-----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, GnUMfIu2anUJ8MUR+2mbfT6Rc6fz9ejqF6WiIngXZ/tYIXZwSqkVBHzUui6BjOX2 lX+LBjaHo12Rv5QeFu5tKw== 0000950117-00-001295.txt : 20000517 0000950117-00-001295.hdr.sgml : 20000517 ACCESSION NUMBER: 0000950117-00-001295 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 20000516 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/A SEC ACT: SEC FILE NUMBER: 001-10857 FILM NUMBER: 638124 BUSINESS ADDRESS: STREET 1: 90 PARK AVE STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126611300 MAIL ADDRESS: STREET 1: 90 PARK AVENUE STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 FORMER COMPANY: FORMER CONFORMED NAME: W ACQUISITION CORP /DE/ DATE OF NAME CHANGE: 19861117 10-Q/A 1 THE WARNACO GROUP, INC. 10-Q/A - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-10857 THE WARNACO GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4032739 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 90 PARK AVENUE NEW YORK, NEW YORK 10016 (ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) (212) 661-1300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) COPIES OF ALL COMMUNICATIONS TO: THE WARNACO GROUP, INC. 90 PARK AVENUE NEW YORK, NEW YORK 10016 ATTENTION: 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. [X] Yes [ ] No The number of shares outstanding of the registrant's Class A Common Stock as of November 13, 1998 is as follows: 59,631,076. - -------------------------------------------------------------------------------- THE WARNACO GROUP, INC. I N D E X
Page No. -------- PART I. FINANCIAL INFORMATION Item 1 - Financial Statements: Consolidated Condensed Balance Sheets - October 3, 1998 and January 3, 1998.. 3 Consolidated Condensed Statements of Income - Three and Nine Months Ended October 3, 1998 and October 4, 1997................................. 4 Consolidated Condensed Statements of Cash Flows - Nine Months Ended October 3, 1998 and October 4, 1997................................. 5 Notes to Consolidated Condensed Financial Statements......................... 6 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition...................................................... 12 PART II. OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K........................................ 17
- 2 - PART I FINANCIAL INFORMATION Item 1. Financial Statements THE WARNACO GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands)
OCTOBER 3, JANUARY 3, 1998 1998 Restated Restated ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash .......................................................... $ 17,189 $ 12,009 Accounts receivable - net ..................................... 459,697 296,378 Inventories: Finished goods .............................................. 354,400 298,161 Work in process ............................................. 80,034 54,580 Raw materials ............................................... 58,393 78,444 ---------- ---------- Total inventories ............................................. 492,827 431,185 Other current assets .......................................... 40,453 45,228 ---------- ---------- Total current assets ............................................ 1,010,166 784,800 Property, plant and equipment (net of accumulated depreciation of $120,717 and $101,982, respectively) .......................... 212,914 130,400 Other assets: Excess of cost over net assets acquired - net ................. 388,579 349,235 Other assets - net ............................................ 519,777 386,683 ---------- ---------- Total other assets .............................................. 908,356 735,918 ---------- ---------- $2,131,436 $1,651,118 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowing under foreign credit facilities ..................... $ 26,297 $ 12,751 Short-term borrowings ......................................... 25,000 -- Current portion of long-term debt ............................. 8,838 7,850 Accounts payable .............................................. 451,793 289,817 Accrued liabilities ........................................... 120,136 116,892 Income taxes payable .......................................... 4,954 5,203 ---------- ---------- Total current liabilities ....................................... 637,018 432,513 ---------- ---------- Long-term debt .................................................. 627,030 354,263 Other long-term liabilities ..................................... 12,383 14,022 Deferred income taxes ........................................... 34,496 -- Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Designer Finance Trust Holding Solely Convertible Debentures ........................................ 101,566 100,758 Stockholders' equity: Preferred Stock; $.01 par value ............................... -- -- Common Stock; $.01 par value .................................. 692 633 Additional paid-in capital .................................... 957,866 940,461 Cumulative translation adjustment ............................. (17,720) (14,838) Retained earnings/(deficit) ................................... (93,487) (122,421) Treasury stock, at cost ....................................... (108,553) (38,567) Notes receivable for common stock issued and unearned stock compensation ............................. (19,855) (15,706) ---------- ---------- Total stockholders' equity ...................................... 718,943 749,562 ---------- ---------- $2,131,436 $1,651,118 ========== ==========
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 INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- ------------------------ OCTOBER 3, OCTOBER 4, OCTOBER 3, OCTOBER 4, 1998 1997 1998 1997 RESTATED RESTATED RESTATED RESTATED ---------- ---------- ---------- --------- (UNAUDITED) Net revenue ...................................................... $544,125 $333,413 $1,402,207 $875,143 Cost of goods sold ............................................... 383,733 223,390 990,769 599,033 -------- -------- ---------- -------- Gross profit ..................................................... 160,392 110,023 411,438 276,110 Selling, administrative and general expenses ..................... 104,390 61,707 296,528 175,401 -------- -------- ---------- -------- Income before interest and income taxes .......................... 56,002 48,316 114,910 100,709 Interest expense ................................................. 15,077 11,484 43,856 31,999 -------- -------- ---------- -------- Income before income taxes ....................................... 40,925 36,832 71,054 68,710 Provision for income taxes ....................................... 13,981 13,419 25,082 26,112 -------- -------- ---------- -------- Income before cumulative effect of accounting change.......... 26,944 23,413 45,972 42,598 Cumulative effect of accounting change............................ -- -- (46,250) -- -------- -------- ---------- -------- Net income (loss)................................................. $ 26,944 $ 23,413 $ (278) $ 42,598 ======== ======== ======== ======== Basic earnings (loss) per common share: Income before cumulative effect of change in accounting principle ..................................... $ 0.44 $ 0.46 $ 0.74 $ 0.83 Cumulative effect of accounting change ........................ -- -- (0.74) -- -------- -------- -------- -------- Net income .................................................... $ 0.44 $ 0.46 $ -- $ 0.83 ======== ======== ======== ======== Diluted earnings (loss) per common share: Income before cumulative effect of change in accounting principle ..................................... $ 0.43 $ 0.44 $ 0.72 $ 0.80 Cumulative effect of accounting change ........................ -- -- (0.72) -- -------- -------- -------- -------- Net income .................................................... $ 0.43 $ 0.44 $ -- $ 0.80 ======== ======== ======== ======== Cash dividends per share of common stock ......................... $ 0.09 $ 0.08 $ 0.27 $ 0.24 ======== ======== ======== ======== Weighted average number of shares of common stock outstanding: Basic ........................................................ 61,830 51,444 62,197 51,328 ======== ======== ========== ======== Diluted ...................................................... 63,300 53,636 63,807 53,378 ======== ======== ========== ========
