<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 1, 2000
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 of (I.R.S. Employer
Incorporation or organization) Identification No.)
90 Park Avenue
New York, New York 10016
(Address of registrant's principal executive offices)
(212) 661-1300
(Registrant's telephone number, including area code)
------------------------
Copies of all communications to:
The Warnaco Group, Inc.
90 Park Avenue
New York, New York 10016
Attention: Vice President and General Counsel
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes [ ] No
The number of shares outstanding of the registrant's Class A Common
Stock as of August 11, 2000 is as follows: 52,692,100.
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
July 1, January 1,
2000 2000
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 11,940 $ 9,328
Accounts receivable, less reserves of $23,699 and $32,872 respectively 339,588 314,961
Marketable securities 700 72,921
Inventories 638,247 734,439
Other current assets 39,572 66,015
----------- ----------
Total current assets 1,030,047 1,197,664
Property, plant and equipment (net of accumulated depreciation
of $181,086 and $152,946, respectively) 359,885 326,352
----------- -----------
Other assets:
Excess of cost over net assets acquired - net 836,797 842,262
Other assets - net 334,160 337,997
Deferred income taxes 115,485 58,710
----------- -----------
Total other assets 1,286,442 1,238,969
----------- -----------
$2,676,374 $2,762,985
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt 12,150 11,052
Short-term debt 222,628 133,752
Accounts payable 470,777 599,768
Accrued liabilities 136,053 111,262
Income taxes payable 10,238 16,217
Deferred income taxes 8,470 7,468
----------- -----------
Total current liabilities 860,316 879,519
----------- -----------
Long-term debt 1,178,976 1,187,951
----------- -----------
Other long-term liabilities 53,637 29,295
----------- -----------
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities ($120,000 - par value) of Designer Finance Trust Holding
Solely Convertible Debentures 103,143 102,904
----------- -----------
Stockholders' equity:
Common stock: $.01 par value 654 654
Additional paid-in capital 961,368 961,368
Accumulated other comprehensive income (loss) (17,554) 24,877
Deficit (141,922) (99,461)
Treasury stock, at cost (313,840) (313,138)
Unearned stock compensation (8,404) (10,984)
----------- -----------
Total stockholders' equity 480,302 563,316
----------- -----------
$2,676,374 $2,762,985
=========== ============
</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 Six Months Ended
------------------------------ ---------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
-------- ------ ------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues $596,559 $484,737 $1,203,547 $928,840
Cost of goods sold 497,958 311,474 924,225 601,488
-------- -------- ---------- ---------
Gross profit 98,601 173,263 279,322 327,352
Selling, general and administrative expenses 157,663 110,688 301,599 212,562
-------- -------- ---------- ---------
Operating income (loss) (59,062) 62,575 (22,277) 114,790
Investment income -- -- (42,782) --
Interest expense 34,465 18,679 68,317 35,512
-------- -------- ---------- ---------
Income (loss) before provision for income taxes (93,527) 43,896 (47,812) 79,278
Income tax provision (benefit) (31,135) 16,050 (13,992) 28,540
-------- -------- ---------- ---------
Net income (loss) $(62,392) $27,846 $(33,820) $50,738
======== ======== ========== ==========
-------- -------- ---------- ---------
Basic earnings (loss) per common share $ (1.18) $ 0.50 $ (0.64) $ 0.89
======== ======== ========== ==========
-------- -------- ---------- ----------
Diluted earnings (loss) per common share $ (1.18) $ 0.49 $ (0.64) $ 0.87
======== ======== ========== ==========
-------- -------- ---------- ---------
Cash dividends declared per share of common stock $ 0.09 $ 0.09 $ 0.18 $ 0.18
======== ======== ========== ==========
Shares used in computing earnings (loss) per share:
Basic 52,821 56,034 52,788 57,063
======== ======== ========== ==========
Diluted 52,821 57,241 52,788 58,295
======== ======== ========== ==========
</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 FLOW
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
July 1, July 3,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (33,820) $ 50,738
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Pre-tax gain on sale of investment (42,782) --
Depreciation and amortization 46,516 28,485
Write-off of property, plant & equipment 3,205 --
Amortization of unearned stock compensation 2,580 2,941
Deferred income taxes (30,456) 25,478
Change in operating assets and liabilities:
Accounts receivable (24,627) (86,602)
Inventories 96,192 (112,734)
Other current assets 26,737 (13,665)
Accounts payable and accrued liabilities (104,200) (64,191)
Income taxes payable (5,979) (1,451)
--------- ---------
Net cash from operating activities (66,634) (171,001)
Cash flow from investing activities:
Disposals of fixed assets 290 --
Purchase of property, plant & equipment (62,201) (33,073)
Acquisition of assets and licenses -- (10,208)
Proceeds from sale of marketable securities 50,357 --
Increase in intangible and other assets (11,080) (23,863)
--------- ---------
Net cash from investing activities (22,634) (67,144)
Cash flow from financing activities:
Net borrowing under credit facilities 84,334 371,163
Proceeds from termination of interest rate swaps 26,076 --
Proceeds from the exercise of stock options and
repayment of notes receivable from employees -- 1,502
Purchase of treasury shares and payment of
withholding tax on restricted stock/option exercises (702) (112,875)
Repayments of debt (1,484) (3,500)
Cash dividends paid (9,577) (10,333)
Other (1,557) (751)
--------- ---------
Net cash from financing activities 97,090 245,206
Effect on cash due to currency translation (5,210) 2,277
--------- ---------
Increase in cash 2,612 9,338
Cash at beginning of period 9,328 9,495
--------- ---------
Cash at end of period $ 11,940 $ 18,833
========== =========
</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)
(Unaudited)
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 the Company, 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 1, 2000 as well as its results of
operations and cash flows for the periods ended July 1, 2000 and July 3, 1999.
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/A for the fiscal year ended January 1, 2000. Certain amounts for prior
periods have been reclassified to be comparable with the current period
presentation.
Impact of New Accounting Standards: In June 2000, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." This statement addresses a limited number of issues
causing implementation difficulties for entities applying SFAS No. 133. SFAS No.
133 requires that an entity recognize all derivative instruments as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (i) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (ii) a hedge
of the exposure to variable cash flows of a forecasted transaction, or (iii) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company is currently
evaluating the effects of this statement on its consolidated financial position,
liquidity, cash flows and results of operations.
In May 2000, the FASB's Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 00-14, "Accounting for Certain Sales Incentives," which addresses
the accounting for sales incentives, rebates, coupons and free products or
services. EITF No. 00-14 is effective for calendar year companies in the fourth
quarter of 2000 and would be treated as a cumulative effect of an accounting
change or prospectively to new sales incentives offered on or after the
effective date. Prior period financial statements presented for comparative
purposes would be reclassified to comply with the income statement display
requirements. The Company is currently evaluating the impact that adoption of
EITF No. 00-14 will have on its financial position and results of operations.
