<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10857
------------------------
THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
90 PARK AVENUE 10016
NEW YORK, NEW YORK 10016 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 661-1300
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
Class A Common Stock, par value $0.01 per share New York Stock Exchange
Convertible Trust Originated Preferred
Securities* New York Stock Exchange
- --------------
*Issued by Designer Finance Trust. Payments of distributions and payment
on liquidation or redemption are guaranteed by the registrant.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the Class A Common Stock, the only voting
stock of the registrant issued and outstanding, held by non-affiliates of the
registrant as of March 29, 1999, was approximately $1,213,555,000.
The number of shares outstanding of the registrant's Class A Common Stock as
of March 29, 1999: 65,130,476.
Documents incorporated by reference: The definitive Proxy Statement of The
Warnaco Group, Inc. relating to the 1999 Annual Meeting of Stockholders is
incorporated by reference in Part III hereof.
________________________________________________________________________________
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
The Warnaco Group, Inc. (the 'Company'), a Delaware corporation, was
organized in 1986 for the purpose of acquiring the outstanding shares of Warnaco
Inc. ('Warnaco'). As a result of the Company's acquisition of Warnaco, Warnaco
became a wholly-owned subsidiary of the Company.
The Company and its subsidiaries design, manufacture and market a broad line
of women's intimate apparel, such as bras, panties, sleepwear, shapewear and
daywear, and men's apparel, such as sportswear, underwear and accessories, all
of which are sold under a variety of internationally recognized owned and
licensed brand names. During fiscal 1998, the Company acquired the sub-license
to produce Calvin Klein'r' jeans and jeans-related products for children in the
United States, Mexico and Central and South America. The Company also acquired
the sub-license to distribute Calvin Klein jeans, jeans-related products and
khakis for men and women in Mexico, Central America and Canada. In addition, the
Company discontinued several underperforming product lines and styles. During
fiscal 1997, the Company acquired Designer Holdings Ltd. ('Designer Holdings'),
which develops, manufactures and markets designer jeanswear and sportswear for
men, women and juniors, and holds a 40-year extendable license from Calvin
Klein, Inc. to develop, manufacture and market designer jeanswear and jeans
related sportswear collections in North, South and Central America under the
Calvin Klein Jeans'r', CK/Calvin Klein Jeans'r' and CK/Calvin Klein/Khakis'r'
labels. During fiscal 1996, the Company made three strategic acquisitions, GJM,
Lejaby and Bodyslimmers, designed to increase the breadth of the Company's
product lines and increase the worldwide distribution of the Company's products.
In March 1994, the Company acquired the worldwide trademarks, rights and
business of Calvin Klein'r' men's underwear and licensed the Calvin Klein
trademark for men's accessories. In addition, the acquisition included the
worldwide trademarks and rights of Calvin Klein women's intimate apparel. In
1999, the Company entered into an exclusive license agreement with Weight
Watchers International, Inc., ('Weight Watchers') to market shapewear and
activewear for the mass market under the Weight Watchers'r' label and acquired a
70% equity interest in Penhaligon's Ltd., a United Kingdom based retailer of
perfumes, soaps, toiletries and other products for men and women.
The Company's growth strategy is to continue to capitalize on its highly
recognized brand names worldwide while broadening its channels of distribution
and improving manufacturing efficiencies and cost controls. The Company
attributes the strength of its brand names to the quality, fit and design of its
products which have developed a high degree of consumer loyalty and a high level
of repeat business. The Company operates in three business segments, Intimate
Apparel, Sportswear and Accessories and Retail Outlet Stores, which accounted
for 48.4%, 44.9% and 6.7%, respectively, of net revenues in fiscal 1998, with
the Intimate Apparel Division accounting for a larger percentage of the
Company's gross profit for the same period.
The Intimate Apparel Division designs, manufactures and markets moderate to
premium priced intimate apparel for women under the Warner's'r', Olga'r', Calvin
Klein'r', Lejaby'r', Van Raalte'r', Fruit of the Loom'r' and Bodyslimmers'r'
brand names. In addition, the Intimate Apparel Division designs, manufactures
and markets men's underwear under the Calvin Klein brand name. The Intimate
Apparel Division is the leading marketer of women's bras to department and
specialty stores in the United States, as measured by the NPD Group, Inc.
('NPD'), accounting for 37.5% of women's bra market share in the 1998 calendar
year, up 3.5% over 1997. The Warner's and Olga brand names, which are owned by
the Company, are 125 and 58 years old, respectively.
The Intimate Apparel Division's strategy is to increase its channels of
distribution and expand its highly recognized brand names worldwide. In February
1996, the Company purchased the GJM Group of Companies ('GJM') from Cygne
Designs, Inc. GJM is a private label maker of sleepwear and intimate apparel.
The acquisition provided the Company with design, marketing and manufacturing
expertise in the sleepwear business, broadening the Company's product line and
contributing to the Company's base of low cost manufacturing capacity. In June
1996, the Company purchased Bodyslimmers. Bodyslimmers is a leading designer and
manufacturer of body slimming undergarments targeted at aging baby boomers,
which also increased the Company's presence in a growing segment of
1
<PAGE>
the intimate apparel market. In July 1996, the Company acquired the
Lejaby/Euralis Group of Companies ('Lejaby'). Lejaby is a leading maker of
intimate apparel in Europe. The Lejaby acquisition increased the size of the
Company's operations in Western Europe and provides the Company with an
opportunity to expand the distribution of its products in the critical European
market.
In 1991, the Company entered into a license agreement with Fruit of the
Loom, Inc. for the design, manufacture and marketing of moderate priced bras,
daywear and other related items to be distributed through mass merchandisers,
such as Wal-Mart and K-Mart, under the Fruit of the Loom brand name and has
built its market share to 5.5% in the mass merchandise market as measured by
NPD. This license was renewed by the Company in 1994 and was further extended
and renewed in 1998. In late 1994, the Company purchased the Van Raalte
trademark for $1.0 million and launched an intimate apparel line through Sears
stores in July 1995.
The Sportswear and Accessories Division designs, manufactures, imports and
markets moderate to premium priced men's apparel and accessories under the Chaps
by Ralph Lauren'r', Calvin Klein and Catalina'r' brand names. In December 1997,
the Company completed the acquisition of Designer Holdings which develops,
manufactures and markets designer jeanswear and jeans related sportswear for
men, women and juniors under the Calvin Klein Jeans, CK/Calvin Klein Jeans and
CK/Calvin Klein/Khakis labels. The Calvin Klein Jeans, CK/Calvin Klein Jeans and
CK/Calvin Klein/Khakis brands complement the Company's existing product lines,
including Calvin Klein underwear for men and women and Calvin Klein men's
accessories. During fiscal 1998, the Company expanded the Calvin Klein jeanswear
business by acquiring the sub-license to produce Calvin Klein jeans and
jeans-related products for children in the United States, Mexico and Central and
South America. In addition, the company acquired the sub-license to distribute
Calvin Klein jeans, jeans-related products and khakis for men and women in
Mexico, Central America and Canada. Chaps by Ralph Lauren has increased its net
revenues by approximately 800% since 1991 from $39.0 million to $351.0 million
in 1998, predominantly by expanding product classifications and updating its
styles. In 1995, the Company extended its Chaps by Ralph Lauren license through
December 31, 2004. The Sportswear and Accessories Division's strategy is to
build on the strength of its brand names and eliminate those businesses which
generate a profit contribution below the Company's required return. Consistent
with this strategy, the Company has eliminated several underperforming brands
since 1992, including its Hathaway business, which was sold to a group of
investors in November 1996.
The Company has been expanding its brand names throughout the world by
increasing the activities of its wholly-owned operating subsidiaries in Canada,
Europe and Mexico. International operations generated $320.9 million, or 16.5%,
of the Company's net revenues in fiscal 1998, compared with $290.4 million, or
20.2%, of the Company's net revenues in fiscal 1997 and $212.4 million or 20.0%
in fiscal 1996. The decrease in international shipments as a percentage of sales
in fiscal 1998 reflects the impact of lower levels of international shipments
for Calvin Klein Underwear, primarily in Russia and the Far East due to currency
devaluations and economic downturns.
The Company's business strategy with respect to its Retail Outlet Stores
Division is to provide a channel for disposing of the Company's excess and
irregular inventory and to shift to more profitable intimate apparel stores to
improve its margins. The Company does not manufacture or source products
exclusively for its Retail Outlet Stores. The Company had 114 stores at the end
of fiscal 1998 (including 3 stores in Canada, 12 stores in the United Kingdom, 1
in France and 1 in Spain) compared with 106 stores and 73 stores at the end of
fiscal 1997 and fiscal 1996, respectively. During 1998, the Company announced
plans to close 13 underperforming stores. Through January 2, 1999, two of the
stores were closed and the remaining stores will be closed in the second quarter
of 1999. In 1997, 35 stores were added as a result of the acquisition of
Designer Holdings.
The Company continues to expand its channels of distribution to include
electronic channels of distribution and is planning to commence marketing of its
products on the Internet in fiscal 1999. To facilitate this opportunity, the
Company in fiscal 1998 invested $5.0 million to acquire a 3% equity interest in
Interworld Corporation, a leading provider of E-Commerce software systems and
other applications for electronic commerce sites.
The Company's products are distributed to over 16,000 customers operating
more than 26,000 department, specialty and mass merchandise stores, including
such leading retailers in the United States
2
<PAGE>
as Dayton-Hudson, Macy's and other units of Federated Department Stores, J.C.
Penney, The May Department Stores, Dillards, Sears, Kmart and Wal-Mart and such
leading retailers in Canada as The Hudson Bay Company and Zeller's. The
Company's products are also distributed to such leading European retailers as
House of Fraser, British Home Stores, Harrods, Galeries Lafayette, Au Printemps
and El Corte Ingles.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company operates within three business segments. One customer accounted
for 10.2% of the Company's net revenues in the three years ended in fiscal 1998.
While important, the loss of such customer would not have a material adverse
effect on the Company taken as a whole. See Note 6 to the Consolidated Financial
Statements on page F-16.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
The Company designs, manufactures and markets a broad line of women's
intimate apparel, and men's apparel and accessories sold under a variety of
internationally recognized brand names owned or licensed by the Company. The
Company operates three divisions, Intimate Apparel, Sportswear and Accessories
and Retail Outlet Stores, which accounted for 48.4%, 44.9% and 6.7%
respectively, of net revenues in fiscal 1998.
INTIMATE APPAREL
The Company's Intimate Apparel Division designs, manufactures and markets
women's intimate apparel, which includes bras, panties, sleepwear, shapewear and
daywear. The Company also designs and markets men's underwear. The Company's bra
brands accounted for 37.5% of women's bra market share in the 1998 calendar year
in department and specialty stores in the United States, as measured by NPD.
Management considers the Intimate Apparel Division's primary strengths to
include its strong brand recognition, product quality and design innovation, low
cost production, strong relationships with department and specialty stores and
its ability to deliver its merchandise rapidly. Building on the strength of its
brand names and reputation for quality, the Company has historically focused its
intimate apparel products on the upper moderate to premium priced range
distributed through leading department and specialty stores. In order to expand
its market penetration in recent years, the Company (i) in 1991, entered into a
license agreement with Fruit of the Loom, Inc. for bras and daywear and in June
1992, began to distribute moderate priced bras, daywear and other related items
under this license through mass merchandise stores, (ii) in March 1994, acquired
the worldwide trademarks, rights and businesses of Calvin Klein men's underwear
and the worldwide trademarks, rights and businesses of Calvin Klein women's
intimate apparel upon the expiration of an existing license on December 31,
1994, (iii) in late 1994, purchased the Van Raalte trademark for $1 million and
launched an intimate apparel line through Sears stores in July 1995, (iv) in
February 1996, acquired substantially all of the assets of GJM, a private label
manufacturer of women's sleepwear and lingerie, (v) in fiscal 1996, acquired the
stock and assets of the Lejaby/Euralis Group of Companies, a leading European
manufacturer and marketer of intimate apparel, (vi) in June 1996, acquired the
business of Bodyslimmers, a marketer of body slimming undergarments targeted at
aging baby boomers, and (vii) in fiscal 1999 entered into a license agreement
with Weight Watchers to market shapewear and activewear for the mass market.
3
<PAGE>
The intimate apparel division markets its lines under the following brand
names:
<TABLE>
<CAPTION>
BRAND NAME PRICE RANGE TYPE OF APPAREL
---------- ----------- ---------------
<S> <C> <C>
Lejaby...................... better to premium intimate apparel
Bodyslimmers................ better to premium intimate apparel
Calvin Klein................ better to premium intimate apparel/men's underwear
Olga........................ better intimate apparel
Warner's.................... upper moderate to better intimate apparel
White Stag.................. moderate intimate apparel
Van Raalte.................. moderate intimate apparel
Fruit of the Loom........... moderate intimate apparel
Weight Watchers............. moderate intimate apparel
</TABLE>
The Company owns the Warner's, Olga, Calvin Klein (underwear and intimate
apparel), Lejaby, Bodyslimmers and Van Raalte brand names and trademarks which
account for approximately 86% of the Company's Intimate Apparel net revenues.
The Company licenses the other brand names under which it markets its product
lines, primarily on an exclusive basis. The Company also manufactures intimate
apparel on a private and exclusive label basis for certain leading specialty and
department stores. The Warner's brand is 125 years old and the Olga brand is 58
years old.
In August 1991, the Company entered into an exclusive license agreement with
Fruit of the Loom, Inc. ('Fruit of the Loom') for the design, manufacture and
marketing of moderate priced bras which are distributed through mass
merchandisers, such as Wal-Mart and Kmart, under the Fruit of the Loom brand
name. The license agreement has since been extended to include bodywear,
coordinating panties, fashion sleepwear, as well as coordinated fashion sets
(bras and panties) and certain control bottoms. The Company began shipping Fruit
of the Loom products in June 1992 and has built its current market share to 5.5%
as measured by NPD in the mass merchandise market. The agreement with Fruit of
the Loom has allowed the Company to enter the mass merchandise market, which is
growing at a rate faster than the department and specialty store market.
In March 1994, the Company acquired the worldwide trademarks, rights and
business of Calvin Klein men's underwear, and effective January 1, 1995, the
worldwide trademark, rights and business of Calvin Klein women's intimate
apparel. The purchase price was approximately $60.9 million and consisted of
cash payments of $33.1 million in fiscal 1994, $5.0 million in fiscal 1995 and
the issuance of 1,699,492 shares of the Company's Common Stock with a fair
market value of $22.8 million for such shares. Since that time, the Company has
acquired the business of several former international licensees and distributors
of Calvin Klein underwear products including those in Canada, Germany, Italy,
Portugal, Scandanavia and Spain. In addition, the Company entered into an
exclusive worldwide license agreement to produce men's accessories and small
leather goods under the Calvin Klein label. The Calvin Klein underwear brand
accounted for net revenues of $308.7 million in fiscal 1998, a decrease of 3.1%
over the $318.7 million recorded in fiscal 1997 due to lower international
shipments (primarily in Russia and the Far East) but nearly 6 times greater than
the $55.0 million recorded in fiscal 1994, the first year of the acquisition.
In fiscal 1996, the Company acquired GJM, a private label maker of sleepwear
and intimate apparel. The acquisition provided the Company with design,
marketing and manufacturing expertise in the sleepwear business, broadening the
Company's product line and contributing to the Company's base of low cost
manufacturing capacity. In June 1996, the Company purchased Bodyslimmers, a
leading designer and manufacturer of body slimming undergarments targeted at
aging baby boomers. The purchase of Bodyslimmers increased the Company's
presence in a growing segment of the intimate apparel market. In July 1996, the
Company acquired Lejaby. Lejaby is a leading maker of intimate apparel in
Europe. The Lejaby acquisition increased the size of the Company's operations in
Western Europe and provides the Company with an opportunity to expand the
distribution of its products, including Calvin Klein'r', in the critical
European market. These three acquisitions contributed $170.3 million in net
revenues for fiscal 1998, 18.0% of the Company's Intimate Apparel net revenues.
The Company attributes the strength of its brands to the quality, fit and
design of its intimate apparel, which has developed a high degree of customer
loyalty and a high level of repeat business. The
4
<PAGE>
Company believes that it has maintained its leadership position, in part,
through product innovation with accomplishments such as introducing the alphabet
bra (A, B, C and D cup sizes), the first all-stretch bra, the body stocking, the
use of two way stretch fabrics, seamless molded cups for smooth look bras, the
cotton-Lycra bra and the sports bra. The Company also introduced the use of
hangers and certain point-of-sale hang tags for in-store display of bras, which
was a significant change from marketing bras in boxes, and enabled women, for
the first time, to see the product in the store. The Company's product
innovations have become standards in the industry.
The Company believes that a shift in consumer attitudes is stimulating
growth in the intimate apparel industry. Women increasingly view intimate
apparel as a fashion-oriented purchase rather than as a purchase of a basic
necessity. The shift has been driven by the expansion of intimate apparel
specialty stores and catalogs, and an increase in space allocated to intimate
apparel by department stores. The Company believes that it is well-positioned to
benefit from increased demand for intimate apparel due to its reputation for
forward-looking design, quality, fit and fashion and to the breadth of its
product lines at a range of price points. Over the past five years, the Company
has further improved its position by continuing to introduce new products under
its Warner's and Olga brands in the better end of the market, by obtaining the
license from Fruit of the Loom to produce bras, daywear and other related items,
by acquiring the Calvin Klein trademarks for premium priced women's intimate
apparel and better priced men's underwear, by purchasing the Van Raalte
trademark for introduction of an intimate apparel line through Sears stores in
July 1995, and by making strategic acquisitions to expand product lines and
distribution channels such as GJM, Lejaby and Bodyslimmers in 1996. The Company
has further improved its position by continuing to strengthen its relationships
with its department store, specialty store and mass merchandise customers.
The Intimate Apparel Division's net revenues have increased at a compound
annual growth rate of 15.7% since 1991, to $944.8 million in fiscal 1998, as the
Company has increased its penetration with existing accounts, expanded sales to
new customers such as Van Raalte to Sears and Fruit of the Loom to mass
merchandisers such as Wal-Mart and Kmart and broadened its product lines to
include men's underwear. The Company believes that it is one of the lowest-cost
producers of intimate apparel in the United States, producing approximately
eight million dozen intimate apparel products per year.
The Company's bras are sold primarily in the department and specialty
stores, the Company's traditional customer base for intimate apparel. In June
1992, the Company expanded into a new channel of distribution, mass
merchandisers, with its Fruit of the Loom product line, which offers a range of
styles designed to meet the needs of the consumer profile of this market. The
Company also sees opportunities for continued growth in the Intimate Apparel
Division for bras specifically designed for the 'full figure' market, as well as
in its panty and daywear product lines, and acquired Bodyslimmers in June 1996
to provide important brand name recognition in this growing segment of the
intimate apparel market for department and specialty stores. In addition, in
February 1999, the Company entered into a license agreement with Weight Watchers
to market shapewear for the mass market.
The Intimate Apparel Division has subsidiaries in Canada and Mexico in North
America, in the United Kingdom, France, Belgium, Ireland, Spain, Italy, Austria,
Switzerland and Germany in Europe, in Costa Rica, the Dominican Republic and
Honduras in Central America and in the Philippines, Sri Lanka, the People's
Republic of China, Japan and Hong Kong in Asia. International sales accounted
for approximately 31.1% of the Intimate Apparel Division's net revenues in
fiscal 1998 compared with 30.1% in fiscal 1997 and 25.4% in fiscal 1996. The
increase in international revenues in fiscal 1998 is due to higher Lejaby and
Bodyslimmers revenues partially offset by lower shipment levels for Calvin Klein
products in Russia and the Far East due to currency devaluations and economic
downturns. The increase in international net revenues in fiscal 1997 is
primarily attributable to the acquisition of Lejaby in July 1996 and increased
net revenues for Calvin Klein Europe. The Company has acquired the businesses of
several former distributors and licensees of its Calvin Klein underwear products
in previous years, including those in Canada, Germany, Italy, Portugal and
Spain. The Company's objective in acquiring its former licensees and
distributors is to expand its business in foreign markets through a coordinated
set of product offerings, marketing and pricing strategies and by consolidating
distribution to obtain economies of scale. Net revenues attributable to the
international divisions of the Intimate Apparel Division were $293.4 million,
$282.9 million and $204.1 million in fiscal 1998, 1997 and 1996,
5
<PAGE>
respectively. Management's strategy is to increase its market penetration in
Europe and to open additional channels of distribution.
The Company's intimate apparel products are manufactured principally in the
Company's facilities in North America, Central America, the Caribbean Basin, the
United Kingdom, France, Ireland, Morocco (joint venture), the Philippines, Sri
Lanka and the People's Republic of China (joint venture). 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. A new
cutting facility and a distribution facility will be opened in 1999. In
connection with the start-up of these facilities, the Company incurred
substantial direct and incremental plant start-up costs to recruit and train
over 39,000 workers. Certain of these costs were capitalized and amortized over
five years. The Company believes it takes approximately five years before new
facilities achieve the manufacturing efficiencies of established plants. In
fiscal 1998, the Company early adopted the provisions of SOP 98-5 requiring that
pre-operating costs be expensed as incurred. In the future, all such start-up
costs will be charged against operations. See Note 1 to the Consolidated
Financial Statements. Capitalized costs represented direct and incremental costs
associated with a new facility and include site selection and site development,
worker training costs, rent and other operating costs incurred prior to
achieving full production in the facility.
Although the Intimate Apparel Division generally markets its product lines
for three retail selling seasons (spring, fall and holiday), its sales and
revenues are somewhat seasonal. Approximately 54% of the Intimate Apparel
Division's net revenues and 57% of the division's operating income were
generated during the second half of the 1998 fiscal year.
SPORTSWEAR AND ACCESSORIES
The Sportswear and Accessories Division designs, manufactures, imports and
markets moderate to better priced sportswear, better to premium priced men's
accessories and moderate to better priced dress shirts and neckwear. Management
considers the Sportswear and Accessories Division's primary strengths to include
its strong brand recognition, product quality, reputation for fashion styling,
strong relationships with department and specialty stores and its ability to
deliver merchandise rapidly.
The Sportswear and Accessories Division markets its lines under the
following brand names:
<TABLE>
<CAPTION>
BRAND NAME PRICE RANGE TYPE OF APPAREL
---------- ----------- ---------------
<S> <C> <C>
Calvin Klein................. better/premium men's, women's, juniors and
children's Designer jeanswear
and jeans related sportswear
and men's accessories
Chaps by Ralph Lauren........ upper moderate dress shirts, neckwear, knit and
woven sport shirts, sweaters,
sportswear and bottoms
Catalina..................... moderate men's and women's sportswear
</TABLE>
The Calvin Klein, Chaps by Ralph Lauren and Catalina accessories brand names
are licensed on an exclusive basis by the Company.
The Sportswear and Accessories Division's strategy is to build on the
strength of its brand names, strengthen its position as a global apparel company
and eliminate those businesses which generate a profit contribution below the
Company's required return. In order to improve profitability, the Company (i)
sold its Hathaway dress shirt business in November 1996, (ii) acquired Designer
Holdings during the fourth quarter of 1997, (iii) acquired the sub-license to
produce Calvin Klein jeans and jeans-related products for children in the United
States, Mexico and Central and South America in June 1998, and (iv) acquired the
sub-license to distribute Calvin Klein jeans, jeans-related products and khakis
for men and women in Mexico, Central America and Canada in June 1998. The
Company recorded losses associated with exiting the Hathaway business of
approximately $46.0 million in 1996 and $10.6 million in fiscal 1997, consisting
of losses related to the write-down of the Hathaway assets, including intangible
assets and operating losses incurred prior to the disposition. The acquisition
of Designer Holdings contributed $453.3 million and $133.3 million to net
revenues in fiscal 1998 and 1997, respectively.
6
<PAGE>
Despite its strategic decisions to discontinue approximately $140.0 million
of annualized net revenues in underperforming brands since 1991, the Sportswear
and Accessories Division's net revenues have increased at a compound annual
growth rate of 25.3% since 1991 to $875.3 million in fiscal 1998. The reduction
in net revenues from discontinued brands has been more than offset by the
success of the Chaps by Ralph Lauren brand which has increased its net revenues
by approximately 800% since fiscal 1991 to $351.0 million in fiscal 1998, and
the addition of the Calvin Klein jeanswear and jeans related sportswear brands
in 1997 and 1998.
Sportswear. In 1989, the Company began repositioning its Chaps by Ralph
Lauren product lines by updating its styling, which has generated significant
net revenue increases, as mentioned above. In 1993, the Company entered into a
license agreement to design men's and women's sportswear and men's dress shirts
and furnishings bearing the Catalina trademark. Catalina products are sold
through the mass merchandise segment of the market, generating royalty income of
approximately $4.9 million and $3.0 million in fiscal 1998 and 1997,
respectively. In 1997, the Company acquired Designer Holdings Ltd., which
develops, manufactures and markets Calvin Klein designer jeanswear and
sportswear for men, women and juniors in North, South and Central America.
During 1998, the Company expanded upon the Calvin Klein jeanswear business by
acquiring sub-licenses to distribute Calvin Klein jeans and jeans-related
products for children in the United States, Mexico and Central and South America
and Calvin Klein jeans, jeans-related products and khakis for men and women in
Mexico, Central America and Canada.