This Statement should be read in conjunction with the accompanying Notes to Consolidated Condensed Financial Statements. - 4 - THE WARNACO GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED ----------------------- OCTOBER 3, OCTOBER 4, 1998 1997 Restated Restated ---------- --------- (UNAUDITED) Cash flow from operations: Net income ...................................................... $ (278) $ 42,598 Non-cash items included in net income: Depreciation and amortization ............................... 44,660 22,492 Amortization of unearned stock compensation ................. 3,533 2,486 Change in deferred income taxes ............................. 502 (15,176) Other changes in operating accounts ......................... 40,446 (138,411) Cash expenses related to non-recurring charges .................. (4,811) (3,994) --------- --------- Net cash provided by (used in) operations ....................... 84,052 (90,005) --------- --------- Cash flow from investing activities: Proceeds from sale of fixed assets .......................... 2,210 610 Purchase of property, plant & equipment ..................... (103,737) (32,086) Payment of assumed liabilities and acquisition accruals ..... (18,801) (15,027) Acquisition of assets and licenses .......................... (44,088) -- Increase in intangible and other assets ..................... (116,284) (15,400) --------- --------- Net cash used in investing activities ........................... (280,700) (61,903) --------- --------- Cash flow from financing activities: Borrowings under revolving credit facilities ................ 322,637 351,197 Borrowings under term loan agreement ........................ 42,206 -- Repayment of borrowings under term loan agreement ........... (21,500) -- Repayment of debt ........................................... (34,438) (189,828) Proceeds from the exercise of options and payment of notes receivable from employees ...................... 41,982 4,188 Purchase of treasury shares ................................. (67,536) (7,545) Payment of withholding taxes on option exercises ............ (38,095) (575) Dividends paid .............................................. (16,082) (12,074) Other ....................................................... (33,393) (786) --------- --------- Net cash provided by financing activities ....................... 195,781 144,577 --------- --------- Effect of exchange rate changes on cash ......................... 6,047 7,176 --------- --------- Increase (decrease) in cash ..................................... 5,180 (155) Cash at beginning of period ................................. 12,009 11,840 --------- --------- Cash at end of period ....................................... $ 17,189 $ 11,685 ========= ========= Other changes in operating accounts: Accounts receivable ......................................... $(166,305) $ (63,312) Inventories ................................................. (57,551) (105,978) Other current assets ........................................ 4,554 (1,284) Accounts payable and accrued liabilities .................... 151,694 34,996 Income taxes payable ........................................ (488) 981 Other ....................................................... 108,542 (3,814) --------- --------- $ 40,446 $(138,411) ========= =========
This Statement should be read in conjunction with the accompanying Notes to Consolidated Condensed Financial Statements. - 5 - 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 adjustments (all of which were of a normal recurring nature) necessary to present fairly the financial position of the Company as of October 3, 1998 as well as its results of operations and cash flows for the periods ended October 3, 1998 and October 4, 1997. 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 3, 1998. Reclassifications and Restatement: Prior to fiscal 1998, the Company rapidly expanded its manufacturing capacity, hiring and training over 15,000 new employees. This resulted in the Company's incurring plant inefficiencies and higher than anticipated manufacturing costs characteristic of new manufacturing operations resulting from high labor turnover and related training and other costs. The Company's infrastructure, personnel and systems were overburdened by the size and scope of this rapid expansion and by the increased manufacturing volume. Manufacturing related costs, which were significantly higher than anticipated, were added to inventories when incurred. In connection with the implementation of a new inventory costing process during the fiscal 1998 year-end closing, the Company determined that in fiscal 1996, 1997 and the first three quarters of 1998, as merchandise was sold, inventories were relieved at less than actual cost per unit, leaving an accumulation of inventory costs. As a result, prior period consolidated financial statements have been restated to reflect additional costs of goods sold. The amount of the restatement affecting the fiscal 1998 and 1997 earnings for the three- and nine-month periods ended October 3, 1998 and October 4, 1997 were $12,066 and $37,718 and $13,980 and $39,940, respectively. This restatement resulted from flaws in the Company's Intimate Apparel Division inventory costing control system that have since been addressed. Actions taken and procedures implemented by the Company to address these issues included the development of a new inventory costing process to supplement the manufacturing costing process and effecting improvements in inventory costing monitoring systems and controls, including increasing the frequency of physical inventory counts and the verification of actual costs. The fiscal 1998 third quarter and nine month results were also restated to reflect the early adoption of SOP 98-5 regarding the write-off of deferred start-up costs. The amount of the restatement in the three and nine month periods ended October 3, 1998 was $14,473 and $37,058, respectively. Certain amounts for prior periods have been reclassified to be comparable with the current period presentation. NOTE 2 - ACQUISITIONS In June 1998, the Company acquired certain inventory and other assets as well as the sub-license to produce Calvin Klein jeans and jeans-related products for children in the United States, Mexico and Central and South America from Commerce Clothing Company LLC ("Commerce") for approximately $36.9 million. A preliminary allocation of the purchase price to the fair value of the assets acquired is summarized below:
(in millions) Inventories................................... $ 5.3 Other current assets.......................... 0.3 Fixed assets.................................. 0.3 Intangible and other assets................... 39.0 Accrued liabilities........................... (8.0) ----- Purchase price................................ $36.9 =====
