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________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 1-10857
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THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
90 PARK AVENUE 10016
NEW YORK, NEW YORK 10016 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 661-1300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A Common Stock, par value $0.01 per share New York Stock Exchange
Convertible Trust Originated Preferred
Securities* New York Stock Exchange
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*Issued by Designer Finance Trust. Payments of distributions and payment on
liquidation or redemption are guaranteed by the registrant.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the Class A Common Stock, the only voting
stock of the registrant issued and outstanding, held by non-affiliates of the
registrant as of April 1, 1998, was approximately $2,143,544,000.
The number of shares outstanding of the registrant's Class A Common Stock
as of April 1, 1998: 63,048,069.
Documents incorporated by reference: The definitive Proxy Statement of The
Warnaco Group, Inc. relating to the 1998 Annual Meeting of Stockholders is
incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS.
The Warnaco Group, Inc. (the 'Company'), a Delaware corporation, was
organized in 1986 for the purpose of acquiring the outstanding shares of Warnaco
Inc. ('Warnaco'). As a result of the Company's acquisition of Warnaco, Warnaco
became a wholly-owned subsidiary of the Company.
The Company and its subsidiaries design, manufacture and market a broad
line of women's intimate apparel, such as bras, panties, sleepwear, shapewear
and daywear, and men's apparel, such as sportswear, underwear and accessories,
all of which are sold under a variety of internationally recognized owned and
licensed brand names. During fiscal 1997, the Company acquired Designer Holdings
Ltd. ('Designer Holdings'), which 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. During fiscal 1996, the Company made three
strategic acquisitions, GJM, Lejaby and Bodyslimmers, designed to increase the
breadth of the Company's product lines and increase the worldwide distribution
of the Company's products. In March 1994, the Company acquired the worldwide
trademarks, rights and business of Calvin Klein'r' men's underwear and licensed
the Calvin Klein trademark for men's accessories. In addition, the acquisition
included the worldwide trademarks and rights of Calvin Klein women's intimate
apparel.
The Company's growth strategy is to continue to capitalize on its highly
recognized brand names worldwide while broadening its channels of distribution
and improving manufacturing efficiencies and cost controls. The Company
attributes the strength of its brand names to the quality, fit and design of its
products which have developed a high degree of consumer loyalty and a high level
of repeat business. The Company operates three divisions, Intimate Apparel,
Menswear and Retail Outlet Stores, which accounted for 65.6%, 29.7% and 4.7%,
respectively, of net revenues in fiscal 1997, with the Intimate Apparel Division
accounting for a larger percentage of the Company's gross profit for the same
period.
The Intimate Apparel Division designs, manufactures and markets moderate to
premium priced intimate apparel for women under the Warner's'r', Olga'r', Calvin
Klein'r', Lejaby'r', Valentino Intimo'r', Van Raalte'r', White Stag'r', Fruit of
the Loom'r', Bodyslimmers'r', Marilyn Monroe'r' and Speedo'r' brand names. In
addition, the Intimate Apparel Division designs, manufactures and markets men's
underwear under the Calvin Klein brand name. The Intimate Apparel Division is
the leading marketer of women's bras to department and specialty stores in the
United States, accounting for 34% of such women's bra sales in 1997. The
Warner's and Olga brand names, which are owned by the Company, are 124 and 57
years old, respectively.
The Intimate Apparel Division's strategy is to increase its channels of
distribution and expand its highly recognized brand names worldwide. In February
1996, the Company purchased the GJM Group of Companies ('GJM') from Cygne
Designs, Inc. GJM is a private label maker of sleepwear and intimate apparel.
The acquisition provided the Company with design, marketing and manufacturing
expertise in the sleepwear business, broadening the Company's product line and
contributing to the Company's base of low cost manufacturing capacity. In June
1996, the Company purchased Bodyslimmers. Bodyslimmers is a leading designer and
manufacturer of body slimming undergarments targeted at aging baby boomers,
which also increased the Company's presence in a growing segment of the intimate
apparel market. In July 1996, the Company acquired the Lejaby/Euralis Group of
Companies ('Lejaby'). Lejaby is a leading maker of intimate apparel in Europe.
The Lejaby acquisition increased the size of the Company's operations in Western
Europe and provides the Company with an opportunity to expand the distribution
of its products in the critical European market. In December 1996, the Company
introduced its Marilyn Monroe line of intimate apparel.
In 1991, the Company entered into a license agreement with Fruit of the
Loom, Inc. for the design, manufacture and marketing of moderate priced bras,
daywear and other related items to be distributed through mass merchandisers,
such as Wal-Mart and Kmart, under the Fruit of the Loom brand name
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and has built its market share to over 6% in the mass merchandise market. This
license was renewed by the Company in 1994. In late 1994, the Company purchased
the Van Raalte trademark for $1.0 million and launched an intimate apparel line
through Sears stores in July 1995.
The Menswear Division designs, manufactures, imports and markets moderate
to premium priced men's apparel and accessories under the Chaps by Ralph
Lauren'r', Calvin Klein and Catalina'r' brand names. In December 1997, the
Company completed the acquisition of Designer Holdings which develops,
manufactures and markets designer jeanswear and jeans related sportswear for
men, women and juniors under the Calvin Klein Jeans, CK/Calvin Klein Jeans and
CK/Calvin Klein/Khakis labels. The Calvin Klein Jeans, CK/Calvin Klein Jeans and
CK/Calvin Klein/Khakis brands will complement the Company's existing product
lines, including Calvin Klein underwear for men and women and Calvin Klein men's
accessories. Chaps by Ralph Lauren has increased its net revenues by
approximately 600% since 1991 from $39.0 million to $272.3 million in 1997,
predominantly by refocusing its products to the age 25 to 50 consumer and by
using natural fibers in its products. In 1995, the Company extended its Chaps by
Ralph Lauren license through December 31, 2004. The Menswear Division's strategy
is to build on the strength of its owned and licensed brand names and eliminate
those businesses which generate a profit contribution below the Company's
required return. Consistent with this strategy, the Company has eliminated
several underperforming brands since 1992, including its Hathaway business,
which was sold to a group of investors in November 1996.
The Company has been expanding its brand names throughout the world by
increasing the activities of its wholly-owned operating subsidiaries in Canada,
Europe and Mexico. International operations generated $290.4 million, or 20.2%,
of the Company's net revenues in fiscal 1997, compared to $212.4 million, or
20.0%, of the Company's net revenues in fiscal 1996 and $135.5 or 14.8% in
fiscal 1995. The Company attributes such increase primarily to the acquisition
of Lejaby in July 1996.
The Company's business strategy with respect to its Retail Outlet Stores
Division is to provide a channel for disposing of the Company's excess and
irregular inventory, thereby limiting its exposure to off-price retailers and to
shift to more profitable intimate apparel stores to improve its margins. The
Company had 106 stores at the end of fiscal 1997 (including two stores in
Canada, 11 stores in the United Kingdom and one in France) compared to 73 stores
and 61 stores at the end of fiscal 1996 and fiscal 1995, respectively. In 1997,
35 stores were added as a result of the acquisition of Designer Holdings.
The Company's products are distributed to over 16,000 customers operating
more than 26,000 department, specialty and mass merchandise stores, including
such leading retailers in the United States as Dayton-Hudson, Macy's and other
units of Federated Department Stores, J.C. Penney, Victoria's Secret, The May
Department Stores, Mercantile Stores, Sears, Kmart and Wal-Mart and such leading
retailers in Canada as The Hudson Bay Company and Zeller's. The Company's
products are also distributed to such leading European retailers as House of
Fraser, British Home Stores, Harrods, Galeries Lafayette, Au Printemps and El
Corte Ingles. The Company has a joint venture with News Corp. Limited to further
expand its channels of distribution and market the products of the Company and
others directly to consumers in Asia and the Middle East through the Satellite
Television Asian Region Network ('STAR').
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company operates within one industry segment, the design, manufacture,
distribution and marketing of apparel. No customer accounted for 10% or more of
the Company's net revenues in the three years ended in fiscal 1997. See Note 7
to the Consolidated Financial Statements on pages F-1 to F-31.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
The Company designs, manufactures and markets a broad line of women's
intimate apparel, and men's apparel and accessories sold under a variety of
internationally recognized brand names owned or licensed by the Company. The
Company operates three divisions, Intimate Apparel, Menswear and
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Retail Outlet Stores, which accounted for 65.6%, 29.7% and 4.7% respectively, of
net revenues in fiscal 1997.
INTIMATE APPAREL
The Company's Intimate Apparel Division designs, manufactures and markets
women's intimate apparel, which includes bras, panties, sleepwear, shapewear and
daywear. The Company also designs and markets men's underwear. The Company's bra
brands accounted for 34% of women's bra sales in the 1997 calendar year in
department and specialty stores in the United States. Management considers the
Intimate Apparel Division's primary strengths to include its strong brand
recognition, product quality and design innovation, low cost production, strong
relationships with department and specialty stores and its ability to deliver
its merchandise rapidly. Building on the strength of its brand names and
reputation for quality, the Company has historically focused its intimate
apparel products on the upper moderate to premium priced range distributed
through leading department and specialty stores. In order to expand its market
penetration in recent years, the Company (i) in 1991, entered into a license
agreement with Fruit of the Loom, Inc., and in June 1992, began to distribute
moderate priced bras, daywear and other related items under this license through
mass merchandise stores, (ii) in March 1994, acquired the worldwide trademarks,
rights and businesses of Calvin Klein men's underwear and the worldwide
trademarks, rights and businesses of Calvin Klein women's intimate apparel upon
the expiration of an existing license on December 31, 1994, (iii) in late 1994,
purchased the Van Raalte trademark for $1 million and launched an intimate
apparel line through Sears stores in July 1995, (iv) in June 1995, entered into
an agreement to manufacture and distribute intimate apparel products under the
Speedo brand name, (v) in February 1996, acquired substantially all of the
assets of GJM, a private label manufacturer of women's sleepwear and lingerie,
(vi) in fiscal 1996, acquired the stock and assets of the Lejaby/Euralis Group
of Companies, a leading European manufacturer and marketer of intimate apparel,
(vii) in June 1996, acquired the business of Bodyslimmers, a marketer of body
slimming undergarments targeted at aging baby boomers, and (viii) in December
1996, launched the Marilyn Monroe brand of intimate apparel and sleepwear.
The intimate apparel division markets its lines under the following brand
names:
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BRAND NAME PRICE RANGE TYPE OF APPAREL
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Valentino Intimo................... premium intimate apparel
Lejaby(1).......................... better to premium intimate apparel
Bodyslimmers(1).................... better to premium intimate apparel
Calvin Klein....................... better to premium intimate apparel/men's underwear
Olga............................... better intimate apparel
Speedo sports bras................. better intimate apparel
Marilyn Monroe(2).................. better intimate apparel
Warner's........................... upper moderate to better intimate apparel
Van Raalte......................... moderate intimate apparel
Fruit of the Loom.................. moderate intimate apparel
White Stag......................... moderate intimate apparel
</TABLE>
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(1) Business acquired in fiscal 1996.
(2) New product line introduced in December 1996.
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The Company owns the Warner's, Olga, Calvin Klein (underwear and intimate
apparel), Lejaby, Bodyslimmers and Van Raalte brand names and trademarks which
account for approximately 80% of the Company's Intimate Apparel net revenues.
The Company also has exclusive licenses in perpetuity for the White Stag
trademark for women's sportswear and intimate apparel and the Speedo trademark
for women's sports bras. The Company licenses the other brand names under which
it markets its product lines, primarily on an exclusive basis. The Company also
manufactures intimate apparel on a private and exclusive label basis for certain
leading specialty and department stores. The Warner's brand is 124 years old and
the Olga brand is 57 years old.
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In August 1991, the Company entered into an exclusive license agreement
with Fruit of the Loom, Inc. ('Fruit of the Loom') for the design, manufacture
and marketing of moderate priced bras which are distributed through mass
merchandisers, such as Wal-Mart and Kmart, under the Fruit of the Loom brand
name. The license agreement has since been extended to include full slips, half
slips, camisoles and petticoats as well as coordinated fashion sets (bras and
panties) and certain control bottoms. The Company began shipping Fruit of the
Loom products in June 1992 and has built its current market share to over 6% in
the mass merchandise market. The agreement with Fruit of the Loom has allowed
the Company to enter the mass merchandise market, which is growing faster than
the department and specialty store market.
In March 1994, the Company acquired the worldwide trademarks, rights and
business of Calvin Klein men's underwear, and effective January 1, 1995, the
worldwide trademark, rights and business of Calvin Klein women's intimate
apparel. The purchase price was approximately $60.9 million and consisted of
cash payments of $33.1 million in fiscal 1994, $5.0 million in fiscal 1995 and
the issuance of 1,699,492 shares of the Company's Common Stock with a fair
market value of $22.8 million for such shares. Since that time, the Company has
acquired the business of several former international licensees and distributors
of Calvin Klein underwear products including those in Canada, Germany, Italy,
Portugal and Spain. In addition, the Company entered into an exclusive worldwide
license agreement to produce men's accessories and small leather goods under the
Calvin Klein label. The Calvin Klein underwear brand accounted for net revenues
of $318.7 million in fiscal 1997, an increase of 30.5% over the $244.3 million
recorded in fiscal 1996 and nearly six times greater than the $55.0 million
recorded in fiscal 1994, the first year of the acquisition.
In fiscal 1996, the Company acquired GJM, a private label maker of
sleepwear and intimate apparel. The acquisition provided the Company with
design, marketing and manufacturing expertise in the sleepwear business,
broadening the Company's product line and contributing to the Company's base of
low cost manufacturing capacity. In June 1996, the Company purchased
Bodyslimmers, a leading designer and manufacturer of body slimming undergarments
targeted at aging baby boomers. The purchase of Bodyslimmers increased the
Company's presence in a growing segment of the intimate apparel market. In July
1996, the Company acquired Lejaby.
Lejaby is a leading maker of intimate apparel in Europe. The Lejaby
acquisition increased the size of the Company's operations in Western Europe and
provides the Company with an opportunity to expand the distribution of its
products, including Calvin Klein, in the critical European market. In December
1996, the Company introduced its Marilyn Monroe line of intimate apparel
designed to expand the Company's product offerings. These acquisitions, along
with the introduction of the Marilyn Monroe line, contributed $183.3 million in
net revenues for fiscal 1997, nearly 20% of the Company's Intimate Apparel net
revenues.
The Company attributes the strength of its brands to the quality, fit and
design of its intimate apparel, which has developed a high degree of customer
loyalty and a high level of repeat business. The Company believes that it has
maintained its leadership position, in part, through product innovation with
accomplishments such as introducing the alphabet bra (A, B, C and D cup sizes),
the first all-stretch bra, the body stocking, the use of two way stretch
fabrics, seamless molded cups for smooth look bras, the cotton-Lycra bra and the
sports bra. The Company also introduced the use of hangers and certain
point-of-sale hang tags for in-store display of bras, which was a significant
change from marketing bras in boxes, and enabled women, for the first time, to
see the product in the store. The Company's product innovations have become
standards in the industry.
The Company believes that a shift in consumer attitudes is stimulating
growth in the intimate apparel industry. Women increasingly view intimate
apparel as a fashion-oriented purchase rather than as a purchase of a basic
necessity. The shift has been driven by the expansion of intimate apparel
specialty stores and catalogs, such as Victoria's Secret, and an increase in
space allocated to intimate apparel by department stores. The Company believes
that it is well-positioned to benefit from increased demand for intimate apparel
due to its reputation for forward-looking design, quality, fit and fashion and
to the breadth of its product lines at a range of price points. Over the past
five years, the Company has further improved its position by obtaining the
licenses to produce intimate apparel under the Valentino Intimo name in the
premium end of the market and the Marilyn Monroe name in the better
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end of the market and by continuing to introduce new products under the Warner's
and Olga brands in the better end of the market, by obtaining the license from
Fruit of the Loom to produce bras, daywear and other related items, and by
producing White Stag bras for the mass merchandise segment of the market, by
acquiring the Calvin Klein trademarks for premium priced women's intimate
apparel and better priced men's underwear, by purchasing the Van Raalte
trademark and introducing an intimate apparel line through Sears stores in July
1995, by entering an agreement to manufacture and distribute intimate apparel
products under the Speedo brand name and by making strategic acquisitions to
expand product lines and distribution channels such as GJM, Lejaby and
Bodyslimmers in 1996. The Company has further improved its position by
continuing to strengthen its relationships with its department store, specialty
store and mass merchandise customers.
The Intimate Apparel Division's net revenues have increased at a compound
annual growth rate of 18.5% since 1991, to $941.2 million in fiscal 1997, as the
Company has increased its penetration with existing accounts, expanded sales to
new customers such as Van Raalte to Sears and Fruit of the Loom to mass
merchandisers such as Wal-Mart and Kmart and broadened its product lines to
include men's underwear. The Company believes that it is one of the lowest-cost
producers of intimate apparel in the United States, producing approximately
eight million dozen garments per year.
The Company's bras are sold primarily in the department and specialty
stores, the Company's traditional customer base for intimate apparel. In June
1992, the Company expanded into a new channel of distribution, mass
merchandisers, with its Fruit of the Loom product line, which offers a range of
styles designed to meet the needs of the consumer profile of this market. The
Company also sees opportunities for continued growth in the Intimate Apparel
Division for bras specifically designed for the 'full figure' market, as well as
in its panty and daywear product lines, and acquired Bodyslimmers in June 1996
to provide important brand name recognition in this growing segment of the
intimate apparel market.
The Intimate Apparel Division has subsidiaries in Canada and Mexico in
North America and in the United Kingdom, France, Belgium, Ireland, Spain, Italy,
Austria, Switzerland and Germany in Europe and in the Philippines, Sri Lanka,
the People's Republic of China and Hong Kong in Asia. International sales
accounted for approximately 30.1% of the Intimate Apparel Division's net
revenues in fiscal 1997 compared to 25.4% in fiscal 1996 and 18.4% in fiscal
1995. The increase in international net revenues is primarily attributable to
the acquisition of Lejaby in July 1996 and increased net revenues for Calvin
Klein Europe. The Company has acquired the businesses of several former
distributors and licensees of its Calvin Klein underwear products in the past
three years, including those in Canada, Germany, Italy, Portugal and Spain. The
Company's objective in acquiring its former licensees and distributors is to
expand its business in foreign markets through a coordinated set of product
offerings, marketing and pricing strategies and by consolidating distribution to
obtain economies of scale. Net revenues attributable to the international
divisions of the Intimate Apparel Division were $282.9 million, $204.1 million
and $126.7 million in fiscal 1997, 1996 and 1995, respectively. Management's
strategy is to increase its market penetration in Europe and to open additional
channels of distribution. In 1994, the Company entered into a joint venture with
News Corp. Limited to market, on an exclusive basis, the products of the Company
and others over the STAR network, serving Asia and the Middle East. The STAR
network reaches over 60 million households in 53 countries in an area that
includes two-thirds of the world's population. Initial shipments of merchandise
to STAR were made in the fourth quarter of fiscal 1995.
The Company's intimate apparel products are manufactured principally in the
Company's facilities in North America, Central America, the Caribbean Basin, the
United Kingdom, France, Ireland, Morocco (joint venture), the Philippines, Sri
Lanka and the People's Republic of China. Over the last three years the Company
has opened one new manufacturing facility in response to increased demand. In
addition, to support anticipated future growth, the Company has plans to open in
Mexico during 1998 two new manufacturing facilities, a cutting facility and a
distribution facility. Certain direct and incremental plant start-up costs
associated with the establishment of new manufacturing facilities in countries
where special efforts are needed to recruit and train entire work forces are
capitalized and amortized over five years. See Note 1 to the Consolidated
Financial Statements. Capitalized costs represent direct and incremental costs
associated with a new facility and include site selection and site
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development, worker training costs, rent and other operating costs incurred
prior to achieving full production in the facility. Amortization of these costs,
together with the initial inefficiencies associated with new facilities,
resulted in a lower gross margin during the 1993 and 1994 fiscal years. The
Company has realized a portion of the benefits associated with these plants in
fiscal 1995 through fiscal 1997 with Intimate Apparel Division gross profit
margin increasing 300 basis points since fiscal 1994. See Management's
Discussion and Analysis of Financial Condition and Results of Operations on
pages 15 to 24. The Company believes it takes approximately five years before
new facilities achieve the manufacturing efficiencies of established plants.
Although the Intimate Apparel Division generally markets its product lines
for three retail selling seasons (spring, fall and holiday), its sales and
revenues are somewhat seasonal. Approximately 60% of the Intimate Apparel
Division's net revenues and operating income were generated during the second
half of the 1997 fiscal year.
MENSWEAR
The Menswear Division designs, manufactures, imports and markets moderate
to better priced sportswear, better to premium priced men's accessories and
moderate to better priced dress shirts and neckwear. Management considers the
Menswear Division's primary strengths to include its strong brand recognition,
product quality, reputation for fashion styling, strong relationships with
department and specialty stores and its ability to deliver merchandise rapidly.
The Menswear Division markets its lines under the following brand names:
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BRAND NAME PRICE RANGE TYPE OF APPAREL
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Calvin Klein........................ better/premium men's underwear (a) and
accessories, men's, women's and
juniors designer jeanswear and
jeans related sportswear
Chaps by Ralph Lauren............... upper moderate dress shirts, neckwear, knit and
woven sport shirts, sweaters,
sportswear and bottoms
Catalina............................ moderate men's and women's sportswear and
dress shirts and furnishings
</TABLE>
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(a) See Intimate Apparel Division.
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The Calvin Klein, Chaps by Ralph Lauren and Catalina accessories brand
names are licensed on an exclusive basis by the Company.
The Menswear Division's strategy is to build on the strength of its brand
names, strengthen its position as a global apparel company and eliminate those
businesses which generate a profit contribution below the Company's required
return. In order to improve profitability, the Company (i) did not renew its
Golden Bear by Jack Nicklaus'r' license, which expired in June 1994, (ii) sold
its Hathaway dress shirt business in November 1996 and (iii) acquired Designer
Holdings during the fourth quarter of 1997. The Company recorded losses
associated with exiting the Hathaway business of approximately $46.0 million in
1996 and $10.6 million in fiscal 1997, consisting of operating losses incurred
prior to the disposition and losses related to the write-down of the Hathaway
assets, including intangible assets. The acquisition of Designer Holdings
contributed $133.3 million to net revenues in fiscal 1997.
Despite the strategic decision to discontinue approximately $140.0 million
of annualized net revenues in underperforming brands, the Menswear Division's
net revenues have increased at a compound annual growth rate of 15.4% since 1991
to $425.9 million in fiscal 1997. The reduction in net revenues from
discontinued brands has been more than offset by the success of the Chaps by
Ralph Lauren brand which has increased its net revenues by approximately 600%
since fiscal 1991 to $272.3
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million in fiscal 1997, and the addition of the Calvin Klein jeanswear and jeans
related sportswear brands.
Sportswear. In 1989, the Company began repositioning its Chaps by Ralph
Lauren product lines by changing to the use of all natural fibers and updating
its styling, which has generated significant net revenue increases, as mentioned
above. In 1994, the Company sold or terminated its licenses for Christian Dior
sportswear, neckwear, dress shirts and accessories. In addition, the Company did
not renew its Golden Bear by Jack Nicklaus license which expired in June 1994.
In 1993, the Company entered into a license agreement to design men's and
women's sportswear and men's dress shirts and furnishings bearing the Catalina
trademark. Catalina products are sold through the mass merchandise segment of
the market, generating royalty income of approximately $3.0 million in fiscal
1997.
Accessories. The Menswear Division markets men's small leather goods and
belts and soft side luggage under the Calvin Klein brand name pursuant to a
worldwide license. The first shipments of Calvin Klein accessories were made in
the third quarter of fiscal 1995 to United States customers. The line has
already grown significantly, accounting for approximately $17.3 million and
$11.1 million of net revenues in fiscal 1997 and 1996, respectively. Management
believes that one of the strengths of its accessories lines is the high level of
international consumer recognition associated with the Calvin Klein label. The
Company's strategy is to expand the accessories business, which has consistently
generated higher margins than other menswear products.
International sales accounted for approximately 4.0% of net revenues of the
Menswear Division in fiscal 1996. Net revenues attributable to international
operations of the Menswear Division were $8.3 million and $8.8 million in fiscal
1996 and 1995, respectively. The decrease in international sales over the last
three years reflects the Company's strategic decision to exit the Hathaway
business and terminate the Christian Dior licenses. The Company expects to
generate future revenue from international sales of Calvin Klein accessories.
Sportswear apparel (knit shirts and sweaters and other apparel) is sourced
principally from the Far East. Dress shirts are sourced from the Far East and
the Caribbean Basin. Accessories are sourced from the United States, Europe and
the Far East. Neckwear is sourced primarily from the United States.
The Menswear Division, similar to the Intimate Apparel Division, generally
markets its apparel products for three retail selling seasons (spring, fall and
holiday). New styles, fabrics and colors are introduced based upon consumer
preferences, market trends and to coincide with the appropriate retail selling
season. Sales of the Menswear Division's product lines follow individual
seasonal shipping patterns ranging from one season to three seasons, with
multiple releases in some of the division's more fashion-oriented lines.
Consistent with industry and consumer buying patterns, approximately 62.0% of
the Menswear Division's net revenues and 77.0% of the Menswear Division's
operating income (excluding the Designer Holdings acquisition in the fourth
quarter of fiscal 1997) were generated in the second half of the calendar year,
reflecting the strength of the fall and holiday shopping seasons.
RETAIL OUTLET STORES DIVISION
The Retail Outlet Stores Division primarily sells the Company's products to
the general public. The Company's business strategy with respect to its retail
outlet stores is to provide a channel for disposing of the Company's excess and
irregular inventory, thereby limiting its exposure to off-price retailers. The
Company's retail outlet stores are situated in areas where they generally do not
conflict with the Company's principal channels of distribution. Operating income
for the Retail Outlet Stores Division in fiscal 1997 improved 22.4% over fiscal
1996 to $7.1 million. As of January 3, 1998, the Company operated 106 stores.
INTERNATIONAL OPERATIONS
The Company has subsidiaries in Canada and Mexico in North America and in
the United Kingdom, France, Belgium, Ireland, Spain, Italy, Austria,
Switzerland, the Netherlands and Germany in Europe, which engage in sales,
manufacturing and marketing activities. The results of the Company's operations
in these countries are influenced by the movement of foreign currency exchange
rates. With the exception of the fluctuation in the rates of exchange of the
local currencies in which these
7
<PAGE>
<PAGE>
subsidiaries conduct their business, the Company does not believe that the
operations in Canada and Western Europe are subject to risks which are
significantly different from those of the domestic operations. Mexico has
historically been subject to high rates of inflation and currency restrictions
which may, from time to time, impact the Mexican operation. The Company also
sells directly to customers in Mexico. Net revenues from these shipments
represent less than 1% of the Company's net revenues.
The Company maintains manufacturing facilities in Mexico, Honduras, Costa
Rica, the Dominican Republic, Canada, Ireland, the United Kingdom, France,
Morocco (joint venture), Sri Lanka, the People's Republic of China and the
Philippines. The Company maintains warehousing facilities in Canada, Mexico, the
United Kingdom, Spain, Belgium, Italy, Austria, Switzerland, France and Germany
and contracts for warehousing in the Netherlands. The Intimate Apparel Division
operates manufacturing facilities in Mexico and in the Caribbean Basin pursuant
to duty-advantaged (commonly referred to as 'Item 807') programs. The Company's
policy is to have many potential sources of manufacturing so that a disruption
at any one facility will not significantly impact the Company.
The majority of the Company's purchases which are imported into the United
States are invoiced in United States dollars and, therefore, are not subject to
currency fluctuations. Those transactions denominated in foreign currencies are
hedged to minimize any impact of such currency fluctuations.
SALES AND MARKETING
The Intimate Apparel and Menswear Divisions sell to over 16,000 customers
operating more than 26,000 department, mass merchandise and men's and women's
specialty store doors throughout North America and Europe. None of the Company's
customers accounted for more than 10% of the Company's net revenues during the
fiscal year ended January 3, 1998.
The Company's retail customers are served by approximately 300 sales
representatives. The Company also employs marketing coordinators who work with
the Company's customers in designing in-store displays and planning the
placement of merchandise. The Company has implemented Electronic Data
Interchange ('EDI') programs with most of its retailing customers which permit
the Company to receive purchase orders electronically and, in some cases, to
transmit invoices electronically. These innovations assist the Company in
providing products to customers on a timely basis.
The Company utilizes various forms of advertising media. In fiscal 1997,
the Company spent approximately $86.2 million, or 6.0% of net revenues, for
advertising and promotion of its various product lines, compared with $59.5
million, or 5.6% of net revenues in fiscal 1996. The statement of income for
fiscal 1995 includes a special charge for advertising costs, previously
deferrable, of $11.7 million ($7.3 million after income tax benefits) related to
the change in accounting for certain advertising costs in accordance with
Statement of Position 93-7, 'Reporting on Advertising Costs,' ('SOP 93-7')
issued by the American Institute of Certified Public Accountants in December
1993, for years beginning after July 1994. The increase in advertising costs in
fiscal 1997, compared with fiscal 1996, reflects the Company's desire to
maintain its strong market position in Calvin Klein underwear and Warner's,
Olga, and Fruit of the Loom intimate apparel. The Company participates in
advertising on a cooperative basis with retailers, principally through newspaper
advertisements.
COMPETITION
The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, some of which have greater resources
than the Company.
The Company also competes with foreign producers, but to date, such foreign
competition has not materially affected the Intimate Apparel or Menswear
Divisions. In addition to competition from other branded apparel manufacturers,
the Company competes in certain product lines with department store private
label programs. The Company believes that its manufacturing skills, coupled with
its existing Central American and Caribbean Basin manufacturing facilities and
selective use of off-shore sourcing, enable the Company to maintain a cost
structure competitive with other major apparel manufacturers.
8
<PAGE>
<PAGE>
The Company believes that it has a significant competitive advantage
because of high consumer recognition and acceptance of its owned and licensed
brand names and its strong presence and market share in the major department,
specialty and mass merchandise store chains.
A substantial portion of the Company's sales are of products, such as
intimate apparel and men's underwear, that are basic and not very susceptible to
rapid design changes. This relatively stable base of business is a significant
contributing factor to the Company's favorable competitive and cost position in
the apparel industry.