Accessories. The Sportswear and Accessories Division markets men's small
leather goods and belts and soft side luggage under the Calvin Klein brand name
pursuant to a worldwide license. The first shipments of Calvin Klein accessories
were made in the third quarter of fiscal 1995 to United States customers. The
line has already grown significantly, accounting for approximately $19.3 million
and $17.3 million of net revenues in fiscal 1998 and 1997, respectively.
Management believes that one of the strengths of its accessories lines is the
high level of international consumer recognition associated with the Calvin
Klein label. The Company's strategy is to expand the accessories business, which
has consistently generated higher margins than other sportswear products.
International sales accounted for approximately 1.6% of net revenues of the
Sportswear and Accessories Division in fiscal 1998, compared with 1.0% and 4.0%
in fiscal 1997 and 1996, respectively. Net revenues attributable to
international operations of the Sportswear and Accessories Division were $14.0
million, $4.1 million and $8.3 million in fiscal 1998, 1997 and 1996,
respectively. The increase in international sales in fiscal 1998 reflects the
continued expansion of Calvin Klein Accessories as well as the acquisition of
Calvin Klein Jeans in Mexico. The Company expects to generate future revenue
from international sales of base Calvin Klein accessories and jeanswear.
Sportswear apparel (knit shirts and sweaters and other apparel) is sourced
principally from the Far East. Dress shirts are sourced from the Far East and
the Caribbean Basin. Accessories are sourced from the United States, Europe and
the Far East. Neckwear is sourced primarily from the United States.
The Sportswear and Accessories Division, similar to the Intimate Apparel
Division, generally markets its apparel products for three retail selling
seasons (spring, fall and holiday). New styles, fabrics and colors are
introduced based upon consumer preferences, market trends and to coincide with
the appropriate retail selling season. Sales of the Sportswear and Accessories
Division's product lines follow individual seasonal shipping patterns ranging
from one season to three seasons, with multiple releases in some of the
division's more fashion-oriented lines. Consistent with industry and consumer
buying patterns, approximately 59.0% of the Sportswear and Accessories
Division's net revenues and 63% of the Sportswear and Accessories Division's
operating income were generated in the second half of 1998, reflecting the
strength of the fall and holiday shopping seasons.
RETAIL OUTLET STORES DIVISION
The Retail Outlet Stores Division primarily sells the Company's products to
the general public. The Company's business strategy with respect to its retail
outlet stores is to provide a channel for disposing of the Company's excess and
irregular inventory. The Company does not manufacture or source products
exclusively for the retail outlet stores. The Company's retail outlet stores are
situated in areas
7
<PAGE>
where they generally do not conflict with the Company's principal channels of
distribution. EBITDA for the Retail Outlet Stores Division in fiscal 1998
improved 120% over fiscal 1997 to $15.6 million. As of January 2, 1999, the
Company operated 114 stores.
INTERNATIONAL OPERATIONS
The Company has subsidiaries in Canada and Mexico in North America and in
the United Kingdom, France, Belgium, Ireland, Spain, Italy, Austria,
Switzerland, the Netherlands and Germany in Europe and Hong Kong and Japan in
Asia, which engage in sales, manufacturing and marketing activities. The results
of the Company's operations in these countries are influenced by the movement of
foreign currency exchange rates. With the exception of the fluctuation in the
rates of exchange of the local currencies in which these subsidiaries conduct
their business, the Company does not believe that the operations in Canada and
Western Europe are subject to risks which are significantly different from those
of the domestic operations. Mexico has historically been subject to high rates
of inflation and currency restrictions which may, from time to time, impact the
Mexican operation. The Company also sells directly to customers in Mexico. Net
revenues from these shipments represent approximately 1% of the Company's net
revenues.
The Company maintains manufacturing facilities in Mexico, Honduras, Costa
Rica, the Dominican Republic, Canada, Ireland, the United Kingdom, France,
Morocco (joint venture), Sri Lanka, the People's Republic of China (joint
venture) and the Philippines. The Company maintains warehousing facilities in
Canada, Mexico, the United Kingdom, Spain, Belgium, Italy, Austria, Switzerland,
France and Germany and contracts for warehousing in the Netherlands. The
Intimate Apparel Division operates manufacturing facilities in Mexico and in the
Caribbean Basin pursuant to duty-advantaged (commonly referred to as 'Item 807')
programs. Over the last six years, the Company has opened or expanded 10
manufacturing facilities and, during 1998, opened 2 new manufacturing
facilities, for a total of 12 new facilities. The Company's policy is to have
many potential sources of manufacturing so that a disruption at any one facility
will not significantly impact the Company.
The majority of the Company's purchases which are imported into the United
States are invoiced in United States dollars and, therefore, are not subject to
currency fluctuations. The majority of the transactions denominated in foreign
currencies are denominated in the Hong Kong dollar, which currently is pegged to
the United States dollar and therefore does not create any currency risk.
SALES AND MARKETING
The Intimate Apparel and Sportswear and Accessories Divisions sell to over
16,000 customers operating more than 26,000 department, mass merchandise and
men's and women's specialty store doors throughout North America and Europe. One
customer accounted for approximately 10.2% of the Company's net revenues during
the fiscal year ended January 2, 1999. While important, the loss of such
customer would not have a material adverse effect on the Company taken as a
whole.
The Company's retail customers are served by approximately 300 sales
representatives. The Company also employs marketing coordinators who work with
the Company's customers in designing in-store displays and planning the
placement of merchandise. The Company has implemented Electronic Data
Interchange ('EDI') programs with most of its retailing customers which permit
the Company to receive purchase orders electronically and, in some cases, to
transmit invoices electronically. These innovations assist the Company in
providing products to customers on a timely basis.
The Company utilizes various forms of advertising media. In fiscal 1998, the
Company spent approximately $102.6 million, or 5.3% of net revenues, for
advertising and promotion of its various product lines, compared with $86.2
million, or 6.0% of net revenues in fiscal 1997, and $59.5 million or 5.6% of
net revenues in fiscal 1996. The increase in advertising costs in fiscal 1998
compared with fiscal 1997 reflects the Company's desire to maintain its strong
market position in Calvin Klein underwear, Jeanswear and Accessories, Chaps by
Ralph Lauren sportswear and Warner's, Olga, and Fruit of the Loom intimate
apparel. The Company participates in advertising on a cooperative basis with
retailers, principally through newspaper advertisements.
8
<PAGE>
COMPETITION
The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, some of which have greater resources
than the Company.
The Company also competes with foreign producers, but to date, such foreign
competition has not materially affected the Intimate Apparel or Sportswear and
Accessories Divisions. In addition to competition from other branded apparel
manufacturers, the Company competes in certain product lines with department
store private label programs. The Company believes that its manufacturing
skills, coupled with its existing Central American and Caribbean Basin
manufacturing facilities and selective use of off-shore sourcing, enable the
Company to maintain a cost structure competitive with other major apparel
manufacturers.
The Company believes that it has a significant competitive advantage because
of high consumer recognition and acceptance of its owned and licensed brand
names and its strong presence and market share in the major department,
specialty and mass merchandise store chains.
A substantial portion of the Company's sales are of products, such as
intimate apparel and men's underwear, that are basic and not very susceptible to
rapid design changes. This relatively stable base of business is a significant
contributing factor to the Company's favorable competitive and cost position in
the apparel industry.
RAW MATERIALS
The Company's raw materials are principally cotton, wool, silk, synthetic
and cotton-synthetic blends of fabrics and yarns. Raw materials used by the
Intimate Apparel and Sportswear and Accessories Division are available from
multiple sources.
IMPORT QUOTAS
Substantially all of the Company's Sportswear and Accessories Division's
sportswear products, as well as Calvin Klein men's and women's underwear, are
manufactured by contractors located outside the United States. These products
are imported and are subject to federal customs laws, which impose tariffs as
well as import quota restrictions established by the Department of Commerce.
While importation of goods from certain countries may be subject to embargo by
United States Customs authorities if shipments exceed quota limits, the Company
closely monitors import quotas through its Washington, D.C. office and can, in
most cases, shift production to contractors located in countries with available
quotas or to domestic manufacturing facilities. The existence of import quotas
has, therefore, not had a material effect on the Company's business.
Substantially all of the Company's Intimate Apparel Division's products, with
the exception of Calvin Klein men's and women's underwear, are manufactured in
the Company's facilities located in Mexico, the Caribbean Basin, Europe and
Asia. The Company's policy is to have many potential manufacturing sources so
that a disruption at any one facility will not significantly impact the Company.
EMPLOYEES
As of January 2, 1999, the Company and its subsidiaries employ approximately
21,000 employees. Approximately 27% of the Company's employees, all of whom are
engaged in the manufacture and distribution of its products, are represented by
labor unions. The Company considers labor relations with employees to be
satisfactory and has not experienced any significant interruption of its
operations due to labor disagreements.
TRADEMARKS AND LICENSING AGREEMENTS
The Company has license agreements permitting it to manufacture and market
specific products using the trademarks of others. The Company's exclusive
license and design agreements for the Chaps by Ralph Lauren trademark expire on
December 31, 2004. These licenses grant the Company an exclusive right to use
the Chaps by Ralph Lauren trademark in the United States and Mexico. The
Company's license to develop, manufacture and market designer jeanswear and
jeans related sportswear
9
<PAGE>
under the Calvin Klein trademark in North, South and Central America extends for
an initial term expiring on December 31, 2034 and is extendable at the Company's
option for a further 10 year term expiring on December 31, 2044. The Company has
an exclusive license agreement to use the Fruit of the Loom trademark in the
United States of America, its territories and possessions, Canada and Mexico
through December 31, 2004, subject to the Company's compliance with certain
terms and conditions. The Company also has the right of first opportunity and
negotiation with respect to other products and territories.
The Company's exclusive worldwide license agreement with Calvin Klein, Inc.
to produce Calvin Klein men's accessories expires June 30, 2004. The Company has
entered into license agreements with Authentic Fitness Corporation to produce
and sell men's and women's sportswear and men's dress shirts and furnishings
under the Catalina label, women's and children's sportswear under the White Stag
label, and certain intimate apparel under the Speedo label. The Company's
exclusive license to use the Catalina trademark for these products worldwide
expires in December 2013 and the Company's exclusive licenses to use the White
Stag'r' and Speedo'r' names for intimate apparel products continues in
perpetuity.
The Company recently entered into an exclusive licensing agreement for an
initial term of 5 years, extendable for a further term of 5 years through July
2009 with Weight Watchers International, Inc., to manufacture and market
shapewear and activewear for the mass market in the United States and Canada.
The Company also has the right of first opportunity and negotiation with respect
to other products and territories.
Although the specific terms of each of the Company's license agreements
vary, generally such agreements provide for minimum royalty payments and/or
royalty payments based on a percentage of net sales. Such license agreements
also generally grant the licensor the right to approve any designs marketed by
the licensee.
The Company owns other trademarks, the most important of which are Warner's,
Olga, Calvin Klein men's underwear and sleepwear, Calvin Klein women's intimate
apparel and sleepwear, Van Raalte, Lejaby, Rasurel, and Bodyslimmers.
The Company sub-licenses the White Stag and Catalina brand names to domestic
and international licensees for a variety of products. These agreements
generally require the licensee to pay royalties and fees to the Company based on
a percentage of the licensee's net sales. The Company regularly monitors product
design, development, quality, merchandising and marketing and schedules meetings
throughout the year with third-party licensees to assure compliance with the
Company's overall marketing, merchandising and design strategies, and to ensure
uniformity and quality control. The Company, on an ongoing basis, evaluates
entering into distribution or license agreements with other companies that would
permit such companies to market products under the Company's trademarks.
Generally, in evaluating a potential distributor or licensee, the Company
considers the experience, financial stability, manufacturing performance and
marketing ability of the proposed licensee. Royalty income derived from
licensing was approximately $21.2 million, $12.2 million and $10.3 million in
fiscal 1998, 1997 and 1996, respectively.
The Company believes that only the trademarks mentioned herein are material
to the business of the Company.
BACKLOG
A substantial portion of net revenues is based on orders for immediate
delivery and, therefore, backlog is not necessarily indicative of future net
revenues.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
The information required by this portion of Item 1 is incorporated herein by
reference to Note 6 to the Consolidated Financial Statements on pages F-1 to
F-34.
10
<PAGE>
ITEM 2. PROPERTIES.
The principal executive offices of the Company are located at 90 Park
Avenue, New York, New York 10016 and are occupied pursuant to a lease that
expires in 2004. In addition to its executive offices, the Company leases
offices in Connecticut, California and New York, pursuant to leases that expire
in 1999, 2000 and 2007, respectively. The Company entered into a ten-year lease
expiring in 2009 for its administrative offices in Connecticut.
The Company has nine domestic manufacturing and warehouse facilities located
in Connecticut, Georgia, Pennsylvania, Tennessee, South Carolina, Massachusetts
and New Jersey and 37 international manufacturing and warehouse facilities
located in Canada, Costa Rica, the Dominican Republic, France, Germany,
Honduras, Mexico, People's Republic of China, the Philippines, Sri Lanka, the
United Kingdom, Ireland, Spain, Belgium, Italy, Switzerland, Holland and
Austria. Certain of the Company's manufacturing and warehouse facilities are
also used for administrative and retail functions. The Company owns six of its
domestic and three of its international facilities. The balance of the
facilities are leased. Lease terms, except for month-to-month leases, expire
from 1999 to 2020. No material facility is underutilized.
The Company leases sales offices in a number of major cities, including
Dallas, Atlanta and New York in the United States; Brussels, Belgium; Dusseldorf
and Frankfurt, Germany; Toronto, Canada; Lausanne, Switzerland; Milan, Italy;
Paris, France; and Hong Kong. The sales office leases expire between 1999 and
2008 and are generally renewable at the Company's option. The Company also
occupies offices in London, England subject to a freehold lease which expires in
2114. The Company leases 113 retail outlet store locations. Outlet store leases,
except for two month-to-month leases, expire from 1999 to 2008 and are generally
renewable at the Company's option.
All of the Company's production and warehouse facilities are located in
appropriately designed buildings, which are kept in good repair. All such
facilities have well maintained equipment and sufficient capacity to handle
present volumes. Over the last six years, the Company has opened or expanded in
Mexico and the Caribbean Basin 10 manufacturing facilities and, during 1998,
opened 2 new manufacturing facilities, for a total of 12 new facilities.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any litigation, other than routine litigation
incidental to the business of the Company, that individually or in the aggregate
is material to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their age and their position are set
forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Linda J. Wachner......................... 53 Director, Chairman of the Board,
President and Chief Executive Officer
William S. Finkelstein................... 50 Director, Senior Vice President and Chief
Financial Officer
Robert J. Conologue...................... 50 Senior Vice President -- Finance
Stanley P. Silverstein................... 46 Vice President, General Counsel and
Secretary
Carl J. Deddens.......................... 46 Vice President and Treasurer
</TABLE>
Mrs. Wachner has been a Director, President and Chief Executive Officer of
the Company since August 1987, and the Chairman of the Board since August 1991.
Mrs. Wachner was a Director and President of the Company from March 1986 to
August 1987. Mrs. Wachner held various positions,
11
<PAGE>
including President and Chief Executive Officer, with Max Factor and Company
from December 1978 to October 1984. Mrs. Wachner also serves as a Director of
Applied Graphics Technologies, Inc., Authentic Fitness Corporation and The New
York Stock Exchange.
Mr. Finkelstein has been Senior Vice President of the Company since May 1992
and Chief Financial Officer and Director of the Company since May 1995. Mr.
Finkelstein served as Vice President and Controller of the Company from November
1988 until his appointment as Senior Vice President. Mr. Finkelstein served as
Vice President of Finance of the Company's Activewear and Olga Divisions from
March 1988 until his appointment as Controller of the Company. Mr. Finkelstein
served as Vice President and Controller of SPI Pharmaceuticals Inc. from
February 1986 to March 1988 and held various financial positions, including
Assistant Corporate Controller with Max Factor and Company, between 1977 and
1985. Mr. Finkelstein also serves as a Director of Authentic Fitness
Corporation.
Mr. Conologue has been Senior Vice President, Finance of the Company since
May, 1998. Mr. Conologue joined the Company in July, 1997 as Senior Vice
President and Controller. Prior to joining the Company, Mr. Conologue served as
Vice President Finance and Control of Southern New England Telecommunications
Corp. from 1995 through early 1997. Mr. Conologue held various financial
positions with Avon Products, Inc. from 1989 to 1995, most recently as Group
Vice President, Finance.
Mr. Silverstein has been Vice President, General Counsel and Secretary of
the Company since December 1990. Mr. Silverstein served as Assistant Secretary
of the Company from June 1986 until his appointment as Secretary in January
1987.
Mr. Deddens has been Vice President and Treasurer of the Company since March
1996. Prior to joining the Company, Mr. Deddens served as Vice President and
Treasurer of Revlon, Inc. from 1991 to 1996 and as Assistant Treasurer from 1987
to 1991. Mr. Deddens held various financial positions with Allied-Signal
Corporation and Union Texas Petroleum Corporation from 1981 to 1987.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock, $0.01 par value per share (the 'Common
Stock'), is listed on the New York Stock Exchange under the symbol 'WAC'. The
table below sets forth, for the periods indicated, the high and low sales prices
of the Company's Common Stock, as reported on the New York Stock Exchange
Composite Tape.
<TABLE>
<CAPTION>
DIVIDEND
PERIOD HIGH LOW DECLARED
- ------ ---- --- --------
<S> <C> <C> <C>
1997:
First Quarter......................................... $33 3/8 $26 5/8 $.08
Second Quarter........................................ $34 $27 1/16 $.08
Third Quarter......................................... $35 9/16 $30 1/16 $.08
Fourth Quarter........................................ $33 1/4 $26 3/4 $.09
1998:
First Quarter......................................... $39 9/16 $30 $.09
Second Quarter........................................ $43 15/16 $39 $.09
Third Quarter......................................... $44 7/16 $18 1/2 $.09
Fourth Quarter........................................ $28 15/16 $19 1/8 $.09
1999:
First Quarter (thru March 31, 1999)................... $27 1/4 $20 1/8 $.09(1)
</TABLE>
- ---------
(1) On March 1, 1999, the Company declared its regular quarterly cash dividend
of $0.09 per share payable on April 8, 1999 to stockholders of record as of
March 11, 1999.
-------------------
As of March 26, 1999, there were 226 holders of the Common Stock, based upon
the number of holders of record and the number of individual participants in
certain security position listings.
In fiscal 1995, the Company initiated a regular cash dividend of $0.28 per
share per annum. The initial cash dividend was paid on June 30, 1995. On
February 20, 1997, the Company's Board of Directors approved an increase in the
Company's quarterly cash dividend to $0.08 per share. On November 21, 1997, the
Company's Board of Directors approved an increase in the quarterly cash dividend
to $0.09 per share.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is consolidated statement of income data with respect to the
fiscal years ended January 4, 1997, January 3, 1998 and January 2, 1999, and
consolidated balance sheet data at January 3, 1998 and January 2, 1999. The
selected financial data is derived from, and qualified by reference to, the
audited consolidated financial statements included herein and such data should
be read in conjunction with those financial statements and notes thereto. The
consolidated statement of income data for the fiscal years ended January 7, 1995
and January 6, 1996 and the consolidated balance sheet data at January 7, 1995,
January 6, 1996 and January 4, 1997 are derived from audited consolidated
financial statements not included herein.
13
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------
JANUARY 7, JANUARY 6, JANUARY 4, JANUARY 3, JANUARY 2,
1995(a)(b) 1996(c)(d) 1997(e)(f) 1998(f)(g) 1999(h)(i)
--------------------------------------------------------------
RESTATED RESTATED
(IN MILLIONS, EXCEPT RATIOS AND SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues......................... $ 788.8 $ 916.2 $ 1,063.8 $ 1,435.7 $ 1,950.3
Gross profit......................... 255.8 309.7 289.7 375.2 537.2
Operating income (loss).............. 96.2 113.9 (12.0) 25.8 85.6
Interest expense..................... 32.5 33.9 32.4 45.9 63.8
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle............. 63.3 49.6 (31.4) (12.3) 14.1
Extraordinary item................... -- (3.1) -- -- --
Cumulative effect of change in
accounting principle................ -- -- -- -- (46.3)
Net income (loss) applicable to
Common Stock........................ 63.3 46.5 (31.4) (12.3) (32.2)
Dividends on Common Stock............ -- 9.5 14.5 17.3 22.4
Per Share Data:
Income (loss)before cumulative effect
of change in accounting principle:
Basic............................. $ 1.53 $ 1.12 $ (0.61) $ (0.23) $ 0.23
Diluted........................... $ 1.53 $ 1.10 $ (0.61) $ (0.23) $ 0.22
Net income (loss):
Basic............................. $ 1.53 $ 1.05 $ (0.61) $ (0.23) $ (0.52)
Diluted........................... $ 1.53 $ 1.03 $ (0.61) $ (0.23) $ (0.51)
Dividends declared................... -- $ 0.14 $ 0.28 $ 0.32 $ 0.36
Shares used in computing earnings per
share:
Basic............................. 41,285,355 44,214,690 51,308,017 52,813,982 61,361,843
Diluted........................... 41,285,355 45,278,117 51,308,017 52,813,982 63,005,358
Divisional Summary Data:
Net revenues:
Intimate Apparel.................. $ 565.3 $ 689.2 $ 802.0 $ 941.2 $ 944.8
Sportswear and Accessories........ 183.8 185.7 214.4 425.9 875.3
Retail Outlet Stores.............. 39.7 41.3 47.4 68.6 130.2
---------- ---------- ---------- ---------- ----------
$ 788.8 $ 916.2 $ 1,063.8 $ 1,435.7 $ 1,950.3
========== ========== ========== ========== ==========
Percentage of net revenues:
Intimate Apparel.................. 71.7% 75.2% 75.4% 65.6% 48.4%
Sportswear and Accessories........ 23.3 20.3 20.2 29.7 44.9
Retail Outlet Stores.............. 5.0 4.5 4.4 4.7 6.7
---------- ---------- ---------- ---------- ----------
100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Working capital................... $ 104.5 $ 307.5 $ 172.6 $ 352.3 $ 28.4
Total assets...................... 780.6 941.1 1,119.8 1,651.1 1,783.1
Long term debt (excluding current
maturities)...................... 206.8 194.3 215.8 354.3 411.9
Mandatorily redeemable convertible
preferred securities............. -- -- -- -- 101.8
Stockholders' equity.............. 240.5 500.3 452.5 749.6 578.1
</TABLE>
- ---------
(a) In fiscal 1994, the Company recorded a $3.0 million pre-tax charge (or
$0.04 per diluted share) related to the California earthquake.
(b) Income reflects the benefits of utilizing the Company's net operating loss
carryforward to offset the Company's federal income tax provision. Income
before non-recurring items, after giving effect to a full tax provision at
the Company's effective income tax rate of 38.0%, was $41.1 million (or
$1.00 per share) in fiscal 1994.
(c) Effective with the 1995 fiscal year, the Company adopted the provisions of
SOP 93-7 which requires, among other things, that certain advertising costs
which had previously been deferred and amortized against future revenues be
expensed when the advertisement first runs. The Company incurred a pre-tax
charge for advertising costs, previously deferrable, of $11.7 million ($7.3
million net of income tax benefits, or $0.16 per diluted share) in the
fourth quarter of fiscal 1995.
(footnotes continued on next page)
14
<PAGE>
(footnotes continued from previous page)
(d) Fiscal 1995 includes a $3.1 million after-tax extraordinary charge ($0.07
per diluted share) to write-off deferred financing costs.
(e) Fiscal 1996 includes pre-tax charges related to the sale of the Company's
Hathaway dress shirt operations of $38.7 million, consolidation and
realignment of the Company's Intimate Apparel Division of $78.1 million and
other items of $13.1 million. Total non-recurring items were $129.9 million
($83.2 million net of income tax benefits, or $1.62 per diluted share). In
addition, fiscal 1996 includes operating losses of the Hathaway dress shirt
operation of $8.6 million ($5.4 million, net of income tax benefit or $0.10
per diluted share).
(f) The fiscal 1996 and 1997 financial statements have been restated (in fiscal
1998) to reflect $38.0 million ($23.2 million net of income tax benefit of
$0.45 per diluted share) and $52.0 million ($35.4 million net of income tax
benefit or $0.67 per diluted share), respectively, of charges related to an
inventory adjustment as described in Note 1 to the Consolidated Financial
Statements.
(g) Fiscal 1997 reflects the acquisition of Designer Holdings during the fourth
quarter and includes pre-tax charges related to the merger and integration
of 1996 and 1997 acquisitions and the completion in 1997 of certain
consolidation and restructuring actions announced in 1996. Total
non-recurring items were $125.7 million ($77.9 million net of income tax
benefits, or $1.48 per diluted share). In addition, fiscal 1997 includes
operating losses of the Hathaway dress shirt operation of $4.0 million and
non-recurring losses of GJM of $1.1 million for a total of $5.1 million
($3.2 million net of income tax benefits or $0.06 per diluted share).
(h) Fiscal 1998 includes restructuring, special charges and other non-recurring
items of $101.5 million ($65.7 million net of income tax benefits, or $1.04
per diluted share) relating to the continuing strategic review of
facilities, products and functions and other items. In addition, fiscal
1998 includes operating losses of the discontinued product lines and styles
of $5.3 million ($3.4 million net of income tax benefits or $0.05 per
diluted share). Also included in fiscal 1998 operating earnings is the
current year impact related to the change in accounting for pre-operating
costs of $40.8 million ($26.4 million net of income tax benefits, or $ 0.42
per diluted share) and an inventory adjustment of $49.6 million ($32.1
million net of income tax benefits, or $0.51 per diluted share), see
Note 1 to the Consolidated Financial Statements.
