-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V5VWeqJ3WbYommt5oRpiTvMYd/yzs/HG1DDqkRrjMA33cZKDjWgx0YEj362zyMaO dVVqLPZocbyWqz+q30UI4g== 0000950117-96-001488.txt : 19961121 0000950117-96-001488.hdr.sgml : 19961121 ACCESSION NUMBER: 0000950117-96-001488 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961005 FILED AS OF DATE: 19961119 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARNACO GROUP INC /DE/ CENTRAL INDEX KEY: 0000801351 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', CHILDREN'S & INFANTS' UNDERGARMENTS [2340] IRS NUMBER: 954032739 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10857 FILM NUMBER: 96669374 BUSINESS ADDRESS: STREET 1: 90 PARK AVE STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126611300 FORMER COMPANY: FORMER CONFORMED NAME: W ACQUISITION CORP /DE/ DATE OF NAME CHANGE: 19861117 10-Q 1 THE WARNACO GROUP, INC. 10-Q ________________________________________________________________________________ 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 5, 1996 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 1-4715 ------------------------------ THE WARNACO GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4032739 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 90 PARK AVENUE NEW YORK, NEW YORK 10016 (ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) (212) 661-1300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------------ COPIES OF ALL COMMUNICATIONS TO: THE WARNACO GROUP, INC. 90 PARK AVENUE NEW YORK, NEW YORK 10016 ATTENTION: VICE PRESIDENT AND GENERAL COUNSEL ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The number of shares outstanding of the registrant's Class A Common Stock as of November 5, 1996 is as follows: 52,031,762. ________________________________________________________________________________ PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE WARNACO GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
OCTOBER 5, JANUARY 6, 1996 1996 --------------- --------------- (UNAUDITED) ASSETS Current assets: Cash (restricted $100 and $3,939, respectively)............................ $ 16,828 $ 6,162 Accounts receivable -- net................................................. 228,699 156,607 Inventories: Finished goods........................................................ 250,923 214,252 Work in process....................................................... 65,326 77,940 Raw materials......................................................... 82,653 64,274 --------------- --------------- Total inventories................................................ 398,902 356,466 Assets held for sale....................................................... 12,078 -- Other current assets....................................................... 30,039 23,148 --------------- --------------- Total current assets............................................. 684,466 542,383 Property, plant and equipment, (net of accumulated depreciation of $95,294 and $81,051, respectively)........................................................ 109,426 106,325 Other assets: Intangibles and other assets -- net............................................. 356,457 290,421 --------------- --------------- $ 1,152,429 $ 939,129 --------------- --------------- --------------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowing under revolving credit facility.................................. $ 191,361 $ 51,033 Borrowing under foreign credit facilities.................................. 3,793 -- Current portion of long-term debt.......................................... 34,025 26,700 Accounts payable and accrued liabilities................................... 196,703 149,950 Accrued income taxes....................................................... 4,378 5,231 --------------- --------------- Total current liabilities............................................. 430,260 232,914 --------------- --------------- Long-term debt.................................................................. 252,116 194,301 Other long-term liabilities..................................................... 11,736 11,613 Stockholders' equity: Preferred Stock; $.01 par value............................................ -- -- Common Stock; $.01 par value............................................... 531 521 Capital in excess of par value............................................. 575,198 567,965 Cumulative translation adjustment.......................................... (3,748) (3,745) Accumulated deficit........................................................ (92,238) (46,896) Treasury stock, at cost.................................................... (5,000) (5,000) Notes receivable for common stock issued and unearned stock compensation... (16,426) (12,544) --------------- --------------- Total stockholders' equity............................................ 458,317 500,301 --------------- --------------- $ 1,152,429 $ 939,129 --------------- --------------- --------------- ---------------
