ltd.
and Luen Thai Overseas Limited (incorporated herein by
reference to Exhibit 2.6 to The Warnaco Group, Inc.'s
Form 10-K filed July 31, 2002).*
2.5 Consent and Waiver, dated as of February 1, 2002, by and
among Warnaco Inc., Warner's (U.K.) Ltd., Warnaco (HK) Ltd.
and Luen Thai Overseas Limited (incorporated herein by
reference to Exhibit 2.7 to The Warnaco Group, Inc.'s
Form 10-K filed July 31, 2002).*
2.6 First Amended Joint Plan of Reorganization of The Warnaco
Group, Inc. and its Affiliated Debtors in Possession Under
Chapter 11 of the Bankruptcy Code (incorporated herein by
reference to Exhibit 99.2 to The Warnaco Group, Inc.'s
Form 10-Q filed on November 18, 2002).*
2.7 Disclosure Statement with respect to the First Amended Joint
Plan of Reorganization of The Warnaco Group, Inc. and its
Affiliated Debtors and Debtors in Possession Under
Chapter 11 of the Bankruptcy Code (incorporated herein by
reference to Exhibit 99.3 to The Warnaco Group, Inc.'s
Form 10-Q filed November 18, 2002).*
3.1 Restated Certificate of Incorporation of Warnaco Inc.
(incorporated by reference to Exhibit T3A-1 to the Form T-3
filed by The Warnaco Group, Inc. on January 17, 2003), as
amended by the Certificate of Amendment to Certificate of
Incorporation of Warnaco Inc. (incorporated by reference to
Exhibit T3A-2 to the Form T-3 filed by The Warnaco Group,
Inc. on January 17, 2003).*
3.2 Bylaws of Warnaco Inc. (incorporated by reference to
Exhibit T3B to the Form T-3 filed by The Warnaco Group,
Inc. on January 17, 2003).*
3.3 Amended and Restated Certificate of Incorporation of The
Warnaco Group, Inc. (incorporated by reference to Exhibit 1
to the Form 8-A/A filed by The Warnaco Group, Inc. on
February 4, 2003).*
3.4 Bylaws of The Warnaco Group, Inc. (incorporated by reference
to the Annual Report on Form 10-K filed by The Warnaco
Group, Inc. on April 4, 2003).*
3.5 Certificate of Incorporation of 184 Benton Street Inc.
(incorporated by reference to Exhibit T3A-5 to the Amendment
No. 1 to Form T-3 filed by The Warnaco Group, Inc. on
February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of 184 Benton
Street Inc. (incorporated by reference to Exhibit T3A-6 to
the Amendment No. 1 to Form T-3 filed by The Warnaco Group,
Inc. on February 3, 2003).*
3.6 Bylaws of 184 Benton Street Inc. (incorporated by reference
to Exhibit T3B-3 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
</Table>
II-19
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.7 Articles of Incorporation of A.B.S. Clothing Collection,
Inc. (incorporated by reference to Exhibit T3A-7 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Articles of Incorporation of A.B.S. Clothing
Collection, Inc. (incorporated by reference to
Exhibit T3A-8 to the Amendment No. 1 to Form T-3 filed by
The Warnco Group, Inc. on February 3, 2003).*
3.8 Bylaws of A.B.S. Clothing Collection, Inc. (incorporated by
reference to Exhibit T3B-4 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.9 Certificate of Incorporation of Abbeville Manufacturing
Company (incorporated by reference to Exhibit T3A-9 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Abbeville
Manufacturing Company (incorporated by reference to
Exhibit T3A-10 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.10 Bylaws of Abbeville Manufacturing Company (incorporated by
reference to Exhibit T3B-5 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003),* as amended by the Amendment to the Bylaws of
Abbeville Manufacturing Company.**
3.11 Restated Certificate of Incorporation of Authentic Fitness
Corporation,** as amended by the Certificate of Amendment to
Certificate of Incorporation of Authentic Fitness
Corporation (incorporated by reference to Exhibit T3A-12 to
the Amendment No. 1 to Form T-3 filed by The Warnaco Group,
Inc. on February 3, 2003).*
3.12 Bylaws of Authentic Fitness Corporation.**
3.13 Restated Certificate of Incorporation of Authentic Fitness
On-Line, Inc. (incorporated by reference to Exhibit T3A-13
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003), as amended by the
Certificate of Amendment to Certificate of Incorporation of
Authentic Fitness On-Line, Inc. (incorporated by reference
to Exhibit T3A-14 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.14 Bylaws of Authentic Fitness On-Line, Inc. (incorporated by
reference to Exhibit T3B-7 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003),* as amended by the Amendment to By-laws of Authentic
Fitness On-Line, Inc.**
3.15 Amended Certificate of Incorporation of Authentic Fitness
Products Inc. (incorporated by reference to Exhibit T3A-15
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003), as amended by the
Certificate of Amendment to Certificate of Incorporation of
