-----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, SdPpFuMGlV5B7i4bCmp2ChrzDrqbQ4y2FEIcuY7vOVEU4w/ytfo1jKfvJlFSQno9 GH8L6tu5fGmEixmRM697eA== 0000950117-99-002392.txt : 19991117 0000950117-99-002392.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950117-99-002392 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991116 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: SEC FILE NUMBER: 001-10857 FILM NUMBER: 99759137 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 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 2, 1999 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 12, 1999 is as follows: 55,634,895. Part I FINANCIAL INFORMATION Item 1. Financial Statements THE WARNACO GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands)
October 2, January 2, 1999 1999 ----------------- --------------- (Unaudited) ASSETS Current assets: Cash $ 13,857 $ 9,495 Accounts receivable less reserves of $21,044 and $36,668 324,379 199,369 Inventories: Finished goods 467,507 326,794 Work in process 106,123 92,821 Raw materials 56,675 52,404 -------------- -------------- Total inventories 630,305 472,019 Other current assets 76,651 26,621 -------------- -------------- Total current assets 1,045,192 707,504 Property, plant and equipment (net of accumulated depreciation of $145,713 and $119,891, respectively) 262,245 224,260 -------------- -------------- Other assets: Excess of cost over net assets acquired - net 515,264 458,018 Other assets - net 363,399 393,351 -------------- -------------- Total other assets 878,663 851,369 -------------- -------------- $ 2,186,100 $ 1,783,133 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 123,217 $ 30,231 Accounts payable 475,205 503,326 Accrued liabilities 104,077 131,316 Deferred income taxes 38,356 14,276 -------------- -------------- Total current liabilities 740,855 679,149 -------------- -------------- Long-term debt 744,237 411,886 -------------- -------------- Other long-term liabilities 28,378 12,129 -------------- -------------- Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Designer Finance Trust Holding Solely Convertible Debentures 102,637 101,836 -------------- -------------- Stockholders' equity: Common stock: $.01 par value 655 652 Additional paid-in capital 961,017 953,512 Accumulated other comprehensive income 3,870 (15,703) Accumulated deficit (97,208) (176,997) Treasury stock, at cost (285,696) (171,559) Unvested stock compensation (12,645) (11,772) -------------- -------------- Total stockholders' equity 569,993 578,133 -------------- -------------- $ 2,186,100 $ 1,783,133 ============== ==============
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 INCOME (Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended ---------------------------- ----------------------------- October 2, October 3, October 2, October 3, 1999 1998 1999 1998 -------------- ------------ -------------- -------------- (Unaudited) Net revenues $ 579,612 $ 544,125 $ 1,508,452 $ 1,402,207 Cost of goods sold 378,124 383,733 979,612 990,769 ------------ ------------ ------------ ------------ Gross profit 201,488 160,392 528,840 411,438 Selling, general and administrative expenses 111,277 104,390 323,839 296,528 ------------ ------------ ------------ ------------ Income before interest, income taxes and cumulative effect of change in accounting principle 90,211 56,002 205,001 114,910 Interest expense 20,869 15,077 56,381 43,856 ------------ ------------ ------------ ------------ Income before income taxes and cumulative effect of change in accounting principle 69,342 40,925 148,620 71,054 Provision for income taxes 24,963 13,981 53,503 25,082 ------------ ------------ ------------ ------------ Income before cumulative effect of change in accounting principle 44,379 26,944 95,117 45,972 Cumulative effect of change in accounting for deferred start-up costs, net -- -- -- (46,250) ------------ ------------ ------------ ------------ Net income (loss) $ 44,379 $ 26,944 $ 95,117 $ (278) ============ ============ ============ ============ Basic earnings (loss) per common share: Income before cumulative effect of change in accounting principle $ 0.80 $ 0.44 $ 1.68 $ 0.74 Cumulative effect of accounting change -- -- -- (0.74) ------------ ------------ ------------ ------------ Net income (loss) $ 0.80 $ 0.44 $ 1.68 $ -- ============ ============ ============ ============ Diluted earnings (loss) per common share: Income before cumulative effect of change in accounting principle $ 0.80 $ 0.43 $ 1.65 $ 0.72 Cumulative effect of accounting change -- -- -- (0.72) ------------ ------------ ------------ ------------ Net income (loss) $ 0.80 $ 0.43 $ 1.65 $ -- ============ ============ ============ ============ Cash dividends declared per share of common stock $ 0.09 $ 0.09 $ 0.27 $ 0.27 ============ ============ ============ ============ Shares used in computing earnings per share: Basic 55,154 61,830 56,463 62,197 ============ ============ ============ ============ Diluted 55,793 63,300 57,497 63,807 ============ ============ ============ ============