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 (IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------- ------------------------- OCTOBER 5, OCTOBER 7, OCTOBER 5, OCTOBER 7, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- (UNAUDITED) Net revenues................................................ $292,010 $239,569 $721,295 $645,120 Cost of goods sold -- Note 4................................ 201,636(a) 154,941 510,742(a) 425,449 ---------- ---------- ---------- ---------- Gross profit................................................ 90,374 84,628 210,553 219,671 Selling, general and administrative expenses................ 52,496 45,432 135,565 130,567 Non-recurring items -- Note 4............................... 19,413 -- 100,621 -- ---------- ---------- ---------- ---------- Income (loss) before interest and income taxes.............. 18,465 39,196 (25,633) 89,104 Interest expense............................................ 8,936 10,017 23,852 27,852 ---------- ---------- ---------- ---------- Income (Loss) before provision (benefit) for income taxes... 9,529 29,179 (49,485) 61,252 Provision (benefit) for income taxes........................ 3,718 11,088 (15,031) 23,276 ---------- ---------- ---------- ---------- Net income (loss)........................................... $ 5,811 $ 18,091 $(34,454) $ 37,976 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares of common stock outstanding............................................... 53,357 44,529 53,489 42,642 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) per share................................. $ 0.11 $ 0.41 $ (0.64) $ 0.89 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------ (a) Includes $11.7 million and $38.0 million of non-recurring items. See Note 4 of Notes 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 FLOW INCREASE (DECREASE) IN CASH (IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED ------------------------ OCTOBER 5, OCTOBER 7, 1996 1995 --------- ----------- (UNAUDITED) Cash flow from operations: Net income (loss)................................................................. $ (34,454) $ 37,976 Non cash items included in net income (loss): Depreciation and amortization................................................ 20,107 14,412 Other........................................................................ 1,813 1,236 Increase in deferred tax assets -- net....................................... (15,031) -- Non cash portion of non-recurring items...................................... 95,688 -- Income taxes paid................................................................. (2,335) (2,584) Other changes in operating accounts............................................... (132,760) (169,231) Other............................................................................. 240 5,184 --------- ----------- Cash used in operations................................................................ (66,732) (113,007) Cash flow from investing activities: Net proceeds from sale of fixed assets............................................ 69 5,932 Purchase of property, plant & equipment........................................... (20,572) (18,142) Payment for purchase of acquired assets........................................... (87,000) (11,200) Increase in intangible and other assets........................................... (14,168) -- --------- ----------- Cash used in investing activities...................................................... (121,671) (23,410) Cash flow from financing activities: Borrowing under revolving credit facilities....................................... 144,121 (70,980) Net proceeds from the sale of Class A common stock and repayment of notes receivable from employees........................................................ 1,026 224,339 Proceeds from other financing..................................................... 71,000 -- Repayments of debt................................................................ (5,860) (14,792) Dividends paid.................................................................... (10,888) (2,922) Increase in deferred financing costs.............................................. (330) (92) --------- ----------- Cash provided from financing activities................................................ 199,069 135,553 --------- ----------- Increase (decrease) in cash............................................................ 10,666 (864) Cash at beginning of period............................................................ 6,162 3,791 --------- ----------- Cash at end of period.................................................................. $ 16,828 $ 2,297 --------- ----------- --------- ----------- Other changes in operating accounts: Accounts receivable............................................................... $ (64,146) $ (46,129) Inventories....................................................................... (19,268) (100,735) Other current assets.............................................................. (2,570) (11,805) Accounts payable and accrued liabilities.......................................... (48,258) (12,918) Accrued income taxes.............................................................. 1,482 2,356 --------- ----------- $(132,760) $(169,231) --------- ----------- --------- -----------