RAW MATERIALS
The Company's raw materials are principally cotton, wool, silk, synthetic
and cotton-synthetic blends of fabrics and yarns. Raw materials used by the
Intimate Apparel and Menswear Division are available from multiple sources.
IMPORT QUOTAS
Substantially all of the Company's Menswear Division's sportswear products
are manufactured by contractors located outside the United States. These
products are imported and are subject to federal customs laws, which impose
tariffs as well as import quota restrictions established by the Department of
Commerce. While importation of goods from certain countries may be subject to
embargo by United States Customs authorities if shipments exceed quota limits,
the Company closely monitors import quotas through its Washington, D.C. office
and can, in most cases, shift production to contractors located in countries
with available quotas or to domestic manufacturing facilities. The existence of
import quotas has, therefore, not had a material effect on the Company's
business. Substantially all of the Company's Intimate Apparel Division's
products are manufactured in the Company's facilities located in Mexico, the
Caribbean Basin, Europe and Asia. The Company's policy is to have many potential
manufacturing sources so that a disruption at any one facility will not
significantly impact the Company.
EMPLOYEES
As of January 3, 1998, the Company and its subsidiaries employ
approximately 20,000 employees. Approximately 20.0% of the Company's employees,
all of whom are engaged in the manufacture and distribution of its products, are
represented by labor unions. The Company considers labor relations with
employees to be satisfactory and has not experienced any significant
interruption of its operations due to labor disagreements.
TRADEMARKS AND LICENSING AGREEMENTS
The Company has license agreements permitting it to manufacture and market
specific products using the trademarks of others. The Company's exclusive
license and design agreements for the Chaps by Ralph Lauren trademark expire on
December 31, 2004. These licenses grant the Company an exclusive right to use
the Chaps by Ralph Lauren trademark in the United States and Mexico. The
Company's license to develop, manufacture and market designer jeanswear and
jeans related sportswear under the Calvin Klein trademark in North, South and
Central America extends for an initial term expiring on December 31, 2034 and is
extendable at the Company's option for a further 10 year term expiring on
December 31, 2044. The Company's license to use the Valentino Intimo trademark
for intimate apparel in the United States, its territories and possessions,
Puerto Rico and Canada, expires on December 31, 2002, and is extendable subject
to the mutual agreement of the parties. In October 1995, the Company entered
into a worldwide licensing arrangement granting the Company exclusive, worldwide
rights to use the Valentino Intimo trademark for intimate apparel for a period
coterminous with the Company's United States license, through December 31, 2002,
subject to extension by mutual agreement of the parties. The Company has an
exclusive license agreement to use the Fruit of the Loom trademark in the United
States of America, its territories and possessions, Canada and Mexico through
December 31, 1998, subject to renewal for a further term by mutual agreement of
the parties.
9
<PAGE>
<PAGE>
The Company's exclusive worldwide license agreement with Calvin Klein, Inc.
to produce Calvin Klein men's accessories is for a period of five years through
June 30, 1999 and is renewable for a five year period through June 30, 2004,
solely at the option of the Company. The Company has entered into license
agreements with Authentic Fitness Corporation to produce and sell men's and
women's sportswear and men's dress shirts and furnishings under the Catalina
label and certain intimate apparel under the Speedo label. The Company's
exclusive license to use the Catalina trademark for these products worldwide
expires in December 2003 and the Company's exclusive license to use the Speedo
name for intimate apparel products continues in perpetuity.
The Company is the exclusive worldwide licensee of the Estate of Marilyn
Monroe for use of the name, voice, image and likeness of Marilyn Monroe on
men's, boys', women's and girls' underwear, sleepwear, bodywear and certain
activewear products, for a five year period expiring December 31, 2000, with two
successive five year renewal periods through December 31, 2005 and December 31,
2010, respectively, each at the Company's option. Under a separate license
arrangement with Twentieth Century Fox Licensing and Merchandising, the Company
has been granted the right to use artwork, film titles, and other creative
elements of films owned or controlled by Fox, Inc., in which Marilyn Monroe
appeared, on and in connection with the products produced by the Company under
its license agreement with the Estate of Marilyn Monroe, for a period
coterminous with that license agreement, including subsequent renewals of that
agreement.
Although the specific terms of each of the Company's license agreements
vary, generally such agreements provide for minimum royalty payments and/or
royalty payments based on a percentage of net sales. Such license agreements
also generally grant the licensor the right to approve any designs marketed by
the licensee.
The Company owns other trademarks, the most important of which are
Warner's, Olga, Calvin Klein men's underwear and sleepwear, Calvin Klein women's
intimate apparel and sleepwear, Van Raalte, Lejaby, Rasurel and Bodyslimmers.
The Company has a license in perpetuity for White Stag women's sportswear and
intimate apparel as well as Speedo sports bras.
The Company licenses the Warner's, White Stag, Catalina and Calvin Klein
brand names to domestic and international licensees for a variety of products.
These agreements generally require the licensee to pay royalties and fees to the
Company based on a percentage of the licensee's net sales. The Company regularly
monitors product design, development, quality, merchandising and marketing and
schedules meetings throughout the year with licensees to assure compliance with
the Company's overall marketing, merchandising and design strategies, and to
ensure uniformity and quality control. The Company, on an ongoing basis,
evaluates entering into distribution or license agreements with other companies
that would permit such companies to market products under the Company's
trademarks. Generally, in evaluating a potential distributor or licensee, the
Company considers the experience, financial stability, manufacturing performance
and marketing ability of the proposed licensee. Royalty income derived from
licensing was approximately $12.2 million, $10.3 million and $10.8 million in
fiscal 1997, 1996 and 1995, respectively.
The Company believes that only the trademarks mentioned herein are material
to the business of the Company.
BACKLOG
A substantial portion of net revenues is based on orders for immediate
delivery and, therefore, backlog is not necessarily indicative of future net
revenues.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
The information required by this portion of Item 1 is incorporated herein
by reference to Note 7 to the Consolidated Financial Statements on pages F-1 to
F-31.
10
<PAGE>
<PAGE>
ITEM 2. PROPERTIES.
The principal executive offices of the Company are located at 90 Park
Avenue, New York, New York 10016 and are occupied pursuant to a lease that
expires in 2004. In addition to its executive offices, the Company leases
offices in Connecticut, California and New York, pursuant to leases that expire
in 1999, 2000 and 2007, respectively.
The Company has nine domestic manufacturing and warehouse facilities
located in Connecticut, Georgia, Pennsylvania, Tennessee, South Carolina,
Massachusetts and New Jersey and 31 international manufacturing and warehouse
facilities located in Canada, Costa Rica, the Dominican Republic, France,
Germany, Honduras, Mexico, People's Republic of China, the Philippines, Sri
Lanka, the United Kingdom, Ireland, Spain, Belgium, Italy, Switzerland, Holland
and Austria. Certain of the Company's manufacturing and warehouse facilities are
also used for administrative and retail functions. The Company owns six of its
domestic and three of its international facilities. The balance of the
facilities are leased. Lease terms, except for five month-to-month leases,
expire from 1998 to 2020. No facility is underutilized, except for the facility
located in Dothan, Alabama, which has discontinued operations and which the
Company has listed for sale.
The Company leases sales offices in a number of major cities, including
Dallas and New York in the United States; Brussels, Belgium; Dusseldorf and
Frankfurt, Germany; Toronto, Canada; Lausanne, Switzerland; Milan, Italy; Paris,
France; and Hong Kong. The sales office leases expire between 1998 and 2008 and
are generally renewable at the Company's option. The Company also occupies
offices in London, England subject to a freehold lease which expires in 2114.
The Company leases 106 retail outlet store locations. Outlet store leases,
except for two month-to-month leases, expire from 1998 to 2008 and are generally
renewable at the Company's option.
All of the Company's production and warehouse facilities are located in
appropriately designed buildings, which are kept in good repair. All such
facilities have well maintained equipment and sufficient capacity to handle
present volumes. The Company has expanded its production capacity in Mexico and
the Caribbean Basin during the last three years.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any litigation, other than routine litigation
incidental to the business of the Company, that individually or in the aggregate
is material to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a special meeting of its stockholders on December 12, 1997
to vote upon a proposal to approve the issuance of shares of the Company's Class
A Common Stock in connection with the Agreement and Plan of Merger, dated as of
September 25, 1997, among the Company, WAC Acquisition Corporation and Designer
Holdings. The result of the voting was as follows:
<TABLE>
<CAPTION>
<S> <C>
Shares voted for the proposal........................................................... 44,286,313
Shares voted against the proposal....................................................... 8,798
Shares abstained........................................................................ 84,153
</TABLE>
11
<PAGE>
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their age and their position are set
forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Linda J. Wachner................................... 52 Director, Chairman of the Board, President and
Chief Executive Officer
William S. Finkelstein............................. 49 Director, Senior Vice President and Chief Financial
Officer
Stanley P. Silverstein............................. 45 Vice President, General Counsel and Secretary
Carl J. Deddens.................................... 45 Vice President and Treasurer
</TABLE>
Mrs. Wachner has been a Director, President and Chief Executive Officer of
the Company since August 1987, and the Chairman of the Board since August 1991.
Mrs. Wachner was a Director and President of the Company from March 1986 to
August 1987. Mrs. Wachner held various positions, including President and Chief
Executive Officer, with Max Factor and Company from December 1978 to October
1984. Mrs. Wachner also serves as a Director of Travelers Group Inc., the New
York Stock Exchange, Applied Graphics Technologies, Inc. and Authentic Fitness
Corporation.
Mr. Finkelstein has been Senior Vice President of the Company since May
1992 and Chief Financial Officer and Director of the Company since May 1995. Mr.
Finkelstein served as Vice President and Controller of the Company from November
1988 until his appointment as Senior Vice President. Mr. Finkelstein served as
Vice President of Finance of the Company's Activewear and Olga Divisions from
March 1988 until his appointment as Controller of the Company. Mr. Finkelstein
served as Vice President and Controller of SPI Pharmaceuticals Inc. from
February 1986 to March 1988 and held various financial positions, including
Assistant Corporate Controller with Max Factor and Company, between 1977 and
1985. Mr. Finkelstein also serves as a Director of Authentic Fitness
Corporation.
Mr. Silverstein has been Vice President, General Counsel and Secretary of
the Company since December 1990. Mr. Silverstein served as Assistant Secretary
of the Company from June 1986 until his appointment as Secretary in January
1987.
Mr. Deddens has been Vice President and Treasurer of the Company since
March 1996. Prior to joining the Company, Mr. Deddens served as Vice President
and Treasurer of Revlon, Inc. from 1991 to 1996 and as Assistant Treasurer from
1987 to 1991. Mr. Deddens held various financial positions with Allied-Signal
Corporation and Union Texas Petroleum Corporation from 1981 to 1987.
12
<PAGE>
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock, $0.01 par value per share (the 'Common
Stock'), is listed on the New York Stock Exchange under the symbol 'WAC'. The
table below sets forth, for the periods indicated, the high and low sales prices
of the Company's Common Stock, as reported on the New York Stock Exchange
Composite Tape.
<TABLE>
<CAPTION>
DIVIDEND
PERIOD HIGH LOW DECLARED
- --------------------------------------------------------------------- ---- --- --------
<S> <C> <C> <C>
1996:
First Quarter................................................... $27 1/2 $21 1/2 $.07
Second Quarter.................................................. $31 1/4 $24 1/4 $.07
Third Quarter................................................... $25 3/4 $21 5/8 $.07
Fourth Quarter.................................................. $29 5/8 $22 3/4 $.07
1997:
First Quarter................................................... $33 3/8 $26 5/8 $.08
Second Quarter.................................................. $34 $27 15/16 $.08
Third Quarter................................................... $35 9/16 $30 15/16 $.08
Fourth Quarter.................................................. $33 1/4 $26 3/4 $.09
1998:
First Quarter (through March 31, 1998).......................... $39 9/16 $30 $.09(1)
</TABLE>
- ------------
(1) On February 19, 1998, the Company declared its regular quarterly cash
dividend of $.09 per share payable on April 9, 1998 to stockholders of
record as of March 12, 1998.
------------------------
As of March 31, 1998, there were 216 holders of the Common Stock, based
upon the number of holders of record and the number of individual participants
in certain security position listings.
In fiscal 1995, the Company initiated a regular cash dividend of $0.28 per
share per annum. The initial cash dividend was paid on June 30, 1995. On
February 20, 1997, the Company's Board of Directors approved an increase in the
Company's quarterly cash dividend to $0.08 per share. On November 21, 1997, the
Company's Board of Directors approved an increase in the quarterly cash dividend
to $0.09 per share, which was paid on January 6, 1998.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is consolidated statement of income data with respect to
the fiscal years ended January 6, 1996, January 4, 1997 and January 3, 1998, and
consolidated balance sheet data at January 4, 1997 and January 3, 1998, all of
which are derived from, and qualified by reference to, the audited consolidated
financial statements included herein and such data should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
income data for the fiscal years ended January 8, 1994 and January 7, 1995 and
the consolidated balance sheet data at January 8, 1994, January 7, 1995 and
January 6, 1996 are derived from audited consolidated financial statements not
included herein.
13
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
JANUARY 8, JANUARY 7, JANUARY 6, JANUARY 4, JANUARY 3,
1994(a)(b) 1995(a) 1996(e)(f) 1997(g) 1998(h)
---------------------------------------------------------------------
(IN MILLIONS, EXCEPT RATIOS AND SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues........................ $ 703.8 $ 788.8 $ 916.2 $ 1,063.8 $ 1,435.7
Gross profit........................ 236.4 255.8 309.7 327.7 432.2
Income before interest and income
taxes............................. 69.7 96.2 113.9 26.0 82.8
Interest expense.................... 38.9 32.5 33.9 32.4 45.9
Income (loss) from continuing
operations........................ 53.3 63.3 49.6 (8.2) 23.0
Net income (loss) applicable to
Common Stock(d)................... 24.1 63.3 46.5 (8.2) 23.0
Dividends on Common Stock........... -- -- 9.5 14.5 17.3
Per Share Data(d):
Income (loss) from continuing
operations:
Basic........................... $ 1.34(c) $ 1.53(c) $ 1.12 $ (0.16) $ 0.44
Diluted......................... $ 1.34(c) $ 1.53(c) $ 1.10 $ (0.16) $ 0.42
Net income (loss):
Basic........................... $ 0.61 $ 1.53 $ 1.05 $ (0.16) $ 0.44
Diluted......................... $ 0.61 $ 1.53 $ 1.03 $ (0.16) $ 0.42
Weighted average number of shares of
Common Stock outstanding(d):
Basic........................... 39,770,482 41,285,355 44,214,690 51,308,017 52,813,982
Diluted......................... 39,770,482 41,285,355 45,278,117 51,308,017 54,820,728
Divisional Summary Data:
Net revenues:
Intimate Apparel................ $ 423.2 $ 565.3 $ 689.2 $ 802.0 $ 941.2
Menswear........................ 243.2 183.8 185.7 214.4 425.9
Retail Outlet Stores............ 37.4 39.7 41.3 47.4 68.6
---------- ---------- ---------- ---------- ----------
$ 703.8 $ 788.8 $ 916.2 $ 1,063.8 $ 1,435.7
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Percentage of net revenues:
Intimate Apparel................ 60.1 % 71.7 % 75.2 % 75.4 % 65.6 %
Menswear........................ 34.6 23.3 20.3 20.2 29.7
Retail Outlet Stores............ 5.3 5.0 4.5 4.4 4.7
---------- ---------- ---------- ---------- ----------
100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Working capital................. $ 122.0 $ 104.5 $ 307.5 $ 210.6 $ 447.3
Total assets.................... 688.6 780.6 941.1 1,142.9 1,727.7
Long term debt (excluding
current maturities)........... 245.5 206.8 194.3 215.8 354.3
Stockholders' equity............ 159.1 240.5 500.3 475.7 808.1
</TABLE>
- ------------------
(a) In October 1993, the Company discontinued a portion of its men's
manufactured dress shirt and neckwear business segment. This resulted in a
pre-tax charge of $19.9 million. Additionally, the Company incurred a $2.6
million pre-tax charge associated with a previously discontinued business.
The total non-recurring charges recorded in fiscal 1993 were $22.5 million
or $0.33 per diluted share. In fiscal 1994, the Company recorded a $3.0
million pre-tax charge (or $0.04 per diluted share) related to the
California earthquake.
(b) Fiscal 1993 includes a $10.5 million after-tax charge ($0.27 per diluted
share) for the cumulative effect of a change in accounting for
postretirement benefits other than pensions and an $18.7 million after-tax
extraordinary charge ($0.47 per diluted share) to write-off deferred
financing costs and losses under related interest rate swap agreements.
(c) Income reflects the benefits of utilizing the Company's net operating loss
carryforward to offset the Company's federal income tax provision. Income
before non-recurring items, after giving effect to a full tax provision at
the Company's effective income tax rate of 38.0%, was $41.1 million (or
$1.00 per share) in fiscal 1994 and $33.0 million (or $0.83 per share) in
fiscal 1993.
(d) All share and per share amounts have been restated to reflect the
two-for-one stock split effective October 3, 1994 and the impact of
Statement of Financial Accounting Standards No. 128, 'Earnings Per Share',
adopted effective January 3, 1998.
(footnotes continued on next page)
14
<PAGE>
<PAGE>
(e) Effective with the 1995 fiscal year, the Company adopted the provisions of
SOP 93-7 which requires, among other things, that certain costs which had
previously been deferred and amortized against future revenues be expensed
when the advertisement first runs. The Company incurred a pre-tax charge
for advertising costs, previously deferrable, of $11.7 million ($7.3
million net of income tax benefits, or $0.17 per diluted share) in the
fourth quarter of fiscal 1995.
(f) Fiscal 1995 includes a $3.1 million after-tax extraordinary charge ($0.06
per diluted share) to write-off deferred financing costs.
(g) Fiscal 1996 includes pre-tax charges related to the sale of the Company's
Hathaway dress shirt operations of $46.0 million, consolidation and
realignment of the Company's Intimate Apparel Division of $72.1 million and
other items of $20.4 million. Total non-recurring items were $138.5 million
($88.8 million net of income tax benefits, or $1.67 per diluted share).
(h) Fiscal 1997 reflects the acquisition of Designer Holdings during the fourth
quarter and includes pre-tax charges related to the merger and integration
of 1996 and 1997 acquisitions and the completion in 1997 of certain
consolidation and restructuring actions announced in 1996. Total
non-recurring items were $130.8 million ($81.1 million net of income tax
benefits, or $1.48 per diluted share). Excluding non-recurring items, net
income and net income per diluted share was $104.1 million and $1.87,
respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
STRATEGIC ACTIONS (See Note 4 of Notes to Consolidated Financial Statements)
FISCAL 1997
During the fourth quarter of 1997, the Company reported a pre-tax charge of
$130.8 million related to the acquisition and integration of Designer Holdings,
the Intimate Apparel consolidation and realignment program initiated in 1996 and
other items, including the final disposition of Hathaway assets (amounts in
millions):
<TABLE>
<CAPTION>
<S> <C>
Merger related integration costs................................................. $ 49.9
Consolidation and realignment.................................................... 59.5
Other items, including final disposition of Hathaway assets...................... 21.4
------
130.8
Less income tax benefits.................................................... (49.7)
------
$ 81.1
------
------
</TABLE>
The charge consists primarily of a write-down of asset values, severance
and other employee costs, costs related to manufacturing realignment and lease
and other costs to combine existing outlet stores with those of Designer
Holdings.
During the fourth quarter of 1997, the Company increased the scope of the
consolidation and restructuring of the Intimate Apparel Division started in
1996, primarily as a result of increased production volumes and demand
experienced throughout the year. Accordingly, additional products and styles
were discontinued and slower moving inventory liquidated.
MERGER RELATED INTEGRATION COSTS
Designer Holdings and the Company previously operated retail outlets in
several common locations. The Company has elected to consolidate retail
operations in such locations into the larger Designer Holdings facilities. As a
result, the Company has provided for the anticipated lease termination costs,
write off of related fixed assets and the close out of store inventories and
surplus stocks not considered suitable for redirected marketing efforts in the
new store format. The Company has also taken steps to reduce the number of new
Designer Holdings retail stores previously planned. In
15
<PAGE>
<PAGE>
addition, following the merger in December 1997, the Company consolidated the
credit and collection functions of the companies, and initiated a program of
consolidating receivables from common customers, offering favorable settlement
of prior balances to accelerate collection efforts. Additional allowances
accepted under this program are expected to generate substantial cash earlier
than otherwise would be available. Under the Company's redirected marketing
strategy for Designer Holdings, it is anticipated that the volume of future
business with certain prior distribution outlets may be significantly reduced.
In connection with the integration, the Company recorded a pre-tax charge of
$49.9 million ($31.3 million net of income tax benefits).
The consolidation of other administrative functions for the Company and
Designer Holdings, which is substantially complete, has resulted in workforce
reductions and closure of office facilities and will generate $19 million of
annual savings. Additional reductions and closures are being considered to
maximize savings.
CONSOLIDATION AND REALIGNMENT
The Company expanded the intimate apparel consolidation and realignment
program initiated in 1996 to include other products and facilities. In large
part this was necessitated or prompted by the increased production volumes and
demand experienced throughout the year. Accordingly, additional products and
styles were discontinued and slower moving inventory liquidated, incurring
markdown losses to accommodate the increased volumes of higher margin
merchandise. The consolidation of retail stores and related restocking plans was
also a factor.
Further reconfiguration of manufacturing facilities and the merger of
Warner's Europe with Lejaby operations achieved a workforce reduction greater
than originally anticipated but delayed realization of anticipated efficiencies
and resulted in additional costs including severance and termination costs,
primarily expensed as incurred. In connection with the consolidation and
realignment, the Company recorded a pre-tax charge of $59.5 million ($36.6
million net of income tax benefits).
OTHER
The planned disposition of assets retained from the Hathaway sale was
achieved on terms less favorable than expected. In addition, insurance
recoveries related to a prior year customer bankruptcy were less than
anticipated. As a result of the above and certain other items, charges incurred
in 1997 exceeded estimates previously accrued by $21.4 million ($13.2 million
net of income tax benefits).
FISCAL 1996
Following the acquisition of the GJM business in February 1996, which
expanded the Company's product lines and significantly added to the Company's
low cost sleepwear manufacturing capacity, the Company undertook a strategic
review of its businesses and manufacturing facilities. The acquisitions of
Bodyslimmers and Lejaby were also considered in this review. As a result of this
review, the Company took the following steps which resulted in a non-recurring
charge in fiscal 1996 as summarized below (in millions):
<TABLE>
<CAPTION>
<S> <C>
Loss related to the sale of the Hathaway business................................ $ 46.0
Charge for the consolidation and realignment of the Intimate Apparel Division.... 72.1
Other items, including merger termination costs.................................. 20.4
------
138.5
Less income tax benefits......................................................... (49.7)
------
$ 88.8
------
------
</TABLE>
EXIT FROM THE HATHAWAY BUSINESS
In May 1996, following a comprehensive evaluation of the Company's men's
dress shirt business, the Company decided to cease manufacturing and marketing
the Hathaway brand. In recent years, the
16
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<PAGE>
dress shirt business had become increasingly price driven and, as a result,
profit margins were considerably below those of the Company's core intimate
apparel business. In addition, the dress shirt business required continuous
investment, particularly of 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
its Hathaway dress shirt business, including its Waterville, Maine and Prescott,
Ontario manufacturing facilities ('Hathaway Assets'). In connection with the
decision to exit the Hathaway business, the Company recorded a pre-tax charge of
approximately $46.0 million ($29.5 million net of income tax benefits). Included
in the charge are losses 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. The pre-tax loss also
includes the write off of $13.8 million of Hathaway intangible assets, including
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 resulted in annual cost savings in excess of $15
million. In connection with the consolidation and realignment, the Company
recorded a pre-tax charge of approximately $72.1 million ($46.2 million net of
income tax benefits), 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 as a
result of the consolidation of facilities and the additional volumes
contemplated as a result of the Lejaby, GJM and Bodyslimmers acquisitions, the
Company reevaluated the viability of all product assortments and styles. As a
result, certain products and styles were 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 charge.
OTHER ITEMS
The 1996 charge also includes a pre-tax charge of $17.4 million ($11.3
million net of income tax benefits) related to the cancellation of certain
contracts, realignment of its European organization and the write-off of
insurance and other receivables.
In June 1996, the Company announced its intent to merge with Authentic
Fitness Corporation. On July 25, 1996, the Company announced the termination of
the merger. The Company incurred legal, accounting and investment advisory fees
in connection with the proposed merger of approximately $3.0 million, ($1.9
million net of income tax benefits), all of which were charged to operations in
fiscal 1996.
The non-recurring charge for the Hathaway disposition, the Intimate Apparel
Division consolidation and realignment and certain other items total $138.5
million ($88.8 million net of income tax benefits), or $1.66 per diluted share
for the year ended January 4, 1997.
RESULTS OF OPERATIONS
The consolidated statements of income for the Company are summarized below
on an analytical basis. The Divisional Summary includes the Retail Outlet Stores
Division for reporting purposes; however, since the Company's business strategy
is to use its Retail Outlet Stores Division as a channel for its excess
inventory and the Company does not consider the results of such division to be
material, the Retail Outlet Stores Division is not discussed further.
17
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<PAGE>
SELECTED DATA
STATEMENT OF INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------------
JANUARY 6, % OF NET JANUARY 4, % OF NET JANUARY 3, % OF NET
1996 REVENUES 1997 REVENUES 1998 REVENUES
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................... $916.2 100.0% $1,063.8 100.0% $1,435.7 100.0%
Cost of goods sold(1)...................... 606.5 66.2% 736.1 69.2% 1,003.5 69.9%
---------- -------- ---------- -------- ---------- --------
Gross profit(1)............................ 309.7 33.8% 327.7 30.8% 432.2 30.1%
Selling, administrative and general
expenses(2).............................. 195.8 21.4% 301.7 28.4% 349.4 24.3%
---------- -------- ---------- -------- ---------- --------
Income before interest and income taxes.... 113.9 12.4% 26.0 2.4% 82.8 5.8%
Interest expense........................... 33.9 32.4 45.9
---------- ---------- ----------
Income (loss) before income taxes.......... 80.0 (6.4) 36.9
Income taxes............................... 30.4 1.8 13.9
---------- ---------- ----------
Income (loss) before extraordinary item.... $ 49.6 $ (8.2) $ 23.0
Extraordinary item, net of income
tax benefits of $1.9..................... (3.1) -- --
---------- --------- ---------
Net income (loss).......................... $ 46.5 $ (8.2) $ 23.0
---------- --------- ---------
---------- ---------- ----------
</TABLE>
DIVISIONAL SUMMARY
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------------
% OF % OF % OF
JANUARY 6, GROSS JANUARY 4, GROSS JANUARY 3, GROSS
1996 PROFIT 1997 PROFIT 1998 PROFIT
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Intimate Apparel...................... $689.2 $ 802.0 $ 941.2
Menswear.............................. 185.7 214.4 425.9
Retail Outlet Stores.................. 41.3 47.4 68.6
---------- ---------- ----------
$916.2 $1,063.8 $1,435.7
---------- ---------- ----------
---------- ---------- ----------
Gross profit(1):
Intimate Apparel...................... $259.2 83.7% $ 268.5 81.9% $ 316.8 73.3%
Menswear.............................. 35.5 11.5% 44.7 13.6% 99.9 23.1%
Retail Outlet Stores.................. 15.0 4.8% 18.5 5.6% 24.7 5.7%
Divested Operations................... -- -- (4.0) (1.1)% (9.2) (2.1)%
---------- -------- ---------- -------- ---------- --------
$309.7 100.0% $ 327.7 100.0% $ 432.2 100.0%
---------- -------- ---------- -------- ---------- --------
---------- -------- ---------- -------- ---------- --------
</TABLE>
- ------------
(1) Includes non-recurring expenses of $37.9 million in fiscal 1996 related to
the decision to exit the Hathaway business and the restructuring and
realignment of the Intimate Apparel Division and $76.6 million in fiscal
1997 related to the acquisition of Designer Holdings and the completion of
the 1996 consolidation and restructuring actions.
(2) Includes non-recurring expenses of $11.7 million in fiscal 1995, $100.6
million in fiscal 1996 and $54.2 million in fiscal 1997 related to the
write-off of certain deferred advertising costs, the sale of the Company's
Hathaway dress shirt operation, consolidation and realignment of the
Company's Intimate Apparel Division and other items and consolidation and
restructuring of facilities and personnel related to the acquisition of
Designer Holdings. Also, in fiscal 1997 includes $3.5 million attributable
to minority interests in the income of Designer Holdings applicable to the
period of less than 100% ownership by the Company.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Net revenues increased $371.9 million or 35.0% to $1,435.7 million compared
with $1,063.8 million in fiscal 1996. The acquisition of Designer Holdings
during the fourth quarter of fiscal 1997 added net revenues of $158.3 million.
Excluding the impact of the Designer Holdings acquisition and the 1996
divestiture of the Hathaway dress shirt business, net revenues improved by
$241.9 million or 23.4%.
18
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INTIMATE APPAREL DIVISION. Net revenues increased $139.2 million or 17.4% to
$941.2 million in fiscal 1997 compared with $802.0 million in fiscal 1996.
The increase is due to the strength of the Calvin Klein and the core Warners
and Olga brands coupled with the full year impact in fiscal 1997 of the
acquisition of the Lejaby companies in fiscal 1996. Net revenues of Calvin
Klein increased by $74.4 million due primarily to stronger sales in Europe.
Warners and Olga brand net revenues improved by $28.8 million due to
increased market penetration. Incremental net revenues contributed by Lejaby
were $43.8 million in fiscal 1997.
MENSWEAR DIVISION. Net revenues increased $211.5 million or 98.6% to $425.9
million in fiscal 1997 compared with $214.4 million in fiscal 1996. The
improvement is due in part to the acquisition of Designer Holdings during
the fourth quarter of 1997, which added net revenues of $133.3 million. In
addition, the increase is due to continued strength in Chaps by Ralph
Lauren, which added $100.3 million in fiscal 1997, or an increase of 58.3%
over fiscal 1996, and Calvin Klein accessories, which added $6.2 million, or
an increase of 55.9% over fiscal 1996. These increases were partially offset
by a decrease in net revenues due to the disposition of the Hathaway dress
shirt operations in November 1996. On a comparable basis, excluding the
Designer Holdings acquisition and the divested Hathaway operations, net
revenues increased $106.5 million or 57.2% in fiscal 1997.