Authentic Fitness Products Inc. (incorporated by reference
to Exhibit T3A-16 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.16 Bylaws of Authentic Fitness Products Inc. (incorporated by
reference to Exhibit T3B-8 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.17 Certificate of Incorporation of Authentic Fitness Retail
Inc. (incorporated by reference to Exhibit T3A-17 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Authentic
Fitness Retail Inc. (incorporated by reference to
Exhibit T3A-18 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
</Table>
II-20
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.18 Bylaws of Authentic Fitness Retail Inc. (incorporated by
reference to Exhibit T3B-9 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.19 Certificate of Incorporation of CCC Acquisition Corp.
(incorporated by reference to Exhibit T3A-19 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of CCC Acquisition
Corp. (incorporated by reference to Exhibit T3A-20 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.20 Bylaws of CCC Acquisition Corp. (incorporated by reference
to Exhibit T3B-10 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.21 Amended Certificate of Incorporation of C.F. Hathaway
Company (incorporated by reference to Exhibit T3A-21 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of C.F. Hathaway
Company (incorporated by reference to Exhibit T3A-22 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.22 Bylaws of C.F. Hathaway Company (incorporated by reference
to Exhibit T3B-11 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.23 Certificate of Incorporation of Calvin Klein Jeanswear
Company (incorporated by reference to Exhibit T3A-23 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Calvin Klein
Jeanswear Company (incorporated by reference to
Exhibit T3A-24 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.24 Bylaws of Calvin Klein Jeanswear Company (incorporated by
reference to Exhibit T3B-12 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.25 Certificate of Incorporation of CKJ Holdings, Inc.
(incorporated by reference to Exhibit T3A-25 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of CKJ Holdings,
Inc. (incorporated by reference to Exhibit T3A-26 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.26 Bylaws of CKJ Holdings, Inc. (incorporated by reference to
Exhibit T3B-13 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.27 Certificate of Incorporation of Designer Holdings Ltd.
(incorporated by reference to Exhibit T3A-27 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Designer
Holdings Ltd. (incorporated by reference to Exhibit T3A-28
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.28 Bylaws of Designer Holdings Ltd. (incorporated by reference
to Exhibit T3B-14 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
</Table>
II-21
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.29 Certificate of Incorporation of Gregory Street, Inc.
(incorporated by reference to Exhibit T3A-29 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Gregory Street,
Inc. (incorporated by reference to Exhibit T3A-30 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.30 Bylaws of Gregory Street, Inc. (incorporated by reference to
Exhibit T3B-15 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.31 Certificate of Incorporation of Jeanswear Holdings, Inc.
(incorporated by reference to Exhibit T3A-31 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Jeanswear
Holdings, Inc. (incorporated by reference to Exhibit T3A-32
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.32 Bylaws of Jeanswear Holdings, Inc. (incorporated by
reference to Exhibit T3B-16 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.33 Amended Certificate of Incorporation of Kai Jay
Manufacturing Company (incorporated by reference to
Exhibit T3A-33 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003), as amended by
the Certificate of Amendment to Certificate of Incorporation
of Kai Jay Manufacturing Company (incorporated by reference
to Exhibit T3A-34 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.34 Bylaws of Kai Jay Manufacturing Company (incorporated by
reference to Exhibit T3B-17 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.35 Certificate of Incorporation of Myrtle Avenue, Inc.
(incorporated by reference to Exhibit T3A-35 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Myrtle Avenue,
Inc. (incorporated by reference to Exhibit T3A-36 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.36 Bylaws of Myrtle Avenue, Inc. (incorporated by reference to
Exhibit T3B-18 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.37 Certificate of Incorporation of Outlet Holdings, Inc.
