<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 3, 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)
<TABLE>
<S> <C>
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(212) 661-1300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
COPIES OF ALL COMMUNICATIONS TO:
THE WARNACO GROUP, INC.
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: VICE PRESIDENT AND GENERAL COUNSEL
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of the registrant's Class A Common Stock as of
August 13, 1999 is as follows: 55,510,303.
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
JULY 3, JANUARY 2,
1999 1999
------------- ----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash.................................................................. $ 18,833 $ 9,495
Accounts receivable - net............................................. 285,971 199,369
Inventories:
Finished goods................................................... 428,944 326,794
Work in process.................................................. 100,450 92,821
Raw materials.................................................... 57,067 52,404
------------- --------------
Total inventories..................................................... 586,461 472,019
Other current assets.................................................. 40,898 26,621
------------- --------------
Total current assets....................................................... 932,163 707,504
------------- --------------
Property, plant and equipment (net of accumulated depreciation of
$135,888 and $119,891, respectively).................................... 241,052 224,260
------------- --------------
Other assets:
Excess of cost over net assets acquired - net......................... 469,119 458,018
Other assets - net.................................................... 368,981 393,351
------------- -------------
Total other assets......................................................... 838,100 851,369
------------- -------------
$ 2,011,315 $ 1,783,133
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................................... $ 95,565 $ 30,231
Accounts payable...................................................... 445,602 503,326
Accrued liabilities................................................... 123,398 131,316
Deferred income taxes................................................. 11,414 14,276
-------------- --------------
Total current liabilities.................................................. 675,979 679,149
-------------- -------------
Long-term debt............................................................. 708,938 411,886
-------------- -------------
Other long-term liabilities................................................ 10,776 12,129
-------------- --------------
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities of Designer Finance Trust Holding Solely
Convertible Debentures................................................ 102,370 101,836
------------- -------------
Stockholders' equity:
Common stock; $.01 par value.......................................... 655 652
Additional paid-in capital............................................ 960,291 953,512
Accumulated other comprehensive income................................ (12,557) (15,703)
Accumulated deficit................................................... (136,592) (176,997)
Treasury stock, at cost............................................... (284,256) (171,559)
Unvested stock compensation........................................... (14,289) (11,772)
------------- -------------
Total stockholders' equity................................................ 513,252 578,133
------------- -------------
$ 2,011,315 $ 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
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------ ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.................................................. $ 484,737 $ 438,874 $ 928,840 $ 858,082
Cost of goods sold............................................ 311,474 307,378 601,488 607,036
--------- --------- --------- ---------
Gross profit.................................................. 173,263 131,496 327,352 251,046
Selling, general and administrative expenses.................. 110,688 95,975 212,562 192,138
--------- --------- --------- ---------
Income before interest, income taxes and cumulative
effect of change in accounting principle.................. 62,575 35,521 114,790 58,908
Interest expense.............................................. 18,679 15,146 35,512 28,779
--------- --------- --------- ---------
Income before income taxes and cumulative effect
of change in accounting principle......................... 43,896 20,375 79,278 30,129
Provision for income taxes.................................... 16,050 7,435 28,540 11,101
--------- --------- --------- ---------
Income before cumulative effect of change
in accounting principle................................... 27,846 12,940 50,738 19,028
Cumulative effect of change in accounting for deferred
start-up costs, net....................................... -- -- -- (46,250)
--------- --------- --------- ---------
Net income (loss)............................................. $ 27,846 $ 12,940 $ 50,738 $ (27,222)
========= ========== ========= =========
Basic earnings (loss) per common share:
Income before cumulative effect of change
in accounting principle................................ $ 0.50 $ 0.21 $ 0.89 $ 0.31
Cumulative effect of accounting change..................... -- -- -- (0.75)
--------- --------- --------- ---------
Net income (loss).......................................... $ 0.50 $ 0.21 $ 0.89 $ (0.44)
========= ========= ========= =========
Diluted earnings (loss) per common share:
Income before cumulative effect of change
