________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 4, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 1-10857
------------------------
THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(212) 661-1300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
COPIES OF ALL COMMUNICATIONS TO:
THE WARNACO GROUP, INC.
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: VICE PRESIDENT AND GENERAL COUNSEL
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No _______
The number of shares outstanding of the registrant's Class A Common Stock
as of November 12, 1997 is as follows: 57,369,721.
________________________________________________________________________________
________________________________________________________________________________
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
OCTOBER 4, JANUARY 4,
1997 1997
---------- ----------
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
Current Assets:
Cash............................................................................. $ 11,685 $ 11,840
Accounts receivable -- net....................................................... 271,964 211,038
Inventories:
Finished goods.............................................................. 310,793 227,929
Work in process............................................................. 112,524 76,445
Raw materials............................................................... 107,434 82,944
---------- ----------
Total inventories...................................................... 530,751 387,318
Other current assets.................................................................. 41,495 40,313
---------- ----------
Total current assets................................................... 855,895 650,509
Property, plant and equipment (net of accumulated depreciation of $100,069 and
$85,244, respectively).............................................................. 135,050 121,537
Other assets:
Intangibles and other assets -- net.............................................. 392,544 370,898
---------- ----------
$1,383,489 $1,142,944
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility........................................ $ -- $ 146,960
Borrowing under foreign credit facilities........................................ 19,547 19,185
Current portion of long-term debt................................................ 11,881 49,281
Accounts payable and accrued liabilities......................................... 252,784 224,272
Accrued income taxes............................................................. 3,771 195
---------- ----------
Total current liabilities.............................................. 287,983 439,893
---------- ----------
Long-term debt........................................................................ 561,172 215,805
Other long-term liabilities........................................................... 11,362 11,532
Stockholders' equity
Preferred Stock; $.01 par value.................................................. -- --
Common Stock; $.01 par value..................................................... 580 524
Capital in excess of par value................................................... 583,326 575,691
Cumulative translation adjustment................................................ (8,607) (3,307)
Accumulated deficit.............................................................. (14,878) (69,667)
Treasury stock, at cost.......................................................... (20,935) (12,030)
Notes receivable for common stock issued and unearned stock compensation......... (16,514) (15,497)
---------- ----------
Total stockholders' equity............................................. 522,972 475,714
---------- ----------
$1,383,489 $1,142,944
---------- ----------
---------- ----------
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
2
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
OCTOBER 4, OCTOBER 5, OCTOBER 4, OCTOBER 5,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
(UNAUDITED)
Net revenues.................................................... $333,413 $292,010 $875,143 $721,295
Cost of goods sold(a)........................................... 209,410 201,636 559,093 510,742
---------- ---------- ---------- ----------
Gross profit.................................................... 124,003 90,374 316,050 210,553
Selling, administrative and general expenses(b)................. 61,707 71,909 175,401 236,186
---------- ---------- ---------- ----------
Income (loss) before interest and income taxes.................. 62,296 18,465 140,649 (25,633)
Interest expense................................................ 11,484 8,936 31,999 23,852
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes....... 50,812 9,529 108,650 (49,485)
Provision (benefit) for income taxes............................ 18,731 3,718 41,288 (15,031)
---------- ---------- ---------- ----------
Net income (loss)............................................... $ 32,081 $ 5,811 $ 67,362 $(34,454)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per share..................................... $ 0.59 $ 0.11 $ 1.24 $ (0.64)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares of common stock outstanding... 54,630 53,357 54,311 53,489
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- ------------
(a) Includes approximately $11,748,000 and $37,969,000 of non-recurring items
in the three and nine month periods ended October 5, 1996. See Note 4 of
Notes to Consolidated Condensed Financial Statements.
(b) Includes approximately $19,413,000 and $100,621,000 of non-recurring and
special items in the three and nine month periods ended October 5, 1996.
See Note 4 to Consolidated Condensed Financial Statements.