Gross profit increased 39.2% (excluding non-recurring items) to $508.8
million in fiscal 1997 compared with $365.6 million in fiscal 1996. Increases
were experienced across all divisions. On a comparable basis, excluding the
results of Designer Holdings in 1997 and the Hathaway business in 1996, gross
profit improved 29.0% or $107.0 million. The Company recorded non-recurring
charges in fiscal 1997 related to the acquisition of Designer Holdings and the
completion in 1997 of certain consolidation and restructuring actions announced
in 1996. On an as-reported basis, including the effects of the non-recurring
charges in 1997 and 1996, gross profit increased 31.9%.
INTIMATE APPAREL DIVISION. Gross profit (excluding non-recurring items)
increased 21.6% to $367.5 million in fiscal 1997 (39.0% of net revenues) in
fiscal 1997 from $302.4 million (37.7% of net revenues) in fiscal 1996. The
increase in gross profit reflects higher sales volumes along with a better
mix of Calvin Klein primarily in Europe and the full year impact in 1997 of
the Lejaby acquisition.
MENSWEAR DIVISION. Gross profit (excluding non-recurring items) increased
160.9% to $116.6 million in fiscal 1997 (27.4% of net revenues) compared
with $44.7 million (20.8% of net revenues) in fiscal 1996. The increase in
gross profit is the result of higher Chaps by Ralph Lauren volume along with
the acquisition of Designer Holdings during the fourth quarter of 1997. The
Company also benefitted from the disposition, in fiscal 1996, of the
Hathaway dress shirt business. On a comparable basis, excluding the results
of Designer Holdings in 1997 and the Hathaway business in 1996, gross profit
improved 74.6% or $35.6 million in fiscal 1997.
Selling, administrative and general expenses (excluding non-recurring
items) increased 46.8% to $295.2 million (20.6% of net revenues) in fiscal 1997
compared with $201.0 million (18.9% of net revenues) in fiscal 1996. The
increase is due to higher sales volume and reflects the Company's commitment to
invest in its brands through increased marketing and promotional activities. In
fiscal 1997, such costs were $86.2 million (6.0% of net revenues) compared with
$59.5 million (5.6% of net revenues) in fiscal 1996 with increased spending on
the Calvin Klein and Lejaby brands of intimate apparel and Calvin Klein
jeanswear and jeans related sportswear. Selling, administrative and general
expenses also increased due to higher Calvin Klein royalties, higher goodwill
amortization, the result of the acquisition of Designer Holdings and the Lejaby
companies and the inclusion of $3.5 million attributable to minority interests
in the income of Designer Holdings applicable to the period of less than 100%
ownership by the Company.
Interest expense increased 41.7% to $45.9 million in fiscal 1997 from $32.4
million in fiscal 1996. The increase results primarily from a full year of
interest expense on funds borrowed to complete the 1996 acquisitions,
principally Lejaby.
Income tax expense was $13.9 million for fiscal 1997 on an as-reported
basis, including tax benefits of $49.7 million applicable to the fiscal 1997
non-recurring charge and a $1.4 million tax benefit related to the minority
interest. The difference between the United States federal statutory rate of
35.0% and
19
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<PAGE>
the Company's effective tax rate of 38.0% (excluding the non-recurring charge
and the minority interest) reflects the impact of state income taxes and the
effects of non-deductible intangible amortization offset in part by taxes on
foreign income at rates lower than the United States statutory rate. For income
tax purposes, the Company has net operating loss carryforwards available to
offset future taxable income of approximately $79.6 million at January 3, 1998.
These carryforwards, which the Company expects to fully utilize, should result
in future tax savings of approximately $25.7 million at current United States
corporate tax rates. The net operating loss carryforwards expire beginning in
2004 and fully expire in 2010.
Net income before non-recurring items increased 29.2% to $104.1 million (or
$1.87 per diluted share) in fiscal 1997 from $80.6 million (or $1.51 per diluted
share) in fiscal 1996. This increase reflects higher sales volumes and gross
margins partially offset by higher selling, administrative and general costs and
interest costs, as previously discussed. On an as-reported basis, net income
increased to $23.0 million in fiscal 1997 compared with a net loss of $8.2
million in fiscal 1996. Included in fiscal 1997 and 1996 net income are
non-recurring charges of $81.1 million and $88.8 million, respectively.
COMPARISON OF FISCAL 1996 TO FISCAL 1995
Net revenues increased $147.6 million or 16.1% to $1,063.8 million compared
with $916.2 million in fiscal 1995 with double-digit increases across all
divisions.
INTIMATE APPAREL DIVISION. Net revenues increased $112.8 million or 16.4% to
$802.0 million in fiscal 1996 compared with $689.2 million in fiscal 1995.
The increase in net revenues is attributable to an increase in Calvin Klein
net revenues of $84.6 million, an increase in sleepwear net revenues of
$55.0 million, reflecting the acquisitions of GJM in February 1996 and
Lejaby in July 1996, which increased net revenues by $47.5 million. This was
partially offset by a decrease in shipments to Avon and Victoria's Secret of
approximately $75.0 million.
MENSWEAR DIVISION. Menswear Division net revenues increased $28.7 million or
15.5% to $214.4 million in fiscal 1996 compared with $185.7 million in
fiscal 1995. The increase in net revenues is attributable to an increase in
Chaps by Ralph Lauren net revenues of $38.1 million and the start-up of
Calvin Klein accessories, which added $7.1 million to net revenues. The
increases in Chaps by Ralph Lauren and Calvin Klein accessories were
partially offset by a decrease in Hathaway net revenues due to the
disposition of the Hathaway dress shirt operations in November 1996.
Gross profit increased 18.0% to $365.5 million (excluding non-recurring
items) in fiscal 1996 compared with $309.7 million in fiscal 1995. Gross profit
as a percentage of net revenues was 34.4% in fiscal 1996 compared with 33.8% in
fiscal 1995. On an as-reported basis and including $37.9 million of
non-recurring expenses related to the Company's decision to exit its Hathaway
dress shirt operations and the realignment and restructuring of the Company's
intimate apparel division, gross profit increased 5.8% to $327.7 million in
fiscal 1996 from $309.7 million in fiscal 1995.
INTIMATE APPAREL DIVISION. Intimate Apparel Division gross profit (excluding
the effect of the realignment and restructuring charges) increased 16.6% to
$302.3 million (37.7% of net revenues) in fiscal 1996 from $259.2 million
(37.6% of net revenues) in fiscal 1995. The increase in gross profit
reflects the higher sales volume noted above. The increase in gross profit
as a percentage of net revenues reflects manufacturing efficiencies in the
Company's manufacturing facilities and a higher mix of Calvin Klein sales
partially offset by the slightly lower margins on the GJM private label
business, which was acquired in February 1996.
MENSWEAR DIVISION. Menswear Division gross profit (excluding the effect of
the Hathaway charges) increased 25.9% to $44.7 million (20.8% of net
revenues) in fiscal 1996 from $35.5 million (19.1% of net revenues) in
fiscal 1995. The increase in gross profit reflects the higher sales volume
noted above. The increase in gross profit as a percentage of net revenues
reflects the more favorable mix of Chaps by Ralph Lauren and Calvin Klein
accessories business and the sale of the Company's Hathaway dress shirt
operations in November 1996.
Selling, administrative and general expenses before non-recurring and
restructuring charges increased 9.2% to $201.1 million (18.9% of net revenues)
in fiscal 1996 compared with $184.1 million (20.1% of net revenues) in fiscal
1995. The increase in selling, administrative and general expenses
20
<PAGE>
<PAGE>
reflects higher sales volumes and an increase in marketing and promotion
expenses to $59.5 million (5.6% of net revenues) in fiscal 1996 compared with
$41.0 million (4.5% of net revenues) in fiscal 1995. Despite the increase in
marketing and promotion expense, selling, administrative and general expenses
improved as a percentage of net revenues, reflecting the cost savings realized
from the realignment and restructuring of the Company's Intimate Apparel
Division.
Interest expense decreased slightly to $32.4 million in fiscal 1996 from
$33.9 million in fiscal 1995. The decrease in interest expense reflects the
benefit from the proceeds of the Company's stock offering, completed in October
1995, and a lower average interest rate, which was partially offset by interest
on funds borrowed to complete the GJM, Lejaby and Bodyslimmers acquisitions.
Income tax expense was $1.8 million for fiscal 1996 on an as-reported
basis. The difference between the United States federal statutory income tax
rate of 35.0% and the Company's effective income tax rate of 38.9% (excluding
the benefits related to the non-recurring charges) primarily reflects the impact
of state income taxes and the effects of non-deductible intangible amortization.
The net loss of $8.2 million in fiscal 1996 on an as reported basis
reflects the impact of the non-recurring charges noted above. Income before
non-recurring charges for fiscal 1996 was $80.6 million compared with income
before the adoption of SOP 93-7 of $56.9 million in fiscal 1995. The increase in
income before non-recurring charges reflects higher operating income.
CAPITAL RESOURCES AND LIQUIDITY
The Company's liquidity requirements arise primarily from its debt service
and the funding of 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 a substantial
amount 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.
In December 1997, the Company completed the acquisition of Designer
Holdings, which develops, manufactures and markets designer jeanswear and
sportswear under a license from Calvin Klein, Inc. The purchase price consisted
of the issuance of 10,413,144 shares of the Company's stock valued at $353.4
million. Net assets acquired included $55.8 million of cash of Designer
Holdings.
In February 1996, the Company acquired substantially all of the assets
(including certain subsidiaries) of GJM, a private label manufacturer of women's
lingerie and sleepwear. The purchase price consisted of a cash payment of $12.5
million plus assumed liabilities.
In the third and fourth quarters of fiscal 1996, the Company acquired
Lejaby, a leading European intimate apparel manufacturer, for approximately $79
million, including certain fees and expenses and assumed liabilities. Funds to
consummate the transaction were provided by members 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 included a term loan totaling 370
million French Francs and revolving loan facilities totaling 150 million French
Francs (the '1996 Bank Credit Agreements').
In July 1996, the Company acquired Bodyslimmers, for approximately $6.5
million and assumed liabilities. The acquisition of Bodyslimmers expanded the
Company's product line to include body slimming undergarments, a fast growing
segment of the intimate apparel market targeting aging baby boomers. This
acquisition enhanced the Company's leading position in the domestic intimate
apparel market.
Cash provided by (used in) operations in fiscal 1997 was $143.9 million,
compared with $27.0 million in fiscal 1996 and $(13.6) million in fiscal 1995.
Cash flow from operating activities for fiscal 1997 includes $29.0 million of
cash expenses for lease run-outs, facility costs and severance and other
personnel costs related to the 1997 non-recurring charge while fiscal 1996
includes $67.7 million of cash expenses related to the decision to exit the
Hathaway business and restructuring and realignment of the Intimate Apparel
Division. Cash provided from operating activities before the payments made on
the non-recurring charges was $172.9 million in fiscal 1997 and $94.8 million in
fiscal 1996. The improvement in cash flow from operating activities in fiscal
1997 compared with fiscal 1996 primarily
21
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<PAGE>
reflects higher net income and non-cash depreciation and amortization coupled
with lower working capital requirements. The lower working capital requirements
compared with fiscal 1996 were principally due to improved collections of
receivables, improved management of payables and reductions in prepaid expenses.
The increase in payables was also due to higher inventory levels at year end in
support of anticipated increased sales volumes. Cash flow from operating
activities increased $40.6 million in fiscal 1996 compared with fiscal 1995,
primarily as a result of decreased use of working capital, principally
inventory, reflecting the Company's efforts to control investment in this area.
Depreciation and amortization expense was $47.4 million, $27.6 million and $22.1
million in fiscal 1997, 1996 and 1995, respectively. The increase in
depreciation and amortization expense primarily reflects amortization of
intangible assets related to the acquisitions completed in fiscal 1995 through
fiscal 1997.
Cash used in investing activities was $22.0 million in fiscal 1997 compared
with $156.5 million in fiscal 1996 and $84.0 million in fiscal 1995. Fiscal 1997
includes $55.8 million of cash acquired in connection with the acquisition of
Designer Holdings for Company stock. Fiscal 1996 includes $85.6 million, net of
cash acquired, related to the purchase of Lejaby, GJM and Bodyslimmers and $30.1
million related to the payment of acquired liabilities and acquisition accruals.
Capital expenditures for new facilities, improvements to existing facilities and
for machinery and equipment were approximately $57.4 million, $33.8 million and
$39.1 million in the 1997, 1996 and 1995 fiscal years, respectively. The Company
anticipates capital expenditures in fiscal 1998 to be approximately $90.0
million, including amounts for year 2000 compliance and a store fixture program
for Calvin Klein jeans. Increases in intangible and other assets in fiscal 1997
were principally due to additional investments in licenses and start-up costs
incurred for the Company's Mexican operations.
Cash (used in) provided by financing activities was $(125.2) million,
$135.2 million and $100.0 million in fiscal 1997, 1996 and 1995, respectively.
During fiscal 1997, debt repayments, including payments on credit facilities,
were $377.7 million. In 1997, the Company renegotiated its bank arrangements,
including facilities for revolving credit, trade credit and letters of credit.
Net proceeds under the revolving credit facility were $291.1 million in fiscal
1997. For the year ended January 3, 1998, the Company repurchased 839,319 shares
of its common stock at a cost of $26.5 million and paid cash dividends of $16.2
million. During fiscal 1996, the Company entered into the 1996 Credit
Agreements, proceeds from which were used to purchase Lejaby in fiscal 1996. In
addition, the Company increased the outstanding balance on its revolving lines
of credit by approximately $105.5 million in fiscal 1996. In fiscal 1995, the
Company sold 9,717,000 shares of Common Stock which resulted in net proceeds to
the Company of $224.3 million. Proceeds from the sale of Common Stock were
primarily used to repay outstanding debt. Debt repayments were $27.8 million and
$46.8 million in fiscal 1996 and 1995, respectively.
The Company has paid a quarterly cash dividend since June 1995. The
dividend payment was raised to $0.08 per share from $0.07 per share in February
1997 and increased to $0.09 per share in January 1998.
At January 3, 1998, the Company had approximately $504.4 million of
additional borrowing availability under the revolving loan portions of its
United States bank facilities. The Company also has bank credit agreements in
Canada, Europe and Asia. At January 3, 1998, the Company had approximately $65.7
million of additional borrowing availability under these agreements. The Company
believes that funds available under its various bank facilities, together with
cash flow to be generated from future operations, will be sufficient to meet the
capital expenditure requirements and working capital needs of the Company,
including interest and debt principal payments for the next twelve months and
for the next several years.
YEAR 2000 AND ECONOMIC AND MONETARY UNION ('EMU') COMPLIANCE
Following a comprehensive review of current systems and future requirements
to support international growth, the Company initiated a program to replace
existing capabilities with enhanced hardware and software applications. The
objectives of the program are to achieve competitive benefits for the Company,
as well as assuring that all information systems will meet 'year 2000' and EMU
compliance. Full implementation of this program is expected to require
expenditures, primarily capital, of approximately $50 million over the next
three years. Funding requirements have been incorporated
22
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<PAGE>
into the Company's capital expenditure planning and are not expected to have a
material adverse impact on financial condition, results of operations or
liquidity.
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 Annual 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.
SEASONALITY
The operations of the Company are somewhat seasonal, with approximately
58.0% of net revenues, 61.0% of operating income before non-recurring items and
substantially all of the Company's net cash flow from operating activities
(excluding the acquisition of Designer Holdings in the fourth quarter of 1997)
generated in the second half of the year. Generally, the Company's operations
during the first half of the year are financed by increased borrowings. The
following sets forth the net revenues, operating income before non-recurring
items and net cash flow from operating activities generated for each quarter of
fiscal 1997 and fiscal 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
(IN MILLIONS)
APR 6, JUL 6, OCT 5, JAN 4, APR 5, JUL 5, OCT 4, JAN 3,
1996 1996 1996 1997 1997 1997 1997 1998(2)
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................... $206.5 $222.8 $292.0 $342.5 $251.5 $290.2 $333.4 $560.6
Operating income(1).................... $ 32.3 $ 31.0 $ 49.6 $ 51.6 $ 39.5 $ 38.8 $ 62.3 $ 73.0
Cash flow from operating
activities(1)........................ $(71.3) $ (8.2) $ 12.7 $164.6 $(75.5) $(20.3) $ 17.0 $251.7
</TABLE>
- ------------
(1) Before non-recurring items.
(2) Includes net revenues of $133.3 million and operating income of $15.4
million of Designer Holdings, acquired in the fourth quarter of 1997.
INFLATION
The Company does not believe that the relatively moderate levels of
inflation in the United States, Canada and Western Europe have had a significant
effect on its net revenues or its profitability. Management believes that, in
the past, the Company has been able to offset such effects by increasing prices
or by instituting improvements in productivity. Mexico historically has been
subject to high rates of inflation; however, the effects of inflation on the
operation of the Company's Mexican subsidiaries have not had a material impact
on the results of the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, 'Reporting
Comprehensive Income' and SFAS No. 131, 'Disclosure about Segments of an
Enterprise and Related Information'. Both SFAS No. 130 and SFAS No. 131 are
effective for financial statements for fiscal years beginning after December 15,
1997. The Company is studying the application of the new statements to evaluate
disclosure requirements. The
23
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<PAGE>
adoption of these statements will have no impact on the Company's consolidated
financial position, liquidity, cash flows or results of operations.
In February 1998, the FASB approved, subject to revision, the proposed
Statement of Position (SOP) on Reporting on the Costs of Start-Up Activities.
The SOP provides guidance on the financial reporting of start-up costs and
requires that such costs, as defined, be expensed as incurred. The SOP is
effective for fiscal years beginning after December 15, 1998 and the Company
will adopt the provisions of the new SOP for the 1999 fiscal year as a change in
accounting. Based upon amounts capitalized at January 3, 1998, net of
amortization, the impact of implementing the SOP would result in after-tax
charge for start-up costs previously capitalized currently estimated at
approximately $28.3 million.
ITEM 7A. 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 trading purposes. The Company has interest rate agreements with
several financial institutions to limit exposure to interest rate volatility.
Additionally, the Company enters into foreign currency forward and option
contracts to mitigate the risks of doing business in foreign currencies. The
Company hedges currency exposures of firm commitments and anticipated
transactions denominated in non-functional currencies to protect against the
possibility of diminished cash flow and adverse impact on earnings. The
Company's currency exposures vary, but are primarily concentrated in the
Canadian dollar, Mexican peso, British pound, German mark and French franc.
The value of market risk sensitive instruments is subject to change as a
result of movement in market rates and prices. Based on a hypothetical
(one-percentage point) increase in interest rates, the potential losses in
future earnings, fair value and cash flows are immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report. See
Item 14 of Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference from page
17 of Item 4 of Part I included herein and from the Proxy Statement of The
Warnaco Group, Inc., relating to the 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is hereby incorporated by reference
from the Proxy Statement of The Warnaco Group, Inc., relating to the 1998 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is hereby incorporated by reference
from the Proxy Statement of The Warnaco Group, Inc., relating to the 1998 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is hereby incorporated by reference
from the Proxy Statement of The Warnaco Group, Inc., relating to the 1998 Annual
Meeting of Stockholders.
24
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The Consolidated Financial Statements of The Warnaco Group, Inc.
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Report of Independent Accountants....................................................... F-1
Report of Independent Accountants....................................................... F-2
Consolidated Balance Sheets as of January 4, 1997 and January 3, 1998................... F-3
Consolidated Statements of Income for the Years Ended January 6, 1996, January 4, 1997
and January 3, 1998................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended January 6, 1996,
January 4, 1997 and January 3, 1998................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended January 6, 1996, January 4,
1997 and January 3, 1998.............................................................. F-6
Notes to Consolidated Financial Statements ............................................. F-7 - F-31
</TABLE>
2. Financial Statement Schedule:
<TABLE>
<S> <C>
Report of Independent Accountants on Financial Statement Schedule............................ S-1
Schedule II. Valuation and Qualifying Accounts and Reserves.................................. S-2
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission which
are not included with this additional financial data have been omitted
because they are not applicable or the required information is shown in
the Consolidated Financial Statements or Notes thereto.
3. LIST OF EXHIBITS:
<TABLE>
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated herein
by reference to Exhibit 3.1 to the Company's Form 10-Q filed May 16, 1995).
3.2 Amended Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Form 10-K filed April 4, 1997).
4.1 Registration Rights Agreement dated March 14, 1994 between the Company and Calvin
Klein, Inc. ('CK') (incorporated herein by reference to Exhibit 4.1 to the Company's
Form 10-Q filed May 24, 1994).
4.2 Amended and Restated Declaration of Trust of Designer Finance Trust, dated as of
November 6, 1996, among Designer Holdings, as Sponsor, IBJ Schroder Bank & Trust
Company, as Property Trustee, Delaware Trust Capital Management, Inc. as Delaware
Trustee and Merril M. Halpern and Arnold H. Simon, as Trustees (incorporated herein by
reference to Exhibit 4.1 to the Company's Form 10-Q filed November 12, 1997).
4.3 First Supplemental Indenture dated as of March 31, 1998, between Designer Holdings,
The Warnaco Group, Inc. and IBJ Schroder Bank & Trust Company, as Trustee.
4.4 Preferred Securities Guarantee Agreement dated as of March 31, 1998, between The
Warnaco Group, Inc., as Guarantor and IBJ Schroder Bank & Trust Company, as Preferred
Guarantee Trustee, with respect to the Preferred Securities of Designer Finance Trust.
10.1 Credit Agreement, dated as of August 12, 1997 (the 'U.S. $600,000,000 Credit
Agreement'), among Warnaco Inc., as Borrower, and The Bank of Nova Scotia and
Citibank, N.A. as Managing Agents, Citibank, N.A. as Documentation Agent, the Bank of
Nova Scotia as Administrative Agent, Competitive Bid Agent, Swing Line Bank and an
Issuing Bank and certain other lenders named therein (incorporated herein by reference
to Exhibit 10.1 to the Company's Form 10-Q filed November 12, 1997).
10.2 Second Amended and Restated Credit Agreement, dated as of August 12, 1997 (the 'U.S.
$300,000,000 Credit Agreement'), among Warnaco Inc., as the U.S. Borrower, Warnaco
(HK) Ltd., as the Foreign Borrower, Citibank, N.A., as the Documentation Agent, The
Bank of Nova Scotia, as the Administrative Agent, and certain other lenders named
therein (incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q
filed November 12, 1997).
</TABLE>
25
<PAGE>
<PAGE>
<TABLE>
<C> <S>
10.3 First Amendment to the U.S. $300,000,000 Credit Agreement, dated as of October 14,
1997 among Warnaco Inc., as the U.S. Borrower, Warnaco (HK) Ltd. as the Foreign
Borrower, Citibank, N.A., as the Documentation Agent, The Bank of Nova Scotia, as
Administrative Agent, and certain other lenders party thereto (incorporated herein by
reference to Exhibit 10.3 to the Company's Form 10-Q filed November 12, 1997).
10.4 Employment Agreement, dated as of January 6, 1991, between the Company and Linda J.
Wachner (incorporated herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1, No. 33-42641).
10.5 Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.8 to the
Company's Registration on Form S-1, No. 33-45877).
10.6 1991 Stock Option Plan (incorporated herein by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, No. 33-45877).
10.7 Amended and Restated 1988 Employee Stock Purchase Plan, as amended (incorporated
herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form
S-1, No. 33-45877).
10.8 Warnaco Employee Retirement Plan (incorporated herein by reference to Exhibit 10.11 to
the Company's Registration Statement on Form S-1, No. 33-45877).
10.9 Executive Management Agreement, dated as of May 9, 1991, as extended, between the
Company, Warnaco Inc. and The Spectrum Group, Inc. (incorporated herein by reference
to Exhibit 10.13 to the Company's Registration Statement on Form S-1, No. 33-45877).
10.10 1993 Non-Employee Director Stock Plan (incorporated herein by reference to the
Company's Proxy Statement for its 1994 Annual Meeting of Stockholders).
10.11 Amended and Restated 1993 Stock Plan (incorporated herein by reference to the
Company's Proxy Statement for its 1994 Annual Meeting of Stockholders).
10.12 The Warnaco Group, Inc. Supplemental Incentive Compensation Plan (incorporated herein
by reference to the Company's Proxy Statement for its 1994 Annual Meeting of
Stockholders).
10.13 Amended and Restated License Agreement dated as of January 1, 1996, between Polo Ralph
Lauren, L.P. and Warnaco Inc. (incorporated herein by reference to Exhibit 10.4 to the
Company's Form 10-Q filed November 12, 1997).
10.14 Amended and Restated Design Services Agreement dated as of January 1, 1996, between
Polo Ralph Lauren Enterprises, L.P. and Warnaco Inc. (incorporated herein by reference
to Exhibit 10.5 to the Company's Form 10-Q filed November 12, 1997).
10.15 Agreement and Plan of Merger dated as of September 25, 1997 among The Warnaco Group,
Inc., WAC Acquisition Corporation and Designer Holdings Ltd. (incorporated herein by
reference to Exhibit 2, attached as Appendix A to the Joint Proxy Statement/Prospectus
to the Company's Registration Statement on Form S-4, No. 333-40207).
10.16 Stock Exchange Agreement dated as of September 25, 1997 among The Warnaco Group, Inc,
New Rio, L.L.C. and each of the members of New Rio signatory hereto (incorporated
herein by reference to Exhibit 10.1, attached as Appendix B to the Joint Proxy
Statement/Prospectus to the Company's Registration Statement on Form S-4, No.
333-40207).
10.17 1997 Stock Option Plan.
10.18 License Agreement dated as of August 4, 1994 (the 'Calvin Klein License Agreement')
between Calvin Klein, Inc. and Calvin Klein Jeanswear Company; incorporated by
reference to Exhibit 10.20 to Designer Holdings, Ltd.'s Registration Statement on Form
S-1 (File No. 333-2236).
10.19 Amendment to the Calvin Klein License Agreement dated as of December 7, 1994;
incorporated by reference to Exhibit 10.21 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-2236).
10.20 Amendment to the Calvin Klein License Agreement dated as of January 10, 1995;
incorporated by reference to Exhibit 10.22 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-2236).
</TABLE>
26
<PAGE>
<PAGE>
<TABLE>
<C> <S>
10.21 Amendment to the Calvin Klein License Agreement dated as of February 28, 1995;
incorporated by reference to Exhibit 10.23 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-2236).
10.22 Amendment to the Calvin Klein License Agreement dated as of April 22, 1996;
incorporated by reference to Exhibit 10.38 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-2236).
21 Subsidiaries of the Company.
23.1(a) Consent of Independent Accountants.
23.1(b) Consent of Independent Accountants.
27 Financial Data Schedule.
99 Designer Holdings, Ltd. Annual Report on Form 10-K for the year ended December 31,
1996 (incorporated herein by reference -- Commission file number 1-11707).
</TABLE>
(b) REPORTS ON FORM 8-K.
The Company filed reports on Form 8-K on October 21, 1997, November 24,
1997 and December 29, 1997.
27
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of New
York, State of New York, on the 3rd day of April, 1998.
THE WARNACO GROUP, INC.
By: /S/ LINDA J. WACHNER
............................
Linda J. Wachner
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/s/ LINDA J. WACHNER Chairman of the Board; Director; April 3, 1998
- ------------------------------------------ President and Chief Executive
LINDA J. WACHNER Officer (Principal Executive Officer)
/s/ WILLIAM S. FINKELSTEIN Director; Senior Vice President and Chief April 3, 1998
- ------------------------------------------ Financial Officer (Principal Financial and
WILLIAM S. FINKELSTEIN Accounting Officer)
/s/ JOSEPH A. CALIFANO, JR. Director April 3, 1998
- ------------------------------------------
JOSEPH A. CALIFANO, JR.
/s/ JOSEPH H. FLOM Director April 3, 1998
- ------------------------------------------
JOSEPH H. FLOM
/s/ ANDREW G. GALEF Director April 3, 1998
- ------------------------------------------
ANDREW G. GALEF
/s/ JAMES R. JONES Director April 3, 1998
- ------------------------------------------
JAMES R. JONES
/s/ WALTER F. LOEB Director April 3, 1998
- ------------------------------------------
WALTER F. LOEB
/s/ STEWART A. RESNICK Director April 3, 1998
- ------------------------------------------
STEWART A. RESNICK
</TABLE>
28
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
The Warnaco Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of The Warnaco Group,
Inc. and its subsidiaries at January 3, 1998 and January 4, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended January 3, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 3 to the consolidated financial statements, during the year
ended January 6, 1996 the Company adopted the provisions of the American
Institute of Certified Public Accountants' Statement of Position 93-7,
'Reporting on Advertising Costs.'
