<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 JULY 6, 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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 August 9, 1996 is as follows: 52,041,762.
________________________________________________________________________________
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JULY 6, JANUARY 6,
1996 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash (restricted $100 and $886, respectively)..................................... $ 4,925 $ 6,162
Accounts receivable -- net...................................................... 168,401 156,607
Inventories:
Finished goods............................................................... 225,611 214,252
Work in process.............................................................. 61,650 77,940
Raw materials................................................................ 70,280 64,274
------------ -----------
Total inventories....................................................... 357,541 356,466
Assets held for disposal.......................................................... 14,165 --
Other current assets.............................................................. 33,053 23,148
------------ -----------
Total current assets.................................................... 578,085 542,383
Property, plant and equipment, (net of accumulated depreciation of $74,952 and $81,051,
respectively)........................................................................ 90,223 106,325
Other assets:
Intangibles and other assets -- net.................................................. 319,051 290,421
------------ -----------
$987,359 $ 939,129
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility......................................... $176,576 $ 51,033
Borrowing under foreign credit facilities......................................... 2,828 --
Current portion of long-term debt................................................. 33,968 26,700
Accounts payable and accrued liabilities.......................................... 123,114 149,950
Accrued income taxes.............................................................. 4,940 5,231
------------ -----------
Total current liabilities.................................................... 341,426 232,914
------------ -----------
Long-term debt......................................................................... 180,110 194,301
Other long-term liabilities............................................................ 11,560 11,613
Stockholders' equity:
Preferred Stock; $.01 par value................................................... -- --
Common Stock; $.01 par value...................................................... 524 521
Capital in excess of par value.................................................... 574,326 567,965
Cumulative translation adjustment................................................. (4,302) (3,745)
Accumulated deficit............................................................... (94,424) (46,896)
Treasury stock, at cost........................................................... (5,000) (5,000)
Notes receivable for common stock issued and unearned stock compensation.......... (16,861) (12,544)
------------ -----------
Total stockholders' equity................................................... 454,263 500,301
------------ -----------
$987,359 $ 939,129
------------ -----------
------------ -----------
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
2
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THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 6, JULY 8, JULY 6, JULY 8,
1996 1995 1996 1995
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues..................................................... $222,805 $210,395 $429,285 $405,551
Cost of goods sold -- Note 4..................................... 175,568 142,176 309,139 270,508
-------- -------- -------- --------
Gross profit..................................................... 47,237 68,219 120,146 135,043
Selling, general and administrative expenses..................... 42,508 43,800 83,069 85,135
Non-recurring items -- Note 4.................................... (81,262) -- (81,262) --
-------- -------- -------- --------
Income (loss) before interest and income taxes................... (76,533) 24,419 (44,185) 49,908
Interest expense................................................. 7,721 9,475 14,916 17,835
-------- -------- -------- --------
Income (Loss) before provision (benefit) for income taxes........ (84,254) 14,944 (59,101) 32,073
Provision (benefit) for income taxes............................. (28,772) 5,679 (18,837) 12,188
-------- -------- -------- --------
Net income (loss)................................................ $(55,482) $ 9,265 $(40,264) $ 19,885
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares of common stock outstanding.... 53,890 42,003 53,565 41,699
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share...................................... $ (1.03) $ 0.22 $ (0.75) $ 0.48
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
3
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THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JULY 6, JULY 8,
1996 1995
--------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flow from operations:
Net income........................................................................... $ (40,264) $ 19,885
Non-cash items included in net income (loss):
Depreciation and amortization................................................... 13,025 9,400
Unearned stock compensation..................................................... 870 --
Increase in deferred tax assets -- net........................................ (18,721) --
Non cash portion of non-recurring items......................................... 87,069 --
Income taxes paid.................................................................... (1,112) (1,758)
Other changes in operating accounts.................................................. (119,877) (68,337)
Other................................................................................ (469) (1,784)
--------- -----------
Cash used in operations................................................................ (79,479) (42,594)
--------- -----------
Cash flow from investing activities:
Net proceeds from sale of fixed assets............................................... 175 5,942