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
3
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
---------------------------------------
OCTOBER 4, OCTOBER 5,
1997 1996
---- ----
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
Cash flow from operations:
Net income (loss)...................................................................... $ 67,362 $ (34,454)
Non cash items included in net income (loss):
Depreciation and amortization..................................................... 22,492 20,107
Amortization of unearned stock compensation....................................... 2,486 1,813
Increase in deferred tax assets -- net............................................ -- (15,031)
Non cash portion of non-recurring items........................................... -- 95,688
Income taxes paid................................................................. (5,573) (2,335)
Other changes in operating accounts............................................... (165,602) (132,520)
------------ ------------
Net cash used in operations before non-recurring items................................. (78,835) (66,732)
Payment of accruals related to exiting the Hathaway business, consolidating and
realigning the intimate apparel division and other items............................. (3,994) --
------------ ------------
Net cash used in operations............................................................ (82,829) (66,732)
Cash flow from investing activities:
Net proceeds from sale of fixed assets............................................ 610 69
Purchase of property, plant & equipment........................................... (32,086) (20,572)
Payment for purchase of acquired assets........................................... (15,027) (87,000)
Increase in intangible and other assets........................................... (15,400) (14,168)
------------ ------------
Net cash used in investing activities.................................................. (61,903) (121,671)
------------ ------------
Cash flow from financing activities:
Borrowing under revolving credit facilities....................................... 351,197 144,121
Net proceeds from the exercise of options and payment of notes receivable from
employees........................................................................ 4,188 1,026
Proceeds from other financing..................................................... -- 71,000
Repayments of debt................................................................ (189,828) (5,860)
Purchase of Treasury Stock........................................................ (8,120) --
Dividends paid.................................................................... (12,074) (10,888)
Increase in deferred financing costs.............................................. (786) (330)
------------ ------------
Net cash provided from financing activities............................................ 144,577 199,069
------------ ------------
Increase (decrease) in cash............................................................ (155) 10,666
Cash at beginning of period............................................................ 11,840 6,162
------------ ------------
Cash at end of period.................................................................. $ 11,685 $ 16,828
------------ ------------
------------ ------------
Other changes in operating accounts:
Accounts receivable............................................................... $ (60,926) $ (64,146)
Inventories....................................................................... (143,433) (19,268)
Other current assets.............................................................. (1,182) (2,570)
Accounts payable and accrued liabilities.......................................... 37,306 (48,258)
Accrued income taxes.............................................................. 6,447 1,482
Other............................................................................. (3,814) 240
------------ ------------
$ (165,602) $ (132,520)
------------ ------------
------------ ------------
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
4
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim financial
information. Accordingly, they do not contain all of the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the Company, the accompanying consolidated
condensed financial statements contain all the adjustments (all of which were of
a normal recurring nature, except as discussed in Note 4 below) necessary to
present fairly the financial position of the Company as of October 4, 1997 as
well as its results of operations and cash flows for the periods ended October
4, 1997 and October 5, 1996. Operating results for interim periods may not be
indicative of results for the full fiscal year. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 4, 1997.
Certain amounts for prior periods have been reclassified to be comparable with
the current period presentation.
NOTE 2 -- ACQUISITION OF DESIGNER HOLDINGS LTD.
On September 24, 1997 the Board of Directors of the Company approved a
merger of a wholly owned subsidiary of the Company with and into Designer
Holdings Ltd. ('Designer Holdings'). Designer Holdings develops, manufactures
and markets designer jeanswear and sportswear for men, women, juniors and
petites, and has a 40-year extendable license from Calvin Klein, Inc. to
develop, manufacture and market designer jeanswear and sportswear collections in
North, South and Central America under the Calvin Klein Jeans'r', CK/Calvin
Klein Jeans'r' and CK/Calvin Klein/Khakis'r' labels.
Pursuant to a merger agreement dated September 25, 1997, each stockholder
of Designer Holdings will receive 0.324 shares of the Company's common stock for
each share owned. On October 14, 1997, pursuant to a stock exchange agreement,
the Company acquired from New Rio LLC and a former member of New Rio LLC 51.3%
of the outstanding common stock of Designer Holdings in exchange for 5,340,773
newly issued shares of the Company's common stock, which equates to ownership of
approximately 9% of the Company's shares. The number of shares of the Company's
common stock to be issued was determined using the same exchange ratio used in
the merger agreement.
The completion of the merger is subject to the approval by the stockholders
of the Company and Designer Holdings. Meetings of the stockholders of both the
Company and Designer Holdings have been scheduled for December 12, 1997 to
approve the merger and the issuance of shares by the Company. Upon approval of
both company's stockholders, the Company will acquire the remaining outstanding
common stock of Designer Holdings.
The merger will be accounted for using the purchase method of accounting.
