<PAGE>
<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 5, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
COMMISSION FILE NUMBER 1-4715
------------------------------
THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(212) 661-1300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
THE WARNACO GROUP, INC.
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: VICE PRESIDENT AND GENERAL COUNSEL
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
The number of shares outstanding of the registrant's Class A Common Stock
as of November 5, 1996 is as follows: 52,031,762.
________________________________________________________________________________
<PAGE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
OCTOBER 5, JANUARY 6,
1996 1996
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash (restricted $100 and $3,939, respectively)............................ $ 16,828 $ 6,162
Accounts receivable -- net................................................. 228,699 156,607
Inventories:
Finished goods........................................................ 250,923 214,252
Work in process....................................................... 65,326 77,940
Raw materials......................................................... 82,653 64,274
--------------- ---------------
Total inventories................................................ 398,902 356,466
Assets held for sale....................................................... 12,078 --
Other current assets....................................................... 30,039 23,148
--------------- ---------------
Total current assets............................................. 684,466 542,383
Property, plant and equipment, (net of accumulated depreciation of $95,294 and
$81,051, respectively)........................................................ 109,426 106,325
Other assets:
Intangibles and other assets -- net............................................. 356,457 290,421
--------------- ---------------
$ 1,152,429 $ 939,129
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility.................................. $ 191,361 $ 51,033
Borrowing under foreign credit facilities.................................. 3,793 --
Current portion of long-term debt.......................................... 34,025 26,700
Accounts payable and accrued liabilities................................... 196,703 149,950
Accrued income taxes....................................................... 4,378 5,231
--------------- ---------------
Total current liabilities............................................. 430,260 232,914
--------------- ---------------
Long-term debt.................................................................. 252,116 194,301
Other long-term liabilities..................................................... 11,736 11,613
Stockholders' equity:
Preferred Stock; $.01 par value............................................ -- --
Common Stock; $.01 par value............................................... 531 521
Capital in excess of par value............................................. 575,198 567,965
Cumulative translation adjustment.......................................... (3,748) (3,745)
Accumulated deficit........................................................ (92,238) (46,896)
Treasury stock, at cost.................................................... (5,000) (5,000)
Notes receivable for common stock issued and unearned stock compensation... (16,426) (12,544)
--------------- ---------------
Total stockholders' equity............................................ 458,317 500,301
--------------- ---------------
$ 1,152,429 $ 939,129
--------------- ---------------
--------------- ---------------
</TABLE>
This statement should be read in conjunction with the accompanying Notes to
Consolidated Condensed Financial Statements.
2
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
OCTOBER 5, OCTOBER 7, OCTOBER 5, OCTOBER 7,
1996 1995 1996 1995
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................................................ $292,010 $239,569 $721,295 $645,120
Cost of goods sold -- Note 4................................ 201,636(a) 154,941 510,742(a) 425,449
---------- ---------- ---------- ----------
Gross profit................................................ 90,374 84,628 210,553 219,671
Selling, general and administrative expenses................ 52,496 45,432 135,565 130,567
Non-recurring items -- Note 4............................... 19,413 -- 100,621 --
---------- ---------- ---------- ----------
Income (loss) before interest and income taxes.............. 18,465 39,196 (25,633) 89,104
Interest expense............................................ 8,936 10,017 23,852 27,852
---------- ---------- ---------- ----------
Income (Loss) before provision (benefit) for income taxes... 9,529 29,179 (49,485) 61,252
Provision (benefit) for income taxes........................ 3,718 11,088 (15,031) 23,276
---------- ---------- ---------- ----------
Net income (loss)........................................... $ 5,811 $ 18,091 $(34,454) $ 37,976
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares of common stock
outstanding............................................... 53,357 44,529 53,489 42,642
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per share................................. $ 0.11 $ 0.41 $ (0.64) $ 0.89
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------
(a) Includes $11.7 million and $38.0 million of non-recurring items. See Note 4
of Notes to Consolidated Condensed Financial Statements.