Purchase of property, plant & equipment.............................................. (12,329) (9,858)
Payment for purchase of acquired assets.............................................. (12,500) (5,000)
Increase in intangible and other assets.............................................. (12,378) (6,200)
--------- -----------
Cash used in investing activities...................................................... (37,032) (15,116)
--------- -----------
Cash flow from financing activities:
Borrowing under revolving credit facilities.......................................... 128,371 65,598
Net proceeds from the sale of Class A common stock and repayment of notes receivable
from employees.................................................................... 1,177 644
Proceeds from other debt............................................................. -- 5,955
Repayments of debt................................................................... (6,923) (13,117)
Dividends paid....................................................................... (7,264) (2,922)
Increase in deferred financing costs................................................. (87) (92)
--------- -----------
Cash provided from financing activities................................................ 115,274 56,066
--------- -----------
Increase (decrease) in cash............................................................ (1,237) (1,644)
Cash at beginning of period............................................................ 6,162 3,791
--------- -----------
Cash at end of period.................................................................. $ 4,925 $ 2,147
--------- -----------
--------- -----------
Other changes in operating accounts:
Accounts receivable.................................................................. $ (21,362) $ 4,935
Inventories.......................................................................... (29,742) (61,447)
Other current assets................................................................. (10,297) (11,752)
Accounts payable and accrued liabilities............................................. (59,297) (1,103)
Accrued income taxes................................................................. 821 1,030
--------- -----------
$(119,877) $ (68,337)
--------- -----------
--------- -----------
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
4
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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 July 6, 1996 as well as its results of operations and cash
flows for the periods ended July 6, 1996 and July 8, 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. The preliminary allocation of purchase price to the
estimated fair value of the assets acquired is summarized below (in
millions of dollars):
<TABLE>
<S> <C>
Accounts receivable............................................... $10.7
Inventories....................................................... 7.7
Prepaid expenses.................................................. 1.4
Property, plant and equipment..................................... 2.9
Goodwill.......................................................... 6.0
-----
28.7
Accounts payable and liabilities assumed.......................... (16.2)
-----
Total purchase price.............................................. $12.5
-----
-----
</TABLE>
In July and August 1996 the Company completed the acquisition of
approximately 88% of the assets or stock in the companies comprising Lejaby
S.A./Euralis S.A. ('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 loan are substantially the same as the terms of the
Company's existing credit agreements and include a $25 million term loan
maturing on June 30, 2001 and a revolving loan of $43 million. Borrowings
under the Lejaby credit agreement bear interest at LIBOR plus .45%.
On July 19, 1996, the Company acquired Body Slimmers, Inc. by Nancy Ganz
('Body Slimmers'), for approximately $6.5 million cash. This company is a
designer and marketer of body slimming undergarments for women.
The impact of these acquisitions on a pro-forma basis is not material to the
results of operations of the Company for fiscal 1995 or fiscal 1996.
4. Non-recurring Items
Following the acquisition of the GJM businesses 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 further
acquisitions of Body Slimmers and Lejaby were also considered. As a result
of this review, the
5
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THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Company has, to date, taken the following steps which have resulted in total
non-recurring charges in the second quarter of fiscal 1996 as summarized
below (in millions):
<TABLE>
<S> <C>
Loss related to the Hathaway business............................ $ 48.4
Charge for the consolidation and realignment of the intimate
apparel division............................................... 46.4
Other items...................................................... 12.6
------
Total charges, including $26.3 in cost of goods sold............. 107.4
Less: Income tax benefits........................................ 37.6
------
$ 69.8
------
------
</TABLE>
The losses reported above include inventory markdowns directly attributable
to the decision to exit the Hathaway business and consolidation and
realignment 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 July 6, 1996 (resulting from inventory
liquidations at markdown prices) and settlement of insurance claims
receivable, together aggregating $26.3 million are not reflected in the
consolidated condensed statement of operations within the non-recurring
items. 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 July 25, 1996, the Company reached
agreement with an investor group, to transfer 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 Company anticipates a closing by
September 30, 1996. The Hathaway Assets have been classified as 'Assets held
for disposal' in the Balance Sheet as of July 6, 1996, at an amount equal
to the estimated fair value of the assets. The Company's Puerto Rico
facility (not included in the transaction noted above) 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 six months ended July 6, 1996
and July 8, 1995 were $14.7 million and $20.1 million, respectively. Results
of operations for the six months ended July 6, 1996 and July 8, 1995 were a
pre tax loss of $2.7 million and $2.7 million, respectively.