(incorporated by reference to Exhibit T3A-37 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Outlet
Holdings, Inc. (incorporated by reference to Exhibit T3A-38
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.38 Bylaws of Outlet Holdings, Inc. (incorporated by reference
to Exhibit T3B-19 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.39 Certificate of Incorporation of Outlet Stores, Inc.
(incorporated by reference to Exhibit T3A-39 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Outlet Stores,
Inc. (incorporated by reference to Exhibit T3A-40 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
</Table>
II-22
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.40 Bylaws of Outlet Stores, Inc. (incorporated by reference to
Exhibit T3B-20 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.41 Certificate of Incorporation of Penhaligon's by Request,
Inc. (incorporated by reference to Exhibit T3A-41 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Penhaligon's by
Request, Inc. (incorporated by reference to Exhibit T3A-42
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.42 Bylaws of Penhaligon's by Request, Inc. (incorporated by
reference to Exhibit T3B-21 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.43 Amended Certificate of Incorporation of Rio Sportswear, Inc.
(incorporated by reference to Exhibit T3A-43 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Rio Sportswear,
Inc. (incorporated by reference to Exhibit T3A-44 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.44 Bylaws of Rio Sportswear, Inc. (incorporated by reference to
Exhibit T3B-22 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.45 Amended Certificate of Incorporation of Ubertech Products,
Inc. (incorporated by reference to Exhibit T3A-45 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Ubertech
Products, Inc. (incorporated by reference to Exhibit T3A-46
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.46 Bylaws of Ubertech Products, Inc. (incorporated by reference
to Exhibit T3B-23 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.47 Amended Certificate of Formation of Warnaco International,
L.L.C. (incorporated by reference to Exhibit T3A-47 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.48 Amended and Restated Limited Liability Company Agreement of
Warnaco International, L.L.C. (incorporated by reference to
Exhibit T3B-24 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.49 Amended Certificate of Incorporation of Warnaco Men's
Sportswear Inc. (incorporated by reference to
Exhibit T3A-49 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003), as amended by
the Certificate of Amendment to Certificate of Incorporation
of Warnaco Men's Sportswear Inc. (incorporated by reference
to Exhibit T3A-50 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.50 Bylaws of Warnaco Men's Sportswear Inc. (incorporated by
reference to Exhibit T3B-25 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.51 Amended Certificate of Incorporation of Warnaco Puerto Rico,
Inc. (incorporated by reference to Exhibit T3A-51 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Warnaco Puerto
Rico, Inc. (incorporated by reference to Exhibit T3A-52 to
the Amendment No. 1 to Form T-3 filed by The Warnaco Group,
Inc. on February 3, 2003).*
</Table>
II-23
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.52 Bylaws of Warnaco Puerto Rico, Inc. (incorporated by
reference to Exhibit T3B-26 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
3.53 Certificate of Incorporation of Warnaco Sourcing Inc.
(incorporated by reference to Exhibit T3A-53 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Warnaco
Sourcing Inc. (incorporated by reference to Exhibit T3A-54
to the Amendment No. 1 to Form T-3 filed by The Warnaco
Group, Inc. on February 3, 2003).*
3.54 Bylaws of Warnaco Sourcing Inc. (incorporated by reference
to Exhibit T3B-27 to the Amendment No. 1 to Form T-3 filed
by The Warnaco Group, Inc. on February 3, 2003).*
3.55 Amended Certificate of Incorporation of Warnaco U.S., Inc.
(incorporated by reference to Exhibit T3A-55 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Warnaco U.S.,
Inc. (incorporated by reference to Exhibit T3A-56 to the
Amendment No. 1 to Form T-3 filed by The Warnaco Group, Inc.