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
OCTOBER 5, OCTOBER 7,
1996 1995
--------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flow from operations:
Net income (loss)................................................................. $ (34,454) $ 37,976
Non cash items included in net income (loss):
Depreciation and amortization................................................ 20,107 14,412
Other........................................................................ 1,813 1,236
Increase in deferred tax assets -- net....................................... (15,031) --
Non cash portion of non-recurring items...................................... 95,688 --
Income taxes paid................................................................. (2,335) (2,584)
Other changes in operating accounts............................................... (132,760) (169,231)
Other............................................................................. 240 5,184
--------- -----------
Cash used in operations................................................................ (66,732) (113,007)
Cash flow from investing activities:
Net proceeds from sale of fixed assets............................................ 69 5,932
Purchase of property, plant & equipment........................................... (20,572) (18,142)
Payment for purchase of acquired assets........................................... (87,000) (11,200)
Increase in intangible and other assets........................................... (14,168) --
--------- -----------
Cash used in investing activities...................................................... (121,671) (23,410)
Cash flow from financing activities:
Borrowing under revolving credit facilities....................................... 144,121 (70,980)
Net proceeds from the sale of Class A common stock and repayment of notes
receivable from employees........................................................ 1,026 224,339
Proceeds from other financing..................................................... 71,000 --
Repayments of debt................................................................ (5,860) (14,792)
Dividends paid.................................................................... (10,888) (2,922)
Increase in deferred financing costs.............................................. (330) (92)
--------- -----------
Cash provided from financing activities................................................ 199,069 135,553
--------- -----------
Increase (decrease) in cash............................................................ 10,666 (864)
Cash at beginning of period............................................................ 6,162 3,791
--------- -----------
Cash at end of period.................................................................. $ 16,828 $ 2,297
--------- -----------
--------- -----------
Other changes in operating accounts:
Accounts receivable............................................................... $ (64,146) $ (46,129)
Inventories....................................................................... (19,268) (100,735)
Other current assets.............................................................. (2,570) (11,805)
Accounts payable and accrued liabilities.......................................... (48,258) (12,918)
Accrued income taxes.............................................................. 1,482 2,356
--------- -----------
$(132,760) $(169,231)
--------- -----------
--------- -----------
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim
financial information. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company,
the accompanying consolidated condensed financial statements contain all the
adjustments (all of which were of a normal recurring nature, except as noted
in Notes 3 and 4 below) necessary to present fairly the financial position of
the Company as of October 5, 1996 as well as its results of operations and
cash flows for the periods ended October 5, 1996 and October 7, 1995.
Operating results for interim periods may not be indicative of results for
the full fiscal year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 6, 1996.
2. Certain amounts for prior periods have been reclassified to be comparable
with the current period presentation.
3. Acquisitions
On February 9, 1996, the Company acquired substantially all of the assets
(including certain subsidiaries) comprising the GJM group of companies
('GJM') from Cygne Designs Inc. GJM is a private label manufacturer of
women's lingerie and sleepwear. The purchase price consisted of a cash
payment of $12,500,000.
In the third quarter of 1996 the Company completed the acquisition of
approximately 88% of the assets or stock in the companies comprising the
Lejaby/Euralis group of companies ('Lejaby'), a leading European intimate
apparel manufacturer, for approximately $68 million. Funds to consummate the
transaction were provided by a member of the Company's bank credit group. The
terms of the bank loans are substantially the same as the terms of the
Company's existing credit agreements and include a term loan facility of 370
million French Francs and revolving loan facilities of 150 million French
Francs. The term and revolving loans mature on December 31, 2001. Borrowings
under the term loan and revolving loan facilities bear interest at LIBOR plus
.45%. The term loan will be repaid in annual installments beginning on July
1, 1997 with a final installment on December 31, 2001.
On July 19, 1996, the Company acquired Body Slimmers, Inc. by Nancy Ganz
('Body Slimmers'), for approximately $6.5 million. This company is a designer
and marketer of body slimming undergarments for women.
In the aggregate, the impact of a pro-forma presentation combining these
acquisitions would not be material to the results of operations of the
Company for fiscal 1995 or fiscal 1996.