The summarized financial information disclosed in Note 13 relating to the
Company's wholly owned subsidiary Designer Holdings Ltd. as of December 31, 1996
and for each of the two years in the period ended December 31, 1996 has been
derived from financial statements audited by the independent accountants whose
report thereon is included herein.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
February 20, 1998
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Designer Holdings Ltd:
We have audited the consolidated balance sheet of Designer Holdings Ltd. (the
'Company') as of December 31, 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 1996 and 1995 (which financial statements are incorporated by
reference). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Designer Holdings
Ltd. as of December 31, 1996, and the consolidated results of their operations
and their cash flows for the years ended December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
March 12, 1997
F-2
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCLUDING SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 4,
1997
-----------
<S> <C>
ASSETS
Current assets:
Cash............................................................................................... $ 11,840
Accounts receivable, less reserves of $11,337 -- 1996 and $46,124 -- 1997.......................... 211,038
Inventories........................................................................................ 387,318
Prepaid expenses and other current assets.......................................................... 40,313
-----------
Total current assets.......................................................................... 650,509
-----------
Property, plant and equipment, at cost:
Land and land improvements......................................................................... 5,690
Buildings and building improvements................................................................ 67,868
Machinery and equipment............................................................................ 133,223
-----------
206,781
Less: Accumulated depreciation..................................................................... 85,244
-----------
Net property, plant and equipment............................................................. 121,537
-----------
Other assets:
Deferred financing costs, less accumulated amortization of $553 -- 1996 and $1,410 -- 1997......... 3,536
Licenses, trademarks, intangible and other assets, at cost, less accumulated amortization of
$61,801 -- 1996 and $81,866 -- 1997............................................................... 164,402
Excess of cost over net assets acquired, less accumulated amortization of $36,005 -- 1996 and
$40,060 -- 1997................................................................................... 180,495
Deferred income taxes.............................................................................. 22,465
-----------
Total other assets............................................................................ 370,898
-----------
$ 1,142,944
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit facility......................................................... $ 146,960
Borrowings under foreign credit facilities......................................................... 19,185
Current portion of long-term debt.................................................................. 49,281
Accounts payable................................................................................... 174,149
Accrued liabilities................................................................................ 50,123
Income taxes payable............................................................................... 195
-----------
Total current liabilities..................................................................... 439,893
-----------
Long-term debt.......................................................................................... 215,805
Deferred income taxes................................................................................... --
Other long-term liabilities............................................................................. 11,532
Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Designer Finance Trust
Holding Solely Convertible Debentures................................................................. --
Stockholders' equity:
Preferred Stock; $.01 par value 10,000,000 shares authorized, none issued in 1996 and 1997,
respectively...................................................................................... --
Class A Common Stock, $.01 par value, 130,000,000 shares authorized, 52,398,112 and 63,294,423
issued in 1996 and 1997, respectively............................................................. 524
Additional paid-in capital......................................................................... 575,691
Cumulative translation adjustment.................................................................. (3,307)
Accumulated deficit................................................................................ (69,667)
Treasury stock, at cost............................................................................ (12,030)
Notes receivable for common stock issued and unearned stock compensation........................... (15,497)
-----------
Total stockholders' equity.................................................................... 475,714
-----------
$ 1,142,944
-----------
-----------
<CAPTION>
JANUARY 3,
1998
-----------
<S> <C>
ASSETS
Current assets:
Cash............................................................................................... $ 12,009
Accounts receivable, less reserves of $11,337 -- 1996 and $44,592 -- 1997.......................... 296,378
Inventories........................................................................................ 526,185
Prepaid expenses and other current assets.......................................................... 45,228
-----------
Total current assets.......................................................................... 879,800
-----------
Property, plant and equipment, at cost:
Land and land improvements......................................................................... 9,867
Buildings and building improvements................................................................ 77,308
Machinery and equipment............................................................................ 145,207
-----------
232,382
Less: Accumulated depreciation..................................................................... 101,982
-----------
Net property, plant and equipment............................................................. 130,400
-----------
Other assets:
Deferred financing costs, less accumulated amortization of $553 -- 1996 and $1,410 -- 1997......... 8,751
Licenses, trademarks, intangible and other assets, at cost, less accumulated amortization of
$61,801 -- 1996 and $81,866 -- 1997............................................................... 359,462
Excess of cost over net assets acquired, less accumulated amortization of $36,005 -- 1996 and
$40,060 -- 1997................................................................................... 349,235
Deferred income taxes.............................................................................. --
-----------
Total other assets............................................................................ 717,448
-----------
$ 1,727,648
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit facility......................................................... $ --
Borrowings under foreign credit facilities......................................................... 12,751
Current portion of long-term debt.................................................................. 7,850
Accounts payable................................................................................... 289,817
Accrued liabilities................................................................................ 116,892
Income taxes payable............................................................................... 5,203
-----------
Total current liabilities..................................................................... 432,513
-----------
Long-term debt.......................................................................................... 354,263
Deferred income taxes................................................................................... 18,009
Other long-term liabilities............................................................................. 14,022
Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Designer Finance Trust
Holding Solely Convertible Debentures................................................................. 100,758
Stockholders' equity:
Preferred Stock; $.01 par value 10,000,000 shares authorized, none issued in 1996 and 1997,
respectively...................................................................................... --
Class A Common Stock, $.01 par value, 130,000,000 shares authorized, 52,398,112 and 63,294,423
issued in 1996 and 1997, respectively............................................................. 633
Additional paid-in capital......................................................................... 940,461
Cumulative translation adjustment.................................................................. (14,838)
Accumulated deficit................................................................................ (63,900)
Treasury stock, at cost............................................................................ (38,567)
Notes receivable for common stock issued and unearned stock compensation........................... (15,706)
-----------
Total stockholders' equity.................................................................... 808,083
-----------
$ 1,727,648
-----------
-----------
</TABLE>
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Financial Statements.
F-3
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
JANUARY 6, JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues.............................................................. $ 916,179 $1,063,823 $1,435,730
Cost of goods sold(a)..................................................... 606,498 736,116 1,003,509
Selling, administrative and general expenses(b)........................... 195,793 301,732 349,431
---------- ---------- ----------
Income before interest and income taxes................................... 113,888 25,975 82,790
Interest expense.......................................................... 33,867 32,435 45,873
---------- ---------- ----------
Income (loss) before income taxes......................................... 80,021 (6,460) 36,917
Provision for income taxes................................................ 30,408 1,779 13,885
---------- ---------- ----------
Income (loss) before extraordinary item................................... 49,613 (8,239) 23,032
Extraordinary item, net of income tax benefits of $1,913.................. (3,120) -- --
---------- ---------- ----------
Net income (loss)......................................................... $ 46,493 $ (8,239) $ 23,032
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per common share:
Income (loss) before extraordinary item.............................. $ 1.12 $ (0.16) $ 0.44
Extraordinary item................................................... (0.07) -- --
---------- ---------- ----------
Basic earnings (loss) per common share.................................... $ 1.05 $ (0.16) $ 0.44
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per common share:
Income (loss) before extraordinary item.............................. $ 1.10 $ (0.16) $ 0.42
Extraordinary item................................................... (0.07) -- --
---------- ---------- ----------
Diluted earnings (loss) per common share.................................. $ 1.03 $ (0.16) $ 0.42
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares outstanding:
Basic................................................................ 44,215 51,308 52,814
---------- ---------- ----------
---------- ---------- ----------
Diluted.............................................................. 45,278 51,308 54,821
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------
(a) Includes $37,868 and $76,625 of non-recurring items for the years ended
January 4, 1997 and January 3, 1998. See Note 4 of Notes to Consolidated
Financial Statements.
(b) Includes $11,745, $100,672 and $54,179 of non-recurring and special items
for the years ended January 6, 1996, January 4, 1997 and January 3, 1998,
respectively and, in the year ended January 3, 1998, includes $3,518
representing minority interest in subsidiary for the period of less than
100% ownership. See Notes 2, 3 and 4 of Notes to Consolidated Financial
Statements.
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Financial Statements.
F-4
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCLUDING SHARE DATA)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FOR COMMON
CLASS A ADDITIONAL CUMULATIVE STOCK AND
COMMON PAID-IN TRANSLATION ACCUMULATED TREASURY UNEARNED STOCK
STOCK CAPITAL ADJUSTMENT DEFICIT STOCK COMPENSATION
------- ---------- ----------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 7, 1995.................... $ 421 $337,872 ($ 1,732) ($83,897) ($ 5,000) ($ 7,192)
Sold 9,717,000 shares of Class A Common Stock
net of expenses of $10,180.................. 97 222,931
Payments of employee notes receivable......... 1,028
Issued 320,000 shares of restricted stock..... 3 6,957 (6,960)
Dividends declared............................ (9,492)
Employee stock options exercised.............. 205
Amortization of unearned stock compensation... 580
Net income.................................... 46,493
Change in cumulative translation adjustment... (2,013)
------- ---------- ----------- ------------ --------- --------------
Balance at January 6, 1996.................... 521 567,965 (3,745) (46,896) (5,000) (12,544)
Issued 190,700 shares of restricted stock..... 2 5,576 (5,578)
Dividends declared............................ (14,532)
Employee stock options exercised and payment
of employee notes receivable................ 1 2,150 123
Amortization of unearned stock compensation... 2,502
Net loss...................................... (8,239)
Change in cumulative translation adjustment... 438
Purchase of 250,000 shares of treasury
stock....................................... (7,030)
------- ---------- ----------- ------------ --------- --------------
Balance at January 4, 1997.................... 524 575,691 (3,307) (69,667) (12,030) (15,497)
Issued 87,172 shares of restricted stock...... 1 3,600 (3,601)
Dividends declared............................ (17,265)
Employee stock options exercised and payment
of employee notes receivable................ 4 9,498 70
Net cash settlements under equity option
arrangements................................ (1,620)
Amortization of unearned stock compensation... 3,322
Net income.................................... 23,032
Change in cumulative translation adjustment... (11,531)
Purchase of 839,319 shares of treasury
stock....................................... (26,537)
Issuance of 10,413,144 shares for the
acquisition of Designer Holdings Ltd........ 104 353,292
------- ---------- ----------- ------------ --------- --------------
Balance at January 3, 1998.................... $ 633 $940,461 ($ 14,838) ($63,900) ($ 38,567) ($15,706)
------- ---------- ----------- ------------ --------- --------------
------- ---------- ----------- ------------ --------- --------------
<CAPTION>
TOTAL
--------
<S> <<C>
Balance at January 7, 1995.................... $240,472
Sold 9,717,000 shares of Class A Common Stock
net of expenses of $10,180.................. 223,028
Payments of employee notes receivable......... 1,028
Issued 320,000 shares of restricted stock..... --
Dividends declared............................ (9,492)
Employee stock options exercised.............. 205
Amortization of unearned stock compensation... 580
Net income.................................... 46,493
Change in cumulative translation adjustment... (2,013)
--------
Balance at January 6, 1996.................... 500,301
Issued 190,700 shares of restricted stock..... --
Dividends declared............................ (14,532)
Employee stock options exercised and payment
of employee notes receivable................ 2,274
Amortization of unearned stock compensation... 2,502
Net loss...................................... (8,239)
Change in cumulative translation adjustment... 438
Purchase of 250,000 shares of treasury
stock....................................... (7,030)
--------
Balance at January 4, 1997.................... 475,714
Issued 87,172 shares of restricted stock...... --
Dividends declared............................ (17,265)
Employee stock options exercised and payment
of employee notes receivable................ 9,572
Net cash settlements under equity option
arrangements................................ (1,620)
Amortization of unearned stock compensation... 3,322
Net income.................................... 23,032
Change in cumulative translation adjustment... (11,531)
Purchase of 839,319 shares of treasury
stock....................................... (26,537)
Issuance of 10,413,144 shares for the
acquisition of Designer Holdings Ltd........ 353,396
--------
Balance at January 3, 1998.................... $808,083
--------
--------
</TABLE>
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Financial Statements.
F-5
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 6, JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)............................................................. $ 46,493 ($ 8,239) $ 23,032
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization.............................................. 22,058 27,576 47,385
Extraordinary item......................................................... 3,120 -- --
Amortization of unearned stock compensation................................ 580 2,502 3,322
Non-recurring expenses..................................................... -- 138,540 129,272
(Increase) decrease in deferred income tax assets.......................... 21,641 (3,643) 7,760
Other changes in operating accounts........................................... (107,473) (61,984) (37,920)
---------- ---------- ----------
Net cash from operating activities before non-recurring items................... (13,581) 94,752 172,851
Cash expenses related to non-recurring charges.................................. -- (67,747) (28,972)
---------- ---------- ----------
Net cash from operating activities.............................................. (13,581) 27,005 143,879
---------- ---------- ----------
Cash flow from investing activities:
Proceeds from sale/leaseback transaction...................................... -- -- 33,223
Proceeds from the sale of fixed assets........................................ 616 1,087 1,704
Increase in intangibles and other assets...................................... (34,320) (8,178) (26,964)
Purchase of property, plant and equipment..................................... (39,122) (33,765) (57,399)
Acquisition of businesses..................................................... (11,200) (85,600) 55,800
Payment of assumed liabilities and acquisition accruals....................... -- (30,052) (28,346)
---------- ---------- ----------
Net cash from investing activities.............................................. (84,026) (156,508) (21,982)
---------- ---------- ----------
Cash flow from financing activities:
Proceeds from sale of common stock and payment of notes receivable from
employees.................................................................. 224,261 2,274 7,270
(Repayments) borrowings under credit facilities............................... (64,646) 105,500 (153,394)
Proceeds from other debt...................................................... 872 79,249 291,109
Repayments of debt............................................................ (46,800) (27,839) (224,281)
Increase in deferred financing cost........................................... (1,599) (2,441) (1,492)
Cash dividends paid........................................................... (5,868) (14,532) (16,220)
Purchase of treasury shares and net cash settlements under equity option
arrangements............................................................... -- (7,030) (28,157)
Other......................................................................... (6,242) -- --
---------- ---------- ----------
Net cash from financing activities.............................................. 99,978 135,181 (125,165)
---------- ---------- ----------
Effect on cash due to currency translation...................................... -- -- 3,437
---------- ---------- ----------
Increase in cash................................................................ 2,371 5,678 169
Cash at beginning of year....................................................... 3,791 6,162 11,840
---------- ---------- ----------
Cash at end of year............................................................. $ 6,162 $ 11,840 $ 12,009
---------- ---------- ----------
---------- ---------- ----------
Other changes in operating accounts:
Accounts receivable........................................................... ($ 7,948) ($ 29,690) ($ 35,929)
Inventories................................................................... (104,283) (36,526) (122,383)
Prepaid expenses.............................................................. (7,256) (16,985) 26,377
Accounts payable and accrued expenses......................................... 8,702 23,411 92,096
Income taxes.................................................................. 5,325 (2,792) 1,919
Other......................................................................... (2,013) 598 --
---------- ---------- ----------
($ 107,473) ($ 61,984) ($ 37,920)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Financial Statements.
F-6
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: The Warnaco Group, Inc. ('Company') was incorporated in
Delaware on March 14, 1986 and on May 10, 1986 acquired substantially all of the
outstanding shares of Warnaco Inc. ('Warnaco'). Warnaco is the principal
operating subsidiary of the Company.
Nature of Operations: The Company designs, manufactures and markets a broad
line of women's intimate apparel, designer jeanswear and jeans related
sportswear for men, women and juniors, men's underwear and men's sportswear,
accessories and dress furnishings under a number of owned and licensed brand
names. The Company's products are sold to department and specialty stores, mass
merchandise stores and catalog and other retailers throughout the United States,
Canada, Mexico and Western Europe.
Basis of Consolidation and Presentation: The accompanying Consolidated
Financial Statements include the accounts of the Company and all subsidiary
companies for the years ended January 6, 1996 ('Fiscal 1995'), January 4, 1997
('Fiscal 1996') and January 3, 1998 ('Fiscal 1997'). All intercompany
transactions are eliminated.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Translation of Foreign Currencies: Cumulative translation adjustments arise
primarily from consolidating the net assets and liabilities of the Company's
foreign operations at current rates of exchange as of the respective balance
sheet date and are applied directly to stockholders' equity. Gains and losses on
contracts designated as hedges of net investments in foreign subsidiaries are
recognized as cumulative translation adjustments in stockholders' equity until
such time as the investment is liquidated. Income and expense items for the
Company's foreign operations are translated using monthly average exchange
rates.
Inventories: Inventories are stated at the lower of cost, determined on a
first-in-first-out basis, or market.
Property, plant and equipment: Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided over the estimated useful lives of the assets or life
of the lease, whichever is shorter, using the straight-line method, as
summarized below:
<TABLE>
<S> <C>
Buildings...................................................................... 20-40 years
Building improvements.......................................................... 2-20 years
Machinery and equipment........................................................ 3-10 years
</TABLE>
Assets under capital lease and related amortization of capitalized leases
are included in property, plant and equipment and accumulated depreciation and
the associated liability is included in long-term debt.
Intangible Assets: Licenses, trademarks and other intangible assets are
amortized over the estimated economic life of the assets which range from 7 to
40 years. The excess of cost over net assets acquired is amortized over 40
years. The Company periodically reviews the carrying value of intangibles for
recoverability based on future (undiscounted) cash flow. Deferred financing
costs are amortized over the life of the related debt, using the debt
outstanding method.
F-7
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Start-Up Costs: The Company defers certain costs associated with the
start-up of new manufacturing facilities and certain new businesses. Deferred
costs are amortized using the straight-line method, principally over five years.
The Company periodically reviews the carrying value of start-up costs for
recoverability based on future cash flows. Start-up costs, net of accumulated
amortization, were $38,637 and $45,590 at January 4, 1997 and January 3, 1998,
respectively, and are included in other assets.
Employee Retirement Plans: The Company has a non-contributory pension plan
and a defined contribution retirement plan for the benefit of qualifying
employees. Contributions are deposited with fund managers who invest the assets
of the plans.
Income Taxes: The provision for income taxes, income taxes payable and
deferred income taxes are determined in accordance with Statement of Financial
Accounting Standards No. 109, 'Accounting for Income Taxes' (SFAS No. 109).
Under SFAS No. 109, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured by applying enacted tax rates and laws to taxable
years in which such differences are expected to reverse.
Revenue Recognition: The Company recognizes revenue when goods are shipped
to customers, net of estimates for normal returns and allowances.
Stock Options: The Company accounts for options granted, using the
intrinsic value method, under its stock incentive programs following Accounting
Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees' (APB
25) and related interpretations.
Financial Instruments: Derivative financial instruments are used by the
Company in the management of its interest rate and foreign currency exposures
and are accounted for on an accrual basis. The Company also uses derivative
financial instruments to execute purchases of its shares under its stock
buyback program. The Company does not use derivative financial instruments for
trading or speculative purposes. Gains and losses resulting from effective
hedges of existing assets, liabilities or firm commitments are deferred and
recognized when the offsetting gains and losses are recognized on the related
hedged items. Income and expense are recorded in the same category as that
arising from the related asset or liability being hedged. Gains realized on
termination of interest rate swap contracts are deferred and amortized over
the remaining terms of the original swap agreement. Costs of interest rate
cap contracts are amortized over the effective lives of the contracts if
considered to be economic hedges; otherwise, they are marked to market.
A number of major international financial institutions are counterparties
to the Company's financial instruments, including derivative financial
instruments. The company monitors its positions with, and the credit quality
of, these counterparty financial institutions and does not anticipate
non-performance of these counterparties. Management believes that the Company
would not suffer a material loss in the event of nonperformance by these
counterparties.
Concentration of Credit Risk: The Company sells its products to department
stores, specialty outlets, catalogs, direct sellers and mass merchandisers. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations. No customer accounted for more than 10% of the
Company's net revenues in the three fiscal years ended January 3, 1998.
Earnings Per Share: In February 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 128, 'Earnings Per Share' (SFAS No. 128), which
revised the methodology of calculating earnings per share and requires the dual
presentation of basic and diluted earnings per share. The Company adopted SFAS
No. 128 in the fourth quarter of 1997. All earnings per share amounts for all
periods presented have been restated to conform to the SFAS No. 128
requirements.
Accounting Changes: In June 1997, the FASB issued SFAS No. 130, 'Reporting
Comprehensive Income' (SFAS No. 130) and SFAS No. 131, 'Disclosures about
Segments of an Enterprise and Related Information' (SFAS No. 131). In December
1997, the FASB issued SFAS No. 132, 'Employers' Disclosures about Pensions and
Other Postretirement Benefits' (SFAS No. 132), which revises disclosure
requirements for employers' pension and other retiree benefits. These statements
are effective for financial statements for fiscal years beginning after December
15, 1997. The Company is studying the application of these new statements to
evaluate the disclosure requirements. The adoption
F-8
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
of these statements will have no impact on the Company's consolidated financial
position, liquidity, cash flows or results of operations.
On February 18, 1998, the FASB approved the issuance of an AICPA Statement
of Position (SOP) requiring that pre-operating costs relating to the start-up of
new manufacturing facilities be expensed as incurred. It has been the Company's
consistent accounting policy to capitalize such costs for amortization over
appropriate periods not to exceed five years. Adoption of the SOP will be
required for the Company in fiscal 1999 and will be reported as adoption of a
change in accounting principle, net of tax. Based on amounts capitalized at
January 3, 1998, net of amortization, the impact of this SOP would result in a
non-cash charge of $28,266, net of income tax.
NOTE 2 - ACQUISITIONS
In February 1996, the Company acquired substantially all of the assets
(including certain subsidiaries) comprising the GJM Group of Companies ('GJM').
GJM was a private label manufacturer of women's lingerie and sleepwear and now
also manufactures products for the Company's Intimate Apparel Division. The
purchase price consisted of a cash payment of $12,500 plus assumed liabilities.
In the third and fourth quarters of fiscal 1996, the Company acquired the
assets and stock of the companies comprising the Lejaby/Euralis group of
companies ('Lejaby'), a leading European intimate apparel manufacturer, for
approximately $79,249 plus assumed liabilities and certain fees and expenses.
Funds to consummate the transaction were provided by members of the Company's
bank credit group. The terms of the bank loans are substantially the same as the
terms of the Company's 1995 Bank 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.
On July 19, 1996, the Company acquired Bodyslimmers, for approximately $6,500
plus assumed liabilities. Bodyslimmers designs and markets body slimming
undergarments for women.
The GJM, Lejaby and Bodyslimmers acquisitions were accounted for using the
purchase method of accounting and the results of operations have been included
in the consolidated results of operations since the respective dates of
acquisition. The purchase price of the respective acquisitions was allocated to
the fair value of the assets acquired, including certain trademarks and
intangible assets. In addition, the Company incurred certain costs to
consolidate the acquired businesses into the Company's operations and terminate
certain contracts and agreements. The allocation of acquisition costs to the
fair value of the assets acquired and liabilities assumed is summarized below:
<TABLE>
<S> <C>
Accounts receivable....................................... $ 34,700
Inventories............................................... 30,500
Other current assets...................................... 1,200
Fixed assets.............................................. 6,900
Intangible and other assets............................... 90,500
Notes payable............................................. (2,300)
Accounts payable.......................................... (29,100)
Accrued liabilities....................................... (46,800)
-----------
Purchase price -- net of cash balances of acquired
entities................................................ $ 85,600
-----------
-----------
</TABLE>
These acquisitions did not have a material pro-forma impact on 1996
consolidated earnings. The final purchase prices did not materially differ from
the amounts shown above.
In October 1997, the Board of Directors of the Company and the owners of
51.3% of Designer Holdings Ltd. ('Designer Holdings') common stock consummated a
Merger Agreement and Exchange
F-9
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Agreement whereby the Company acquired 51.3% of Designer Holdings outstanding
common stock in exchange for 5,340,773 shares of the Company's common stock and
agreed, subject to shareholder approval, to acquire the remaining shares
outstanding at the same exchange ratio. In December 1997, the Company acquired
the remaining 48.7% of the outstanding common stock of Designer Holdings in
exchange for 5,072,371 shares of the Company's common stock. Designer Holdings
develops, manufactures and markets designer jeanswear and jeans related
sportswear for men, women and juniors, and has a 40-year extendable license from
Calvin Klein, Inc. to develop, manufacture and market designer jeanswear and
sportswear collections in North, South and Central America under the Calvin
Klein Jeans, CK/Calvin Klein Jeans and CK/Calvin Klein/Khakis labels.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the accompanying consolidated financial statements include the
results of the Designer Holdings business commencing in October 1997. The
minority interest in the results of operations for periods of less than 100%
ownership by the Company have been included in selling, administrative and
general expenses. In these transactions, the Company issued a total of
10,413,144 shares of its common stock, valued at fair market value ($33.94 per
share), resulting in a total purchase price of $353,400. The preliminary
allocation of the total purchase price, exclusive of cash received of
approximately $55,800, to the fair value of the net assets acquired is
summarized as follows:
<TABLE>
<S> <C>
Accounts receivable.................................................. $ 85,100
Inventories.......................................................... 74,300
Prepaid and other current assets..................................... 41,000
Property and equipment............................................... 7,900
Intangible and other assets.......................................... 343,300
Accounts payable and accrued liabilities............................. (93,200)
Deferred income taxes................................................ (59,800)
Other liabilities.................................................... (500)
Mandatorily redeemable preferred securities.......................... (100,500)
--------------
Purchase price -- net of cash balances............................... $ 297,600
--------------
--------------
</TABLE>
Included in intangible and other assets above are $130,000 for licenses and
$159,000 of goodwill.
The allocation of purchase price is subject to revision when additional
information concerning the asset and liability valuations becomes available.
Accordingly, the final purchase price allocation could differ from the amounts
shown.
The following summarized unaudited pro forma information combines financial
information of the Company with Designer Holdings for fiscal 1997 and 1996
assuming the acquisition had occurred as of January 7, 1996. The unaudited pro
forma information does not reflect any cost savings or other benefits
anticipated by the Company's management as a result of the acquisition.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------
JANUARY 4, JANUARY 3,
1997 1998
---------- ----------
<S> <C> <C>
Statement of Income Data:
Net revenues................................................................ $1,544,200 $1,800,800
Income before extraordinary item............................................ 14,100 18,700
Net income.................................................................. 11,800 18,700
Income per common share:
Basic.................................................................. $ 0.23 $ 0.31
---------- ----------
---------- ----------
Diluted................................................................ $ 0.22 $ 0.29
---------- ----------
---------- ----------
</TABLE>
The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred on the dates specified above, nor is it
F-10
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
indicative of future results of operations for the combined companies at any
future date or for any future periods.
In February 1995, the Company terminated the license agreement for the
production of men's underwear and women's intimate apparel bearing the Calvin
Klein name in Canada. The cost of terminating the license agreement was $6,200.
In August 1996, the Company terminated a production agreement with the former
licensee in Canada prior to its expiration date. The cost to terminate the
production agreement was approximately $1,793.
NOTE 3 - SPECIAL CHARGE FOR ADVERTISING COSTS PREVIOUSLY DEFERRABLE
In December 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-7, 'Reporting on Advertising Costs' ('SOP
93-7'). In accordance with SOP 93-7, certain advertising and promotion costs
previously deferred by the Company are expensed when the advertisement first
runs. As a result, in fiscal 1995 the Company recorded a charge for advertising
costs previously deferrable of $11,745 ($7,282 net of income tax benefits).
NOTE 4 - NON-RECURRING EXPENSE
In 1996, the acquisition of the GJM businesses significantly added to the
Company's low cost manufacturing capacity and resulted in an immediate expansion
of product lines. As a result of this and the acquisition of Bodyslimmers and
Lejaby, the Company undertook a strategic review of its businesses and
manufacturing facilities. The Company recorded non-recurring charges aggregating
$138,540 ($88,804 net of income tax benefits) for actions taken as a result of
this review, including disposition of the Hathaway men's dress shirt business.
In 1997, the acquisition of Designer Holdings introduced significant new
product lines and the Company incurred additional one-time charges related to
the merger and integration of this business together with the further
integration of the 1996 acquisitions and expansion of the consolidation and
realignment program initiated in 1996. These 1997 non-recurring items,
aggregating $130,804 ($81,061 net of income tax benefits) and the 1996 charges
are described below.
The charges reported below include inventory markdowns directly
attributable to the decision to exit product lines and businesses as well as the
consolidation and realignment of facilities in both years. It is difficult to
distinguish inventory markdowns attributable to the decision to exit or realign
these activities from external market conditions. Accordingly, inventory
markdowns in 1996 and 1997 as well as gross margin losses incurred during fiscal
1996 and 1997 are included in cost of goods sold. Charges totaling $37,868 in
fiscal 1996 and $76,625 in fiscal 1997 are reflected within cost of goods sold
in the consolidated statement of income. All other charges totaling $100,672 in
fiscal 1996 and $54,179 in fiscal 1997 are reflected within selling,
administrative and general expenses.
1996 NON-RECURRING:
<TABLE>
<S> <C>
Loss related to the sale of the Hathaway business........................................... $ 46,058
Charge for the consolidation and realignment of the Intimate Apparel
Division.................................................................................. 72,073
Other items, including merger termination costs............................................. 20,409
--------
138,540
Less: income tax benefits................................................................... (49,736)
--------
$ 88,804
--------
--------
</TABLE>
F-11
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
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 to
an investor group, 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'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 were $37,754 and $27,800 for the
years ended January 6, 1996 and January 4, 1997, respectively. Results of
operations for the years ended January 6, 1996 and January 4, 1997 generated a
pre-tax loss of approximately $4,641 and $8,669, respectively.
Losses recorded in fiscal 1996 related to the Hathaway business are
summarized as follows:
<TABLE>
<S> <C>
Write-down of assets to fair value (including $13,800 of intangible assets and $1,000 in
cost of goods sold)....................................................................... $ 32,420
Severance and other employee costs.......................................................... 4,760
Legal and professional fees................................................................. 209
Losses incurred during fiscal 1996.......................................................... 8,669
--------
Total charges............................................................................... 46,058
Less: income tax benefits................................................................... (16,535)
--------
Total net loss related to exit from the Hathaway business -- fiscal 1996............... $ 29,523
--------
--------
</TABLE>
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 and realignment resulted in a non-recurring charge in fiscal 1996
of $46,198, net of income tax benefits of $25,875. The closing of several
manufacturing facilities and consolidation of certain distribution operations
resulted in the Company incurring certain integration costs in its remaining
manufacturing facilities to reconfigure product assortments and retrain existing
personnel. The costs attendant to the realignment and retraining incurred in
fiscal 1996 amounted to approximately $16,100.
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 Bodyslimmers acquisitions, the Company
re-evaluated the viability of all product lines and styles. As a result, certain
products and styles were 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 $18,070 in fiscal 1996.
F-12
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
A summary of the total intimate apparel division consolidation and
realignment charge follows:
<TABLE>
<S> <C>
Fees and other expenses..................................................................... $ 2,840
Lease termination costs..................................................................... 6,042
Severance and other employee costs, net of pension curtailment gains........................ 21,861
Realignment of manufacturing facilities and retraining costs................................ 16,100
Disposition and write-down of discontinued inventory........................................ 18,070
Manufacturing variances..................................................................... 7,160
--------
Total charges.......................................................................... 72,073
Less: Income tax benefits................................................................... (25,875)
--------
Net intimate apparel consolidation and realignment..................................... $ 46,198
--------
--------
</TABLE>
OTHER
Other non-recurring items of $13,083, net of income tax benefits of $7,326,
were incurred and paid in fiscal 1996.
The addition of the GJM manufacturing and administrative organization
enabled the Company to begin manufacturing and direct sourcing certain products
which had been previously outsourced through a buying agent. This has resulted
in significant ongoing cost savings to the Company. The pre-tax cost of
terminating the existing agency contract was $2,693.
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 fiscal 1996, primarily reductions in
existing staff, resulted in a non-recurring pretax charge of $6,066.
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
approximately $19,000 and wrote-off the remaining receivable of $6,082. The
Company also wrote off certain other claims of approximately $2,568. The write
off of these amounts resulted in a pre-tax charge of $8,650.