in accounting principle.................................. $ 0.49 $ 0.20 $ 0.87 $ 0.30
Cumulative effect of accounting change..................... -- -- -- (0.72)
--------- --------- --------- ---------
Net income (loss).......................................... $ 0.49 $ 0.20 $ 0.87 $ (0.42)
========= ========= ========= =========
Cash dividends declared per share of common stock............. $ 0.09 $ 0.09 $ 0.18 $ 0.18
========= ========= ========= =========
Shares used in computing earnings per share:
Basic...................................................... 56,034 62,603 57,063 62,358
========= ========= ========= =========
Diluted................................................... 57,241 64,440 58,295 64,092
========= ========= ========= =========
</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>
SIX MONTHS ENDED
--------------------------
JULY 3, JULY 4,
1999 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss).......................................................... $ 50,738 $ (27,222)
----------- -----------
Non-cash items included in net income:
Depreciation and amortization....................................... 28,485 27,783
Cumulative effect of accounting change.............................. -- 46,250
Amortization of unvested stock compensation......................... 2,941 2,089
Change in deferred income taxes..................................... 25,478 6,347
Other changes in operating accounts................................. (278,643) (178,174)
----------- -----------
Net cash from operating activities......................................... (171,001) (122,927)
----------- -----------
Cash flow from investing activities:
Disposals of fixed assets........................................... -- 304
Purchase of property, plant and equipment........................... (33,073) (72,121)
Acquisition of assets and licenses.................................. (10,208) (40,986)
Increase in intangible and other assets............................. (23,863) (47,018)
------------ -----------
Net cash from investing activities......................................... (67,144) (159,821)
------------ -----------
Cash flow from financing activities:
Borrowing under revolving credit facilities......................... 371,163 328,956
Borrowing under term loan agreement................................. -- 21,500
Proceeds from the exercise of stock options and
repayment of notes receivable from employees...................... 1,502 36,436
Purchase of treasury shares and payment of
withholding tax on option exercises............................... (112,875) (53,766)
Repayments of debt.................................................. (3,500) (4,724)
Dividends paid...................................................... (10,333) (10,378)
Other............................................................... (751) (33,057)
----------- ----------
Net cash from financing activities......................................... 245,206 284,967
----------- ----------
Effect on cash due to currency translation................................. 2,277 2,312
----------- ----------
Increase (decrease) in cash................................................ 9,338 4,531
Cash at beginning of period................................................ 9,495 12,009
----------- ----------
Cash at end of period...................................................... $ 18,833 $ 16,540
=========== ===========
Other changes in operating accounts:
Accounts receivable................................................. $ (86,602) $ (71,998)
Inventories......................................................... (112,734) (43,886)
Other current assets................................................ (13,665) (1,128)
Accounts payable and accrued liabilities............................ (64,191) (59,803)
Accrued income taxes................................................ (1,451) (1,359)
----------- -----------
$ (278,643) $ (178,174)
=========== ===========
</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 July 3, 1999 as well as its results of
operations and cash flows for the periods ended July 3, 1999 and July 4, 1998.
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 six-month periods
ended July 4, 1998 approximately $8,263 and $22,585, 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 six 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 six-month periods ended July 4, 1998 was $11,171 and $25,652,
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 July 3, 1999 and January 2, 1999, Class A common stock outstanding was
55,650,003 shares, net of 9,785,497 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 six months
ended July 3, 1999, the Company repurchased 1,355,002 shares under equity option
arrangements at a cost of approximately $49,419 and 2,287,700 shares in open
market purchases at a cost of approximately $61,687. A total of approximately
9.5 million shares have been repurchased under the current authorization of
22.42 million shares leaving approximately 12.9 million shares available to
repurchase. The Company has options outstanding on 142,200 shares at an average
forward price of $24.61 per share at July 3, 1999. These option arrangements
expire in August 1999. If the arrangements were settled on a net cash basis at
July 3, 1999, the Company would be entitled to receive $260 based on the closing
price of the Company's common stock. After accounting for these options, the
Company has approximately 12.8 million shares available to repurchase. As of
July 3, 1999, treasury stock includes approximately 9.8 million shares at a cost
of $284,256.
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.
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 July 3,
1999, the reduction in force has been completed and 10 retail outlet stores were
closed.