4. Non-Recurring Items
The acquisition of the GJM businesses in February, 1996 significantly added
to the Company's low cost manufacturing capacity, and resulted in an
immediate expansion of product lines. The Company subsequently undertook
a strategic review of its businesses and manufacturing facilities. The
acquisitions of Body Slimmers and Lejaby have also been considered. As a
result of this review, the Company has, to date,
5
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
taken the following steps (described below) which have resulted in total
non-recurring charges in the second and third quarters of fiscal 1996 as
summarized below (in millions):
<TABLE>
<CAPTION>
SECOND THIRD
QUARTER QUARTER TOTAL
------- ------- ------
<S> <C> <C> <C>
Loss related to the sale of the Hathaway
business................................... $48.4 $ 7.3 $ 55.7
Charge for the consolidation and re-alignment
of the intimate apparel division........... 46.4 17.1 63.5
Other items, including merger termination
costs of $3 million........................ 12.6 6.8 19.4
------- ------- ------
107.4 31.2 138.6
Less: income tax benefits.................... 37.6 12.2 49.8
------- ------- ------
$69.8 $19.0 $ 88.8
------- ------- ------
------- ------- ------
</TABLE>
The losses reported above include inventory markdowns directly attributable
to the decision to exit the Hathaway business and consolidation and
re-alignment of the intimate apparel division. It is difficult to distinguish
inventory markdowns attributable to the decision to exit or realign these
activities from external market conditions. Accordingly, inventory markdowns,
operating losses of Hathaway through October 5, 1996 (resulting from
inventory liquidations at markdown prices) and settlement of insurance claims
related to the 1994 California earthquake and other claims receivable
together aggregating $38.0 million are reflected in the Consolidated
Condensed Statement of Operations within cost of goods sold. A description of
the non-recurring items follows.
Exit from the Hathaway Business
On May 6, 1996, after a careful evaluation of the Company's Hathaway men's
dress shirt operations, the Company announced that it had decided to cease
manufacturing and marketing this brand. On November 12, 1996 the Company sold
certain assets comprising the Hathaway dress shirt manufacturing operations
in Waterville, Maine and Prescott, Ontario including certain inventory,
property and equipment and other assets (the 'Hathaway Assets').
The Hathaway Assets and certain assets retained by the Company have been
classified as 'Assets held for sale' in the Consolidated Condensed Balance
Sheet as of October 5, 1996, at an amount equal to the estimated fair
value of the assets. The Company's Puerto Rico facility (not included in
the sale) ended production of Hathaway products in 1995 and necessary legal
filings to cease operations in the leased Puerto Rico plant were made in
May, 1996.
Net revenues of the Hathaway business for the nine months ended October 5,
1996 and October 7, 1995 were $24.2 million and $29.8 million, respectively.
Results of operations for the nine months ended October 5, 1996 and October
7, 1995 were a pre-tax loss of $9.4 million and $2.5 million, respectively.
6
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the losses recorded in fiscal 1996 related to the Hathaway
business are summarized as follows (in millions):
<TABLE>
<CAPTION>
SECOND THIRD
QUARTER QUARTER TOTAL
------- ------- -----
<S> <C> <C> <C>
Write-down of assets to fair value (including
$23.0 million of intangible assets)......... $ 43.7 $ 1.2 $44.9
Severance and other employee costs............ 0.7 (0.3) 0.4
Lease termination costs....................... 0.3 -- 0.3
Legal and professional fees................... 1.0 (0.3) 0.7
------- ------- -----
45.7 0.6 46.3
Less: income tax benefit...................... (16.0 ) (0.6) (16.6)
------- ------- -----
Total.................................... 29.7 -- 29.7
Add: Losses incurred through October 5,
1996........................................ 2.7 6.7 9.4
Less: Income tax benefits..................... (1.0 ) (1.8) (2.8)
------- ------- -----
Total loss related to the Hathaway
business business through October 5,
1996................................... $ 31.4 $ 4.9 $36.3
------- ------- -----
------- ------- -----
</TABLE>
Through October 5, 1996, the Company had expended approximately $6.9 million
of net cash related to the Hathaway disposition. The Company expects that the
estimated cash proceeds from the disposition of the assets of the Hathaway
business of approximately $12.0 million will more than offset the estimated
remaining cash payments of approximately $1.6 million. In addition, the
Company's income tax payments will be reduced in future periods resulting in
additional cash savings. The Company does not expect to recognize any
additional charges related to exiting the Hathaway business.
Intimate Apparel Division Consolidation and Realignment
In April 1996, the Company announced the consolidation and realignment of
certain of its intimate apparel manufacturing, distribution, selling and
administrative functions and facilities in the United States and Europe. The
consolidation, substantially completed, and realignment has resulted in a
non-recurring charge in the second and third quarters of fiscal 1996 of $40.8
million, net of income tax benefits of $22.7 million. The closing of several
manufacturing facilities and consolidation of certain distribution operations
has resulted in the Company incurring certain integration costs in its
remaining manufacturing facilities to reconfigure product lines and retrain
existing personnel. The costs attendant to the realignment and retraining,
incurred in the second and third quarters of fiscal 1996 amounted to
approximately $15.9 million.