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 1. 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 footnotes 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 noted in Notes 3 and 4 below) necessary to present fairly the financial position of the Company as of October 5, 1996 as well as its results of operations and cash flows for the periods ended October 5, 1996 and October 7, 1995. Operating results for interim periods may not be indicative of results for the full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 6, 1996. 2. Certain amounts for prior periods have been reclassified to be comparable with the current period presentation. 3. Acquisitions On February 9, 1996, the Company acquired substantially all of the assets (including certain subsidiaries) comprising the GJM group of companies ('GJM') from Cygne Designs Inc. GJM is a private label manufacturer of women's lingerie and sleepwear. The purchase price consisted of a cash payment of $12,500,000. In the third quarter of 1996 the Company completed the acquisition of approximately 88% of the assets or stock in the companies comprising the Lejaby/Euralis group of companies ('Lejaby'), a leading European intimate apparel manufacturer, for approximately $68 million. Funds to consummate the transaction were provided by a member of the Company's bank credit group. The terms of the bank loans are substantially the same as the terms of the Company's existing credit agreements and include a term loan facility of 370 million French Francs and revolving loan facilities of 150 million French Francs. The term and revolving loans mature on December 31, 2001. Borrowings under the term loan and revolving loan facilities bear interest at LIBOR plus .45%. The term loan will be repaid in annual installments beginning on July 1, 1997 with a final installment on December 31, 2001. On July 19, 1996, the Company acquired Body Slimmers, Inc. by Nancy Ganz ('Body Slimmers'), for approximately $6.5 million. This company is a designer and marketer of body slimming undergarments for women. In the aggregate, the impact of a pro-forma presentation combining these acquisitions would not be material to the results of operations of the Company for fiscal 1995 or fiscal 1996. 4. Non-Recurring Items The acquisition of the GJM businesses in February, 1996 significantly added to the Company's low cost manufacturing capacity, and resulted in an immediate expansion of product lines. The Company subsequently undertook a strategic review of its businesses and manufacturing facilities. The acquisitions of Body Slimmers and Lejaby have also been considered. As a result of this review, the Company has, to date, 5 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) taken the following steps (described below) which have resulted in total non-recurring charges in the second and third quarters of fiscal 1996 as summarized below (in millions):
SECOND THIRD QUARTER QUARTER TOTAL ------- ------- ------ Loss related to the sale of the Hathaway business................................... $48.4 $ 7.3 $ 55.7 Charge for the consolidation and re-alignment of the intimate apparel division........... 46.4 17.1 63.5 Other items, including merger termination costs of $3 million........................ 12.6 6.8 19.4 ------- ------- ------ 107.4 31.2 138.6 Less: income tax benefits.................... 37.6 12.2 49.8 ------- ------- ------ $69.8 $19.0 $ 88.8 ------- ------- ------ ------- ------- ------
The losses reported above include inventory markdowns directly attributable to the decision to exit the Hathaway business and consolidation and re-alignment of the intimate apparel division. It is difficult to distinguish inventory markdowns attributable to the decision to exit or realign these activities from external market conditions. Accordingly, inventory markdowns, operating losses of Hathaway through October 5, 1996 (resulting from inventory liquidations at markdown prices) and settlement of insurance claims related to the 1994 California earthquake and other claims receivable together aggregating $38.0 million are reflected in the Consolidated Condensed Statement of Operations within cost of goods sold. A description of the non-recurring items follows. Exit from the Hathaway Business On May 6, 1996, after a careful evaluation of the Company's Hathaway men's dress shirt operations, the Company announced that it had decided to cease manufacturing and marketing this brand. On November 12, 1996 the Company sold certain assets comprising the Hathaway dress shirt manufacturing operations in Waterville, Maine and Prescott, Ontario including certain inventory, property and equipment and other assets (the 'Hathaway Assets'). The Hathaway Assets and certain assets retained by the Company have been classified as 'Assets held for sale' in the Consolidated Condensed Balance Sheet as of October 5, 1996, at an amount equal to the estimated fair value of the assets. The Company's Puerto Rico facility (not included in the sale) ended production of Hathaway products in 1995 and necessary legal filings to cease operations in the leased Puerto Rico plant were made in May, 1996. Net revenues of the Hathaway business for the nine months ended October 5, 1996 and October 7, 1995 were $24.2 million and $29.8 million, respectively. Results of operations for the nine months ended October 5, 1996 and October 7, 1995 were a pre-tax loss of $9.4 million and $2.5 million, respectively. 6 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the losses recorded in fiscal 1996 related to the Hathaway business are summarized as follows (in millions):