In March 2000, the Emerging Issues Task Force issued Issue 00-7 "Accounting
application of EITF Issue No. 96-13, `Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,' to
Equity Derivative Transactions That Require Net Cash Settlement If Certain
Events Occur". This EITF will require the Company to mark to market the Equity
Forward Purchase Transaction Agreements ("Equity Agreements") entered into in
the first quarter of fiscal 2000 unless the Company amends such agreements by
December 31, 2000 to remove provisions which require net cash settlement. See
Note 2 to the consolidated condensed financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain of the SEC Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. This
5
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
bulletin, through its subsequent revised releases, SAB No. 101A and No. 101B,
is effective for registrants no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. The Company does not expect the
implementation of this bulletin to have a significant impact on its results of
operations or equity.
Long-term debt: As of July 1, 2000, the Company has excluded short-term
obligations relating to a bridge facility totaling $459,539 from current
liabilities because it intends to refinance this obligation on a long-term
basis. The Company has the ability to consummate the refinancing by utilizing
long-term commitments in place as of July 1, 2000. On July 19, 2000, the Company
received commitments from its lead banks to, among other things, extend this
facility, subject to closing conditions, through August 12, 2002. See Note 5 to
the consolidated condensed financial statements.
Note 2 - Equity
As of July 1, 2000 and January 1, 2000, Class A common stock
outstanding was 53,162,185 shares, net of 12,245,209 shares held in treasury and
53,229,388 shares, net of 12,163,650 held in treasury, respectively. The Company
is authorized to repurchase an additional 10,300,000 shares under its existing
stock repurchase program.
In connection with the Company's stock repurchase program, the Company
entered into Equity Agreements with two banks for terms of up to two and
one-half years. The Equity Agreements allow for the purchase by the Company of
up to 5.2 million shares of the Company's Common Stock. The Equity Agreements
are required to be settled by the Company, in a manner elected by the Company,
on a physical settlement, cash settlement or net share settlement basis within
the duration of the Equity Agreements. The Equity Agreements require net cash
settlement in an event of default, as defined. As of July 1, 2000, the banks had
purchased 5.2 million shares under the Equity Agreements. As of July 1, 2000,
the prices at which the Company would effect physical settlement or settle in
cash or in net shares with the two banks under the Equity Agreements are $10.65
and $12.67. Dividends on the shares outstanding under the Equity Agreements are
reimbursed to the Company. In accordance with the terms of the Equity
Agreements, the banks could, based on the current price of the Company's stock
and action by one of the applicable rating agencies, elect to terminate the
Equity Agreements in which event physical settlement by the Company would be
required. Each of the banks has deferred action in connection with the Equity
Agreements pending further amendments to extend the termination date of the
Equity Agreements to August 12, 2002. If these Equity Agreements were settled on
a net cash or physical settlement basis at July 1, 2000, the Company would be
required to make a payment of approximately $20,200 or approximately $60,600
respectively.
Note 3 - Special Charges
Second Quarter of fiscal 2000
As a result of a strategic review of the Company's worldwide
businesses, manufacturing, distribution and other facilities, and product lines
and styles, the Company initiated a global implementation of programs designed
to create cost efficiencies through plant consolidations, workforce reductions
and consolidation of the finance, manufacturing and operations organizations
within the Company. As a result of the decision to implement these programs, the
Company recorded restructuring, special charges and other non-recurring items of
$105,963 ($69,936 net of income tax benefits) during the second quarter of
fiscal 2000 related to costs to exit certain facilities and activities and
consolidate such operations, including charges related to inventory write-downs
and other asset write-offs, facility shutdown and leasehold and contract
termination costs, employee termination and severance benefits, retail outlet
store closings and other related costs. Of the total amount of
6
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
charges, $90,931 is reflected in cost of goods sold and $15,032 is
reflected in selling, administrative and general expenses. The detail of the
charge, including costs incurred and reserves remaining for costs estimated to
be incurred through completion of the aforementioned programs, anticipated by
the end of fiscal 2000, are summarized below;
<TABLE>
<CAPTION>
Facility
Inventory shutdown Employee
write-down and and contract termination
other asset termination and severance Retail outlet
write-offs costs costs store closings Other Total
------------------ ---------------- ---------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Provisions $57,879 $22,237 $14,472 $ 10,375 $ 1,000 $105,963
Cash Reductions -- (11,822) (2,922) -- (273) (15,017)
Non-cash reductions (14,474) -- -- -- -- (14,474)
---------- --------- -------- --------- --------- ---------
Balance as of
July 1, 2000 $43,405 $10,415 $11,550 $ 10,375 $ 727 $ 76,472
========== ========= ======== ========= ========= ==========
</TABLE>
Inventory write-down and other asset write-offs $(57,879)
Management's strategic review of the Company's manufacturing and distribution
facilities and product lines and styles resulted in the decision to close six
manufacturing plants and eight distribution facilities and discontinue the
manufacturing of certain raw materials and product styles that were associated
with theses facilities. Included in the above amount are charges for inventory
write-downs for obsolete raw materials and finished goods of $55,089 and
write-off of fixed assets and investments of $2,790. Of the total charge,
$55,767 is included in cost of sales and $2,112 is included in selling, general
and administrative expenses.
Facility shutdown and contract termination costs $(22,237)
Costs associated with the shutdown of the facilities mentioned above include
plant reconfiguration and shutdown costs of $10,593, which were charged to
expense as incurred, lease obligation costs of $2,984 and contractual
obligations of $8,660. Of the total charge, $17,663 is included in cost of sales
and $4,574 is included in selling, general and administrative expenses.
Employee termination and severance costs $(14,472)
The Company recorded charges of $8,239 to cost of goods sold related to
providing severance and benefits to 1,502 manufacturing related employees
terminated as a result of the closure of certain facilities. The Company also
recorded charges of $6,233 to selling, general and administrative expenses
related to providing severance and benefits to 521 distribution and
administrative employees terminated as a result of the closure of certain
facilities and administrative redundancy.
Retail outlet stores closings $(10,375)
In an effort to improve the overall profitability of the retail outlet division,
the Company announced plans to close 8 retail outlet stores. Included in the
charge are costs for the write-down of inventory of discontinued product lines
and styles which the Company intends to liquidate through these stores of
$9,262, the write-off of fixed assets
7
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
associated with these stores of $415 and the costs of terminating leases of
$698. Of the total charge, $9,262 is included in cost of sales and $1,113 is
included in selling, general and administrative expenses.
Other related costs $(1,000)
Also included in the charge are $1,000 of legal expenses related to all of the
global initiatives mentioned above which is included in selling, general and
administrative expenses.
First Quarter of Fiscal 2000
In the first quarter of fiscal 2000, the Company recorded severance costs of
$6,547 ($4,321 net of income tax benefit), $849 related to the cost of providing
severance benefits to 364 manufacturing employees which was charged to cost of
sales and $5,698 related to 120 management and administrative employees at the
date they were terminated, which was charged to selling, general and
administrative expenses. All such costs have been paid as of July 1, 2000.
Note 4 - Financial Instruments
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. In the first
quarter of fiscal 2000 the Company sold its investment in InterWorld Corporation
resulting in a realized pre-tax gain of $42,782 ($26,739 net of taxes), which is
recorded as investment income.