on February 3, 2003).*
3.56 Bylaws of Warnaco U.S., Inc. (incorporated by reference to
Exhibit T3B-28 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.57 Amended Certificate of Incorporation of Warner's de Costa
Rica Inc. (incorporated by reference to Exhibit T3A-57 to
the Amendment No. 1 to Form T-3 filed by The Warnaco Group,
Inc. on February 3, 2003), as amended by the Certificate of
Amendment to Certificate of Incorporation of Warner's de
Costa Rica Inc. (incorporated by reference to
Exhibit T3A-58 to the Amendment No. 1 to Form T-3 filed by
The Warnaco Group, Inc. on February 3, 2003).*
3.58 Bylaws of Warner's de Costa Rica Inc. (incorporated by
reference to Exhibit T3B-29 to the Amendment No. 1 to
Form T-3 filed by The Warnaco Group, Inc. on February 3,
2003).*
4.1 Registration Rights Agreement, dated as of June 12, 2003,
among Warnaco Inc., the Guarantors (as defined therein) and
the Initial Purchasers (as defined therein).**
4.2 Indenture, dated as of June 12, 2003, among Warnaco Inc.,
the Guarantors (as defined therein) and the Trustee (as
defined therein).**
4.3 Rights Agreement, dated as of February 4, 2003, between The
Warnaco Group, Inc. 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 (incorporated by reference to Exhibit 4 to the
Form 8-A/A filed by The Warnaco Group, Inc. on February 4,
2003).*
4.4 Registration Rights Agreement, dated as of February 4, 2003,
among The Warnaco Group, Inc. and certain creditors thereof
(as described in the Registration Rights Agreement)
(incorporated herein by reference to Exhibit 4.5 to The
Warnaco Group, Inc.'s Form 8-K filed February 10, 2003).*
5.1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
regarding the legality of the notes being offered hereby.'D'
5.2 Form of Opinion of Schreck Brignone, regarding the legality
of certain of the guarantees being offered hereby.'D'
</Table>
II-24
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.1 Senior Secured Revolving Credit Agreement, dated as of
February 4, 2003, among Warnaco Inc., The Warnaco Group,
Inc., 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 managers and
joint lead book managers (incorporated herein by reference
to Exhibit 99.2 to The Warnaco Group, Inc.'s Form 8-K filed
February 10, 2003).*
10.2 Pledge and Security Agreement, dated as of February 4, 2003,
among Warnaco Inc., as a grantor, the Guarantors and
Citicorp North America, Inc., as administrative agent
(incorporated herein by reference to Exhibit 99.3 to The
Warnaco Group, Inc.'s Form 8-K filed February 10, 2003).*
10.3 Intercreditor Agreement, dated as of February 4, 2003, among
the Administrative Agent, the Indenture Trustee, the
Collateral Trustee, Warnaco and the Guarantors (incorporated
herein by reference to Exhibit 99.4 to The Warnaco Group,
Inc.'s Form 8-K filed February 10, 2003).*
10.4 Warnaco Employee Retirement Plan (incorporated herein by
reference to Exhibit 10.11 to The Warnaco Group, Inc.'s
Registration Statement on Form S-1, No. 33-4587).*
10.5 The Warnaco Group, Inc. 2003 Stock Incentive Plan
(incorporated herein by reference to Appendix D to The
Warnaco Group, Inc.'s Proxy Statement filed April 29,
2003).*
10.6 The Warnaco Group, Inc. Incentive Compensation Plan
(incorporated herein by reference to Appendix E to The
Warnaco Group, Inc.'s Proxy Statement filed April 29,
2003).*
10.7 Summary of Key Domestic Employee Retention Plan
(incorporated herein by reference to Exhibit 10.51 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
10.8 Letter Agreement, dated April 30, 2001, between The Warnaco
Group, Inc. and Alvarez & Marsal, Inc. (incorporated herein
by reference to Exhibit 10.52 to The Warnaco Group, Inc.'s
Form 10-K filed July 31, 2002).*
10.9 Employment Agreement, dated as of June 11, 2001, between The
Warnaco Group, Inc. and Antonio Alvarez (incorporated herein
by reference to Exhibit 10.53 to The Warnaco Group, Inc.'s
Form 10-K filed July 31, 2002).*
10.10 Amended Employment Agreement, dated as of June 11, 2001,
between The Warnaco Group, Inc. and Antonio Alvarez
(incorporated herein by reference to Exhibit 10.42 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
10.11 Offer Letter and Employee Waiver, Release and Discharge of
Claims pursuant to the Key Domestic Employee Retention Plan
for Stanley Silverstein, dated November 26, 2001
(incorporated herein by reference to Exhibit 10.41 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
10.12 Agreement to Extend Amended Employment Agreement between The
Warnaco Group, Inc. and Antonio Alvarez, dated July 16, 2002
(incorporated herein by reference to Exhibit 10.54 to The
Warnaco Group, Inc.'s Form 10-K filed July 31, 2002).*
10.13 Letter Agreement, dated January 29, 2003, by and between
Alvarez & Marsal, Inc. and The Warnaco Group, Inc.