(i) Effective with the 1998 fiscal year, the Company early adopted the
provisions of SOP 98-5 which requires, among other things, that certain
pre-operating costs which had previously been deferred and amortized be
expensed as incurred. The Company recorded the impact as the cumulative
effect of a change in accounting principle of $46.3 million, net of income
tax benefits, or $0.73 per diluted share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
STRATEGIC ACTIONS
FISCAL 1998 -- RESTRUCTURING, SPECIAL CHARGES AND OTHER NON-RECURRING ITEMS
As a result of a strategic review of the Company's businesses, manufacturing
and other facilities, product lines and styles and worldwide operations
following significant acquisitions in 1996 and 1997, in the fourth quarter of
1998 the Company initiated the implementation of programs designed to streamline
operations and improve profitability. As a result of the decision to implement
these programs, the Company recorded restructuring and special charges of
approximately $48.5 million ($31.4 million net of income tax benefits) related
to costs to exit certain facilities and activities, asset impairments and
employee termination and severance benefits. Of the total amount of the 1998
charges, $22.1 million is reflected in cost of goods sold and $26.4 million is
reflected in selling, administrative and general expenses in the accompanying
consolidated statement of operations. The detail of the charges recorded in
1998, including costs incurred and reserves remaining for costs estimated to be
incurred through completion of the aforementioned programs, anticipated by the
end of fiscal 1999, are summarized below:
15
<PAGE>
<TABLE>
<CAPTION>
AMOUNTS
TOTAL UTILIZED BALANCE
----- -------- -------
<S> <C> <C> <C>
Costs to exit facilities and activities............. $13.3 $11.9 $1.4
Asset impairments................................... 23.8 22.2 1.6
Employee termination and severance benefits......... 6.1 2.5 3.6
Prior strategic initiatives......................... 5.3 5.3 --
----- ----- ----
$48.5 $41.9 $6.6
===== ===== ====
</TABLE>
See Note 3 to the Consolidated Financial Statements for further detail.
In addition and related to the above actions, the current year operations
included $53.0 million ($34.3 million net of income tax benefits) related to the
first nine months of losses on discontinued product lines, severance associated
with reductions in headcount, incremental advertising, allowances and
manufacturing variances and $5.3 million ($3.4 milion net of income tax
benefits) related to fourth quarter losses on discontinued product lines. Of the
total amount of $58.3 million, $27.0 million is reflected in cost of goods sold
and $31.3 million is reflected in selling, administrative and general expenses.
The total restructuring, special charges and other non-recurring items
including the associated operating losses are $106.8 million ($69.1 million, net
of income tax benefits or $1.10 per diluted share) for the year ended
January 2, 1999. The Company anticipates that these programs will generate
annual savings of $15.0 million pre-tax.
FISCAL 1997
During the fourth quarter of 1997, the Company reported a pre-tax charge of
$125.7 million related to the acquisition and integration of Designer Holdings,
the Intimate Apparel consolidation and realignment program initiated in 1996 and
other items, including the final disposition of Hathaway assets (amounts in
millions):
<TABLE>
<S> <C>
Merger related integration costs............................ $ 44.6
Intimate Apparel consolidation and realignment.............. 59.5
Other items, including final disposition of Hathaway
assets.................................................... 21.6
------
125.7
Less income tax benefits.................................... (47.8)
------
$ 77.9
======
</TABLE>
The charge consists primarily of a write-down of asset values, severance and
other employee costs, costs related to manufacturing realignment and lease and
other costs to combine existing retail outlet stores with those of Designer
Holdings.
Following the successful Intimate Apparel consolidation and realignment
program initiated in 1996, the Company initiated a new program to reexamine all
of its existing products in an effort to streamline its number of product
offerings. Accordingly, additional products and styles were discontinued and
slower moving inventory liquidated.
In addition, fiscal 1997 includes operating losses of the Hathaway dress
shirt operations of $4.0 million and non-recurring losses of the GJM operation
of $1.1 million for a total of $5.1 million ($3.2 million net of income tax
benefits). The total restructuring, special charges and other non-recurring
items including the associated operating losses are $130.8 million
($72.3 million, net of income tax benefits) for the year ended January 3, 1998.
Of the total amount, $76.6 million is reflected in cost of goods sold and $54.2
million is reflected in selling, administrative, and general expenses.
See Note 3 to the Consolidated Financial Statements for further detail.
DESIGNER HOLDINGS ACQUISITION
Prior to its acquisition by the Company, Designer Holdings experienced
substantial sales growth. A significant portion of this sales growth was
achieved through distribution to jobbers and off-price
16
<PAGE>
retailers. Additionally, Designer Holdings had also announced a significant
increase in the number of its outlet stores. The Company viewed this growth and
expansion as detrimental to the long-term integrity and value of the brand. To
sustain its growth strategy, Designer Holdings committed to large quantities of
inventories. When the primary department store distribution channel was unable
to absorb all of Designer Holdings' committed production, it increased sales to
the secondary and tertiary distribution channels, including sales to jobbers,
off-price retailers and Designer Holdings' own outlet stores, which were
expanded to serve as an additional channel of distribution. The Company's
post-acquisition strategy did not embrace the outlet store expansion or
expansion of secondary channels of distribution, thereby significantly
eliminating product distribution, resulting in excess inventory.
The Company had a different plan from that of Designer Holdings for
realization of inventories and accounts receivable, as follows: Based upon its
strategy for the business, it had to quickly dispose of significantly higher
than desirable levels of inventory. It had to stabilize relationships with its
core department store customers. It had to collect receivable balances from
customers with whom the Company would no longer do business, and had to respond
to challenges from the core department store customers who were adversely
impacted by channel conflict and brand image issues. Finally, the Company began
a complete redesign of the product, the impact of which would not be immediately
felt at retail due to the fact that Designer Holdings had already committed to
inventory that was in production to be delivered for the ensuing seasons.
The consequences related not only to the receivables and inventory acquired,
but also to the design, fabric and inventory purchases to which Designer
Holdings had previously committed. Immediately following the acquisition, the
Company began quickly liquidating excess inventories. Most of these sales were
below original cost. Not only did the Company fail to recover cost (including
royalties payable to the licensor), it was deprived of the 'reasonable gross
profit' contemplated by APB Opinion 16 in valuing acquired inventory.
Accordingly, the Company reduced the historical carrying value of inventory by
$18 million. The $18 million fair value adjustment recorded addressed all of
these issues and represented the fair value of inventory pursuant to APB
Opinion 16.
The Company offered significant discounts (by negotiating settlements on a
customer by customer basis) to collect outstanding receivable balances in light
of product related issues raised, as well as the decision to discontinue certain
channels of distribution, realizing that these balances would become
increasingly more difficult to collect with the passage of time. In addition,
the core retail customers took substantial deductions against current invoices
for the Designer Holdings inventory in the stores, unilaterally revising the
economics of the initial sale transaction entered into by Designer Holdings.
Although these deductions relate to both the inventory acquired and
pre-acquisition accounts receivable, the decrease in asset value manifested
itself through accounts receivable as a result of these deductions. Accordingly,
the Company reduced the historical carrying value of accounts receivable by $31
million. The $31 million fair value adjustment, which was recorded pursuant to
APB Opinion 16, addresses these issues.
The Company believes that these strategies should enhance future results of
operations and cash flows, however, these fair value adjustments will result in
additional annual goodwill amortization of approximately $1.2 million.
FISCAL 1996
Following the acquisition of the GJM business in February 1996, which
expanded the Company's product lines and significantly added to the Company's
low cost sleepwear manufacturing capacity, the Company undertook a strategic
review of its businesses and manufacturing facilities. The acquisitions of
Bodyslimmers and Lejaby were also considered in this review. As a result of this
review, the Company took the following steps which resulted in a non-recurring
charge in fiscal 1996 as summarized below (in millions):
17
<PAGE>
<TABLE>
<S> <C>
Loss related to the sale of the Hathaway business........... $ 38.7
Charge for the consolidation and realignment of the Intimate
Apparel Division.......................................... 78.1
Other items, including merger termination costs............. 13.1
------
129.9
Less income tax benefits.................................... (46.7)
------
$ 83.2
======
</TABLE>
In addition, fiscal 1996 includes operating losses of the Hathaway dress shirt
operation of $8.6 million ($5.4 million, net of income tax benefit). The total
restructuring, special charges and other non-recurring items including the
associated operating losses are $138.5 million ($88.6 million, net of income tax
benefits) for the year ended January 4, 1997. Of the total amount, $37.9 million
is reflected in cost of good sold and $100.6 million is reflected in selling,
administrative and general expenses.
See Note 3 to the Consolidated Financial Statements for further detail.
RESULTS OF OPERATIONS
The consolidated statements of income for the Company are summarized below.
SELECTED DATA
STATEMENT OF INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
JANUARY 4, % OF JANUARY 3, % OF % OF
1997 NET 1998 NET JANUARY 2, NET
RESTATED REVENUES RESTATED REVENUES 1999 REVENUES
-------- -------- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues........................ $1,063.8 100.0% $1,435.7 100.0% $1,950.3 100.0%
Cost of goods sold(a)............... 774.1 72.8% 1,060.5 73.9% 1,413.1 72.5%
-------- ----- -------- ----- -------- -----
Gross profit(a)..................... 289.7 27.2% 375.2 26.1% 537.2 27.5%
Selling, administrative and general
expenses(b)....................... 301.7 28.4% 349.4 24.3% 451.6 23.1%
-------- ----- -------- ----- -------- -----
Operating income (loss)............. (12.0) (1.2)% 25.8 1.8% 85.6 4.4%
Interest expense.................... 32.4 45.9 63.8
-------- -------- --------
Income (loss) before income taxes
and cumulative effect of change in
accounting principle.............. (44.4) (20.1) 21.8
Income taxes (benefit).............. (13.0) (7.8) 7.7
-------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle......................... $ (31.4) $ (12.3) $ 14.1
======== ======== ========
</TABLE>
18
<PAGE>
DIVISIONAL SUMMARY
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
JANUARY 4, % OF JANUARY 3, % OF % OF
1997 GROSS 1998 GROSS JANUARY 2, GROSS
RESTATED PROFIT RESTATED PROFIT 1999 PROFIT
-------- ------ -------- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Intimate Apparel................ $ 802.0 $ 941.2 $ 944.8
Sportswear & Accessories........ 214.4 425.9 875.3
Retail Outlet Stores............ 47.4 68.6 130.2
-------- -------- --------
$1,063.8 $1,435.7 $1,950.3
======== ======== ========
Gross profit(a):
Intimate Apparel................ $ 230.5 79.6% $ 259.8 69.2% $ 255.3 47.5%
Sportswear & Accessories........ 40.7 14.0% 90.7 24.2% 241.4 44.9%
Retail Outlet Stores............ 18.5 6.4% 24.7 6.6% 40.5 7.6%
-------- ----- -------- ----- -------- -----
$ 289.7 100.0% $ 375.2 100.0% $ 537.2 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
- ---------
(a) Includes restructuring, special charges and other non-recurring items of
$37.9 million in fiscal 1996 related to the decision to exit the Hathaway
business and the restructuring and realignment of the Intimate Apparel
Division, $76.6 million in fiscal 1997 related to the acquisition of
Designer Holdings and the completion of the Intimate Apparel restructuring
actions and $49.1 million in fiscal 1998 related to the continuing
strategic review of facilities, products and functions. Also included in
fiscal 1998 is the current year impact related to the change in accounting
for pre-operating costs of $40.8 million. Included in fiscal years 1996,
1997 and 1998 are the effects of the restatement for charges relating to an
inventory adjustment of $38.0 million, $57.0 million and $49.6 million
respectively, see Note 1 to the Consolidated Financial Statements.
(b) Includes restructuring, special charges and other non-recurring items of
$100.6 million in fiscal 1996, $54.2 million in fiscal 1997 and $57.7
million in fiscal 1998 related to the write-off of certain deferred
advertising costs, the sale of the Company's Hathaway dress shirt
operation, consolidation and realignment of the Company's Intimate Apparel
Division and other items and consolidation and restructuring of facilities,
products and functions related to the Company's recent acquisitions. Also,
fiscal 1997 includes $3.5 million attributable to minority interests in the
income of Designer Holdings applicable to the period of less than 100%
ownership by the Company.
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Net revenues increased $514.6 million or 35.8% to $1,950.3 million in fiscal
1998 compared with $1,435.7 million in fiscal 1997. Incremental net revenues
contributed by the 1997 and 1998 acquisitions of Calvin Klein Jeanswear and
Kidswear were $415.5 million. In addition, the Company discontinued several
underperforming brands during 1998. These discontinued brands accounted for a
reduction in net revenues of $30.9 million in fiscal 1998. Excluding the impact
of these items, net revenues from continuing brands were up 9.4%.
INTIMATE APPAREL DIVISION. Net revenues increased $3.6 million or 0.4% to
$944.8 million in fiscal 1998 compared with $941.2 million in fiscal 1997.
Discontinued brands accounted for a reduction in net revenues of $30.9
million in fiscal 1998. Excluding the impact of the discontinued brands, net
revenues increased 3.9%. Core Warner's, Olga and private label business
increased $29.3 million or 8.1% over fiscal 1997 results. Bra market share in
Department and Specialty stores for the year was 37.5% compared with 34.0% in
1997. Fiscal 1998 net revenues were negatively affected by hurricanes in
Costa Rica and Honduras which disrupted shipments during the 1998 fourth
quarter. Calvin Klein net revenues declined 3.1% primarily on lower
international shipments in Russia of $6.3 million, and the Far East of $0.8
million due to currency devaluation and economic downturns.
SPORTSWEAR AND ACCESSORIES DIVISION. Net revenues increased $449.4 million or
105.5% to $875.3 million in fiscal 1998 compared with $425.9 million in
fiscal 1997. Incremental net revenues in 1998
19
<PAGE>
contributed by the 1997 and 1998 Calvin Klein acquisitions were $366.8
million. Excluding these acquisitions, net revenues increased $82.6 million
or 28.2%. Improvements were recorded across all brands with Chaps up $78.7
million or 28.9% and Accessories up $2.0 million or 11.6%.
RETAIL OUTLET STORES DIVISION. Net revenues increased $61.6 million or 89.8%
in fiscal 1998. Incremental net revenues in 1998 contributed by the 1997
Designer Holdings acquisition was $48.7 million. Excluding the acquisition,
net revenues increased $12.9 million or 22.4%.
Gross profit increased $162.0 million or 43.2% on an as-reported basis to
$537.2 million in fiscal 1998 compared with $375.2 million in fiscal 1997. The
increase is due primarily to the 1997 and 1998 Calvin Klein acquisitions. Gross
margins improved 1.4% to 27.5% from 26.1% resulting from a more favorable
regular to off-price mix across all brands. Included in cost of sales in fiscal
1998 are restructuring and special charges of $22.1 million, other non-recurring
items of $27.0 million (see discussion of Strategic Actions on pages 15-18) and
the current year impact of the early adoption of SOP 98-5 of $40.8 million and
charges relating to an inventory adjustment of $49.6 million (see Note 1 to the
Consolidated Financial Statements). Included in cost of sales in fiscal 1997 are
restructuring, special charges and other non-recurring items of $76.6 million
(see Strategic Actions on pages 15-18) and charges related to an inventory
adjustment of $57.0 million (see note 1 to the Consolidated Financial
Statements). Excluding these items, gross profit increased $167.9 million or
33.0% to $676.7 million compared with $508.8 million in fiscal 1997. Gross
margins on this basis were 34.7% in 1998 compared with 35.4% in 1997. The
decrease in gross margins from fiscal 1997 was caused by a higher mix of
jeanswear and Chaps net revenues, which has lower gross margins than Intimate
Apparel.
INTIMATE APPAREL DIVISION. Gross profit (excluding all non-recurring items
described above) increased $11.1 million or 3.0% to $378.6 million in fiscal
1998 compared with $367.5 million in fiscal 1997. Gross margins were 40.1% in
1998 compared with 39.0% in 1997. The improvement in margins resulted from a
better regular price sales mix and cost savings initiatives implemented
during the year.
The restatement described in Note 1 resulted from flaws in the Company's
Intimate Apparel Division inventory costing control system that have since
been corrected. As discussed in Note 1, the Company had rapidly expanded
its manufacturing capacity over a period prior to fiscal 1998, hiring and
training over 15,000 people in Mexico and the Caribbean Basin. The Company's
infrastructure, personnel and systems were overburdened by the size and scope
of this rapid expansion and by the increased manufacturing volume to meet
consumer demand. At the same time, as reported in the Company's fiscal 1996
Form 10-K, commencing in fiscal 1996, the Company determined to consolidate
and integrate its two intimate apparel divisions -- Warner's and Olga. These
two intimate apparel units had separate manufacturing facilities, separate
financial and administrative personnel and separate cost systems. The
integration of these two independent operations and systems further burdened
already extended personnel and systems. The Company anticipated that it would
address any shortcomings in its inventory costing system as part of the
implementation of new and enhanced hardware and software applications in
connection with the Company's year 2000 compliance program. During the relevant
period, substantially all of the Company's financial and information systems
personnel were committed to the Company's SAP implementation and Year 2000
compliance efforts, which consumed a significant portion of their time. When
the Company's SAP implementation was delayed in 1998 and ultimately replaced
with the ACS system, the Company developed a new inventory costing process as
an interim measure pending the selection and implementation of the Company's
new software which incorporated an integrated cost accounting package. The
Company now has a new inventory costing system and new monitoring procedures
for its Intimate Apparel Division that are designed to ensure that the
problems that led to the restatement of inventory accounts will not be
repeated and will function to reduce to a low level the risk that errors may
occur and not be detected within a timely period.
SPORTSWEAR AND ACCESSORIES DIVISION. Gross profit (excluding all
non-recurring items described above) increased $141.0 million or 120.9% to
$257.6 million in fiscal 1998 compared with $116.6 million in fiscal 1997.
The increase in gross profit was due to the 1997 and 1998 Calvin Klein
acquisitions, which contributed an incremental $121.9 million of gross
profit. Excluding acquisitions, gross profit was up $19.1 million compared
with 1997 with most of the increase in Chaps. Gross margins in 1998 were
29.4% compared with 27.4% in 1997 with the improvement due to the addition of
Calvin Klein Jeanswear.
RETAIL OUTLET STORES DIVISION. Gross profit increased $15.8 million or 64.0%
to $40.5 million in fiscal 1998 compared with $24.7 million in fiscal 1997,
with the increase attributable to the Designer Holdings acquisition.
Selling, administrative and general expenses increased $102.2 million to
$451.6 million on an as-reported basis in fiscal 1998 compared with $349.4
million in fiscal 1997. Selling, administrative and general expenses as a
percentage of sales improved to 23.1% in 1998 compared with 24.3% in 1997 on an
as-reported basis. Included in fiscal 1998 results are restructuring and special
charges of $26.4 million and other non-recurring items of $31.3 million (see
discussion of Strategic Actions on pages 15-16). The Company anticipates that
these programs will generate annual savings of approximately $15.0 million
pre-tax. Included in Fiscal 1997 are restructuring, special charges and other
non-recurring items of $54.2 million. Excluding restructuring, special charges
and other non-recurring items in 1998 and 1997, selling, administrative and
general expenses were $393.9 million (20.2% of net revenues) in 1998 compared
with $295.2 million (20.6% of net revenues) in 1997. The improvement in selling,
administrative and general expenses is attributable to the leverage attained
through increased net revenues of Calvin Klein Jeanswear.
Operating Profit
INTIMATE APPAREL DIVISION. Operating profit before special items increased
$4.6 million or 2.4% to $200.1 million in fiscal 1998 compared with $195.5
million in fiscal 1997. This was attributable to the
20
<PAGE>
increase in net revenues and gross profit mentioned above. In addition,
restructuring, non-recurring and special charges as outlined above were $75.5
million in fiscal 1998 and $68.0 million in fiscal 1997. The SOP 98-5
start-up costs were $40.8 million in fiscal 1998 and a charge for an
inventory adjustment was $49.6 million in fiscal 1998 and $57.0 million in
fiscal 1997 (see Note 1 to the Consolidated Financial Statement).
SPORTSWEAR AND ACCESSORIES DIVISION. Operating profit before special items
increased $82.9 million or 134.1% to $144.7 million in fiscal 1998 compared
with $61.8 million in fiscal 1997. This was attributable to the 1997 and 1998
Calvin Klein acquisitions and the increased Chaps net revenues mentioned
above. In addition, restructuring, non-recurring and special charges as
outlined above were $5.2 million in fiscal 1998 and $40.2 million in fiscal
1997.
RETAIL OUTLET STORES DIVISION. Operating profit before special items
increased $8.5 million or 119.7% to $15.6 million in fiscal 1998 compared
with $7.1 million in fiscal 1997, with the increase attributable to the
additional stores acquired in the Designer Holdings acquisition. In addition,
restructuring, non-recurring and special charges as outlined above were $4.8
million in fiscal 1998 and $18.7 million in fiscal 1997.
Interest expense increased $17.9 million to $63.8 million in fiscal 1998
compared with $45.9 million in fiscal 1997. The increase was caused primarily by
the company's stock buyback program and the Calvin Klein Jeanswear and Kidswear
acquisitions in fiscal 1997 and 1998.
The income tax benefit in fiscal 1998 was $17.5 million consisting of a $7.7
million income tax expense on continuing operations and a $25.2 million income
tax benefit on the cumulative effect of an accounting change, or an overall
effective tax rate of 35.3%. The difference between the United States federal
statutory rate of 35.0% and the Company's effective tax rate of 35.3% primarily
reflects the impact of state income taxes (net of federal benefits), foreign
income taxes at rates other than the U. S. statutory rate, the impact of
non-deductible intangible amortization, offset by the realization of a $10.8
million deferred tax asset, principally related to a realization of a capital
loss carryover during the fourth quarter of fiscal 1998, previously subject to a
valuation allowance. The Company has estimated United States net operating loss
carryforwards of approximately $496.2 million at January 2, 1999 and foreign net
operating loss carryforwards of approximately $18.3 million available to offset
future taxable income. The United States and foreign loss carryforwards, which
the Company expects to fully utilize, should result in future cash tax savings
of approximately $130.7 million at current United States income tax rates. The
net operating loss carryforwards expire between 2002 and 2018.
Income on an as-reported basis before cumulative effect of the early
adoption of SOP 98-5 improved $26.4 million to $14.1 million or $0.22 per
diluted share in fiscal 1998 compared with a loss of $12.3 million or $0.23 per
diluted share in fiscal 1997. Income before the effects of restructuring and
special charges of $34.8 million, other non-recurring items of $34.3 million and
the current year impact of the early adoption of SOP 98-5 and the charges
relating to an inventory adjustment of $58.5 million, (see Note 1 to the
Consolidated Financial Statements) was $141.7 million or $2.25 per diluted
share. Compared with fiscal 1997 net income (excluding non-recurring charges of
$81.1 million and the charges relating to an inventory adjustment of $35.4
million) of $104.1 million or $1.87 per diluted share, this represents an
improvement of $37.6 million, or $0.38 per diluted share.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Net revenues increased $371.9 million or 35.0% to $1,435.7 million compared
with $1,063.8 million in fiscal 1996. The acquisition of Designer Holdings
during the fourth quarter of fiscal 1997 added net revenues of $158.3 million.
Excluding the impact of the Designer Holdings acquisition and the divestiture of
the Hathaway dress shirt business which had revenues of $27.9 million in 1996,
net revenues improved by $241.5 million or 23.3%.
INTIMATE APPAREL DIVISION. Net revenues increased $139.2 million or 17.4% to
$941.2 million in fiscal 1997 compared with $802.0 million in fiscal 1996.
The increase is due to the strength of the Calvin Klein and the core Warners
and Olga brands coupled with the full year impact in fiscal 1997 of the
acquisition of the Lejaby companies in fiscal 1996. Net revenues of Calvin
Klein increased by
21
<PAGE>
$74.4 million due primarily to stronger sales in Europe. Warners and Olga
brand net revenues improved by $28.8 million due to increased market
penetration. Incremental net revenues contributed by Lejaby were $43.8
million in fiscal 1997.
SPORTSWEAR AND ACCESSORIES DIVISION. Net revenues increased $211.5 million or
98.6% to $425.9 million in fiscal 1997 compared with $214.4 million in fiscal
1996. The improvement is due in part to the acquisition of Designer Holdings
during the fourth quarter of 1997, which added net revenues of $133.3
million. In addition, the increase is due to continued strength in Chaps by
Ralph Lauren, which added $100.3 million in fiscal 1997, or an increase of
58.3% over fiscal 1996, and Calvin Klein accessories, which added $6.2
million, or an increase of 55.9% over fiscal 1996. These increases were
partially offset by a decrease in net revenues due to the disposition of the
Hathaway dress shirt operations in November 1996 of $27.9 million. On a
comparable basis, excluding the Designer Holdings acquisition and the
divested Hathaway operations, net revenues increased $105.4 million or 56.5%
in fiscal 1997.
RETAIL OUTLET STORES DIVISION. Net revenues increased $21.2 million or 44.7%
to $68.6 million in fiscal 1997 compared with $47.4 million in fiscal 1997.