SECOND THIRD QUARTER QUARTER TOTAL ------- ------- ----- Write-down of assets to fair value (including $23.0 million of intangible assets)......... $ 43.7 $ 1.2 $44.9 Severance and other employee costs............ 0.7 (0.3) 0.4 Lease termination costs....................... 0.3 -- 0.3 Legal and professional fees................... 1.0 (0.3) 0.7 ------- ------- ----- 45.7 0.6 46.3 Less: income tax benefit...................... (16.0 ) (0.6) (16.6) ------- ------- ----- Total.................................... 29.7 -- 29.7 Add: Losses incurred through October 5, 1996........................................ 2.7 6.7 9.4 Less: Income tax benefits..................... (1.0 ) (1.8) (2.8) ------- ------- ----- Total loss related to the Hathaway business business through October 5, 1996................................... $ 31.4 $ 4.9 $36.3 ------- ------- ----- ------- ------- -----
Through October 5, 1996, the Company had expended approximately $6.9 million of net cash related to the Hathaway disposition. The Company expects that the estimated cash proceeds from the disposition of the assets of the Hathaway business of approximately $12.0 million will more than offset the estimated remaining cash payments of approximately $1.6 million. In addition, the Company's income tax payments will be reduced in future periods resulting in additional cash savings. The Company does not expect to recognize any additional charges related to exiting the Hathaway business. Intimate Apparel Division Consolidation and Realignment In April 1996, the Company announced the consolidation and realignment of certain of its intimate apparel manufacturing, distribution, selling and administrative functions and facilities in the United States and Europe. The consolidation, substantially completed, and realignment has resulted in a non-recurring charge in the second and third quarters of fiscal 1996 of $40.8 million, net of income tax benefits of $22.7 million. The closing of several manufacturing facilities and consolidation of certain distribution operations has resulted in the Company incurring certain integration costs in its remaining manufacturing facilities to reconfigure product lines and retrain existing personnel. The costs attendant to the realignment and retraining, incurred in the second and third quarters of fiscal 1996 amounted to approximately $15.9 million. In order to maximize the cost savings and efficiencies made available through the consolidation of facilities and the additional volumes contemplated as a result of the Lejaby, GJM and Body Slimmers acquisitions, the Company has re-evaluated the viability of all product lines and styles with potential for greater returns. As a result, certain products and styles have been discontinued to permit the investment of working capital in products and styles with greater returns. The liquidation of these products, completed in the second and third quarters of fiscal 1996 resulted in mark-down losses included in cost of goods sold of approximately $18.1 million primarily in the second quarter of fiscal 1996. 7 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the total intimate apparel division consolidation and realignment charge follows (in millions):
SECOND THIRD QUARTER QUARTER TOTAL ------- ------- ------ Write-down of fixed assets................... $ 3.7 $(1.6) $ 2.1 Lease termination costs...................... 6.4 3.4 9.8 Severance and other employee costs........... 14.3 3.3 17.6 Realignment of manufacturing facilities and retraining costs........................... 4.4 11.5 15.9 Disposition and write-down of discontinued inventory included in cost of good sold.... 17.6 0.5 18.1 ------- ------- ------ Total charges........................... 46.4 17.1 63.5 Less: Income tax benefits.................... (16.2) (6.5) (22.7) ------- ------- ------ Net intimate apparel consolidation and realignment charge.................... $30.2 $10.6 $ 40.8 ------- ------- ------ ------- ------- ------
Total cash expense incurred through October 5, 1996 related to this charge was $27.8 million partially offset by proceeds from the sales of certain assets of approximately $11.0 million. The Company expects to expend approximately $13.7 million of additional cash, primarily in the fourth quarter of fiscal 1996, except for lease termination costs which will be incurred over the next five years. Future cash outlays will be offset by proceeds from the sales of assets and tax benefits realized resulting in a cash savings to the Company. The remaining charges are non-cash in nature. Other The addition of the GJM manufacturing and administrative organization has enabled the Company to begin manufacturing and direct sourcing certain products which had been previously outsourced through a buying agent. This will result in significant ongoing cost savings to the Company. The cost of