(incorporated by reference to Exhibit 10.26 to the Annual
Report on Form 10-K filed by The Warnaco Group, Inc. on
April 4, 2003).*
10.14 Letter Agreement, dated March 18, 2003, by and between
Alvarez & Marsal, Inc. and The Warnaco Group, Inc.
(incorporated by reference to Exhibit 10.17 to the Annual
Report on Form 10-K filed by The Warnaco Group, Inc. on
April 4, 2003).*#
10.15 Employment Agreement, dated as of April 14, 2003, by and
between The Warnaco Group, Inc. and Joseph R. Gromek
(incorporated by reference to Exhibit 10.7 to the Quarterly
Report on Form 10-Q filed by The Warnaco Group, Inc. on May
20, 2003).*
</Table>
II-25
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.16 Amended and Restated License Agreement, dated as of
January 1, 1996, between Polo Ralph Lauren, L.P. and Warnaco
Inc. (incorporated herein by reference to Exhibit 10.4 to
The Warnaco Group, Inc.'s Form 10-Q filed November 14,
1997).*
10.17 Amended and Restated Design Services Agreement, dated as of
January 1, 1996, between Polo Ralph Lauren Enterprises, L.P.
and Warnaco Inc. (incorporated herein by reference to
Exhibit 10.5 to The Warnaco Group, Inc.'s Form 10-Q filed
November 14, 1997).*
10.18 License Agreement, dated as of August 4, 1994, between
Calvin Klein, Inc. and Calvin Klein Jeanswear Company
(incorporated by reference to Exhibit 10.20 to Designer
Holdings, Ltd.'s Registration Statement on Form S-1 (File
No. 333-02236)).*
10.19 Amendment to the Calvin Klein License Agreement, dated as of
December 7, 1994 (incorporated by reference to
Exhibit 10.21 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-02236)).*
10.20 Amendment to the Calvin Klein License Agreement, dated as of
January 10, 1995 (incorporated by reference to
Exhibit 10.22 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-02236)).*
10.21 Amendment to the Calvin Klein License Agreement, dated as of
February 28, 1995 (incorporated by reference to
Exhibit 10.23 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-02236)).*
10.22 Amendment to the Calvin Klein License Agreement, dated as of
April 22, 1996 (incorporated by reference to Exhibit 10.38
to Designer Holdings, Ltd.'s Registration Statement on
Form S-1 (File No. 333-02236)).*
10.23 Amendment and Agreement, dated June 5, 2003, by and among
Calvin Klein, Inc., Phillips-Van Heusen Corporation, Warnaco
Inc., Calvin Klein Jeanswear Company, and CKJ Holdings
Inc.**#
10.24 Consent and Amendment No. 1 to the Facility Agreement, dated
as of February 5, 2002 (incorporated herein by reference to
Exhibit 10.49 to The Warnaco Group, Inc.'s Form 10-K filed
July 31, 2002).*
10.25 Speedo Settlement Agreement, dated November 25, 2002, by and
between Speedo International Limited and Authentic Fitness
Corporation, Authentic Fitness Products, Inc., The Warnaco
Group, Inc. and Warnaco Inc. (incorporated herein by
reference to Exhibit 10.28 to The Warnaco Group, Inc.'s
Annual Report on Form 10-K filed April 4, 2003).*
10.26 Amendment to the Speedo Licenses, dated as of November 25,
2002, by and among Speedo International Limited, Authentic
Fitness Corporation and Authentic Fitness Products, Inc.
