<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended October 2, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10857
THE WARNACO GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4032739
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
90 Park Avenue
New York, New York 10016
(Address of registrant's principal executive offices)
(212) 661-1300
(Registrant's telephone number, including area code)
Copies of all communications to:
The Warnaco Group, Inc.
90 Park Avenue
New York, New York 10016
Attention: Vice President and General Counsel
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of the registrant's Class A Common Stock as of
November 12, 1999 is as follows: 55,634,895.
<PAGE>
Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
October 2, January 2,
1999 1999
----------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 13,857 $ 9,495
Accounts receivable less reserves of $21,044 and $36,668 324,379 199,369
Inventories:
Finished goods 467,507 326,794
Work in process 106,123 92,821
Raw materials 56,675 52,404
-------------- --------------
Total inventories 630,305 472,019
Other current assets 76,651 26,621
-------------- --------------
Total current assets 1,045,192 707,504
Property, plant and equipment (net of accumulated depreciation of
$145,713 and $119,891, respectively) 262,245 224,260
-------------- --------------
Other assets:
Excess of cost over net assets acquired - net 515,264 458,018
Other assets - net 363,399 393,351
-------------- --------------
Total other assets 878,663 851,369
-------------- --------------
$ 2,186,100 $ 1,783,133
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 123,217 $ 30,231
Accounts payable 475,205 503,326
Accrued liabilities 104,077 131,316
Deferred income taxes 38,356 14,276
-------------- --------------
Total current liabilities 740,855 679,149
-------------- --------------
Long-term debt 744,237 411,886
-------------- --------------
Other long-term liabilities 28,378 12,129
-------------- --------------
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities of Designer Finance Trust Holding Solely
Convertible Debentures 102,637 101,836
-------------- --------------
Stockholders' equity:
Common stock: $.01 par value 655 652
Additional paid-in capital 961,017 953,512
Accumulated other comprehensive income 3,870 (15,703)
Accumulated deficit (97,208) (176,997)
Treasury stock, at cost (285,696) (171,559)
Unvested stock compensation (12,645) (11,772)
-------------- --------------
Total stockholders' equity 569,993 578,133
-------------- --------------
$ 2,186,100 $ 1,783,133
============== ==============
</TABLE>
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Condensed Financial Statements.
2
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
-------------- ------------ -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 579,612 $ 544,125 $ 1,508,452 $ 1,402,207
Cost of goods sold 378,124 383,733 979,612 990,769
------------ ------------ ------------ ------------
Gross profit 201,488 160,392 528,840 411,438
Selling, general and administrative expenses 111,277 104,390 323,839 296,528
------------ ------------ ------------ ------------
Income before interest, income taxes and cumulative
effect of change in accounting principle 90,211 56,002 205,001 114,910
Interest expense 20,869 15,077 56,381 43,856
------------ ------------ ------------ ------------
Income before income taxes and cumulative effect
of change in accounting principle 69,342 40,925 148,620 71,054
Provision for income taxes 24,963 13,981 53,503 25,082
------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle 44,379 26,944 95,117 45,972
Cumulative effect of change in accounting for
deferred start-up costs, net -- -- -- (46,250)
------------ ------------ ------------ ------------
Net income (loss) $ 44,379 $ 26,944 $ 95,117 $ (278)
============ ============ ============ ============
Basic earnings (loss) per common share:
Income before cumulative effect of change
in accounting principle $ 0.80 $ 0.44 $ 1.68 $ 0.74
Cumulative effect of accounting change -- -- -- (0.74)
------------ ------------ ------------ ------------
Net income (loss) $ 0.80 $ 0.44 $ 1.68 $ --
============ ============ ============ ============
Diluted earnings (loss) per common share:
Income before cumulative effect of change
in accounting principle $ 0.80 $ 0.43 $ 1.65 $ 0.72
Cumulative effect of accounting change -- -- -- (0.72)
------------ ------------ ------------ ------------
Net income (loss) $ 0.80 $ 0.43 $ 1.65 $ --
============ ============ ============ ============
Cash dividends declared per share of common stock $ 0.09 $ 0.09 $ 0.27 $ 0.27
============ ============ ============ ============
Shares used in computing earnings per share:
Basic 55,154 61,830 56,463 62,197
============ ============ ============ ============
Diluted 55,793 63,300 57,497 63,807
============ ============ ============ ============
</TABLE>
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Condensed Financial Statements.