In the first quarter of fiscal 2000, the Company received cash proceeds
of $26,076 from the termination of certain interest rate swaps. Three of these
swaps had converted variable rate borrowings of $610,000 to a fixed rate of
5.99% through September 2004 while a fourth swap had converted variable rate
borrowings of $75,000 to a fixed rate of 6.66% through September 2003. The
$26,076 gain from the termination of these swaps will be recognized in interest
income over the remaining life of the swaps.
The Company entered into five new interest rate swaps during the first
quarter of fiscal 2000 which convert variable rate borrowings of $637,000 to an
average fixed rate of 6.65% for periods ranging from nine to twelve months.
Note 5 - Debt
On June 19, 2000, Warnaco requested and its lenders agreed to waive
certain financial covenants contained in certain of its loan agreements for the
fiscal quarter ending July 1, 2000 including the $600,000 and $450,000 Revolving
Credit Facilities, $600,000 364-day Facility, $500,000 Trade Credit Facility,
certain European Credit Lines and the Canadian Credit Facility. The waivers
executed on June 19, 2000 were effective through July 27, 2000. As of July 19,
2000, these waivers were extended through September 30, 2000.
On July 19, 2000, the Company received commitments from its lead banks
to amend and extend up to $2.9 billion of existing financing facilities through
August 12, 2002. The commitments from these lead banks represent $1.7 billion of
the Company's worldwide debt facilities. The agreements, which are subject to
various closing conditions described below, are expected to close in September
2000. The contractual maturities of the Company's longer-term debt are
unaffected by the transactions. The agreements will extend the maturities of the
$500 million trade credit and $600 million bridge loan facilities through August
12, 2002. These facilities
8
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
presently have contractual maturities in July and October 2000,
respectively. As a result, the Company will have no material debt maturing prior
to August 2002. In the interim period, prior to closing, the Company will use
bilateral trade facilities, including a supplemental trade credit facility, for
its normal trade and letter of credit requirements. The amended financing
facilities will be secured by assets owned by Warnaco and its subsidiaries. The
new facility agreements are subject to customary closing conditions, the
completion of bank debt amendments by the holders of the Company's committed and
bilateral financing facilities including approval of the amendments by the
requisite lenders, the execution of appropriate documentation, the satisfactory
completion of confirmatory due diligence by the bank agents, and the absence of
any material adverse change in Warnaco and its subsidiaries taken as a whole.
Note 6 - Acquisitions
Authentic Fitness Corporation
In December 1999, the Company acquired all of the outstanding common
stock of Authentic Fitness Corporation ("Authentic Fitness") for $437,100,
excluding debt assumed of approximately $154,170 and other costs incurred in the
acquisition of $3,255. The acquisition (all of which was financed) was accounted
for as a purchase. Accordingly, the accompanying consolidated financial
statements include the results of operations for Authentic Fitness commencing on
December 16, 1999. The preliminary allocation of the total purchase price,
exclusive of cash acquired of approximately $7,000, to the fair value of the net
assets acquired and liabilities assumed is summarized as follows:
Fair value of assets acquired $674,256
Liabilities assumed (79,731)
----------
Purchase price--net of cash balances $594,525
==========
Included in intangible and other assets for the Authentic Fitness
acquisition is $378,417 of goodwill which is being amortized over 40 years. The
final assessment of the purchase accounting will be completed during fiscal
2000.
The following summarized unaudited pro forma information combines
financial information of the Company with Authentic Fitness for the six months
ended July 3, 1999, assuming the acquisition had occurred as of January 2, 1999.
The unaudited pro-forma information does not reflect any cost savings or other
benefits anticipated by the Company's management as a result of the acquisition.
The unaudited pro-forma information reflects interest expense on the additional
financing of $437,100 incurred for the acquisition and the amortization of
goodwill using a 40-year life.
The unaudited pro-forma combined information is not necessarily
indicative of the results of operations of the combined companies, had the
acquisition occurred on the dates specified above, nor is it indicative of
future results of operations for the combined companies at any future date or
for any future periods.
9
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
July 3,
1999
---------------
<S> <C>
Statement of Income Data:
Net revenues $1,216.3
Net income $ 64.7
------------
Basic earnings per common share $ 1.13
============
Diluted earnings per common share $ 1.11
============
</TABLE>
A.B.S. Clothing Collection, Inc.
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 and other costs incurred in the acquisition of approximately
$1,208. The acquisition was accounted for as a purchase. The preliminary
allocation of the purchase price to the fair value of assets acquired and
liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $59,720
Liabilities assumed (4,012)
-----------
Purchase price -- net of cash balances $55,708
===========
</TABLE>
The acquisition did not have a material pro-forma impact on 1999
consolidated earnings. Included in intangibles and other assets for the A.B.S.
acquisition is $53,820 of goodwill, which is being amortized over 20 years. The
final assessment of the purchase accounting will be completed during fiscal
2000.
Note 7 - Inventory
<TABLE>
<CAPTION>
July 1, January 1,
2000 2000
------------ -----------
<S> <C> <C>
Finished goods $495,904 $563,583
Work in process 78,742 89,422
Raw materials 63,601 81,434
------------ -----------
$638,247 $734,439
============ ===========
</TABLE>
Note 8 - Summarized Financial Information -- Designer Holdings Ltd.
The following is summarized unaudited financial information of the
Company's wholly-owned subsidiary, Designer Holdings Ltd, as of July 1, 2000 and
January 1, 2000 and for the three months ended July 1, 2000 and July 3, 1999,
and for the six months ended July 1, 2000 and July 3, 1999, respectively, which
is presented as required by reason of the public preferred securities issued by
Designer Holdings. 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,
10
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
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. In the first
quarter of fiscal 2000 the Company paid in cash the remaining $209 reserve
related to employee severance and other related costs.
The information below is not indicative of the future operating results.