<TABLE>
<CAPTION>
Balance at Amounts Balance at
January 2, 1999 Utilized July 3, 1999
--------------- ------------- ------------
<S> <C> <C> <C>
Costs to exit facilities and activities.............. $ 3,010 $ 3,010 $ --
Employee termination and severance................... 3,590 2,339 1,251
--------- --------- ---------
$ 6,600 $ 5,349 $ 1,251
========= ========= =========
</TABLE>
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. The investment is classified as an available-for-sale security and
recorded at fair value.
- 6 -
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Unrealized gains at July 3, 1999 of $392 (net of deferred income taxes of $210),
were included as a separate component of stockholders' equity. The Company did
not have any marketable securities at January 2, 1999. Marketable securities are
included in other current assets at July 3, 1999.
NOTE 5 - SUMMARIZED FINANCIAL INFORMATION - DESIGNER HOLDINGS
The following is summarized unaudited financial information of the Company's
wholly-owned subsidiary, Designer Holdings, as of July 3, 1999 and January 2,
1999 and for the fiscal quarters ended July 3, 1999 and July 4, 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.
<TABLE>
<CAPTION>
BALANCE SHEET SUMMARY: JULY 3, JANUARY 2,
1999 1999
--------- ----------
<S> <C> <C>
Current assets...................................................... $ 170,487 $ 115,328
Noncurrent assets................................................... 581,563 589,191
Current liabilities................................................. 162,151 140,000
Noncurrent liabilities.............................................. 57,200 58,067
Redeemable preferred securities..................................... 102,370 101,836
Stockholders' equity................................................ 430,329 404,616
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENT SUMMARY: SIX MONTHS ENDED
-------------------------
JULY 3, JULY 4,
1999(a) 1998(a)
-------- --------
<S> <C> <C>
Net revenues........................................................ $ 251,275 $ 203,230
Cost of good sold................................................... 166,133 137,243
Net income.......................................................... 25,713 18,843
</TABLE>
(a) Excludes net revenues of $35,300 and $35,700 for the six months of
fiscal 1999 and 1998 respectively, now 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 6 - CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
JULY 3, JULY 4,
1999 1998
------- ------
<S> <C> <C>
Cash paid (received) for:
Interest, including $ 1,392 and $ 1,317 capitalized in fiscal 1999
and 1998, respectively............................................... $ 34,449 $ 26,992
Income taxes, net of refunds received................................... 3,024 (1,740)
</TABLE>
- 7 -
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 7 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ----------------------
JULY 3, JULY 4, JULY 3, JULY 4,
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....... $ 27,846 $ 12,940 $ 50,738 $ 19,028
Cumulative effect of change in accounting..................... -- -- -- (46,250)
-------- -------- -------- ---------
Net income (loss)............................................. $ 27,846 $ 12,940 $ 50,738 $(27,222)
======== ======== ======== ========
Denominator for basic earnings per share--weighted
average shares............................................. 56,034 62,603 57,063 62,358
-------- -------- -------- --------
Effect of dilutive securities:
Employee stock options..................................... 570 1,335 391 1,267
Restricted stock shares.................................... 489 502 467 467
Shares under put option contracts.......................... 148 -- 374 --
-------- -------- -------- --------
Dilutive potential common shares........................... 1,207 1,837 1,232 1,734
-------- ---------- -------- --------
Denominator for diluted earnings per share--
weighted average adjusted shares......................... 57,241 64,440 58,295 64,092
======== ====== ======== ========
Basic earnings per share before cumulative effect of
change in accounting....................................... $ 0.50 $ 0.21 $ 0.89 $ 0.31
======= ======== ======== ========
Diluted earnings per share before cumulative effect of
change in accounting....................................... $ 0.49 $ 0.20 $ 0.87 $ 0.30
======= ======== ======== =========
</TABLE>
Options to purchase shares of common stock that were outstanding during the
three- and six-month periods of fiscal 1999 and 1998 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 7.5 million and 0.3 million, respectively.