In June 1996, the Company announced its intent to merge with Authentic
Fitness Corporation. On July 25, 1996, the Company announced the termination of
the merger. The Company incurred legal, accounting and investment advisory fees
in connection with the proposed merger of $3,000.
1997 NON-RECURRING:
<TABLE>
<S> <C>
Merger related integration costs............................................................ $ 49,959
Consolidation and realignment............................................................... 59,499
Other items, including final disposition of Hathaway assets................................. 21,346
--------
130,804
Less: income tax benefits................................................................... (49,743)
--------
$ 81,061
--------
--------
</TABLE>
MERGER RELATED INTEGRATION COSTS
Designer Holdings and the Company previously operated retail outlets in
several common locations. The Company has elected to consolidate retail
operations in such locations into the larger existing Designer Holdings
facilities. As a result, the Company has provided for the anticipated lease
termination costs, write-off of related fixed assets and the close-out of store
inventories and surplus stocks not considered suitable for redirected marketing
efforts in the new store format. The Company
F-13
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
has also taken steps to reduce the number of new Designer Holdings retail stores
previously planned. In addition, following the merger in December 1997, the
Company consolidated the credit and collection functions of the companies and
initiated a program of consolidating receivables from common customers, offering
favorable settlement of prior balances to accelerate collection efforts.
Additional allowances accepted under this program are expected to generate
substantial cash earlier than otherwise would be available. Under the Company's
redirected marketing strategy for Designer Holdings, it is anticipated that the
volume of future business with certain prior distribution outlets may be
significantly reduced.
The consolidation of other administrative functions for the Company and
Designer Holdings, which is substantially complete, has resulted in workforce
reductions and closure of office facilities. Additional reductions and closures
are being considered to maximize savings.
A summary of the merger related integration costs follows:
<TABLE>
<S> <C>
Consolidation of retail stores and credit and collections................................... $ 40,120
Other merger related costs.................................................................. 9,839
--------
49,959
Less: income tax benefits................................................................... (18,644)
--------
$ 31,315
--------
--------
</TABLE>
CONSOLIDATION AND REALIGNMENT
The Company expanded the intimate apparel consolidation and realignment
program initiated in 1996 to include other products and facilities. In large
part this was necessitated or prompted by the increased production volumes and
demand experienced throughout the year. Accordingly, additional products and
styles were discontinued and slower moving inventory liquidated, incurring
markdown losses to accommodate the increased volumes of higher margin
merchandise. The consolidation of retail stores and related restocking plans was
also a factor.
Further reconfiguration of manufacturing facilities and the merger of
Warner's Europe with Lejaby operations achieved a workforce reduction greater
than originally anticipated but delayed realization of anticipated efficiencies
and resulted in additional costs including severance and termination costs,
primarily expensed as incurred.
A summary of consolidation and realignment costs follows:
<TABLE>
<S> <C>
Disposition and write-down of assets including discontinued inventory....................... $ 34,846
Realignment of manufacturing facilities..................................................... 17,273
Severance and other employee costs.......................................................... 7,380
--------
59,499
Less: income tax benefits................................................................... (22,907)
--------
$ 36,592
--------
--------
</TABLE>
OTHER
The planned disposition of assets retained from the Hathaway sale was
achieved on terms less favorable than expected. In addition, insurance
recoveries related to a prior year customer bankruptcy were less than
anticipated. As a result of the above, charges incurred in 1997 exceeded
estimates previously accrued by $21,346 ($13,154 net of income tax benefits).
In the aggregate, the non-cash portion of the 1997 non-recurring item is
$96,600 pre-tax and related primarily to the write-off of inventory, accounts
receivable and other assets. The cash portion of $34,200
F-14
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
pre-tax relates to severance and other employee costs, remaining obligations
under leases and facility costs, of which $29,000 was incurred and paid in 1997
and $5,200 is expected to be paid in fiscal 1998. The reserve balance at January
3, 1998 was $31,028 which includes the 1996 reserve balance of $3,000, primarily
for lease termination costs less minor expenditures in 1997.
NOTE 5 - EXTRAORDINARY ITEM
In October 1995, in conjunction with a refinancing of the Company's credit
agreements, as more fully described in Note 11, the Company recorded a non-cash
extraordinary charge of $3,120 (net of income tax benefits of $1,913) related to
the write-off of deferred financing costs under the Company's previous credit
agreement.
NOTE 6 - RELATED PARTY TRANSACTIONS
In 1990, the Company sold its Activewear Division to a newly formed
company, Authentic Fitness Corporation ('Authentic Fitness'). Certain directors
and officers of the Company are also directors and officers of Authentic
Fitness. The Company originally maintained an equity interest in Authentic
Fitness equal to approximately 3.0% of the outstanding equity of Authentic
Fitness. The equity interest was sold in March 1995 pursuant to an option
granted at the time of the sale. From time to time, the Company and Authentic
Fitness jointly negotiate contracts and agreements with vendors and suppliers.
Authentic Fitness purchases certain occupancy services related to leased
facilities, computer services, laboratory testing, transportation and contract
production services from the Company. Total charges to Authentic Fitness for
these services were approximately $5,335, $5,446 and $5,607 for the years ended
January 6, 1996, January 4, 1997 and January 3, 1998, respectively. In fiscal
1997, the Company and Authentic Fitness settled outstanding balances of $2,875
resulting in an additional payment by the Company. For the fiscal year ended
January 3, 1998, the Company sold no inventory to Authentic Fitness for sale in
its outlet stores; such sales totaled $2,668 and $350 for the years ended
January 6, 1996 and January 4, 1997, respectively.
The Company purchases certain design and occupancy services from Authentic
Fitness. Charges for design and occupancy services were approximately $2,206,
$1,244 and $1,299 for the years ended January 6, 1996, January 4, 1997 and
January 3, 1998, respectively. The Company purchases inventory from Authentic
Fitness for sale in the Company's outlet stores. Inventory purchases from
Authentic Fitness were $7,562, $15,531 and $16,201 for the years ended January
6, 1996, January 4, 1997 and January 3, 1998, respectively. In July 1996,
Authentic Fitness announced that it was exiting the outlet store business.
Pursuant to an agreement, leases relating to four outlet stores were assigned to
the Company and the Company purchased the existing Authentic Fitness outlet
store inventory for its net book value, which is included in the amount
previously mentioned.
In June 1995, the Company and Authentic Fitness entered into a sub-license
agreement whereby the Company secured rights to design, manufacture and
distribute certain intimate apparel using the Speedo brand name. The Company
pays a royalty to Authentic Fitness for garments sold under the Speedo label.
The Company paid Authentic Fitness $1,000 for this sub-license. Royalty expense
under this agreement was approximately $78, $469 and $293 for the years ended
January 6, 1996, January 4, 1997 and January 3, 1998, respectively.
A director and a stockholder of the Company is the sole stockholder,
President and a director of The Spectrum Group, Inc. ('Spectrum'). Spectrum and
the Company are parties to an agreement under which Spectrum provides consulting
services to the Company. The Spectrum consulting agreement was amended on May 9,
1991 to provide for annual fees of $350 or such higher amount, including
expenses, not to exceed $500 (plus cost of living increases) for a period of
five years. The
F-15
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
contract has been extended through May 9, 1999. Amounts charged to expense
pursuant to these agreements were $500 in each of the three fiscal years ended
January 3, 1998.
The Company believes that the terms of the relationships and transactions
described above are at least as favorable to the Company as could have been
obtained from an unaffiliated third party.
NOTE 7 - SEGMENT REPORTING
The Company operates within one industry segment -- the design,
manufacturing and marketing of apparel. No one customer accounted for more than
10.0% of the Company's net revenues for any of the three years in the period
ended January 3, 1998. The Company operates in several geographic areas.
<TABLE>
<CAPTION>
CANADA AND
FOR THE YEAR ENDED JANUARY 6, 1996 UNITED STATES LATIN AMERICA EUROPE CONSOLIDATED
- ---------------------------------------------------- ------------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Net revenues........................................ $ 807,491 $57,820 $ 50,868 $ 916,179
------------- ------------- -------- ------------
------------- ------------- -------- ------------
Operating profit.................................... $ 142,673 $ 9,948 $ 2,449 $ 155,070
------------- ------------- --------
------------- ------------- --------
General corporate expense -- net.................... (41,182)
Interest expense.................................... (33,867)
------------
Income before extraordinary items and income
taxes............................................. $ 80,021
------------
------------
Identifiable assets at January 6, 1996.............. $ 707,258 $43,093 $ 39,329 $ 789,680
------------- ------------- --------
------------- ------------- --------
Corporate assets.................................... 151,407
------------
Total Assets at January 6, 1996................ $ 941,087
------------
------------
<CAPTION>
FOR THE YEAR ENDED JANUARY 4, 1997
- ----------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues........................................ $ 902,572 $66,297 $ 94,954 $1,063,823
------------- ------------- -------- ------------
------------- ------------- -------- ------------
Operating profit.................................... $ 149,632 $ 9,444 $ 15,375 $ 174,451
------------- ------------- --------
------------- ------------- --------
General corporate expense -- net.................... (148,476)
Interest expense.................................... (32,435)
------------
Income (loss) before income taxes................... $ (6,460)
------------
------------
Identifiable assets at January 4, 1997.............. $ 859,971 $32,810 $102,730 $ 995,511
------------- ------------- --------
------------- ------------- --------
Corporate assets.................................... 147,433
------------
Total Assets at January 4, 1997................ $1,142,944
------------
------------
<CAPTION>
FOR THE YEAR ENDED JANUARY 3, 1998
- ----------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues........................................ $ 1,158,893 $68,234 $208,603 $1,435,730
------------- ------------- -------- ------------
------------- ------------- -------- ------------
Operating profit.................................... $ 171,583 $11,802 $ 43,351 $ 226,736
------------- ------------- --------
------------- ------------- --------
General corporate expense -- net.................... (143,946)
Interest expense.................................... (45,873)
------------
Income before income taxes.......................... $ 36,917
------------
------------
Identifiable assets at January 3, 1998.............. $ 1,441,765 $41,338 $ 92,309 $1,575,412
------------- ------------- --------
------------- ------------- --------
Corporate assets.................................... 152,236
------------
Total Assets at January 3, 1998................ $1,727,648
------------
------------
</TABLE>
Special charges related to SOP 93-7 of $11,745 in fiscal 1995 are included
in general corporate expense -- net. Non-recurring pre-tax charges of $138,540
and $130,804 in fiscal 1996 and 1997, respectively, related to certain
consolidation and restructuring actions announced in 1996, the merger and
integration of 1996 and 1997 acquisitions and the sale of the Hathaway dress
shirt operations in 1996 are included in general corporate expense -- net.
F-16
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Identifiable assets are those assets of the Company that are associated
with the operations in each geographic area. Corporate assets consist
principally of accounts receivable (other than trade), prepaid expenses,
property and equipment, deferred financing costs, deferred income tax assets and
other assets.
NOTE 8 - INCOME TAXES
The following presents the United States and foreign components of income
from operations before income taxes and the related provision (benefit) for
United States federal and other income taxes:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------------
JANUARY 6 JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
United States income (loss) from operations before income taxes and
extraordinary item................................................ $ 75,542 $(24,659) $ 6,060
Foreign income before taxes......................................... 4,479 18,199 30,857
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item............ $ 80,021 $ (6,460) $ 36,917
---------- ---------- ----------
---------- ---------- ----------
Current Provision:
United States federal............................................... $ 1,790 $ -- $ (432)
State and Puerto Rico............................................... 6,013 60 77
Foreign............................................................. 1,923 1,161 6,480
---------- ---------- ----------
9,726 1,221 6,125
---------- ---------- ----------
Deferred Provision (Benefit):
United States federal............................................... 23,792 (2,767) 6,687
State and Puerto Rico............................................... (3,110) 102 1,073
Foreign............................................................. -- 3,223 --
---------- ---------- ----------
20,682 558 7,760
---------- ---------- ----------
Total............................................................... $ 30,408 $ 1,779 $ 13,885
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following presents the reconciliation of the provision for income taxes
to United States federal income taxes computed at the statutory rate:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------------
JANUARY 6 JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) from continuing operations before income taxes........ $ 80,021 $ (6,460) $ 36,917
---------- ---------- ----------
---------- ---------- ----------
Provision for income taxes at the statutory rate.................... $ 28,007 $ (2,261) $ 12,921
Foreign income taxes at rates in excess of (lower than) the U.S.
statutory rate.................................................... 300 (2,108) (3,859)
State income taxes -- net of federal benefit........................ 3,908 105 759
Non-deductible intangible amortization and disposals................ 1,256 4,736 1,829
Other -- net........................................................ 234 1,307 2,235
Current benefit of capital loss carryforward........................ (1,275) -- --
Current benefit for U.S. NOL carryforward........................... (2,022) -- --
---------- ---------- ----------
Provision for income taxes.......................................... $ 30,408 $ 1,779 $ 13,885
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company has estimated United States net operating loss carryforwards of
approximately $79,616 which expire from 2004 through 2010.
F-17
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
As a result of certain sales of the Company's common stock in 1991 and 1992
and other ownership changes occurring during the three-year period prior to
1991, a change of ownership occurred under Internal Revenue Code Section 382,
which effectively limits the rate at which the Company may utilize its net
operating loss carryforwards. Nevertheless, the Company expects that it will be
able to utilize substantially all of the net operating loss carryforwards it
would have used, absent any limitation.
As of January 3, 1998 and January 4, 1997, the Company had total deferred
tax assets of $69,410 and $34,417, respectively, and deferred tax liabilities of
$86,610 and $18,036, respectively. Valuation allowances are not significant.
Significant deferred tax assets at January 3, 1998 and January 4, 1997 were for
operating costs not currently deductible for tax purposes, net operating loss
carryforwards and postretirement benefits and totaled $62,349 and $22,411,
respectively. Significant deferred tax liabilities at January 3, 1998 and
January 4, 1997 were for depreciation and amortization differences and totaled
$50,958 and $2,587, respectively. The change between January 4, 1997 and January
3, 1998 is primarily the result of recording the tax effect of differing tax and
accounting basis of net assets arising from the acquisition of Designer
Holdings. Other current assets include current taxes receivable of $14,395 and
deferred income taxes of $809 at January 3, 1998. At January 4, 1997, accrued
liabilities included deferred income taxes of $6,084.
NOTE 9 - EMPLOYEE RETIREMENT PLANS
Pensions
The Company has a defined benefit pension plan which covers substantially
all non-union domestic employees (the 'Plan'). The Plan is noncontributory and
benefits are based upon years of service and average earnings for the eight
highest consecutive calendar years of compensation (increasing to ten years in
1999 and fifteen years in 2004) during the years immediately preceding
retirement. Pension contributions are also made to foreign plans and directly to
union-sponsored plans.
The funding policy for the Plan is to make, as a minimum contribution, the
equivalent of the minimum required by the Employee Retirement Income Security
Act of 1974.
The periodic net pension cost (income) is comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------------
JANUARY 6, JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Benefits earned..................................................... $ 1,676 $ 1,552 $ 1,296
Interest cost on projected benefits................................. 7,801 7,728 7,799
Actual return on investments........................................ (20,976) (9,326) (19,493)
Net amortization/deferral........................................... 13,271 (91) 10,110
Curtailment gain and other -- net................................... -- (2,048) --
---------- ---------- ----------
Net periodic pension cost (income) -- Company plan.................. 1,772 (2,185) (288)
Cost of other plans................................................. 539 1,054 839
---------- ---------- ----------
Net pension cost (income)........................................... $ 2,311 $ (1,131) $ 551
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Plan had assets in excess of projected benefit obligations at January
4, 1997 and assets approximately equal to projected benefit obligations at
January 3, 1998. Plan investments include fixed income securities and marketable
equity securities, including 71,800, 81,800 and 212,000 shares of the Company's
Class A Common Stock, which had a fair market value of $1,795, $2,423 and $6,652
at January 6, 1996, January 4, 1997 and January 3, 1998, respectively. The Plan
also owned 101,300, 112,500 and 112,500 shares of Authentic Fitness' common
stock, which had a fair market value of $2,102, $1,350 and $2,095 at January 6,
1996, January 4, 1997 and January 3, 1998, respectively.
F-18
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The following table sets forth the Plan's funded status and amounts
recognized in the balance sheet:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------
JANUARY 4, JANUARY 3,
1997 1998
---------- ----------
<S> <C> <C>
Plan assets at fair value........................................................... $ 104,267 $ 115,330
---------- ----------
---------- ----------
Actuarial present value of benefit obligation:
Vested......................................................................... 94,452 106,640
Non-vested..................................................................... 1,542 1,954
---------- ----------
Accumulated benefit obligation...................................................... 95,994 108,594
Effect of projected future salary increases......................................... 4,785 6,900
---------- ----------
Projected benefit obligation........................................................ 100,779 115,494
---------- ----------
Plan assets (in excess of) less than projected benefit obligation................... (3,488) 164
Unrecognized prior service cost..................................................... 422 347
Unrecognized net gain............................................................... 4,426 558
---------- ----------
Amounts accrued for employee retirement Plan........................................ $ 1,360 $ 1,069
---------- ----------
---------- ----------
</TABLE>
As of January 3, 1998, the discount rate was 7.5%. As of January 4, 1997,
the discount rate was 8.0%. The actuarial assumption for long-term rate of
return on plan assets is 9.0% for fiscal 1996 and 1997. The actuarial assumption
for increases in salary levels are based on employee's attained age and years of
service and range from 4.8% to 12.0% per annum.
OTHER POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Company has defined benefit
health care and life insurance plans that provide postretirement benefits to
retired employees and former directors. The plans are contributory, with retiree
contributions adjusted annually, and contain cost-sharing features including
deductibles and co-insurance. The Company does not fund postretirement benefits.
The net periodic postretirement benefit cost is comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------------
JANUARY 6, JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Service cost.................................... $ 109 $ 68 $ 91
Interest cost................................... 599 601 672
Net amortization/deferral....................... (220) (187) (20)
Curtailment gain................................ -- (171) --
---------- ---------- ----------
Net periodic postretirement benefit cost........ $ 488 $ 311 $743
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-19
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The following sets forth the status of the plans and amounts recognized in
the balance sheets at January 4, 1997 and January 3, 1998:
<TABLE>
<CAPTION>
JANUARY 4, JANUARY 3,
1997 1998
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................... $6,979 $7,968
Actives, fully eligible.................................... 129 264
Actives, not fully eligible................................ 551 760
Unrecognized net gain from experience differences and changes in
assumptions................................................... 1,667 475
---------- ----------
Amount accrued for postretirement benefit costs................. $9,326 $9,467
---------- ----------
---------- ----------
</TABLE>
The weighted average annual assumed rate of increase in the per capita
costs of covered benefits (health care cost trend rate) for the year ended
January 6, 1996 was 11.0% for years 1 through 3, 9.0% for years 4 through 8, and
5.0% for years thereafter. The weighted average annual assumed rate of increase
in the per capita costs of covered benefits (health care cost trend rate) for
the year ended January 4, 1997 was 9.0% for years 1 through 4, and 5.0%
thereafter. The weighted average annual assumed rate of increase in the per
capita costs of covered benefits (health care cost trend rate) for the year
ended January 3, 1998 was 9% for years 1 through 3, and 5.0% for years
thereafter. A 1.0% increase in the trend rate assumption would have increased
the periodic postretirement benefit cost by approximately $34, $47 and $47 for
the years ended January 6, 1996, January 4, 1997 and January 3, 1998,
respectively. To reflect the curtailment under FAS 106 resulting primarily from
the restructuring and realignment of the Intimate Apparel Division, a discount
rate of 8.25% was used at a measurement date of July 1, 1996. As of the end of
the 1996 measurement period, the discount rate was decreased to 8.0%. As of
January 3, 1998, the discount rate was 7.5%. The rate is consistent with the
discount rate used in valuing the Company's pension plan.
The Company also sponsors a defined contribution plan for substantially all
of its domestic employees. Employees can contribute to the plan, on a pre-tax
and after-tax basis, a percentage of their qualifying compensation up to the
legal limits allowed. Beginning July 1, 1995, the Company contributes common
stock in amounts equal to 15.0% of the first 6.0% of employee contributions to
the defined contribution plan. The maximum Company contribution on behalf of any
employee is $1,350 in one year. Employees vest in the Company contribution over
four years. Company contributions to the defined contribution plan totaled $125,
$300 and $281 for the years ended January 6, 1996, January 4, 1997 and January
3, 1998, respectively.
NOTE 10 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 4, JANUARY 3,
1997 1998
---------- ----------
<S> <C> <C>
Finished goods...................................................................... $ 227,929 $ 340,246
Work in process..................................................................... 76,445 107,495
Raw materials....................................................................... 82,944 78,444
---------- ----------
$ 387,318 $ 526,185
---------- ----------
---------- ----------
</TABLE>
F-20
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 11 - DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 4, JANUARY 3,
1997 1998
---------- ----------
<S> <C> <C>
Revolving credit facility........................................................... $ -- $ 291,109
Term Note due 1995-1999............................................................. 175,000 --
Term Note due 1997-2001............................................................. 70,560 60,727
Capital lease obligations........................................................... 3,265 2,884
Other............................................................................... 16,261 7,393
---------- ----------
265,086 362,113
Less: amounts due within one year................................................... 49,281 7,850
---------- ----------
$ 215,805 $ 354,263
---------- ----------
---------- ----------
</TABLE>
Approximate maturities of long-term debt as of January 3, 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- -------------------------------------------------------------- --------
<S> <C>
1998.......................................................... $ 7,850
1999.......................................................... 10,083
2000.......................................................... 9,103
2001.......................................................... 43,603
2002.......................................................... 291,304
2003 and thereafter........................................... 170
</TABLE>
In October 1995, the Company entered into Bank Credit Agreements ('1995
Bank Credit Agreements') with substantially the same lenders as those in the
Company's previous bank credit agreement. The 1995 Bank Credit Agreements had
provided for a term loan of $200,000, a five year revolving loan in the amount
of $250,000 and a 364 day revolving loan in the amount of $100,000 ('1995
Revolving Credit Facilities'). The 364 day revolving loan was extended for an
additional 364 days in fiscal 1996 and was extendable for additional 364 day
periods. Amounts outstanding under the 1995 Bank Credit Agreements bore interest
at the Bank's base lending rate, or at LIBOR plus 0.4250%. In addition, the 1995
Bank Credit Agreements allowed the Company to place amounts borrowed under the
$250,000 Credit Agreement for bid with participating credit institutions. The
Company had the right to accept or reject any bids offered by the participating
institutions. Amounts drawn under the 1995 Revolving Credit Facilities were not
limited to any borrowing base and were essentially unsecured. The Company was
required to pay a commitment fee (included in interest expense) on unused
portions of the 1995 Revolving Credit Facilities equal to 0.1750% per annum.
Also in 1995, the Company entered into a $200,000 credit agreement with its
banks which provided the Company with a credit facility for the issuance of
commercial letters of credit ('1995 L/C Facility'). The 1995 L/C Facility
replaced a previous facility with the same lenders in an aggregate amount of
$80,000 (subsequently increased to $100,000). In addition to providing for the
issue of trade letters of credit, the 1995 L/C Facility provided that the
Company could borrow, for a period of 90 days (subsequently increased to 120
days), the amounts due under maturing trade letters of credit ('120 Day Trade
Drafts'). Total amounts outstanding under the 1995 L/C Facility, including the
face amount of trade letters of credit and 120 Day Trade Drafts, could not
exceed $200,000 in the aggregate. The total amount of 120 Day Trade Drafts
outstanding could not exceed $100,000 at any time. Amounts outstanding under 120
Day Trade Drafts accrue interest at the bank's base rate or at LIBOR plus
0.4250%. The interest rate payable on outstanding 120 Day Trade Drafts decreased
as the Company's implied senior debt rating improved. The Company was required
to pay a commitment fee on the unused portion of the 1995 L/C Facility equal to
0.125% per annum of the average unused portion of
F-21
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
the 1995 L/C Facility. The Company classifies 120 Day Trade Drafts with trade
accounts payable. The amount of 120 Day Trade Drafts outstanding at January 4,
1997 was $64,902.
In July and August 1996, the Company entered into credit agreements related
to the purchase of Lejaby with several of the members of its existing bank group
('1996 Bank Credit Agreements'). The terms of the 1996 Bank Credit Agreements
are substantially the same as those of the 1995 Bank Credit Agreement and
include a term loan facility of 370 million French Francs and revolving loan
facilities of 120 million French Francs. The term and revolving loans mature on
December 31, 2001. Borrowings under the term loan and revolving loan facility
bear interest at LIBOR plus .45%. The term loan is being repaid in annual
installments which began in July 1997, with a final installment due on December
31, 2001. As of January 3, 1998, the Company had approximately $20,400 of
additional credit available under the revolving loan portion of the 1996 Bank
Credit Agreement.
In August and November 1997, the Company entered into Bank Credit
Agreements ('1997 Bank Credit Agreements') with substantially the same lenders
as those in the 1995 Bank Credit Agreements. The 1997 Bank Credit Agreements
provide for a five year revolving credit facility in the amount of $600,000 (the
'Five Year Facility'), a 364 day credit facility in the amount of $200,000 (the
'364 Day Credit Facility,' and together with the Five Year Facility, '1997
Revolving Credit Facilities') and a $300,000 Trade Letter of Credit Facility
('1997 L/C Facility'). The 1997 L/C Facility provides for the issuance of
commercial letters of credit and allows the Company to borrow, for periods of
120 days, the amounts due under maturing letters of credit. The 1997 Bank Credit
Agreements replace the 1995 Bank Credit Agreements with improved terms and
conditions which include a lower borrowing rate, an extension of maturities and
revised debt covenants. The 364 day period is extendable for additional 364 day
periods. Amounts outstanding under the 1997 Bank Credit Agreements bear interest
at the Bank's base lending rate or at the Eurodollar rate plus 0.375%.
Facilities are not limited to any borrowing base and are essentially unsecured.
The rate of interest payable on amounts outstanding under the 1997 Bank Credit
Agreements and the commitment fee payable on the unused portion of the
facilities decreases as the Company's implied senior debt rating improves.
As of January 4, 1997, the Company had two interest rate swap agreements in
place which were used to convert variable interest rate borrowings of $156,500
to fixed interest rates. Borrowings of $150,000 were fixed at 5.67% until
maturity in October 1998. Also, borrowings of $6,500 were fixed at 6.60% until
maturity in July 2006. As of January 3, 1998, the Company has two additional
similar interest rate swap agreements in place, bringing the total amount of
borrowings converted to fixed interest rates to $356,500. The two new swap
agreements include borrowings of $125,000 fixed at 5.76% and borrowings of
$75,000 fixed at 5.79%, both maturing in September 2002. The counterparties to
all of the Company's interest rate swap agreements are banks who are lenders in
the 1997 Bank Credit Agreements. Differences between the fixed interest rate on
each swap and the three month LIBOR interest rate are settled quarterly between
the Company and each counterparty. The Company made payments under its interest
rate swap agreements totalling $524 and $32 in the years ended January 4, 1997
and January 3, 1998, respectively.
The Company is required to pay a commitment fee on the average unused
portion of the Five Year Facility equal to 0.125% per annum, the 364 Day
Credit Facility equal to 0.100% per annum and the 1997 L/C Facility equal to
0.100% per annum. The Company classifies 120 Day Trade Drafts with trade
accounts payable. As of January 3, 1998, the amount of 120 Day Trade Drafts
outstanding was $111,172.
The 1997 Bank Credit Agreements contain various covenants involving
additional debt, liens on Company property, mergers, investments in other
entities, asset sales and other items. These Agreements also require the Company
to meet certain financial tests, which as of January 3, 1998, were as follows:
(1) leverage ratio of .55 to 1, and, (2) interest coverage ratio of 3 to 1. The
Company was in compliance with all of the covenants under the 1997 and 1995 Bank
Credit Agreements for the three fiscal years ended January 3, 1998.
F-22
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The Company believes that the fair market value of its outstanding variable
rate debt is approximately equal to the outstanding principal amount thereof as
(i) substantially all of the Company's debt bears interest at floating rates
(market) and (ii) there are no prepayment premiums required by any of the
Company's material debt agreements.
The Company's average interest rate on all its outstanding debt was
approximately 6.06% and 5.92% at January 4, 1997 and January 3, 1998,
respectively.
The Company issues stand-by and commercial letters of credit guaranteeing
the Company's performance under certain purchase agreements. Certain obligations
for letters of credit reduce amounts available under the 1997 Bank Credit
Agreements. At January 4, 1997 and January 3, 1998, the Company had outstanding
letters of credit totaling approximately $42,590 and $64,037, respectively, of
which $5,031 and $4,483, respectively, reduced amounts available under the
applicable Revolving Credit Facility.
At January 3, 1998, the Company had $504,408 and $129,274 of additional
credit available under the 1997 Revolving Credit Facilities and the 1997 L/C
Facility, respectively.
The Company and certain of its foreign subsidiaries have entered into
credit agreements that provide for revolving lines of credit ('Foreign Credit
Facilities'). At January 3, 1998, the total amount of the Foreign Credit
Facilities was approximately $71,300, of which approximately $45,300 was
available.
NOTE 12 - MANDATORILY REDEEMABLE PREFERRED SECURITIES
In 1996, Designer Holdings issued 2.4 million Company-obligated mandatorily
redeemable convertible preferred securities of a wholly owned subsidiary (the
'Preferred Securities') for aggregate gross proceeds of $120,000. The Preferred
Securities represent preferred undivided beneficial interests in the assets of
Designer Finance Trust ('Trust'), a statutory business trust formed under the
laws of the State of Delaware in 1996. Designer Holdings owns all of the common
securities representing undivided beneficial interests of the assets of the
Trust. Accordingly, the Trust is included in the consolidated financial
statements of the Company. The Trust exists for the sole purpose of (i) issuing
the Preferred Securities and common securities (together with the Preferred
Securities, the 'Trust Securities'), (ii) investing the gross proceeds of the
Trust Securities in 6% Convertible Subordinated Debentures of Designer Holdings
due 2016 ('Convertible Debentures') and (iii) engaging in only those other
activities necessary or incidental thereto. The Company indirectly owns 100% of
the voting common securities of the Trust which is equal to 3% of the Trust's
total capital.
Each Preferred Security is convertible at the option of the holder thereof
into 0.6888 of a share of Common Stock, par value $.01 per share, of the
Company, or 1,653,177 shares of the Company's Common Stock in the aggregate, at
an effective conversion price of $72.59 per share of common stock, subject to
adjustments in certain circumstances.