3
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
October 2, October 3,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 95,117 $ (278)
---------- ----------
Non-cash items included in net income:
Depreciation and amortization 44,121 36,897
Cumulative effect of accounting change -- 46,250
Amortization of unvested stock compensation 4,585 3,533
Change in deferred income taxes 51,727 25,736
Other changes in operating accounts (363,836) (72,907)
---------- ----------
Net cash from operating activities (168,286) 39,231
---------- ----------
Cash flow from investing activities
Disposals of fixed assets -- 2,210
Purchase of property, plant & equipment (66,236) (103,737)
Payment of assumed liabilities and acquisition accruals -- (18,801)
Acquisition of assets and licenses (39,708) (44,088)
Increase in intangible and other assets (16,965) (71,463)
---------- ----------
Net cash from investing activities (122,909) (235,879)
---------- ----------
Cash flow from financing activities:
Borrowing under revolving credit facilities 433,117 293,896
Borrowing under term loan agreement -- 20,706
Proceeds from the exercise of stock options and
repayment of notes receivable from employees 1,364 41,982
Purchase of treasury shares and payment of
withholding tax on option exercises (117,246) (105,631)
Repayments of debt (7,780) (5,697)
Dividends paid (15,328) (16,082)
Other (2,514) (33,393)
---------- ----------
Net cash from financing activities 291,613 195,781
---------- ----------
Effect on cash due to currency translation 3,944 6,047
---------- ----------
Increase (decrease) in cash 4,362 5,180
Cash at beginning of period 9,495 12,009
---------- ----------
Cash at end of period $ 13,857 $ 17,189
========== ==========
Other changes in operating accounts:
Accounts receivable $(123,755) $(166,305)
Inventories (152,109) (57,551)
Other current assets (25,484) 4,554
Accounts payable and accrued liabilities (61,015) 146,883
Accrued income taxes (1,473) (488)
---------- ----------
$(363,836) $ (72,907)
========== ==========
</TABLE>
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Condensed Financial Statements.
4
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim financial
information. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
consolidated condensed financial statements contain all adjustments (all of
which were of a normal recurring nature) necessary to present fairly the
financial position of the Company as of October 2, 1999 as well as its results
of operations and cash flows for the periods ended October 2, 1999 and October
3, 1998, see Note 9. Operating results for interim periods may not be indicative
of results for the full fiscal year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999.
Start-Up Costs: In the fourth quarter of fiscal 1998, retroactive to the
beginning of fiscal 1998, the Company early adopted the provisions of SOP 98-5
requiring that pre-operating costs relating to the start-up of new manufacturing
facilities, product lines and businesses be expensed as incurred. The Company
recognized $46,250, after taxes, as the cumulative effect of a change in
accounting to reflect the new accounting and write-off the balance of
unamortized deferred start-up costs as of the beginning of 1998. In addition,
the Company recognized in 1998 earnings for the three- and nine- month periods
ended October 3, 1998 approximately $14,473 and $37,058, before taxes,
respectively, related to 1998 costs that would have been deferred under the
Company's start-up accounting policy prior to the adoption of SOP 98-5. Prior to
the early adoption of SOP 98-5, start-up costs were deferred and amortized using
the straight line method, principally over five years.
Adjustments, Reclassifications and Revisions: As noted above, the Company early
adopted SOP 98-5 in fiscal 1998. In connection with the adoption of the new
accounting standard, an extensive effort was undertaken to identify all start-up
related production and inefficiency costs that had previously been deferred.
Over the last nine years, the Company has opened or expanded 10 manufacturing
facilities. In addition, to support anticipated future growth, the Company
opened 2 new manufacturing facilities during 1998 for a total of 12 new
facilities. This resulted in the Company incurring plant inefficiencies and
other start-up related costs resulting from high turnover and related training
and other costs. Such start-up related production and inefficiency costs had
been classified in other assets and inventories. Because certain such costs
identified in this process related to prior period activities, such prior period
consolidated financial statements have been revised to reflect additional costs
of goods sold. The amount of the revision affecting the fiscal 1998 earnings for
the three- and nine-month periods ended October 3, 1998 was $12,066 and $37,718,
respectively. For additional information, see Notes 1 and 18 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended January 2, 1999.
Certain amounts for prior periods have been reclassified to be comparable with
the current period presentation.
5
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Note 2 - Equity
As of October 2, 1999 and January 2, 1999, Class A common stock outstanding was
55,590,745 shares, net of 9,864,050 shares held in treasury and 59,084,934
shares, net of 6,087,674 shares held in treasury, respectively. On March 1,
1999, the Board of Directors authorized the repurchase of an additional 10.0
million shares of the Company's common stock to supplement its previously
authorized 12.42 million share stock repurchase program. During the nine months
ended October 2, 1999, the Company repurchased 1,497,202 shares under equity
option arrangements at a cost of approximately $52,919 and 2,287,700 shares in
open market purchases at a cost of approximately $61,687. A total of
approximately 9.6 million shares have been repurchased under the current
authorization of 22.42 million shares leaving approximately 12.8 million shares
available to repurchase.