A summary of the losses recorded in fiscal 1996 related to the Hathaway
business are summarized as follows (in millions):
<TABLE>
<S> <C>
Write-down of assets to fair value (including $23.0 million of
intangible assets).............................................. $43.7
Severance and other employee costs................................ 0.7
Lease termination costs........................................... 0.3
Legal and professional fees....................................... 1.0
-----
45.7
Less: Income tax benefit.......................................... 16.0
-----
Total........................................................ 29.7
Add: Losses incurred through July 6, 1996......................... 2.7
Less: Income tax benefits......................................... 1.0
-----
Total loss related to the Hathaway business through July 6,
1996....................................................... $31.4
-----
-----
</TABLE>
6
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<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Through July 6, 1996, the Company had expended approximately $2.7 million of
net cash related to the exit from the Hathaway business. The Company expects
that the estimated cash proceeds from the liquidation of certain of the
Hathaway Assets of approximately $14.2 million will more than offset the
estimated remaining cash payments of approximately $2.0 million. In addition,
the Company's income tax payments will be reduced in future periods resulting
in additional cash savings.
Expenses, including future operating losses prior to the date of transfer
(which are not expected to be material), that do not meet the criteria for
recognition at July 6, 1996 will be recorded in future periods as incurred.
All other charges are non-cash in nature.
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 quarter of fiscal 1996 of $30.2 million,
net of income tax benefits of $16.2 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 quarter of fiscal 1996, amounted to approximately $4.4
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. 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 resulted in mark down losses of approximately
$14.8 million in the second quarter of fiscal 1996. The Company has provided
an additional $2.8 million for the write-down of remaining inventories
related to these discontinued products and styles. The Company expects to
liquidate the remaining inventory during the third quarter of fiscal 1996.
A summary of the total intimate apparel division consolidation and
realignment charge follows (in millions):
<TABLE>
<S> <C>
Write-down of fixed assets....................................... $ 3.7
Lease termination costs.......................................... 6.4
Severance and other employee costs............................... 14.3
Realignment of manufacturing facilities and retraining costs..... 4.4
Disposition and write-down of discontinued inventory -- included
in cost of goods sold.......................................... 17.6
------
Total charges............................................... 46.4
Less: Income tax benefits........................................ (16.2)
------
Net intimate apparel consolidation and realignment charge... $ 30.2
------
------
</TABLE>
Total cash expense incurred through July 6, 1996 related to this charge was
$15.9 million partially offset by proceeds from the sales of certain assets
of $10.1 million. The Company expects to expend approximately $11.8 million
of additional cash, primarily in the third quarter of fiscal 1996, except for
lease termination costs which will be paid over the next five years. Future
cash outlays will be offset by proceeds from the sales of assets and tax
benefits realized resulting in cash savings to the Company. The remaining
charges are non-cash in nature.
7
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<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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 an agent. This will
result in significant ongoing cost savings to the Company. The Company will
pay $3 million in non-recurring charges attendant to the run-off of the
former agency contract of which approximately $0.8 million was paid through
July 6, 1996 and the Company expects to pay the remaining balance to the
agent during the third and 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 quarter, primarily
reductions in existing staff, resulted in a non-recurring charge of $3.6
million in the second quarter of fiscal 1996, approximately $1.2 million of
such charges were paid in the second quarter of fiscal 1996; the remaining
charges will be paid in the third and fourth quarters 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 million in the
second quarter of fiscal 1996.
5. In June 1996, the Company announced its intent to merge with Authentic
Fitness Corporation. On July 25, 1996 the Company and Authentic Fitness
announced that the merger agreement had been terminated. 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
will be paid and charged against income in the third quarter of fiscal 1996.