In addition, the Company entered into a supply agreement with a subsidiary of Commerce whereby the Company will purchase, at a specified price, certain products for a period of eighteen months. In June 1998, the Company also acquired certain assets as well as the sub-license to distribute Calvin Klein jeans, jeans-related products and khakis for men and women in Mexico and Central Mexico from Macro Jeans S.A. de C.V. for approximately $4.0 million. These acquisitions, accounted for as purchases, did not have a material pro-forma impact on 1998 consolidated earnings. - 6 - THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- RESTRUCTURING During the fourth quarter of 1997, the Company recorded restructuring and restructuring related pre-tax charges of $118,819, related to the integration of Designer Holdings of $44,620 following its acquisition, the Intimate Apparel (including GJM) consolidation and realignment program of $63,699 and the disposition of certain retained Hathaway assets of $10,500. Additionally, in the fourth quarter, the Company wrote off approximately $6,300 of accounts receivable, related to customer bankruptcies of $3,400 and other accounts receivable write-offs of $2,900 (see Note 5) and incurred $546 of other non-recurring expenses. Of the total $125,665 of 1997 charges, $76,645 is reflected in cost of goods sold and $49,020 is reflected in selling, administrative and general expenses. MERGER RELATED INTEGRATION COSTS ($44,620) Designer Holdings (which was acquired in fiscal 1997) and the Company previously operated retail outlets in several common locations, which the Company elected to consolidate. As a result, the Company recorded a charge of $18,420 as follows: $3,300 for anticipated lease termination costs related to sixteen of its Warner's outlet stores, $1,200 for the write-off of related leasehold improvements and $13,920 for the close-out of store inventories and surplus stocks not considered suitable for redirected marketing efforts in the new store format. In addition, following the merger in December 1997, the Company consolidated the credit and collection functions of the companies. In an effort to accelerate cash collections from common customers following the Designer Holdings acquisition, the Company initiated a program of consolidating receivables from common customers, offering favorable settlement of prior balances to accelerate collection efforts. This program resulted in a charge of $21,700, which was charged to expense as incurred. The Company also charged to expense as incurred $3,600 of special bonuses to Warnaco management and severance and employee termination costs of $900, which were charged to expense at the date the employees were terminated. The detail of the charges recorded in fiscal 1998, including costs incurred and reserves remaining for costs estimated to be incurred through completion of the aforementioned program are as follows:
LEASE CONSOLIDATION TERMINATIONS TERMINATION INVENTORY OF CREDIT AND COST WRITE-DOWNS FUNCTIONS SEVERANCE TOTAL ----------- ----------- ------------- ------------ ----- Balance as of January 4, 1998. $ 2,190 $ 4,802 $ -- $ 55 $ 7,047 1998 Provision................ -- 800 2,500 -- 3,300 Cash reductions............... (2,190) -- -- (55) (2,245) Non-cash reductions........... -- (5,602) (2,500) -- (8,102) ------- ------- ------- ---- ------- Balance as of October 3, 1998. $ -- $ -- $ -- $ -- $ -- ======= ======= ======= ==== =======
- 7 - THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) INTIMATE APPAREL CONSOLIDATION AND REALIGNMENT ($59,499) Following the successful Intimate Apparel consolidation and realignment program initiated in 1996, the Company initiated a new program to re-examine all of its existing products in an effort to streamline its number of product offerings. Accordingly, products and styles were discontinued and slower moving inventory liquidated, incurring markdown losses of $32,600 to accommodate the increased volumes of higher margin merchandise and $2,246 of receivable write-offs related to these merchandising decisions. Further reconfiguration of manufacturing facilities and the merger of Warner's Europe with Lejaby operations achieved a workforce reduction greater than originally anticipated but delayed realization of anticipated efficiencies and resulted in severance and termination costs of $7,380, which were charged to expense at the date approximately 150 employees were terminated. The cost for facility realignment of $17,273 all of which was incurred in 1997, includes charges for the increased costs related to the reconfiguration of the manufacturing facilities. The detail of the charges recorded in fiscal 1998, including costs incurred and reserves remaining for costs estimated to be incurred through completion of the aforementioned program, are as follows:
EMPLOYEE INVENTORY TERMINATION WRITE-DOWNS AND SEVERANCE TOTAL ----------- ------------- ----- Balance as of January 4, 1998....... $ 21,015 $ 1,464 $ 22,479 Cash reductions..................... -- (1,464) (1,464) Non-cash reductions................. (20,902) -- (20,902) -------- ------- -------- Balance as of October 3, 1998....... $ 113 $ -- $ 113 ======== ======= ========
GJM ($4,200) The Company also restructured a portion of its GJM manufacturing business, which was acquired in 1996, resulting in charges of $4,200, $700 of which was for severance of five employees, $2,400 for accounts receivable write-offs, which were expensed as incurred and $1,100 for asset write-offs. GJM incurred other non-recurring losses of $1,139 related to these operations in fiscal 1997. As of January 4, 1998, $674 of such severance costs remained to be incurred, with all $674 incurred in the quarter ended April 4, 1998. INTIMATE APPAREL DIVISION CONSOLIDATION AND REALIGNMENT ($78,139) 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 and realignment resulted in restructuring and restructuring related charges of $78,139. As of January 4, 1998, $828 of such reserve remained to be incurred relating to lease termination costs, with all $828 incurred in the first nine months of fiscal 1998. - 8 - THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) NOTE 4 - CAPITAL STOCK On August 19, 1998, the Company's Board of Director's declared a quarterly cash dividend of $0.09 per share to be paid on October 8, 1998 to shareholders of record as of September 3, 1998. During the first nine months of fiscal 1998, the Company repurchased approximately 2,609,200 shares in open market purchases and under equity option arrangements at a cost of approximately $72.3 million. Excluded from these amounts are the repurchase of approximately 1,446,700 shares at a cost of $34.2 million, for which settlement did not occur prior to the end of the Company's fiscal quarter. Including the shares settling subsequent to the Company's quarter end, a total of approximately 5,038,400 shares have been repurchased under the current authorization of 12,420,000 million shares leaving approximately 7,381,600 shares available to repurchase. In addition, as of October 3, 1998 the Company had options outstanding on approximately 2,257,700 shares at an average forward price of approximately $36.48 per share. These option arrangements expire between November 1998 and August 1999. Under these option arrangements, the Company is obligated to either purchase its common stock at the forward price or pay or receive cash for the difference between the forward price and the market price of the Company's common stock at the option expiration date. After accounting for these options, the Company has approximately 5,123,900 shares available to repurchase. As of October 3, 1998, treasury stock includes approximately 3,985,100 shares at a cost of $108.6 million. The change in additional paid-in capital during the first nine months of fiscal 1998 primarily relates to stock options exercised in which previously owned shares were tendered for payment of the exercise price of the options and the related employee withholding taxes, net of related tax benefits to the Company. NOTE 5 - RESTRICTED STOCK In May 1998, the Company's Board of Directors authorized the issuance of 182,903 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 2002. The fair market value of the restricted shares was approximately $7.7 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 6 - NEW ACCOUNTING STANDARDS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). In December 1997, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132), which revises disclosure requirements for employers' pension and other retiree benefits. These statements are effective for the Company for fiscal 1998. The Company is studying the application of these new statements to evaluate the disclosure requirements. The adoption of these statements will have no impact on the Company's consolidated financial position, liquidity, cash flows or results of operations. However, the Company will present reportable segment information pursuant to the adoption of SFAS No. 131. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This statement, which is effective for the fiscal year beginning January 3, 2000, establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires the recognition of all derivatives as either assets or liabilities in the statement of financial position along with the measurement of such instruments at fair value. Management believes that the implementation of SFAS No. 133 will not have a material impact on the Company's consolidated financial position, liquidity, cash flows or results of operations. - 9 - THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) NOTE 7 - COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) effective with the beginning of fiscal 1998. SFAS No. 130 establishes standards for reporting of changes in equity from nonowner sources in the financial statements; however, the adoption of SFAS No. 130 has no impact on the Company's net earnings or stockholders' equity. Under SFAS No. 130, among other things, foreign currency translation adjustments, which are reported separately in stockholders' equity, are included in other comprehensive income. Total comprehensive income, representing changes in foreign currency translation adjustments, was $39.5 million and $28.2 million for the three month periods ended October 3, 1998 and October 4, 1997 and $92.5 million and $64.1 million for the nine month periods ending October 3, 1998 and October 4, 1997, respectively. NOTE 8 - DEBT In April 1998, the Company amended a 1996 bank credit agreement (the "Agreement") to increase a revolving loan facility to 480 million French Francs from 120 million French Francs. Borrowings under the Agreement bear interest at LIBOR plus .40% and mature on December 31, 2001. In July 1998, the Company amended its $300 million Trade Letter of Credit Facility (the "L/C Facility") to increase the size of the facility to $450 million, to extend the borrowing period for amounts due under the maturing letters of credit from 120 days to 180 days, to extend the maturity of the L/C Facility to July 29, 1999 and to eliminate certain restrictions relating to debt and investments. In conjunction with the amendment of the L/C Facility, the Company also amended its $600 million revolving credit facility and its $200 million 364-day credit facility to allow for the increase in the L/C Facility and the elimination of certain restrictions relating to debt and investments. The Company uses derivative financial instruments in the management of interest rate and foreign currency exposures. The Company does not use derivative financial instruments for trading or speculative purposes. During the first nine months of fiscal 1998, the Company entered into new interest rate swap agreements and amended certain existing interest rate swap agreements with several of its lenders to convert variable rate obligations of $610.0 million, including amounts under the L/C Facility, to fixed rate borrowings bearing interest at 5.99%. The agreements mature in September 2004. The Company follows accrual accounting for these interest rate swap agreements. - 10 - THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) NOTE 9 - SUMMARIZED FINANCIAL AND PRO-FORMA INFORMATION The following is summarized unaudited financial information of the Company's wholly-owned subsidiary, Designer Holdings as of October 3, 1998 and January 3, 1998 and for the nine month periods ended October 3, 1998 and September 30, 1997, respectively, which is presented as required by reason of the public preferred securities issued by Designer Holdings. Designer Holdings, acquired by the Company in the fourth quarter of 1997, develops, manufactures and markets designer jeanswear and jeans-related sportswear for men, women and juniors and holds a 40-year extendable license from Calvin Klein, Inc. to develop, manufacture and market designer jeanswear and jeans- related 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.
(DOLLARS IN THOUSANDS) BALANCE SHEET SUMMARY: OCTOBER 3, JANUARY 3, 1998 1998 --------- --------- Current assets............................. $148,745 $129,285 Noncurrent assets.......................... 528,334 497,557 Current liabilities........................ 122,126 104,458 Noncurrent liabilities..................... 58,500 59,800 Redeemable preferred securities............ 101,566 100,758 Stockholders' equity....................... 394,887 361,826 INCOME STATEMENT SUMMARY: NINE MONTHS ENDED -------------------------- OCTOBER 3, SEPTEMBER 30, --------- ------------- 1998(a) 1997(b) Net revenues............................... $332,806 $365,049 Cost of good sold.......................... 223,449 262,759 Net income before extraordinary item....... 33,061 274 Net income (loss).......................... 33,061 (633)
(a) Excludes net revenues of $59.3 million now reported as Retail division net revenues. As a result of the continuing integration of Designer Holdings into the operations of the Company, cost of goods sold and net income associated with these net revenues cannot be separately identified. (b) The summarized income statement information for the nine months ended September 30, 1997 is presented on a historical basis and does not reflect the effect of the acquisition by the Company. Certain amounts have been reclassified to cost of goods sold to conform to the current year presentation. Prior to its acquisition by the Company, Designer Holdings experienced substantial sales growth. A significant portion of this sales growth was achieved through distribution to jobbers and off-price retailers. Additionally, Designer Holdings had also announced a significant increase in the number of its outlet stores. The Company viewed this growth and expansion as detrimental to the long-term integrity and value of the brand. To sustain its growth strategy, Designer Holdings committed to large quantities of inventories. When the primary department store distribution channel was unable to absorb all of Designer Holdings' committed production, it increased sales to the secondary and tertiary distribution channels, including sales to jobbers, off-price retailers and Designer Holdings' own outlet stores, which were expanded to serve as an additional channel of distribution. The Company's post-acquisition strategy did not embrace the outlet store expansion or expansion of secondary channels of distribution, thereby significantly eliminating product distribution, resulting in excess inventory. The Company had a different plan from that of Designer Holdings for realization of inventories and accounts receivable, as follows: Based upon its strategy for the business, it had to quickly dispose of