It is estimated that the Company will issue a total of 10,413,144 shares of its
common stock, resulting in a total purchase price of $353.4 million. The
preliminary estimated allocation of the total purchase price to the fair value
of the net assets acquired is summarized as follows (in millions):
Cash...................................................................... $ 55.8
Accounts receivable....................................................... 107.6
Inventories............................................................... 92.3
Prepaid and other current assets.......................................... 25.0
Property and equipment.................................................... 15.8
Intangible and other assets............................................... 237.7
Accounts payable and accrued liabilities.................................. (79.8)
Other liabilities......................................................... (0.5)
Redeemable Preferred Securities........................................... (100.5)
-------
Purchase Price....................................................... $ 353.4
-------
-------
5
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The allocation of purchase price is subject to revision when additional
information concerning the asset and liability valuations becomes available.
Accordingly, the final purchase price allocation could be different from the
amounts previously shown.
The following summarizes the unaudited pro forma combined financial
information of Warnaco's results for nine months ended October 4, 1997 and
October 5, 1996 with Designer Holdings' results for its nine months ended
September 30, 1997 and 1996, giving effect to the merger as if it had occurred
as of January 7, 1996 and assuming the acquisition of the remaining stock of
Designer Holdings by the end of fiscal 1997. The unaudited pro forma information
does not reflect any cost savings or other benefits anticipated by the Company's
management as a result of the merger.
NINE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 4, 1997 OCTOBER 5, 1996
----------------- -----------------
Statement of Income Data:
Net Revenues............................................. $ 1,240.2 $ 1,077.8
Income (loss) before extraordinary item.................. 65.1 (14.3)
Net income (loss)........................................ 64.2 (16.6)
Income (loss) per common share before extraordinary
item................................................... 1.01 (0.22)
Net income (loss) per share.............................. 0.99 (0.26)
The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred on the dates specified above, nor is it necessarily indicative of
future results or financial position.
NOTE 3 -- FOURTH QUARTER MERGER RELATED AND RESTRUCTURING CHARGE
Following the announcement of the Designer Holdings acquisition, the
Company immediately instituted an internal study to plan for the optimization of
both companies' operating strategies and administration. Planned consolidations
of facilities and staff, strategic redirection of marketing strategies and other
cost savings actions are expected to result in some restructuring of the Warnaco
operations, as well as those of Designer Holdings. As a result of these actions,
it is anticipated that the Company will incur charges in the fourth quarter
currently estimated to be between $35 - 45 million, net of tax. This includes
the anticipated conclusion of the consolidation and restructuring actions
announced last year.
NOTE 4 -- STRATEGIC ACTIONS IN 1996
The acquisition of the GJM businesses in February, 1996 enhanced the
Company's low cost manufacturing capacity and expanded the Company's product
lines. The Company subsequently undertook a strategic review of its businesses
and manufacturing facilities. The acquisitions of Bodyslimmers and Lejaby, later
in 1996, were also considered. As a result, the Company took the following steps
which resulted in total non-recurring charges in the second and third quarters
of fiscal 1996 as summarized below (in millions):
THIRD
QUARTER TOTAL
------- ------
Loss related to the sale of the Hathaway business.................................... $ 7.3 $ 46.0
Charge for the consolidation and realignment of the intimate apparel division........ 17.1 72.1
Other items:......................................................................... 6.8 20.4
------- ------
31.2 138.5
Less: Income tax benefits............................................................ 12.2 49.7
------- ------
$19.0 $ 88.8
------- ------
------- ------
6
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The losses reported in the third quarter of fiscal 1996 above include
inventory markdowns directly attributable to the decision to exit the Hathaway
business and consolidation and realignment of the intimate apparel division.
Accordingly, inventory markdowns, operating losses of Hathaway for the third
quarter of 1996 (resulting from inventory liquidations at markdown prices) and
settlement of insurance claims related to the 1994 California earthquake and
other claims together aggregating $11.7 million are reflected in the
Consolidated Condensed Statement of Operations within cost of goods sold. The
remaining $19.4 million, consisting mainly of the write-down of assets to fair
value, severance costs and other employee costs, is included in selling,
administrative and general expenses (SA&G). For the nine months ended October 4,
1996, the cost of goods sold charge relative to inventory markdowns and other
charges indicated above was $38.0 million, whereas the SA&G charge was $100.6
million. A complete description of the 1996 non-recurring items is contained in
Note 4 to the Consolidated Financial Statements contained in the Company's
Annual Report on Form 10-K for the fiscal year ended January 4, 1997.
NOTE 5 -- STOCK REPURCHASE PROGRAM
During the first nine months of fiscal 1997, the Company repurchased
271,363 shares of its common stock at a cost of $8.9 million under its
repurchase program. On May 14, 1997, the Company's Board of Directors authorized
the repurchase of an additional 420,000 shares to supplement its previously
announced 2 million share repurchase program. Also in 1997, the Company entered
into equity option arrangements to purchase approximately 1.1 million shares of
stock at an average price of $33.00. These option arrangements expire between
November 1997 and June 1998. At expiration, the Company has the choice of
settling these arrangements in stock, cash, or net shares.