In May 1999, the Company's Board of Directors authorized the issuance of 190,680
shares of restricted stock to certain employees, including officers and
directors of the Company. The restricted shares vest ratably over four years and
will be fully vested in May 2003. The fair market value of the restricted shares
was approximately $5.4 million at the date of grant. The Company recognizes
compensation expense equal to the fair value of the restricted shares on the
date of grant over the vesting period.
On August 19, 1999, the Board of Directors of the Company adopted a Rights
Agreement (the "Agreement"). Under the terms of the Agreement, the Company
declared a dividend distribution of one Right for each outstanding share of
common stock of the Company to stockholders of record on August 31, 1999. Each
Right entitles the holder to purchase from the Company a unit consisting of one
one-thousandth of a Series A Junior Participating Preferred Stock, par value
$.01 per share at a purchase price of $100 per unit. The Rights only become
exercisable, if not redeemed, ten days after a person or group has acquired 15%
or more of the Company's common stock or the announcement of a tender offer that
would result in a person or group acquiring 15% or more of the Company's common
stock. The Agreement expires on August 31, 2009, unless earlier redeemed or
extended by the Company.
Note 3 - 1998 Restructuring and Special Charges
In the fiscal 1998 fourth quarter, the Company recorded restructuring and other
special charges related to costs to exit certain facilities and activities,
including charges related to inventory write-downs and valuations, asset
impairments and employee termination and severance benefits. Through October 2,
1999, the reduction in force has been completed and 10 retail outlet stores were
closed.
<TABLE>
<CAPTION>
Balance at Amounts Balance at
Jan. 2, 1999 Utilized Oct. 2, 1999
------------- ---------- -------------
<S> <C> <C> <C>
Costs to exit facilities and activities $ 3,010 $ 3,010 $ --
Employee termination and severance 3,590 2,957 633
------------- ---------- -------------
$ 6,600 $ 5,967 $ 633
============= ========== =============
</TABLE>
6
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Note 4 - Investments
During the first quarter of fiscal 1999, the Company received shares of common
stock in exchange for the early termination of a non-compete agreement with the
former principal stockholder of its Designer Holdings subsidiary. The fair
market value of the common stock on the date of issuance was $875, which was
recorded as a reduction of goodwill associated with the Designer Holdings
acquisition. During 1998 and 1999, the Company invested $7,575 to acquire an
interest in Interworld Corporation, a leading provider of E-Commerce software
systems and other applications for electronic commerce sites. These investments
are classified as available-for-sale securities and recorded at fair value based
on quoted market prices. Unrealized gains at October 2, 1999 of $15,629 (net of
deferred income taxes of $8,791), were included as a separate component of
stockholder's equity. The Company did not have any marketable securities at
January 2, 1999. Marketable securities are included in other current assets at
October 2, 1999.
Note 5 - Acquisitions
In September 1999, the Company acquired the outstanding common stock of A.B.S.
Clothing Collection, Inc. ("ABS"). ABS is a leading contemporary designer of
casual sportswear and dresses sold through better department and specialty
stores. The purchase price consisted of a cash payment of $29,500, shares of the
Company's common stock with a fair market value of $2,200 and a deferred cash
payment of $22,800. The acquisition was accounted for as a purchase. The
preliminary allocation of the purchase price to the fair market value of assets
acquired is summarized as follows:
<TABLE>
<S> <C>
Accounts receivable $ 1,255
Inventories 4,469
Property and equipment 1,086
Intangible and other assets 52,154
Accounts payable and accrued expenses (4,341)
Other liabilities (123)
--------
$54,500
========
</TABLE>
The final allocation of the purchase price to acquired tangible and intangible
assets, based on an independent appraisal, will be completed by the end of
fiscal 1999. The acquisition did not have a material pro-forma impact on 1999
consolidated earnings.
Note 6 - Summarized Financial Information - Designer Holdings
The following is summarized unaudited financial information of the Company's
wholly-owned subsidiary, Designer Holdings, as of October 2, 1999 and January 2,
1999 and for the nine months ended October 2, 1999 and October 3, 1998,
respectively. Designer Holdings, acquired by the Company in the fourth quarter
of 1997, develops, manufactures and markets designer jeanswear and sportswear
for men, women and juniors and holds a 40-year extendable license from Calvin
Klein, Inc. to develop, manufacture and market designer jeanswear and jeans
related sportswear collections in North, South and Central America under the
Calvin Klein Jeans'r', CK Calvin Klein Jeans'r', and CK/Calvin Klein/Khakis'r'
labels.