significantly higher than desirable levels of inventory. It had to stabilize relationships with its core department store customers. It had to collect receivable balances from customers with whom the Company would no longer do business, and had to respond to challenges from the core department store customers who were adversely impacted by channel conflict and brand image issues. Finally, the Company began a complete redesign of the product, the impact of which would not be immediately felt at retail due to the fact that Designer Holdings had already committed to inventory that was in production to be delivered for the ensuing seasons. The consequences related not only to the receivables and inventory acquired, but also to the design, fabric and inventory purchases to which Designer Holdings had previously committed. Immediately following the acquisition, the Company began quickly liquidating excess inventories. Most of these sales were below original cost. Not only did the Company fail to recover cost (including royalties payable to the licensor), it was deprived of the 'reasonable gross profit' contemplated by APB Opinion 16 in valuing acquired inventory. Accordingly, the Company reduced the historical carrying value of inventory by $18 million. The $18 million fair value adjustment recorded addressed all of these issues and represented the fair value of inventory pursuant to APB Opinion 16. The Company offered significant discounts (by negotiating settlements on a customer by customer basis) to collect outstanding receivable balances in light of product related issues raised, as well as the decision to discontinue certain channels of distribution, realizing that these balances would become increasingly more difficult to collect with the passage of time. In addition, the core retail customers took substantial deductions against current invoices for the Designer Holdings inventory in the stores, unilaterally revising the economics of the initial sale transaction entered into by Designer Holdings. Although these deductions relate to both the inventory acquired and pre-acquisition accounts receivable, the decrease in asset value manifested itself through accounts receivable as a result of these deductions. Accordingly, the Company reduced the historical carrying value of accounts receivable by $31 million. The $31 million fair value adjustment, which was recorded pursuant to APB Opinion 16, addresses these issues. The Company believes that these strategies should enhance future results of operations and cash flows, however, these fair value adjustments will result in additional annual goodwill amortization of approximately $1.2 million. In conjunction with the allocation of purchase price of Designer Holdings to assets acquired and liabilities assumed, the Company recorded accruals of approximately $48,313. These charges relate generally to employee termination and severance benefits, facility exit costs, including lease termination costs (representing future lease payments on abandoned facilities) and contract termination costs. The detail of the charges recorded in fiscal 1998, including costs incurred and reserves remaining for costs estimated to be incurred through completion of the aforementioned programs, anticipated by the end of fiscal 1999, are summarized below:
SEVERANCE AND FACILITY OTHER EMPLOYEE EXIT RELATED COSTS COSTS TOTAL ------------------ --------------- -------- Balance as of January 4, 1998 $9,831 $ 170 $10,001 Total provisions 200 6,800 7,000 Cash Reductions (3,971) (216) (4,187) ---------------- ----------------- ------- Balance as of October 3, 1998 $6,060 $ 6,754 $12,814 ================ ================= =======
The $12,814 reserve at October 3, 1998 relates principally to certain facility exit costs and employee severance costs, representing the remaining severance costs for terminated employees, anticipated to be utilized by the end of fiscal 1999. The following summarized unaudited pro forma information combines the historical results of operations of the Company with Designer Holdings, after the effects of estimated purchase accounting adjustments, assuming the acquisition had occurred at the beginning of fiscal 1997. The pro forma information does not reflect any cost savings or other benefits anticipated as a result of the acquisition. The pro forma information does not purport to be indicative of the results that would have been obtained if the operations had actually been combined during the period presented nor are they indicative of future results for the combined companies. - 11 - THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands) NINE MONTHS ENDED OCTOBER 4, 1997 Statement of Income Data: Net revenues......................................... $1,240,100 Net income before extraordinary item................. $ 68,100 Net income........................................... $ 67,200 Income per common share before extraordinary item: Basic............................................ $1.10 ===== Diluted.......................................... $1.07 ===== Income per common share: Basic............................................ $1.09 ===== Diluted.......................................... $1.05 =====
The final assessment of the purchase accounting estimates have not yet been completed. During the nine months ended October 3, 1998, adjustments to these estimates (primarily for revisions to estimated liabilities assumed) increased the excess of cost over net assets acquired by approximately $70.0 million. NOTE 10 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------- ----------------------- OCTOBER 3, OCTOBER 4, OCTOBER 3, OCTOBER 4, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) Numerator for basic and diluted earnings per share: Income before cumulative effect of accounting change......................................... $ 26,944 $ 23,413 $ 45,972 $ 42,598 ========= ========= ======== ========= Denominator for basic earnings per share-- Weighted average shares........................ 61,830 51,444 62,197 51,328 --------- --------- -------- --------- Effect of dilutive securities: Employee stock options......................... 521 1,721 1,019 1,605 Restricted stock shares........................ 507 471 481 445 Shares under put option contracts.............. 442 -- 110 -- --------- --------- -------- --------- Dilutive potential common shares................. 1,470 2,192 1,610 2,050 --------- --------- -------- --------- Denominator for diluted earnings per share-- Weighted average adjusted shares............... 63,300 53,636 63,807 53,378 ========= ========= ======== ========= Basic earnings per share......................... $0.44 $0.46 $0.74 $0.83 ========= ========= ======== ========= Diluted earnings per share....................... $0.43 $0.44 $0.72 $0.80 ========= ========= ======== =========
Options to purchase 315,000 shares of common stock at prices ranging from $39.25 to $42.88 per share were outstanding during the first nine months of fiscal 1998 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. The options, which expire from March 2008 through July 2008, were still outstanding as of October 3, 1998. Incremental shares issuable on the assumed conversion of the preferred securities (1,653,177 shares) were not included in the computation of diluted earnings per share as the impact would have been antidilutive. NOTE 11 - CASH FLOW INFORMATION
NINE MONTHS ENDED ----------------------- OCTOBER 3, OCTOBER 4, 1998 1997 ---------- ---------- (DOLLARS IN THOUSANDS) Cash paid (received) for: Interest (net of amounts capitalized of $962 in fiscal 1998; $0 in fiscal 1997)........................................ $ 42,224 $ 29,923 Income taxes, net of refunds received....................... $ (7,571) $ 5,573