The improvement is due to the acquisition of Designer Holdings during the
fourth quarter of 1997, which added net revenues of $25.0 million.
Gross profit increased $85.5 million or 29.5% on an as-reported basis to
$375.2 million in fiscal 1997 compared with $289.7 million in fiscal 1996. The
increase is due to the 35.0% increase in net revenues. Gross margins decreased
1.1% to 26.1% from 27.2%. Included in cost of sales in fiscal 1997 are
restructuring and special charges of $76.6 million (see Note 3) and a charge
relating to an inventory adjustment of $57.0 million (see Note 1). Included in
cost of sales in fiscal 1996 are restructuring and special charges of $37.9
million (see Note 3) and a charge relating to an inventory adjustment of $38.0
million (see Note 1). Excluding these items, gross profit increased 39.2% to
$508.8 million in fiscal 1997 compared with $365.6 in fiscal 1996 and gross
margins increased 100 basis points to 35.4% in 1997 compared with 34.4% in 1996
due to cost saving measures implemented during this period. Increases were
experienced across all divisions.
INTIMATE APPAREL DIVISION. Gross profit (excluding all non-recurring items
described above) increased 21.6% to $367.5 million in fiscal 1997 (39.0% of
net revenues) from $302.4 million (37.7% of net revenues) in fiscal 1996. The
increase in gross profit reflects higher revenues along with the full year
impact in 1997 of the Lejaby acquisition.
SPORTSWEAR AND ACCESSORIES DIVISION. Gross profit (excluding all
non-recurring items described above) increased 160.9% to $116.6 million in
fiscal 1997 (27.4% of net revenues) compared with $44.7 million (20.8% of net
revenues) in fiscal 1996. The increase in gross profit is the result of
higher Chaps by Ralph Lauren volume along with the acquisition of Designer
Holdings during the fourth quarter of 1997. The Company also benefitted from
the disposition, in fiscal 1996, of the Hathaway dress shirt business. On a
comparable basis, excluding the results of Designer Holdings in 1997 and the
Hathaway business in 1996, gross profit improved 74.6% or $35.6 million in
fiscal 1997.
RETAIL OUTLET STORES DIVISION. Gross profit increased 33.5% to $24.7 million
in fiscal 1997 compared with $18.5 million in fiscal 1996. The increase in
gross profit is the result of the Designer Holdings acquisition.
Selling, administrative and general expenses increased $47.7 million to
$349.4 million on an as-reported basis in fiscal 1997 compared with $301.7
million in fiscal 1996. Selling, administrative and general expenses as a
percentage of sales improved to 24.3% in 1997 compared to 28.4% in 1996 on an
as-reported basis. Included in fiscal 1997 results are restructuring and special
charges of $54.2 million. Included in fiscal 1996 results are restructuring and
special charges of $100.6 million (see discussion of strategic actions on pages
15-18). Excluding these non-recurring items selling, administrative and general
expenses increased 46.8% to $295.2 million (20.6% of net revenues) in fiscal
1997 compared with $201.0 million (18.9% of net revenues) in fiscal 1996. The
increase is due to higher sales volume and reflects the Company's commitment to
invest in its brands through increased marketing and promotional activities. In
fiscal 1997, such costs were $86.2 million (6.0% of net revenues) compared with
$59.5 million (5.6% of net revenues) in fiscal 1996 with increased spending on
the Calvin Klein
22
<PAGE>
($15.2 million) and Lejaby ($3.1 million) brands of intimate apparel and Calvin
Klein jeanswear and jeans related sportswear ($6.9 million). Selling,
administrative and general expenses also increased due to higher Calvin Klein
royalties ($11.1 million), higher goodwill amortization ($1.2 million), the
result of the acquisition of Designer Holdings and the Lejaby companies and the
inclusion of $3.5 million attributable to minority interests in the income of
Designer Holdings applicable to the period of less than 100% ownership by the
Company.
Operating Profit
INTIMATE APPAREL DIVISION. Operating profit before special items increased
$24.7 million or 14.5% to $195.5 million in fiscal 1997 compared with $170.8
million in fiscal 1996. This was attributable to the 17.4% increase in net
revenues and a 21.6% increase in gross profit partially offset by increased
marketing spending of $19.9 million, primarily in the Calvin Klein and Lejaby
brands. In addition, restructuring, non-recurring and special charges as
outlined above were $68.0 million in fiscal 1997 and $85.5 million in fiscal
1996. Also, a charge for an inventory adjustment was $57.0 million in fiscal
1997 and $38.0 million in fiscal 1996 (see Note 1 to the Consolidated
Financial Statements).
SPORTSWEAR AND ACCESSORIES DIVISION. Operating profit before special items
increased $32.9 million or 113.8% to $61.8 million in fiscal 1997 compared
with $28.9 million in fiscal 1996. The increase was attributable to the
acquisition of Designer Holdings in the fourth quarter of 1997 and the 58.3%
increase in Chaps net revenues which resulted in a 160.9% increase in gross
profit partially offset by increased marketing spending of $6.7 million
primarily in Calvin Klein sportswear. In addition, restructuring,
non-recurring and special charges as outlined above were $40.2 million in
fiscal 1997 and $50.0 million in fiscal 1996.
RETAIL AND OUTLET STORES DIVISION. Operating profit before special items
increased $1.3 million or 22.4% to $7.1 million in fiscal 1997 compared with
$5.8 million in fiscal 1996. The increase was attributable to the Designer
Holdings acquisition. In addition, restructuring, non-recurring and special
charges as outlined above were $18.7 million in fiscal 1997.
Interest expense increased 41.7% to $45.9 million in fiscal 1997 from $32.4
million in fiscal 1996. The increase results primarily from a full year of
interest expense on funds borrowed to complete the 1996 acquisitions,
principally Lejaby.
Income tax benefits on continuing operations were $7.8 million for fiscal
1997, or an effective tax rate of 38.7%. The difference between the United
States federal statutory rate of 35.0% and the Company's effective tax rate of
38.7% (excluding the non-recurring charge and the minority interest) primarily
reflects the impact of state income taxes (net of federal benefits), foreign
income taxes at rates other than the U.S. statutory rate and the impact of
non-deductible intangible amortization. For income tax purposes, the Company has
estimated United States net operating loss carryforwards available to offset
future taxable income of approximately $216.9 million at January 3, 1998. These
carryforwards, which the Company expects to fully utilize, should result in
future cash tax savings of approximately $85.8 million at current United States
income tax rates. The net operating loss carryforwards expire between 2002 and
2012.
On an as-reported basis, the net loss of $12.3 million in fiscal 1997 was an
improvement of $19.1 million compared with a net loss of $31.4 million in fiscal
1996. Included in fiscal 1997 and 1996 net income are non-recurring charges of
$81.1 million and $88.8 million, respectively. Net income before non-recurring
items increased 29.2% to $104.1 million (or $1.87 per diluted share) in fiscal
1997 from $80.6 million (or $1.51 per diluted share) in fiscal 1996. This
increase reflects higher sales volumes and gross margins partially offset by
higher selling, administrative and general costs and interest costs, as
previously discussed.
CAPITAL RESOURCES AND LIQUIDITY
The Company's liquidity requirements arise primarily from its debt service
and the funding of working capital needs, primarily inventory and accounts
receivable and capital improvements programs. 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
23
<PAGE>
generates a substantial amount of its operating cash flow in the fourth quarter
of the fiscal year, reflecting third and fourth quarter shipments and the sale
of inventory built during the first half of the fiscal year.
During 1998, the Company acquired certain inventory and other assets as well
as the sub-license to produce Calvin Klein jeans and jeans-related products for
children in the United States, Mexico and Central and South America and the
sub-license to produce Calvin Klein jeans and related products for children in
Canada. Also during 1998, the Company acquired certain assets as well as the
sub-license to distribute Calvin Klein jeans, jeans-related products and khakis
for men and women in Mexico, Central America and Canada. The total purchase
price of these acquisitions was approximately $53.1 million.
In December 1997, the Company completed the acquisition of Designer
Holdings, which develops, manufactures and markets designer jeanswear and
sportswear under a license from Calvin Klein, Inc. The purchase price consisted
of the issuance of 10,413,144 shares of the Company's stock valued at $353.4
million. Net assets acquired included $55.8 million of cash of Designer
Holdings.
In February 1996, the Company acquired substantially all of the assets
(including certain subsidiaries) of GJM, a private label manufacturer of women's
lingerie and sleepwear. The purchase price consisted of a cash payment of $12.5
million plus assumed liabilities.
In the third and fourth quarters of fiscal 1996, the Company acquired
Lejaby, a leading European intimate apparel manufacturer, for approximately $79
million, including certain fees and expenses and assumed liabilities. Funds to
consummate the transaction were provided by members of the Company's bank credit
group. The terms of the bank loans are substantially the same as the terms of
the Company's existing credit agreements and included a term loan totaling 370
million French Francs and revolving loan facilities totaling 150 million French
Francs (the '1996 Bank Credit Agreements').
In July 1996, the Company acquired Bodyslimmers, for approximately $6.5
million and assumed liabilities. The acquisition of Bodyslimmers expanded the
Company's product line to include body-slimming undergarments, a fast growing
segment of the intimate apparel market targeting aging baby boomers. This
acquisition enhanced the Company's leading position in the domestic intimate
apparel market.
Cash provided by operations in fiscal 1998 was $333.7 million, compared with
$143.9 million in fiscal 1997 and $27.0 million in fiscal 1996. Cash flow from
operating activities increased $189.8 million in fiscal 1998 compared with
fiscal 1997 primarily as a result of improved management of trade payables
together with the favorable impact of the accounts receivable securitization.
Cash flow from operating activities increased $116.9 million in fiscal 1997
compared with fiscal 1996, primarily as a result of a lower net loss and
non-cash depreciation and amortization coupled with lower working capital
requirements. The lower working capital requirements compared with 1996 were
principally due to improved management of payables and reductions in prepaid
expenses. The increase in payables was also due to higher inventory levels at
year end in support of anticipated increased sales volume. Depreciation and
amortization expense was $46.5 million, $47.4 million and $27.6 million in
fiscal 1998, 1997 and 1996, respectively. The increase in depreciation and
amortization expense in fiscal 1997 primarily reflects amortization of
intangible assets related to the acquisitions completed in fiscal 1996.
The provision for receivable allowances was $166.3 million in fiscal 1998,
$139.5 million in fiscal 1997 and $78.9 million in fiscal 1996. The increase in
fiscal 1998 over fiscal 1997 represents the 35.9% sales increase primarily
related to the Designer Holdings acquisition. The provision for inventory write-
downs was $25.4 million in fiscal 1998, $57.3 million in fiscal 1997 and $25.3
million in fiscal 1996. The fiscal 1997 charge reflects the Intimate Apparel
restructuring (see Note 3 to the Consolidated Financial Statements).
Cash used in investing activities was $221.8 million in fiscal 1998 compared
with $22.0 million in fiscal 1997 and $156.5 million in fiscal 1996. Fiscal 1998
includes $53.1 million related to the purchase of various Calvin Klein Jeanswear
sub-licenses and $43.8 million related to the payment of acquired liabilities
and acquisition accruals in connection with the Designer Holdings acquisition.
Fiscal 1997 includes $55.8 million of cash acquired in connection with the
acquisition of Designer Holdings for Company stock. Fiscal 1996 includes $85.6
million, net of cash acquired, related to the purchase of Lejaby, GJM and
Bodyslimmers and $30.1 million related to the payment of acquired liabilities
and
24
<PAGE>
acquisition accruals. Capital expenditures for new facilities, improvements to
existing facilities and for machinery and equipment were approximately $142.8
million, $57.4 million and $33.8 million in the 1998, 1997 and 1996 fiscal
years, respectively. Also, in fiscal 1998, intangibles and other assets include
a $5.0 million investment in Interworld, a leading provider of E-Commerce
software systems.
Cash (used in) provided by financing activities was $(116.3) million,
$(125.2) million and $135.2 million in fiscal 1998, 1997 and 1996, respectively.
During fiscal 1998 and 1997, debt repayments, including payments on credit
facilities, were $6.1 million and $377.7 million, respectively. In 1997, the
Company renegotiated its bank arrangements, including facilities for revolving
credit, trade credit and letters of credit. Net proceeds under the revolving
credit facility were $291.1 million in fiscal 1997. For the year ended
January 2, 1999, the Company repurchased 4,794,699 shares of its common stock at
a cost of $135.4 million and paid cash dividends of $22.3 million. In exchange
for shares received from option holders with a fair market value of $38.1
million and $0.6 million, the Company paid $38.1 million and $0.6 million of
withholding taxes on options that were exercised during fiscal 1998 and 1997,
respectively. For the year ended January 3, 1998, the Company repurchased
839,319 shares of its common stock at a cost of $26.5 million and paid cash
dividends of $16.2 million. During fiscal 1996, the Company entered into the
1996 Bank Credit Agreements, proceeds from which were used to purchase Lejaby in
fiscal 1996. In addition, the Company increased the outstanding balance on its
revolving lines of credit by approximately $105.5 million in fiscal 1996.
In April 1998, the Company amended its 1996 Bank Credit Agreements (the
'Agreement') to increase its revolving loan facilities to 480 million French
Francs from 120 million French Francs. Borrowings under the Agreement bear
interest at LIBOR plus .35% and mature on April 17, 2003. In July 1998, the
Company amended its $300 million Trade Letter of Credit Facility (the 'L/C
Facility') to increase the size of the facility to $450 million, to extend the
borrowing period for amounts due under the maturing letters of credit from 120
days to 180 days, to extend the maturity of the L/C Facility to July 29, 1999
and to eliminate certain restrictions relating to debt and investments. The
amount of borrowings available under both the 1996 Bank Credit Agreements and
the L/C Facility was increased to accommodate the internal growth of the
Company's business as well as the increased demand for finished product
purchases stemming from the acquisition of Designer Holdings in the fourth
quarter of 1997 and the acquisition of the Calvin Klein Children's business in
the second quarter of 1998. In conjunction with the amendment of the L/C
Facility, the Company also amended its $600 million revolving credit facility
and its $200 million 364-day credit facility to allow for the increase in the
L/C Facility and the elimination of certain restrictions relating to debt and
investments.
In October 1998, the Company entered into a $200 million revolving accounts
receivable securitization facility. Under this facility, the Company entered
into agreements to sell, for a period of up to five years, undivided
participation interests in designated pools of U.S. trade receivables.
Participation interests in new receivables may be sold as collections reduce
previously sold participation interests. The participation interests are sold at
a discount to reflect normal dilution. Net proceeds to the Company from the
initial funding were $200 million, and were used primarily to temporarily repay
long-term debt. At January 2, 1999, approximately $170.3 million was advanced
under this facility.
The Company has paid a quarterly cash dividend since June 1995. The dividend
payment was raised to $0.08 per share from $0.07 per share in February 1997 and
increased to $0.09 per share in January 1998.
At January 2, 1999, the Company had approximately $511.1 million of
additional borrowing availability under the revolving loan portions of its
United States bank facilities. The Company also has bank credit agreements in
Canada, Europe and Asia. At January 2, 1999, the Company had approximately
$115.4 million of additional borrowing availability under these agreements. The
Company believes that funds available under its various bank facilities,
together with cash flow to be generated from future operations, will be
sufficient to meet the capital expenditure requirements and working capital
needs of the Company, including interest and debt principal payments for the
next twelve months and for the next several years.
25
<PAGE>
YEAR 2000 AND ECONOMIC AND MONETARY UNION ('EMU') 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 and EMU
compliance. Full implementation of this program is expected to require
expenditures of approximately $10.0 million over the next twelve 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
expected to be completed in mid-1999.
As a part of its Year 2000 process, the Company intends to test its Year
2000 readiness for critical business processes and application systems. The
Company anticipates that minor issues will be identified during this test period
and intends to address such issues during the first half of fiscal 1999. 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 suppliers and governmental/regulatory agencies
are not timely completed. This process was begun in fiscal 1998 and will be
on-going throughout 1999. The Company's contingency planning consists of
upgrading current information systems operating and application software to Year
2000 compliance. The upgrade of current systems, which the Company anticipates
will be substantially complete by the end of the second quarter of fiscal 1999,
will be accomplished with both internal and external resources. Such remediation
costs will be 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.
Readers are cautioned that forward-looking statements contained in the Year
2000 update should be read in conjunction with the Company's disclosure under
'Statement Regarding Forward-looking Disclosures'.
In anticipation of the establishment of the European EMU and the
introduction of a single European unit of currency (the 'Euro') scheduled for
January 1, 1999, Warnaco formed a Steering Committee in December 1997 to
(1) identify the related issues and their potential effect on Warnaco, and
(2) develop an action plan for EMU compliance.
The steering committee completed development of and implemented an action
plan which included preparation of banking arrangements for use of the Euro,
development of dual currency price lists and invoices, modification of prices to
mitigate the potential effects of price transparency and taking the necessary
computer-related remediation steps. As a result of this plan, as of January 1,
1999, Warnaco was EMU compliant.
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
26
<PAGE>
amended, which represent the Company's expectations or beliefs concerning future
events that involve risks and uncertainties, including those associated with the
effect of national and regional economic conditions, the overall level of
consumer spending, the performance of the Company's products within the
prevailing retail environment, customer acceptance of both new designs and
newly-introduced product lines, and financial difficulties encountered by
customers. All statements other than statements of historical facts included in
this Annual Report, including, without limitation, the statements under
'Management's Discussion and Analysis of Financial Condition,' are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
SEASONALITY
The operations of the Company are somewhat seasonal, with approximately 56%
of net revenues, 63% of operating income before restructuring, special charges
and other non-recurring items, 31% of operating income after restructuring,
special charges and other non-recurring items and the charge relating to an
inventory adjustment as described in Note 1 to the Consolidated Financial
Statements, and substantially all of the Company's net cash flow from operating
activities generated in the second half of the year. Generally, the Company's
operations during the first half of the year are financed by increased
borrowings. The following sets forth the net revenues, operating income before
restructuring and special charges and other non-recurring items, operating
income and net cash flow from operating activities generated for each quarter of
fiscal 1998 and fiscal 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------
(IN MILLIONS)
APR. 5, JUL. 5, OCT. 4, JAN. 3, APR. 4, JUL. 4, OCT. 3, JAN. 2,
1997 1997 1997 1998 1998 1998 1998 1999
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues................... $251.5 $290.2 $333.4 $560.6 $ 419.2 $438.9 $544.1 $548.1
Operating income (loss)........ $ 28.6 $ 23.8 $ 48.3 $(74.9) $ 23.4 $ 35.5 $ 56.0 $(29.3)
Cash flow from (used in)
operating activities......... $(69.6) $(31.8) $ 11.5 $233.8 $(145.4) $ 22.4 $207.0 $249.7
</TABLE>
INFLATION
The Company does not believe that the relatively moderate levels of
inflation in the United States, Canada and Western Europe have had a significant
effect on its net revenues or its profitability. Management believes that, in
the past, the Company has been able to offset such effects by increasing prices
or by instituting improvements in productivity. Mexico historically has been
subject to high rates of inflation; however, the effects of inflation on the
operation of the Company's Mexican subsidiaries have not had a material impact
on the results of the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, 'Accounting for Derivative Instruments and Hedging Activities' (SFAS
No. 133). This statement, which is effective for the fiscal year beginning
January 3, 2000, establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 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
SFAS No.133 will not have a material impact on the Company's consolidated
financial position, liquidity, cash flows or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, and selectively uses financial instruments
to manage these risks. The Company does not enter into financial instruments for
speculation or for trading purposes.
27
<PAGE>
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 January 2, 1999, approximately $610.0
million of $879.7 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 January 2, 1999, the net fair value liability of all
financial instruments (primarily interest rate swap agreements) with exposure to
interest rate risk was approximately $24.3 million. As of January 2, 1999, the
Company had approximately $286.9 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
January 2, 1999 would have had a $1.7 million unfavorable impact on the
Company's pre-tax earnings and cash flow over a one-year 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 January 2, 1999, the net fair value asset of financial instruments with
exposure to foreign currency risk, which included only 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.
EQUITY PRICE RISK
The Company entered into combination put-call contracts to facilitate the
repurchase of its common stock. At January 2, 1999, the Company has contracts
covering 1.5 million shares of common stock with an average forward price of
$35.35. At January 2, 1999, the net fair value liability of these contracts was
approximately $15.1 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report. See
Item 14 of Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference from page
11 of Item 4 of Part I included herein and from the Proxy Statement of The
Warnaco Group, Inc., relating to the 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is hereby incorporated by reference from
the Proxy Statement of The Warnaco Group, Inc., relating to the 1999 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is hereby incorporated by reference from
the Proxy Statement of The Warnaco Group, Inc., relating to the 1999 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is hereby incorporated by reference from
the Proxy Statement of The Warnaco Group, Inc., relating to the 1999 Annual
Meeting of Stockholders.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The Consolidated Financial Statements of The Warnaco Group, Inc.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets as of January 3, 1998 and
January 2, 1999........................................... F-2
Consolidated Statements of Operations for the Years Ended
January 4, 1997, January 3, 1998 and January 2, 1999...... F-3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended January 4, 1997,
January 3, 1998 and January 2, 1999....................... F-4
Consolidated Statements of Cash Flows for the Years Ended
January 4, 1997, January 3, 1998 and January 2, 1999...... F-5
Notes to Consolidated Financial Statements.................. F-6 - F-40
</TABLE>
2. Financial Statement Schedule:
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission which
are not included with this additional financial data have been omitted
because they are not applicable or the required information is shown in
the Consolidated Financial Statements or Notes thereto.
30
<PAGE>
3. LIST OF EXHIBITS:
<TABLE>
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-Q
filed May 16, 1995).
3.2 Amended Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Form 10-K filed April 4, 1997).
4.1 Registration Rights Agreement dated March 14, 1994 between the Company and
Calvin Klein, Inc. ('CK') (incorporated herein by reference to Exhibit 4.1
to the Company's Form 10-Q filed May 24, 1994).
4.2 Amended and Restated Declaration of Trust of Designer Finance Trust, dated
as of November 6, 1996, among Designer Holdings, as Sponsor, IBJ Schroder
Bank & Trust Company, as Property Trustee, Delaware Trust Capital
Management, Inc. as Delaware Trustee and Merril M. Halpern and Arnold H.
Simon, as Trustees (incorporated herein by reference to Exhibit 4.1 to the
Company's Form 10-Q filed November 12, 1997).
4.3 First Supplemental Indenture dated as of March 31, 1998, between Designer
Holdings, The Warnaco Group, Inc. and IBJ Schroder Bank & Trust Company, as
Trustee (incorporated herein by reference to Exhibit 4.3 to the Company's
Form 10-K filed April 3, 1998).
4.4 Preferred Securities Guarantee Agreement dated as of March 31, 1998,
between The Warnaco Group, Inc., as Guarantor and IBJ Schroder Bank & Trust
Company, as Preferred Guarantee Trustee, with respect to the Preferred
Securities of Designer Finance Trust (incorporated herein by reference to
Exhibit 4.4 to the Company's Form 10-K filed April 3, 1998).
10.1 Credit Agreement, dated as of August 12, 1997 (the 'U.S. $600,000,000
Credit Agreement'), among Warnaco Inc., as Borrower, and The Bank of Nova
Scotia and Citibank, N.A. as Managing Agents, Citibank, N.A. as
Documentation Agent, the Bank of Nova Scotia as Administrative Agent,
Competitive Bid Agent, Swing Line Bank and an Issuing Bank and certain
other lenders named therein (incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-Q filed November 12, 1997).
10.2 Second Amended and Restated Credit Agreement, dated as of August 12, 1997
(the 'U.S. $300,000,000 Credit Agreement'), among Warnaco Inc., as the U.S.
Borrower, Warnaco (HK) Ltd., as the Foreign Borrower, Citibank, N.A., as
the Documentation Agent, The Bank of Nova Scotia, as the Administrative
Agent, and certain other lenders named therein (incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q filed November 12,
1997).
10.3 First Amendment to the U.S. $300,000,000 Credit Agreement, dated as of
October 14, 1997 among Warnaco Inc., as the U.S. Borrower, Warnaco (HK)
Ltd. as the Foreign Borrower, Citibank, N.A., as the Documentation Agent,
The Bank of Nova Scotia, as Administrative Agent, and certain other lenders
party thereto (incorporated herein by reference to Exhibit 10.3 to the
Company's Form 10-Q filed November 12, 1997).
10.4 Employment Agreement, dated as of January 6, 1991, between the Company and
Linda J. Wachner (incorporated herein by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1, No. 33-42641).
10.5 Incentive Compensation Plan (incorporated herein by reference to Exhibit
10.8 to the Company's Registration on Form S-1, No. 33-45877).
10.6 1991 Stock Option Plan (incorporated herein by reference to Exhibit 10.9 to
the Company's Registration Statement on Form S-1, No. 33-45877).
10.7 Amended and Restated 1988 Employee Stock Purchase Plan, as amended
(incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1, No. 33-45877).
10.8 Warnaco Employee Retirement Plan (incorporated herein by reference to
Exhibit 10.11 to the Company's Registration Statement on Form S-1, No. 33-
45877).
10.9 Executive Management Agreement, dated as of May 9, 1991, as extended,
between the Company, Warnaco Inc. and The Spectrum Group, Inc.
(incorporated herein by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1, No. 33-45877).