<TABLE>
<CAPTION>
Balance sheet summary: July 1, January 1,
2000 2000
----------------- ------------------
<S> <C> <C>
Current assets $187,050 $160,296
Noncurrent assets 504,493 549,090
Current liabilities 66,172 107,408
Noncurrent liabilities 37,344 29,168
Redeemable preferred securities 103,143 102,904
Stockholders' equity 484,884 469,906
</TABLE>
<TABLE>
<CAPTION>
Income statement summary: Three Months Ended Six Months Ended
------------------------------- -------------------------------
July 1, July 3, July 1, July 3,
2000 (a) 1999 (a) 2000 (a) 1999 (a)
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues $117,520 $131,525 $236,311 $251,275
Cost of goods sold 81,380 85,770 164,369 166,133
Net income 6,599 14,712 14,978 25,713
</TABLE>
(a) Excludes net revenues of $19,147 and $19,741 for the three months ended
July 1, 2000 and July 3, 1999 and $39,377 and $35,381 for the six
months ended July 1, 2000 and July 3, 1999, respectively, reported as
Retail Store division net revenues. As a result of the 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 9 - Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Six Months Ended
------------------
July 1, July 3,
2000 1999
------- -------
<S> <C> <C>
Cash paid for:
Interest, including $1,112 and $1,392 capitablized in the
first half of fiscal 2000 and 1999, respectively $69,776 $34,449
Income taxes, net of refunds received (5,602) 3,024
</TABLE>
11
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
Note 10 - Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings
(loss) per share:
Net income (loss) $(62,392) $27,846 $(33,820) $50,738
========== ========= ========= ========
Denominator for basic earnings (loss) per share -
weighted average shares 52,821 56,034 52,788 57,063
Effect of dilutive securities:
Employee stock options 23 570 19 391
Restricted stock shares 314 489 372 467
Shares under equity agreements 1,596 148 895 374
---------- --------- --------- --------
Dilutive potential common shares 1,933(a) 1,207 1,286(a) 1,232
---------- --------- --------- --------
Denominator for diluted earnings (loss) per share -
weighted average adjusted shares (a) 52,821 57,241 52,788 58,295
========== ========= ========= ========
Basic earnings (loss) per share $(1.18) $0.50 $ (0.64) $ .89
========== ========= ========= ========
Diluted earnings (loss) per share $(1.18) $0.49 $ (0.64) $ .87
========== ========= ========= ========
</TABLE>
(a) The effect of dilutive securities was not included in the computation of
diluted earnings (loss) per share for the three-months and the six-months ended
July 1, 2000 because the effect would have been anti-dilutive.
Options to purchase shares of common stock that were outstanding during
the six-month period of fiscal 2000 and 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 are shown below.
<TABLE>
<CAPTION>
JULY 1, JULY 3,
2000 1999
---- ----
<S> <C> <C>
Number of shares under option 16,909,336 14,767,836
Range of exercise price $10.88-$42.88 $18.25-$42.88
</TABLE>
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 11 - Business Segments
The Company operates in three segments: Sportswear and Accessories,
Intimate Apparel, and Retail Stores. The Company evaluates the performance of
its segments based on earnings before interest, taxes, and amortization of
intangibles and deferred financing costs and restructuring, special charges and
other non-recurring items.
The Sportswear and Accessories segment designs, manufactures, imports
and markets moderate to premium priced men's, women's, junior's and children's
sportswear and Jeanswear, men's accessories and men's,
12
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
women's, junior's and children's active apparel under the Chaps by Ralph
Lauren'r', Calvin Klein'r', Catalina'r', A.B.S. by Allen Schwartz'r', Speedo'r',
Oscar de la Renta'r', Anne Cole'r', Cole of California'r', Sandcastle'r', Sunset
Beach'r', Ralph Lauren'r', Polo Sport Ralph Lauren'r', Polo Sport-RLX'r' and
White Stag'r' brand names.
The Intimate Apparel segment designs, manufactures and markets moderate
to premium priced intimate apparel for women under the Warner's'r', Olga'r',
Calvin Klein'r', Lejaby'r', Van Raalte'r', Fruit of the Loom'r', Weight
Watchers'r' and Bodyslimmers'r' brand names, and men's underwear under the
Calvin Klein'r' brand name.
The Retail Store segment which is comprised of both outlet as well as
full-price retail stores, principally sells the Company's products to the
general public through 137 stores under the Speedo'r', Authentic Fitness'r' name
as well as 123 Company outlet stores for the disposition of excess and irregular
inventory. The Company does not manufacture or source products exclusively for
the outlet stores.
Information by business segment is set forth below:
<TABLE>
<CAPTION>
Sportswear
and Intimate Retail
Accessories Apparel Stores Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Three months ended July 1, 2000:
---------------------------------------------
Net revenues $344,376 $200,741 $ 51,442 $ 596,559
Adjusted EBITDA 65,883 25,952 (1,138) 90,697
Depreciation 5,088 5,549 963 11,600
Adjusted EBIT 60,795 20,403 (2,101) 79,097
Three months ended July 3, 1999:
---------------------------------------------
Net revenues $230,910 $219,743 $ 34,084 $ 484,737
Adjusted EBITDA 42,300 49,061 3,339 94,700
Depreciation 3,243 4,294 823 8,360
Adjusted EBIT 39,057 44,767 2,516 86,340
Six months ended July 1, 2000:
---------------------------------------------
Net revenues $ 703,400 $400,640 99,507 $1,203,547
Adjusted EBITDA 135,765 52,098 (10,323) 177,540
Depreciation 9,890 11,251 1,705 22,846
Adjusted EBIT 125,875 40,847 (12,028) 154,694
Six months ended July 3, 1999:
---------------------------------------------
Net revenues $439,172 $430,404 $ 59,264 $ 928,840
Adjusted EBITDA 76,100 96,703 4,097 176,900
Depreciation 5,436 8,633 1,433 15,502
Adjusted EBIT 70,664 88,070 2,664 161,398
</TABLE>
13
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
A reconciliation of total segment Adjusted EBIT to total consolidated
income before taxes for the three and six months ended July 1, 2000 and July 3,
1999, respectively, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -------------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Total adjusted EBIT for reportable segments $ 79,097 $86,340 $154,694 $161,398
General corporate expenses not allocated 20,337 17,398 40,793 33,625
Restructuring, special charges and other non-recurring items 105,963 - 112,510 -
Depreciation of corporate assets and amortization 11,859 6,367 23,668 12,983
Investment income - - (42,782) -
Interest expense 34,465 18,679 68,317 35,512
---------- -------- -------- ---------
Income (loss) before provision for income taxes $(93,527) $43,896 $(47,812) $ 79,278
========== ======== ========== =========
</TABLE>
Note 12 - Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
---- ---- ---- ------
<S> <C> <C> <C> <C>
Net income (loss) $(62,392) $ 27,846 $(33,820) $ 50,738
-------- -------- -------- --------
Other comprehensice income (loss):
Foreign currency translation adjustments (4,652) 8,142 (3,359) 2,754
Change in unrealized gains -- (360) (64,635) 602
Income tax (expense)/benefit -- 136 25,563 (210)
-------- -------- -------- --------
Total other comprehensive income (loss) (4,652) 7,918 (42,431) 3,146
-------- -------- -------- --------
Comprehensive income (loss) $(67,044) $ 35,764 $(76,251) $ 53,884
======== ======== ======== ========
</TABLE>
The components of accumulated other comprehensive income (loss) as of
July 1, 2000 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
July 1, January 1,
2000 2000
------ ----------
<S> <C> <C>
Foreign currency translation adjustments $(17,448) $(14,089)
Unrealized holding (loss) gain, net (106) 38,966
--------- ---------
Total accumulated other comprehensive
income (loss) $(17,554) $ 24,877
========= =========
14
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, Excluding Share Data)
(Unaudited)
Note 13 - Legal Proceedings
Between October 12, and October 13, 1999, six punitive class action
complaints were filed in Delaware Chancery Court against the Company, Authentic
Fitness Corporation and certain of their officers and directors in connection
with the Company's proposed acquisition of Authentic Fitness.