- 12 - THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) NOTE 12 - SUBSEQUENT EVENTS In October 1998, the Company entered into a $200 million revolving accounts receivable securitization facility. Under this facility, the Company entered into agreements to sell, for a period of up to five years, undivided participation interests in designated pools of U. S. trade receivables. Participation interests in new receivables may be sold as collections reduce previously sold participation interests. The participation interests are sold at a discount to reflect normal dilution. Net proceeds to the company were $200 million. As part of a continuing strategic review of facilities, products and functions following significant acquisitions in 1996 and 1997, the Company intends to implement programs designed to streamline operations and improve profitability. As a result of this review, the Company expects to report a charge in the fourth quarter of fiscal 1998, currently estimated to be approximately $55 million, net of tax benefits. The charge will be for the consolidation of both domestic and international manufacturing, warehouse and distribution and administrative operations and facilities and the discontinuation of non-strategic brands/licenses. Included in the fourth quarter charge will be employee costs, non-cash inventory and other asset write-downs and other costs related to these actions. These programs will commence in the fourth quarter of fiscal 1998 and are expected to be substantially completed by mid-1999, generating annual cash savings of approximately $10 million on a pre-tax basis. - 13 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. RESULTS OF OPERATIONS STATEMENTS OF INCOME (SELECTED DATA) (AMOUNTS IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 3, OCTOBER 4, OCTOBER 3, OCTOBER 4, 1998 1997 1998 1997 --------- ---------- ---------- -------- Net revenues ............................... $ 544.1 $ 333.4 $1,402.2 $875.1 Cost of goods sold ......................... 383.7 223.4 990.8 599.0 -------- -------- -------- ------ Gross profit ............................... 160.4 110.0 411.4 276.1 % of net revenues ........................ 29.5% 33.0% 29.3% 31.6% Selling, administrative and general expenses 104.4 61.7 296.5 175.4 -------- -------- -------- ------ Income before interest, income taxes and cumulative effect of accounting change ... 56.0 48.3 114.9 100.7 % of net revenues ...................... 10.3% 14.5% 8.2% 11.5% Interest expense ........................... 15.1 11.5 43.9 32.0 Provision for income taxes ................. 14.0 13.4 25.0 26.1 -------- -------- -------- ------ Income before cumulative effect of accounting change ...................... $ 26.9 $ 23.4 $ 46.0 $ 42.6 ======== ======== ======== ======
Net revenues in the third quarter of fiscal 1998 were $544.1 million, $210.7 million or 63.2% higher than the $333.4 million recorded in the third quarter of fiscal 1997. Net revenues for 1998 include $169.8 million associated with the Calvin Klein Jeanswear acquisitions, completed in the fourth quarter of 1997 and the second quarter of 1998. Excluding the impact of the above acquisitions, net revenues increased $40.9 million or 12.3%. International net revenues increased $15.7 million or 21.7% during the quarter due to strength in the Calvin Klein business in Europe coupled with increases at the Company's Lejaby division. Net revenues for the nine months ended October 3, 1998 were $1,402.2 million, an increase of $527.1 million or 60.2% over the $875.1 million in the first nine months of fiscal 1997. Acquisitions contributed $409.1 million to net revenues for the nine month period ended October 3, 1998. Excluding net revenues attributable to the Calvin Klein Jeanswear acquisitions, net revenues increased $118.0 million or 13.5%. Intimate apparel division net revenues increased $9.4 million or 4.0% to $245.1 million from $235.7 million in the third quarter of fiscal 1997. The increase in net revenues in the third quarter of fiscal 1998 compared with fiscal 1997 was generated by a strong increase in core domestic branded products, attributed substantially to the continued success of Olga's Simply Perfect and Warner's Naked Truth lines. In addition, Calvin Klein Underwear net revenues increased approximately 9.5% and Bodyslimmers net revenues nearly tripled during the period. Partially offsetting these increases were declines in private label net revenues, reflecting the Company's strategic decision to reduce private label business. Net revenues for the nine months ended October 3, 1998 increased $39.1 million or 6.1% to $683.6 million compared with $644.5 million in the first nine months of 1997. The increase was due to stronger shipments of core domestic branded products as well as increases in Bodyslimmers and Lejaby. Sportswear division net revenues increased $177.9 million or 210.3% to $262.5 million in the third quarter of fiscal 1998. The Calvin Klein Jeanswear acquisitions in the fourth quarter of 1997 and the second quarter of 1998 added $152.9 million to the Sportswear division's net revenues. Excluding these acquisitions, net revenues increased by $25.0 million or 29.6%. This increase is attributable to a 31.1% increase in Chaps by Ralph Lauren. Net revenues for - 14 - the nine months ended October 3, 1998 increased $429.6 million or 220.9% to $624.1 million compared with $194.5 million in the first nine months of fiscal 1997. Excluding the Calvin Klein jeanswear and kidswear acquisitions for the nine-month period, net revenues increased by $64.5 million or 33.2%. The increase for the nine months primarily reflects an increase in net revenues of 34.5% in Chaps by Ralph Lauren and an 11.4% increase for Calvin Klein accessories. Gross profit increased $50.4 million or 45.8% to $160.4 million in the third quarter of fiscal 1998 compared with $110.0 million in the third quarter of fiscal 1997. Gross profit as a percentage of net revenues was 29.5% in the third quarter of fiscal 1998 compared with 33.0% in the third quarter of fiscal 1997. The decrease in gross margin was a result of the addition of the jeanswear business, which carries a lower gross margin than the intimate apparel division, as well as $14.5 million in fiscal 1998 related to the early adoption of SOP 98-5. Gross profit for the first nine months of fiscal 1998 increased $135.3 million or 49.0% to $411.4 million from $276.1 million in the first nine months of fiscal 1997. Gross profit as a percentage of net revenues was 29.3% for the nine months of fiscal 1998 compared with 31.6% in 1997. The year-to-date gross margin reflects the inclusion of the jeanswear business, which carries a lower gross margin, as well as $37 million in fiscal 1998 related to the early adoption of SOP 98-5. The restatement described in Note 1 resulted from flaws in the Company's Intimate Apparel Division inventory costing control system that have since been corrected. As discussed in Note 1, the Company had rapidly expanded its manufacturing capacity over a period prior to fiscal 1998, hiring and training over 15,000 people in Mexico and the Caribbean Basin. The Company's infrastructure, personnel and systems were overburdened by the size and scope of this rapid expansion and by the increased manufacturing volume to meet consumer demand. At the same time, as reported in the Company's fiscal 1996 Form 10-K, commencing in fiscal 1996, the Company determined to consolidate and integrate its two intimate apparel divisions -- Warner's and Olga. These two intimate apparel units had separate manufacturing facilities, separate financial and administrative personnel and separate cost systems. The