The holders of the Preferred Securities are entitled to receive cumulative
cash distributions at an annual rate of 6% of the liquidation amount of $50.00
per Preferred Security, payable quarterly in arrears. The distribution rate and
payment dates correspond to the interest rate and interest payment dates on the
Convertible Debentures, which are the sole assets of the Trust. Such
distributions are included in interest expense.
The Company has the right to defer payments of interest on the Convertible
Debentures and distributions on the Preferred Securities for up to twenty
consecutive quarters (five years), provided such deferral does not extend past
the maturity date of the Convertible Debentures. Upon the payment, in full, of
such deferred interest and distributions, the Company may defer such payments
for additional five-year periods.
F-23
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The Preferred Securities are mandatorily redeemable upon the maturity of
the Convertible Debentures on December 31, 2016, or earlier to the extent of any
redemption by the Company of any Convertible Debenture, at a redemption price of
$50.00 per share plus accrued and unpaid distributions to the date fixed for
redemption. In addition, there are certain circumstances wherein the Trust will
be dissolved, with the result that the Convertible Debentures will be
distributed pro-rata to the holders of the Trust Securities.
The Company has guaranteed, on a subordinated basis, distributions and
other payments due on the Preferred Securities ('Guarantee'). In addition, the
Company has entered into a supplemental indenture pursuant to which it has
assumed, as a joint and several obligor with Designer Holdings, liability for
the payment of principal, premium, if any, and interest on the Convertible
Debentures, as well as the obligation to deliver shares of Common Stock, par
value $.01 per share, of the Company upon conversion of the Preferred Securities
as described above. The Guarantee, when taken together with the Company's
obligations in respect of the Convertible Debentures provides a full and
unconditional guarantee of amounts due on the Preferred Securities.
As a result of the acquisition of Designer Holdings by the Company, the
Preferred Securities were adjusted to their estimated fair value at the date of
acquisition of $100,500, resulting in a decrease in their recorded value of
approximately $19,500. This decrease is being amortized, using the effective
interest rate method to maturity of the Preferred Securities. As of January 3,
1998, the unamortized balance is $19,242.
NOTE 13 - SUMMARIZED FINANCIAL INFORMATION
The following is summarized financial information of the Company's
wholly-owned subsidiary, Designer Holdings as of December 31, 1996 and January
3, 1998 and for each of the three fiscal years ended January 3, 1998,
respectively.
Balance sheet summary:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 3,
1996 1998
------------ ----------
<S> <C> <C>
Current assets................................................................... $270,819 $ 129,285
Noncurrent assets................................................................ 136,140 497,557
Current liabilities.............................................................. 51,454 104,458
Noncurrent liabilities........................................................... 49,583 59,800
Redeemable preferred securities.................................................. 120,000 100,758
Stockholders' equity............................................................. 185,922 361,826
</TABLE>
Income statement summary:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED NINE MONTHS THREE MONTHS
DECEMBER 31, ENDED ENDED
---------------------------- SEPTEMBER 30, JANUARY 3,
1995(a) 1996(a) 1997 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenues........................................ $462,122 $480,360 $ 365,049 $158,276
Cost of goods sold.................................. 358,613 339,249 262,759 115,958
Net income before extraordinary item................ 11,063 27,502 274 8,430
Net income (loss)................................... 11,063 25,246 (633) 8,430
</TABLE>
- ------------
(a) Certain amounts for the years ended December 31, 1996 and 1995 have been
reclassified to cost of goods sold to conform to the current year
presentation.
F-24
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The summarized balance sheet information as of December 31, 1996 is
presented on a historical basis and does not reflect the effect of the
acquisition by the Company. The summarized balance sheet information as of
January 3, 1998 reflects the effect of the acquisition by the Company.
Stockholders equity represents the purchase price paid plus earnings for the
period since acquisition.
The income statement information for the years ended December 31, 1995 and
1996 and the nine months ended September 30, 1997 is presented on a historical
basis and does not reflect the effect of the acquisition by the Company.
The above information is not indicative of the future operating results
primarily due to the integration of the operations of Designer Holdings with the
operations of the Company, the redirected marketing efforts in the new store
format and redirected marketing strategy. For further information regarding the
acquisition of Designer Holdings by the Company including pro forma information,
see Note 2 of the Notes to the Consolidated Financial Statements.
NOTE 14 - CAPITAL STOCK
On June 30, 1995 the Company paid its first quarterly dividend on its
Common Stock. Total dividends paid during the years ended January 6, 1996,
January 4, 1997 and January 3, 1998 were $5,868, $14,532 and $16,220,
respectively.
In 1988, the Company adopted the 1988 Employee Stock Purchase Plan ('Stock
Purchase Plan'). The Stock Purchase Plan provides for sales of up to 4,800,000
shares of Class A Common Stock of the Company to certain key employees. At
January 4, 1997 and January 3, 1998, 4,521,300 shares were issued and
outstanding pursuant to grants under the Stock Purchase Plan. The Stock Purchase
Plan is administered by the Employee Stock Purchase Plan Administrative
Committee of the Board of Directors which has full authority to determine the
number of shares granted or sold, vesting requirements, voting requirements and
conditions of any stock purchase agreement between the Company and a key
employee.
All shares were sold at amounts determined to be equal to the fair market
value of the shares. In addition, certain employees elected to pay for the
shares granted by executing a promissory note payable to the Company. Notes
totaling $6,041 and $5,972 were outstanding at January 4, 1997 and January 3,
1998, respectively. The note maturities range from five to ten years. Notes
receivable from employees are deducted from stockholders' equity and are
principally owed by officers and directors of the Company.
In 1991, the Company established The Warnaco Group, Inc. 1991 Stock Option
Plan ('Option Plan') and authorized the issuance of up to 1,500,000 shares of
Class A Common Stock to cover grants to be made under the plan. The Option Plan
is administered by a committee of the Board of Directors of the Company which
determines the number of stock options to be granted under the Option Plan, and
the terms and conditions of such grants. The Option Plan provides for the
granting of qualified stock options within the meaning of Internal Revenue Code
Section 422 and non-qualified stock options. In addition, the Option Plan limits
the amount of qualified stock options that may become exercisable by any
individual during a calendar year and limits the vesting period for options
awarded under the Option Plan.
On May 14, 1993, the stockholders approved the adoption of The Warnaco
Group, Inc. 1993 Stock Plan ('Stock Plan'). The Stock Plan provides for the
issuance of up to 2,000,000 shares of common stock of the Company through awards
of stock options, stock appreciation rights, performance awards, restricted
stock units and stock unit awards. On May 12, 1994, the stockholders approved an
amendment to the Stock Plan whereby the number of shares issuable under the
Stock Plan is automatically increased each year by 3% of the number of
outstanding shares of Class A Common Stock of the Company as of the beginning of
each fiscal year. The total number of shares available for
F-25
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
issuance under the Stock Plan as of January 3, 1998, was 1,601,387. The
Compensation Committee of the Board of Directors has the sole and complete
authority to make awards under the Stock Plan and to determine the specific
terms and conditions of such awards, except that the exercise price of any stock
option award may not be less than the fair market value of the Company's Common
Stock at the date of the grant.
In accordance with the provisions of the Stock Plan, the Company granted
190,700 and 137,135 shares of restricted stock to certain employees, including
certain officers of the Company, during the years ending January 4, 1997 and
January 3, 1998, respectively. The restricted shares vest over four years. The
fair market value of the restricted shares was $5,578 and $4,082 at the dates of
grant, respectively. The Company will recognize compensation expense equal to
the fair value of the restricted shares over the vesting period. Compensation
expense for the years ended January 6, 1996, January 4, 1997 and January 3, 1998
was $580, $2,502 and $3,322, respectively. During 1997, 18,250 of non-vested
restricted shares were canceled resulting in a reduction in unearned
compensation of $481. Unearned stock compensation at January 4, 1997 and January
3, 1998 was $9,456 and $9,734, respectively, and is deducted from stockholders'
equity.
In May 1994, the Company's stockholders approved the adoption of the 1993
Non-Employee Director Stock Plan ('Director Plan'). The Director Plan provides
for awards of non-qualified stock options to directors of the Company who are
not employees of the Company. Options granted under the Director Plan are
exercisable in whole or in part until the earlier of ten years from the date of
the grant or one year from the date on which an optionee ceases to be a Director
eligible for grants. Options are granted at the fair market value of the
Company's Common Stock at the date of the grant. The Director Plan provides for
the automatic grant of options to purchase (i) 30,000 shares of Common Stock
upon a Director's election to the Company's Board of Directors and (ii) 10,000
shares of Common Stock immediately following each annual shareholders' meeting
as of the date of such meeting.
In 1997, the Company's Board of Directors approved the adoption of The
Warnaco Group, Inc. 1997 Stock Option Plan ('1997 Plan'). The plan provides for
the issuance of stock options up to the number of shares of common stock held in
treasury. The 1997 Plan is administered by a committee of the Board of Directors
of the Company which determines the number of stock options to be granted under
the 1997 Plan, and the terms and conditions of such grants. The 1997 Plan
provides for the granting of qualified stock options within the meaning of
Internal Revenue Code Section 422, non-qualified stock options and restricted
stock. In addition, the Plan limits the amount of qualified stock options that
may become exercisable by any individual during a calendar year and limits the
vesting period for options awarded under the 1997 Plan. During 1997, options for
626,972 shares were granted.
F-26
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Options granted, exercised, canceled and outstanding under the Option Plan,
the Stock Plan, the Director Plan and the 1997 Plan at January 3, 1998 are
summarized below:
<TABLE>
<CAPTION>
PRICE RANGE SHARES
----------- ---------
<S> <C> <C>
Outstanding January 7, 1995................................................. 13.13-18.31 3,497,000
Options granted............................................................. 15.75-18.50 2,255,000
Options exercised........................................................... 15.81-18.31 (100,500)
Options canceled............................................................ 15.81-18.31 (369,000)
---------
Outstanding January 6, 1996................................................. 13.13-18.50 5,282,500
Options granted............................................................. 22.38-29.25 1,962,000
Options exercised........................................................... 13.25-17.32 (417,500)
Options canceled............................................................ 13.25-24.38 (136,000)
---------
Outstanding January 4, 1997................................................. 13.13-29.25 6,691,000
Options granted(1).......................................................... 18.33-33.31 2,611,500
Options exercised........................................................... 13.13-24.38 (251,259)
Options canceled............................................................ 13.13-24.38 (233,366)
---------
Outstanding January 3, 1998................................................. 13.13-33.19 8,817,875
---------
---------
</TABLE>
- ------------------
(1) Includes options on 80,000 shares at $18.33 per share in connection with the
acquisition by the Company of Designer Holdings.
Of the outstanding options at January 3, 1998, 4,127,594 were exercisable
at a weighted average exercise price of $17.76 per share. Options are
exercisable for a period of ten years from date of grant and vest when granted
in the case of the Director Plan and from the grant date to four years for the
Stock Plan, Option Plan and 1997 Plan. Options expire from February 14, 2002 to
December 12, 2007.
The Company has reserved 1,861,112 shares of Class A Common Stock for
issuance under the Director Plan, Stock Plan and Option Plan as of January 3,
1998. In addition, there are 839,319 shares of Class A common stock in treasury
stock available for issuance under the 1997 Plan.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense has been
recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, 'Accounting for Stock Based Compensation' (SFAS No.
123), which also requires that the pro forma information be determined as if the
Company had accounted for its employee stock options granted subsequent to
January 7, 1995 under the fair-value method of SFAS No. 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
JANUARY 6, JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate............................................ 7.14% 5.47% 6.20%
Dividend yield..................................................... 1.70% 1.15% 1.08%
Expected volatility of market price of Company's Common Stock...... .3143 .3189 .3197
Expected option life............................................... 5 years 5 years 5 years
</TABLE>
F-27
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
JANUARY 6, JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income (loss)........................................ $ 42,145 $(14,947) $ 18,230
Pro forma basic income (loss) per share............................ $ 0.95 $ (0.29) $ 0.34
Pro forma diluted income (loss) per share.......................... $ 0.93 $ (0.29) $ 0.33
</TABLE>
These pro forma effects may not be representative of the effects on future
years because of the prospective application required by SFAS No. 123, and the
fact that options vest over several years and new grants generally are made each
year.
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------------
JANUARY 6, JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Treasury Stock:
Balance at beginning of year....................................... 286,600 286,600 536,600
Common stock reacquired............................................ -- 250,000 839,319
---------- ---------- ----------
Balance at end of year............................................. 286,600 536,600 1,375,919
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
On November 14, 1996, the Board of Directors approved a stock buyback
program of up to 2.0 million shares. On May 14, 1997, the Company's Board of
Directors approved an increase of this program to 2.4 million shares, and on
February 19, 1998, the Company's Board of Directors authorized the repurchase of
an additional 10.0 million shares. During fiscal 1996 and 1997, the Company
repurchased 250,000 and 839,319 shares of its common stock under the repurchase
programs at a cost of $7,030 and $26,537, respectively.
As part of the repurchase program, in 1997 the Company has entered into
put-call option combinations. Each put option entitles the third-party holder to
sell shares of Warnaco common stock to the Company at a specified price. Each
call option entitles the Company to buy shares of Warnaco common stock at a
specified price. During 1997, 140,350 shares were repurchased under this program
and are included in treasury stock, at a cost of $4,475. Net cash settlement
payments of $1,620 were also made under this program and are included in
additional paid-in capital. At January 3, 1998, the Company had put-call
option combinations outstanding on approximately 1.3 million shares at an
average forward price per share of $31.66. These option arrangements expire
between March 1998 and September 1998. At expiration, the Company has the choice
of settling these arrangements through physical settlement (purchase of shares),
in cash or in net shares. If these arrangements were settled on a net cash
basis at their expiration dates, based on the January 2, 1998 market price
for the Company's common stock of $31.25, the Company would be obligated to
pay $539.
F-28
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 15 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
JANUARY 6, JANUARY 7, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share -- income (loss)
before extraordinary item........................................ $ 49,613 $ (8,239) $ 23,032
---------- ---------- ----------
---------- ---------- ----------
Denominator for basic earnings per share -- weighted average
shares........................................................... 44,215 51,308 52,814
---------- ---------- ----------
Effect of dilutive securities:
Employee stock options........................................ 932 -- 1,613
Restricted stock shares....................................... 131 -- 394
---------- ---------- ----------
Dilutive potential common shares................................... 1,063 -- 2,007
---------- ---------- ----------
Denominator for diluted earnings per share -- weighted average
adjusted shares.................................................. 45,278 51,308 54,821
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per share before extraordinary item.......... $ 1.12 $ (.16) $ 0.44
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per share before extraordinary item........ $ 1.10 $ (.16) $ 0.42
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Options to purchase 1,900,556 shares of common stock at prices ranging from
$30.38 to $33.31 per share were outstanding during fiscal 1997 but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
The options, which expire from February to August, 2007, were still outstanding
at the end of fiscal 1997.
Incremental shares issuable on the assumed conversion of the Preferred
Securities (1,653,177 shares) were not included in the computation of diluted
earnings per share as the impact would have been antidilutive.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Leases:
During 1997, the Company sold certain fixed assets for net book value of
approximately $33,223. The assets are being leased back from the purchaser,
under the terms of an operating lease, over a six-year period.
Rental expense was $16,545, $19,923 and $24,492 for the years ended January
6, 1996, January 4, 1997 and January 3, 1998, respectively.
F-29
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The following is a schedule of future minimum rental payments required
under operating leases with terms in excess of one year, as of January 3, 1998:
<TABLE>
<CAPTION>
RENTAL PAYMENTS
------------------------
REAL ESTATE EQUIPMENT
----------- ---------
<S> <C> <C>
1998.......................................................................... $20,153 $12,864
1999.......................................................................... 15,345 11,217
2000.......................................................................... 12,166 10,928
2001.......................................................................... 10,488 8,809
2002.......................................................................... 8,829 8,634
2003 and thereafter........................................................... 31,022 10,874
</TABLE>
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS
The following summarizes the unaudited quarterly results of operations of
the Company for the years ended January 4, 1997 and January 3, 1998.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 4, 1997
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues..................................................... $206,480 $222,805 $292,010 $342,528
Gross profit..................................................... 72,909 47,237 90,374 117,187
Net income (loss)................................................ 15,218 (55,482) 5,811 26,214
Basic net income (loss) per common share(1)...................... $ 0.30 $ (1.08) $ 0.11 $ 0.51
-------- -------- -------- --------
-------- -------- -------- --------
Diluted net income (loss) per common share(1).................... $ 0.29 $ (1.08) $ 0.11 $ 0.49
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 4, 1998
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues..................................................... $251,526 $290,204 $333,413 $560,587
Gross profit..................................................... 92,742 99,305 124,003 116,171
Net income (loss)................................................ 18,126 17,155 32,081 (44,330)
Basic net income (loss) per common share(2)...................... $ 0.35 $ 0.33 $ 0.62 $ (0.77)
-------- -------- -------- --------
-------- -------- -------- --------
Diluted net income (loss) per common share(2).................... $ 0.34 $ 0.32 $ 0.60 $ (0.77)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(1) Includes the results of Designer Holdings acquired during the fourth quarter
of 1997.
(2) The fiscal 1996 and first three quarters of fiscal 1997 earnings per share
amounts have been restated to comply with SFAS No. 128.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Revolving, term loans and other borrowings. The carrying amounts of the
Company's outstanding balances under its various Bank Credit Agreements and
other outstanding debt approximate the fair value because the interest rate on
the outstanding borrowings is variable and there are no prepayment penalties.
F-30
<PAGE>
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Redeemable preferred securities. These securities are publically traded on
the New York Stock Exchange. The fair market value was determined based on the
closing price on January 2, 1998, the last trading date prior to the end of the
fiscal year.
Interest rate swap agreements. The Company has entered into interest rate
swap agreements which have the effect of converting a portion of the Company's
outstanding variable rate debt into fixed rate debt. The fair value of the
Company's agreements to fix the interest rate on $356,500 of its outstanding
debt is based upon quotes from brokers and represents the cash requirement if
the existing agreements had been settled at year end.
Letters of credit. Letters of credit collateralize the Company's
obligations to third parties and have terms ranging from 30 days to one year.
The face amount of the letters of credit are a reasonable estimate of the fair
value since the value for each is fixed over its relatively short maturity.
Equity option arrangements. These arrangements can be settled, at the
Company's option, by the purchase of shares, on a net basis in shares of the
Company's common stock or on a net cash basis. To the extent that the market
price of the Company's common stock on the settlement date is higher or lower
than the forward purchase price, the net differential can be paid or received by
the Company.
Foreign currency transactions. During 1997, the Company entered into
various foreign currency forward and option contracts which were used as hedges
for various commercial transactions. As of January 3, 1998, the Company did not
have any open foreign currency forward or option contracts.
The carrying amounts and fair value of the Company's financial instruments
as of January 4, 1997 and January 3, 1998, are as follows:
<TABLE>
<CAPTION>
JANUARY 4, 1997 JANUARY 3, 1998
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revolving loans.................................................. $166,145 $166,145 $303,860 $303,860
Term loans....................................................... 245,560 245,560 60,727 60,727
Other long term debt............................................. 19,526 19,526 10,277 10,277
Redeemable preferred securities.................................. -- -- 100,758 100,800
Interest rate swaps.............................................. -- 261 -- (4,716)
Letters of credit................................................ 42,590 42,590 64,037 64,037
Equity option arrangement........................................ -- -- -- (539)
</TABLE>
NOTE 19 - CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
JANUARY 6, JANUARY 4, JANUARY 3,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest............................................................... $ 32,667 $ 32,008 $ 42,931
Income taxes, net of refunds received.................................. 4,168 8,672 13,578
Supplemental Non-Cash Investing and Financing Activities:
Details of acquisitions:
Fair value of assets acquired.......................................... -- $176,497 $ 607,400
Liabilities assumed.................................................... -- (78,200) (254,000)
Stock issued........................................................... -- -- (353,400)
---------- ---------- ----------
Cash paid.............................................................. -- 98,297 --
Less cash acquired..................................................... -- (12,649) (55,800)
---------- ---------- ----------
Net cash paid (acquired)............................................... -- $ 85,648 $ (55,800)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-31
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
The Warnaco Group, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 20, 1998 appearing on page F-1 of this Form 10-K also included an
audit of the Financial Statement Schedule listed in Item 14(a)2 of this Form
10-K as of and for the three years ended January 3, 1998. In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PRICE WATERHOUSE LLP
New York, New York
February 20, 1998
S-1
<PAGE>
<PAGE>
SCHEDULE II
THE WARNACO GROUP, INC
VALUATION & QUALIFYING ACCOUNTS & RESERVES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO
OF COSTS AND BALANCE AT
DESCRIPTION YEAR EXPENSES(1) DEDUCTIONS(2) OTHER(3) END OF YEAR
- ------------------------------------------ ---------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended January 6, 1996
Receivable allowances................... $ 5,033 $ 2,327 $ 2,225 $-- $ 5,135
---------- ----------- ------------- -------- -----------
---------- ----------- ------------- -------- -----------
Year Ended January 4, 1997
Receivable allowances................... $ 5,135 $ 3,458 $ 649 $3,393 $11,337
---------- ----------- ------------- -------- -----------
---------- ----------- ------------- -------- -----------
Year Ended January 3, 1998
Receivable allowances................... $ 11,337 $32,284(4) $ 5,482 $7,985 $46,124
---------- ----------- ------------- -------- -----------
---------- ----------- ------------- -------- -----------
Inventory reserves...................... $ -- $19,333(4) $11,152 $1,236 $ 9,417
---------- ----------- ------------- -------- -----------
---------- ----------- ------------- -------- -----------
</TABLE>
- ------------------
(1) Allowances are primarily charged to income as incurred. The allowance is
adjusted at the end of each period, by a charge or credit to income, for the
estimated discounts and allowances applicable to the accounts receivable
then outstanding.
(2) Amounts written-off, net of recoveries.
(3) Reserves related to assets acquired in fiscal 1996 and 1997, respectively.
(4) Includes non-recurring expense charged in fiscal 1997.
The above reserves are deducted from the related assets in the consolidated
balance sheets. Current presentation includes amounts for cash discounts and
other allowances, aside from allowances for doubtful accounts previously
disclosed.
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as.......... 'r'
S-2
<PAGE>
<PAGE>
-------------------------------------------
DESIGNER HOLDINGS LTD.,
THE WARNACO GROUP, INC.,
AND
IBJ SCHRODER BANK & TRUST COMPANY,
as Trustee
-------------------------------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of March 31, 1998
-------------------------------------------
<PAGE>
<PAGE>
1
FIRST SUPPLEMENTAL INDENTURE, dated as of March 31, 1998, among
Designer Holdings Ltd., a Delaware corporation (the "Company"), The Warnaco
Group, Inc., a Delaware corporation ("Warnaco"), and IBJ Schroder Bank & Trust
Company, a New York corporation, as trustee (the "Trustee"). Terms not defined
herein shall have the meanings assigned to them in the Indenture (as defined
below).
R E C I T A L S
WHEREAS, the Company and the Trustee are parties to an Indenture,
dated as of November 6, 1996 (the "Indenture"), relating to the Company's 6%
Convertible Subordinated Debentures due 2016 (the "Securities").
WHEREAS, on December 12, 1997, a wholly-owned subsidiary of Warnaco
was merged with and into the Company with the Company being the surviving
corporation in the merger (the "Merger") and each outstanding share of common
stock of the Company (other than shares held by Warnaco, Designer Holdings or
any of their direct or indirect subsidiaries) was converted into the right to
receive 0.324 of a fully paid and nonassessable share of Warnaco Class A Common
Stock.
WHEREAS, Warnaco desires to become jointly and severally liable for
and assume all of the obligations of the Company under the Indenture and the
Securities.
WHEREAS, Section 901 of the Indenture provides that the Company, when
authorized by a Board Resolution, and the Trustee may enter into a supplemental
indenture, without the consent of any Holder, to, among other things, make
provision with respect to the conversion rights of Holders pursuant to the
requirements of Article Thirteen of the Indenture.
WHEREAS, the Company and the Trustee have determined that this First
Supplemental Indenture complies with Section 901 of the Indenture and does not
require the consent of any Holders and, on the basis of the foregoing, the
Trustee has determined that this First Supplemental Indenture is in form
satisfactory to it.
<PAGE>
<PAGE>
2
W I T N E S S E T H :
NOW, THEREFORE, for and in consideration of the premises, it is
mutually covenanted and agreed, for the equal and ratable benefit of the
Holders, as follows:
ARTICLE 1
ASSUMPTION OF OBLIGATIONS
Section 1.1. Assumption. Warnaco hereby unconditionally assumes joint
and several liability on and after the Effective Date (as defined below) for all
of the obligations of the Company under the Indenture and the Securities,
including the punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of the principal of, premium, if any, and interest on
the Securities according to the terms of the Securities and as more fully
described in the Indenture. Notwithstanding the foregoing, the Company shall
remain obligated under the Indenture and the Securities, in accordance with the
terms of the Indenture. "Effective Date" shall mean December 12, 1997.
ARTICLE 2
CONVERSION RIGHTS OF HOLDERS IN
CONNECTION WITH THE MERGER
SECTION 2.1. Conversion Rights. The Company, as the surviving
corporation of the Merger, and Warnaco hereby provide in accordance with Section
1304 of the Indenture that the Holder of each Security outstanding at the
effective time of the Merger shall have the right, during the period such
Security shall be convertible as specified in Section 1301 of the Indenture, to
convert such Security only into that number of shares of class A common stock,
par value $.01 per share, of Warnaco ("Warnaco Common Stock") equal to the
product of .324 and the number of shares of Common Stock of the Company into
which such Security would have been convertible into immediately prior to the
Merger.
ARTICLE 3
GENERAL PROVISIONS
SECTION 3.1. Incorporation of Indenture. All the provisions of this
First Supplemental Indenture shall be deemed to be incorporated in, and made a
part of, the Indenture; and the Indenture, as supplemented and amended by this
First Supplemental Indenture, shall be read, taken and construed as one and the
same instrument.
SECTION 3.2. Headings. The headings of the Articles and Sections of
this First Supplemental Indenture are inserted for convenience of reference and
shall not be deemed to be a part thereof.
<PAGE>
<PAGE>
3
SECTION 3.3. Counterparts. This First Supplemental Indenture may be
executed in any number of counterparts, each of which so executed shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same instrument.
SECTION 3.4. Conflict with Trust Indenture Act. If any provision
hereof limits, qualifies or conflicts with another provision hereof which is
required to be included in this First Supplemental Indenture by any of the
provisions of the Trust Indenture Act, such required provision shall control.
SECTION 3.5. Successors. All covenants and agreements in this First
Supplemental Indenture by the Company and Warnaco shall be binding upon and
accrue to benefit of their respective successors. All covenants and agreements
in this First Supplemental Indenture by the Trustee shall be binding upon and
accrue to the benefit of its successors.
SECTION 3.6. Separability Clause. In case any provision in this First
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 3.7. Benefits of First Supplemental Indenture. Nothing in this
First Supplemental Indenture, express or implied, shall give to any person,
other than the parties hereto and their successors hereunder and the Holders,
any benefit or any legal or equitable right, remedy or claim under this First
Supplemental Indenture.
<PAGE>
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this First Supplemental Indenture, as
of the date first above written.
DESIGNER HOLDINGS LTD.
/s/ Stanley P. Silverstein
------------------------------------
By: Stanley P. Silverstein
Title: Vice President and Secretary
Attest:
- ------------------------
Name:
THE WARNACO GROUP, INC.
/s/ Stanley P. Silverstein
-----------------------------------
By: Stanley P. Silverstein
Title: Vice President, General
Counsel and Secretary
Attest:
- ------------------------
Name:
IBJ SCHRODER BANK & TRUST COMPANY,
as Trustee
/s/ Robert Radich
------------------------------------
By: Robert Radich
Title: Vice President
<PAGE>
<PAGE>
PREFERRED SECURITIES GUARANTEE AGREEMENT
The Warnaco Group, Inc.
Dated as of March 31, 1998
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND INTERPRETATION 2
SECTION 1.1. Definitions and Interpretation 2
ARTICLE II
TRUST INDENTURE ACT 5
SECTION 2.1. Trust Indenture Act; Application 5
SECTION 2.2. List of Holders of Securities
SECTION 2.3. Reports by the Preferred Guarantee
Trustee 6
SECTION 2.4. Periodic Reports to the Preferred
Guarantee Trustee 6
SECTION 2.5. Event of Default; Notice 7
SECTION 2.6. Evidence of Compliance with Conditions
Precedent 7
SECTION 2.7. Event of Default; Waiver 7
SECTION 2.8. Conflicting Interests 7
ARTICLE III
POWERS, DUTIES AND RIGHTS OF THE PREFERRED GUARANTEE TRUSTEE 7
SECTION 3.1. Powers and Duties of the Preferred
Guarantee Trustee 8
SECTION 3.2. Certain Rights of the Preferred
Guarantee Trustee 9
SECTION 3.3. Not Responsible for Recitals or Issuance
of Guarantee 12
ARTICLE IV
PREFERRED GUARANTEE TRUSTEE 12
SECTION 4.1. Preferred Guarantee Trustee;
Eligibility 12
SECTION 4.2. Appointment, Removal and Resignation of
Preferred Guarantee Trustees 13
ARTICLE V
GUARANTEE 13
SECTION 5.1. Guarantee 14
SECTION 5.2. [Reserved] 14
SECTION 5.3. Waiver of Notice and Demand 14
SECTION 5.4. Obligations Not Affected 14
SECTION 5.5. Rights of Holders 15
SECTION 5.6. Guarantee of Payment 16
SECTION 5.7. Subrogation 16
SECTION 5.8. Independent Obligations 16
SECTION 5.9. Conversion 16
<PAGE>
<PAGE>
SECTION 5.10. Expenses 16
ARTICLE VI
LIMITATION OF TRANSACTIONS; RANKING 16
SECTION 6.1. Limitation of Transactions 16
SECTION 6.2. Ranking 17
ARTICLE VII
TERMINATION 17
SECTION 7.1. Termination 17
ARTICLE VIII
INDEMNIFICATION 18
SECTION 8.1. Exculpation 18
SECTION 8.2. Indemnification 18
ARTICLE IX
MISCELLANEOUS 19
SECTION 9.1. Successors and Assigns 19
SECTION 9.2. Amendments 19
SECTION 9.3. Notices 19
SECTION 9.4. Benefit 20
SECTION 9.5. Governing Law 20
<PAGE>
<PAGE>
1
PREFERRED SECURITIES GUARANTEE AGREEMENT
This PREFERRED SECURITIES GUARANTEE AGREEMENT (the "Preferred
Securities Guarantee"), dated as of March 31, 1998, is executed and delivered by
The Warnaco Group, Inc., a Delaware corporation (the "Guarantor"), and IBJ
Schroder Bank & Trust Company, a New York banking corporation, as trustee (the
"Preferred Guarantee Trustee"), for the benefit of the Holders (as defined
herein) from time to time of the Preferred Securities (as defined herein) of
Designer Finance Trust, a Delaware statutory business trust (the "Trust");
WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the
"Declaration"), dated as of November 6, 1996, among the trustees of the Trust
named therein, Designer Holdings Ltd., a Delaware corporation ("Designer
Holdings"), as sponsor, and the holders from time to time of undivided
beneficial interests in the assets of the Trust, the Trust issued on November 6,
1996, 2,760,000 preferred securities, having an aggregate liquidation amount of
$138,000,000, designated the 6% Convertible Trust Originated Preferred
SecuritiesSM (the "Preferred Securities");
WHEREAS, as incentive for the Holders to purchase the Preferred
Securities, Designer Holdings entered into a Preferred Securities Guarantee
Agreement dated as of November 6, 1996, pursuant to which it irrevocably and
unconditionally agreed, to the extent set forth therein, to guarantee the
obligations of the Trust to the Holders of the Preferred Securities on the terms
and conditions set forth therein;
WHEREAS, pursuant to an Agreement and Plan of Merger dated as of
September 25, 1997 among the Guarantor, a wholly owned subsidiary of the
Guarantor and Designer Holdings, Designer Holdings became a wholly owned
subsidiary of the Guarantor;
WHEREAS, the Guarantor desires irrevocably and unconditionally to
agree, to the extent set forth in this Preferred Securities Guarantee, to
guarantee, on a joint and several basis with Designer Holdings, the obligations
of the Trust to the Holders of the Preferred Securities on the terms and
conditions set forth herein;
NOW, THEREFORE, for good and valid consideration, the receipt and
sufficiency of which are hereby acknowledged, the Guarantor executes and
delivers this Preferred Securities Guarantee for the benefit of the Holders.