7
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
<TABLE>
<CAPTION>
Balance sheet summary: October 2, January 2,
1999 1999
---------------- ---------------
<S> <C> <C>
Current assets......................................... $ 207,650 $ 115,328
Noncurrent assets...................................... 544,831 589,191
Current liabilities.................................... 138,755 140,000
Noncurrent liabilities................................. 56,767 58,067
Redeemable preferred securities........................ 102,637 101,836
Stockholder's equity................................... 454,322 404,616
<CAPTION>
Income statement summary: Nine months ended
October 2, October 3,
1999(a) 1998(a)
---------------- ---------------
<S> <C> <C>
Net revenues........................................... $ 413,505 $ 332,806
Cost of goods sold..................................... 264,253 223,449
Net income............................................. 49,706 33,061
</TABLE>
(a) Excludes net revenues of $61,100 and $59,300 for the nine months of fiscal
1999 and 1998 respectively, reported as Retail Outlet Store division net
revenues. As a result of the continuing integration of Designer Holdings
into the operations of the Company, cost of goods sold and net income
associated with these net revenues cannot be separately identified.
Note 7 - Cash Flow Information
<TABLE>
<CAPTION>
Nine months ended
<S> <C> <C>
October 2, October 3,
Cash paid (received) for: 1999 1998
Interest, including $2,455 and $962 capitalized in --------------- ---------------
fiscal 1999 and 1998, respectively $ 54,679 $ 42,224
Income taxes, net of refunds received $ 5,491 $ (7,571)
</TABLE>
8
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Note 8 - Earnings per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings (loss) per share:
Income before cumulative effect of change in accounting $ 44,379 $ 26,944 $ 95,117 $ 45,972
Cumulative effect of change in accounting -- -- -- (46,250)
-------- -------- -------- ----------
Net income (loss) $ 44,379 $ 26,944 $ 95,117 $ (278)
======== ======== ======== ==========
Denominator for basic earnings per share -- weighted
average shares 55,154 61,830 56,463 62,197
-------- -------- -------- ----------
Effect of dilutive securities:
Employee stock options 169 521 316 1,019
Restricted stock shares 470 507 468 481
Shares under put option contracts -- 442 250 110
-------- -------- -------- ----------
Dilutive potential common shares 639 1,470 1,034 1,610
-------- -------- -------- ----------
Denominator for diluted earnings per share --
weighted average adjusted shares 55,793 63,300 57,497 63,807
======== ======== ======== ==========
Basic earnings per share before cumulative effect of
change in accounting $ 0.80 $ 0.44 $ 1.68 $ 0.74
======== ======== ======== ==========
Diluted earnings per share before cumulative effect of
change in accounting $ 0.80 $ 0.43 $ 1.65 $ 0.72
======== ======== ======== ==========
</TABLE>
Options to purchase shares of common stock that were outstanding during the
three- and nine-month periods of fiscal 1999 but were not included in the
computation of diluted earnings per share because the option exercise price was
greater than the average market price of the common shares were approximately
13.2 million and 7.5 million, respectively. For the three- and nine-month
periods of fiscal 1998, such options to purchase common stock excluded from the
computation of diluted earnings per share were approximately 0.3 million.
Incremental shares issuable on the assumed conversion of the preferred
securities (1,653,177 shares) were not included in the computation of diluted
earnings per share for any of the periods presented as the impact would have
been antidilutive.