This Statement should be read in conjunction with the accompanying Notes to Consolidated Condensed Financial Statements. 3 THE WARNACO GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH (Dollars in thousands)
Nine Months Ended -------------------------------- October 2, October 3, 1999 1998 -------------- -------------- (Unaudited) Cash flow from operating activities: Net income (loss) $ 95,117 $ (278) ---------- ---------- Non-cash items included in net income: Depreciation and amortization 44,121 36,897 Cumulative effect of accounting change -- 46,250 Amortization of unvested stock compensation 4,585 3,533 Change in deferred income taxes 51,727 25,736 Other changes in operating accounts (363,836) (72,907) ---------- ---------- Net cash from operating activities (168,286) 39,231 ---------- ---------- Cash flow from investing activities Disposals of fixed assets -- 2,210 Purchase of property, plant & equipment (66,236) (103,737) Payment of assumed liabilities and acquisition accruals -- (18,801) Acquisition of assets and licenses (39,708) (44,088) Increase in intangible and other assets (16,965) (71,463) ---------- ---------- Net cash from investing activities (122,909) (235,879) ---------- ---------- Cash flow from financing activities: Borrowing under revolving credit facilities 433,117 293,896 Borrowing under term loan agreement -- 20,706 Proceeds from the exercise of stock options and repayment of notes receivable from employees 1,364 41,982 Purchase of treasury shares and payment of withholding tax on option exercises (117,246) (105,631) Repayments of debt (7,780) (5,697) Dividends paid (15,328) (16,082) Other (2,514) (33,393) ---------- ---------- Net cash from financing activities 291,613 195,781 ---------- ---------- Effect on cash due to currency translation 3,944 6,047 ---------- ---------- Increase (decrease) in cash 4,362 5,180 Cash at beginning of period 9,495 12,009 ---------- ---------- Cash at end of period $ 13,857 $ 17,189 ========== ========== Other changes in operating accounts: Accounts receivable $(123,755) $(166,305) Inventories (152,109) (57,551) Other current assets (25,484) 4,554 Accounts payable and accrued liabilities (61,015) 146,883 Accrued income taxes (1,473) (488) ---------- ---------- $(363,836) $ (72,907) ========== ==========
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 (Dollars in thousands, excluding share data) 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 footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, 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 2, 1999 as well as its results of operations and cash flows for the periods ended October 2, 1999 and October 3, 1998, see Note 9. 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 2, 1999. Start-Up Costs: In the fourth quarter of fiscal 1998, retroactive to the beginning of fiscal 1998, the Company early adopted the provisions of SOP 98-5 requiring that pre-operating costs relating to the start-up of new manufacturing facilities, product lines and businesses be expensed as incurred. The Company recognized $46,250, after taxes, as the cumulative effect of a change in accounting to reflect the new accounting and write-off the balance of unamortized deferred start-up costs as of the beginning of 1998. In addition, the Company recognized in 1998 earnings for the three- and nine- month periods ended October 3, 1998 approximately $14,473 and $37,058, before taxes, respectively, related to 1998 costs that would have been deferred under the Company's start-up accounting policy prior to the adoption of SOP 98-5. Prior to the early adoption of SOP 98-5, start-up costs were deferred and amortized using the straight line method, principally over five years. Adjustments, Reclassifications and Revisions: As noted above, the Company early adopted SOP 98-5 in fiscal 1998. In connection with the adoption of the new accounting standard, an extensive effort was undertaken to identify all start-up related production and inefficiency costs that had previously been deferred. Over the last nine years, the Company has opened or expanded 10 manufacturing facilities. In addition, to support anticipated future growth, the Company opened 2 new manufacturing facilities during 1998 for a total of 12 new facilities. This resulted in the Company incurring plant inefficiencies and other start-up related costs resulting from high turnover and related training and other costs. Such start-up related production and inefficiency costs had been classified in other assets and inventories. Because certain such costs identified in this process related to prior period activities, such prior period consolidated financial statements have been revised to reflect additional costs of goods sold. The amount of the revision affecting the fiscal 1998 earnings for the three- and nine-month periods ended October 3, 1998 was $12,066 and $37,718, respectively. For additional information, see Notes 1 and 18 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. Certain amounts for prior periods have been reclassified to be comparable with the current period presentation. 