NOTE 6 -- RESTRICTED STOCK
In May 1997, the Company's Board of Directors authorized the issuance of
122,210 shares of restricted stock to certain employees, including certain
officers and directors of the Company. The restricted shares vest ratably over
four years and will be fully vested in May 2001. The fair market value of the
restricted shares was approximately $3.6 million at the date of grant. The
Company will recognize compensation expense equal to the fair value of the
restricted shares over the vesting period.
NOTE 7 -- AMENDED BANK CREDIT AGREEMENT
On August 12, 1997 the Company entered into an amended bank credit
agreement which extends through the year 2002. Under the terms of the amended
agreement, the Company will have available up to $900 million in a revolving
credit facility and lines of credit which replace the Company's previous $750
million in availability. This agreement has improved terms and conditions which
includes a lower borrowing rate and an extension of maturities.
NOTE 8 -- NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, 'Earnings per
Share,' which requires the dual presentation of Basic and Diluted Earnings per
share. Pro-forma Basic and Diluted Earnings Per Share calculated in accordance
with the standard would have resulted in income of $1.31 and $1.24 respectively,
for the nine months ended October 4, 1997 and a (loss) of $(0.67) and $(0.64),
respectively, for the nine months ended October 5, 1996. The Company will adopt
this standard as of January 3, 1998 as required. Early adoption is not
permitted.
In June 1997, FASB also issued SFAS No. 130, 'Reporting Comprehensive
Income' and SFAS No. 131, 'Disclosure about Segments of an Enterprise and
Related Information'. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components and SFAS No. 131 establishes
standards for the way public businesses report financial information about
operating
7
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
segments. The Company will adopt both in fiscal 1998, as required. These
statements will affect disclosure and presentation in the financial statements
but will not have a material impact on the Company's consolidated financial
position, liquidity, cash flows or results of operations.
NOTE 9 -- CERTAIN STOCKHOLDER LITIGATION
Shortly after the announcement of a proposed transaction between Designer
Holdings and the Company, three stockholders of Designer Holdings, Jacob J.
Spinner, Yaskov Glatter and Sherry Berman, as custodian for Jordan Berman, filed
lawsuits in the Delaware Court of Chancery challenging the transaction. The
named plantiff in each of the actions purports to maintain each individual
action as a class action on behalf of Designer Holdings stockholders. On
October 30, 1997 the Court of Chancery signed an order which consolidated the
three actions. Now captioned as In re Designer Holdings Ltd. Shareholders
Litigation, Consolidated Civil Action 15942, the consolidated complaint
alleges that the directors of Designer Holdings breached their fiduciary
duties to Designer Holdings' stockholders in approving the transaction. The
complaint further alleges that the directors have a conflict of interest based
on the price at which Designer Holdings shares were sold to the public in
May 1996 relative to the transaction price. The plaintiffs also claim that
the Company aided and abetted the directors of Designer Holdings in breaching
their fiduciary duties. The plaintiffs seek injunctive relief to prohibit
Designer Holdings from completing the merger, or in the alternative, monetary
damages of an unspecified amount.
On November 13, 1997, the parties to this litigation reached an agreement
in principle to settle this litigation on the following terms, subject to court
approval:
1. the defendants permitted the plaintiffs' attorneys to review drafts
of the Joint Proxy Statement/Prospectus relating to the transaction
prior to mailing and have revised the disclosure therein in response
to their comments;
2. the defendants agreed that they would reduce the termination fee
payable to the Company in certain circumstances from $12.5 million to
$6.25 million; and
3. Charterhouse Equity Partners II, L.P., which beneficially owns
approximately 2.6 million shares of the Company as a result of the
exchange of shares with New Rio, L.L.C., has agreed that during the
14-day period following the date on which Designer Holdings
stockholders can sell the shares of the Company issued in the
merger, but in no event extending past December 31, 1997, it will
not sell, transfer or otherwise dispose of any shares of the Company,
notwithstanding the existence of an effective registration statement
for the resale of any such shares, unless the closing price for shares
of the Company on the NYSE Composite Transactions Tape on any day
within such 14-day period was more than 15% above or below such
closing price on the trading day immediately preceding the effective
time of the merger.