Note 9 - Business Segments
The Company designs, manufactures and markets apparel within the Intimate
Apparel, Sportswear and Accessories markets and operates a Retail Outlet Store
Division for the disposition of excess and irregular inventory. Information by
business segment is set forth below:
9
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
<TABLE>
<CAPTION>
Sportswear Retail
Intimate and Outlet
Apparel Accessories Stores Total
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Three months ended October 2, 1999
Net Revenues $ 250,072 $ 289,857 $ 39,683 $ 579,612
Adjusted EBITDA 60,000 57,200 5,700 122,900
Three months ended October 3, 1998:
Net Revenues $ 245,138 $ 262,455 $ 36,532 $ 544,125
Adjusted EBITDA 59,500 45,400 5,700 110,600
Nine months ended October 2, 1999:
Net Revenues $ 682,687 $ 729,029 $ 96,736 $ 1,508,452
Adjusted EBITDA 156,300 133,300 10,200 299,800
Nine months ended October 3, 1998:
Net Revenues $ 683,643 $ 623,993 $ 94,571 $ 1,402,207
Adjusted EBITDA 153,000 101,800 11,200 266,000
</TABLE>
On an ongoing basis, the Company reviews and updates the methodology reflected
in the cost accounting processes throughout the Company including its
manufacturing units. During the third quarter of fiscal 1999, this review
resulted in a refinement of the calculation of certain inventoriable costs in
the Intimate Apparel division which resulted in a reduction of cost of sales of
approximately $6.0 million, net of tax. This refinement is not expected to be
material in the 1999 fiscal year. A reconciliation of total segment Adjusted
EBITDA to total consolidated income before taxes and cumulative effect of a
change in accounting principle for the three- and nine- months ended October 2,
1999 and October 3, 1998, respectively, is as follows:
<TABLE>
<CAPTION>
Three months ended Nine Months Ended
---------------------- ----------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total adusted EBITDA for reportable segments $122,900 $110,600 $299,800 $266,000
General corporate expenses not allocated 17,053 16,301 50,678 43,095
Depreciation and amortization 15,636 11,758 44,121 33,219
Effect of early adoption of SOP 98-5 and other
start-up related production and inefficiency costs -- 26,539 -- 74,776
Interest expense 20,869 15,077 56,381 43,856
-------- -------- -------- --------
Income before income taxes and cumulative effect
of a change in accounting policy $ 69,342 $ 40,925 $148,620 $ 71,054
======== ======== ======== ========
</TABLE>
10
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Note 10 - Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 44,379 $ 26,944 $ 95,117 $ (278)
-------------- -------------- -------------- ---------------
Other comprehensive income (loss):
Foreign currency translation adjustments 1,190 (7,118) 3,944 (2,882)
Unrealized holding gains (losses) 23,808 - 24,420 -
Tax provision on unrealized holding gains (8,571) - (8,791) -
-------------- -------------- -------------- ---------------
Total other comprehensive income (loss) 16,427 (7,118) 19,573 (2,882)
-------------- -------------- -------------- ---------------
Comprehensive income (loss) $ 60,806 $ 19,826 $ 114,690 $ (3,160)
============== ============== ============== ===============
</TABLE>
The components of accumulated other comprehensive income (loss) as of October 2,
1999 and January 2, 1999 are as follows:
<TABLE>
<CAPTION>
October 2, January 2,
1999 1999
---------------- ---------------
<S> <C> <C>
Foreign currency translation adjustments $ (11,759) $ (15,703)
Unrealized holding gains, net 15,629 --
---------------- ---------------
Total accumulated other comprehensive income (loss) $ 3,870 $ (15,703)
=============== ================
</TABLE>
Note 11 - Subsequent Event
On October 10, 1999 the Company announced that it made a cash offer to acquire
all of the outstanding common stock of Authentic Fitness Corporation in a
negotiated transaction for $20.50 per share in cash plus the assumption of
Authentic Fitness' debt. On November 15, 1999 the Company and Authentic Fitness
Corporation entered into a definitive merger agreement for Warnaco's
acquisition, subject to certain conditions, of all of the common stock of
Authentic Fitness for $20.80 per share in cash plus the assumption of Authentic
Fitness' debt. In connection with the proposed transaction, the Company has
obtained financing commitments from several financial institutions in the amount
of $600,000.
11
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Item 2. Management's Discussion and Analysis of Results of Operations And
Financial Condition.
Results of Operations.
STATEMENT OF OPERATIONS (SELECTED DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ --------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
------------- ----------- ------------ -------------
(Amounts in millions of dollars)
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 579.6 $ 544.1 $ 1,508.4 $ 1,402.2
Cost of goods sold 378.1 383.7 979.6 990.8
-------- ------- --------- ---------
Gross profit 201.5 160.4 528.8 411.4
%of net revenues 34.8% 29.5% 35.1% 29.3%
Selling, general and administrative expenses 111.3 104.4 323.8 296.5
-------- ------- --------- ---------
Income before interest, income taxes and cumulative
effect of change in accounting principle 90.2 56.0 205.0 114.9
%of net revenues 15.6% 10.3% 13.6% 8.2%
Interest expense 20.9 15.1 56.4 43.9
Provision for income taxes 24.9 14.0 53.5 25.1
-------- ------- --------- ---------
Income before cumulative effect of change
in accounting principle $ 44.4 $ 26.9 $ 95.1 $ 45.9
======== ======= ========= =========
</TABLE>
Net revenues in the third quarter of fiscal 1999 were $579.6 million, $35.5
million or 6.5% higher than the $544.1 million recorded in the third quarter of
fiscal 1998. For the nine month period, net revenues increased $106.2 million or
7.6% over the comparable 1998 period.