terminating the existing buying agency relationship was $3.0 million and is included in non-recurring charges in the second quarter of fiscal 1996. The Company has paid approximately $2.7 million of these costs through October 5, 1996 and expects to pay the remaining balance to the agent during the fourth quarters of fiscal 1996. The Company has recognized other opportunities for further cost savings by consolidating certain administrative and sales functions in Europe following the Lejaby acquisition. Actions taken in the second and third quarters, primarily reductions in existing staff, resulted in a non-recurring charge of $4.5 million in the second and third quarters of fiscal 1996, approximately $2.4 million of which were incurred by October 5, 1996, the remaining charges will be paid in the fourth quarter of fiscal 1996. In order to achieve an early resolution of the insurance claims related to the destruction of one of the Company's distribution centers as a result of the 1994 California earthquake, the Company accepted a cash settlement offer of $19 million and wrote-off the remaining receivable of $6.1 million in the second quarter of fiscal 1996. The Company also settled certain other accounts and claims for $2.7 million. In June 1996, the Company announced its intent to merge with Authentic Fitness Corporation. On July 25, 1996 the Company announced that the merger would not take place as planned. The Company has incurred legal, accounting and investment advisory fees in connection with the proposed merger. Such fees and expenses of approximately $3.0 million were charged against income in the third quarter of fiscal 1996. 5. In May 1996, the Company's Board of Directors authorized the issuance of 195,700 shares of restricted stock to certain employees, including certain officers and directors of the Company. The restricted shares vest over four years and will be fully vested in May 2000. The fair market value of the restricted shares was approximately $5.4 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. 8 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS STATEMENT OF OPERATIONS (SELECTED DATA) (AMOUNTS IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------ ------------------------ OCTOBER 5, OCTOBER 7, OCTOBER 5, OCTOBER 7, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- (UNAUDITED) Net revenues.................................................... $292.0 $239.5 $721.3 $645.1 Cost of goods sold as reported.................................. 201.6 154.9 510.7 425.4 Non-recurring items............................................. (11.7) -- (37.9) -- ---------- ---------- ---------- ---------- Gross profit before non-recurring items......................... 102.1 84.6 248.5 219.7 % of net revenues.......................................... 35.0% 35.3% 34.5% 34.1% Selling, administrative and general expenses.................... 52.5 45.4 135.6 130.6 ---------- ---------- ---------- ---------- Income before interest and income taxes and non-recurring items......................................................... 49.6 39.2 113.1 89.1 % to net revenues.......................................... 17.0% 16.4% 15.7% 12.3% Interest expense................................................ 8.9 10.0 23.9 27.8 Provision for income taxes...................................... 15.9 11.1 34.8 23.3 ---------- ---------- ---------- ---------- Income before non-recurring items(1)............................ 24.8 18.1 54.4 38.0 Non-recurring items, net of income tax benefits................. (19.0) -- (88.8) -- ---------- ---------- ---------- ---------- Net income (loss)............................................... $ 5.8 $ 18.1 $(34.5) $ 38.0 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------ (1) Net income before non-recurring items was $0.47 per share and $1.02 per share for the three months and nine months ended October 5, 1996 compared to $0.41 per share and $0.89 per share for the comparable fiscal 1995 periods. STRATEGIC ACTIONS (See Note 4 of Notes 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 Body Slimmers and Lejaby have also been considered. As a result of this review, the Company has, to date, taken the following steps which have resulted in a non-recurring charge in the second and third quarters of fiscal 1996 as summarized below (in millions):
SECOND THIRD QUARTER QUARTER TOTAL ------- ------- ------ Loss related to the sale of the Hathaway business................ $ 48.4 $ 7.3 $ 55.7 Charge for the consolidation and realignment of the intimate apparel division............................................... 46.4 17.1 63.5 Other items, including merger termination costs of $3.0 million................................................... 12.6 6.8 19.4 ------- ------- ------ 107.4 31.2 138.6 Less: income tax benefits........................................ 37.6 12.2 49.8 ------- ------- ------ $ 69.8 $19.0 $ 88.8 ------- ------- ------ ------- ------- ------