5 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, excluding share data) Note 2 - Equity As of October 2, 1999 and January 2, 1999, Class A common stock outstanding was 55,590,745 shares, net of 9,864,050 shares held in treasury and 59,084,934 shares, net of 6,087,674 shares held in treasury, respectively. On March 1, 1999, the Board of Directors authorized the repurchase of an additional 10.0 million shares of the Company's common stock to supplement its previously authorized 12.42 million share stock repurchase program. During the nine months ended October 2, 1999, the Company repurchased 1,497,202 shares under equity option arrangements at a cost of approximately $52,919 and 2,287,700 shares in open market purchases at a cost of approximately $61,687. A total of approximately 9.6 million shares have been repurchased under the current authorization of 22.42 million shares leaving approximately 12.8 million shares available to repurchase. In May 1999, the Company's Board of Directors authorized the issuance of 190,680 shares of restricted stock to certain employees, including officers and directors of the Company. The restricted shares vest ratably over four years and will be fully vested in May 2003. The fair market value of the restricted shares was approximately $5.4 million at the date of grant. The Company recognizes compensation expense equal to the fair value of the restricted shares on the date of grant over the vesting period. On August 19, 1999, the Board of Directors of the Company adopted a Rights Agreement (the "Agreement"). Under the terms of the Agreement, the Company declared a dividend distribution of one Right for each outstanding share of common stock of the Company to stockholders of record on August 31, 1999. Each Right entitles the holder to purchase from the Company a unit consisting of one one-thousandth of a Series A Junior Participating Preferred Stock, par value $.01 per share at a purchase price of $100 per unit. The Rights only become exercisable, if not redeemed, ten days after a person or group has acquired 15% or more of the Company's common stock or the announcement of a tender offer that would result in a person or group acquiring 15% or more of the Company's common stock. The Agreement expires on August 31, 2009, unless earlier redeemed or extended by the Company. Note 3 - 1998 Restructuring and Special Charges In the fiscal 1998 fourth quarter, the Company recorded restructuring and other special charges related to costs to exit certain facilities and activities, including charges related to inventory write-downs and valuations, asset impairments and employee termination and severance benefits. Through October 2, 1999, the reduction in force has been completed and 10 retail outlet stores were closed.
Balance at Amounts Balance at Jan. 2, 1999 Utilized Oct. 2, 1999 ------------- ---------- ------------- Costs to exit facilities and activities $ 3,010 $ 3,010 $ -- Employee termination and severance 3,590 2,957 633 ------------- ---------- ------------- $ 6,600 $ 5,967 $ 633 ============= ========== =============
6 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, excluding share data) Note 4 - Investments During the first quarter of fiscal 1999, the Company received shares of common stock in exchange for the early termination of a non-compete agreement with the former principal stockholder of its Designer Holdings subsidiary. The fair market value of the common stock on the date of issuance was $875, which was recorded as a reduction of goodwill associated with the Designer Holdings acquisition. During 1998 and 1999, the Company invested $7,575 to acquire an interest in Interworld Corporation, a leading provider of E-Commerce software systems and other applications for electronic commerce sites. These investments are classified as available-for-sale securities and recorded at fair value based on quoted market prices. Unrealized gains at October 2, 1999 of $15,629 (net of deferred income taxes of $8,791), were included as a separate component of stockholder's equity. The Company did not have any marketable securities at January 2, 1999. Marketable securities are included in other current assets at October 2, 1999. Note 5 - Acquisitions In September 1999, the Company acquired the outstanding common stock of A.B.S. Clothing Collection, Inc. ("ABS"). ABS is a leading contemporary designer of casual sportswear and dresses sold through better department and specialty stores. The purchase price consisted of a cash payment of $29,500, shares of the Company's common stock with a fair market value of $2,200 and a deferred cash payment of $22,800. The acquisition was accounted for as a purchase. The preliminary allocation of the purchase price to the fair market value of assets acquired is summarized as follows: Accounts receivable $ 1,255 Inventories 4,469 Property and equipment 1,086 Intangible and other assets 52,154 Accounts payable and accrued expenses (4,341) Other liabilities (123) -------- $54,500 ========