On December 20, 1999, an Amended Class Action Complaint ("Amended
Complaint") was filed and on January 6, 2000 the court designated the Amended
Complaint as the operative complaint for a consolidated action captioned: In Re
Authentic Fitness Corporation Shareholders Litigation, C.A. No. 17464-NC
(consolidated). In the Amended Complaint (and all six complaints made virtually
identical claims), plaintiffs allege an unlawful scheme by certain of the
defendants, in breach of their fiduciary duties, to allow the Company to acquire
Authentic Fitness shares for inadequate consideration. Plaintiffs are seeking to
have the court declare the action a proper class action, to declare that the
defendants have breached their fiduciary duties to the class, and in the event
the transaction is consummated, rescission thereof and damages awarded to the
Class. On February 14, 2000, the Company moved to dismiss the Amended Complaint.
The Company believes the claims to be without merit and intends to vigorously
defend these actions.
On May 30, 2000, Calvin Klein, Inc. and the Calvin Klein Trademark
Trust filed a complaint in the U.S. District Court in the Southern District
of New York (Calvin Klein Trademark Trust, et al. v. The Warnaco Group, Inc.
et al. No. 00 CIV. 4052 (JSR) (S.D.N.Y.)) against The Warnaco Group, Inc.,
various other Warnaco entities, and Wachner alleging, inter alia, claims
for breach of contract and trademark violations. The complaint seeks, inter
alia, termination of certain licensing agreements and trademark rights,
injunctive relief and damages.
On June 26, 2000, the Warnaco defendants filed an answer and
counterclaims (amended on July 31, 2000) against Calvin Klein, Inc. for, inter
alia, breach of the jeanswear and men's accessories licenses and breach of
fiduciary duty, and against Calvin Klein, Inc. and Calvin Klein personally for
tortious interference with business relations, defamation and trade libel.
Warnaco is seeking, inter alia, damages, injunctive and declaratory relief.
On August 3, 2000, the Court announced it would grant defendants'
motion to dismiss Wachner from four counts of the complaint. Warnaco's motion to
dismiss certain additional counts and plaintiffs motion to dismiss certain of
Warnaco's counterclaims are pending.
The Company believes the claims to be without merit and intends to
vigorously defend and to pursue its counterclaims. The impact of the litigation
is expected to reduce the Company's sales of Calvin Klein products in fiscal
2000 and 2001.
The Company is not a party to any other litigation that individually or
in the aggregate is material to the business of the Company.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations
STATEMENT OF OPERATIONS (SELECTED DATA)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- ------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
---- ---- ---- -----
(Amounts in Millions of Dollars)
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues $596.6 $484.7 $1,203.5 928.8
Cost of goods sold (a) 498.0 311.5 924.2 601.5
------ ------ ------ ------
Gross profit 98.6 173.2 279.3 327.3
% of net revenues 16.5% 35.7% 23.2% 35.2%
Selling, general and administrative expenses (b) 157.7 110.7 301.6 212.6
------ ------ ------ ------
Operating income (loss) (59.1) 62.5 (22.3) 114.7
% to net revenues (9.9)% 12.9% (1.9)% 12.3%
Investment income -- -- (42.8) --
Interest expense 34.5 18.7 68.3 35.5
Income tax provision (benefit) (31.2) 16.0 (14.0) 28.5
------ ------ ------ ------
Net income (loss) $(62.4) $ 27.8 $(33.8) $ 50.7
====== ====== ====== ======
</TABLE>
---------
(a) Includes $90.9 and $91.8 of restructuring, special charges and other
non-recurring items in the second quarter and first half of fiscal 2000
respectively, related to global operating strategic initiatives.
(b) Includes $15.0 and $20.7 of restructuring, special charges and other
non-recurring items in the second quarter and first half of fiscal 2000
respectively, related to global operating strategic initiatives.
Net revenues in the second quarter of fiscal 2000 were $596.6 million,
an increase of $111.9 million or 23.1% from the $484.7 million recorded in the
second quarter of fiscal 1999. Net revenues contributed by the 1999 acquisition
of Authentic Fitness ($155.3 million) and ABS ($10.6 million) amounted to $165.9
million. For the six-month period, net revenues were $1,203.5 million, an
increase of $274.7 million or 29.6% from the $928.8 million recorded for the
fiscal 1999 period. Net revenues contributed by the 1999 acquisition of
Authentic Fitness ($301.6 million) and ABS ($22.2 million) and Chaps Canada
($3.2 million) amounted to $327.0 million.
Sportswear and Accessories Division. Net revenues increased
$113.5 million or 49.2% to $344.4 million in the second quarter of
fiscal 2000 compared with $230.9 million in the second quarter of
fiscal 1999. Net revenues contributed by the 1999 acquisitions of
Authentic Fitness ($139.5 million) and ABS ($10.6 million) amounted to
$150.1 million. Excluding acquisitions, net revenues of $194.3 million
were 15.9% lower than the fiscal quarter of 1999. Chaps net revenue in
the quarter was $55.5 million, down 36.0% from $86.7 million last year.
The decrease in net revenue is primarily due to Chaps being adversely
affected by the discounted pricing policy of its competitors as well as
their lost customers, SRI and Uptons due to bankruptcy. Shipments
resumed to SRI subsequent to July 1, 2000. In addition Calvin Klein
Jeans Division revenues were down $4.8 million to $132.5 million from
$137.3 million primarily in the Junior division or 3.5% from last year.
For the six month period net revenues increased $264.2
million or 60.1% to $703.4 million compared with $439.2 million for the
six month period last year. Net revenues contributed by the 1999
acquisitions of Authentic Fitness ($271.6 million), ABS ($22.2 million)
and Chaps Canada ($3.2 million) amounted to $297.0 million. Excluding
acquisitions, net revenues of $406.4 million were down 7.5% compared to
the same period last year. The decrease in net revenue is primarily in
Chaps, down 16.3% to $123.9 million from $148.1 million last year,
primarily due to the adverse effect of the discounted pricing
16
<PAGE>
policy of its competitors and the lost customers as cited above.
In addition, the Calvin Klein Jeans division's revenues were down
3.3% to $270.1 million from $279.4 million for the six month period
last year, primarily in the Juniors division.
Intimate Apparel Division. Net revenues decreased $19.0
million or 8.6% to $200.7 million in the second quarter of fiscal 2000
compared with $219.7 million in the second quarter of fiscal 1999.
Warner's and Olga decreased $3.3 million to $83.0 million from $86.3
million primarily due to the loss of three major customers (Uptons,
Eaton's and Mercantile). Calvin Klein underwear decreased $5.7 million
in the second quarter of fiscal 2000 primarily in Sleepwear to $65.1
million from $70.8 million last year. Lejaby increased $0.5 million to
$24.0 million despite a $2.7 negative effect related to the weakness of
the Euro against the U.S. dollar.
For the six month period, net revenues in the Intimate Apparel
division decreased $29.6 million or 6.9% to $400.7 million from $430.3
million during the six month period last year. Warners and Olga
decreased $14.9 million to $146.9 million from $161.8 million last year
due to their lost accounts mentioned above. Calvin Klein Underwear
decreased $2.2 million to $140.3 from $142.5 million, primarily in
Sleepwear and Lejaby decreased $3.2 million to $51.6 million from $54.8
million due to the weakness of the Euro against the U.S. dollar.