9 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) EXIT FROM THE HATHAWAY BUSINESS Following a comprehensive evaluation the Company's men's dress shirt business, in April 1996, the Company decided to cease manufacturing and marketing the Hathaway brand. In recent years the dress shirt business has become increasingly price driven and, as a result, the Company's dress shirt business has returned profit margins considerably below those of the Company's core intimate apparel business. In addition, the dress shirt business requires continuing investment, particularly in working capital, disproportionate to its return. Accordingly, the Company elected to withdraw from the Hathaway dress shirt business, freeing up funds for reinvestment in brands and businesses with higher growth potential and greater returns. On November 12, 1996 the Company completed the sale of certain assets of the Hathaway dress shirt operation, including its Waterville, Maine and Prescott, Ontario manufacturing facilities ('Hathaway Assets'). As a result, the Company wrote down the assets related to its Hathaway operation to fair value and reclassified the assets of the Hathaway business to be sold to the caption 'Assets held for sale' in the Consolidated Condensed Balance Sheet as of October 5, 1996. The loss from the write-down of the Hathaway Assets to fair value and losses incurred in the operation of the Hathaway business since the Company announced its intent to exit this business of approximately $36.3 million net of income tax benefits of $19.4 million are included in the Statement of Operations for fiscal 1996. The pre-tax loss includes the write off of $23 million of Hathaway intangibles and goodwill. INTIMATE APPAREL CONSOLIDATION AND REALIGNMENT In April 1996, the Company announced the consolidation of certain intimate apparel and other manufacturing, distribution and administrative operations in the United States and Europe. The consolidation and realignment of the Intimate Apparel Division was designed to reduce costs and improve the efficiency of the Company's operations and is expected to result in annual cost savings in excess of $15 million per year. The consolidation and realignment resulted in a non-recurring charge of approximately $40.8 million after income tax benefits of $22.7 million, comprised primarily of a write-down of asset values, accruals of lease and other contractual obligations, and employee termination and severance costs. In order to maximize the cost savings and efficiencies made available through the consolidation of facilities and the additional volumes contemplated as a result of the Lejaby, GJM and Body Slimmers acquisitions, the Company re-evaluated the viability of all product lines and styles. As a result, certain products and styles have been discontinued to permit the investment of working capital in products and styles with greater returns. In addition, the Company incurred certain costs and expenses associated with the realignment of manufacturing plants, consolidation of the Company's intimate apparel sales forces and other costs during the second and third quarters of fiscal 1996 which are also included in the non-recurring charge. OTHER ITEMS The non-recurring charge also includes $10.6 million, net of income tax benefits of $5.8 million, related to the cancellation of certain contracts, re-alignment of its European organization, the write off of an insurance receivable related to the 1994 California earthquake. In June 1996, the Company announced its intent to merge with Authentic Fitness Corporation. On July 25, 1996 the Company announced that the merger would not take place as planned. The Company has incurred legal, accounting and investment advisory fees in connection with the proposed merger. Such fees and expenses of approximately $3.0 million, $1.8 million net of income tax benefits, were charged against income in the third quarter of fiscal 1996. The non-recurring charge for the Hathaway disposition and the Intimate Apparel Division consolidation and realignment and other items including merger termination costs total approximately $88.8 million, after income tax benefits of $49.8 million, or $1.66 per share for the nine months ended October 5, 1996. 10 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) RESULTS OF OPERATIONS Net revenues in the third quarter of fiscal 1996 were $292.0 million, 21.9% higher than the $239.6 million recorded in the third quarter of fiscal 1995. Net revenues for the nine months ended October 5, 1996 were $721.3 million an increase of 11.8% over the $645.1 million recorded in the first nine months of fiscal 1995. Intimate apparel division net revenues increased 21.8% to $215.8 million from $177.1 million in the third quarter of fiscal 1995. The increase in net revenues in the third quarter of fiscal 1996 compared to fiscal 1995 reflects increases in Calvin Klein net revenues of 28.7%, increases in Warner's and Olga domestic net revenues of 6.7%, incremental net revenues related to Lejaby, Body Slimmers and GJM of $36.4 million, partially offset by a decrease in Avon and Victoria Secret net revenues of $10.4 million. Net revenues for the nine months ended October 5, 1996 increased 11.5% compared to the first nine months of fiscal 1995 despite a decrease in net revenues from Avon and Victoria's Secret of $54.3 million. Excluding these items net revenues increased 25.6%. The increase reflects an increase in Calvin Klein