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 8 - BUSINESS SEGMENTS
The Company designs, manufactures and markets apparel within the Intimate
Apparel and 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:
- 8 -
<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 July 3, 1999:
Net revenues............................................... $ 220,968 $ 230,910 $ 32,859 $ 484,737
Adjusted EBITDA............................................ 48,600 42,300 3,800 94,700
Three months ended July 4, 1998:
Net revenues............................................... $ 220,461 $ 184,783 $ 33,630 $ 438,874
Adjusted EBITDA............................................ 45,800 29,700 4,000 79,500
Six months ended July 3, 1999:
Net revenues............................................... $ 432,615 $ 439,172 $ 57,053 $ 928,840
Adjusted EBITDA............................................ 96,300 76,100 4,500 176,900
Six months ended July 4, 1998:
Net revenues............................................... 438,505 361,538 58,039 858,082
Adjusted EBITDA............................................ 93,500 56,400 5,500 155,400
</TABLE>
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 six- months ended July 3, 1999 and July 4, 1998, respectively, is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total Adjusted EBITDA for reportable segments................. $ 94,700 $ 79,500 $ 176,900 $ 155,400
General corporate expenses not allocated...................... 17,425 7,280 33,625 20,472
Depreciation and amortization................................. 14,700 17,265 28,485 27,783
Effect of early adoption of SOP 98-5 and other
start-up related production and inefficiency costs......... -- 19,434 -- 48,237
Interest expense.............................................. 18,679 15,146 35,512 28,779
---------- --------- ----------- ---------
Income before income taxes and cumulative effect
of a change in accounting principle........................ $ 43,896 $ 20,375 $ 79,278 $ 30,129
========== ========= ========== =========
</TABLE>
NOTE 9 - COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ------------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net income (loss)............................................. $ 27,846 $ 12,940 $ 50,738 $ (27,222)
---------- -------- ----------- ----------
Other comprehensive income (loss):
Foreign currency translation adjustments................... 8,142 (104) 2,754 4,236
Unrealized holding gains (losses).......................... (360) -- 602 --
Tax provision on unrealized holding gains.................. 136 -- (210) --
---------- -------- ----------- ----------
Total other comprehensive income (loss)....................... 7,918 (104) 3,146 4,236
---------- -------- ----------- -----------
Comprehensive income (loss)................................... $ 35,764 $ 12,836 $ 53,884 $ (22,986)
========== ======== =========== ==========
</TABLE>
- 9 -
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The components of accumulated other comprehensive income (loss) as of July 3,
1999 and January 2, 1999 are as follows:
<TABLE>
<CAPTION>
JULY 3, JANUARY 2,
1999 1999
------------ ------------
<S> <C> <C>
Foreign currency translation adjustments...................... $ (12,949) $ (15,703)
Unrealized holding gains, net................................. 392 --
------------ ------------
Total accumulated other comprehensive income (loss)........... $ (12,557) $ (15,703)
============ ============
</TABLE>
- 10 -
<PAGE>
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 SIX MONTHS ENDED
---------------------- ---------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
-------- ------- ------- --------
(AMOUNTS IN MILLIONS OF DOLLARS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.................................................. $ 484.7 $ 438.9 $ 928.8 $ 858.1
Cost of goods sold ........................................... 311.5 307.4 601.5 607.1
-------- ------- -------- --------
Gross profit.................................................. 173.2 131.5 327.3 251.0
% of net revenues......................................... 35.7% 30.0% 35.2% 29.3%
Selling, general and administrative expenses.................. 110.7 96.0 212.6 192.1
-------- ------- -------- --------
Income before interest, income taxes and cumulative
effect of change in accounting principle................... 62.5 35.5 114.7 58.9
% to net revenues......................................... 12.9% 8.1% 12.3% 6.9%
Interest expense.............................................. 18.7 15.2 35.5 28.8
Provision for income taxes.................................... 16.0 7.4 28.5 11.1
-------- ------- -------- --------
Income before cumulative effect of change
in accounting principle.................................... $ 27.8 $ 12.9 $ 50.7 $ 19.0
======== ======= ======== ========
</TABLE>
Net revenues in the second quarter of fiscal 1999 were $484.7 million,
$45.8 million or 10.4% higher than the $438.9 million recorded in the second
quarter of fiscal 1998. For the six month period, net revenues increased $70.7
million or 8.2% over the comparable 1998 period.
Net revenues in the Sportswear and Accessories division increased $46.1
million or 24.9% to $230.9 million in the second quarter of fiscal 1999 compared
with $184.8 million in the second quarter of fiscal 1998. The improvement was
principally due to increased Calvin Klein Jeanswear and Chaps by Ralph Lauren
net revenues. For the six month period, net revenues increased $77.6 million or
21.5% to $439.2 million compared with $361.6 million in the comparable 1998
period. The improvement was due to increased net revenues in the Calvin Klein
Jeanswear and Kidswear businesses.