6. 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 ratably
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
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<PAGE>
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 SIX MONTHS
ENDED ENDED
-------------------- --------------------
JULY 6, JULY 8, JULY 6, JULY 8,
1996 1995 1996 1995
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues....................................................... $ 222.8 $ 210.4 $ 429.3 $ 405.6
Cost of goods sold as reported..................................... 175.6 142.2 309.1 270.5
Non-recurring items................................................ (26.3) -- (26.3) --
------- ------- ------- -------
Gross profit before non-recurring items............................ 73.5 68.2 146.4 135.0
% of net revenues................................................ 33.0% 32.4% 34.1% 33.3%
Selling, administrative and general expenses....................... 42.5 43.8 83.1 85.1
------- ------- ------- -------
Income before interest and income taxes and non-recurring items.... 31.0 24.4 63.3 49.9
% to net revenues................................................ 13.9% 11.6% 14.8% 12.3%
Interest expense................................................... 7.7 9.5 14.9 17.8
Provision for income taxes......................................... 8.9 5.7 18.9 12.2
------- ------- ------- -------
Income before non-recurring items(1)............................... 14.3 9.3 29.5 19.9
Non-recurring items, net of income tax benefits.................... (69.8) -- (69.8) --
------- ------- ------- -------
Net income (loss).................................................. $ (55.4) $ 9.3 $ (40.3) $ 19.9
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- ------------
(1) Net income before non-recurring items was $0.27 per share and $0.55 per
share for the three months and six months ended July 6, 1996 compared to
$0.22 per share and $0.48 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 further
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 total non-recurring charges in the second quarter of fiscal 1996 as
summarized below (in millions):
<TABLE>
<S> <C>
Loss related to the Hathaway business................................................ $ 48.4
Charge for the consolidation and realignment of the intimate apparel division........ 46.4
Other items.......................................................................... 12.6
-------
Total charges, including $26.3 in cost of goods sold................................. 107.4
Less: Income tax benefits............................................................ 37.6
-------
$ 69.8
-------
-------
</TABLE>
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
9
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<PAGE>
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.
In July 1996, the Company entered into a 'Heads of Agreement' with an
investor group to transfer certain assets of the Hathaway dress shirt
operation, including its Waterville, Maine and Prescott, Ontario manufacturing
facilities. As a result, the Company has written the assets related to its
Hathaway operation down to fair value and reclassified the assets to the
caption 'Assets held for disposal' in the July 6, 1996 Balance Sheet. 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 $31.4 million, net of income tax
benefits of $17.0 million, are included in the Statement of Operations for
the second quarter of fiscal 1996. The pre-tax loss includes the write off of
$23 million of Hathaway intangibles and goodwill. The Company expects to
complete the transfer of the Hathaway assets by the end of the third quarter of
the 1996 fiscal year.
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 is 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 $10 million per year. The consolidation and realignment has resulted in a
non-recurring charge of approximately $30.2 million after income tax benefits of
$16.2 million in the second quarter of fiscal 1996, 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 has 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
quarter which are also included in the non-recurring charge.
OTHER ITEMS
The non-recurring charge also includes $8.2 million net of income tax
benefits of $4.4 million related to the cancellation of certain contracts,
realignment of its European organization and the write off of an insurance
receivable.
The non-recurring charge for exiting the Hathaway business and the Intimate
Apparel Division consolidation and realignment and other items total
approximately $69.8 million, after income tax benefits of $37.6 million, or
$1.30 per share for both the second quarter and first six months of fiscal 1996.
RESULTS OF OPERATIONS
Net revenues in the second quarter of fiscal 1996 were $222.8 million, 5.9%
higher than the $210.4 million recorded in the second quarter of fiscal 1995.
Net revenues for the six months ended July 6, 1996 were $429.3 million, an
increase of 5.9% over the $405.6 million recorded in the first six months of
fiscal 1995.
Intimate apparel division net revenues increased 4.1%, $165.5 million from
$159.0 million in the second quarter of fiscal 1995. The increase in net
revenues in the second quarter of fiscal 1996 compared to fiscal 1995 was
accomplished despite a decrease in net revenues from Avon and Victoria's Secret
of $19.3 million. Excluding the impact of Avon and Victoria's Secret, intimate
apparel division net
10
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<PAGE>
revenues increased 19.2% reflecting increases in Calvin Klein net revenues of
49.1%, increases in Warner's and Olga domestic net revenues of 5.0% and an
increase in international net revenues of 5.2%. Net revenues for the six months
ended July 6, 1996 increased 5.5% compared to the first six months of fiscal
1995 despite a decrease in net revenues from Avon and Victoria's Secret of $43.9
million. Excluding these items net revenues increased 24.1%. The increase
reflects an increase in Calvin Klein of 72.4%, an increase in Olga and Warner's
domestic net revenues of 7.3%, international net revenues of 13.5% and an
increase in sleepwear net revenues of approximately $18 million reflecting the
impact of the acquisition of GJM in February 1996.