Upon final approval of the settlement by the court, plaintiffs' counsel
will petition the court for an award of attorney's fees and expenses, which will
be paid by Designer Holdings. Plaintiffs' counsel has agreed to submit a request
for, and the defendants have agreed not to oppose, a request for court approval
of not more than $350,000 in attorney's fees and expenses.
8
THE WARNACO GROUP, INC.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITIONS
RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS (SELECTED DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 4, OCTOBER 5, OCTOBER 4, OCTOBER 5,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(AMOUNTS IN MILLIONS OF DOLLARS)
(UNAUDITED)
Net revenues................................................ $ 333.4 $ 292.0 $ 875.1 $ 721.3
Cost of goods sold(1)....................................... 209.4 201.6 559.1 510.7
----------- ----------- ----------- -----------
Gross profit................................................ 124.0 90.4 316.0 210.6
% of net revenues...................................... 37.2% 30.9% 36.1% 29.2%
Selling, administrative and general expenses(2)............. 61.7 71.9 175.4 236.2
----------- ----------- ----------- -----------
Income (loss) before interest and income taxes.............. 62.3 18.5 140.6 (25.6)
% to net revenues...................................... 18.7% 6.3% 16.1% (3.6%)
Interest expense............................................ 11.5 9.0 32.0 23.9
----------- ----------- ----------- -----------
Income (loss) before Provision (benefit) for income taxes... 50.8 9.5 108.6 (49.5)
Provision (benefit) for income taxes(3)..................... 18.7 3.7 41.2 (15.0)
----------- ----------- ----------- -----------
Net income (loss)(4)........................................ $ 32.1 $ 5.8 $ 67.4 $ (34.5)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- ------------
(1) Cost of goods sold includes approximately $11.7 and $38.0 for the three and
nine month periods ended October 5, 1996 in connection with inventory
markdowns and other charges related to the 1996 Strategic Actions discussed
below. Accordingly, these actions decreased Gross Profit percentage by 4.1
and 5.3 for the respective 1996 periods.
(2) Selling, administrative and general expenses includes approximately $19.4
million and $100.6 million for the three and nine month periods ended
October 5, 1996 for the write-down of assets to the fair value, severance
costs and employee costs related to the Strategic Actions discussed below.
(3) Provision (benefit) for income taxes includes a benefit of approximately
$12.2 million and $49.7 million for the three and nine month periods ended
October 5, 1996. See the 1996 Strategic Actions discussed below.
(4) Net income was $0.59 per share and $1.24 per share for the three months and
nine months ended October 4, 1997, compared to $0.47 per share and $1.02 per
share, respectively, for the comparable 1996 periods before non-recurring
items resulting from the 1996 Strategic Actions.
1996 STRATEGIC ACTIONS (See Note 4 to Consolidated Condensed Financial
Statements)
Following the acquisition of the GJM business in February, 1996 which
significantly added to the Company's low cost manufacturing capacity, in
addition to an immediate expansion of product lines, the Company undertook a
strategic review of its businesses and manufacturing facilities. The
acquisitions of Bodyslimmers and Lejaby later in 1996, were also considered. As
a result of this review, the Company
9
took the following steps which resulted in non-recurring charges in the third
quarter of fiscal 1996 as summarized below (in millions):
THIRD
QUARTER TOTAL
------- ------
Loss related to the Hathaway business................................................ $ 7.3 $ 46.0
Charge for the consolidation and realignment of the intimate apparel division........ 17.1 72.1
Other items.......................................................................... 6.8 20.4
------- ------
Total charges........................................................................ 31.2 138.5
Less: Income tax benefits............................................................ 12.2 49.7
------- ------
$19.0 $ 88.8
------- ------
------- ------
In the accompanying consolidated condensed statement of operations, the
total charge of $31.2 million for the third quarter of 1996 has been included in
both costs of goods sold and selling, administrative and general expenses at
$11.7 million and $19.4 million, respectively. The charges for the first three
quarters of fiscal 1996 to cost of goods sold and selling, administrative and
general expenses are approximately $38.0 million and $100.6 million,
respectively. These amounts have been separately reflected in the above table.
In summary, the 1996 non-recurring charges for exiting the Hathaway
business and the Intimate Apparel Division consolidation and realignment and
other items totaled approximately $88.8 million, after income tax benefits of
$49.7 million, or $1.66 per share for first nine months of fiscal 1996.
RESULTS OF OPERATIONS
Net revenues in the third quarter of fiscal 1997 were $333.4 million, 14.2%
higher than the $292.0 million recorded in the third quarter of fiscal 1996. Net
revenues for the nine months ended October 4, 1997 were $875.1 million, an
increase of 21.3% over the $721.3 million recorded in the first nine months of
fiscal 1996.