In order to maximize the cost savings and efficiencies made available through
the consolidation of facilities and the additional volumes contemplated as a
result of the Lejaby, GJM and Body Slimmers acquisitions, the Company has
re-evaluated the viability of all product lines and styles with potential
for greater returns. As a result, certain products and styles have been
discontinued to permit the investment of working capital in products and
styles with greater returns. The liquidation of these products, completed
in the second and third quarters of fiscal 1996 resulted in mark-down losses
included in cost of goods sold of approximately $18.1 million primarily in
the second quarter of fiscal 1996.
7
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the total intimate apparel division consolidation and
realignment charge follows (in millions):
<TABLE>
<CAPTION>
SECOND THIRD
QUARTER QUARTER TOTAL
------- ------- ------
<S> <C> <C> <C>
Write-down of fixed assets................... $ 3.7 $(1.6) $ 2.1
Lease termination costs...................... 6.4 3.4 9.8
Severance and other employee costs........... 14.3 3.3 17.6
Realignment of manufacturing facilities and
retraining costs........................... 4.4 11.5 15.9
Disposition and write-down of discontinued
inventory included in cost of good sold.... 17.6 0.5 18.1
------- ------- ------
Total charges........................... 46.4 17.1 63.5
Less: Income tax benefits.................... (16.2) (6.5) (22.7)
------- ------- ------
Net intimate apparel consolidation and
realignment charge.................... $30.2 $10.6 $ 40.8
------- ------- ------
------- ------- ------
</TABLE>
Total cash expense incurred through October 5, 1996 related to this charge
was $27.8 million partially offset by proceeds from the sales of certain
assets of approximately $11.0 million. The Company expects to expend
approximately $13.7 million of additional cash, primarily in the fourth
quarter of fiscal 1996, except for lease termination costs which will be
incurred over the next five years. Future cash outlays will be offset by
proceeds from the sales of assets and tax benefits realized resulting in a
cash savings to the Company. The remaining charges are non-cash in nature.
Other
The addition of the GJM manufacturing and administrative organization has
enabled the Company to begin manufacturing and direct sourcing certain
products which had been previously outsourced through a buying agent. This
will result in significant ongoing cost savings to the Company. The cost of
terminating the existing buying agency relationship was $3.0 million and is
included in non-recurring charges in the second quarter of fiscal 1996. The
Company has paid approximately $2.7 million of these costs through October 5,
1996 and expects to pay the remaining balance to the agent during the fourth
quarters of fiscal 1996.
The Company has recognized other opportunities for further cost savings by
consolidating certain administrative and sales functions in Europe following
the Lejaby acquisition. Actions taken in the second and third quarters,
primarily reductions in existing staff, resulted in a non-recurring charge of
$4.5 million in the second and third quarters of fiscal 1996, approximately
$2.4 million of which were incurred by October 5, 1996, the remaining charges
will be paid in the fourth quarter of fiscal 1996.
In order to achieve an early resolution of the insurance claims related to
the destruction of one of the Company's distribution centers as a result of
the 1994 California earthquake, the Company accepted a cash settlement offer
of $19 million and wrote-off the remaining receivable of $6.1 million in the
second quarter of fiscal 1996. The Company also settled certain other
accounts and claims for $2.7 million.
In June 1996, the Company announced its intent to merge with Authentic Fitness
Corporation. On July 25, 1996 the Company announced that the merger would not
take place as planned. The Company has incurred legal, accounting and
investment advisory fees in connection with the proposed merger. Such fees and
expenses of approximately $3.0 million were charged against income in the
third quarter of fiscal 1996.
5. In May 1996, the Company's Board of Directors authorized the issuance of
195,700 shares of restricted stock to certain employees, including certain
officers and directors of the Company. The restricted shares vest over four
years and will be fully vested in May 2000. The fair market value of the
restricted shares was approximately $5.4 million at the date of grant. The
Company will recognize compensation expense equal to the fair value of the
restricted shares over the vesting period.