Menswear division net revenues increased 11.5% to $45.5 million in the
second quarter of fiscal 1996 from $40.8 million in the second quarter of fiscal
1995. The increase is attributable to a 16.2% increase in Chaps net revenues
resulting from strong sell-thru at retail and $2.6 million of Calvin Klein
accessories net revenues. Hathaway division net revenues for the second quarter
of fiscal 1996 decreased by approximately 30% or $2.9 million compared to
fiscal 1995 reflecting the Company's decision to exit the Hathaway business.
Net revenues for the six months ended July 6, 1996 increased 6.7% to $88.2
million from $82.6 million in the first six months of fiscal 1995. The increase
for the six months primarily reflects an increase of 7.7% in Chaps net revenues
and $5.4 million of Calvin Klein accessories net revenues, partially offset by
a decrease in Hathaway net revenues.
Gross profit before non-recurring items increased 7.7% to $73.5 million in
the second quarter of fiscal 1996 from $68.2 million in the second quarter of
fiscal 1995. Gross profit before the consolidation and re-alignment charge as a
percentage of net revenues increased to 33.0% in the second quarter of fiscal
1996 from 32.4% in the second quarter of fiscal 1995. Gross profit for the first
six months of fiscal 1996 increased 8.4% to $146.4 million from $135.0 million
in the first six months of fiscal 1995. The increase in gross profit and gross
profit as a percentage of net revenues for both the quarter and the six months
reflects the higher mix of Calvin Klein sales and increased manufacturing
efficiencies in intimate apparel.
Selling, administrative and general expenses decreased to $42.5 million
(19.1% of net revenues) in the second quarter of fiscal 1996 from the $43.8
million (20.8% of net revenues) recorded in the second quarter of fiscal 1995.
Selling, administrative and general expenses for the first six months of fiscal
1996 decreased to $83.1 million (19.4% of net revenues) from $85.1 million
(21.0% 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 $10
million on an annualized basis as a result of these consolidation and
realignment efforts.
Interest expense decreased 18.5% in the second quarter of fiscal 1996 to
$7.7 million from $9.5 million recorded in the second quarter of fiscal 1995.
Interest expense for the six months ended July 6, 1996 decreased 16.4% to $14.9
million from $17.8 million in the first six months of fiscal 1995. The decrease
in interest expense for both the quarter and six months reflects the use of the
proceeds from the Company's public offering to reduce outstanding debt, which
was completed in October 1995.
The provision for income taxes for the second quarter of fiscal 1996 and
for the first six months of fiscal 1996 reflects income tax benefits of $37.6
million related to the exit from the Hathaway business and consolidation and
realignment of the intimate apparel division. The provision for income taxes
before giving effect to these tax benefits for the second quarter of fiscal 1996
was $8.9 million compared to $5.7 million in the second quarter of fiscal 1995.
The Company's effective tax rate for the first six months of fiscal 1996 was 39%
before non-recurring items compared to 38% for the first six months of fiscal
1995. The increase in the effective tax rate in fiscal 1996 compared to fiscal
1995 reflects the realization of tax benefits in fiscal 1995 of certain state
net operating loss carryforwards.
Income before non-recurring charges for the second quarter of fiscal 1996
was $14.3 million, an increase of 54.5% from the $9.3 million for the second
quarter of fiscal 1995. Income before non-recurring charges for the first six
months of fiscal 1996 increased 48.5% to $29.5 million from $19.9 million in the
first six months of fiscal 1995. The increase for both the quarter and six
months reflects the higher operating income and lower interest expense noted
above.