The final allocation of the purchase price to acquired tangible and intangible assets, based on an independent appraisal, will be completed by the end of fiscal 1999. The acquisition did not have a material pro-forma impact on 1999 consolidated earnings. Note 6 - Summarized Financial Information - Designer Holdings The following is summarized unaudited financial information of the Company's wholly-owned subsidiary, Designer Holdings, as of October 2, 1999 and January 2, 1999 and for the nine months ended October 2, 1999 and October 3, 1998, respectively. Designer Holdings, acquired by the Company in the fourth quarter of 1997, develops, manufactures and markets designer jeanswear and 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. 7 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, excluding share data)
Balance sheet summary: October 2, January 2, 1999 1999 ---------------- --------------- Current assets......................................... $ 207,650 $ 115,328 Noncurrent assets...................................... 544,831 589,191 Current liabilities.................................... 138,755 140,000 Noncurrent liabilities................................. 56,767 58,067 Redeemable preferred securities........................ 102,637 101,836 Stockholder's equity................................... 454,322 404,616 Income statement summary: Nine months ended October 2, October 3, 1999(a) 1998(a) ---------------- --------------- Net revenues........................................... $ 413,505 $ 332,806 Cost of goods sold..................................... 264,253 223,449 Net income............................................. 49,706 33,061
(a) Excludes net revenues of $61,100 and $59,300 for the nine months of fiscal 1999 and 1998 respectively, reported as Retail Outlet Store 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. Note 7 - Cash Flow Information
Nine months ended October 2, October 3, Cash paid (received) for: 1999 1998 Interest, including $2,455 and $962 capitalized in --------------- --------------- fiscal 1999 and 1998, respectively $ 54,679 $ 42,224 Income taxes, net of refunds received $ 5,491 $ (7,571)
8 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, excluding share data) Note 8 - Earnings per Share
Three Months Ended Nine Months Ended --------------------- ------------------------ October 2, October 3, October 2, October 3, 1999 1998 1999 1998 ----------- ---------- ----------- ----------- Numerator for basic and diluted earnings (loss) per share: Income before cumulative effect of change in accounting $ 44,379 $ 26,944 $ 95,117 $ 45,972 Cumulative effect of change in accounting -- -- -- (46,250) -------- -------- -------- ---------- Net income (loss) $ 44,379 $ 26,944 $ 95,117 $ (278) ======== ======== ======== ========== Denominator for basic earnings per share -- weighted average shares 55,154 61,830 56,463 62,197 -------- -------- -------- ---------- Effect of dilutive securities: Employee stock options 169 521 316 1,019 Restricted stock shares 470 507 468 481 Shares under put option contracts -- 442 250 110 -------- -------- -------- ---------- Dilutive potential common shares 639 1,470 1,034 1,610 -------- -------- -------- ---------- Denominator for diluted earnings per share -- weighted average adjusted shares 55,793 63,300 57,497 63,807 ======== ======== ======== ========== Basic earnings per share before cumulative effect of change in accounting $ 0.80 $ 0.44 $ 1.68 $ 0.74 ======== ======== ======== ========== Diluted earnings per share before cumulative effect of change in accounting $ 0.80 $ 0.43 $ 1.65 $ 0.72 ======== ======== ======== ==========
Options to purchase shares of common stock that were outstanding during the three- and nine-month periods of fiscal 1999 but were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares were approximately 13.2 million and 7.5 million, respectively. For the three- and nine-month periods of fiscal 1998, such options to purchase common stock excluded from the computation of diluted earnings per share were approximately 0.3 million. 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 for any of the periods presented as the impact would have been antidilutive. Note 9 - Business Segments The Company designs, manufactures and markets apparel within the Intimate Apparel, Sportswear and Accessories markets and operates a Retail Outlet Store Division for the disposition of excess and irregular inventory. Information by business segment is set forth below: 9 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, excluding share data)