integration of these two independent operations and systems further burdened already extended personnel and systems. The Company anticipated that it would address any shortcomings in its inventory costing system as part of the implementation of new and enhanced hardware and software applications in connection with the Company's year 2000 compliance program. During the relevant period, substantially all of the Company's financial and information systems personnel were committed to the Company's SAP implementation and Year 2000 compliance efforts, which consumed a significant portion of their time. When the Company's SAP implementation was delayed in 1998 and ultimately replaced with the ACS system, the Company developed a new inventory costing process as an interim measure pending the selection and implementation of the Company's new software which incorporated an integrated cost accounting package. The Company now has a new inventory costing system and new monitoring procedures for its Intimate Apparel Division that are designed to ensure that the problems that led to the restatement of inventory accounts will not be repeated and will function to reduce to a low level the risk that errors may occur and not be detected within a timely period. Selling, administrative and general expenses increased $42.7 million or 69.2% to $104.4 million (19.2% of net revenues) in the third quarter of fiscal 1998 compared with $61.7 million (18.5% of net revenues) in the third quarter of fiscal 1997. Selling, administrative and general expenses for the first nine months of fiscal 1998 increased $121.1 million or 69.0% to $296.5 million (21.1% of net revenues) compared with $175.4 million (20.0 % of net revenues) in fiscal 1997. The increase in selling, administrative and general expenses is due primarily to higher marketing and corporate expenses reflecting additional headcount and costs associated with information services related to new systems and the year 2000 implementation. Interest expense increased $3.6 million in the third quarter of fiscal 1998 to $15.1 million. Interest expense for the nine months ended October 3, 1998 increased $11.8 million to $43.8 million from $32.0 million in the first nine months of fiscal 1997. The increase in 1998 interest expense reflects the funding of the Company's recent acquisitions and stock buyback program. The estimated full year effective tax rate for fiscal 1998 was lowered to 35.3% resulting in an effective tax rate of 34.2% for the third quarter. The difference between the United States federal statutory rate of 35% and the Company's estimated effective tax rate of 35.3% reflects the impact of state income taxes and the effects of non-deductible intangible amortization offset by foreign income taxed at rates more favorable than the United States statutory rate. Net income for the third quarter of fiscal 1998 was $26.9 million, an increase of $3.5 million or 15.1% compared with $23.4 million in the third quarter of fiscal 1997. Income before cumulative effect of accounting change for the first nine months of fiscal 1998 increased $3.4 million to $46.0 million or 7.9% compared with $42.6 million in the first nine months of fiscal 1997. The increase for both the quarter and nine months reflects higher net revenues and gross profit mentioned above. CAPITAL RESOURCES AND LIQUIDITY The Company's liquidity requirements arise primarily from its debt service requirements, capital expenditures related to the Company's year 2000 compliance program and the funding of the Company's working capital needs, primarily inventory and accounts receivable. The Company's borrowing requirements are seasonal, with peak 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. - 15 - Cash provided by (used in) operations before non-recurring items was $88.9 million in the first nine months of fiscal 1998 compared with $(86.0) million in the first nine months of fiscal 1997. The increase in cash provided by operating activities reflects better management of working capital and higher net income. Receivable levels increased at quarter end in line with the third quarter sales increase and inventory levels were up in anticipation of fourth quarter shipment levels. Cash used in investing activities was $280.7 million for the first nine months of fiscal 1998 compared with $61.9 million in the first nine months of fiscal 1997. Capital expenditures were $103.7 million in the first nine months of fiscal 1998, compared with $32.1 million in the first nine months of fiscal 1997 and included amounts for information systems and store fixture programs for Calvin Klein Jeans "shop in shops". During the second quarter of 1998, the Company acquired certain inventory and other assets as well as the sub-license to produce Calvin Klein jeans and jeans-related products for children in the United States, Mexico and Central and South America. In addition, the Company acquired certain assets as well as the sub-license to distribute Calvin Klein jeans and jeans-related products and khakis for men and women in Mexico and Central America. The purchase price of these acquisitions was approximately $40.9 million. Cash provided from financing activities was $195.8 million in the first nine months of fiscal 1998 compared with $144.6 million in the first nine months of fiscal 1997. The increase in the Company's revolving credit balance during the first nine months of fiscal 1998 was $322.6 million compared with $351.2 million in the first nine months of fiscal 1997 due to the funding of the most recent acquisitions and stock repurchase program and capital expenditures for the Company's year 2000 compliance program. The Company paid approximately $105.6 million for the repurchase of shares and withholding taxes on option exercises in the first nine months of fiscal 1998. The Company repurchased approximately 2.6 million shares of its common stock in the first nine months of fiscal 1998 at an average cost of approximately $27.72 per share or approximately $72.3 million. Excluded from these amounts are the repurchase of approximately 1.4 million shares at a cost of approximately $34.2 million, for which settlement did not occur prior to the end of the Company's fiscal quarter. Including these shares, the Company has purchased approximately 5.0 million shares of its common stock under the current repurchase authorization of 12.4 million shares, leaving approximately 7.4 million shares available to repurchase. At October 3, 1998 the Company has options outstanding on approximately 2.3 million of its shares at an average forward price of $36.48 per share, expiring between November 1998 and August 1999. Under these option arrangements, the Company is obligated to either purchase its stock at the forward price or pay or receive cash for the difference between the forward price and the market price of the Company's stock at the option expiration date. If fully exercised, the aggregate purchase price for the Company's stock under these options would be $82.4 million. In April 1998, the Company amended its 1996 Bank Credit Agreements (the "Agreement") to increase its revolving loan facilities to 480 million French Francs from 120 million French Francs. Borrowings under the Agreement bear interest at LIBOR plus .40% and mature on December 31, 2001. In July 1998, the Company amended its $300 million Trade Letter of Credit Facility (the "L/C Facility") to increase the size of the facility to $450 million, to extend the borrowing period for amounts due under the maturing letters of credit from 120 days to 180 days, to extend the maturity of the L/C Facility to July 29, 1999 and to eliminate certain restrictions relating to debt and investments. The amount of borrowings