Retail Store Division. Net revenues increased $17.3 million or
50.7% to $51.4 million in the second quarter of fiscal 2000 compared
with $34.1 million in the second quarter of fiscal 1999. The
acquisition of Authentic Fitness contributed $15.8 million to net
revenues. Excluding net revenues of Authentic Fitness, net revenues
increased $1.5 million or 4.4% due to a significant effort made to
liquidate excess inventory and improve cash flow.
For the six month period of fiscal 2000, net revenues
increased 68.1% to $99.5 million compared with $59.2 million for the
six month period in fiscal 1999. The acquisition of Authentic Fitness
contributed $30.0 million to net revenues. Excluding Authentic Fitness,
net revenue of $69.5 million increased 17.4% due to a significant
effort made to liquidate excess inventory and improve cash flow.
Gross profit (excluding special charges) increased $16.3 million or 9.4% to
$189.6 million in the second quarter of fiscal 2000 compared with $173.2 million
in the second quarter of fiscal 1999. Gross margin was 31.8% in the second
quarter of fiscal 2000 compared with 35.7% in the second quarter of fiscal 1999.
For the six month period gross profit (excluding special charges) increased
$43.7 million or 13.4% to $371.0 million compared with $327.3 million recorded
for the fiscal 1999 period. Gross margin was 30.8% for the six months compared
to 35.2% last year. The decrease in gross margin is attributable to higher
off-price sales and increased markdowns taken in the first and second quarters
of fiscal 2000 to reduce inventories and improve cash flow. Also included in
cost of sales is $90.9 million and $91.8 million for the second quarter and six
months of fiscal 2000, respectively, related to the global operating initiatives
discussed above, see Note 3 to the consolidated condensed financial statements.
Gross profit on an as reported basis after these charges were $98.6 million and
$279.3 million for the second quarter and six months of fiscal 2000,
respectively.
Sportswear and Accessories Division. Gross profit increased
$35.7 million or 48.0% to $110.1 million in the second quarter of
fiscal 2000 compared with $74.4 million in the second quarter of fiscal
1999. Gross margins were 32.0% in the second quarter of fiscal 2000
compared with 32.2% in the second quarter of fiscal 1999. For the six
month period gross profit increased $84.9 million or 60.8% to $224.6
million compared with $139.7 million in the comparable fiscal 1999
period. Gross margin for the six month period of fiscal 2000 was 31.9%
compared to 31.8% for the same period last year. The flat gross margin
is due to higher margins of the newly acquired Authentic Fitness brands
offset by markdowns taken in the first and second quarters of
fiscal 2000 primarily to reduce Chaps and Calvin Klein junior's
inventories and improve cash flow.
Intimate Apparel Division. Gross profit (excluding special
charges) decreased $33.6 million or 37.9% to $55.0 million in the
second quarter of fiscal 2000 compared with $88.6 million in the second
quarter of fiscal 1999. Gross margins were 27.4% in the second quarter
of fiscal 2000 compared with
17
<PAGE>
40.3% in the second quarter of fiscal 1999. For the six month period
gross profit (excluding special charges) decreased $62.8 million or
37.4% to $105.2 million compared with $168.0 million in the fiscal
1999 period. Gross margin was 26.3% for the six month period of fiscal
2000 compared with 39.0% for the six month period of fiscal 1999.
The decrease in gross margin is due to markdowns taken in the first
and second quarters of fiscal 2000 to reduce inventories and improve
cash flow. In addition, restructuring, special and non-recurring
charges as outlined above were $81.7 million and $82.5 million for
the second quarter and six months of fiscal 2000.
Retail Store Division. Gross profit (excluding special
charges) increased $14.2 million or 137.3% to $24.5 million (47.6% of
net revenues) in the second quarter of fiscal 2000 compared with $10.3
million (30.3% of net revenues) in the second quarter of fiscal 1999.
For the six month Gross profit (excluding special charges) increased
$21.6 million or 109.7% to $41.3 million (41.5% of net revenues)
compared with $19.7 million (33.3% of net revenues) in the fiscal 1999
period. The increase in gross margin is due to higher margins in the
Authentic Fitness retail stores. In addition, restructuring, special
and non-recurring charges as outlined above were $9.3 million in the
second quarter and six months of fiscal 2000.
Selling, general and administrative expenses (excluding special
charges) increased $31.9 million or 28.9% to $142.6 million as compared to
$110.7 million in second quarter of fiscal 1999. Selling, general and
administrative expenses as a percentage of net revenue were 23.9% in the second
quarter of fiscal 2000 compared with 22.8% in the second quarter of fiscal 1999.
For the six month period, selling, general and administrative expenses
(excluding special charges) increased $68.3 million or 32.1% to $280.9 million
as compared to $212.6 million in 1999 period. Selling, general and
administrative expenses as a percentage of net revenue were 23.3% compared with
22.9% in the fiscal 1999 period. The increased selling, general and
administrative expenses as a percent of net sales is due to an increase in the
Company's Retail business (primarily Authentic Fitness), and higher depreciation
and amortization expense related to additional goodwill for acquisitions and
depreciation for systems implemented in fiscal 1999. Offsetting a majority of
the SG&A increase is cost saving initiatives implemented in the Company. Also
included in selling, general and administrative expenses is $15.0 million and
$20.7 million for the second quarter and six months of fiscal 2000,
respectively, related to the global operating initiatives discussed above, see
Note 3 to consolidated condensed financial statements. Selling, general and
administrative expenses on an as reported basis after these charges were $157.7
million and $301.6 million for the second quarter and six months of fiscal 2000
respectively.
Operating Profit
Sportswear and Accessories Division. Operating profit
increased $21.7 million or 55.7% to $60.8 million in the second quarter
of fiscal 2000 compared with $39.1 million in the second quarter of
fiscal 1999. For the six month period, operating profit increased $55.2
million or 78.1% to $125.9 million compared with $70.7 million in the
fiscal 1999 period. The increase in operating profit primarily was due
to the acquisitions of Authentic Fitness, Chaps Canada and ABS.
Intimate Apparel Division. Operating profit (excluding special
charges) decreased $24.4 million or 54.4% to $20.4 million in the
second quarter of fiscal 2000 compared with $44.8 million in the second
quarter of fiscal 1999. For the six month period operating profit
(excluding special charges) decreased $47.2 million or 53.6% to $40.8
million compared with $88.1 million in the fiscal 1999 period. The
decrease in operating profit primarily was due to markdowns taken in
the first and second quarters of fiscal 2000 to reduce inventories and
improve cash flow. In addition, restructuring, special and non-
recurring charges as outlined above were $90.0 million and $90.8
million in the second quarter and six months of fiscal 2000.
Retail Store Division. Operating profit (excluding special
charges) decreased $4.6 million to a loss of $2.1 million in the second
quarter of fiscal 2000 compared with $2.5 million profit in the second
quarter of fiscal 1999. For the six month period operating profit
(excluding special charges) decreased $14.7 million to a loss of $12.0
million compared with $2.7 million profit in the fiscal 1999 period.