10.10 1993 Non-Employee Director Stock Plan (incorporated herein by reference to
the Company's Proxy Statement for its 1994 Annual Meeting of Stockholders).
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
10.11 Amended and Restated 1993 Stock Plan (incorporated herein by
reference to the Company's Proxy Statement for its 1994
Annual Meeting of Stockholders).
10.12 The Warnaco Group, Inc. Supplemental Incentive Compensation
Plan (incorporated herein by reference to the Company's
Proxy Statement for its 1994 Annual Meeting of
Stockholders).
10.13 Amended and Restated License Agreement dated as of January
1, 1996, between Polo Ralph Lauren, L.P. and Warnaco Inc.
(incorporated herein by reference to Exhibit 10.4 to the
Company's Form 10-Q filed November 12, 1997).
10.14 Amended and Restated Design Services Agreement dated as of
January 1, 1996, between Polo Ralph Lauren Enterprises, L.P.
and Warnaco Inc. (incorporated herein by reference to
Exhibit 10.5 to the Company's Form 10-Q filed November 12,
1997).
10.15 Agreement and Plan of Merger dated as of September 25, 1997
among The Warnaco Group, Inc., WAC Acquisition Corporation
and Designer Holdings Ltd. (incorporated herein by reference
to Exhibit 2, attached as Appendix A to the Joint Proxy
Statement/Prospectus to the Company's Registration Statement
on Form S-4, No. 333-40207).
10.16 Stock Exchange Agreement dated as of September 25, 1997
among The Warnaco Group, Inc, New Rio, L.L.C. and each of
the members of New Rio signatory hereto (incorporated herein
by reference to Exhibit 10.1, attached as Appendix B to the
Joint Proxy Statement/Prospectus to the Company's
Registration Statement on Form S-4, No. 333-40207).
10.17 1997 Stock Option Plan (incorporated herein by reference to
Exhibit 10.17 to the Company's Form 10-K filed April 3,
1998).
10.18 License Agreement dated as of August 4, 1994 (the 'Calvin
Klein License Agreement') between Calvin Klein, Inc. and
Calvin Klein Jeanswear Company; incorporated by reference to
Exhibit 10.20 to Designer Holdings, Ltd.'s Registration
Statement on Form S-1 (File No. 333-2236).
10.19 Amendment to the Calvin Klein License Agreement dated as of
December 7, 1994; incorporated by reference to Exhibit 10.21
to Designer Holdings, Ltd.'s Registration Statement on Form
S-1 (File No. 333-2236).
10.20 Amendment to the Calvin Klein License Agreement dated as of
January 10, 1995; incorporated by reference to Exhibit 10.22
to Designer Holdings, Ltd.'s Registration Statement on Form
S-1 (File No. 333-2236).
10.21 Amendment to the Calvin Klein License Agreement dated as of
February 28, 1995; incorporated by reference to Exhibit
10.23 to Designer Holdings, Ltd.'s Registration Statement on
Form S-1 (File No. 333-2236).
10.22 Amendment to the Calvin Klein License Agreement dated as of
April 22, 1996; incorporated by reference to Exhibit 10.38
to Designer Holdings, Ltd.'s Registration Statement on Form
S-1 (File No. 333-2236).
10.23 Amendment No. 1, dated as of July 31, 1998, to the Credit
Agreement dated as of August 12, 1997, among Warnaco Inc.
and The Warnaco Group, Inc., as Borrowers, and The Bank of
Nova Scotia, as Managing Agent and Administrative Agent and
Citibank N.A., as Managing Agent, and certain other lenders
named therein. (incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-Q filed August 18, 1998).
10.24 Amendment No. 1, dated as of July 31, 1998, to the Credit
Agreement dated as of November 26, 1997, among Warnaco Inc.
and The Warnaco Group, Inc., as Borrowers, and The Bank of
Nova Scotia, as Managing Agent and Administrative Agent and
Citibank N.A., as Managing Agent, and certain other lenders
named therein. (incorporated herein by reference to Exhibit
10.2 to the Company's Form 10-Q filed August 18, 1998).
10.25 Fifth Amended and Restated Credit Agreement, dated as of
July 31, 1998, among Warnaco Inc., as the U.S. Borrower,
Designer Holdings, Ltd. and other wholly-owned domestic
subsidiaries as designated from time to time, as the
Sub-Borrowers, Warnaco (HK) Ltd., Warnaco B.V., Warnaco
Netherlands B.V., as the Foreign Borrowers, the Warnaco
Group, Inc., as a Guarantor, and Societe Generale, as the
Documentation Agent, Citibank, N.A., as the Syndication
Agent, and The Bank of Nova Scotia, as the Administrative
Agent, and certain other lenders named therein.
(incorporated herein by reference to Exhibit 10.3 to the
Company's Form 10-Q filed August 18, 1998).
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
10.26 Amended and Restated Master Agreement of Sale, dated as of
September 30, 1998, among Warnaco Inc., as Originator, and
Gregory Street, Inc., as Buyer and Servicer. (incorporated
herein by reference to Exhibit 10.4 to the Company's Form
10-Q filed November 7, 1998).
10.27 Master Agreement of Sale, dated as of September 30, 1998,
among Calvin Klein Jeanswear Company, as Originator, and
Gregory Street, Inc., as Buyer and Servicer. (incorporated
herein by reference to Exhibit 10.5 to the Company's Form
10-Q filed November 7, 1998).
10.28 Purchase and Sale Agreement, dated as of September 30, 1998,
among Gregory Street, Inc., as Seller and initial Servicer
and Warnaco Operations Corporation, as Buyer. (incorporated
herein by reference to Exhibit 10.6 to the Company's Form
10-Q filed November 7, 1998).
10.29 Parallel Purchase Commitment, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller and
certain commercial lending institutions, as the Banks, and
Gregory Street, Inc., as the initial Servicer and The Bank
of Nova Scotia, as Agent. (incorporated herein by reference
to Exhibit 10.7 to the Company's Form 10-Q filed November 7,
1998).
10.30 Receivables Purchase Agreement, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller,
Gregory Street, Inc., as Servicer, Liberty Street Funding
Corp., and Corporate Asset Funding Company, Inc. as
Investors and The Bank of Nova Scotia, as Agent, and
Citicorp North America, Inc., as Co-Agent. (incorporated
herein by reference to Exhibit 10.8 to the Company's Form
10-Q filed November 7, 1998).
10.31 1998 Stock Plan for Non-Employee Directors.
21 Subsidiaries of the Company (incorporated herein by
reference to Exhibit 21 to the Company's Form 10-K filed
April 3, 1998).
27 Financial Data Schedule.
99 Designer Holdings, Ltd. Annual Report on Form 10-K for the
year ended December 31, 1996 (incorporated herein by
reference -- Commission file number 1-11707).
</TABLE>
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the 1998 fiscal year.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of New
York, State of New York, on the 16th day of May, 2000.
THE WARNACO GROUP, INC.
/s/ LINDA J. WACHNER
--------------------
Linda J. Wachner
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ LINDA J. WACHNER Chairman of the Board; Director; May 16, 2000
- -------------------------------------- President and Chief Executive
Linda J. Wachner Officer (Principal Executive Officer)
/s/ WILLIAM S. FINKELSTEIN Director; Senior Vice President, and May 16, 2000
- -------------------------------------- Chief Financial Officer (Principal
William S. Finkelstein Financial and Accounting Officer)
/s/ STUART D. BUCHALTER Director May 16, 2000
- --------------------------------------
Stuart D. Buchalter
/s/ JOSEPH A CALIFANO, JR. Director May 16, 2000
- --------------------------------------
Joseph A. Califano, Jr.
/s/ DONALD G. DRAPKIN Director May 16, 2000
- --------------------------------------
Donald G. Drapkin
/s/ ANDREW G. GALEF Director May 16, 2000
- --------------------------------------
Andrew G. Galef
/s/ WALTER F. LOEB Director May 16, 2000
- --------------------------------------
Walter F. Loeb
/s/ DR. MANUEL T. PACHECO Director May 16, 2000
- --------------------------------------
Dr. Manuel T. Pacheco
/s/ STEWART A. RESNICK Director May 16, 2000
- --------------------------------------
Stewart A. Resnick
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Warnaco Group, Inc.
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page 30 present fairly, in all
material respects, the financial position of The Warnaco Group, Inc. and its
subsidiaries at January 2, 1999 and January 3, 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 2, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Note 1, pursuant to the adoption of SOP 98-5 the Company changed
its accounting for deferred start-up costs effective the beginning of fiscal
1998. Also as described in Note 1, the Company restated its fiscal 1997 and 1996
consolidated financial statements with respect to accounting for inventory
production and inefficiency costs.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 2, 1999
F-1
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCLUDING SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 3,
1998(1) JANUARY 2,
RESTATED 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................... $ 12,009 $ 9,495
Accounts receivable, less reserves of $46,124 -- 1997
and $36,668 -- 1998................................... 296,378 199,369
Inventories............................................. 431,185 472,019
Prepaid expenses and other current assets............... 45,228 26,621
---------- ----------
Total current assets................................ 784,800 707,504
---------- ----------
Property, plant and equipment, at cost:
Land and land improvements.............................. 7,060 7,060
Buildings and building improvements..................... 80,115 81,928
Machinery and equipment................................. 145,207 255,163
---------- ----------
232,382 344,151
Less: Accumulated depreciation.......................... (101,982) (119,891)
---------- ----------
Net property, plant and equipment................... 130,400 224,260
---------- ----------
Other assets:
Licenses, trademarks, intangible and other assets, at
cost, less accumulated amortization of $83,276 -- 1997
and $78,116 -- 1998................................... 368,213 306,932
Excess of cost over net assets acquired, less
accumulated amortization of $40,060 -- 1997 and
$51,297 -- 1998....................................... 308,999 417,782
Deferred income taxes................................... 58,706 126,655
---------- ----------
Total other assets.................................. 735,918 851,369
---------- ----------
$1,651,118 $1,783,133
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................... $ 20,601 $ 30,231
Accounts payable........................................ 289,817 503,326
Accrued liabilities..................................... 122,095 131,316
Deferred income taxes................................... -- 14,276
---------- ----------
Total current liabilities........................... 432,513 679,149
---------- ----------
Long-term debt.............................................. 354,263 411,886
---------- ----------
Other long-term liabilities................................. 14,022 12,129
---------- ----------
Company-Obligated Mandatorily Redeemable Convertible
Preferred Securities of Designer Finance Trust Holding
Solely Convertible Debentures............................. 100,758 101,836
Stockholders' equity:
Class A Common Stock, $.01 par value, 130,000,000 shares
authorized, 63,294,423 and 65,172,608 issued in 1997
and 1998.............................................. 633 652
Additional paid-in capital.............................. 940,461 953,512
Accumulated other comprehensive income.................. (14,838) (15,703)
Accumulated deficit..................................... (122,421) (176,997)
Treasury stock, at cost................................. (38,567) (171,559)
Notes receivable for common stock issued and unvested
stock Compensation.................................... (15,706) (11,772)
---------- ----------
Total stockholders' equity.......................... 749,562 578,133
---------- ----------
$1,651,118 $1,783,133
========== ==========
</TABLE>
- ---------
(1) Fiscal 1997 has been restated as described in Note 1.
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Financial Statements.
F-2
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------
JANUARY 4, JANUARY 3,
1997(1) 1998(1) JANUARY 2,
RESTATED RESTATED 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues............................................. $1,063,823 $1,435,730 $1,950,251
Cost of goods sold....................................... 774,099 1,060,526 1,413,036
Selling, administrative and general expenses............. 301,732 349,431 451,640
---------- ---------- ----------
Operating income (loss).................................. (12,008) 25,773 85,575
Interest expense......................................... 32,435 45,873 63,790
---------- ---------- ----------
Income (loss) before income taxes and cumulative effect
of change in accounting principle...................... (44,443) (20,100) 21,785
Provision (benefit) for income taxes..................... (13,034) (7,781) 7,688
---------- ---------- ----------
Income (loss) before cumulative effect of change in
accounting principle................................... (31,409) (12,319) 14,097
Cumulative effect of change in accounting for deferred
start-up costs, net.................................... -- -- (46,250)
---------- ---------- ----------
Net income (loss)........................................ $ (31,409) $ (12,319) $ (32,153)
========== ========== ==========
Basic earnings (loss) per common share:
Income (loss) before accounting change............... $ (0.61) $ (0.23) $ 0.23
Cumulative effect of accounting change............... -- -- (0.75)
---------- ---------- ----------
Net income (loss).................................... $ (0.61) $ (0.23) $ (0.52)
========== ========== ==========
Diluted earnings (loss) per common share:
Income (loss) before accounting change............... $ (0.61) $ (0.23) $ 0.22
Cumulative effect of accounting change............... -- -- (0.73)
---------- ---------- ----------
Net income (loss).................................... $ (0.61) $ (0.23) $ (0.51)
========== ========== ==========
Shares used in computing earnings per share:
Basic................................................ 51,308 52,814 61,362
========== ========== ==========
Diluted.............................................. 51,308 52,814 63,005
========== ========== ==========
</TABLE>
- ---------
(1) Fiscal 1996 and 1997 have been restated as described in Note 1.
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Financial Statements.
F-3
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCLUDING SHARE DATA)
<TABLE>
<CAPTION>
NOTES
ACCUMULATED RECEIVABLE
OTHER FOR COMMON
CLASS A ADDITIONAL COMPREHENSIVE STOCK AND
COMMON PAID-IN INCOME ACCUMULATED TREASURY UNVESTED STOCK
STOCK CAPITAL (LOSS) DEFICIT STOCK COMPENSATION TOTAL
------- ---------- ------------- ------------ --------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 6, 1996.......... $ 521 $567,965 $ (3,745) $ (46,896) $ (5,000) $(12,544) $500,301
------- -------- -------- --------- --------- -------- --------
Net loss(1)......................... (31,409) (31,409)
Translation adjustments............. 438 438
--------
Comprehensive income (loss)......... (30,971)
Issued 190,700 shares of restricted
stock............................. 2 5,576 (5,578) --
Dividends declared.................. (14,532) (14,532)
Employee stock options exercised and
payment of employee notes
receivable........................ 1 2,150 123 2,274
Amortization of unvested stock
compensation...................... 2,502 2,502
Purchase of 250,000 shares of
treasury stock.................... (7,030) (7,030)
------- -------- -------- --------- --------- -------- --------
Balance at January 4, 1997.......... 524 575,691 (3,307) (92,837) (12,030) (15,497) 452,544
------- -------- -------- --------- --------- -------- --------
Net loss(1)......................... (12,319) (12,319)
Translation adjustments............. (11,531) (11,531)
--------
Comprehensive income (loss)......... (23,850)
Issued 137,135 shares of restricted
stock............................. 1 3,600 (3,601) --
Dividends declared.................. (17,265) (17,265)
Employee stock options exercised and
payment of employee notes
receivable........................ 4 9,498 70 9,572
Net cash settlements under equity
option arrangements............... (1,620) (1,620)
Amortization of unvested stock
compensation...................... 3,322 3,322
Purchase of 839,319 shares of
treasury stock.................... (26,537) (26,537)
Issuance of 10,413,144 shares for
the acquisition of Designer
Holdings Ltd...................... 104 353,292 353,396
------- -------- -------- --------- --------- -------- --------
Balance at January 3, 1998.......... 633 940,461 (14,838) (122,421) (38,567) (15,706) 749,562
------- -------- -------- --------- --------- -------- --------
Net loss............................ (32,153) (32,153)
Translation adjustments............. (865) (865)
--------
Comprehensive income (loss)......... (33,018)
Employee stock options exercised and
payment of employee note
receivable........................ 17 3,046 2,424 5,971 11,458
Net cash settlements under equity
option arrangements............... 2,325 2,325
Issued 182,903 shares of restricted
stock............................. 2 7,680 (7,682) --
Dividends declared.................. (22,423) (22,423)
Amortization of unvested stock
compensation...................... 5,645 5,645
Purchase of 4,794,699 shares of
treasury stock.................... (135,416) (135,416)
------- -------- -------- --------- --------- -------- --------
Balance at January 2, 1999.......... $ 652 $953,512 $(15,703) $(176,997) $(171,559) $(11,772) $578,133
======= ======== ======== ========= ========= ======== ========
</TABLE>
- ---------
(1) Fiscal 1996 and 1997 have been restated as described in Note 1.
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Financial Statements.
F-4
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------------
JANUARY 4, JANUARY 3,
1997(1) 1998(1) JANUARY 2,
RESTATED RESTATED 1999
---------- ---------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)...................................... $ (31,409) $ (12,319) $ (32,153)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization...................... 27,576 47,385 46,500
Provision for receivable allowances................ 78,851 139,469 166,347
Provision for inventory write-downs................ 25,320 57,298 25,442
Cumulative effect of accounting change............. -- -- 46,250
Amortization of unvested stock compensation........ 2,502 3,322 4,978
Non-recurring items................................ 113,220 48,806 95,143
(Increase) in deferred income tax assets........... (18,456) (13,906) (74,616)
Sale of accounts receivable............................ -- -- 170,500
Other changes in operating accounts.................... (102,852) (97,204) (109,531)
Cash portion of non-recurring items.................... (67,747) (28,972) (5,200)
--------- --------- ---------
Net cash from operating activities..................... 27,005 143,879 333,660
--------- --------- ---------
Cash flow from investing activities:
Proceeds from sale/leaseback transaction............... -- 33,223 21,713
Disposals of fixed assets.............................. 1,087 1,704 3,966
Increase in intangibles and other assets............... (8,178) (26,964) (7,849)
Purchase of property, plant and equipment.............. (33,765) (57,399) (142,787)
Acquisition of businesses.............................. (85,600) 55,800 (53,118)
Payment of assumed liabilities and acquisition
accruals............................................. (30,052) (28,346) (43,765)
--------- --------- ---------
Net cash from investing activities......................... (156,508) (21,982) (221,840)
--------- --------- ---------
Cash flow from financing activities:
Proceeds from sale of common stock, sale of treasury
shares and payment of notes receivable from
employees............................................ 2,274 7,270 46,476
Borrowings (repayments) under credit facilities........ 105,500 (153,394) 49,237
Borrowings under term loan agreements.................. -- -- 20,706
Proceeds from debt issuance............................ 79,249 291,109 2,027
Repayments of debt..................................... (27,839) (224,281) (6,094)
Cash dividends paid.................................... (14,532) (16,220) (22,284)
Payment of withholding taxes on option exercises....... -- (575) (38,095)
Purchase of treasury shares and net cash settlements
under equity option arrangements..................... (7,030) (27,582) (132,992)
Other.................................................. (2,441) (1,492) (35,280)
--------- --------- ---------
Net cash from financing activities......................... 135,181 (125,165) (116,299)
--------- --------- ---------
Effect on cash due to currency translation................. -- 3,437 1,965
--------- --------- ---------
Increase (decrease) in cash................................ 5,678 169 (2,514)
Cash at beginning of year.................................. 6,162 11,840 12,009
--------- --------- ---------
Cash at end of year........................................ $ 11,840 $ 12,009 $ 9,495
========= ========= =========
Other changes in operating accounts:
Accounts receivable.................................... $(108,541) $(145,652) $(250,109)
Inventories............................................ 1,457 (71,944) (87,404)
Prepaid expenses and other current assets.............. (16,387) 26,377 15,433
Accounts payable and accrued expenses.................. 20,619 94,015 212,549
--------- --------- ---------
$(102,852) $ (97,204) $(109,531)
========= ========= =========
</TABLE>
- ---------
(1) Fiscal 1996 and 1997 have been restated as described in Note 1.
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Financial Statements.
F-5
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: The Warnaco Group, Inc. ('Company') was incorporated in
Delaware on March 14, 1986 and on May 10, 1986 acquired substantially all of the
outstanding shares of Warnaco Inc. ('Warnaco'). Warnaco is the principal
operating subsidiary of the Company.
Nature of Operations: The Company designs, manufactures and markets a broad
line of women's intimate apparel, designer jeanswear and jeans related
sportswear for men, women, juniors and children, men's underwear and men's
sportswear, accessories and dress furnishings under a number of owned and
licensed brand names. The Company's products are sold to department and
specialty stores, mass merchandise stores and catalog and other retailers
throughout the United States, Canada, Mexico, Latin America, Western Europe and
the Far East.
Basis of Consolidation and Presentation: The accompanying Consolidated
Financial Statements include the accounts of the Company and all subsidiary
companies for the years ended January 4, 1997 ('Fiscal 1996'), January 3, 1998
('Fiscal 1997') and January 2, 1999 ('Fiscal 1998'). All intercompany
transactions are eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses.
Translation of Foreign Currencies: Cumulative translation adjustments,
arising primarily from consolidating the net assets and liabilities of the
Company's foreign operations at current rates of exchange as of the respective
balance sheet date, are applied directly to stockholders' equity and are
included as part of accumulated other comprehensive income. Income and expense
items for the Company's foreign operations are translated using monthly average
exchange rates.
Inventories: Inventories are stated at the lower of cost or market, cost
being determined on a first-in, first-out basis.
Property, plant and equipment: Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided over the lesser of the estimated useful lives of the
assets or term of the capital lease, using the straight-line method, as
summarized below:
<TABLE>
<S> <C>
Buildings. 20-40 years
Building improvements................................. 2-20 years
Machinery and equipment............................... 3-10 years
</TABLE>
Assets under capital lease and related amortization of capitalized leases
are included in property, plant and equipment and accumulated depreciation and
the associated liability is included in debt. Depreciation expense was $18,541,
$21,865 and $23,931 for fiscal years 1996, 1997 and 1998, respectively.
Intangible Assets: Intangible assets consist of goodwill, licenses,
trademarks, deferred financing costs and other intangible assets. Goodwill
represents the excess of cost over net assets acquired and is amortized on a
straight-line basis over the estimated useful life, not exceeding 40 years.
Licenses and trademarks of $243,400 in fiscal 1998 and $246,200 in fiscal 1997.
Licenses are amortized over the remaining life of the license, between 5 and
40 years and trademarks are amortized over the remaining life of the trademark
not to exceed 20 years. Deferred financing costs of $8,600 in fiscal 1998 and
$8,800 in fiscal 1997 are amortized over the life of the bank credit facility;
Other assets of $54,900 in fiscal 1998 and $113,200 in fiscal 1997 include
long-term investments, other non-current assets, deposits and deferred start-up
costs (only in 1997). Amortization expense, included in selling administrative
and general expenses was $9,035, $10,021 and $22,569 for fiscal years 1996, 1997
and 1998, respectively.
The Company reviews impairment when changes in circumstances, which include,
but are not limited to, the historical and projected operating performance of
business operations, specific industry
F-6
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
trends and general economic conditions, indicate that the carrying value of
business specific intangibles or enterprise level goodwill may not be
recoverable. Under these circumstances, the Company estimates future cash flows
using the recoverability method (undiscounted and including related interest
charges), as a basis for recording any impairment loss. An impairment loss would
then be recorded to adjust the carrying value of intangibles to the recoverable
amount. The impairment loss taken would be no greater than the amount by which
the carrying value of the net assets of the business exceeds its fair value. No
such impairment losses have been recorded.
Advertising Costs: Advertising costs are included in selling, administrative
and general expenses and expensed as incurred. Cooperative advertising
allowances provided to customers are charged to operations, as earned, and are
included in selling, administrative and general expenses. The amounts charged to
operations for advertising costs and cooperative advertising during fiscal 1996,
1997 and 1998 were $59,500, $86,200 and $102,600, respectively.
Income Taxes: The provision for income taxes, income taxes payable and
deferred income taxes are determined using the liability method. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
enacted tax rates and laws to taxable years in which such differences are
expected to reverse.
Unremitted earnings of subsidiaries outside of the United States are
considered to be reinvested indefinitely. If remitted, management believes they
would be substantially free of additional taxes.
Revenue Recognition: The Company recognizes revenue when goods are shipped
to customers, net of estimates for normal returns, discounts and allowances.
Stock Options: The Company accounts for options granted using the intrinsic
value method. Because the exercise price of the Company's options equals the
market value of the underlying stock on the date of grant, no compensation
expense has been recognized for any period presented.
Financial Instruments: Derivative financial instruments are used by the
Company in the management of its interest rate and foreign currency exposures.
The Company also uses derivative financial instruments to execute purchases of
its shares under its stock buyback program. The Company does not use derivative
financial instruments for trading or speculative purposes. Gains and losses
resulting from effective hedges of existing assets, liabilities or firm
commitments are deferred and recognized when the offsetting gains and losses are
recognized on the related hedged items. Income and expense are recorded in the
same category as that arising from the related asset or liability being hedged.
Changes in amounts to be received or paid under interest rate swap agreements
are recognized as interest expense. Gains and losses realized on termination of
interest rate swap contracts are deferred and amortized over the remaining terms
of the original swap agreement.
A number of major international financial institutions are counterparties to
the Company's financial instruments, including derivative financial instruments.
The Company monitors its positions with, and the credit quality of, these
counterparty financial institutions and does not anticipate non-performance of
these counterparties. Management believes that the Company would not suffer a
material loss in the event of nonperformance by these counterparties.
Equity Instruments Indexed to the Company's Common Stock: Equity instruments
are originally recorded at fair value. Proceeds received upon the sale of equity
instruments and amounts paid upon the purchase of equity instruments are
recorded as a component of stockholders' equity. Subsequent changes in the fair
value of the equity instrument contracts are not recognized. Repurchases of
common stock pursuant to the terms of the equity instruments are recorded as
treasury stock, at cost. If the contracts are ultimately settled in cash, the
amount of cash paid or received is recorded in additional paid-in capital.