8
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS (SELECTED DATA)
(AMOUNTS IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
OCTOBER 5, OCTOBER 7, OCTOBER 5, OCTOBER 7,
1996 1995 1996 1995
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.................................................... $292.0 $239.5 $721.3 $645.1
Cost of goods sold as reported.................................. 201.6 154.9 510.7 425.4
Non-recurring items............................................. (11.7) -- (37.9) --
---------- ---------- ---------- ----------
Gross profit before non-recurring items......................... 102.1 84.6 248.5 219.7
% of net revenues.......................................... 35.0% 35.3% 34.5% 34.1%
Selling, administrative and general expenses.................... 52.5 45.4 135.6 130.6
---------- ---------- ---------- ----------
Income before interest and income taxes and non-recurring
items......................................................... 49.6 39.2 113.1 89.1
% to net revenues.......................................... 17.0% 16.4% 15.7% 12.3%
Interest expense................................................ 8.9 10.0 23.9 27.8
Provision for income taxes...................................... 15.9 11.1 34.8 23.3
---------- ---------- ---------- ----------
Income before non-recurring items(1)............................ 24.8 18.1 54.4 38.0
Non-recurring items, net of income tax benefits................. (19.0) -- (88.8) --
---------- ---------- ---------- ----------
Net income (loss)............................................... $ 5.8 $ 18.1 $(34.5) $ 38.0
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------
(1) Net income before non-recurring items was $0.47 per share and $1.02 per
share for the three months and nine months ended October 5, 1996 compared to
$0.41 per share and $0.89 per share for the comparable fiscal 1995 periods.
STRATEGIC ACTIONS (See Note 4 of Notes to Consolidated Condensed Financial
Statements)
Following the acquisition of the GJM business in February, 1996 which
significantly added to the Company's low cost manufacturing capacity, in
addition to an immediate expansion of product lines, the Company undertook a
strategic review of its businesses and manufacturing facilities. The
acquisitions of Body Slimmers and Lejaby have also been considered. As a result
of this review, the Company has, to date, taken the following steps which have
resulted in a non-recurring charge in the second and third quarters of fiscal
1996 as summarized below (in millions):
<TABLE>
<CAPTION>
SECOND THIRD
QUARTER QUARTER TOTAL
------- ------- ------
<S> <C> <C> <C>
Loss related to the sale of the Hathaway business................ $ 48.4 $ 7.3 $ 55.7
Charge for the consolidation and realignment of the intimate
apparel division............................................... 46.4 17.1 63.5
Other items, including merger termination costs of
$3.0 million................................................... 12.6 6.8 19.4
------- ------- ------
107.4 31.2 138.6
Less: income tax benefits........................................ 37.6 12.2 49.8
------- ------- ------
$ 69.8 $19.0 $ 88.8
------- ------- ------
------- ------- ------
</TABLE>
9
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
EXIT FROM THE HATHAWAY BUSINESS
Following a comprehensive evaluation the Company's men's dress shirt
business, in April 1996, the Company decided to cease manufacturing and
marketing the Hathaway brand. In recent years the dress shirt business has
become increasingly price driven and, as a result, the Company's dress shirt
business has returned profit margins considerably below those of the Company's
core intimate apparel business. In addition, the dress shirt business requires
continuing investment, particularly in working capital, disproportionate to its
return. Accordingly, the Company elected to withdraw from the Hathaway dress
shirt business, freeing up funds for reinvestment in brands and businesses with
higher growth potential and greater returns.
On November 12, 1996 the Company completed the sale of certain assets of
the Hathaway dress shirt operation, including its Waterville, Maine and
Prescott, Ontario manufacturing facilities ('Hathaway Assets'). As a result, the
Company wrote down the assets related to its Hathaway operation to fair value
and reclassified the assets of the Hathaway business to be sold to the caption
'Assets held for sale' in the Consolidated Condensed Balance Sheet as of
October 5, 1996. The loss from the write-down of the Hathaway Assets to fair
value and losses incurred in the operation of the Hathaway business since the
Company announced its intent to exit this business of approximately $36.3
million net of income tax benefits of $19.4 million are included in the
Statement of Operations for fiscal 1996. The pre-tax loss includes the write
off of $23 million of Hathaway intangibles and goodwill.