ARTICLE I
DEFINITIONS AND INTERPRETATION
SECTION 1.1. Definitions and Interpretation.
<PAGE>
<PAGE>
2
In this Preferred Securities Guarantee, unless the context
otherwise requires:
(a) Capitalized terms used in this Preferred Securities
Guarantee but not defined in the preamble above have the
respective meanings assigned to them in this Section 1.1;
(b) terms defined in the Declaration as at the date hereof
have the same meaning when used in this Preferred
Securities Guarantee unless otherwise defined in this
Preferred Securities Guarantee;
(c) a term defined anywhere in this Preferred
Securities Guarantee has the same meaning
throughout;
(d) all references to "the Preferred Securities Guarantee" or
"this Preferred Securities Guarantee" are to this
Preferred Securities Guarantee as modified, supplemented
or amended from time to time;
(e) all references in this Preferred Securities Guarantee to
Articles and Sections are to Articles and Sections of this
Preferred Securities Guarantee, unless otherwise
specified;
(f) a term defined in the Trust Indenture Act has the same
meaning when used in this Preferred Securities Guarantee,
unless otherwise defined in this Preferred Securities
Guarantee or unless the context otherwise requires;
(g) a reference to the singular includes the plural
and vice versa;
(h) a reference to any Person shall include its
successors and assigns;
(i) a reference to any agreement or instrument shall mean such
agreement or instrument, as supplemented, modified,
amended, or amended and restated, and in effect from time
to time; and
(j) a reference to any statute, law, rule or regulation, shall
include any amendments thereto applicable to the relevant
Person, and any successor statute, law, rule or
regulation.
"Affiliate" has the same meaning as given to that term in Rule 405 of
the Securities Act of 1933, as amended, or any successor rule thereunder.
"Authorized Officer" of a Person means any Person that is authorized
to
<PAGE>
<PAGE>
3
bind such Person.
"Business Day" means any day other than a day on which banking
institutions in New York, New York or in Wilmington, Delaware are authorized or
required by any applicable law or executive order to close.
"Common Securities" means the securities representing common undivided
beneficial interests in the assets of the Trust.
"Corporate Trust Office" means the office of the Preferred Guarantee
Trustee at which the corporate trust business of the Preferred Guarantee Trustee
shall, at any particular time, be principally administered, which office at the
date of execution of this Agreement is located at One State Street, 11th Floor,
New York, New York 10004, Attention: Corporate Trust & Agency Department.
"Covered Person" means any Holder or beneficial owner of Preferred
Securities.
"Debentures" means the 6% Convertible Subordinated Debentures due
December 31, 2016 of Designer Holdings held by the Property Trustee (as defined
in the Declaration).
"Event of Default" means a default by the Guarantor on any of its
payment or other obligations under this Preferred Securities Guarantee.
"Guarantee Payments" means the following payments or distributions,
without duplication, with respect to the Preferred Securities, to the extent not
paid or made by the Trust: (i) any accrued and unpaid Distributions (as defined
in the Declaration) that are required to be paid on the Preferred Securities to
the extent the Trust has funds available therefor, (ii) the redemption price,
with respect to any Preferred Securities called for redemption by the Trust (the
"Redemption Price"), to the extent the Trust has funds available therefor, and
(iii) upon a voluntary or involuntary dissolution, winding-up or termination of
the Trust (other than in connection with the distribution of Convertible
Subordinated Debentures to the Holders of Preferred Securities or the redemption
of all the Preferred Securities (as provided in the Declaration)), the lesser of
(a) the aggregate of the liquidation amount and all accrued and unpaid
Distributions on the Preferred Securities to the date of payment to the extent
the Trust has funds available therefor and (b) the amount of assets of the Trust
remaining available for distribution to Holders of Preferred Securities upon the
liquidation of the Trust (in either case, the "Liquidation Distribution").
"Holder" shall mean any holder, as registered on the books and records
of the Trust of any Preferred Securities; provided, however, that in determining
whether the holders of the requisite percentage of Preferred Securities have
given or been given, as the case may be, any request, notice, consent or waiver
hereunder, "Holder" shall not include the Guarantor or any Affiliate of the
Guarantor.
<PAGE>
<PAGE>
4
"Indemnified Person" means the Preferred Guarantee Trustee, any
Affiliate of the Preferred Guarantee Trustee, or any officers, directors,
shareholders, members, partners, employees, representatives, nominees,
custodians or agents of the Preferred Guarantee Trustee.
"Indenture" means the Indenture dated as of November 6, 1996, among
Designer Holdings (the "Convertible Debenture Issuer") and IBJ Schroder Bank &
Trust Company, a New York banking corporation, as trustee, as amended by the
First Supplemental Indenture dated as of March 31, 1998 among the Guarantor,
Designer Holdings and the Indenture Trustee, pursuant to which the Debentures
were issued to the Property Trustee of the Trust.
"Indenture Trustee" means the Person acting as trustee under the
Indenture, initially IBJ Schroder Bank & Trust Company.
"Majority in liquidation amount of the Preferred Securities" means,
except as provided by the Trust Indenture Act, a vote by Holder(s) of Preferred
Securities, voting separately as a class, of more than 50% of the liquidation
amount of all Preferred Securities.
"Officers' Certificate" means, with respect to any Person, a
certificate signed by two Authorized Officers of such Person. Any Officers'
Certificate delivered with respect to compliance with a condition or covenant
provided for in this Preferred Securities Guarantee shall include:
(a) a statement that each officer signing the
Officers' Certificate has read the covenant or
condition and the definition relating thereto;
(b) a brief statement of the nature and scope of the
examination or investigation undertaken by each
officer in rendering the Officers' Certificate;
(c) a statement that each such officer has made such
examination or investigation as, in such officer's
opinion, is necessary to enable such officer to express an
informed opinion as to whether or not such covenant or
condition has been complied with; and
(d) a statement as to whether, in the opinion of each such
officer, such condition or covenant has been complied
with.
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association, or government or any
agency or political subdivision thereof, or any other entity of whatever nature.
<PAGE>
<PAGE>
5
"Preferred Guarantee Trustee" means IBJ Schroder Bank & Trust Company,
until a Successor Preferred Guarantee Trustee has been appointed and has
accepted such appointment pursuant to the terms of this Preferred Securities
Guarantee and thereafter means each such Successor Preferred Guarantee Trustee.
"Responsible Officer" means, with respect to the Preferred Guarantee
Trustee, any officer within the Corporate Trust Office of the Preferred
Guarantee Trustee, including any vice president, any assistant vice president,
any assistant secretary, the treasurer, any assistant treasurer or other officer
of the Corporate Trust Office of the Preferred Guarantee Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of that officer's
knowledge of and familiarity with the particular subject.
"Successor Preferred Guarantee Trustee" means a successor Preferred
Guarantee Trustee possessing the qualifications to act as Preferred Guarantee
Trustee under Section 4.1.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended.
ARTICLE II
TRUST INDENTURE ACT
SECTION 2.1. Trust Indenture Act; Application.
(a) This Preferred Securities Guarantee is subject to the
provisions of the Trust Indenture Act that are required to be part of this
Preferred Securities Guarantee and shall, to the extent applicable, be governed
by such provisions.
(b) If and to the extent that any provision of this Preferred
Securities Guarantee limits, qualifies or conflicts with the duties imposed by
Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties
shall control.
SECTION 2.2. List of Holders of Securities.
The Guarantor shall provide the Preferred Guarantee Trustee with
a list, in such form as the Preferred Guarantee Trustee may reasonably require,
of the names and addresses of the Holders of the Preferred Securities ("List of
Holders") as of such date, (i) within one Business Day after January 1 and June
30 of each year, and (ii) at any other time within 30 days of receipt by the
Guarantor of a written request for a List of Holders as of a date no more than
14 days before such List of Holders is given to the Preferred Guarantee Trustee,
provided that the Guarantor shall not be obligated to provide such List of
Holders at any time (x) the List of Holders does not differ from the most recent
List of Holders given to the Preferred Guarantee Trustee by the Guarantor or (y)
the Preferred Securities are represented by one or more Global Securities (as
<PAGE>
<PAGE>
6
defined in the Indenture). The Preferred Guarantee Trustee may destroy any List
of Holders previously given to it on receipt of a new List of Holders.
The Preferred Guarantee Trustee shall comply with its obligations
under Section 311(a), 311(b) and Section 312(b) of the Trust Indenture Act.
SECTION 2.3. Reports by the Preferred Guarantee Trustee .
Within 60 days after May 15 of each year, the Preferred Guarantee
Trustee shall provide to the Holders of the Preferred Securities such reports as
are required by Section 313 of the Trust Indenture Act, if any, in the form and
in the manner provided by Section 313 of the Trust Indenture Act. The Preferred
Guarantee Trustee shall also comply with the requirements of Section 313(d) of
the Trust Indenture Act.
SECTION 2.4. Periodic Reports to the Preferred Guarantee
Trustee.
The Guarantor shall provide to the Preferred Guarantee Trustee
such documents, reports and information as required by Section 314, if any, and
the compliance certificate required by Section 314 of the Trust Indenture Act in
the form, in the manner and at the times required by Section 314 of the Trust
Indenture Act.
SECTION 2.5. Evidence of Compliance with Conditions Precedent.
The Guarantor shall provide to the Preferred Guarantee Trustee
such evidence of compliance with any conditions precedent, if any, provided for
in this Preferred Securities Guarantee that relate to any of the matters set
forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion
required to be given by an officer pursuant to Section 314(c)(1) may be given in
the form of an Officers' Certificate.
SECTION 2.6. Event of Default; Waiver.
The Holders of a Majority in liquidation amount of Preferred
Securities may, by vote, on behalf of the Holders of all of the Preferred
Securities, waive any past Event of Default and its consequences. Upon such
waiver, any such Event of Default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured, for every purpose of this
Preferred Securities Guarantee, but no such waiver shall extend to any
subsequent or other default or Event of Default or impair any right consequent
thereon.
SECTION 2.7. Event of Default; Notice.
The Preferred Guarantee Trustee shall, within 90 days after the
occurrence of an Event of Default, transmit by mail, first class postage
prepaid, to the Holders of the Preferred Securities, notices of all Events of
Default actually known to a Responsible Officer of the Preferred Guarantee
<PAGE>
<PAGE>
7
Trustee, unless such defaults have been cured before the giving of such notice;
provided that the Preferred Guarantee Trustee shall be protected in withholding
such notice if and so long as a Responsible Officer of the Preferred Guarantee
Trustee in good faith determines that the withholding of such notice is in the
interests of the Holders of the Preferred Securities.
The Preferred Guarantee Trustee shall not be deemed to have
knowledge of any Event of Default unless the Preferred Guarantee Trustee shall
have received written notice, or of which a Responsible Officer of the Preferred
Guarantee Trustee charged with the administration of the Declaration shall have
obtained actual knowledge.
SECTION 2.8. Conflicting Interests.
The Declaration shall be deemed to be specifically described in
this Preferred Securities Guarantee for the purposes of clause (i) of the first
proviso contained in Section 310(b) of the Trust Indenture Act.
<PAGE>
<PAGE>
8
ARTICLE III
POWERS, DUTIES AND RIGHTS OF THE PREFERRED GUARANTEE TRUSTEE
SECTION 3.1. Powers and Duties of the Preferred Guarantee
Trustee.
(a) This Preferred Securities Guarantee shall be held by the
Preferred Guarantee Trustee for the benefit of the Holders of the Preferred
Securities, and the Preferred Guarantee Trustee shall not transfer this
Preferred Securities Guarantee to any Person except a Holder exercising his or
her rights pursuant to Section 5.5(b) or to a Successor Preferred Guarantee
Trustee on acceptance by such Successor Preferred Guarantee Trustee of its
appointment to act as Successor Preferred Guarantee Trustee. The right, title
and interest of the Preferred Guarantee Trustee shall automatically vest in any
Successor Preferred Guarantee Trustee, and such vesting and cessation of title
shall be effective whether or not conveyancing documents have been executed and
delivered pursuant to the appointment of such Successor Preferred Guarantee
Trustee.
(b) If an Event of Default actually known to a Responsible
Officer of the Preferred Guarantee Trustee has occurred and is continuing, the
Preferred Guarantee Trustee shall enforce this Preferred Securities Guarantee
for the benefit of the Holders of the Preferred Securities.
(c) The Preferred Guarantee Trustee, before the occurrence of any
Event of Default and after the curing of all Events of Default that may have
occurred, shall undertake to perform only such duties as are specifically set
forth in this Preferred Securities Guarantee, and no implied covenants shall be
read into this Preferred Securities Guarantee against the Preferred Guarantee
Trustee. In case an Event of Default has occurred (that has not been cured or
waived pursuant to Section 2.6) and is actually known to a Responsible Officer
of the Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall
exercise such of the rights and powers vested in it by this Preferred Securities
Guarantee, and use the same degree of care and skill in its exercise thereof, as
a prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
(d) No provision of this Preferred Securities Guarantee shall be
construed to relieve the Preferred Guarantee Trustee from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) prior to the occurrence of any Event of Default and
after the curing or waiving of all such Events of Default that may have
occurred:
(A) the duties and obligations of the Preferred
Guarantee Trustee shall be determined solely by the express
provisions of this Preferred Securities
<PAGE>
<PAGE>
9
Guarantee, and the Preferred Guarantee Trustee shall not be
liable except for the performance of such duties and obligations
as are specifically set forth in this Preferred Securities
Guarantee, and no implied covenants or obligations shall be read
into this Preferred Securities Guarantee against the Preferred
Guarantee Trustee; and
(B) in the absence of bad faith on the part of the
Preferred Guarantee Trustee, the Preferred Guarantee Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any
certificates or opinions furnished to the Preferred Guarantee
Trustee and conforming to the requirements of this Preferred
Securities Guarantee; but in the case of any such certificates or
opinions that by any provision hereof are specifically required
to be furnished to the Preferred Guarantee Trustee, the Preferred
Guarantee Trustee shall be under a duty to examine the same to
determine whether or not they conform to the requirements of this
Preferred Securities Guarantee;
(ii) the Preferred Guarantee Trustee shall not be liable
for any error of judgment made in good faith by a Responsible Officer of
the Preferred Guarantee Trustee, unless it shall be proved that the
Preferred Guarantee Trustee was negligent in ascertaining the pertinent
facts upon which such judgment was made;
(iii) the Preferred Guarantee Trustee shall not be liable
with respect to any action taken or omitted to be taken by it in good
faith in accordance with the direction of the Holders of not less than a
Majority in liquidation amount of the Preferred Securities relating to
the time, method and place of conducting any proceeding for any remedy
available to the Preferred Guarantee Trustee, or exercising any trust or
power conferred upon the Preferred Guarantee Trustee under this
Preferred Securities Guarantee; and
(iv) no provision of this Preferred Securities Guarantee
shall require the Preferred Guarantee Trustee to expend or risk its own
funds or otherwise incur personal financial liability in the performance
of any of its duties or in the exercise of any of its rights or powers,
if the Preferred Guarantee Trustee shall have reasonable grounds for
believing that the repayment of such funds or liability is not
reasonably assured to it under the terms of this Preferred Securities
Guarantee or indemnity, reasonably satisfactory to the Preferred
Guarantee Trustee, against such risk or liability is not reasonably
assured to it.
SECTION 3.2. Certain Rights of the Preferred Guarantee Trustee.
(a) Subject to the provisions of Section 3.1:
(i) The Preferred Guarantee Trustee may
conclusively rely, and shall be fully protected in acting or refraining from
acting upon, any resolution, certificate, statement, instrument, opinion,
report, notice, request,
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10
direction, consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document believed by it to be genuine and to have been signed,
sent or presented by the proper party or parties.
(ii) Any direction or act of the Guarantor contemplated by
this Preferred Securities Guarantee shall be sufficiently evidenced by
an Officers' Certificate.
(iii) Whenever, in the administration of this Preferred
Securities Guarantee, the Preferred Guarantee Trustee shall deem it
desirable that a matter be proved or established before taking,
suffering or omitting any action hereunder, the Preferred Guarantee
Trustee (unless other evidence is herein specifically prescribed) may,
in the absence of bad faith on its part, request and conclusively rely
upon an Officers' Certificate which, upon receipt of such request, shall
be promptly delivered by the Guarantor.
(iv) The Preferred Guarantee Trustee shall have no duty to
see to any recording, filing or registration of any instrument (or any
rerecording, refiling or registration thereof).
(v) The Preferred Guarantee Trustee may consult with
counsel of its selection, and the written advice or opinion of such
counsel with respect to legal matters shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in accordance with such advice
or opinion. Such counsel may be counsel to the Guarantor or any of its
Affiliates and may include any of its employees. The Preferred Guarantee
Trustee shall have the right at any time to seek instructions concerning
the administration of this Preferred Securities Guarantee from any court
of competent jurisdiction.
(vi) The Preferred Guarantee Trustee shall be under no
obligation to exercise any of the rights or powers vested in it by this
Preferred Securities Guarantee at the request or direction of any
Holder, unless such Holder shall have provided to the Preferred
Guarantee Trustee such security and indemnity, reasonably satisfactory
to the Preferred Guarantee Trustee, against the costs, expenses
(including attorneys' fees and expenses) and liabilities that might be
incurred by it in complying with such request or direction, including
such reasonable advances as may be requested by the Preferred Guarantee
Trustee; provided that nothing contained in this Section 3.2(a)(vi)
shall be taken to relieve the Preferred Guarantee Trustee, upon the
occurrence of an Event of Default, of its obligation to
exercise the rights and powers vested in it by this
Preferred Securities Guarantee.
(vii) The Preferred Guarantee Trustee shall not be bound to
make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, report, notice,
request, direction,
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11
consent, order, bond, debenture, note, other evidence of indebtedness or
other paper or document, but the Preferred Guarantee Trustee, in its
discretion, may make such further inquiry or investigation into such
facts or matters as it may see fit.
(viii) The Preferred Guarantee Trustee may execute any of
the trusts or powers hereunder or perform any duties hereunder either
directly or by or through agents, nominees, custodians or attorneys, and
the Preferred Guarantee Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed
with due care by it hereunder.
(ix) Any action taken by the Preferred Guarantee Trustee
or its agents hereunder shall bind the Holders of the Preferred
Securities, and the signature of the Preferred Guarantee Trustee or its
agents alone shall be sufficient and effective to perform any such
action. No third party shall be required to inquire as to the authority
of the Preferred Guarantee Trustee to so act or as to its compliance
with any of the terms and provisions of this Preferred Securities
Guarantee, both of which shall be conclusively evidenced by the
Preferred Guarantee Trustee's or its agent's taking such action.
(x) Whenever in the administration of this Preferred
Securities Guarantee the Preferred Guarantee Trustee shall deem it
desirable to receive instructions with respect to enforcing any remedy
or right or taking any other action hereunder, the Preferred Guarantee
Trustee (i) may request instructions from the Holders of a Majority in
liquidation amount of the Preferred Securities, (ii) may refrain from
enforcing such remedy or right or taking such other action until such
instructions are received and (iii) shall be protected in conclusively
relying on or acting in accordance with such instructions.
(xi) The Preferred Guarantee Trustee shall not be liable
for any action taken, suffered, or omitted to be taken by it in good
faith and reasonably believed by it to be authorized or within the
discretion or rights or powers conferred upon it by this Preferred
Securities Guarantee.
(b) No provision of this Preferred Securities Guarantee shall be
deemed to impose any duty or obligation on the Preferred Guarantee Trustee to
perform any act or acts or exercise any right, power, duty or obligation
conferred or imposed on it in any jurisdiction in which it shall be illegal, or
in which the Preferred Guarantee Trustee shall be unqualified or incompetent in
accordance with applicable law, to perform any such act or acts or to exercise
any such right, power, duty or obligation. No permissive power or authority
available to the Preferred Guarantee Trustee shall be construed to be a duty.
SECTION 3.3. Not Responsible for Recitals or Issuance of
Guarantee.
The recitals contained in this Preferred Securities Guarantee
shall be
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12
taken as the statements of the Guarantor, and the Preferred Guarantee
Trustee does not assume any responsibility for their correctness. The Preferred
Guarantee Trustee makes no representation as to the validity or sufficiency of
this Preferred Securities Guarantee.
ARTICLE IV
PREFERRED GUARANTEE TRUSTEE
SECTION 4.1. Preferred Guarantee Trustee; Eligibility.
(a) There shall at all times be a Preferred Guarantee
Trustee which shall:
(i) not be an Affiliate of the Guarantor; and
(ii) be a corporation organized and doing business under
the laws of the United States of America or any State or Territory
thereof or of the District of Columbia, or a corporation or Person
permitted by the Securities and Exchange Commission to act as an
institutional trustee under the Trust Indenture Act, authorized under
such laws to exercise corporate trust powers, having a combined capital
and surplus of at least 50 million U.S. dollars ($50,000,000), and
subject to supervision or examination by Federal, State, Territorial or
District of Columbia authority. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of
the supervising or examining authority referred to above, then, for the
purposes of this Section 4.1(a)(ii), the combined capital and surplus of
such corporation shall be deemed to be its combined capital and surplus
as set forth in its most recent report of condition so published.
(b) If at any time the Preferred Guarantee Trustee shall cease to
be eligible to so act under Section 4.1(a), the Preferred Guarantee Trustee
shall immediately resign in the manner and with the effect set out in Section
4.2(c).
(c) If the Preferred Guarantee Trustee has or shall acquire any
"conflicting interest" within the meaning of Section 310(b) of the Trust
Indenture Act, the Preferred Guarantee Trustee and Guarantor shall in all
respects comply with the provisions of Section 310(b) of the Trust Indenture
Act.
SECTION 4.2. Appointment, Removal and Resignation of Preferred
Guarantee Trustees.
(a) Subject to Section 4.2(b), the Preferred Guarantee Trustee
may be appointed or removed without cause at any time by the Guarantor.
(b) The Preferred Guarantee Trustee shall not be removed in
accordance with Section 4.2(a) until a Successor Preferred Guarantee Trustee has
been appointed and has accepted such appointment by written instrument executed
by such Successor
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13
Preferred Guarantee Trustee and delivered to the Guarantor.
(c) The Preferred Guarantee Trustee appointed to office shall
hold office until a Successor Preferred Guarantee Trustee shall have been
appointed or until its removal or resignation. The Preferred Guarantee Trustee
may resign from office (without need for prior or subsequent accounting) by an
instrument in writing executed by the Preferred Guarantee Trustee and delivered
to the Guarantor, which resignation shall not take effect until a Successor
Preferred Guarantee Trustee has been appointed and has accepted such appointment
by instrument in writing executed by such Successor Preferred Guarantee Trustee
and delivered to the Guarantor and the resigning Preferred Guarantee Trustee.
(d) If no Successor Preferred Guarantee Trustee shall have been
appointed and accepted appointment as provided in this Section 4.2 within 60
days after delivery to the Guarantor of an instrument of removal or resignation,
the resigning or removed Preferred Guarantee Trustee may petition any court of
competent jurisdiction for appointment of a Successor Preferred Guarantee
Trustee. Such court may thereupon, after prescribing such notice, if any, as it
may deem proper, appoint a Successor Preferred Guarantee Trustee.
(e) No Preferred Guarantee Trustee shall be liable for the acts
or omissions to act of any Successor Preferred Guarantee Trustee.
(f) Upon termination of this Preferred Securities Guarantee or
removal or resignation of the Preferred Guarantee Trustee pursuant to this
Section 4.2, the Guarantor shall pay to the Preferred Guarantee Trustee all
amounts accrued to the date of such termination, removal or resignation.
ARTICLE V
GUARANTEE
SECTION 5.1. Guarantee.
The Guarantor irrevocably and unconditionally agrees to pay in
full to the Holders (except to the extent paid by the Trust or by Designer
Holdings), as and when due, regardless of any defense, right of set-off or
counterclaim that the Trust or Designer Holdings may have or assert, the
Guarantee Payments, without duplication. The Guarantor's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts
by the Guarantor to the Holders or by causing the Trust to pay such amounts
to the Holders.
SECTION 5.2. [Reserved.]
SECTION 5.3. Waiver of Notice and Demand.
The Guarantor hereby waives notice of acceptance of this
Preferred
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14
Securities Guarantee and of any liability to which it applies or may
apply, presentment, demand for payment, any right to require a proceeding first
against the Trust, Designer Holdings or any other Person before proceeding
against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice
of redemption and all other notices and demands.
SECTION 5.4. Obligations Not Affected.
The obligations, covenants, agreements and duties of the
Guarantor under this Preferred Securities Guarantee shall in no way be affected
or impaired by reason of the happening from time to time of any of the
following:
(a) the release or waiver, by operation of law or otherwise, of
the performance or observance by the Trust or Designer Holdings of any express
or implied agreement, covenant, term or condition relating to the Preferred
Securities to be performed or observed by the Trust or Designer Holdings;
(b) the extension of time for the payment by the Trust of all or
any portion of the Distributions, Redemption Price, Liquidation Distribution or
any other sums payable under the terms of the Preferred Securities or the
extension of time for the performance of any other obligation under, arising out
of, or in connection with, the Preferred Securities (other than an extension of
time for payment of Distributions, Redemption Price, Liquidation Distribution or
other sum payable that results from the extension of any interest payment period
on the Debentures or any extension of the maturity date of the Debentures
permitted by the Indenture);
(c) any failure, omission, delay or lack of diligence on the part
of the Holders to enforce, assert or exercise any right, privilege, power or
remedy conferred on the Holders pursuant to the terms of the Preferred
Securities, or any action on the part of the Trust or Designer Holdings granting
indulgence or extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution, sale
of any collateral, receivership, insolvency, bankruptcy, assignment for the
benefit of creditors, reorganization, arrangement, composition or readjustment
of debt of, or other similar proceedings affecting, the Trust or any of the
assets of the Trust;
(e) any invalidity of, or defect or deficiency in, the
Preferred Securities;
(f) the settlement or compromise of any obligation
guaranteed hereby or hereby incurred; or
(g) any other circumstance whatsoever that might otherwise
constitute a legal or equitable discharge or defense of a guarantor, it being
the intent of this Section 5.4 that the obligations of the Guarantor hereunder
shall be absolute and unconditional under any and all circumstances.
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15
There shall be no obligation of the Holders or any other Persons
to give notice to, or obtain consent of, the Guarantor with respect to the
happening of any of the foregoing.
SECTION 5.5. Rights of Holders.
(a) The Holders of a Majority in liquidation amount of the
Preferred Securities have the right to direct the time, method and place of
conducting of any proceeding for any remedy available to the Preferred Guarantee
Trustee in respect of this Preferred Securities Guarantee or to direct the
exercise of any trust or power conferred upon the Preferred Guarantee Trustee
under this Preferred Securities Guarantee.
(b) Any Holder may directly institute a legal proceeding against
the Guarantor to enforce the obligations of the Guarantor under this Preferred
Securities Guarantee without first instituting a legal proceeding against the
Trust, Designer Holdings, the Preferred Guarantee Trustee or any other Person.
(c) If an Event of Default with respect to the Debentures (an
"Indenture Event of Default"), constituting the failure to pay interest or
principal on the Debentures on the date such interest or principal is otherwise
payable has occurred and is continuing, then a Holder of Preferred Securities
may directly, at any time, institute a proceeding for enforcement of payment to
such Holder of the principal of or interest on the Debentures having a principal
amount equal to the aggregate liquidation amount of the Preferred Securities of
such Holder on or after the respective due date specified in the Debentures. The
Holders of Preferred Securities will not be able to exercise directly any other
remedy available to the holders of the Debentures unless the Property Trustee
(as defined in the Indenture) fails to do so.
SECTION 5.6. Guarantee of Payment.
This Preferred Securities Guarantee creates a guarantee of
payment and not of collection.
SECTION 5.7. Subrogation.
The Guarantor shall be subrogated to all, if any, rights of the
Holders against the Trust in respect of any amounts paid to such Holders by the
Guarantor under this Preferred Securities Guarantee; provided, however, that the
Guarantor shall not (except to the extent required by mandatory provisions of
law) be entitled to enforce or exercise any right that it may acquire by way of
subrogation or any indemnity, reimbursement or other agreement, in all cases as
a result of payment under this Preferred Securities Guarantee, if, at the time
of any such payment, any amounts are due and unpaid under this Preferred
Securities Guarantee. If any amount shall be paid to the Guarantor in violation
of the preceding sentence, the Guarantor agrees to hold such amount in trust for
the Holders and to pay over such amount to the Holders.