Net revenues in the Sportswear and Accessories division increased $27.4
million or 10.4% to $289.9 million in the third quarter of fiscal 1999 compared
with $262.5 million in the third quarter of fiscal 1998. The improvement was
principally due to strong shipments of Calvin Klein jeans coupled with the
September 1999 acquisition of ABS by Allen Schwartz. Partially offsetting these
increases were lower Chaps sales, primarily due to the loss of two customers
accounting for over $6.0 million of 1998 third quarter sales. For the nine month
period, net revenues increased $105.0 million or 16.8% to $729.0 million
compared with $624.0 million in the comparable 1998 period. The improvement was
due to stronger Calvin Klein jeanswear and kidswear shipments.
Intimate Apparel division net revenues increased $4.9 million or 2.0% to
$250.1 million in the third quarter of fiscal 1999 from $245.1 million in the
third quarter of fiscal 1998. Net revenues in the Calvin Klein Underwear segment
improved $1.8 million or 1.9% to $98.8 million in the third quarter. The
division reported strong growth in the Sleepwear segment, due to the addition of
several new accounts, and in the Shapewear segment, where the Weight Watchers
brand was launched during the second quarter of 1999. Partially offsetting these
improvements was a decrease in the core Warner's/Olga businesses, reflecting a
lower level of off-price sales, the discontinuation of certain product lines in
the last quarter of fiscal 1998 and the loss of three major customers.
12
<PAGE>
International sales accounted for approximately 26% of total divisional net
sales in the third quarter of fiscal 1999 compared with 33% in the 1998 third
quarter. For the nine month period, net revenues declined $1.0 million or 0.1%
to $682.7 million compared with $683.6 million in the comparable 1998 period,
with the Warner's and Olga brands affected by the loss of three major customers
as well as discontinued product lines favorably offset by strong growth in the
Calvin Klein Underwear and Bodyslimmers and Shapewear segments.
The Retail Outlet Store division net revenues increased $3.2 million or
8.6% to $39.7 million in the third quarter of fiscal 1999 compared with fiscal
1998 net revenues of $36.5 million. For the nine month period, net revenues
increased $2.2 million or 2.3% to $96. 7 million. During 1999, the Company
closed 10 underperforming stores in connection with the 1998 restructuring.
Gross profit increased $41.1 million or 25.6% to $201.5 million in the
third quarter of fiscal 1999 compared with $160.4 million in the third quarter
of fiscal 1998. Gross margin was 34.8% in the third quarter of fiscal 1999
compared with 29.5% in the third quarter of fiscal 1998. For the nine month
period, gross profit increased $117.4 million or 28.5% to $528.8 million
compared with $411.4 million in the comparable 1998 period. Gross margins
improved to 35.1% in the 1999 nine month period compared with 29.3% in 1998. The
improvement in gross margin is a result of a decline in start-up related costs,
a decrease in off-price sales in the Intimate Apparel division and lower costs
in both the Intimate Apparel and Sportswear and Accessories divisions resulting
from the Company's 1998 restructuring where the Company realigned factories,
consolidated facilities and reduced headcount, resulting in a more favorable
cost structure and refinement in the calculation of certain inventoriable costs.
See Note 9 - Business Segments.
Selling, general and administrative expenses increased $6.9 million or 6.6%
to $111.3 million (19.2% of net revenues) in the third quarter of fiscal 1999
compared with $104.4 million (19.2% of net revenues) in the third quarter of
fiscal 1998. The increase in selling, general and administrative expenses
primarily reflects higher corporate expenses related to information systems and
Year 2000 remediation expenses. For the nine month period, selling, general and
administrative expenses increased $27.3 million or 9.2% to $323.8 million
(21.5% of net revenues) compared with $296.5 million ( 21.1% of net revenues) in
the comparable 1998 period. The increase is the result of higher corporate
expenses related to information systems and Year 2000 remediation expenses and
increased marketing costs in the Sportswear and Accessories division.
Interest expense increased $5.8 million to $20.9 million in the third
quarter of fiscal 1999 compared with $15.1 million in the third quarter of
fiscal 1998. For the nine month period, interest expense was up $12.5 million
over the comparable 1998 period to $56.4 million. The increase reflects the
funding of the Company's recent acquisitions and stock buyback program.
The provision for income taxes for the third quarter and year to date
period of fiscal 1999 reflects an estimated full year effective tax rate of
36.0%.
Net income for the third quarter of fiscal 1999 was $ 44.4 million compared
with net income of $26.9 million in the third quarter of fiscal 1998. For the
nine month period, net income before the cumulative effect of a change in
accounting principle in the first quarter of 1998 grew by $49.2 million to $95.1
million. The increase in net income reflects the higher net revenues and
associated
13
<PAGE>
gross profit mentioned above.