11
<PAGE>
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
On May 11, 1995, consistent with the Company's goal of providing increased
shareholder value, the Company declared its first quarterly cash dividend of
$0.07 per share. The Company has since declared six 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 Design 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.
On July 17, 1996, the Company acquired certain assets and stock in certain
companies comprising approximately 88% of Lejaby S.A./Euralis S.A. ('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 loan are substantially the same as the
terms of the Company's existing credit agreements and include a $25 million term
loan maturing on June 30, 2001 and a revolving loan of $43 million.
On July 19, 1996, the Company acquired Body Slimmers, Inc. by Nancy Ganz
('Body Slimmers'), for approximately $6.5 million cash. 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 half of fiscal 1996 was $79.5 million
compared to $42.6 million in the comparable fiscal 1995 period. The cash used in
operations for the first six months of fiscal 1996 includes $20.4 million
related to the exit from the Hathaway business and the consolidation and
realignment of the intimate apparel division. The cash used in operations in the
first six months of fiscal 1996 before giving effect to the non-recurring
charges was $59.1 million compared to the $42.6 million in the comparable 1995
fiscal period. The increase in the use of working capital is a result of
seasonal increases in working capital, primarily inventory and accounts
receivable. The increase in inventory is primarily in the intimate apparel
division with increases in Calvin Klein inventory to support sales increases,
Warner's basic goods inventory which has contributed to an improvement in
service levels to our customers and GJM, the new division, which the Company
acquired in 1996.
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>
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 on Form 8-K.
No reports on Form 8-K were filed during the first quarter of fiscal 1996.
</TABLE>
13
<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: August 19, 1996 By: ____/s/ WILLIAM S. FINKELSTEIN____
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and
Accounting Officer
Date: August 19, 1996 By: _______/s/ WALLIS H. BROOKS_______
Wallis H. Brooks
Vice President and
Corporate Controller
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 SIX MONTHS ENDED
------------------------ ------------------------
JULY 6, JULY 8, JULY 6, JULY 8,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) ($ 55,482) $ 9,265 ($ 40,264) $ 19,885
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares outstanding during the period 47,216,492 37,499,492 47,216,492 37,499,492
Restricted shares issued during the period 73,346 -- 36,673 --
Shares issued due to exercise of options 11,694 -- 5,846 --
Add: common equivalent shares using the treasury stock
method 6,874,592 4,789,822 6,592,469 4,486,455
Less: treasury stock (286,600) (286,600) (286,600) (286,600)
---------- ---------- ---------- ----------
Weighted average number of shares 53,889,524 42,002,714 53,564,880 41,699,347
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per share ($1.03) $0.22 ($0.75) $0.48
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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 SIX
MONTHS ENDED JULY 6, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-04-1997
<PERIOD-START> JAN-07-1996
<PERIOD-END> JUL-06-1996
<CASH> 6,162
<SECURITIES> 0
<RECEIVABLES> 157,552
<ALLOWANCES> 945
<INVENTORY> 357,541
<CURRENT-ASSETS> 578,085
<PP&E> 165,175
<DEPRECIATION> 74,952
<TOTAL-ASSETS> 987,359
<CURRENT-LIABILITIES> 341,426
<BONDS> 180,110
0
0
<COMMON> 524
<OTHER-SE> 453,739
<TOTAL-LIABILITY-AND-EQUITY> 987,359
<SALES> 429,285
<TOTAL-REVENUES> 429,285
<CGS> 309,139<F1>
<TOTAL-COSTS> 83,069
<OTHER-EXPENSES> 81,262<F2>
<LOSS-PROVISION> 190
<INTEREST-EXPENSE> 14,916
<INCOME-PRETAX> (59,101)
<INCOME-TAX> (18,837)<F3>
<INCOME-CONTINUING> (40,264)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,264)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
<FN>
<F1>
INCLUDES NON-RECURRING ITES OF $26.3 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 AND OTHER ITEMS.
<F3>
REFLECTS INCOME TAX BENEFITS OF $37.6 MILLION RELATED TO LOSSES
FROM EXITING THE HATHAWAY BUSINESS, CONSOLIDATING AND REALIGNING
THE INTIMATE APPAREL DIVISION AND OTHER ITEMS.
</FN>
</TABLE>