(incorporated herein by reference to Exhibit 10.29 to The
Warnaco Group, Inc.'s Annual Report on Form 10-K filed
April 4, 2003).*#
10.27 Settlement Agreement, dated January 22, 2001, by and between
Calvin Klein Trademark Trust, Calvin Klein, Inc. and Calvin
Klein and Linda Wachner, The Warnaco Group, Inc., Warnaco
Inc., Designer Holdings, Ltd, CKJ Holdings, Inc., Jeanswear
Holdings Inc., Calvin Klein Jeanswear Company and Outlet
Holdings, Inc. (incorporated herein by reference to
Exhibit 10.57 to The Warnaco Group, Inc.'s Form 10-K filed
July 31, 2002).*#
10.28 License Agreement, dated as of March 1, 2003, by and between
Nautica Apparel, Inc. and Authentic Fitness Corporation.
(incorporated herein by reference to Exhibit 10.31 to The
Warnaco Group, Inc.'s Annual Report on Form 10-K filed
April 4, 2003).*#
10.29 Amended and Restated Master Agreement of Sale, dated as of
September 30, 1998, among Warnaco Inc., as Originator, and
Gregory Street, Inc., as Buyer and Servicer (incorporated
herein by reference to Exhibit 10.4 to The Warnaco Group,
Inc.'s Form 10-Q filed November 16, 1998).*
</Table>
II-26
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.30 Master Agreement of Sale, dated as of September 30, 1998,
among Calvin Klein Jeanswear Company, as Originator, and
Gregory Street, Inc., as Buyer and Servicer (incorporated
herein by reference to Exhibit 10.5 to The Warnaco Group,
Inc.'s Form 10-Q filed November 16, 1998).*
10.31 Purchase and Sale Agreement, dated as of September 30, 1998,
among Gregory Street, Inc., as Seller and initial Servicer
and Warnaco Operations Corporation, as Buyer (incorporated
herein by reference to Exhibit 10.6 to The Warnaco Group,
Inc.'s Form 10-Q filed November 16, 1998).*
10.32 Parallel Purchase Commitment, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller and
certain commercial lending institutions, as the Banks, and
Gregory Street, Inc., as the initial Servicer and The Bank
of Nova Scotia, as Agent (incorporated herein by reference
to Exhibit 10.7 to The Warnaco Group, Inc.'s Form 10-Q filed
November 16, 1998).*
10.33 Receivables Purchase Agreement, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller,
Gregory Street, Inc., as Servicer, Liberty Street Funding
Corp., and Corporate Asset Funding Company, Inc. as
Investors and The Bank of Nova Scotia, as Agent, and
Citicorp North America, Inc., as Co-Agent (incorporated
herein by reference to Exhibit 10.8 to The Warnaco Group,
Inc.'s Form 10-Q filed November 16, 1998).*
10.34 Settlement Agreement, dated November 15, 2002, by and among
Linda J. Wachner, the Debtors, the Bank of Nova Scotia and
Citibank, N.A. in their capacity as Debt Coordinators for
the Debtors' Prepetition Secured Lenders and the Official
Committee of Unsecured Creditors of the Debtors
(incorporated herein by reference to Exhibit 10.38 to The
Warnaco Group, Inc.'s Annual Report on Form 10-K filed
April 4, 2003).*
10.35 Acquisition Agreement, dated as of March 14, 1994, by and
among Calvin Klein, Inc., The Warnaco Group, Inc. and
Warnaco Inc. (incorporated herein by reference to
Exhibit 10.6 to The Warnaco Group, Inc.'s Form 10-Q filed on
May 24, 1994).*
10.36 Letter Agreement, dated as of September 11, 2003, by and
between The Warnaco Group, Inc. and Lawrence R.
Rutkowski.'D'
12.1 Computation of Ratio of Earnings to Fixed Charges.'D'
21.1 Subsidiaries of The Warnaco Group, Inc.**
23.1 Consent of Deloitte & Touche LLP.'D'
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included as Exhibit 5.1 hereto).
24.1 Powers of Attorney.**
25.1 Statement of Eligibility on Form T-1 of Wells Fargo Bank
Minnesota, National Association, as Trustee.**
99.1 Form of Letter of Transmittal.'D'
99.2 Form of Notice of Guaranteed Delivery.'D'
99.3 Form of Letter to Clients.'D'
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.'D'
</Table>
- ---------
* Incorporated herein by reference.
** Previously filed.
'D' Filed herewith.
# Certain information omitted pursuant to a request for
confidential treatment filed separately with the Securities
and Exchange Commission.
II-27
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'