available under both the 1996 Bank Credit Agreements and the L/C Facility was increased to accommodate the internal growth of the Company's business as well as the increased demand for finished product purchases stemming from the acquisition of Designer Holdings in the fourth quarter of 1997 and the acquisition of the CK Kids business in the second quarter of 1998. In conjunction with the amendment of the L/C Facility, the Company also - 16 - amended its $600 million revolving credit facility and its $200 million 364-day credit facility to allow for the increase in the L/C Facility and the elimination of certain restrictions relating to debt and investments. In October 1998, the Company entered into a $200 million revolving accounts receivable securitization facility. Under this facility, the Company entered into agreements to sell, for a period of up to five years, undivided participation interests in designated pools of U. S. trade receivables. Participation interests in new receivables may be sold as collections reduce previously sold participation interests. The participation interests are sold at a discount to reflect normal dilution. Net proceeds to the Company from the initial funding were $200 million, and were used primarily to retire long-term debt. YEAR 2000 AND ECONOMIC AND MONETARY UNION ("EMU") COMPLIANCE. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. These programs, including some that are critical to the Company's operations, could fail to properly process data that contain dates after 1999 unless they are modified or replaced. Following a comprehensive review of current systems and future requirements to support international growth, the Company initiated a program to replace existing capabilities with enhanced hardware and software applications. The objectives of the program are to achieve competitive benefits for the Company, as well as assuring that all information systems will meet Year 2000 and EMU compliance. Full implementation of this program is expected to require expenditures, primarily capital, of approximately $17 million over the next twelve to eighteen months, primarily for Year 2000 compliance and system upgrades. Funding requirements have been incorporated into the Company's capital expenditure planning and are not expected to have a material adverse impact on financial condition, results of operations or liquidity. Approximately $43.2 million has been incurred through October 3, 1998 and such amounts are included in property and equipment. The implementation and testing processes are expected to be complete in the first quarter of fiscal 1999 for the Chaps and Calvin Klein Underwear divisions and in mid-1999 for all of the remaining divisions of the Company. As a part of its Year 2000 process, the Company intends to test its Year 2000 readiness for critical business processes and application systems. The Company anticipates that minor issues will be identified during this test period and intends to address such issues during the first half of fiscal 1999. The Company has contacted key suppliers and vendors in order to determine the status of such third parties' Year 2000 remediation plans. The Company recognizes the need for Year 2000 contingency plans in the event that remediation is not fully successful or that the remediation efforts of its vendors, suppliers and governmental/regulatory agencies are not timely completed. This process will be on-going throughout 1999 and the Company will be better able to assess the risk and prepare contingency plans when third party processes are more complete. The Company recognizes that issues related to Year 2000 constitute a material known uncertainty. The Company also recognizes the importance of ensuring its operations will not be adversely affected by Year 2000 issues. It believes that the processes described above will be effective to manage the risks associated with the problem. However, there can be no assurance that the process can be completed on the timetable described above or that the remediation process will be fully effective. The failure to identify and remediate Year 2000 problems or, the failure of key third - 17 - parties who do business with the Company or governmental regulatory agencies to timely remediate their Year 2000 issues could cause system failures or errors and business interruptions. Readers are cautioned that forward-looking statements contained in the Year 2000 update should be read in conjunction with the Company's disclosure under "Statement Regarding Forward-looking Disclosures". QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates, and selectively uses financial instruments to manage these risks. The Company does not enter into financial instruments for speculative or trading purposes. The Company has interest rate agreements with several financial institutions to limit exposure to interest rate volatility. Additionally, the Company enters into foreign currency forward and option contracts to mitigate the risks of doing business in foreign currencies. The Company hedges currency exposures of firm commitments and anticipated transactions denominated in non-functional currencies to protect against the possibility of diminished cash flow and adverse impacts on earnings. The Company is exposed to credit loss in the event of nonperformance by counterparties on foreign exchange contracts and interest rate swap agreements. The Company minimizes such risk exposure by limiting the counterparties to major international banks and financial institutions. The Company's currency exposures vary, but are primarily concentrated in the Canadian dollar, Mexican peso, British pound, German mark, French franc and Hong Kong dollar. The value of market risk sensitive instruments is subject to change as a result of movement in market rates and prices. STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE This Report includes "forward-looking statements" within the meaning of Section 27A of Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended which represent the Company's expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the effect of national and regional economic conditions, the overall level of consumer spending, the performance of the Company's products within the prevailing retail environment, customer acceptance of both new designs and newly-introduced product lines, and financial difficulties encountered by customers. All statements other than statements of historical facts included in this quarterly report, including, without limitation, the statements under Management's Discussion and Analysis of Financial Condition, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. - 18 - PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 27.1 -- Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the third quarter of fiscal 1998. - 19 - 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: May 16, 2000 By: /s/ WILLIAM S. FINKELSTEIN --------------------------------- William S. Finkelstein Director, Senior Vice President and Chief Financial Officer Principal Financial and Accounting Officer Date: May 16, 2000 By: /s/ STANLEY P. SILVERSTEIN -------------------------------- Stanley P. Silverstein Vice President, General Counsel and Secretary - 20 - EX-27 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE WARNACO GROUP, INC. FOR THE QUARTER ENDED OCTOBER 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 9-MOS JAN-02-1999 JAN-04-1998 OCT-03-1998 17,189 0 481,178 21,481 492,827 1,010,166 333,631 120,717 2,131,436 637,018 627,030 101,566 0 692 718,251 2,131,436 1,402,207 1,402,207 990,769 990,769 293,873 2,655 43,856 71,054 25,082 45,972 0 0 (46,250) (278) 0.00 0.00
-----END PRIVACY-ENHANCED MESSAGE-----