Intimate Apparel division net revenues increased $0.5 million or 0.2% to
$221.0 million in the second quarter of fiscal 1999 from $220.5 million in the
second quarter of fiscal 1998. Net revenues in the Calvin Klein Underwear
segment improved $9.1 million or 14.7% to $70.8 million in the second quarter.
The strong results were due to improved international revenues, primarily in
Asia. In addition, 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. Partially
offsetting these improvements was a decrease in the core Warner's/Olga
businesses, reflecting a lower level of off-price sales and the discontinuation
of certain product lines in the last quarter of fiscal 1998. International sales
accounted for approximately 30% of total divisional net sales in the second
quarter of fiscal 1999 and 1998. For the six month period, net revenues declined
$5.9 million or 1.3% to $432.6 million compared with $438.5 million in the
comparable 1998 period, with Warner's brand shipping a better mix of product
with fewer closeouts than the previous year and lower sales due to discontinued
product lines favorably offset by strong growth in the Calvin Klein Underwear
and Bodyslimmers and Shapewear segments.
- 11 -
<PAGE>
The Retail Outlet Store division net revenues decreased in both the second
quarter and six month period of fiscal 1999 compared with fiscal 1998, the
result of the closing of approximately 10 underperforming stores in connection
with the 1998 restructuring.
Gross profit increased $41.8 million or 31.8% to $173.2 million in the
second quarter of fiscal 1999 compared with $131.5 million in the second quarter
of fiscal 1998. Gross margin was 35.7% in the second quarter of fiscal 1999
compared with 30.0% in the second quarter of fiscal 1998. For the six month
period, gross profit increased $76.3 million or 30.4% to $327.3 million compared
with $251.0 million in the comparable 1998 period. Gross margins improved to
35.2% in the 1999 six 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.
Selling, general and administrative expenses increased $14.7 million or
15.3% to $110.7 million (22.8% of net revenues) in the second quarter of fiscal
1999 compared with $96.0 million (21.9% of net revenues) in the second 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 six month period, selling, general and
administrative expenses increased $20.4 million or 10.6% to $212.6 million
(22.9% of net revenues) compared with $192.1 million (22.4% 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 $3.5 million to $18.7 million in the second
quarter of fiscal 1999 compared with $15.2 million in the second quarter of
fiscal 1998. For the six month period, interest expense was up $6.7 million over
the comparable 1998 period to $35.5 million. The increase reflects the funding
of the Company's recent acquisitions and stock buyback program.
The provision for income taxes for the second quarter of fiscal 1999 was
36.6% which reflects an estimated effective income tax rate for the full year of
1999 of 36.0%.
Net income for the second quarter of fiscal 1999 was $27.8 million compared
with net income of $12.9 million in the second quarter of fiscal 1998. For the
six month period, net income before the cumulative effect of a change in
accounting principle in the first quarter of 1998 grew by $31.7 million to $50.7
million. The increase in net income reflects the higher net revenues and
associated 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 second quarter
and during the third quarter of the fiscal year. The Company typically generates
nearly all of its operating cash flow in the fourth quarter of the fiscal year
reflecting third and fourth quarter shipments and the sale of inventory built
during the first half of the fiscal year.
- 12 -
<PAGE>
Cash used in operations was $(171.0) million in the first half of fiscal
1999 compared with $(122.9) million in the first half of fiscal 1998. The
increase in cash used by operating activities reflects higher seasonal working
capital requirements primarily in finished goods inventories to allow for a
better order match rate in the second half of the year. Partially offsetting the
increase in working capital was a higher level of net income compared with the
first half of fiscal 1998.
Cash used in investing activities was $(67.1) million for the first half
of fiscal 1999 compared with $(159.8) million in the first half of fiscal 1998.