Sportswear Retail Intimate and Outlet Apparel Accessories Stores Total --------------- -------------- -------------- --------------- Three months ended October 2, 1999 Net Revenues $ 250,072 $ 289,857 $ 39,683 $ 579,612 Adjusted EBITDA 60,000 57,200 5,700 122,900 Three months ended October 3, 1998: Net Revenues $ 245,138 $ 262,455 $ 36,532 $ 544,125 Adjusted EBITDA 59,500 45,400 5,700 110,600 Nine months ended October 2, 1999: Net Revenues $ 682,687 $ 729,029 $ 96,736 $ 1,508,452 Adjusted EBITDA 156,300 133,300 10,200 299,800 Nine months ended October 3, 1998: Net Revenues $ 683,643 $ 623,993 $ 94,571 $ 1,402,207 Adjusted EBITDA 153,000 101,800 11,200 266,000
On an ongoing basis, the Company reviews and updates the methodology reflected in the cost accounting processes throughout the Company including its manufacturing units. During the third quarter of fiscal 1999, this review resulted in a refinement of the calculation of certain inventoriable costs in the Intimate Apparel division which resulted in a reduction of cost of sales of approximately $6.0 million, net of tax. This refinement is not expected to be material in the 1999 fiscal year. A reconciliation of total segment Adjusted EBITDA to total consolidated income before taxes and cumulative effect of a change in accounting principle for the three- and nine- months ended October 2, 1999 and October 3, 1998, respectively, is as follows:
Three months ended Nine Months Ended ---------------------- ---------------------- October 2, October 3, October 2, October 3, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Total adusted EBITDA for reportable segments $122,900 $110,600 $299,800 $266,000 General corporate expenses not allocated 17,053 16,301 50,678 43,095 Depreciation and amortization 15,636 11,758 44,121 33,219 Effect of early adoption of SOP 98-5 and other start-up related production and inefficiency costs -- 26,539 -- 74,776 Interest expense 20,869 15,077 56,381 43,856 -------- -------- -------- -------- Income before income taxes and cumulative effect of a change in accounting policy $ 69,342 $ 40,925 $148,620 $ 71,054 ======== ======== ======== ========
10 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, excluding share data) Note 10 - Comprehensive Income
Three Months Ended Nine Months Ended ----------------------------- ------------------------------ October 2, October 3, October 2, October 3, 1999 1998 1999 1998 -------------- -------------- -------------- --------------- Net income (loss) $ 44,379 $ 26,944 $ 95,117 $ (278) -------------- -------------- -------------- --------------- Other comprehensive income (loss): Foreign currency translation adjustments 1,190 (7,118) 3,944 (2,882) Unrealized holding gains (losses) 23,808 - 24,420 - Tax provision on unrealized holding gains (8,571) - (8,791) - -------------- -------------- -------------- --------------- Total other comprehensive income (loss) 16,427 (7,118) 19,573 (2,882) -------------- -------------- -------------- --------------- Comprehensive income (loss) $ 60,806 $ 19,826 $ 114,690 $ (3,160) ============== ============== ============== ===============
The components of accumulated other comprehensive income (loss) as of October 2, 1999 and January 2, 1999 are as follows:
October 2, January 2, 1999 1999 ---------------- --------------- Foreign currency translation adjustments $ (11,759) $ (15,703) Unrealized holding gains, net 15,629 -- ---------------- --------------- Total accumulated other comprehensive income (loss) $ 3,870 $ (15,703) =============== ================
Note 11 - Subsequent Event On October 10, 1999 the Company announced that it made a cash offer to acquire all of the outstanding common stock of Authentic Fitness Corporation in a negotiated transaction for $20.50 per share in cash plus the assumption of Authentic Fitness' debt. On November 15, 1999 the Company and Authentic Fitness Corporation entered into a definitive merger agreement for Warnaco's acquisition, subject to certain conditions, of all of the common stock of Authentic Fitness for $20.80 per share in cash plus the assumption of Authentic Fitness' debt. In connection with the proposed transaction, the Company has obtained financing commitments from several financial institutions in the amount of $600,000. 11 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, excluding share data) Item 2. Management's Discussion and Analysis of Results of Operations And Financial Condition. Results of Operations. STATEMENT OF OPERATIONS (SELECTED DATA)