INTIMATE APPAREL CONSOLIDATION AND REALIGNMENT
In April 1996, the Company announced the consolidation of certain intimate
apparel and other manufacturing, distribution and administrative operations in
the United States and Europe. The consolidation and realignment of the Intimate
Apparel Division was designed to reduce costs and improve the efficiency of the
Company's operations and is expected to result in annual cost savings in excess
of $15 million per year. The consolidation and realignment resulted in a
non-recurring charge of approximately $40.8 million after income tax benefits of
$22.7 million, comprised primarily of a write-down of asset values, accruals of
lease and other contractual obligations, and employee termination and severance
costs. In order to maximize the cost savings and efficiencies made available
through the consolidation of facilities and the additional volumes contemplated
as a result of the Lejaby, GJM and Body Slimmers acquisitions, the Company
re-evaluated the viability of all product lines and styles. As a result, certain
products and styles have been discontinued to permit the investment of working
capital in products and styles with greater returns. In addition, the Company
incurred certain costs and expenses associated with the realignment of
manufacturing plants, consolidation of the Company's intimate apparel sales
forces and other costs during the second and third quarters of fiscal 1996 which
are also included in the non-recurring charge.
OTHER ITEMS
The non-recurring charge also includes $10.6 million, net of income tax
benefits of $5.8 million, related to the cancellation of certain contracts,
re-alignment of its European organization, the write off of an insurance
receivable related to the 1994 California earthquake.
In June 1996, the Company announced its intent to merge with Authentic
Fitness Corporation. On July 25, 1996 the Company announced that the merger
would not take place as planned. The Company has incurred legal, accounting and
investment advisory fees in connection with the proposed merger. Such fees and
expenses of approximately $3.0 million, $1.8 million net of income tax benefits,
were charged against income in the third quarter of fiscal 1996.
The non-recurring charge for the Hathaway disposition and the Intimate
Apparel Division consolidation and realignment and other items including merger
termination costs total approximately $88.8 million, after income tax benefits
of $49.8 million, or $1.66 per share for the nine months ended October 5, 1996.
10
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
RESULTS OF OPERATIONS
Net revenues in the third quarter of fiscal 1996 were $292.0 million, 21.9%
higher than the $239.6 million recorded in the third quarter of fiscal 1995. Net
revenues for the nine months ended October 5, 1996 were $721.3 million an
increase of 11.8% over the $645.1 million recorded in the first nine months of
fiscal 1995.
Intimate apparel division net revenues increased 21.8% to $215.8 million
from $177.1 million in the third quarter of fiscal 1995. The increase in net
revenues in the third quarter of fiscal 1996 compared to fiscal 1995 reflects
increases in Calvin Klein net revenues of 28.7%, increases in Warner's and Olga
domestic net revenues of 6.7%, incremental net revenues related to Lejaby, Body
Slimmers and GJM of $36.4 million, partially offset by a decrease in Avon and
Victoria Secret net revenues of $10.4 million. Net revenues for the nine months
ended October 5, 1996 increased 11.5% compared to the first nine months of
fiscal 1995 despite a decrease in net revenues from Avon and Victoria's
Secret of $54.3 million. Excluding these items net revenues increased 25.6%. The
increase reflects an increase in Calvin Klein of 51.9%, an increase in Olga and
Warner's domestic net revenues of 6.1%, an increase in international net
revenues of 41.3% reflecting the acquisition of Lejaby in July 1996 and an
increase in sleepwear net revenues of approximately $30.2 million reflecting the
impact of the acquisition of GJM in February 1996.
Menswear division net revenues increased 22.2% to $60.8 million in the
third quarter of fiscal 1996 from $49.7 million in the third quarter of fiscal
1995. The increase is attributable to a 25.0% increase in Chaps net revenues
resulting from strong sell-thru at retail and an increase of $1.7 million in
Calvin Klein accessories net revenues. Hathaway division net revenues for the
third quarter of fiscal 1996 decreased slightly compared to the third quarter of
fiscal 1995. Net revenues for the nine months ended October 5, 1996 increased
12.6% to $148.9 million from $132.3 million in the first nine months of fiscal
1995. The increase for the nine months primarily reflects an increase of 14.4%
in Chaps net revenues and an increase of $7.1 million in Calvin Klein
accessories net revenues, partially offset by a decrease in Hathaway net
revenues.
Gross profit before non-recurring items increased 20.7% to $102.1 million
in the third quarter of fiscal 1996 from $84.6 million in the third quarter of
fiscal 1995. Gross profit before the consolidation and re-alignment charge as a
percentage of net revenues was 35.0% in the third quarter of fiscal 1996
compared to 35.3% in the third quarter of fiscal 1995. Gross profit for the
first nine months of fiscal 1996 increased 13.1% to $248.5 million from $219.7
million in the first nine months of fiscal 1995. The increase in gross profit
for both the quarter and the nine months reflects the higher net revenues, as
noted above. The increase in gross profit as a percentage of net revenues for
the nine month period reflects the higher mix of Calvin Klein sales and
increased manufacturing efficiencies in intimate apparel.