Capital expenditures were $33.1 million in the first half of fiscal 1999
compared with $72.1 million in the first half of fiscal 1998. Fiscal 1999
included amounts for information systems implementations (net of reimbursements
received of $24.0 million) and store fixture programs. 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 $245.2 million in the first
half of fiscal 1999 compared with $285.0 million in the first half of fiscal
1998. The increase in the Company's revolving credit balance during the first
half of the fiscal year of $371.2 million was higher than the $329.0 million
increase in the first half of fiscal 1998 due to the increase in cash used by
operating activities as previously discussed. The Company paid approximately
$111.1 million for the repurchase of shares in the first half of fiscal 1999
compared with $53.8 million in the first half of fiscal 1998. The Company repaid
$3.5 million of long term debt in the first half of fiscal 1999 compared with
$4.7 million in the first half 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.
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 are to achieve competitive benefits for the Company,
as well as assuring that all information systems will meet Year 2000 compliance.
Full implementation of this program is expected to require expenditures of
approximately $3.7 million over the next three months, primarily for Year 2000
compliance and system upgrades. Funding requirements have been incorporated 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. The implementation and testing processes are complete for the Calvin
Klein underwear and Chaps by Ralph Lauren businesses and are anticipated to be
completed by October 1999 for the remainder of the Company's businesses.
- 13 -
<PAGE>
As a part of its Year 2000 compliance program, the Company is in the
process of testing its Year 2000 readiness for critical business processes and
application systems. The Company has addressed issues identified during this
test period. 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
remediation is not fully successful or 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's contingency planning includes upgrading current
information systems operating and application software to Year 2000 compliance.
Such remediation costs have been charged to operations as incurred.
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
process can be completed on the timetable described above or that the
remediation process will be fully effective. The failure to identify and
remediate 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
fiscal year beginning January 3, 2001, 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
- 14 -
<PAGE>
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 July 3, 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 July 3, 1999, the net fair value asset of all financial instruments
(primarily interest rate swap agreements) with exposure to interest rate risk
was approximately $6.4 million. The potential decrease in fair value resulting
from a hypothetical 10% shift in interest rates would be approximately $17.2
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 July 3, 1999, the net fair value asset of financial instruments with
exposure to foreign currency risk, which included primarily currency option
contracts, was $0.2 million. The potential decrease in fair value resulting from
a hypothetical 10% adverse change in quoted foreign currency exchange rates
would be limited to $0.2 million, the fair value of these options.
- 15 -
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders of the Company held on May 6, 1999, the
shareholders of the Company (i) re-affirmed the performance goals under The
Warnaco Group, Inc. Supplemental Incentive Compensation Plan (the number of
affirmative votes cast was 46,848,515 and the number of negative votes cast was
2,165,402) and (ii) elected the following nominees to the Company's Board of
Directors:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
Joseph H. Flom........................... 47,878,468 -- 1,157,617
Joseph A. Califano, Jr................... 48,198,672 -- 837,413
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter of
fiscal 1999.
- 16 -
<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.
<TABLE>
<S> <C>
THE WARNACO GROUP, INC.
Date: August 17, 1999 By: /s/ WILLIAM S. FINKELSTEIN
----------------------------------
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and Accounting
Officer
Date: August 17, 1999 By: /s/ STANLEY P. SILVERSTEIN
-----------------------------------
Stanley P. Silverstein
Vice President, General Counsel
and Secretary
</TABLE>
- 17 -
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as.......................'r'
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS OF THE WARNACO GROUP, INC. FOR THE QUARTER
ENDED JULY 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 18,833
<SECURITIES> 0
<RECEIVABLES> 306,744
<ALLOWANCES> (20,773)
<INVENTORY> 586,461
<CURRENT-ASSETS> 932,163
<PP&E> 376,940
<DEPRECIATION> (135,888)
<TOTAL-ASSETS> 2,011,315
<CURRENT-LIABILITIES> 675,979
<BONDS> 708,938
102,370
0
<COMMON> 655
<OTHER-SE> 512,597
<TOTAL-LIABILITY-AND-EQUITY> 2,011,315
<SALES> 484,737
<TOTAL-REVENUES> 484,737
<CGS> 311,474
<TOTAL-COSTS> 422,162
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,679
<INCOME-PRETAX> 43,896
<INCOME-TAX> 16,050
<INCOME-CONTINUING> 27,846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,846
<EPS-BASIC> .50
<EPS-DILUTED> .49
</TABLE>