Intimate apparel division net revenues increased 9.2% to $235.7 million
from $215.8 million in the third quarter of fiscal 1996. The increase in net
revenues in the third quarter of fiscal 1997 compared to fiscal 1996 was
generated by a nearly 30.0% increase in Calvin Klein worldwide revenues, and a
strong 18.0% increase in our Warner's/Olga U.S. business, partially offset by
$6.0 million unfavorable foreign exchange impact on revenues resulting from a
stronger dollar to European currencies. For the first nine months, net revenues
increased 19.8% to $644.5 million from $538.0 million in the first nine months
of fiscal 1996. The increase in net revenues in the first nine months of fiscal
1997 compared to fiscal 1996 was generated by a 24.0% increase in Calvin Klein
worldwide revenues, and a 10.0% increase in our Warner's/Olga U.S. business.
International shipments in the first nine months of fiscal 1997, including
Calvin Klein and Lejaby increased 41.1% to $201.2 million or 31.2% of total
intimate apparel sales from $142.6 million or 26.5% of total intimate apparel
sales last year reflecting continuing expansion outside the United States.
Menswear division net revenues increased 39.1% to $84.6 million in the
third quarter of fiscal 1997. The increase is attributable to a 66.0% increase
in Chaps by Ralph Lauren partially offset by the discontinuance of the Hathway
shirts brand in 1996. Net revenues for the nine months ended October 4, 1997
increased 30.6% to $194.5 million from $148.9 million in the first nine months
of fiscal 1996. The increase for the nine months primarily reflects an increase
of 58.5% in Chaps by Ralph Lauren net revenues and 51.9% for Calvin Klein
accessories net revenues partially offset by the discontinuance of the Hathway
shirts brand in 1996.
Gross profit increased 37.2% to $124.0 million in the third quarter of
fiscal 1997 from $90.4 million in the third quarter of fiscal 1996. Gross profit
for the first nine months of fiscal 1997 increased 50.0% to $316.0 million from
$210.6 million in the first nine months of fiscal 1996. The increase in gross
profit was attributable to a better mix of regular price sales and higher Calvin
Klein sales in fiscal year 1997, and the non-recurring charge recorded in fiscal
1996 (see discussion above).
10
Selling, administrative and general expenses decreased to $61.7 million
(18.5% of net revenues) in the third quarter of fiscal 1997 from the $71.9
million (24.6% of net revenues) recorded in the third quarter of fiscal 1996.
Excluding the fiscal 1996 non-recurring charge, selling, administrative and
general expenses increased slightly resulting from higher marketing costs to
support the Calvin Klein line. Selling, administrative and general expenses, for
the first nine months of fiscal 1997 decreased to $175.4 million (20.0% of net
revenues) from $236.2 million (32.7% of net revenues) in fiscal 1996 mainly as a
result of the 1996 non-recurring charges previously discussed.
Interest expense increased $2.5 million in the third quarter of fiscal 1997
to $11.5 million. Interest expense for the nine months ended October 4, 1997
increased $8.1 million to $32.0 million from $23.9 million in the first nine
months of fiscal 1996. The increase in 1997 interest expense for both the
quarter and nine months is due mainly to interest costs attributable to the
three acquisitions completed in 1996.
The provision for income taxes for the third quarter of fiscal 1996 and for
the first nine months of fiscal 1996 reflects income tax benefits of $12.2
million and $49.7 million, respectively, related to the exit from the Hathaway
business and consolidation and realignment of the intimate apparel division. The
Company's effective tax rate for 1996, before the tax benefits discussed above,
was 39% compared to 38% in 1997.
Net income for the third quarter of fiscal 1997 was $32.1 million, an
increase of $26.3 million from the third quarter of fiscal 1996. Net income for
the first nine months of fiscal 1997 was $67.4 million as opposed to a net loss
of $34.5 million in the first nine months of fiscal 1996. The increase for both
the quarter and nine months reflects the higher net revenues and operating
income in 1997, and the non-recurring charge recorded in fiscal 1996, as
previously discussed.
CAPITAL RESOURCES AND LIQUIDITY
On May 11, 1995, consistent with the Company's goal of providing increased
shareholder value, the Company declared a quarterly cash dividend of $0.07 per
share. The Company has since declared eleven successive quarterly cash
dividends. In fiscal 1997, the Company increased its quarterly cash dividend
from $0.07 per share to $0.08 per share.