Concentration of Credit Risk: The Company sells its products to department
stores, specialty outlets, catalogs, direct sellers and mass merchandisers. The
Company performs periodic credit
F-7
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
evaluations of its customers' financial condition and generally does not require
collateral. Credit losses have been within management's expectations.
Computer Software Costs: Internal and external direct and incremental costs
incurred in developing or obtaining computer software for internal use are
capitalized in property and equipment and amortized, under the straight-line
method, over the estimated useful life of the software, generally 5 to 7 years.
General and administrative costs related to developing or obtaining such
software are expensed as incurred.
Comprehensive Income: Comprehensive income consists of net income and
cumulative foreign currency translation adjustments. Because such cumulative
translation adjustments are considered a component of permanently invested
unremitted earnings of subsidiaries outside the United States, no income taxes
are provided on such amounts.
Start-Up Costs: In the fourth quarter of fiscal 1998, retroactive to the
beginning of the year, 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 ($71,484, pretax), 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 fiscal 1998 earnings approximately $40,823, before
taxes, related to current year 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.
Reclassifications and Restatement: Prior to fiscal 1998, the Company rapidly
expanded its manufacturing capacity, hiring and training over 15,000 new
employees. This resulted in the Company incurring plant inefficiencies and
higher than anticipated manufacturing costs characteristic of new manufacturing
operations resulting from high labor turnover and related training and other
costs. The Company's infrastructure, personnel and systems were overburdened
by the size and scope of this rapid expansion and by the increased
manufacturing volume. Manufacturing related costs, which were significantly
higher than anticipated, were added to inventories when incurred. In connection
with the fiscal 1998 year-end closing, the Company determined that in fiscal
1996, 1997 and the first three quarters of 1998, as merchandise was sold,
inventories were relieved at less than actual cost per unit, leaving an
accumulation of inventory costs. As a result, costs related to fiscal 1997 and
1996 activities have been restated to reflect additional costs of goods sold of
$57,017 in fiscal 1997 ($35,351 after tax or $0.65 per diluted share and $0.67
per basic share) and $37,983 in fiscal 1996 ($23,170 after tax or $0.45 per
diluted and basic share). In fiscal 1997, restated income (loss) before income
taxes, net income (loss), basic earnings per share and diluted earnings per
share were $(20,100), $(12,319), $(0.23) and $(0.23), respectively. Before the
restatement, these amounts were $36,917, $23,032, $0.44 and $0.42, respectively.
In fiscal 1996, restated income (loss) before income taxes, net income (loss),
basic earnings per share and diluted earnings per share were $(44,443),
$(31,409), $(0.61) and $(0.61), respectively. Before the restatement, these
amounts were $(6,460), $(8,239), $(0.16) and $(0.16), respectively. In
addition, fiscal 1998 interim results have been similarly restated to
recognize an adjustment for such current year costs in cost of goods sold
($49,668 or $32,135 after tax) (see Note 18). This restatement resulted from
flaws in the Company's Intimate Apparel Division inventory costing control
system that have since been addressed. Actions taken and procedures implemented
by the Company to address these issues included the development of a new
inventory costing process to supplement the manufacturing costing process and
effecting improvements in inventory costing monitoring systems and controls,
including increasing the frequency of physical inventory counts and the
verification of actual costs.
Certain fiscal 1997 and 1996 amounts have been reclassified in the fiscal
1998 consolidated financial statements to conform to the current presentation.
F-8
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 2 - ACQUISITIONS
In February 1996, the Company acquired substantially all of the assets
(including certain subsidiaries) comprising the GJM Group of Companies ('GJM').
GJM was a private label manufacturer of women's lingerie and sleepwear and now
also manufactures products for the Company's Intimate Apparel Division. The
purchase price consisted of a cash payment of $12,500 plus assumed liabilities.
In fiscal 1996, the Company acquired the Lejaby/Euralis group of companies
('Lejaby'), a leading European intimate apparel manufacturer, for approximately
$79,249 plus assumed liabilities and certain fees and expenses. Also in fiscal
1996, the Company acquired Bodyslimmers, for approximately $6,500 plus assumed
liabilities. Bodyslimmers designs and markets body slimming undergarments for
women.
The GJM, Lejaby and Bodyslimmers acquisitions were accounted for as
purchases. The results of operations of the acquired companies have been
included in the consolidated results of operations of the Company since the
respective dates of acquisition. The purchase price of the acquisitions was
allocated to the fair value of the net assets acquired of $163,800 in aggregate,
including certain trademarks and intangible assets of $90,500. These
acquisitions did not have a material pro-forma impact on 1996 consolidated
earnings and the final purchase prices did not materially differ from the
amounts shown above.
In October 1997, the Company acquired 51.3% of Designer Holdings Ltd.
('Designer Holdings') outstanding common stock in exchange for 5,340,773 shares
of the Company's common stock and agreed, subject to shareholder approval, to
acquire the remaining shares outstanding at the same exchange ratio. In December
1997, the Company acquired the remaining 48.7% of the outstanding common stock
of Designer Holdings in exchange for 5,072,371 shares of the Company's common
stock. Designer Holdings develops, manufactures and markets designer jeanswear
and jeans related sportswear for men, women and juniors, and has a 40-year
extendable license from Calvin Klein, Inc. to develop, manufacture and market
designer jeanswear and sportswear collections in North, South and Central
America under the Calvin Klein Jeans, CK/Calvin Klein Jeans and CK/Calvin
Klein/Khakis labels.
The acquisition was accounted for as a purchase. Accordingly, the
accompanying consolidated financial statements include the results of operations
for Designer Holdings commencing in October 1997. The minority interest for
periods of less than 100% ownership by the Company have been included in
selling, administrative and general expenses. In connection with this
acquisition, the Company issued a total of 10,413,144 shares of its common
stock, with a fair market value of $353,396. The allocation of the total
purchase price, exclusive of cash received of approximately $55,800, to the fair
value of the net assets acquired is summarized as follows:
<TABLE>
<S> <C>
Accounts receivable............................ $ 76,600
Inventories.................................... 74,300
Prepaid and other current assets............... 41,000
Property and equipment......................... 4,100
Intangible and other assets.................... 355,809
Accounts payable and accrued liabilities....... (127,325)
Deferred income taxes.......................... (25,884)
Other liabilities.............................. (500)
Mandatorily redeemable preferred securities.... (100,500)
---------
Purchase price -- net of cash balances......... $ 297,600
=========
</TABLE>
Included in intangible and other assets for the Designer Holdings
acquisition are $163,600 for licenses and $171,500 of goodwill.
F-9
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Prior to its acquisition by the Company, Designer Holdings experienced
substantial sales growth. A significant portion of this sales growth was
achieved through distribution to jobbers and off-price retailers. Additionally,
Designer Holdings had also announced a significant increase in the number of its
outlet stores. The Company viewed this growth and expansion as detrimental to
the long-term integrity and value of the brand. To sustain its growth strategy,
Designer Holdings committed to large quantities of inventories. When the primary
department store distribution channel was unable to absorb all of Designer
Holdings' committed production, it increased sales to the secondary and tertiary
distribution channels, including sales to jobbers, off-price retailers and
Designer Holdings' own outlet stores, which were expanded to serve as an
additional channel of distribution. The Company's post-acquisition strategy did
not embrace the outlet store expansion or expansion of secondary channels of
distribution, thereby significantly eliminating product distribution, resulting
in excess inventory.
The Company had a different plan from that of Designer Holdings for
realization of inventories and accounts receivable, as follows: Based upon its
strategy for the business, it had to quickly dispose of significantly higher
than desirable levels of inventory. It had to stabilize relationships with its
core department store customers. It had to collect receivable balances from
customers with whom the Company would no longer do business, and had to respond
to challenges from the core department store customers who were adversely
impacted by channel conflict and brand image issues. Finally, the Company began
a complete redesign of the product, the impact of which would not be immediately
felt at retail due to the fact that Designer Holdings had already committed to
inventory that was in production to be delivered for the ensuing seasons.
The consequences related not only to the receivables and inventory acquired,
but also to the design, fabric and inventory purchases to which Designer
Holdings had previously committed. Immediately following the acquisition, the
Company began quickly liquidating excess inventories. Most of these sales were
below original cost. Not only did the Company fail to recover cost (including
royalties payable to the licensor), it was deprived of the 'reasonable gross
profit' contemplated by APB Opinion 16 in valuing acquired inventory.
Accordingly, the Company reduced the historical carrying value of inventory by
$18 million. The $18 million fair value adjustment recorded addressed all of
these issues and represented the fair value of inventory pursuant to APB Opinion
16.
The Company offered significant discounts (by negotiating settlements on a
customer by customer basis) to collect outstanding receivable balances in light
of product related issues raised, as well as the decision to discontinue certain
channels of distribution, realizing that these balances would become
increasingly more difficult to collect with the passage of time. In addition,
the core retail customers took substantial deductions against current invoices
for the Designer Holdings inventory in the stores, unilaterally revising the
economics of the initial sale transaction entered into by Designer Holdings.
Although these deductions relate to both the inventory acquired and
pre-acquisition accounts receivable, the decrease in asset value manifested
itself through accounts receivable as a result of these deductions. Accordingly,
the Company reduced the historical carrying value of accounts receivable by $31
million. The $31 million fair value adjustment, which was recorded pursuant to
APB Opinion 16, addresses these issues.
The Company believes that these strategies should enhance future results of
operations and cash flows, however, these fair value adjustments will result in
additional annual goodwill amortization of approximately $1.2 million.
The following summarized unaudited pro forma information combines financial
information of the Company with Designer Holdings for fiscals 1996 and 1997
assuming the acquisition had occurred as of
F-10
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
January 7, 1996. The unaudited pro forma information does not reflect any cost
savings or other benefits anticipated by the Company's management as a result of
the acquisition.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------
JANUARY 4, JANUARY 3,
1997 1998
---------- ------------------
<S> <C> <C>
Statement of Income Data:
Net revenues........................................... $1,544,200 $1,800,800
Income (loss) before extraordinary item................ (9,100) (16,700)
Net income (loss)...................................... (11,400) (16,700)
Income (loss) per common share:
Basic.............................................. $ (0.22) $ (0.34)
========== ==========
Diluted............................................ $ (0.23) $ (0.36)
========== ==========
</TABLE>
The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred on the dates specified above, nor is it indicative of future results of
operations for the combined companies at any future date or for any future
periods.
In conjunction with the allocation of purchase price of Designer Holdings,
the Company recorded accruals of approximately $48,313. These charges relate
generally to employee termination and severance benefits, facility exit costs,
including lease termination costs (representing future lease payments on
abandoned facilities) and contract termination costs. The detail of the charges
recorded in the fourth quarter of fiscal 1997 and in fiscal 1998, including
costs incurred and reserves remaining for costs estimated to be incurred through
completion of the aforementioned programs, anticipated by the end of fiscal
1999, are summarized below:
<TABLE>
<CAPTION>
SEVERANCE AND FACILITY
OTHER EMPLOYEE EXIT
RELATED COSTS COSTS OTHER TOTAL
------------- -------- ----- --------
<S> <C> <C> <C> <C>
Fiscal 1997 -- 4th Quarter
Total Provisions........................ $ 20,631 $ 3,470 $ 900 $ 25,001
Cash Reductions......................... (10,800) (3,300) (900) (15,000)
-------- ------- ----- --------
Balance as of January 3, 1998............... 9,831 170 -- 10,001
-------- ------- ----- --------
Total Provisions........................ 5,957 17,300 55 23,312
Cash Reductions......................... (6,266) (4,762) (55) (11,083)
-------- ------- ----- --------
Balance as of January 2, 1999............... $ 9,522 $12,708 $-- $ 22,230
======== ======= ===== ========
</TABLE>
Severance and other employee related costs - $26,588 (as detailed below)
Contractual employee obligations -- $19,000
The former CEO of Designer Holdings and nine senior executives of Designer
Holdings were terminated by the Company. The amounts represent contractual
obligations under their contracts with Designer Holdings.
Other employee severance and related benefit payments -- $7,588
Represents $5,200 of severance and unfunded pension liabilities for 506
bargaining unit employees of Designer Holdings in the two factories and a
distribution facility that were to be closed in accordance with the
Company's exit plan and $2,388 of severance for 90 Designer Holdings'
headquarters and 40 Designer Holdings' Hong Kong office employees.
F-11
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
As of January 2, 1999, the remaining accrual of $9,522 represents the remaining
severance costs for employees of Designer Holdings terminated prior to fiscal
1999, anticipated to be utilized by early fiscal 2000.
Facility exit costs -- $20,770
Represents $9,000 for the anticipated lease buyout and the cost associated
with the unused portion of a distribution center, $5,000 of property, equipment
and leasehold improvements to be abandoned for the two factories and
distribution facility that were to be closed and $6,770 for the lease buyout and
abandonment of leasehold improvements in connection with closing Designer
Holdings' headquarters and Hong Kong office. As of January 2, 1999, the
remaining accrual of $12,708 represents certain costs to be incurred relative to
the two factories and distribution facility and is estimated to be utilized in
fiscal 1999.
Contract termination costs -- $9,000 (not included in the aforementioned table)
Represents fees and amounts paid in connection with terminating Designer
Holdings' accounts receivable factoring arrangement, including the settlement of
outstanding balances.
During 1998, the Company acquired certain inventory and other assets as well
as the sub-license to produce Calvin Klein jeans and jeans-related products for
children in the United States, Mexico and Central and South America and the
sub-license to produce Calvin Klein jeans and related products for children in
Canada. Also during 1998, the Company acquired certain assets as well as the
sub-license to distribute Calvin Klein jeans, jeans-related products and khakis
for men and women in Mexico, Central America and Canada. The total cost of these
acquisitions, including related costs and expenses, was $53,118. The allocation
of the purchase prices to the fair value of the assets acquired as of
January 2, 1999 is summarized below:
<TABLE>
<S> <C>
Inventories................................................. $ 2,300
Other current assets........................................ 300
Fixed assets................................................ 300
Intangible and other assets................................. 58,018
Accrued liabilities......................................... (7,800)
-------
Purchase price.............................................. $53,118
=======
</TABLE>
In addition, the Company entered into a supply agreement with a seller
whereby the Company will purchase, at a specified price, certain products for a
period of eighteen months.
The acquisitions were accounted for as purchases and did not have a material
pro-forma effect on 1998 consolidated results of operations. The allocation of
the purchase price is subject to revision when additional information concerning
the asset and liability valuations become available. Accordingly, the final
purchase price allocation could differ from the amounts shown.
NOTE 3 - RESTRUCTURING, SPECIAL CHARGES AND OTHER NON-RECURRING ITEMS
During 1998, 1997 and 1996, the Company recorded restructuring and
restructuring related charges of $40,000 ($25,874 net of tax benefit), $118,819
($73,633 net of tax benefit), and $116,828 ($74,887 net of tax benefit),
respectively.
These charges relate generally to exiting facilities, realignment of
manufacturing and distribution operations, discontinuing product lines and the
integration of businesses following acquisitions, and include charges related to
inventory write-downs, asset impairments, employee termination and severance
benefits and lease termination costs (representing future lease payments on
abandoned facilities). Any costs that do not qualify as exit costs have been
charged to expense as incurred.
F-12
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Asset impairments relate principally to the write-off of unamortized
leasehold improvements for vacated locations. Any other fixed assets that were
written down were abandoned and taken out of service at the time of the
write-down and related depreciation was discontinued at that time.
For inventory which management determined was salable, the estimated
write-down was based upon the differences between the expected net sales
proceeds of the inventory and the carrying value of the inventory. In the case
of scrapped inventory, the write-down was equal to the carrying value of the
inventory.
In addition, during 1998, 1997 and 1996, the Company incurred special and
non- recurring charges of $8,500 ($5,498 net of tax benefit), $6,846 ($4,246 net
of tax benefit), and $13,043 ($8,360 net of tax benefit), respectively.
The Company maintains a general allowance for doubtful accounts based upon
historical loss experience. The Company records specific provisions based upon
information about a particular customer when such information becomes known.
The Company regularly reviews the adequacy of its reserves and adjusts them
as appropriate based upon available information.
1998
As a result of a strategic review of the Company's businesses, manufacturing
and other facilities, product lines and styles and worldwide operations
following significant acquisitions in 1996 and 1997, in the fourth quarter of
1998 the Company initiated the implementation of programs designed to streamline
operations and improve profitability. These programs resulted in pre-tax charges
of approximately $40,000 related to costs to exit certain product lines and
styles, as well as facilities and realignment of manufacturing and distribution
activities, including charges related to inventory write-downs and employee
termination and severance benefits.
Additionally, in the fourth quarter, the Company wrote-off approximately
$8,500 which included $8,000 of accounts receivable, related to customer
bankruptcies of $3,900 and other write-offs of $4,100 (see Note 5).
Of the total $48,500 of 1998 charges, $22,100 is reflected in cost of goods
sold and $26,400 is reflected in selling, administrative and general expenses.
The detail of the charges recorded in 1998, including costs incurred and
reserves remaining for costs estimated to be incurred through completion of the
aforementioned programs, anticipated by the end of fiscal 1999, are summarized
below:
<TABLE>
<CAPTION>
FACILITIES EMPLOYEE
SHUTDOWNS TERMINATION
ASSET AND RETAIL OUTLET AND
WRITE-OFFS REALIGNMENT STORE CLOSINGS SEVERANCE TOTAL
---------- ----------- -------------- --------- -----
<S> <C> <C> <C> <C> <C>
1998 Provision............... $ 15,300 $ 6,000 $ 4,800 $ 6,100 $ 32,200
Other related period costs,
charged to expense as
incurred................... 2,500 2,500
Cash reductions.............. (1,672) (2,500) (4,172)
Non-cash reductions.......... (13,700) (6,000) (4,228) (23,928)
-------- ------- ------- ------- --------
Balance 1/2/99............... $ 1,600 $ 828 $ 572 $ 3,600 $ 6,600
======== ======= ======= ======= ========
</TABLE>
F-13
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
DISCONTINUED PRODUCT LINES AND STYLES AND MANUFACTURING AND DISTRIBUTION
REALIGNMENT ($23,800)
Management's review of certain product lines resulted in the decision to
discontinue the manufacture and marketing of certain unprofitable product lines
during the fourth quarter of 1998, including the Valentino and Marilyn Monroe
product lines, as well as certain private label brands. The decision to
discontinue these product lines will enable the Company to focus its working
capital on more profitable product lines and styles. The Company also announced
the realignment of manufacturing and distribution operations as an effort to
reduce costs. Included in the amount above are charges for inventory write-downs
for obsolete and excess raw materials and finished goods of $13,500 (included in
cost of sales), and receivable write-offs of $1,800 (included in selling,
administrative and general expenses).
Costs for facility shutdowns of $6,000 represent the write-off of
unamortized leaseholds and fixed and other assets at the Company's former
administrative offices in Connecticut. The cost for facility realignment of
$2,500, all of which was incurred in 1998, includes charges for the relocation
of and realignment of existing factories and consolidation of warehouse and
distribution facilities.
For fiscal 1998, discontinued product lines and styles contributed net
revenues of $26,300 and operating losses of $13,400. Fourth quarter operating
losses incurred subsequent to the commitment date of the decision to discontinue
these product lines and styles were $5,300. These product lines contributed net
revenues of $56,800 and $64,000 and operating (losses) profits of ($700) and
$8,600 in fiscal 1997 and 1996, respectively.
RETAIL OUTLET STORE SHUTDOWNS ($4,800)
In an effort to improve the overall profitability of the retail outlet store
division, the Company announced plans to close 13 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 at
close-out prices of $4,100 and costs for terminating leases of $700. Through
January 2, 1999, the Company closed 2 stores and expects to close the remaining
stores by the second quarter of 1999.
EMPLOYEE TERMINATION AND SEVERANCE ($6,100)
The Company recorded charges of approximately $800 related to the cost of
providing severance and benefits to approximately 381 manufacturing related
employees terminated as a result of the closure of certain facilities and $5,300
(all of which was charged to expense at the date when 123 managerial and
administrative employees were terminated) related to a reduction in work force
during the fourth quarter of 1998.
ADDITIONAL COSTS RELATED TO PRIOR STRATEGIC INITIATIVES ($5,300)
The Company expensed as incurred approximately $2,000 of additional costs,
(in part due to facilities remediation) related to the final disposition of
certain Hathaway assets that were retained following the sale of that division
in 1996.
The Company expensed as incurred approximately $3,300 of additional costs
related to the merger integration initiative undertaken in 1997 following the
Designer Holdings acquisition. These costs relate principally to settlements on
accounts receivable balances with common customers.( See 1997 chart below)
The $6,600 reserve at January 2, 1999, which relates principally to
severance and the disposal of discontinued inventory, will be utilized by the
first quarter of fiscal 2000.
F-14
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
1997
During the fourth quarter of 1997, the Company recorded restructuring and
restructuring related pre-tax charges of $118,819 related to the integration of
Designer Holdings of $44,620 following its acquisition , the Intimate Apparel
(including GJM) consolidation and realignment program of $63,699 and the
disposition of certain retained Hathaway assets of $10,500.
Additionally, in the fourth quarter, the Company wrote off approximately
$6,300 of accounts receivable, related to customer bankruptcies of $3,400 and
other accounts receivable write-offs of $2,900 (see Note 5) and incurred $546 of
other non-recurring expenses.
Of the total $125,665 of 1997 charges, $76,645 is reflected in cost of goods
sold and $49,020 is reflected in selling, administrative and general expenses.
MERGER RELATED INTEGRATION COSTS ($44,620)
Designer Holdings (which was acquired in fiscal 1997) and the Company
previously operated retail outlets in several common locations, which the
Company elected to consolidate. As a result, the Company recorded a charge of
$18,420 as follows: $3,300 for anticipated lease termination costs related to
sixteen of its Warner's outlet stores, $1,200 for the write-off of related
leasehold improvements and $13,920 for the close-out of store inventories and
surplus stocks not considered suitable for redirected marketing efforts in the
new store format.
In addition, following the merger in December 1997, the Company consolidated
the credit and collection functions of the companies. In an effort to accelerate
cash collections from common customers following the Designer Holdings
acquisition, the Company initiated a program of consolidating receivables from
common customers, offering favorable settlement of prior balances to accelerate
collection efforts. This program resulted in a charge of $21,700, which was
charged to expense as incurred. The Company also charged to expense as incurred
$3,600 of special bonuses to Warnaco management and severance and employee
termination costs of $900, which were charged to expense at the date the
employees were terminated.
The detail of the charges recorded, including costs incurred and reserves
remaining at each year-end for costs estimated to be incurred through completion
of the aforementioned program are as follows:
<TABLE>
<CAPTION>
LEASE CONSOLIDATION TERMINATIONS
TERMINATION FIXED ASSET INVENTORY OF CREDIT AND EMPLOYEE
COST WRITE-OFFS WRITE-DOWNS FUNCTIONS SEVERANCE BONUSES TOTAL
---- ---------- ----------- --------- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1997 Provision....... $ 3,300 $ 1,200 $13,920 $ 900 $ 19,320
Other related period
costs, charged to
expense as
incurred........... -- -- -- $ 21,700 -- $ 3,600 25,300
Cash reductions...... (1,110) -- -- -- (845) (3,600) (5,555)
Non-cash
reductions......... -- (1,200) (9,118) (21,700) -- -- (32,018)
------- ------- ------- -------- ------- ------- --------
Balance 1/3/98....... 2,190 $-- 4,802 -- 55 $ -- 7,047
======= =======
1998 Provision....... -- 800 2,500 -- 3,300
Cash reductions...... (2,190) (55) (2,245)
Non-cash
reductions......... -- (5,602) (2,500) -- (8,102)
------- ------- -------- ------- --------
Balance 1/2/99....... $-- $-- $ -- $-- $ --
======= ======= ======== ======= ========
</TABLE>
F-15
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
INTIMATE APPAREL CONSOLIDATION AND REALIGNMENT ($59,499)
Following the successful Intimate Apparel consolidation and realignment
program initiated in 1996, the Company initiated a new program to re-examine all
of its existing products in an effort to streamline its number of product
offerings. Accordingly, products and styles were discontinued and slower moving
inventory liquidated, incurring markdown losses of $32,600 to accommodate the
increased volumes of higher margin merchandise and $2,246 of receivable
write-offs related to these merchandising decisions. Further reconfiguration of
manufacturing facilities and the merger of Warner's Europe with Lejaby
operations achieved a workforce reduction greater than originally anticipated
but delayed realization of anticipated efficiencies and resulted in severance
and termination costs of $7,380, which were charged to expense at the date
approximately 150 employees were terminated. The cost for facility realignment
of $17,273 all of which was incurred in 1997, includes charges for the increased
costs related to the reconfiguration of the manufacturing facilities.