The decrease in operating profit was due to markdowns taken and other
costs incurred in the first and second quarters of
18
<PAGE>
fiscal 2000 to reduce inventories and improve cash flow. In addition,
restructuring, special and non-recurring charges as outlined above
were $10.4 million for the second quarter and six months of fiscal
2000.
Interest expense increased $15.8 million to $34.5 million in the second
quarter of fiscal 2000 compared with $18.7 million in the second quarter of
fiscal 1999. For the six month period interest expense increased $32.8 million
to $68.3 million compared with $35.5 million in the fiscal 1999 period. The
increase reflects the funding of the Company's 1999 acquisitions and stock
buyback program, which totaled more than $800 million.
The benefit for income taxes recorded during the second quarter of
fiscal 2000 reflects an effective income tax rate of 33.3% as compared to the
provision for income taxes recorded at an effective income tax rate of 36.6% for
the same period in fiscal 1999. The benefit for income taxes for the first six
months of fiscal 2000 reflects an effective income tax rate of 29.3% as compared
to the provision for income taxes recorded at an effective income tax rate of
36.0% for the same period in fiscal 1999. These differences relate to the
benefit derived from the special charges recorded by the Company during fiscal
2000 at an effective 34% rate, offset by a 37.5% effective rate for income
before these charges. Certain of the special charges are in jurisdictions where
limited tax benefit can be realized. The higher rate of 37.5% compared to last
year resulted, in part, from higher non-deductible goodwill, resulting from the
1999 acquisitions.
Net income (excluding special charges) for the second quarter of fiscal
2000 was $7.5 million compared with net income of $27.8 million in the second
quarter of fiscal 1999. For the six month period, net income (excluding special
charges and investment income) was $13.7 million compared with net income of
$50.7 million in the fiscal 1999 period. Net loss on an as reported basis after
these items was $62.4 million and $33.8 million for the second quarter and six
months of fiscal 2000, respectively.
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 during the first
half 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
six months of the fiscal year.
Cash used in operations was $66.6 million in the first half of fiscal
2000 compared with cash used in operations of $171.0 million in the first half
of fiscal 1999. The substantial improvement in cash used by operating activities
of $104.4 million reflects the successful effort to liquidate inventory, which
improved by $208.9 million, of which $64.4 million was related to the special
charges. The Company normally uses the greatest amount of cash on working
capital in the first half of the fiscal year due to seasonal inventory
requirements.
Cash used by investing activities was $22.6 million for the first half
of fiscal 2000 compared with cash used of $67.1 million in the first half of
fiscal 1999. The first half of fiscal 2000 includes proceeds from the sale of
the Company's equity investment in InterWorld Corporation of $50.4 million.
Capital expenditures in the first half were $62.2 million compared to $33.1
million in the comparable 1999 period. The first half of fiscal 2000 includes
amounts for new information systems implementations of $27.0 million and store
fixture programs of $15.1 million.
Cash provided by financing activities was $97.1 million in the first
half of fiscal 2000 compared with $245.2 million in the first half of fiscal
1999, a significant improvement. The increase in the Company's revolving credit
balance during the first half of fiscal 2000 of $84.3 million was substantially
less than the $371.2 million increase in the first half of fiscal 1999 due to
the improvement in cash used by operating activities as previously discussed.
Also, the Company received $26.1 million in the first half 2000 from the
termination of certain interest rate swaps. In addition, the Company also paid
$112.9 million in the first half of 1999 for the purchase of its
19
<PAGE>
shares in treasury. The Company paid $9.6 million of dividends in the first
half of fiscal 2000 compared to $10.3 million in the first half of fiscal 1999.
On June 19, 2000, Warnaco requested and its lenders agreed to waive
certain financial covenants contained in certain of its loan agreements for the
fiscal quarter ending July 1, 2000 including the $600,000 and $450,000 Revolving
Credit Facilities, $600,000 364-day Facility, $500,000 Trade Credit Facility,
certain European Credit Lines and the Canadian Credit Facility. The waivers
executed on June 19, 2000 were effective through July 27, 2000. As of July 19,
2000, these waivers were extended through September 30, 2000.
On July 19, 2000 the Company received commitments from its lead banks
to amend and extend up to $2.9 billion of existing financing facilities through
August 12, 2002. The commitments from these lead banks represent $1.7 billion of
the Company's worldwide debt facilities. The agreements, which are subject to
various closing conditions described below, are expected to close in September
2000. The contractual maturities of the Company's longer-term debt are
unaffected by the transactions. The agreements will extend the maturities of the
$500 million trade credit and $600 million bridge loan facilities through August
12, 2002. These facilities presently have contractual maturities in July and
October 2000, respectively. As a result, the Company will have no material debt
maturing prior to August 2002. In the interim period, prior to closing, the
Company will use bilateral trade facilities, including a supplemental trade
credit facility, for its normal trade and letter of credit requirements. The
amended financing facilities will be secured by assets owned by Warnaco and its
subsidiaries. The new facility agreements are subject to customary closing
conditions, the completion of bank debt amendments by the holders of the
Company's committed and bilateral financing facilities including approval of the
amendments by the requisite lenders, the execution of appropriate documentation,
the satisfactory completion of confirmatory due diligence by the bank agents,
and the absence of any material adverse change in Warnaco and its subsidiaries
taken as a whole.
The Company believes that funds available under the existing credit
facilities currently being refinanced, and cash flow to be generated from future
operations will be sufficient to meet the working capital, and capital
expenditure needs of the Company, including dividends and interest and principal
payments on outstanding debt obligations for the next twelve months and for the
next several years.
New Accounting Standards
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." This statement
addresses a limited number of issues causing implementation difficulties for
entities applying SFAS No. 133. SFAS No. 133 requires that an entity recognize
all derivative instruments as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (i) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (ii) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (iii) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company is currently evaluating the effects of this
statement on its consolidated financial position, liquidity, cash flows and
results of operations.
In May 2000, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," which
addresses the accounting for sales incentives, rebates, coupons and free
products or services. EITF No. 00-14 is effective for calendar year companies in
the fourth quarter of fiscal 2000 and would be treated as a cumulative effect of
an accounting change or prospectively to new sales incentives offered on or
after the effective date. Prior period financial statements presented for
comparative purposes would be reclassified to comply with the income statement
display requirements. The Company is
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currently evaluating the impact that adoption of EITF No. 00-14 will have on
its financial position or results of operations.
In March 2000, the Emerging Issues Task Force issued Issue 00-7
"Accounting application of EITF Issue No. 96-13, `Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock,' to Equity Derivative Transactions That Require Net Cash Settlement If
Certain Events Occur". This EITF will require the Company to mark to market the
Equity Forward Purchase Transaction Agreements ("Equity Agreements") entered
into in the first quarter of fiscal 2000 unless the Company amends such
agreements by December 31, 2000 to remove provisions which require net cash
settlement, See Note 2 to the consolidated condensed financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain of the SEC Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases,
SAB No. 101A and No. 101B, is effective for registrants no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The Company
does not expect the implementation of this bulletin to have a significant impact
on its results of operations or equity.