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16
SECTION 5.8. Independent Obligations.
The Guarantor acknowledges that its obligations hereunder are
independent of the obligations of the Trust and Designer Holdings with respect
to the Preferred Securities, and that the Guarantor shall be liable as principal
and as debtor hereunder to make Guarantee Payments pursuant to the terms of this
Preferred Securities Guarantee notwithstanding the occurrence of any event
referred to in subsections (a) through (g) inclusive, of Section 5.4 hereof.
SECTION 5.9. Conversion.
The Guarantor acknowledges its obligation to issue and deliver
common stock of the Guarantor upon the conversion of the Preferred Securities.
SECTION 5.10. Expenses.
The Guarantor shall be liable for all debts and obligations of
the Trust (other than with respect to the Preferred Securities) to the extent
not satisfied out of the Trust's Assets or paid by Designer Holdings as holder
of the Common Securities pursuant to Section 9.1(b) of the Declaration.
ARTICLE VI
LIMITATION OF TRANSACTIONS; RANKING
SECTION 6.1. Limitation of Transactions.
So long as any Preferred Securities remain outstanding, if there
shall have occurred any event of default under this Preferred Securities
Guarantee or any event that, with the giving of notice or the lapse of time or
both, would constitute an Event of Default under the Indenture, then the
Guarantor has agreed not to declare or pay dividends on, or make a distribution
with respect to, or redeem, purchase, acquire or make a liquidation payment with
respect to, any of its capital stock (other than (i) purchases or acquisitions
of shares of common stock in connection with the satisfaction by the Guarantor
of its obligations under any employee benefit plans or the satisfaction by the
Guarantor of its obligations pursuant to any contract or security requiring the
Guarantor to purchase shares of common stock, (ii) as a result of a
reclassification of the Guarantor's capital stock or the exchange or conversion
of one class or series of the Guarantor's capital stock for another class or
series of the Guarantor's capital stock or (iii) the purchase of fractional
interests in shares of the Guarantor's capital stock pursuant to the conversion
or exchange provisions of such capital stock or the security being converted or
exchanged (or make any guarantee payments with respect to the foregoing).
SECTION 6.2. Ranking.
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17
(a) This Preferred Securities Guarantee will constitute an
unsecured obligation of the Guarantor and will rank (i) subordinate and junior
to all other liabilities of the Guarantor except any liabilities that may be
pari passu expressly by their terms, (ii) pari passu with the most senior
preferred stock issued from time to time by the Guarantor and with any guarantee
now or hereafter entered into by the Guarantor in respect of any preferred or
preference stock or preferred securities of any Affiliate of the Guarantor, and
(iii) senior to the Guarantor's common stock.
(b) The holders of any obligations of the Guarantor that are
senior in priority to the obligations under this Preferred Securities Guarantee
will be entitled to all of the rights inuring to the holders of "Senior
Indebtedness" under Article 12 of the Indenture, and the Holders of the
Preferred Securities will be subject to all of the terms and conditions of such
Article 12 with respect to any claims or rights hereunder with the same effect
as though fully set forth herein.
ARTICLE VII
TERMINATION
SECTION 7.1. Termination.
This Preferred Securities Guarantee will terminate as to each
Holder upon (i) full payment of the Redemption Price of all Preferred
Securities; or (ii) distribution of the Debentures held by the Trust to the
Holders; or (iii) liquidation of the Trust, or (iv) upon the distribution of
Guarantor's common stock to such Holder in respect of conversion of such
Holder's Preferred Securities into common stock of the Guarantor. The Guarantee
also will terminate completely upon full payment of the amounts payable in
accordance with the Declaration of the Trust. This Preferred Securities
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any Holder must restore payment of any sums paid under such
Preferred Securities or under this Preferred Securities Guarantee.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1. Exculpation.
(a) No Indemnified Person shall be liable, responsible or
accountable in damages or otherwise to the Guarantor or any Covered Person for
any loss, damage or claim incurred by reason of any act or omission performed or
omitted by such Indemnified Person in good faith in accordance with this
Preferred Securities Guarantee and in a manner that such Indemnified Person
reasonably believed to be within the scope of the authority conferred on such
Indemnified Person by this Preferred Securities Guarantee or by law, except that
an Indemnified Person shall be liable for any such loss, damage or claim
incurred by reason of such Indemnified Person's negligence or willful misconduct
with respect to such acts or omissions.
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18
(b) An Indemnified Person shall be fully protected in relying in
good faith upon the records of the Guarantor and upon such information,
opinions, reports or statements presented to the Guarantor by any Person as to
matters the Indemnified Person reasonably believes are within such other
Person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Guarantor, including information,
opinions, reports or statements as to the value and amount of the assets,
liabilities, profits, losses, or any other facts pertinent to the existence and
amount of assets from which Distributions to Holders of Preferred Securities
might properly be paid.
SECTION 8.2. Indemnification.
The Guarantor agrees to indemnify each Indemnified Person for,
and to hold each Indemnified Person harmless against, any loss, liability or
expense incurred without negligence or bad faith on its part, arising out of or
in connection with the acceptance or administration of the trust or trusts
hereunder, including the costs and expenses (including reasonable legal fees and
expenses) of defending itself against, or investigating, any claim or liability
in connection with the exercise or performance of any of its powers or duties
hereunder. The obligation to indemnify as set forth in this Section 8.2 shall
survive the termination of this Preferred Securities Guarantee.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. Successors and Assigns.
All guarantees and agreements contained in this Preferred
Securities Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Guarantor and shall inure to the benefit of the Holders
of the Preferred Securities then outstanding. Except in connection with any
permitted merger or consolidation of the Guarantor with or into another entity
or any permitted sale, transfer or lease of the Guarantor's assets to another
entity as described in the Indenture, the Guarantor may not assign its rights or
delegate its obligations under this Preferred Securities Guarantee without the
prior approval of the Holders of at least a Majority of theaggregate stated
liquidation amount of the Preferred Securities then outstanding.
SECTION 9.2. Amendments.
Except with respect to any changes that do not materially
adversely affect the rights of Holders (in which case no vote will be required),
this Preferred Securities Guarantee may be amended only with the prior approval
of the Holders of at least a Majority in liquidation amount of all the
outstanding Preferred Securities. The provisions of Section 11.2 of the
Declaration with respect to meetings of Holders of the Preferred Securities
apply to the giving of such approval.
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19
SECTION 9.3. Notices.
All notices provided for in this Preferred Securities Guarantee
shall be in writing, duly signed by the party giving such notice, and shall be
delivered, sent by facsimile or mailed by registered or certified mail, as
follows:
(a) If given to the Preferred Guarantee Trustee, at the Preferred
Guarantee Trustee's mailing address set forth below (or such other address as
the Preferred Guarantee Trustee may give notice of to the Holders of the
Preferred Securities):
IBJ Schroder Bank & Trust Company
One State Street, 11th Floor
New York, New York 10004
Attention: Corporate Trust & Agency Department
(b) If given to the Guarantor, at the Guarantor's mailing address
set forth below (or such other address as the Guarantor may give notice of to
the Holders of the Preferred Securities):
The Warnaco Group, Inc.
90 Park Avenue South
New York, New York 10016
Attention: General Counsel
(c) If given to any Holder at the address set forth
on the books and records of the Trust.
All such notices shall be deemed to have been given when received
in person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid except that if a notice or other document is refused delivery or
cannot be delivered because of a changed address of which no notice was given,
such notice or other document shall be deemed to have been delivered on the date
of such refusal or inability to deliver.
SECTION 9.4. Benefit.
This Preferred Securities Guarantee is solely for the
benefit of the Holders of the Preferred Securities and, subject
to Section 3.1(a), is not separately transferable from the
Preferred Securities.
SECTION 9.5. Governing Law.
THIS PREFERRED SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
AND ALL RIGHTS AND REMEDIES SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO ITS
PRINCIPLES OF CONFLICTS OF LAWS.
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20
THIS PREFERRED SECURITIES GUARANTEE is executed as of the day and
year first above written.
THE WARNACO GROUP, INC., as Guarantor
By: /s/ Stanley Silverstein
------------------------------------
Name: Stanley Silverstein
Title: Vice President, General Counsel
and Secretary
IBJ SCHRODER BANK & TRUST COMPANY,
as Preferred Guarantee Trustee
By: /s/ Robert Radich
------------------------------------
Name: Robert Radich
Title: Vice President
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THE WARNACO GROUP, INC.
1997 STOCK PLAN
SECTION 1. PURPOSE. The purposes of The Warnaco Group, Inc. 1997 Stock
Plan are to promote the interests of The Warnaco Group, Inc. and its
stockholders by (i) attracting and retaining exceptional executive personnel and
other key employees of, and advisors and consultants to, the Company and its
Affiliates, as defined below; (ii) motivating such employees, advisors and
consultants by means of performance-related incentives to achieve longer-range
performance goals; and (iii) enabling such employees, advisors and consultants
to participate in the long-term growth and financial success of the Company.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms
shall have the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or indirectly, is
controlled by the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the Committee.
"Award" shall mean any Option or Restricted Stock Award.
"Award Agreement" shall mean the written agreement, contract, or other
instrument or document evidencing an Award, which may, but need not, be executed
or acknowledged by a Participant.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Committee" shall mean that committee of the Board designated by the
Board to administer the Company's incentive plans.
"Company" shall mean The Warnaco Group, Inc., together with any
successor thereto.
"Employee" shall mean (i) an employee of the Company or of any
Affiliate and (ii) an advisor or consultant to the Company or to any Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Fair Market Value" shall mean the fair market value of the property or
other item being valued, as determined by the Committee in its sole discretion.
"Option" shall mean a right to purchase Shares from the Company.
"Participant" shall mean any Employee selected by the Committee to
receive an Award under the Plan.
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"Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, government
or political subdivision thereof or other entity.
"Plan" shall mean The Warnaco Group, Inc. 1997 Stock Plan.
"Restoration Option" shall mean an Option granted pursuant to Section
6(e) of the Plan.
"Restricted Stock" shall mean any Share granted under Section 7 of the
Plan.
"Shares" shall mean shares of the Class A Common Stock, par value $.01
per share, of the Company, or such other securities of the Company as may be
designated by the Committee from time to time.
"Substitute Options" shall mean Options granted in assumption of, or in
substitution for, outstanding awards previously granted by a company acquired by
the Company or with which the Company combines.
SECTION 3. ADMINISTRATION. (a) The Plan shall be administered by the
Committee. Subject to the terms of applicable law, and in addition to other
express powers and authorizations conferred on the Committee by the Plan, the
Committee shall have full power and authority to: (i) designate Participants;
(ii) determine the type of Award to be granted to an eligible Employee; (iii)
determine the number of Shares to be covered by Awards; (iv) determine the terms
and conditions of any Award, including, without limitation, the conditions under
which the Shares received by an Employee upon exercise or vesting of any Award
may be subject to forfeiture; (v) determine whether, to what extent, and under
what circumstances Awards may be settled or exercised in cash, Shares, other
securities or other property, or cancelled, forfeited, or suspended and the
method or methods by which Awards may be settled, exercised, cancelled,
forfeited, or suspended; (vi) determine whether, to what extent, and under what
circumstances Shares payable with respect to an Award shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret and administer the Plan and any instrument or agreement relating
to, or Award granted under, the Plan; (viii) establish, amend, suspend, or waive
such rules and regulations and appoint such agents as it shall deem appropriate
for the proper administration of the Plan; and (ix) make any other determination
and take any other action that the Committee deems necessary or desirable for
the administration of the Plan.
(b) Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations, and other decisions under or with respect to
the Plan or any Award shall be within the sole discretion of the Committee, may
be made at any time and shall be final, conclusive, and binding upon all
Persons, including the Company, any Affiliate, any Participant, any holder or
beneficiary of any Award, any shareholder and any Employee.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) Shares Available. Subject to adjustment as provided in Section
4(b), the number of Shares with respect to which Awards may be granted under the
Plan shall not exceed the number of Shares held from time to time in the
treasury. If, after the effective date of the Plan, any Shares
2
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covered by an Award granted under the Plan are forfeited, or if any Shares are
forfeited and returned to the Company following the exercise or vesting of any
Award, or if an Award otherwise terminates or is cancelled without the delivery
of Shares, then the Shares covered by such Award, or the Shares forfeited, or
the number of Shares otherwise counted against the aggregate number of Shares
with respect to which Awards may be granted, to the extent of any such
settlement, forfeiture, termination or cancellation, shall again be, or shall
become, Shares with respect to which Awards may be granted. In the event that
(i) an Option is exercised through the delivery of Shares or (ii) a Participant
shall deliver Shares in satisfaction of any withholding obligation relating to
the exercise or vesting of any Award, the number of Shares available for Awards
under the Plan shall be increased by the number of Shares surrendered.
(b) Adjustments. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee shall, in such manner as
it may deem equitable, adjust any or all of (i) the number of Shares with
respect to which Awards may be granted, in aggregate or to any individual, (ii)
the number of Shares subject to outstanding Awards, and (iii) the exercise price
with respect to any Option or, if deemed appropriate, make provision for a cash
payment to the holder of an outstanding Award.
(c) Substitute Options. Any Shares underlying Substitute Options shall
not, except in the case of Shares with respect to which Substitute Options are
granted to Employees who are officers or directors of the Company for purposes
of Section 16 of the Exchange Act or any successor section thereto, be counted
against the Shares available for Awards under the Plan.
(d) Sources of Shares Deliverable Under Awards. Any Shares
delivered pursuant to the exercise or vesting of an Award shall be treasury
Shares.
SECTION 5. ELIGIBILITY. Any Employee, including any officer or
employee-director of the Company or any Affiliate, shall be eligible to be
designated a Participant.
SECTION 6. STOCK OPTIONS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall
have sole and complete authority to determine the Employees to whom Options
shall be granted, the number of Shares to be covered by each Option, the
exercise price therefor and the conditions and limitations applicable to the
exercise of the Option. The Committee shall have the authority to grant only
Options that are not intended to be "incentive stock options" within the meaning
of Section 422 of the Code.
(b) Exercise Price. The Committee shall establish the exercise
price at the time each Option is granted, which price shall not be less than
100% of the per Share Fair Market Value on the date of grant.
3
<PAGE>
<PAGE>
(c) Exercise. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Option Agreement or thereafter. The
Committee may impose such conditions with respect to the exercise of
Options, including, without limitation, any relating to the application of
federal or state securities laws, as it may deem necessary or advisable.
(d) Payment. No Shares shall be delivered pursuant to any exercise of
an Option until payment in full of the exercise price therefor is received by
the Company. Such payment may be made in cash, or its equivalent, or, if and to
the extent permitted by the Committee, by exchanging Shares owned by the
optionee (which are not the subject of any pledge or other security interest),
or by a combination of the foregoing, provided that the combined value of all
cash and cash equivalents and the Fair Market Value of any such Shares so
tendered to the Company as of the date of such tender is at least equal to such
exercise price.
(e) Restoration Options. In the event that any Participant delivers
Shares in payment of the exercise price of an Option granted hereunder, the
Committee shall have the authority to grant or provide for the automatic grant
of a Restoration Option to such Participant, subject to Section 4(a). The grant
of a Restoration Option shall be subject to the satisfaction of such conditions
or criteria as the Committee in its sole discretion shall establish from time to
time. A Restoration Option shall entitle the holder thereof to purchase a number
of Shares equal to the number of such Shares so delivered upon exercise of the
original Option and, in the discretion of the Committee, the number of Shares,
if any, tendered to the Company to satisfy any withholding tax liability arising
in connection with the exercise of the original Option. A Restoration Option
shall have a per share exercise price of not less than 100% of the per Share
Fair Market Value on the date of grant of such Restoration Option, a term not
longer than the remaining term of the original Option at the time of exercise
thereof, and such other terms and conditions as the Committee in its sole
discretion shall determine.
SECTION 7. RESTRICTED STOCK.
(a) Grant. Subject to the provisions of the Plan, the Committee shall
have sole and complete authority to determine the Employees to whom Shares of
Restricted Stock shall be granted, the number of Shares of Restricted Stock to
be granted to each Participant, the duration of the period during which, and the
conditions under which, the Restricted Stock may be forfeited to the Company,
and the other terms and conditions of such Awards.
(b) Transfer Restrictions. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as provided in
the Plan or the applicable Award Agreements. Certificates issued in respect of
Shares of Restricted Stock shall be registered in the name of the Participant
and deposited by such Participant, together with a stock power endorsed in
blank, with the Company. Upon the lapse of the restrictions applicable to such
Shares of Restricted Stock, the Company shall deliver such certificates to the
Participant or the Participant's legal representative.
(c) Dividends During Restricted Period. Dividends paid on any
Shares of Restricted Stock may be paid directly to the Participant, or may be
reinvested in additional Shares of Restricted Stock, as determined by the
Committee in its sole discretion.
4
<PAGE>
<PAGE>
SECTION 8. AMENDMENT AND TERMINATION.
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without shareholder approval if such approval is necessary to
comply with any tax or regulatory requirement, including for these purposes any
approval requirement which is a prerequisite for exemptive relief from Section
16(b) of the Exchange Act for which or with which the Board deems it necessary
or desirable to qualify or comply. Notwithstanding anything to the contrary
herein, the Committee may amend the Plan in such manner as may be necessary so
as to have the Plan conform with local rules and regulations in any jurisdiction
outside the United States.
(b) Amendments to Awards. The Committee may waive any conditions or
rights under, amend any terms of, or alter, suspend, discontinue, cancel or
terminate, any Award theretofore granted, prospectively or retroactively;
provided that any such waiver, amendment, alteration, suspension,
discontinuance, cancellation or termination that would impair the rights of any
Participant or any holder or beneficiary of any Award theretofore granted shall
not to that extent be effective without consent of the affected Participant,
holder or beneficiary.
(c) Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Awards in recognition
of unusual or nonrecurring events (including, without limitation, the events
described in Section 4(b) hereof) affecting the Company, any Affiliate, or the
financial statements of the Company or any Affiliate, or of changes in
applicable laws, regulations, or accounting principles, whenever the Committee
determines that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan.
(d) Cancellation. Any provision of this Plan or any Award Agreement to
the contrary notwithstanding, the Committee may cause any Award granted
hereunder to be cancelled in consideration of a cash payment made to the holder
of such cancelled Award equal in value to the Fair Market Value of such
cancelled Award.
SECTION 9. GENERAL PROVISIONS.
(a) Nontransferability.
(i) Each Award, and each right under any Award, shall be
exercisable only by the Participant during the Participant's lifetime,
or, if permissible under applicable law, by the Participant's guardian
or legal representative or by a transferee receiving such Award
pursuant to a qualified domestic relations order ("QDRO"), as
determined by the Committee.
(ii) No Award may be assigned, alienated, pledged, attached,
sold or otherwise transferred or encumbered by a Participant otherwise
than by will or by the laws of descent and distribution or pursuant to
a QDRO, and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and
unenforceable against the
5
<PAGE>
<PAGE>
Company or any Affiliate; provided that the designation of a
beneficiary shall not constitute an assignment, alienation, pledge,
attachment, sale, transfer or encumbrance.
(b) No Rights to Awards. No Director, Employee, Participant or
other Person shall have any claim to be granted any Award, and there is no
obligation for uniformity of treatment of Employees, Participants, or holders
or beneficiaries of Awards. The term and conditions of Awards need not be the
same with respect to each recipient.
(c) Share Certificates. All certificates for Shares or other securities
of the Company or any Affiliate delivered under the Plan pursuant to the
exercise or vesting of any Award shall be subject to such stop transfer orders
and other restrictions as the Committee may deem advisable under the Plan or the
rules, regulations, and other requirements of the Securities and Exchange
Commission, any stock exchange upon which such Shares or other securities are
then listed, and any applicable Federal or state laws, and the Committee may
cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(d) Delegation. Subject to the terms of the Plan and applicable law,
the Committee may delegate to one or more officers or managers of the Company or
any Affiliate, or to a committee of such officers or managers, the authority,
subject to such terms and limitations as the Committee shall determine, to grant
Awards to, or to cancel, modify or waive rights with respect to, or to alter,
discontinue, suspend, or terminate Awards held by, Employees who are not
officers or directors of the Company for purposes of Section 16 of the Exchange
Act, or any successor section thereto, or who are otherwise not subject to such
Section.
(e) Withholding. A Participant may be required to pay to the Company or
any Affiliate and the Company or the Affiliate shall have the right and is
hereby authorized to withhold from any payment due or transfer made pursuant to
the exercise or vesting of any Award or from any compensa tion or other amount
owing to a Participant the amount (in cash, Shares, other securities, or other
property) of any applicable withholding taxes in respect of the exercise or
vesting of an Award and to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for the payment of such taxes.
The Committee may provide for additional cash payments to holders of Awards to
defray or offset any tax arising from the exercise or vesting of any Award.
(f) Award Agreements. Each Award hereunder shall be evidenced by an
Award Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Award and any rules applicable thereto,
including but not limited to the effect on such Award of the death, retirement
or other termination of employment of a Participant and the effect, of any, of a
change in control of the Company.
(g) No Limit on Other Compensation Arrangements. Nothing contained in
the Plan shall prevent the Company or any Affiliate from adopting or continuing
in effect other compensation arrangements, which may, but need not, provide for
the grant of the types of Awards provided for hereunder (subject to shareholder
approval if such approval is required), and such arrangements may be either
generally applicable or applicable only in specific cases.
(h) No Right to Employment or Service. The grant of an Award shall
not be construed as giving a Participant the right to be retained in the employ
of the Company or any Affiliate. Further,
6
<PAGE>
<PAGE>
the Company or an Affiliate may at any time dismiss a Participant from
employment, free from any liability or any claim under the Plan, unless
otherwise expressly provided in the Plan or in any Award Agreement.
(i) No Rights as Stockholder. Subject to the provisions of the
applicable Award, no Participant or holder or beneficiary of any Award shall
have any rights as a stockholder with respect to any Shares to be distributed
under the Plan until he or she has become the holder of such Shares.
(j) Governing Law. The validity, construction, and effect of the
Plan and any rules and regulations relating to the Plan and any Award Agreement
shall be determined in accordance with the laws of the State of Delaware.
(k) Severability. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform the applicable laws, or if it cannot be
construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall be
stricken as to such jurisdiction, Person or Award and the remainder of the Plan
and any such Award shall remain in full force and effect.
(l) Other Laws. The Committee may refuse to issue or transfer any
Shares under any Award if, acting in its sole discretion, it determines that the
issuance or transfer of such Shares might violate any applicable law or
regulation or entitle the Company to recover the same under Section 16(b) of the
Exchange Act, and any payment tendered to the Company by a Participant, other
holder or beneficiary in connection with the exercise or vesting of such Award
shall be promptly refunded to the relevant Participant, holder or beneficiary.
Without limiting the generality of the foregoing, no Award granted hereunder
shall be construed as an offer to sell securities of the Company, and no such
offer shall be outstanding, unless and until the Committee in its sole
discretion has determined that any such offer, if made, would be in compliance
with all applicable requirements of the U.S. federal securities laws.
(m) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant or
any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(n) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be cancelled, terminated, or otherwise eliminated.
(o) Headings. Headings are given to the Sections and subsections
of the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
7
<PAGE>
<PAGE>
SECTION 10. TERM OF THE PLAN.
(a) Effective Date. The Plan shall be effective as of the date of
its adoption by the Board.
(b) Expiration Date. No Award shall be granted under the Plan after
November 20, 2007. Unless otherwise expressly provided in the Plan or in an
applicable Award Agreement, any Award granted hereunder may, and the authority
of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or
terminate any such Award or to waive any conditions or rights under any such
Award shall, continue after November 20, 2007.
8
<PAGE>
<PAGE>
EXHIBIT 21
Warnaco Group Inc. and Subsidiaries
Subsidiaries of the Registrant
Warnaco Group Inc. ("Warnaco"), a Delaware corporation, consolidates
all majority owned subsidiaries. The principal consolidated subsidiaries, all of
which are wholly owned by Warnaco or its wholly-owned subsidiaries, except as
indicated, are listed below. Included on the list are subsidiaries which
individually are not significant subsidiaries but primarily represent
subsidiaries in countries in which the Company has operations. The names of
Warnaco's other consolidated subsidiaries, which are primarily wholly owned by
Warnaco or its wholly-owned subsidiaries, are not listed because all such
subsidiaries, considered in the aggregate as a single subsidiary, would not
constitute a significant subsidiary.
<TABLE>
<CAPTION>
Incorporation
Company Country or State
------- ----------------
<S> <C>
Warnaco Inc. Delaware
Myrtle Ave. Inc. Delaware
Gregory St. Inc. Delaware
ML Inc. Delaware
Warnaco Men's Sportswear, Inc. Delaware
C.F. Hathaway Company Delaware
Blanche Inc. Delaware
184 Benton St. Inc. Delaware
Warnaco Int'l LLC Delaware
Designer Holdings LTD Delaware
Broadway Jeanswear Company, Inc. Delaware
Broadway Jeanswear Sourcing, Inc. Delaware
Broadway Jeanswear Holdings, Inc. Delaware
Outlet Stores, Inc. Delaware
Outlet Holdings, Inc. Delaware
Rio Sportswear Inc. Delaware
AEI Management Corp. Delaware
Jeanswear Holdings, Inc. Delaware
Calvin Klein Jeanswear Company Delaware
CKJ Holdings, Inc. Delaware
Kai Jay Manufacturing Company Delaware
Abbeville Manufacturing Company Delaware
New Bedford Shippers Corp Delaware
CKJ Sourcing Inc. Delaware
Warmana LTD Delaware
Warnaco Sourcing Inc. Delaware
Warners de Costa Rica Delaware
Designer Finance Trust Delaware
Lenitex-Warnaco Handelsgesellschaft Austria
Raineurop, S.A. Brussels
Warner's Company S.A. Belgium
Donatex-Warnaco S.A. Belgium
Warnaco (HK) LTD Barbados
Warnaco of Canada LTD Canada
Tilbes Servisport Inc. Canada
Warnaco International General Partnership Cayman Islands, BWI
GJM Shatou China
Leratex-Warnaco LTD (UK) England
Hamlet Shirt Co. LTD England
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Warnaco LTD England
SCHF S.A. France
Euralis S.A.S. France
Lejaby S.A.S. France
Warnaco France SARL France
CK France SNC France
Warners Aiglon S.A. France
Warnaco LAC One GmbH Germany
Warnaco LAC Two GmbH Germany
Sigrun Verwaltungsgellschaft MBH & Co. Germany
Eratex-Warnaco GmbH Germany
INVASA Honduras
Olga de Villanueva, S.A. Honduras
Hamlet Manufacturing, S.A. Honduras
Warnaco de Honduras Honduras
GJM (HK) Mfg. LTD Hong Kong
Designer Holdings Overseas LTD Hong Kong
Warners Eire Teoranta Ireland
Warnaco SRL Italy
Warnaco Japan K.K. Japan
Warners de Mexico S.A. de C.V. Mexico
Linda Vista LTD de Puebla S.A. de C.V. Mexico
Linda Vista de Yucatan S.A. de C.V. Mexico
Linda Vista de Veracruz S.A. de C.V. Mexico
Linda Vista de Tlaxcala S.A. de C.V. Mexico
Olguita de Mexico, S.A. Mexico
Juarmex S.A. de C.V. Mexico
The Bra Comp-Moroccan Morocco
Warnaco B.V. Netherlands
Warnaco Netherlands B.V. Netherlands
Warnaco Holland B.V. Netherlands
Warners (UK) LTD Northern Ireland
GJM (Philippines) Mfg. LTD Philippines
Warnaco Intimo S.A. Spain
GJM Lanka Mfg. Ltd. Sri Lanka
Lintex-Warnaco S.A. Switzerland
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 23.1(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-60093, 33-60091, 33-59091, 33-58148 and
33-58146) and in the Prospectus constituting part of the Post-Effective
Amendment No. 1 to the Registration Statement on Form S-3 (No. 333-41415)
of The Warnaco Group, Inc. of our report dated February 20, 1998 appearing on
page F-1 of this Form 10-K. We also consent to the incorporation by reference
of our report on the Financial Statement Schedule, which appears on page S-1
of this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
April 3, 1998
<PAGE>
<PAGE>
EXHIBIT 23.1(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
The Warnaco Group, Inc. on Form S-3 (File No. 333-41415), on Form S-8 (File No.
33-58146) pertaining to The Warnaco Group, Inc. Amended and Restated 1988
Employee Stock Purchase Plan, on Form S-8 (File No. 33-58148) pertaining to The
Warnaco Group, Inc. 1991 Stock Option Plan, on Form S-8 (File No. 33-59091)
pertaining to The Warnaco Group, Inc. Amended and Restated 1993 Stock Plan, on
Form S-8 (File No. 33-60091) pertaining to The Warnaco Group, Inc. Employee
Savings Plan and on Form S-8 (File No. 33-60093) pertaining to the 1993 Stock
Plan for Non-Employee Directors of our report dated March 12, 1997, on our
audits of the consolidated financial statements and financial statement schedule
of Designer Holdings Ltd. as of December 31, 1996, and for the years ended
December 31, 1996 and 1995, which are incorporated by reference in this Form
10-K.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
New York, New York
April 3, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 12,009
<SECURITIES> 0
<RECEIVABLES> 342,502
<ALLOWANCES> (46,124)
<INVENTORY> 526,185
<CURRENT-ASSETS> 879,800
<PP&E> 232,382
<DEPRECIATION> 101,982
<TOTAL-ASSETS> 1,727,648
<CURRENT-LIABILITIES> 432,513
<BONDS> 354,263
100,758
0
<COMMON> 633
<OTHER-SE> 807,450
<TOTAL-LIABILITY-AND-EQUITY> 1,727,648
<SALES> 1,435,730
<TOTAL-REVENUES> 1,435,730
<CGS> 1,003,509
<TOTAL-COSTS> 317,147
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 32,284
<INTEREST-EXPENSE> 45,873
<INCOME-PRETAX> 36,917
<INCOME-TAX> 13,885
<INCOME-CONTINUING> 23,032
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,032
<EPS-PRIMARY> .44
<EPS-DILUTED> .42
</TABLE>