The detail of the charges recorded including costs incurred and reserves
remaining at each year-end for costs estimated to be incurred through completion
of the aforementioned program, are as follows:
<TABLE>
<CAPTION>
ACCOUNTS EMPLOYEE
INVENTORY RECEIVABLE TERMINATION MANUFACTURING
WRITE-DOWNS WRITE-OFFS AND SEVERANCE REALIGNMENT TOTAL
----------- ---------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C>
1997 Provision............. $ 32,600 $ 2,246 $ 7,380 $ 42,226
Other related period costs,
charged to expense as
incurred................. -- -- -- $ 17,273 17,273
Cash reductions............ -- -- (5,916) (17,273) (23,189)
Non-cash reductions........ (11,585) (2,246) -- -- (13,831)
-------- ------- ------- -------- --------
Balance 1/3/98............. 21,015 $ -- 1,464 $ -- 22,479
======= ========
Cash reductions............ -- (1,464) (1,464)
Non-cash reductions........ (21,015) -- (21,015)
-------- ------- --------
Balance 1/2/99............. $ -- $-- $ --
======== ======= ========
</TABLE>
GJM ($4,200)
The Company also restructured a portion of its GJM manufacturing business,
which was acquired in 1996, resulting in charges of $4,200, $700 of which was
for severance of five employees, $2,400 for accounts receivable write-offs,
which were expensed as incurred and $1,100 for asset write-offs.
GJM incurred other non-recurring losses of $1,139 related to these
operations in fiscal 1997.
The detail of the charges recorded in 1997, including costs incurred and
reserves remaining for costs estimated to be incurred through completion of the
aforementioned program, are as follows:
<TABLE>
<CAPTION>
EMPLOYEE ACCOUNTS
TERMINATION RECEIVABLE FIXED ASSET
AND SEVERANCE WRITE-OFFS WRITE-OFFS TOTAL
------------- ---------- ---------- -----
<S> <C> <C> <C> <C>
1997 Provision........................... $ 700 $ 2,400 $ 1,100 $ 4,200
Cash reductions.......................... (26) -- -- (26)
Non-cash reductions...................... -- (2,400) (1,100) (3,500)
----- ------- ------- -------
Balance 1/3/98........................... 674 $-- $-- 674
======= =======
Cash reductions.......................... (674) (674)
----- -------
Balance 1/2/99........................... -$- $ --
===== =======
</TABLE>
F-16
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
ADDITIONAL COSTS RELATED TO PRIOR STRATEGIC INITIATIVE ($10,500)
During fiscal 1997, the Company incurred approximately $10,500 of costs
related to the disposal of certain Hathaway assets that were retained following
the sale of that division in 1996, including $4,200 on the liquidation of
inventories, $4,600 on the disposition of fixed assets and $1,700 of other
expenses, which were charged to expense as incurred.
In addition, the operations of the retained Hathaway assets (principally
foreign locations), had losses of $4,000 for the year.
The reserve balance of $31,028 at January 3 ,1998, which relates principally
to discontinued inventory to be disposed of, was fully utilized during fiscal
1998.
1996
In 1996, the acquisition of the GJM businesses significantly added to the
Company's low cost manufacturing capacity and resulted in an immediate expansion
of product lines. As a result of this and the acquisition of Bodyslimmers and
Lejaby, the Company undertook a strategic review of its businesses and
manufacturing facilities. The Company recorded pre-tax restructuring and
restructuring related charges of $78,139 for actions taken as a result of this
review. The Company also disposed of substantially all of the Hathaway men's
dress shirt business, resulting in a pre-tax loss of $38,689.
In addition, the Company incurred non-recurring costs of $13,043,
principally related to terminated merger costs, contract termination fees, and
an insurance claim settlement.
Of the total $129,871 of 1996 charges, $34,820 is reflected in cost of goods
sold and $95,051 is reflected in selling, administrative and general expenses.
INTIMATE APPAREL DIVISION CONSOLIDATION AND REALIGNMENT ($78,139)
In April 1996, the Company announced the consolidation and realignment of
certain of its intimate apparel manufacturing, distribution, selling and
administrative functions and facilities in the United States and Europe. The
consolidation and realignment resulted in restructuring and restructuring
related charges of $78,139.
The detail of the charges recorded, including costs incurred and reserves
remaining at each year-end for costs estimated to be incurred through completion
of the aforementioned program, areas follows:
F-17
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
<TABLE>
<CAPTION>
EMPLOYEE LEASE
TERMINATION INVENTORY TERMINATION FACILITIES
AND SEVERANCE WRITE-DOWNS COSTS REALIGNMENT OTHER TOTAL
------------- ----------- ----- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1996 Provision....... $ 27,927 $ 25,230 $ 6,042 $ 2,840 $ 62,039
Other related period
costs, charged to
expense as
incurred........... -- -- -- $ 16,100 -- 16,100
Cash reductions...... (27,927) -- (3,042) (16,100) (2,840) (49,909)
Non-cash
reductions......... -- (25,230) -- -- -- (25,230)
-------- -------- ------- -------- ------- --------
Balance 1/4/97....... $ -- $ -- 3,000 $ -- $ -- 3,000
======== ======== ======== =======
Cash reductions...... (2,172) (2,172)
------- --------
Balance 1/3/98....... 828 828
Cash reductions...... (828) (828)
------- --------
Balance 1/2/99....... $-- $ --
======= ========
</TABLE>
SEVERANCE AND OTHER EMPLOYEE COSTS ($27,927)
The Company recorded charges of approximately $27,927, net of pension
curtailment gains, related to the cost of providing severance and benefits to
approximately 1490 manufacturing and administrative employees terminated all of
which was charged to expense at the date the employees were terminated) related
to the consolidation and relocation of operations during fiscal 1996.
DISCONTINUED PRODUCT LINES AND STYLES ($25,230)
In order to maximize the cost savings and efficiencies made available
through the consolidation of facilities and the additional volumes contemplated
as a result of the Lejaby, GJM and Bodyslimmers acquisitions, the Company
re-evaluated the viability of product lines and styles. As a result, certain
products and styles were discontinued to permit the investment of working
capital in products and styles with greater returns. The liquidation of these
products resulted in mark down losses of approximately $25,320 in fiscal 1996.
LEASE TERMINATION COSTS ($6,042)
These costs represent the balance of future lease payments related to
abandoned facilities.
REALIGNMENT AND RETRAINING ($16,100)
The closing of several manufacturing facilities and consolidation of certain
distribution operations resulted in the Company incurring integration costs in
its remaining manufacturing facilities to reconfigure product assortments and
retrain existing personnel. The costs attendant to the realignment and
retraining, which were charged to expense as incurred in fiscal 1996, amounted
to approximately $16,100.
OTHER ($2,840)
These costs represent various fees and expenses charged to expense as
incurred in connection with the Intimate Apparel division consolidation and
realignment.
F-18
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
EXIT FROM THE HATHAWAY BUSINESS ($38,689)
On May 6, 1996, after a careful evaluation of the Company's Hathaway men's
dress shirt operations, the Company announced that it had decided to cease
manufacturing and marketing this brand. On November 12, 1996 the Company sold to
an investor group, certain assets comprising the Hathaway dress shirt
manufacturing operations in Waterville, Maine and Prescott, Ontario including
certain inventory, property and equipment and other assets (the 'Hathaway
Business'). The Company recorded a loss of $38,689 on the sale.
For fiscal 1996, the Hathaway business contributed net revenues of $27,865
and operating losses of $8,669.
OTHER
Other non-recurring items of $13,043 were incurred and paid in fiscal 1996,
including the following:
1. The addition of the GJM manufacturing and administrative organization
enabled the Company to begin manufacturing and direct sourcing
certain products, which had been previously outsourced through a
buying agent. This has resulted in significant ongoing cost savings
to the Company. The pre-tax cost of the existing agency contract,
which was charged to expense as incurred in the period from
February-July 1996 (its expiration date) was $2,693.
2. In order to achieve an early resolution of the insurance claims
related to the destruction of one of the Company's distribution
centers as a result of the 1994 California earthquake, the Company
accepted a cash settlement offer of approximately $19,000 and
wrote-off the remaining receivable of $6,082.
3. The Company incurred other claims related to closed facilities of
approximately $1,268.
4. In June 1996, the Company announced its intent to merge with
Authentic Fitness Corporation. On July 25, 1996, the Company
announced the termination of the merger. The Company incurred legal
accounting and investment advisory fees in connection with the
proposed merger of $3,000.
NOTE 4 - SALE OF ACCOUNTS RECEIVABLE
In October 1998, the Company entered into a five-year revolving receivables
securitization facility whereby it can obtain up to $200,000 of funding from the
sale of eligible U.S. trade accounts receivable through a bankruptcy remote
special purpose subsidiary. The amount of funding varies based upon the
availability of the designated pool of eligible receivables and is directly
affected by changing business volumes. At January 2, 1999, the Company had sold
$330,100 of accounts receivable for which it received proceeds of $170,500 in
cash; the Company retains the interest in and subsequent realization of excess
of amounts sold over the proceeds received and provides allowances as
appropriate on the entire balance. Accounts receivable are presented net of
$170,500 of proceeds from trade receivables sold, with the remaining $159,600
included in accounts receivable. The sale is reflected as a reduction of
accounts receivable and the proceeds received are included in cash flows from
operating activities. Fees for this program are paid monthly and are based on
variable rates indexed to commercial paper.
NOTE 5 - RELATED PARTY TRANSACTIONS
In 1990, the Company sold its Activewear Division to a newly formed company,
Authentic Fitness Corporation ('Authentic Fitness'). Certain directors and
officers of the Company are also directors and officers of Authentic Fitness.
From time to time, the Company and Authentic Fitness jointly negotiate contracts
and agreements with vendors and suppliers. In fiscal 1996, 1997 and 1998,
Authentic Fitness
F-19
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
paid the Company $5,446, $5,607 and $15,566, respectively for certain occupancy
services related to leased facilities, computer services, laboratory testing,
transportation and contract production services. In fiscal 1996, 1997 and 1998,
the Company paid Authentic Fitness approximately $1,244, $1,299 and $462,
respectively, for certain design and occupancy services. The Company also
purchased inventory from Authentic Fitness for sale in its retail outlet stores
of $15,531, $16,201 and $11,223 in fiscal 1996, 1997 and 1998, respectively. The
net amount due (to) from Authentic Fitness at January 3, 1998 and January 2,
1999 was $2,607 and $(784), respectively. In fiscal 1997 the Company had a
write-off of $2,875 primarily comprised of certain inventory and administrative
charges relating to activities with Authentic Fitness that should have been
charged to the Company's operations in prior periods rather than being
inadvertently reflected as receivables. When these facts became known during the
fourth quarter of fiscal 1997, it was determined the amount should be
written-off and the charge was taken. In connection with the fiscal 1998
year-end closing, the Company discovered an additional $4,139 relating to
activities with Authentic Fitness. The Company determined that the $4,139
consisted of certain cost overruns and royalty expenses that should have been
charged to the Company's operations in prior periods. As the related amounts
were not significant to any prior periods, the entire amount of the write-offs
were recorded in the fourth quarter of fiscals 1997 and 1998, respectively. In
June 1995, the Company paid $1,000 in connection with and under a sub-license
entered into with Authentic Fitness to design, manufacture and distribute
certain intimate apparel using the Speedo brand name. The Company recognized
royalty expense of $469, $293 and $58 in fiscal 1996, 1997 and 1998,
respectively.
A director and a stockholder of the Company is the sole stockholder,
President and a director of The Spectrum Group, Inc. ('Spectrum'). The Company
recognized consulting expenses of $500, $500 and $560 in fiscal 1996, 1997 and
1998, respectively, pursuant to a consulting agreement with Spectrum that
expires in May 2000. A director of the Company provides consulting services to
the Company from time to time and received $125 for such services in fiscal
1998. A director of the Company is a partner in a law firm which provides
legal services to the Company from time to time.
The Company believes that the terms of the relationships and transactions
described above are at least as favorable to the Company as could have been
obtained from an unaffiliated third party.
NOTE 6 - BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
BUSINESS SEGMENTS
In fiscal 1998, the Company adopted SFAS No. 131, 'Disclosures about
Segments of an Enterprise and Related Information.' SFAS 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and customers.
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.
The Intimate Apparel Division designs, manufactures and markets moderate to
premium priced intimate apparel for women under the Warner's, Olga, Calvin
Klein, Lejaby, Van Raalte, Fruit of the Loom and Bodyslimmers brand names, and
men's underwear under the Calvin Klein brand name.
The Sportswear and Accessories Division designs, manufactures, imports and
markets moderate to premium priced men's apparel and accessories under the Chaps
by Ralph Lauren and Calvin Klein brand names.
The Retail Outlet Stores principally sell the Company's products to the
general public through 114 outlets for the disposition of excess and irregular
inventory and to shift to more profitable intimate apparel stores to improve its
margins. The Company does not manufacture or source products exclusively for the
retail outlet stores.
F-20
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The accounting policies of the segments are the same as those described in
the 'Summary of Significant Accounting Policies' in Note 1. Transfers to the
Retail Outlet Stores occur at standard cost and are not reflected in net
revenues of the Intimate Apparel or Sportswear and Accessories segments. 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, as well as the
effect of the early adoption of SOP 98-5 and the charges relating to the fiscal
1998 restatement for an inventory adjustment which affected fiscal 1996-1998
(see Note 1) ('Adjusted EBIT').
Information by business segment is set forth below:
<TABLE>
<CAPTION>
SPORTSWEAR RETAIL
INTIMATE AND OUTLET
APPAREL ACCESSORIES STORES TOTAL
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
1998 Net revenues................................ $944,788 $875,257 $130,206 $1,950,251
Adjusted EBITDA............................. 218,600 149,200 17,000 384,800
Depreciation................................ 18,500 4,500 1,400 24,400
Adjusted EBIT............................... 200,100 144,700 15,600 360,400
1997 Net revenues................................ $941,188 $425,974 $ 68,568 $1,435,730
Adjusted EBITDA............................. 209,500 64,200 8,100 281,800
Depreciation................................ 14,000 2,400 1,000 17,400
Adjusted EBIT............................... 195,500 61,800 7,100 264,400
1996 Net revenues................................ $802,004 $214,379 $ 47,440 $1,063,823
Adjusted EBITDA............................. 181,700 31,300 6,200 219,200
Depreciation................................ 10,900 2,400 400 13,700
Adjusted EBIT............................... 170,800 28,900 5,800 205,500
</TABLE>
F-21
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
A reconciliation of total segment Adjusted EBIT to total consolidated income
(loss) before taxes and cumulative effect of a change in accounting principle
for fiscal years 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Total Adjusted EBIT for reportable segments................. $360,400 $264,400 $205,500
General corporate expenses not allocated.................... 55,567 33,823 29,068
Depreciation of corporate assets and amortization........... 22,100 13,500 11,900
Restructuring, special and other non-recurring items........ 106,758 130,804 138,540
Effect of early adoption of SOP 98-5 (see note 1)........... 40,800 -- --
Charges related to an inventory adjustment (see note 1)..... 49,600 57,000 38,000
Interest expense............................................ 63,790 45,873 32,435
Minority interest........................................... -- 3,500 --
-------- -------- --------
Income (loss) before income taxes and cumulative effect of a
change in accounting principle............................ $ 21,785 $(20,100) $(44,443)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SPORTSWEAR RETAIL
INTIMATE AND OUTLET RECONCILING
YEAR ENDED JANUARY 4, 1997 APPAREL ACCESSORIES STORES ITEMS* CONSOLIDATED
- ---------------------------------------- --------- ----------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total assets............................ $893,677 $ 71,730 $34,636 $119,731 $1,119,774
Depreciation and amortization........... 11,011 4,328 413 11,824 27,576
Capital expenditures.................... 25,395 3,879 812 3,679 33,765
YEAR ENDED JANUARY 3, 1998
- ----------------------------------------
Total assets............................ $996,457 $544,352 $39,806 $ 70,503 $1,651,118
Depreciation and amortization........... 30,338 4,160 625 12,262 47,385
Capital expenditures.................... 26,356 14,134 3,810 13,099 57,399
YEAR ENDED JANUARY 2, 1999
- ----------------------------------------
Total assets............................ $832,371 $665,297 $78,557 $206,908 $1,783,133
Depreciation and amortization........... 20,564 15,654 1,235 9,047 46,500
Capital expenditures.................... 41,128 30,209 7,297 64,153 142,787
</TABLE>
- ---------
* Includes Corporate items not allocated to business segments, primarily fixed
assets related to the Company's management information systems and corporate
facilities and goodwill, intangible and other assets.
F-22
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
GEOGRAPHIC INFORMATION
Included in the consolidated financial statements are the following amounts
relating to geographic locations:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues:
United States................................ $ 902,572 $1,145,276 $1,630,583
Canada....................................... 58,680 56,525 55,072
United Kingdom............................... 30,299 48,933 55,774
France....................................... 25,182 42,230 41,164
Germany...................................... 16,545 54,857 41,963
Mexico....................................... 7,617 11,709 21,209
Asia......................................... -- 13,617 14,534
All Other.................................... 22,928 62,583 89,952
---------- ---------- ----------
$1,063,823 $1,435,730 $1,950,251
========== ========== ==========
Long-lived assets(1):
United States................................ $ 107,200 $ 113,644 $ 205,428
Canada....................................... 4,387 4,716 5,394
All other.................................... 9,950 12,040 13,438
---------- ---------- ----------
$ 121,537 $ 130,400 $ 224,260
========== ========== ==========
</TABLE>
- ---------
(1) Long-lived assets represent net property, plant and equipment.
INFORMATION ABOUT MAJOR CUSTOMERS
The Company has one customer representing 10.2% of consolidated net revenues
for the fiscal year ended January 2, 1999. Such revenues are included in the
Intimate Apparel and Sportswear and Accessories segments. The Company does not
believe that the loss of this one customer would have a material adverse effect
on the Company.
F-23
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 7 - INCOME TAXES
The following presents the United States and foreign components of income
from operations before income taxes and the total provision (benefit) for United
States federal and other income taxes:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------
JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) from operations before taxes and
cumulative effect of change in accounting principle:
Domestic.......................................... $(62,642) $(50,957) $ 1,397
Foreign........................................... 18,199 30,857 20,388
-------- -------- --------
Total............................................. $(44,443) $(20,100) $ 21,785
======== ======== ========
Current Provision:
Federal........................................... $ -- $ -- $ --
State and local................................... 1,084 1,269 1,187
Foreign........................................... 1,161 6,480 10,231
-------- -------- --------
2,245 7,749 11,418
-------- -------- --------
Deferred Provision (Benefit):
Federal........................................... (15,301) (12,560) 12,301
State and local................................... (3,201) (2,970) (5,213)
Foreign........................................... 3,223 -- --
Reversal of valuation allowance................... -- -- (10,818)
-------- -------- --------
(15,279) (15,530) (3,730)
-------- -------- --------
Provision (benefit) for income taxes.................. $(13,034) $ (7,781) $ 7,688
======== ======== ========
</TABLE>
The provision (benefit) for income tax is included in the financial
statements as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------
JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Continuing operations................................. $(13,034) $(7,781) $ 7,688
Cumulative effect of accounting change................ -- -- (25,231)
-------- ------- --------
Total Provision (benefit)............................. $(13,034) $(7,781) $(17,543)
======== ======= ========
</TABLE>
F-24
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The following presents the reconciliation of the provision for income taxes
to United States federal income taxes computed at the statutory rate:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-----------------------------------------------
JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) from operations before income
taxes............................................ $(44,443) $(20,100) $(49,698)(1)
======== ======== ========
Provision (benefit) for income taxes at the
statutory rate................................... (15,555) (7,035) (17,394)
Foreign income taxes at rates in excess of (lower
than) the U.S. statutory rate.................... (2,108) (3,859) 7,408
State income taxes -- net of federal benefit....... (1,414) (951) (2,984)
Non-deductible intangible amortization and
disposals........................................ 4,736 1,829 3,198
Changes in valuation allowance..................... -- -- (10,818)
Other -- net....................................... 1,307 2,235 3,047
-------- -------- --------
Provision (benefit) for income taxes............... $(13,034) $ (7,781) $(17,543)
======== ======== ========
</TABLE>
- ---------
(1) Includes pre-tax impact of cumulative effect of accounting change of
$71,484.
The Company has estimated United States net operating loss carryforwards of
approximately $385,200 and foreign net operating loss carryforwards of
approximately $18,300 which, if unused, will expire from 2002 through 2018.
The components of deferred tax assets and liabilities as of January 3, 1998
and January 2, 1999 are as follows:
<TABLE>
<CAPTION>
JANUARY 3, JANUARY 2,
1998 1999
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Discounts and sales allowances.......................... $ 5,858 $ 6,646
Postretirement benefits................................. 3,675 4,222
Alternative minimum tax credit carryovers............... 1,907 2,237
Non deductible reserves................................. 64,034 49,647
Net operating loss and capital loss carryovers.......... 89,365 137,484
-------- --------
Gross deferred tax assets........................... 164,839 200,236
Valuation allowances.................................... (17,620) (6,802)
-------- --------
Deferred tax assets -- net.......................... 147,219 193,434
-------- --------
Deferred Tax Liabilities:
Prepaid and other assets................................ 12,044 10,559
Depreciation and amortization........................... 52,974 54,890
Bond discount........................................... 7,800 7,519
Other................................................... 13,792 8,087
-------- --------
Deferred tax liabilities............................ 86,610 81,055
-------- --------
Net deferred tax asset.............................. $ 60,609 $112,379
======== ========
</TABLE>
The change in net deferred tax assets between January 3, 1998 and January 2,
1999 is primarily the result of recording the tax effect of additional net
operating loss carryforwards created during the year. The net decrease in the
valuation allowance of $(10,818) at January 2, 1999 primarily relates to a the
utilization of a capital loss carryover. At January 2, 1999, other current
assets include current taxes receivable of $3,970 (of which $1,913 relates to
foreign entities) and current liabilities include current
F-25
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
deferred tax liabilities of $14,276. At January 3, 1998, other current assets
include current tax receivables of $14,395 and current deferred income taxes of
$1,903.
NOTE 8 - EMPLOYEE RETIREMENT PLANS
The Company has a defined benefit pension plan which covers substantially
all non-union domestic employees (the 'Pension Benefit Plan'). The Plan is
noncontributory and benefits are based upon years of service. The Company also
has defined benefit health care and life insurance plans that provide
postretirement benefits to retired employees and former directors ('Other
Benefit Plans'). The Other Benefit Plans are contributory with retiree
contributions adjusted annually.
The components of net periodic benefit cost is as follows:
<TABLE>
<CAPTION>
PENSION BENEFIT PLAN OTHER BENEFIT PLANS
FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------------------------ ------------------------------------
JANUARY 4, JANUARY 3, JANUARY 2, JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost.................... $ 1,552 $ 1,296 $ 1,732 $ 68 $ 91 $ 190
Interest cost................... 7,728 7,799 8,660 601 672 528
Expected return on plan
assets........................ (8,943) (9,001) (10,530) -- -- --
Prior service cost.............. (97) (75) (74) -- -- --
Recognized net actuarial gain... (377) (307) -- (187) (20) (121)
Curtailment gain................ (2,048) -- -- (171) -- --
------- ------- -------- ----- ---- -----
Net periodic benefit cost
(income)...................... (2,185) (288) (212) 311 743 597
Cost of other plans............. 1,054 479 300 -- -- --
------- ------- -------- ----- ---- -----
Net benefit cost (income)....... $(1,131) $ 191 $ 88 $ 311 $743 $ 597
======= ======= ======== ===== ==== =====
</TABLE>
A reconciliation of the balance of the benefit obligation is as follows:
<TABLE>
<CAPTION>
PENSION BENEFIT PLAN OTHER BENEFIT PLANS
----------------------- -----------------------
JANUARY 3, JANUARY 2, JANUARY 3, JANUARY 2,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at beginning of year......... $101,738 $115,494 $ 9,017 $ 8,992
Service cost.................................... 1,296 1,732 91 190
Interest cost................................... 7,799 8,660 672 529
Plan participants' contributions................ -- -- -- 294
Change in actuarial assumptions................. 13,095 11,653 432 (1,646)
Benefits paid................................... (8,434) (8,643) (1,220) (836)
-------- -------- ------- -------
Benefit obligation at end of year............... $115,494 $128,896 $ 8,992 $ 7,523
======== ======== ======= =======
</TABLE>
F-26
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
A reconciliation of the change in the fair value of plan assets is as
follows:
<TABLE>
<CAPTION>
PENSION BENEFIT PLAN OTHER BENEFIT PLANS
----------------------- -----------------------
JANUARY 3, JANUARY 2, JANUARY 3, JANUARY 2,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning of year...... $104,267 $115,330 $ -- $ --
Actual return on plan assets........................ 19,492 19,950 -- --
Employer's contributions............................ 5 -- 603 541
Plan participants' contributions.................... -- -- 420 294
Benefits paid....................................... (8,434) (8,643) (1,023) (835)
-------- -------- ------- -------
Fair value of plan assets at end of year............ $115,330 $126,637 $ -- $ --
======== ======== ======= =======
Funded status....................................... $ (164) $ (2,259) $(8,992) $(7,523)
Unrecognized prior service cost..................... (347) (273) -- --
Unrecognized net actuarial (gain) loss.............. (558) 1,676 (475) (1,484)
-------- -------- ------- -------
Accrued benefit cost................................ $ (1,069) $ (856) $(9,467) $(9,007)
======== ======== ======= =======
</TABLE>
Pension Benefit Plan assets include fixed income securities and marketable
equity securities, including 212,000 and 340,000 shares of the Company's Class A
Common Stock, which had a fair market value of $6,652 and $8,585 at January 3,
1998 and January 2, 1999, respectively. The Pension Benefit Plan also owned
112,500 shares of Authentic Fitness' common stock at January 3, 1998 and 502,800
shares at January 2, 1999. Such shares had a fair market value of $2,095 and
$9,176 at January 3, 1998 and January 2, 1999, respectively.