Statement Regarding Forward-Looking Disclosure
This report includes "forward-looking statements" within the meaning of
Section 27A of the 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. Factors that could cause actual results to differ materially from
those expressed or implied in such forward-looking statements include the
ability of the Company to satisfy the conditions and requirements of financing
commitments accepted by the Company, the effect of worldwide regional and
country general economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
competitive pricing pressures, consumer preferences including acceptance of both
new designs and newly-introduced product lines, financial difficulties
encountered by customers, inflation, merchandise supply constraints, interest
rate movements and access to capital. 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. Consequently, all of the
forward-looking statements made in this report are qualified by these and other
factors, risks and uncertainties.
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, which have the effect of converting the
Company's variable rate obligations to fixed rate obligations, to reduce the
impact of interest rate fluctuations on cash flow and interest expense. As of
July 1, 2000, approximately $643.5 million of interest-rate sensitive
obligations were swapped to achieve an average fixed rate of 6.65%, limiting the
Company's risk to any future shift in interest rates. As of July 1, 2000, the
net fair value asset of all financial instruments (primarily interest rate swap
agreements) with exposure to interest rate risk was approximately $0.7 million.
As of July 1, 2000, the Company had approximately $1,302.3 million of
obligations subject to variable interest rates in excess of such obligations
that had been swapped to achieve a fixed rate. A hypothetical 10% adverse change
in interest rates as of July 1,
21
<PAGE>
2000 would have had a $4.6 million unfavorable impact on the Company's pre-tax
earnings and cash flow over the six-month period.
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 1, 2000, the net fair value asset of
financial instruments with exposure to foreign currency risk 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 approximately $1.7
million.
Equity Price Risk
The Company is subject to market risk from changes in its stock price
as a result of the Equity Agreements. The Equity Agreements allow for the
purchase by the Company of up to 5.2 million shares of the Company's Common
Stock from two banks. The Equity Agreements are required to be settled by the
Company, in a manner elected by the Company, on a physical settlement, cash
settlement or net share settlement basis within the duration of the Equity
Agreements. The Equity Agreements require net cash settlement in an event of
default, as defined. As of July 1, 2000, the banks had purchased 5.2 million
shares under the Equity Agreements. As of July 1, 2000, the prices at which the
Company would effect physical settlement or settle in cash or in net shares with
the two banks under the Equity Agreements are $10.65 and $12.67. Dividends on
the shares outstanding under the Equity Agreements are reimbursed to the
Company. In accordance with the terms of the Equity Agreements, the banks could,
based on the current price of the Company's stock and action by one of the
applicable rating agencies, elect to terminate the Equity Agreements in
which event physical settlement by the Company would be required. Each of the
banks has deferred action in connection with the Equity Agreements pending
further amendments to extend the termination date of the Equity Agreements to
August 12, 2002, See Note 5 to consolidated condensed financial statements. If
these Equity Agreements were settled on a net cash or physical settlement basis
at July 1, 2000, the Company would be required to make a payment of
approximately $20,200 or approximately $60,600 respectively.
22
<PAGE>
Item 3. Legal Proceedings
Between October 12, and October 13, 1999, six punitive class action
complaints were filed in Delaware Chancery Court against the Company, Authentic
Fitness Corporation and certain of their officers and directors in connection
with the Company's proposed acquisition of Authentic Fitness.
On December 20, 1999, an Amended Class Action Complaint ("Amended
Complaint") was filed and on January 6, 2000 the court designated the Amended
Complaint as the operative complaint for a consolidated action captioned: In Re
Authentic Fitness Corporation Shareholders Litigation, C.A. No. 17464-NC
(consolidated). In the Amended Complaint (and all six complaints made virtually
identical claims), plaintiffs allege an unlawful scheme by certain of the
defendants, in breach of their fiduciary duties, to allow the Company to acquire
Authentic Fitness shares for inadequate consideration. Plaintiffs are seeking to
have the court declare the action a proper class action, to declare that the
defendants have breached their fiduciary duties to the class, and in the event
the transaction is consummated, rescission thereof and damages awarded to the
Class. On February 14, 2000, the Company moved to dismiss the Amended Complaint.
The Company believes the claims to be without merit and intends to vigorously
defend these actions.
On May 30, 2000, Calvin Klein, Inc. and the Calvin Klein Trademark
Trust filed a complaint in the U.S. District Court in the Southern District
of New York (Calvin Klein Trademark Trust, et al. v. The Warnaco Group, Inc.
et al. No. 00 CIV. 4052 (JSR) (S.D.N.Y.)) against The Warnaco Group, Inc.,
various other Warnaco entities, and Wachner alleging, inter alia, claims
for breach of contract and trademark violations. The complaint seeks, inter
alia, termination of certain licensing agreements and trademark rights,
injunctive relief and damages.
On June 26, 2000, the Warnaco defendants filed an answer and
counterclaims (amended on July 31, 2000) against Calvin Klein, Inc. for,
inter alia, breach of the jeanswear and men's accessories licenses and breach
of fiduciary duty, and against Calvin Klein, Inc. and Calvin Klein personally
for tortious interference with business relations, defamation and trade libel.
Warnaco is seeking, inter alia, damages, injunctive and declaratory relief.
On August 3, 2000, the Court announced it would grant defendants'
motion to dismiss Wachner from four counts of the complaint. Warnaco's motion to
dismiss certain additional counts and plaintiffs motion to dismiss certain of
Warnaco's counterclaims are pending.
The Company believes the claims to be without merit and intends to
vigorously defend and to pursue its counterclaims. The impact of the litigation
is expected to reduce the Company's sales of Calvin Klein products in fiscal
2000 and 2001.
The Company is not a party to any other litigation that individually or
in the aggregate is material to the business of the Company.
23
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company held on May 4,
2000, the shareholders voted on the following proposals:
Proposal 1 - Election of Directors
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
Nominee listed to vote for Nominee
at left listed at left
<S> <C> <C>
Linda J. Wachner............................... 43,485,158 1,968,122
Andrew G. Galef................................ 43,503,346 1,949,934
Stuart D. Buchalter............................ 43,500,702 1,952,578
</TABLE>
Proposal 2 - Shareholder Proposal on Vendor Standards
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
2,803,484 27,299,325 1,522,648
</TABLE>
24
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.39 - Nine (9) Warnaco Credit Agreement Waivers obtained in June 2000
10.40 - Nine (9) Warnaco Credit Agreement Waivers obtained in July 2000
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed on July 20, 2000, in which Warnaco Inc.
entered into a commitment letter which is attached hereto as Exhibit 99.1 and
incorporated herein by reference. On July 20, 2000, The Warnaco Group, Inc.
issued a press release which is attached hereto as Exhibit 99.2 and incorporated
herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WARNACO GROUP, INC.
Date: August 15, 2000 By: /S/ WILLIAM S. FINKELSTEIN
---------------------------
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and
Accounting Officer
Date: August 15, 2000 By: /S/ STANLEY P. SILVERSTEIN
--------------------------
Stanley P. Silverstein
Vice President, General
Counsel and Secretary
26
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as .................. 'r'