Three Months Ended Nine Months Ended ------------------------ -------------------------- October 2, October 3, October 2, October 3, 1999 1998 1999 1998 ------------- ----------- ------------ ------------- (Amounts in millions of dollars) (Unaudited) Net revenues $ 579.6 $ 544.1 $ 1,508.4 $ 1,402.2 Cost of goods sold 378.1 383.7 979.6 990.8 -------- ------- --------- --------- Gross profit 201.5 160.4 528.8 411.4 %of net revenues 34.8% 29.5% 35.1% 29.3% Selling, general and administrative expenses 111.3 104.4 323.8 296.5 -------- ------- --------- --------- Income before interest, income taxes and cumulative effect of change in accounting principle 90.2 56.0 205.0 114.9 %of net revenues 15.6% 10.3% 13.6% 8.2% Interest expense 20.9 15.1 56.4 43.9 Provision for income taxes 24.9 14.0 53.5 25.1 -------- ------- --------- --------- Income before cumulative effect of change in accounting principle $ 44.4 $ 26.9 $ 95.1 $ 45.9 ======== ======= ========= =========
Net revenues in the third quarter of fiscal 1999 were $579.6 million, $35.5 million or 6.5% higher than the $544.1 million recorded in the third quarter of fiscal 1998. For the nine month period, net revenues increased $106.2 million or 7.6% over the comparable 1998 period. Net revenues in the Sportswear and Accessories division increased $27.4 million or 10.4% to $289.9 million in the third quarter of fiscal 1999 compared with $262.5 million in the third quarter of fiscal 1998. The improvement was principally due to strong shipments of Calvin Klein jeans coupled with the September 1999 acquisition of ABS by Allen Schwartz. Partially offsetting these increases were lower Chaps sales, primarily due to the loss of two customers accounting for over $6.0 million of 1998 third quarter sales. For the nine month period, net revenues increased $105.0 million or 16.8% to $729.0 million compared with $624.0 million in the comparable 1998 period. The improvement was due to stronger Calvin Klein jeanswear and kidswear shipments. Intimate Apparel division net revenues increased $4.9 million or 2.0% to $250.1 million in the third quarter of fiscal 1999 from $245.1 million in the third quarter of fiscal 1998. Net revenues in the Calvin Klein Underwear segment improved $1.8 million or 1.9% to $98.8 million in the third quarter. The division reported strong growth in the Sleepwear segment, due to the addition of several new accounts, and in the Shapewear segment, where the Weight Watchers brand was launched during the second quarter of 1999. Partially offsetting these improvements was a decrease in the core Warner's/Olga businesses, reflecting a lower level of off-price sales, the discontinuation of certain product lines in the last quarter of fiscal 1998 and the loss of three major customers. 12 International sales accounted for approximately 26% of total divisional net sales in the third quarter of fiscal 1999 compared with 33% in the 1998 third quarter. For the nine month period, net revenues declined $1.0 million or 0.1% to $682.7 million compared with $683.6 million in the comparable 1998 period, with the Warner's and Olga brands affected by the loss of three major customers as well as discontinued product lines favorably offset by strong growth in the Calvin Klein Underwear and Bodyslimmers and Shapewear segments. The Retail Outlet Store division net revenues increased $3.2 million or 8.6% to $39.7 million in the third quarter of fiscal 1999 compared with fiscal 1998 net revenues of $36.5 million. For the nine month period, net revenues increased $2.2 million or 2.3% to $96. 7 million. During 1999, the Company closed 10 underperforming stores in connection with the 1998 restructuring. Gross profit increased $41.1 million or 25.6% to $201.5 million in the third quarter of fiscal 1999 compared with $160.4 million in the third quarter of fiscal 1998. Gross margin was 34.8% in the third quarter of fiscal 1999 compared with 29.5% in the third quarter of fiscal 1998. For the nine month period, gross profit increased $117.4 million or 28.5% to $528.8 million compared with $411.4 million in the comparable 1998 period. Gross margins improved to 35.1% in the 1999 nine month period compared with 29.3% in 1998. The improvement in gross margin is a result of a decline in start-up related costs, a decrease in off-price sales in the Intimate Apparel division and lower costs in both the Intimate Apparel and Sportswear and Accessories divisions resulting from the Company's 1998 restructuring where the Company realigned factories, consolidated facilities and reduced headcount, resulting in a more favorable cost structure and refinement in the calculation of certain inventoriable costs. See Note 9 - Business Segments. Selling, general and administrative expenses increased $6.9 million or 6.6% to $111.3 million (19.2% of net revenues) in the third quarter of fiscal 1999 compared with $104.4 million (19.2% of net revenues) in the third quarter of fiscal 1998. The increase in selling, general and administrative expenses primarily reflects higher corporate expenses related to information systems and Year 2000 remediation expenses. For the nine month period, selling, general and administrative expenses increased $27.3 million