Capital Resources and Liquidity.
The Company's liquidity requirements arise primarily from its debt service
requirements and the funding of its working capital needs, primarily inventory
and accounts receivable. The Company's borrowing requirements are seasonal, with
peak working capital needs generally arising at the end of the third quarter and
during the third quarter of the fiscal year. The Company typically generates
nearly all of its operating cash flow in the fourth quarter of the fiscal year
reflecting third and fourth quarter shipments and the sale of inventory built
during the first nine months of the fiscal year.
Cash used in operations was $(168.3) million in the first nine months of
fiscal 1999 compared with cash provided by operations of $39.2 million in the
comparable period of fiscal 1998. The increase in cash used by operating
activities reflects higher finished goods inventories, primarily in Intimate
Apparel, to allow for a better order match rate in the last quarter of 1999 and
to allow for the planned delay in production due to the start-up of two
manufacturing facilities in Mexico. The increase in cash used by operating
activities also reflects the favorable trade payment terms the Company
negotiated in the third quarter of fiscal 1998. Partially offsetting the
increase used for working capital was a higher level of net income compared with
1998.
Cash used in investing activities was $(122.9) million for the first nine
months of fiscal 1999 compared with $(235.9) million in the first nine months of
fiscal 1998. Capital expenditures were $66.2 million in the first nine months of
fiscal 1999 compared with $103.7 million in the comparable 1998 period. Fiscal
1999 included amounts for information systems implementations (net of
reimbursements received of $24.0 million) and store fixture programs. During the
third quarter of fiscal 1999, the Company acquired the outstanding common stock
of A.B.S. Clothing Collection, Inc. for $54.5 million. The purchase price
consisted of $31.7 million in cash and Company stock with the balance of $22.8
million deferred and payable quarterly based on a percentage of sales. During
the second quarter of fiscal 1999, the Company acquired certain inventory along
with the Canadian license for Chaps by Ralph Lauren for $10.2 million.
Cash provided from financing activities was $291.6 million in the first
nine months of fiscal 1999 compared with $195.8 million in the first nine months
of fiscal 1998. The increase in the Company's revolving credit balance during
the first nine months of the fiscal year of $433.1 million was higher than the
$293.9 million increase in the first nine months of fiscal 1998 due to the
increase in cash used by operating activities as previously discussed. The
Company paid approximately $117.2 million for the repurchase of shares in the
first nine months of fiscal 1999 compared with $105.6 million in the first nine
months of fiscal 1998. The Company repaid $7.8 million of long term debt in the
first nine months of fiscal 1999 compared with $5.7 million in the first nine
months of fiscal 1998.
The Company believes that funds available under its existing credit
arrangements and cash flow to be generated from future operations will be
sufficient to meet the working capital, share repurchase and capital expenditure
needs of the Company, including dividends and interest and principal payments on
outstanding debt obligations for the next twelve months and for the next several
years.
14
<PAGE>
In October 1999, the Company announced that it made a cash offer to acquire
all of the outstanding common stock of Authentic Fitness Corporation in a
negotiated transaction for $20.50 per share in cash plus the assumption of
Authentic Fitness' debt. On November 15, 1999 the Company and Authentic Fitness
Corporation entered into a definitive merger agreement for Warnaco's
acquisition, subject to certain conditions, of all of the common stock of
Authentic Fitness for $20.80 per share in cash plus the assumption of Authentic
Fitness' debt. In connection with the proposed transaction, the Company has
obtained financing commitments from several financial institutions in the amount
of $600.0 million.
Year 2000 Compliance.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. These programs, including some
that are critical to the Company's operations, could fail to properly process
data that contain dates after 1999 unless they are modified or replaced.
Following a comprehensive review of current systems and future requirements
to support international growth, the Company initiated a program to replace
existing capabilities with enhanced hardware and software applications. The
objectives of the program were to achieve competitive benefits for the Company,
as well as assuring that all information systems meet Year 2000 compliance. Full
implementation of this program was accomplished as of the beginning of October
1999 for all of the Company's divisions.
As a part of its Year 2000 compliance program, the Company has contacted
key suppliers and vendors in order to determine the status of such third parties
Year 2000 remediation plans. Evaluation of suppliers and vendors readiness is
currently on-going. The Company recognizes the need for Year 2000 contingency
plans in the event that the remediation efforts of its vendors, suppliers and
governmental/regulatory agencies are not timely completed. This process was
begun in fiscal 1998 and is essentially complete at this time.