Selling, administrative and general expenses increased to $52.5 million
(18.0% of net revenues) in the third quarter of fiscal 1996 from the $45.4
million (19.0% of net revenues) recorded in the third quarter of fiscal 1995.
Selling, administrative and general expenses for the first nine months of fiscal
1996 increased to $135.6 million (18.8% of net revenues) from $130.6 million
(20.2% of net revenues) in fiscal 1995. The decrease in selling, administrative
and general expenses in dollars and as a percentage of net revenues is due
primarily to the cost savings measures and realignment of administrative
functions undertaken by the Company beginning in April 1996. The Company expects
that overall selling and administrative expenses will be reduced by over $15
million on an annualized basis as a result of these consolidation and
realignment efforts.
Interest expense decreased 10.8% in the third quarter of fiscal 1996 to
$8.9 million from $10.0 million recorded in the third quarter of fiscal 1995.
Interest expense for the nine months ended October 5, 1996 decreased 14.3% to
$23.9 million from $27.9 million in the first nine months of fiscal 1995. The
decrease in interest expense for both the quarter and nine months reflects the
use of the proceeds from the Company's public offering to reduce outstanding
debt, which was completed in
11
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
October 1995 partially offset by the subsequent acquisition of GJM, Lejaby and
Body Slimmers all purchased for cash.
The provision for income taxes for the third quarter and for the first nine
months of fiscal 1996 reflects income tax benefits of $49.8 million related to
the disposition of the Hathaway business, consolidation and realignment of the
intimate apparel division and the merger termination costs. The provision for
income taxes before giving effect to these tax benefits for the third quarter of
fiscal 1996 was $15.9 million compared to $11.1 million in the third quarter of
fiscal 1995. The Company's effective tax rate for the first nine months of
fiscal 1996 was 39% compared to 38% for the first nine months of fiscal 1995.
The increase in effective tax rate in 1996 compared to 1995 reflects the
realization of tax benefits in 1995 of certain state net operating loss
carryforwards.
Income before non-recurring charges for the third quarter of fiscal 1996
was $24.8 million and increase of 37.2% from the $18.1 million for the third
quarter of fiscal 1995. Income before non-recurring charges for the first nine
months of fiscal 1996 increased 43.1% to $54.4 million from $38.0 million in the
first nine months of fiscal 1995. The increase for both the quarter and nine
months reflects the higher operating income and lower interest expense noted
above.
CAPITAL RESOURCES AND LIQUIDITY.
On May 11, 1995, consistent with the Company's goal of providing increased
shareholder value, the Company declared a quarterly cash dividend of $0.07 per
share. The Company has since declared seven successive quarterly cash dividends
of $0.07 per share.
On February 9, 1996, the Company acquired substantially all of the assets
(including certain subsidiaries) comprising the GJM group of companies ('GJM')
from Cygne Designs Inc. GJM is a private label manufacturer of women's lingerie
and sleepwear. The purchase price consisted of a cash payment of $12.5 million.
In the third quarter of fiscal 1996 the Company acquired certain assets and
stock in certain companies comprising approximately 88% of the Lejaby, Euralis
group of companies ('Lejaby'), a leading European intimate apparel manufacturer
for approximately $68 million. Funds to consummate the transaction were provided
by members of the Company's bank credit group. The terms of the bank loan are
substantially the same as the terms of the Company's existing credit agreements
and include a term loan of 370 million French Francs and revolving loan
facilities of approximately 150 million French Francs.
On July 19, 1996, the Company acquired Body Slimmers, Inc. by Nancy Ganz
('Body Slimmers'), for approximately $6.5 million. The acquisition of Body
Slimmers will expand the Company's product line to the fast growing segment of
the intimate apparel market targeting aging baby boomers. This acquisition
enhances the Company's leading position in the domestic intimate apparel market.
The Company's liquidity requirements arise primarily from its debt service
requirements and the funding of the Company's working capital needs, primarily
inventory and accounts receivable. The Company's borrowing requirements are
seasonal, with peak working capital needs generally arising at the end of the
second quarter and during the third quarter of the fiscal year. The Company
typically generates nearly all of its operating cash flow in the fourth quarter
of the fiscal year reflecting third and fourth quarter shipments and the sale of
inventory built during the first half of the fiscal year.