or 9.2% to $323.8 million (21.5% of net revenues) compared with $296.5 million ( 21.1% of net revenues) in the comparable 1998 period. The increase is the result of higher corporate expenses related to information systems and Year 2000 remediation expenses and increased marketing costs in the Sportswear and Accessories division. Interest expense increased $5.8 million to $20.9 million in the third quarter of fiscal 1999 compared with $15.1 million in the third quarter of fiscal 1998. For the nine month period, interest expense was up $12.5 million over the comparable 1998 period to $56.4 million. The increase reflects the funding of the Company's recent acquisitions and stock buyback program. The provision for income taxes for the third quarter and year to date period of fiscal 1999 reflects an estimated full year effective tax rate of 36.0%. Net income for the third quarter of fiscal 1999 was $ 44.4 million compared with net income of $26.9 million in the third quarter of fiscal 1998. For the nine month period, net income before the cumulative effect of a change in accounting principle in the first quarter of 1998 grew by $49.2 million to $95.1 million. The increase in net income reflects the higher net revenues and associated 13 gross profit mentioned above. Capital Resources and Liquidity. The Company's liquidity requirements arise primarily from its debt service requirements and the funding of its 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 third 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 nine months of the fiscal year. Cash used in operations was $(168.3) million in the first nine months of fiscal 1999 compared with cash provided by operations of $39.2 million in the comparable period of fiscal 1998. The increase in cash used by operating activities reflects higher finished goods inventories, primarily in Intimate Apparel, to allow for a better order match rate in the last quarter of 1999 and to allow for the planned delay in production due to the start-up of two manufacturing facilities in Mexico. The increase in cash used by operating activities also reflects the favorable trade payment terms the Company negotiated in the third quarter of fiscal 1998. Partially offsetting the increase used for working capital was a higher level of net income compared with 1998. Cash used in investing activities was $(122.9) million for the first nine months of fiscal 1999 compared with $(235.9) million in the first nine months of fiscal 1998. Capital expenditures were $66.2 million in the first nine months of fiscal 1999 compared with $103.7 million in the comparable 1998 period. Fiscal 1999 included amounts for information systems implementations (net of reimbursements received of $24.0 million) and store fixture programs. During the third quarter of fiscal 1999, the Company acquired the outstanding common stock of A.B.S. Clothing Collection, Inc. for $54.5 million. The purchase price consisted of $31.7 million in cash and Company stock with the balance of $22.8 million deferred and payable quarterly based on a percentage of sales. During the second quarter of fiscal 1999, the Company acquired certain inventory along with the Canadian license for Chaps by Ralph Lauren for $10.2 million. Cash provided from financing activities was $291.6 million in the first nine months of fiscal 1999 compared with $195.8 million in the first nine months of fiscal 1998. The increase in the Company's revolving credit balance during the first nine months of the fiscal year of $433.1 million was higher than the $293.9 million increase in the first nine months of fiscal 1998 due to the increase in cash used by operating activities as previously discussed. The Company paid approximately $117.2 million for the repurchase of shares in the first nine months of fiscal 1999 compared with $105.6 million in the first nine months of fiscal 1998. The Company repaid $7.8 million of long term debt in the first nine months of fiscal 1999 compared with $5.7 million in the first nine months of fiscal 1998. 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 the working capital, share repurchase 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. 