The Company recognizes that issues related to Year 2000 constitute a
material known uncertainty. The Company also recognizes the importance of
ensuring its operations will not be adversely affected by Year 2000 issues. It
believes that the processes described above will be effective to manage the
risks associated with the problem. However, there can be no assurance that the
processes described above will be fully effective. The failure to identify Year
2000 problems or, the failure of key third parties who do business with the
Company or governmental regulatory agencies to timely remediate their Year 2000
issues could cause system failures or errors and business interruptions.
This Year 2000 update should be read in conjunction with the Company's
disclosure under Statement Regarding Forward-looking Disclosures.
New Accounting Standards
In June 1998, the FASB issued a standard on accounting for derivative
instruments and hedging activities. This standard, which is effective for the
Company's fiscal year beginning January 3, 2001,
15
<PAGE>
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires the recognition of all derivatives as either
assets or liabilities in the statement of financial position along with the
measurement of such instruments at fair value. Management believes, based on
current activities, that the implementation of this standard will not have a
material impact on the Company's consolidated financial position, liquidity,
cash flows or results of operations.
Statement Regarding Forward-looking Disclosure
This Report includes forward-looking statements within the meaning of
Section 27A of Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including those associated with the effect of national and
regional economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements other than
statements of historical facts included in this quarterly report, including,
without limitation, the statements under Management's Discussion and Analysis of
Financial Condition, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, and selectively uses financial instruments
to manage these risks. The Company does not enter into financial instruments for
speculation or for trading purposes.
Interest Rate Risk
The Company is subject to market risk from exposure to changes in interest
rates based primarily on its financing activities. The Company enters into
interest rate swap agreements to reduce the impact of interest rate fluctuations
on cash flow and interest expense. As of October 2, 1999, approximately $610.0
million of interest-rate sensitive obligations were swapped to achieve a fixed
rate of 5.99%, limiting the Company's risk to any future shift in interest
rates. As of October 2, 1999, the net fair value asset of all financial
instruments (primarily interest rate swap agreements) with exposure to interest
rate risk was approximately $12.2 million. The potential decrease in fair value
resulting from a hypothetical 10% shift in interest rates would be approximately
$14.6 million.
Foreign Exchange Risk
The Company has foreign currency exposures related to buying, selling and
financing in currencies other than the functional currency in which it operates.
These exposures are primarily concentrated in the Canadian dollar, Mexican peso,
Hong Kong dollar, British pound and the Euro. The Company enters into foreign
currency forward and option contracts to mitigate the risk of doing business in
foreign currencies. The Company hedges currency exposures of firm commitments
and anticipated transactions denominated in non-functional currencies to protect
against the possibility of diminished cash flow and adverse impacts on earnings.
As of October 2, 1999, the net fair value asset of financial instruments with
exposure to foreign currency risk, which included primarily
16
<PAGE>
currency option contracts, was $0.1 million. The potential decrease in fair
value resulting from a hypothetical 10% adverse change in quoted foreign
currency exchange rates would be limited to $0.1 million, the fair value of
these options.
17
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
4.5 Rights Agreement, dated as of August 19, 1999, between the
Warnaco Group, Inc. and the Bank of New York (incorporated herein
by reference to Exhibit 4 to the Company's Form 8-K filed
August 20, 1999)
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
A Report on Form 8-K was filed on August 19, 1999 in connection with the
execution of the Rights Agreement between the Registrant and the Bank of
New York, as Rights Agent.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WARNACO GROUP, INC.
Date: November 16, 1999 By: /s/ WILLIAM S. FINKELSTEIN
---------------------------------
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and Accounting
Officer
Date: November 16, 1999 By: /s/ STANLEY P. SILVERSTEIN
---------------------------------
Stanley P. Silverstein
Vice President, General Counsel
and Secretary
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as ..................... 'r'
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE WARNACO GROUP, INC. FOR THE NINE MONTHS ENDED
OCTOBER 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
<CASH> 13,857
<SECURITIES> 0
<RECEIVABLES> 345,423
<ALLOWANCES> (21,044)
<INVENTORY> 630,305
<CURRENT-ASSETS> 1,045,192
<PP&E> 407,958
<DEPRECIATION> (145,713)
<TOTAL-ASSETS> 2,186,100
<CURRENT-LIABILITIES> 740,855
<BONDS> 744,237
102,637
0
<COMMON> 655
<OTHER-SE> 569,338
<TOTAL-LIABILITY-AND-EQUITY> 2,186,100
<SALES> 1,508,452
<TOTAL-REVENUES> 1,508,452
<CGS> 979,612
<TOTAL-COSTS> 1,303,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,381
<INCOME-PRETAX> 148,620
<INCOME-TAX> 53,503
<INCOME-CONTINUING> 95,117
<DISCONTINUED> 0
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<NET-INCOME> 95,117
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