of 51.9%, an increase in Olga and Warner's domestic net revenues of 6.1%, an increase in international net revenues of 41.3% reflecting the acquisition of Lejaby in July 1996 and an increase in sleepwear net revenues of approximately $30.2 million reflecting the impact of the acquisition of GJM in February 1996. Menswear division net revenues increased 22.2% to $60.8 million in the third quarter of fiscal 1996 from $49.7 million in the third quarter of fiscal 1995. The increase is attributable to a 25.0% increase in Chaps net revenues resulting from strong sell-thru at retail and an increase of $1.7 million in Calvin Klein accessories net revenues. Hathaway division net revenues for the third quarter of fiscal 1996 decreased slightly compared to the third quarter of fiscal 1995. Net revenues for the nine months ended October 5, 1996 increased 12.6% to $148.9 million from $132.3 million in the first nine months of fiscal 1995. The increase for the nine months primarily reflects an increase of 14.4% in Chaps net revenues and an increase of $7.1 million in Calvin Klein accessories net revenues, partially offset by a decrease in Hathaway net revenues. Gross profit before non-recurring items increased 20.7% to $102.1 million in the third quarter of fiscal 1996 from $84.6 million in the third quarter of fiscal 1995. Gross profit before the consolidation and re-alignment charge as a percentage of net revenues was 35.0% in the third quarter of fiscal 1996 compared to 35.3% in the third quarter of fiscal 1995. Gross profit for the first nine months of fiscal 1996 increased 13.1% to $248.5 million from $219.7 million in the first nine months of fiscal 1995. The increase in gross profit for both the quarter and the nine months reflects the higher net revenues, as noted above. The increase in gross profit as a percentage of net revenues for the nine month period reflects the higher mix of Calvin Klein sales and increased manufacturing efficiencies in intimate apparel. Selling, administrative and general expenses increased to $52.5 million (18.0% of net revenues) in the third quarter of fiscal 1996 from the $45.4 million (19.0% of net revenues) recorded in the third quarter of fiscal 1995. Selling, administrative and general expenses for the first nine months of fiscal 1996 increased to $135.6 million (18.8% of net revenues) from $130.6 million (20.2% of net revenues) in fiscal 1995. The decrease in selling, administrative and general expenses in dollars and as a percentage of net revenues is due primarily to the cost savings measures and realignment of administrative functions undertaken by the Company beginning in April 1996. The Company expects that overall selling and administrative expenses will be reduced by over $15 million on an annualized basis as a result of these consolidation and realignment efforts. Interest expense decreased 10.8% in the third quarter of fiscal 1996 to $8.9 million from $10.0 million recorded in the third quarter of fiscal 1995. Interest expense for the nine months ended October 5, 1996 decreased 14.3% to $23.9 million from $27.9 million in the first nine months of fiscal 1995. The decrease in interest expense for both the quarter and nine months reflects the use of the proceeds from the Company's public offering to reduce outstanding debt, which was completed in 11 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) October 1995 partially offset by the subsequent acquisition of GJM, Lejaby and Body Slimmers all purchased for cash. The provision for income taxes for the third quarter and for the first nine months of fiscal 1996 reflects income tax benefits of $49.8 million related to the disposition of the Hathaway business, consolidation and realignment of the intimate apparel division and the merger termination costs. The provision for income taxes before giving effect to these tax benefits for the third quarter of fiscal 1996 was $15.9 million compared to $11.1 million in the third quarter of fiscal 1995. The Company's effective tax rate for the first nine months of fiscal 1996 was 39% compared to 38% for the first nine months of fiscal 1995. The increase in effective tax rate in 1996 compared to 1995 reflects the realization of tax benefits in 1995 of certain state net operating loss carryforwards. Income before non-recurring charges for the third quarter of fiscal 1996 was $24.8 million and increase of 37.2% from the $18.1 million for the third quarter of fiscal 1995. Income before non-recurring charges for the first nine months of fiscal 1996 increased 43.1% to $54.4 million from $38.0 million in the first nine months of fiscal 1995. The increase for both the quarter and nine months reflects the higher operating income and lower interest expense noted above. 