Cash used in operations in the first nine months of fiscal 1996 was $66.7
million compared to $113.0 million in the comparable fiscal 1995 period. The
cash use for the first nine months of fiscal 1996 includes $39.9 million related
to the disposition of the Hathaway business and the consolidation and
realignment of the intimate apparel division. The improvement in seasonal
working capital usage reflects the Company's efforts to reduce inventory levels
and improve working capital usage.
The Company believes that funds available under its existing credit
arrangements and cash flow to be generated from future operations will be
sufficient to meet working capital and capital expenditure needs of the Company,
including dividends and interest and principal payments on outstanding debt
obligations for the next twelve months and for the next several years.
12
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WARNACO GROUP, INC.
Date: November 18, 1996 By: /s/ WILLIAM S. FINKELSTEIN
----------------------------------
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and
Accounting Officer
Date: November 18, 1996 By: /s/ WALLIS H. BROOKS
----------------------------------
Wallis H. Brooks
Vice President and
Corporate Controller
13
<PAGE>
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) Exhibits.
<C> <S>
11.1 -- Earnings per share.
(b) Reports of Form 8-K.
No reports on Form 8-K were filed during the third quarter of fiscal 1996.
</TABLE>
14
<PAGE>
<PAGE>
EXHIBIT 11.1
THE WARNACO GROUP, INC.
Calculation of Income (Loss) per Common Share
(in thousands except share data)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
OCTOBER 5, OCTOBER 7, OCTOBER 5, OCTOBER 7,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) ($ 5,811) $ 18,091 ($ 34,454) $ 37,976
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares outstanding during the period 52,074,524 37,499,492 51,789,200 37,499,492
Shares issued in public offering -- 1,511,011 -- 503,670
Restricted shares issued during the period -- -- 88,015 --
Shares issued due to exercise of options 24,038 -- 85,496 --
Add: common equivalent shares using the treasury stock
method 1,544,583 5,805,364 1,812,657 4,925,143
Less: treasury stock (286,600) (286,600) (286,600) (286,600)
---------- ---------- ---------- ----------
Weighted average number of shares 53,356,545 44,529,267 53,488,768 42,641,705
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per share ($0.11) $0.41 ($0.64) $0.89
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF THE WARNACO GROUP, INC. FOR THE NINE
MONTHS ENDED OCTOBER 5, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-04-1997
<PERIOD-START> JAN-07-1996
<PERIOD-END> OCT-05-1996
<CASH> 16,829
<SECURITIES> 0
<RECEIVABLES> 229,701
<ALLOWANCES> 1,002
<INVENTORY> 398,902
<CURRENT-ASSETS> 684,466
<PP&E> 204,720
<DEPRECIATION> 95,294
<TOTAL-ASSETS> 1,152,429
<CURRENT-LIABILITIES> 430,260
<BONDS> 252,116
0
0
<COMMON> 531
<OTHER-SE> 457,786
<TOTAL-LIABILITY-AND-EQUITY> 1,152,429
<SALES> 721,295
<TOTAL-REVENUES> 721,295
<CGS> 510,742<F1>
<TOTAL-COSTS> 135,565
<OTHER-EXPENSES> 100,621<F2>
<LOSS-PROVISION> 308
<INTEREST-EXPENSE> 23,852
<INCOME-PRETAX> (49,485)
<INCOME-TAX> (15,031)<F3>
<INCOME-CONTINUING> (34,454)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,454)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)
<FN>
<F1>
INCLUDES NON-RECURRING ITEMS OF $38.0 MILLION RELATED TO THE
COMPANY'S DECISION TO EXIT FROM THE HATHAWAY BUSINESS, CONSOLIDATE
AND REALIGN THE INTIMATE APPAREL DIVISION AND OTHER ITEMS.
<F2>
REFLECTS NON-RECURRING ITEMS RELATED TO THE COMPANY'S DECISION
TO EXIT THE HATHAWAY BUSINESS, CONSOLIDATE AND REALIGN THE
INTIMATE APPAREL DIVISION MERGER TERMINATION COSTS AND OTHER ITEMS.
<F3>
REFLECTS INCOME TAX BENEFITS OF $49.8 MILLION RELATED TO LOSSES
FROM EXITING THE HATHAWAY BUSINESS, CONSOLIDATING AND REALIGNING
THE INTIMATE APPAREL DIVISION AND OTHER ITEMS.
</FN>
</TABLE>