The Company's liquidity requirements arise primarily from its debt service
requirements and funding of the Company's working capital needs, primarily
inventory and accounts receivable. The Company's borrowing requirements are
seasonal, with needs peaking at the end of the second quarter and during the
third quarter each year. The Company generates nearly all of its operating cash
flow in the fourth quarter of the fiscal year due to increased shipments in the
third and fourth quarters and the sale of inventory built during the first half
of the fiscal year.
Cash used in operations before the $4.0 million payment of accruals related
to exiting the Hathaway business, the consolidation and realignment of the
intimate apparel division and other items was $78.8 million in the first nine
months of fiscal 1997 compared to $66.7 million in the first nine months of
fiscal 1996. The negative cash flow in operating activities reflects higher
working capital requirements primarily due to higher sales and seasonal
increases in working capital, primarily inventory.
Cash used in investing activities was $61.9 million for the first nine
months of fiscal 1997 compared to $121.7 million in the first nine months of
fiscal 1996. Capital expenditures were $32.1 million in the first nine months of
fiscal 1997, compared to $20.6 million in the first nine months of fiscal 1996.
Payment for the purchase of acquired assets includes $15.0 million related to
the payment of acquisition accruals, primarily Lejaby, GJM and Bodyslimmers in
fiscal 1997 and $87.0 million related to the purchase of Lejaby, GJM and
Bodyslimmers in fiscal 1996.
Cash provided from financing activities was $144.6 for the first nine
months of fiscal 1997 compared to $199.1 million for the first nine months of
fiscal 1996. Borrowings under the Company's revolving credit agreements, which
increase during the first nine months of the fiscal year, were $351.2 million in
the first nine months of fiscal 1997 compared to $144.1 million in the first
nine months of fiscal 1996. The Company repurchased 271,363 shares of its common
stock in the first nine months of fiscal 1997 for approximately $8.9 million.
The Company has purchased 521,363 shares of its common stock for
11
approximately $15.9 million under the current share repurchase program, for an
average cost of approximately $30.50 per share.
On August 12, 1997, the Company refinanced existing credit facilities of
$750 million, consisting of the remaining outstanding balance of a $200 million
term loan, a $250 million revolving credit facility, both maturing in 2000, a
$100 million, 364-day revolving credit facility and a $200 million trade credit
facility (the 'Predecessor Facilities') with amended credit facilities totaling
$900 million and consisting of a $600 million revolving credit facility maturing
in 2002 and a $300 million trade credit facility (the 'Facilities'). The
Facilities provide the Company with additional financing to support the
continued strong growth of its business and flexibility for acquisitions and
further share repurchases. The Amended Facilities have improved terms and
conditions compared to the Predecessor Facilities reflecting the Company's
continuing strong operating performance and credit profile, including lower
pricing, fewer restrictive covenants, no debt amortization and increased
flexibility.
The Company believes that funds available under the Amended Facilities and
cash flow to be generated from future operations will be sufficient to meet
working capital and capital expenditure needs of the Company, including
dividends and interest and principal payments on outstanding debt obligations
for the next twelve months and for the next several years.
YEAR 2000 COMPLIANCE
Following a comprehensive study of current systems and future requirements
to support international growth, the Company will initiate a program to replace
existing capabilities with enhanced hardware and software applications. The
objectives of the new program are to achieve competitive benefits for the
Company, as well as assuring that all information systems will meet 'year 2000'
and Economic and Monetary Union compliance. Full implementation of this program
is expected to require expenditures, primarily capital, of approximately $50
million over the next three years. Funding requirements have been incorporated
in the Company's capital expenditure planning and are not expected to have a
material adverse impact on financial condition, results of operations or
liquidity.
12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Shortly after the announcement of a proposed transaction between Designer
Holdings and the Company, three stockholders of Designer Holdings, Jacob J.
Spinner, Yaskov Glatter and Sherry Berman, as custodian for Jordan Berman, filed
lawsuits in the Delaware Court of Chancery challenging the transaction. The
named plantiff in each of the actions purports to maintain each individual
action as a class action on behalf of Designer Holdings stockholders. On
October 30, 1997 the Court of Chancery signed an order which consolidated the
three actions. Now captioned as In re Designer Holdings Ltd. Shareholders
Litigation, Consolidated Civil Action 15942, the consolidated complaint
alleges that the directors of Designer Holdings breached their fiduciary
duties to Designer Holdings' stockholders in approving the transaction. The
complaint further alleges that the directors have a conflict of interest based
on the price at which Designer Holdings shares were sold to the public in
May 1996 relative to the transaction price. The plaintiffs also claim that
the Company aided and abetted the directors of Designer Holdings in breaching
their fiduciary duties. The plaintiffs seek injunctive relief to prohibit
Designer Holdings from completing the merger, or in the alternative, monetary
damages of an unspecified amount.