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 seven successive quarterly cash dividends of $0.07 per share. On February 9, 1996, the Company acquired substantially all of the assets (including certain subsidiaries) comprising the GJM group of companies ('GJM') from Cygne Designs Inc. GJM is a private label manufacturer of women's lingerie and sleepwear. The purchase price consisted of a cash payment of $12.5 million. In the third quarter of fiscal 1996 the Company acquired certain assets and stock in certain companies comprising approximately 88% of the Lejaby, Euralis group of companies ('Lejaby'), a leading European intimate apparel manufacturer for approximately $68 million. Funds to consummate the transaction were provided by members of the Company's bank credit group. The terms of the bank loan are substantially the same as the terms of the Company's existing credit agreements and include a term loan of 370 million French Francs and revolving loan facilities of approximately 150 million French Francs. On July 19, 1996, the Company acquired Body Slimmers, Inc. by Nancy Ganz ('Body Slimmers'), for approximately $6.5 million. The acquisition of Body Slimmers will expand the Company's product line to the fast growing segment of the intimate apparel market targeting aging baby boomers. This acquisition enhances the Company's leading position in the domestic intimate apparel market. The Company's liquidity requirements arise primarily from its debt service requirements and the funding of the Company's working capital needs, primarily inventory and accounts receivable. The Company's borrowing requirements are seasonal, with peak working capital needs generally arising at the end of the second quarter and during the third quarter of the fiscal year. The Company typically generates nearly all of its operating cash flow in the fourth quarter of the fiscal year reflecting third and fourth quarter shipments and the sale of inventory built during the first half of the fiscal year. Cash used in operations in the first nine months of fiscal 1996 was $66.7 million compared to $113.0 million in the comparable fiscal 1995 period. The cash use for the first nine months of fiscal 1996 includes $39.9 million related to the disposition of the Hathaway business and the consolidation and realignment of the intimate apparel division. The improvement in seasonal working capital usage reflects the Company's efforts to reduce inventory levels and improve working capital usage. The Company believes that funds available under its existing credit arrangements and cash flow to be generated from future operations will be sufficient to meet working capital and capital expenditure needs of the Company, including dividends and interest and principal payments on outstanding debt obligations for the next twelve months and for the next several years. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE WARNACO GROUP, INC. Date: November 18, 1996 By: /s/ WILLIAM S. FINKELSTEIN ---------------------------------- William S. Finkelstein Director, Senior Vice President and Chief Financial Officer Principal Financial and Accounting Officer Date: November 18, 1996 By: /s/ WALLIS H. BROOKS ---------------------------------- Wallis H. Brooks Vice President and Corporate Controller 13 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. 11.1 -- Earnings per share. (b) Reports of Form 8-K. No reports on Form 8-K were filed during the third quarter of fiscal 1996.
14 EX-11 2 EXHIBIT 11.1 EXHIBIT 11.1 THE WARNACO GROUP, INC. Calculation of Income (Loss) per Common Share (in thousands except share data)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED ------------------------ ------------------------ OCTOBER 5, OCTOBER 7, OCTOBER 5, OCTOBER 7, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Net income (loss) ($ 5,811) $ 18,091 ($ 34,454) $ 37,976 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Number of shares outstanding during the period 52,074,524 37,499,492 51,789,200 37,499,492 Shares issued in public offering -- 1,511,011 -- 503,670 Restricted shares issued during the period -- -- 88,015 -- Shares issued due to exercise of options 24,038 -- 85,496 -- Add: common equivalent shares using the treasury stock method 1,544,583 5,805,364 1,812,657 4,925,143 Less: treasury stock (286,600) (286,600) (286,600) (286,600) ---------- ---------- ---------- ---------- Weighted average number of shares 53,356,545 44,529,267 53,488,768 42,641,705 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) per share ($0.11) $0.41 ($0.64) $0.89 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
EX-27 3 ARTICLE 5 FDS 3RD QTR 1996 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE WARNACO GROUP, INC. FOR THE NINE MONTHS ENDED OCTOBER 5, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-04-1997 JAN-07-1996 OCT-05-1996 16,829 0 229,701 1,002 398,902 684,466 204,720 95,294 1,152,429 430,260 252,116 0 0 531 457,786 1,152,429 721,295 721,295 510,742 135,565 100,621 308 23,852 (49,485) (15,031) (34,454) 0 0 0 (34,454) (.64) (.64) INCLUDES NON-RECURRING ITEMS OF $38.0 MILLION RELATED TO THE COMPANY'S DECISION TO EXIT FROM THE HATHAWAY BUSINESS, CONSOLIDATE AND REALIGN THE INTIMATE APPAREL DIVISION AND OTHER ITEMS. REFLECTS NON-RECURRING ITEMS RELATED TO THE COMPANY'S DECISION TO EXIT THE HATHAWAY BUSINESS, CONSOLIDATE AND REALIGN THE INTIMATE APPAREL DIVISION MERGER TERMINATION COSTS AND OTHER ITEMS. REFLECTS INCOME TAX BENEFITS OF $49.8 MILLION RELATED TO LOSSES FROM EXITING THE HATHAWAY BUSINESS, CONSOLIDATING AND REALIGNING THE INTIMATE APPAREL DIVISION AND OTHER ITEMS.
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