14 In October 1999, the Company announced that it made a cash offer to acquire all of the outstanding common stock of Authentic Fitness Corporation in a negotiated transaction for $20.50 per share in cash plus the assumption of Authentic Fitness' debt. On November 15, 1999 the Company and Authentic Fitness Corporation entered into a definitive merger agreement for Warnaco's acquisition, subject to certain conditions, of all of the common stock of Authentic Fitness for $20.80 per share in cash plus the assumption of Authentic Fitness' debt. In connection with the proposed transaction, the Company has obtained financing commitments from several financial institutions in the amount of $600.0 million. Year 2000 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 were to achieve competitive benefits for the Company, as well as assuring that all information systems meet Year 2000 compliance. Full implementation of this program was accomplished as of the beginning of October 1999 for all of the Company's divisions. As a part of its Year 2000 compliance program, the Company has contacted key suppliers and vendors in order to determine the status of such third parties Year 2000 remediation plans. Evaluation of suppliers and vendors readiness is currently on-going. The Company recognizes the need for Year 2000 contingency plans in the event that the remediation efforts of its vendors, suppliers and governmental/regulatory agencies are not timely completed. This process was begun in fiscal 1998 and is essentially complete at this time. 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 processes described above will be fully effective. The failure to identify Year 2000 problems or, the failure of key third 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. This Year 2000 update should be read in conjunction with the Company's disclosure under Statement Regarding Forward-looking Disclosures. New Accounting Standards In June 1998, the FASB issued a standard on accounting for derivative instruments and hedging activities. This standard, which is effective for the Company's fiscal year beginning January 3, 2001, 15 establishes accounting and reporting standards for derivative instruments and hedging activities and 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, based on current activities, that the implementation of this standard will not have a material impact on the Company's consolidated financial position, liquidity, cash flows or results of operations. 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. 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 speculation or for trading purposes. Interest Rate Risk The Company is subject to market risk from exposure to changes in interest rates based primarily on its financing activities. The Company enters into interest rate swap agreements to reduce the impact of interest rate fluctuations on cash flow and interest expense. As of October 2, 1999, approximately $610.0 million of interest-rate sensitive obligations were swapped to achieve a fixed rate of 5.99%, limiting the Company's risk to any future shift in interest rates. As of October 2, 1999, the net fair value asset of all financial instruments (primarily interest rate swap agreements) with exposure to interest rate risk was approximately $12.2 million. The potential decrease in fair value resulting from a hypothetical 10% shift in interest rates would be approximately $14.6 million. Foreign Exchange Risk The Company has foreign currency exposures related to buying, selling and financing in currencies other than the functional currency in which it operates. These exposures are primarily concentrated in the Canadian dollar, Mexican peso, Hong Kong dollar, British pound and the Euro. The Company enters into foreign currency forward and option contracts to mitigate the risk 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. As of October 2, 1999, the net fair value asset of financial instruments with exposure to foreign currency risk, which included primarily 16 currency option contracts, was $0.1 million. The potential decrease in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be limited to $0.1 million, the fair value of these options. 17 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 4.5 Rights Agreement, dated as of August 19, 1999, between the Warnaco Group, Inc. and the Bank of New York (incorporated herein by reference to Exhibit 4 to the Company's Form 8-K filed August 20, 1999) 27.1 Financial Data Schedule (b) Reports on Form 8-K. A Report on Form 8-K was filed on August 19, 1999 in connection with the execution of the Rights Agreement between the Registrant and the Bank of New York, as Rights Agent. 18 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 16, 1999 By: /s/ WILLIAM S. FINKELSTEIN --------------------------------- William S. Finkelstein Director, Senior Vice President and Chief Financial Officer Principal Financial and Accounting Officer Date: November 16, 1999 By: /s/ STANLEY P. SILVERSTEIN --------------------------------- Stanley P. Silverstein Vice President, General Counsel and Secretary STATEMENT OF DIFFERENCES The registered trademark symbol shall be expressed as ..................... 'r' 19 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 NINE MONTHS ENDED OCTOBER 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-01-2000 JAN-03-1999 OCT-02-1999 13,857 0 345,423 (21,044) 630,305 1,045,192 407,958 (145,713) 2,186,100 740,855 744,237 102,637 0 655 569,338 2,186,100 1,508,452 1,508,452 979,612 1,303,451 0 0 56,381 148,620 53,503 95,117 0 0 0 95,117 1.68 1.65
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