On November 13, 1997, the parties to this litigation reached an agreement
in principle to settle this litigation on the following terms, subject to court
approval:
1. the defendants permitted the plaintiffs' attorneys to review drafts
of the Joint Proxy Statement/Prospectus relating to the transaction
prior to mailing and have revised the disclosure therein in response
to their comments;
2. the defendants agreed that they would reduce the termination fee
payable to the Company in certain circumstances from $12.5 million to
$6.25 million; and
3. Charterhouse Equity Partners II, L.P., which beneficially owns
approximately 2.6 million shares of the Company as a result of the
exchange of shares with New Rio, L.L.C., has agreed that during the
14-day period following the date on which Designer Holdings
stockholders can sell the shares of the Company issued in the
merger, but in no event extending past December 31, 1997, it will
not sell, transfer or otherwise dispose of any shares of the Company,
notwithstanding the existence of an effective registration statement
for the resale of any such shares, unless the closing price for shares
of the Company on the NYSE Composite Transactions Tape on any day
within such 14-day period was more than 15% above or below such
closing price on the trading day immediately preceding the effective
time of the merger.
Upon final approval of the settlement by the court, plaintiffs' counsel
will petition the court for an award of attorney's fees and expenses, which will
be paid by Designer Holdings. Plaintiffs' counsel has agreed to submit a request
for, and the defendants have agreed not to oppose, a request for court approval
of not more than $350,000 in attorney's fees and expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
4.1 -- Amended and Restated Declaration of Trust of Designer Finance Trust, dated as of November 6, 1996, among
Designer Holdings, as Sponsor, IBJ Schroder Bank & Trust Company, as Property Trustee, Delaware Trust
Capital Management, Inc., as Delaware Trustee and Merril M. Halpern and Arnold H. Simon, as Trustees.
4.2 -- Indenture dated as of November 6, 1996, between Designer Holdings and IBJ Schroder Bank & Trust Company, as
Trustee.
4.3 -- Preferred Securities Guarantee Agreement dated as of November 6, 1996, between Designer Holdings, as
Guarantor and IBJ Schroder Bank & Trust Company, as Preferred Guarantee Trustee, with respect to the
Preferred Securities of Designer Finance Trust.
10.1 -- Credit Agreement, dated as of August 12, 1997 (the 'U.S. $600,000,000 Credit Agreement'), among Warnaco
Inc., as Borrower, and Warnaco and The Bank of Nova Scotia and Citibank, N.A. as Managing Agents, Citibank,
N.A. as Documentation Agent, The Bank of Nova Scotia as Administrative Agent, Competitive Bid Agent, Swing
Line Bank and an Issuing Bank and certain other lenders named therein.
10.2 -- Second Amended and Restated Credit Agreement, dated as of August 12, 1997 (the 'U.S. $300,000,000 Credit
Agreement'), among Warnaco Inc., as the U.S. Borrower, Warnaco (HK) Ltd., as the Foreign Borrower, Warnaco,
as a Guarantor, Citibank, N.A., as the Documentation Agent, The Bank of Nova Scotia, as the Administrative
Agent, and certain other lenders named therein.
10.3 -- First Amendment to the U.S. $300,000,000 Credit Agreement, dated as of October 14, 1997 among Warnaco Inc.,
as the U.S. Borrower, Warnaco (HK) Ltd. as the Foreign Borrower, Warnaco, Citibank, N.A., as the
Documentation Agent, The Bank of Nova Scotia, as Administrative Agent, and certain other lenders party
thereto.
10.4 -- Amended and Restated License Agreement dated as of January 1, 1996, between Polo Ralph Lauren, L.P. and
Warnaco Inc.
10.5 -- Amended and Restated Design Services Agreement dated as of January 1, 1996, between Polo Ralph Lauren
Enterprises, L.P. and Warnaco Inc.
11.1 -- Earnings per share.
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K on October 3, 1997 during the
third quarter of 1997.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1997 By: /S/ WILLIAM S. FINKELSTEIN
...................................
WILLIAM S. FINKELSTEIN
DIRECTOR, SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER
Date: November 12, 1997 By: /S/ STANLEY P. SILVERSTEIN
...................................
STANLEY P. SILVERSTEIN
VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY
14
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as........................'r'