The Company contributes to a multi-employer defined benefit pension plan on
behalf of union employees of its two manufacturing facilities and a warehouse
and distribution facility, which amounts are not significant for the periods
presented.
The weighted-average assumptions used in the actuarial calculations were as
follows:
<TABLE>
<CAPTION>
JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Discount rate.................................. 8.0% 7.5% 7.0%
Expected return on plan assets................. 9.0% 9.0% 9.5%
Rate of compensation increase.................. 5.0% 5.0% 5.0%
</TABLE>
For measurement purposes, the weighted average annual assumed rate of
increase in the per capita cost of covered benefits (health care cost trend
rate) was 9% for the years through 2000 and 5% for the years 2001 and beyond.
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one-percentage-point change in assumed health
care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
ONE PERCENTAGE ONE PERCENTAGE
POINT POINT
INCREASE DECREASE
-------- --------
<S> <C> <C>
Effect on total of service and interest cost
components.................................... $ 51 $ (34)
Effect on health care component of the
accumulated postretirement benefit
obligation.................................... $361 $(334)
</TABLE>
The Company also sponsors a defined contribution plan for substantially all
of its domestic employees. Employees can contribute to the plan, on a pre-tax
and after-tax basis, a percentage of their qualifying compensation up to the
legal limits allowed. The Company contributes amounts equal to 15.0% of the
first 6.0% of employee contributions to the defined contribution plan. The
maximum Company contribution on behalf of any employee is $1,350 in one year.
Employees vest in the Company
F-27
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
contribution over four years. Company contributions to the defined contribution
plan totaled $300, $281 and $386 for the years ended January 4, 1997, January 3,
1998 and January 2, 1999, respectively.
NOTE 9 - INVENTORIES
<TABLE>
<CAPTION>
JANUARY 3, JANUARY 2,
1998 1999
---- ----
<S> <C> <C>
Finished goods.......................................... $298,161 $326,794
Work in process......................................... 54,580 92,821
Raw materials........................................... 78,444 52,404
-------- --------
$431,185 $472,019
======== ========
</TABLE>
NOTE 10 - DEBT
<TABLE>
<CAPTION>
JANUARY 3, JANUARY 2,
1998 1999
---- ----
<S> <C> <C>
Revolving credit facility due 2002.......................... $291,109 $329,446
Term loan agreement due 2001-2006........................... -- 20,706
Term Note due 1997-2001..................................... 60,727 59,220
Capital lease obligations due 1999-2004..................... 2,884 5,388
Foreign credit facilities due 1999-2003..................... 12,751 23,651
Other....................................................... 7,393 3,706
-------- --------
374,864 442,117
Less: amounts due within one year........................... 20,601 30,231
-------- --------
$354,263 $411,886
======== ========
</TABLE>
Approximate maturities of long-term debt as of January 2, 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ------
<S> <C>
1999.............................................. $ 30,231
2000.............................................. 9,908
2001.............................................. 49,317
2002.............................................. 333,516
2003.............................................. 7,098
2004 and thereafter............................... 12,047
</TABLE>
In August and November 1997, the Company entered into Bank Credit Agreements
('1997 Bank Credit Agreements') with substantially the same lenders as those in
the Company's previous bank credit agreements. The 1997 Bank Credit Agreements
provided for a five year revolving credit facility in the amount of $600,000
(the 'Five Year Facility'), a 364 day credit facility in the amount of $200,000
(the '364 Day Credit Facility,' and together with the Five Year Facility, '1997
Revolving Credit Facilities') and a $300,000 Trade Letter of Credit Facility
('1997 L/C Facility'). The 364 Day Credit Facility is extendable for additional
364 day periods, and was extended as such in November 1998. In July 1998, the
1997 L/C Facility was increased to $450 million. These facilities are not
limited to any borrowing base and are essentially unsecured.
Amounts outstanding under the 1997 Bank Credit Agreements bear interest at
the Bank's base lending rate or at the Eurodollar rate plus a margin. The
applicable margin and the commitment fee payable on the unused portion of the
facilities decreases as the Company's implied senior debt rating improves. As of
January 2, 1999, the Company was required to pay a margin of 0.35% over the
Eurodollar rate on its borrowings under both the Five Year Facility and the 1997
L/C Facility, and
F-28
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
0.50% over the Eurodollar rate on its borrowings under the 364 Day Credit
Facility. At January 2, 1999, the applicable commitment fee on the average
unused portion was 0.090% per annum under the 1997 Revolving Credit Facilities
and 0.075% per annum under the 1997 L/C Facility. At January 3, 1998 and
January 2, 1999, the Company had additional credit available under the 1997 Bank
Credit Agreements of $633,682 and $489,092, respectively.
The 1997 Bank Credit Agreements contain various financial and non-financial
covenants related to additional debt, liens on Company property, mergers,
investments in other entities, asset sales and other items. The Company was in
compliance with all of the covenants under its credit agreements for the three
fiscal years ended January 2, 1999.
The 1997 L/C Facility provides for the issuance of commercial letters of
credit for the purchase of inventory from suppliers and offers the Company
extended terms, for periods of up to 180 days ('Trade Drafts'). The Company
classifies the 180 day Trade Drafts in trade accounts payable. As of January 3,
1998 and January 2, 1999, the amount of Trade Drafts outstanding was $111,172
and $308,806, respectively. Also at January 3, 1998 and January 2, 1999, the
Company had outstanding letters of credit totaling approximately $64,037 and
$129,802, respectively. Letters of credit issued under this facility are not
recognized on the balance sheet.
The Company entered into credit agreements related to the purchase of Lejaby
in the third quarter of 1996 with several members of its existing bank group
('1996 Bank Credit Agreements'). The terms of the 1996 Bank Credit Agreements
are substantially the same as those of the 1997 Bank Credit Agreements and
include a term loan facility of 370 million French Francs and revolving loan
facilities of 120 million French Francs. The term loan is being repaid in annual
installments which began in July 1997, with a final installment due on
December 31, 2001. In addition, the 1996 Bank Credit Agreements included a 120
million French Franc revolving loan facility that originally was scheduled to
mature in December 2001. In April 1998, the revolving loan facility was
increased to 480 million French Francs and the maturity was extended to April
2003. Borrowings under the term loan and revolving loan facility bear interest
at LIBOR plus 0.35%. As of January 2, 1999, the Company had approximately
$83,100 of additional credit available under the revolving loan portion of the
1996 Bank Credit Agreement.
The Company and certain of its foreign subsidiaries have entered into credit
agreements that provide for revolving lines of credit and issuance of letters of
credit ('Foreign Credit Facilities'). At January 2, 1999 and January 3, 1998,
the total amounts of the Foreign Credit Facilities was approximately $94,300 and
$71,300, respectively of which approximately $52,000 and $45,300, respectively
was available.
In July 1998, the Company entered into a term loan agreement with a member
of its existing bank group. The balance of this loan as of January 2, 1999 was
$20,706 and carried a fixed interest rate of 6.8%. This loan is due to be repaid
in installments beginning in 2001 with a final maturity date of July 2006.
During the second half of 1998, two other members of the existing bank group
made available to the Company, on an uncommitted basis, a total of $45,000 in
short term credit facilities. As of January 2, 1999, the Company had no
outstanding borrowings under these facilities.
As of January 3, 1998, the Company had four interest rate swap agreements in
place which were used to convert variable interest rate borrowings of $356,500
to fixed interest rates. Under these agreements, borrowings of $150,000 were
fixed at 5.67% until maturity in October 1998, borrowings of $6,500 were fixed
at 6.60% until maturity in July 2006, borrowings of $125,000 were fixed at 5.76%
until maturity in September 2002 and borrowings of $75,000 were fixed at 5.79%,
until maturity in September
F-29
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
2002. During 1998, an additional swap agreement was added and two existing swaps
were amended. As of January 2, 1999, the Company had four swap agreements in
place, as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT DUE DATE
- --------------- --------
<S> <C>
$210.0 September 2004
$150.0 September 2004
$250.0 September 2004
$ 6.5 June 2006
</TABLE>
Under these new and amended agreements, borrowings of $610,000 were fixed at
5.99% until maturity in September 2004 and borrowings of $6,500 were fixed at
6.60% until maturity in July 2006. These swaps are utilized to convert floating
rate obligations, which include bank debt, obligations under the asset
securitization program (see Note 4) and trade drafts under the letter of credit
facility, to fixed rate obligations. The outstanding variable rate obligations
at January 2, 1999 exceed the notional amount of interest rate swap agreements
and we anticipate that they will continue to do so for at least the remaining
term of the swap agreements based upon the Company's ability and intent to
refinance all variable rate obligations as they come due. The counterparties to
all of the Company's interest rate swap agreements are banks who are lenders in
the 1997 Bank Credit Agreements. Differences between the fixed interest rate on
each swap and the one month or three month LIBOR rate are settled at least
quarterly between the Company and each counterparty. Pursuant to its interest
rate swap agreements, the Company made payments totaling $524 in the year ended
January 3, 1998 and received payments totaling $575 in the year ended
January 2, 1999.
The Company's average interest rate on its outstanding debt, after giving
effect to the interest rate swap agreements, was approximately 5.92% and 5.99%
at January 3, 1998 and January 2, 1999, respectively.
NOTE 11 - MANDATORILY REDEEMABLE PREFERRED SECURITIES
In 1996, Designer Holdings issued 2.4 million Company-obligated mandatorily
redeemable convertible preferred securities of a wholly owned subsidiary (the
'Preferred Securities') for aggregate gross proceeds of $120,000. The Preferred
Securities represent preferred undivided beneficial interests in the assets of
Designer Finance Trust ('Trust'), a statutory business trust formed under the
laws of the State of Delaware in 1996. Designer Holdings owns all of the common
securities representing undivided beneficial interests of the assets of the
Trust. Accordingly, the Trust is included in the consolidated financial
statements of the Company. The Trust exists for the sole purpose of (i) issuing
the Preferred Securities and common securities (together with the Preferred
Securities, the 'Trust Securities'), (ii) investing the gross proceeds of the
Trust Securities in 6% Convertible Subordinated Debentures of Designer Holdings
due 2016 ('Convertible Debentures') and (iii) engaging in only those other
activities necessary or incidental thereto. The Company indirectly owns 100% of
the voting common securities of the Trust which is equal to 3% of the Trust's
total capital.
Each Preferred Security is convertible at the option of the holder thereof
into 0.6888 of a share of Common Stock, par value $.01 per share, of the
Company, or 1,653,177 shares of the Company's Common Stock in the aggregate, at
an effective conversion price of $72.59 per share of common stock, subject to
adjustments in certain circumstances.
The holders of the Preferred Securities are entitled to receive cumulative
cash distributions at an annual rate of 6% of the liquidation amount of $50.00
per Preferred Security, payable quarterly in arrears. The distribution rate and
payment dates correspond to the interest rate and interest payment dates on the
Convertible Debentures, which are the sole assets of the Trust. As a result of
the acquisition of Designer Holdings by the Company, the Preferred Securities
were adjusted to their estimated fair value at the date of acquisition of
$100,500, resulting in a decrease in their recorded value
F-30
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
of approximately $19,500. This decrease is being amortized, using the effective
interest rate method to maturity of the Preferred Securities. As of January 2,
1999, the unamortized balance is $18,164. Such distributions and accretion to
redeemable value are included in interest expense.
The Company has the right to defer payments of interest on the Convertible
Debentures and distributions on the Preferred Securities for up to twenty
consecutive quarters (five years), provided such deferral does not extend past
the maturity date of the Convertible Debentures. Upon the payment, in full, of
such deferred interest and distributions, the Company may defer such payments
for additional five-year periods.
The Preferred Securities are mandatorily redeemable upon the maturity of the
Convertible Debentures on December 31, 2016, or earlier to the extent of any
redemption by the Company of any Convertible Debenture, at a redemption price of
$50.00 per share plus accrued and unpaid distributions to the date fixed for
redemption. In addition, there are certain circumstances wherein the Trust will
be dissolved, with the result that the Convertible Debentures will be
distributed pro-rata to the holders of the Trust Securities.
The Company has guaranteed, on a subordinated basis, distributions and other
payments due on the Preferred Securities ('Guarantee'). In addition, the Company
has entered into a supplemental indenture pursuant to which it has assumed, as a
joint and several obligor with Designer Holdings, liability for the payment of
principal, premium, if any, and interest on the Convertible Debentures, as well
as the obligation to deliver shares of Common Stock, par value $.01 per share,
of the Company upon conversion of the Preferred Securities as described above.
The Guarantee, when taken together with the Company's obligations in respect of
the Convertible Debentures, provides a full and unconditional guarantee of
amounts due on the Preferred Securities.
The following is summarized financial information of Designer Holdings,
which is presented as required by reason of the public preferred securities
issued by Designer Holdings, as of January 3, 1998 and January 2, 1999 and for
each of the three fiscal years ended January 2, 1999, respectively.
<TABLE>
<CAPTION>
JANUARY 3, JANUARY 2,
1998(A) 1999(A)
------- -------
<S> <C> <C>
Current assets.......................................... $129,285 $115,328
Noncurrent assets....................................... 457,321 538,600
Current liabilities..................................... 104,458 123,325
Noncurrent liabilities.................................. 19,564 24,151
Redeemable preferred securities......................... 100,758 101,836
Stockholder's equity.................................... 361,826 404,616
</TABLE>
- ---------
(a) Reclassification made to reflect the tax benefits attributable to certain
tax deductible purchase accounting adjustments.
<TABLE>
<CAPTION>
FOR THE YEAR NINE MONTHS THREE MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JANUARY 3, JANUARY 2,
1996(a) 1997 1998 1999(b)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues.............................. $480,360 $365,049 $158,276 $453,229
Cost of goods sold........................ 339,249 262,759 115,958 310,738
Net income before extraordinary item...... 27,502 274 8,430 42,790
Net income (loss)......................... 25,246 (633) 8,430 42,790
</TABLE>
- ---------
(a) Certain amounts for the year ended December 31, 1996 have been reclassified
to cost of goods sold to conform to the current year presentation.
(footnotes continued on next page)
F-31
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(footnotes continued from previous page)
(b) Excludes net revenues of $84.5 million now reported as Retail 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 revenues cannot be separately identified.
The summarized balance sheet information as of January 3, 1998 and
January 2, 1999 reflects the effect of the acquisition by the Company.
Stockholders' equity represents the purchase price paid plus earnings from the
time of acquisition. The income statement information for the year ended
December 31, 1996 and the nine months ended September 30, 1997 is presented on a
historical basis and does not reflect the effect of the acquisition by the
Company. The above information is not indicative of the future operating results
primarily due to the integration of the operations of Designer Holdings with the
operations of the Company, the redirected marketing efforts in the new store
format and redirected marketing strategy.
NOTE 12 - STOCKHOLDERS' EQUITY
On June 30, 1995 the Company paid its first quarterly dividend on its Common
Stock. Total dividends declared during fiscal years 1996, 1997 and 1998 were
$14,532 ($0.28 per share), $17,265 ($0.32 per share) and $22,423 ($0.36 per
share), respectively.
The Company has 10,000,000 shares of authorized and unissued preferred stock
with a par value of $0.01 per share.
Stock Compensation Plans
The Board of Directors and Compensation Committee thereof are responsible
for administration of the Company's compensation plans and determine, subject to
the provisions of the plans, the number of shares to be issued, the terms of
awards, the sale or exercise price, the number of shares awarded and the rate at
which awards vest or become exercisable.
1988 Employee Stock Purchase Plan
In 1988, the Company adopted the 1988 Employee Stock Purchase Plan ('Stock
Purchase Plan') which provides for sales of up to 4,800,000 shares of Class A
Common Stock of the Company to certain key employees. At January 3, 1998 and
January 2, 1999, 4,521,300 shares were issued and outstanding pursuant to grants
under the Stock Purchase Plan. All shares were sold at amounts determined to be
equal to the fair market value. In addition, certain employees elected to pay
for the shares granted by executing promissory notes payable to the Company.
Notes totaling $5,971 were outstanding at January 3, 1998 and were repaid during
fiscal 1998. Notes receivable from employees are deducted from stockholders'
equity and were principally owed by an officer and director of the Company.
1991 Stock Option Plan
In 1991, the Company established The Warnaco Group, Inc. 1991 Stock Option
Plan ('Option Plan') and authorized the issuance of up to 1,500,000 shares of
Class A Common Stock pursuant to incentive and non-qualified option grants to be
made under the plan. The exercise price on any stock option award may not be
less than the fair market value of the Company's Common Stock at the date of the
grant. The Option Plan limits the amount of qualified stock options that may
become exercisable by any individual during a calendar year. Options generally
expire 10 years from the date of grant and vest ratably over 4 years.
F-32
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
1993 Stock Plan
On May 14, 1993, the stockholders approved the adoption of The Warnaco
Group, Inc. 1993 Stock Plan ('Stock Plan') which provides for the issuance of up
to 2,000,000 shares of Class A Common Stock of the Company through awards of
stock options, stock appreciation rights, performance awards, restricted stock
units and stock unit awards. On May 12, 1994, the stockholders approved an
amendment to the Stock Plan whereby the number of shares issuable under the
Stock Plan is automatically increased each year by 3% of the number of
outstanding shares of Class A Common Stock of the Company as of the beginning of
each fiscal year. The exercise price of any stock option award may not be less
than the fair market value of the Company's Common Stock at the date of the
grant. Options generally expire 10 years from the date of grant and vest ratably
over 4 years.
In accordance with the provisions of the Stock Plan, the Company granted
137,135 and 182,903 shares of restricted stock to certain employees, including
certain officers of the Company, during the fiscal years ended January 3, 1998
and January 2, 1999, respectively. The restricted shares vest over four years.
The fair market value of the restricted shares was $3,601 and $7,682 at the
dates of grant, respectively. The Company recognizes compensation expense equal
to the fair value of the restricted shares over the vesting period. Compensation
expense for the fiscal years ended January 4, 1997, January 3, 1998 and
January 2, 1999 was $2,502, $3,322 and $4,978, respectively. During 1997 and
1998, 18,250 and 16,177 shares, respectively, of non-vested restricted shares
were canceled resulting in a reduction in unvested compensation of $481 and
$667, respectively. Unvested stock compensation at January 3, 1998 and
January 2, 1999 was $9,734 and $11,772, respectively, and is deducted from
stockholders' equity.
1993 Non-Employee Director Stock Plan and 1998 Director Plan
In May 1994, the Company's stockholders approved the adoption of the 1993
Non-Employee Director Stock Plan ('Director Plan'). The Director Plan provides
for awards of non-qualified stock options to non-employee directors of the
Company. Options granted under the Director Plan are exercisable in whole or in
part until the earlier of ten years from the date of the grant or one year from
the date on which an optionee ceases to be a Director eligible for grants.
Options are granted at the fair market value of the Company's Common Stock at
the date of the grant. In May 1998, the Board of Directors approved the adoption
of the 1998 Stock Plan for Non-Employee Directors ('1998 Director Plan', and
together with the Director Plan, 'Combined Director Plan'). The 1998 Director
Plan includes the same features as the Director Plan and provides for issuance
of the Company's Common Stock held in treasury. The Combined Director Plan
provides for the automatic grant of options to purchase (i) 30,000 shares of
Common Stock upon a Director's election to the Company's Board of Directors and
(ii) 20,000 shares of Common Stock immediately following each annual
shareholders' meeting as of the date of such meeting.
1997 Stock Option Plan
In 1997, the Company's Board of Directors approved the adoption of The
Warnaco Group, Inc. 1997 Stock Option Plan ('1997 Plan') which provides for the
issuance of incentive and non-qualified stock options and restricted stock up to
the number of shares of common stock held in treasury. The Plan limits the
amount of qualified stock options that may become exercisable by any individual
during a calendar year and limits the vesting period for options awarded under
the 1997 Plan.
F-33
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
A summary of the status of the Company's stock option plans are presented
below:
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997 FISCAL 1998
--------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 5,282,500 $16.52 6,691,000 $18.57 8,817,875 $22.00
Granted........................ 1,962,000 24.28 2,611,500 29.91 6,674,202 36.22
Exercised...................... (136,000) 15.63 (251,259) 16.85 (5,625,014) 20.68
Canceled....................... (417,500) 18.49 (233,366) 23.80 (958,131) 30.95
--------- --------- ----------
Outstanding at end of year..... 6,691,000 18.57 8,817,875 22.00 8,908,932 32.68
========= ========= ==========
Options exercisable at end of
year......................... 4,850,250 $18.28 4,127,594 $17.76 6,755,889 $33.04
========= ====== ========= ====== ========== ======
Weighted average fair value of
options granted.............. $ 8.24 $10.58 $12.28
====== ====== ======
Options available for future
grant........................ 7,145,293 2,700,431 2,151,308
========= ========= ==========
</TABLE>
In fiscal 1998, 1997 and 1996, in exchange for shares received from option
holders with a fair value of $38,095, $575 and $0, respectively, the Company
paid $38,095, $575 and $0, respectively of withholding taxes on options that
were exercised during the year. Such shares have been included in treasury at
cost, which equals fair value at date of option exercise.
Summary information related to options outstanding and exercisable at
January 2, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AT JANUARY 2, REMAINING EXERCISE AT JANUARY 2, EXERCISE
RANGE OF EXERCISE PRICES 1999 CONTRACTUAL LIFE PRICE 1999 PRICE
- ------------------------ ---- ---------------- ----- ---- -----
(YEARS)
<S> <C> <C> <C> <C> <C>
$10.01 - $20.00..................... 936,474 5.56 $15.69 785,681 $13.10
$20.01 - $30.00..................... 851,250 7.75 25.88 417,875 26.08
$30.01 - $40.00..................... 6,850,208 9.04 35.49 5,472,333 35.94
$40.01 - $50.00..................... 271,000 9.35 41.82 80,000 42.00
--------- ---------
8,908,932 8.56 32.68 6,755,889 33.04
========= =========
</TABLE>
The Company has reserved 120,000 shares of Class A Common Stock for issuance
under the Director Plan, Stock Plan and Option Plan as of January 2, 1999. In
addition, there are 6,087,674 shares of Class A Common Stock in treasury stock
available for issuance under the 1997 Plan.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate............................... 5.47% 6.20% 5.60%
Dividend yield........................................ 1.15% 1.08% 1.00%
Expected volatility of market price of Company's
Common Stock........................................ .3189 .3197 .3069
Expected option life.................................. 5 years 5 years 5 years
</TABLE>
F-34
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------
JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Pro forma net (loss) before cumulative effect of
accounting change................................... $(38,117) $(17,121) $(41,814)
Pro forma basic (loss) per share before cumulative
effect of accounting change......................... $ (0.74) $ (0.32) $ (0.68)
Pro forma diluted (loss) per share before cumulative
effect of accounting change......................... $ (0.74) $ (0.32) $ (0.68)
</TABLE>
These pro forma effects may not be representative of the effects on future
years because of the prospective application required by SFAS No. 123, and the
fact that options vest over several years and new grants generally are made each
year.
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------------
JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Common Stock:
Balance at beginning of year..................... 52,073,912 52,398,112 63,294,423
Shares issued upon exercise of stock options..... 133,500 383,975 1,707,097
Shares issued under restricted stock grants, net
of cancellations............................... 190,700 99,192 171,088
Shares issued for acquisition of Designer
Holdings, Ltd.................................. -- 10,413,144 --
---------- ---------- ----------
Balance at end of year........................... 52,398,112 63,294,423 65,172,608
========== ========== ==========
Treasury Stock:
Balance at beginning of year..................... 286,600 536,600 1,375,919
Net additions.................................... 250,000 839,319 4,711,755
---------- ---------- ----------
Balance at end of year........................... 536,600 1,375,919 6,087,674
========== ========== ==========
</TABLE>
Stock Buyback Program
On November 14, 1996, the Board of Directors approved a stock buyback
program of up to 2.0 million shares. On May 14, 1997, the Company's Board of
Directors approved an increase of this program to 2.4 million shares, and on
February 19, 1998, the Company's Board of Directors authorized the repurchase of
an additional 10.0 million shares. During fiscal 1996, 1997 and 1998, the
Company repurchased 250,000, 839,319 and 4,794,699 shares of its common stock
under the repurchase programs at a cost of $7,030, $26,537 and $135,416,
respectively. At January 2, 1999, there were 6,440,926 shares available for
repurchase under this program. On March 1, 1999, the Company's Board of
Directors approved an additional 10.0 million share repurchase.
The Company has used a combined put-call option contract to facilitate the
repurchase of its common stock. This contract provides for the sale of a put
option giving the counterparty the right to sell the Company's shares to the
Company at a preset price at a future date and for the purchase of a call option
giving the Company the right to purchase its shares from the counterparty at the
same price at the same future date.
At January 2, 1999, the Company holds call options (all covered by one
contract) and has sold put options covering 1.5 million shares of common stock
with an average forward price of $35.35 per share. The equity instruments are
exercisable only at expiration of the contracts, with expiration dates ranging
F-35
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
from the first through third quarters of fiscal 1999. The equity instruments are
settled, at the election of the Company, through physical, net share or net cash
settlement. During fiscal 1997 and 1998, the Company repurchased 140,350 shares
and 1,790,455 shares of common stock at a cost of $4,475 and $65,899, which is
reflected in treasury stock. In addition, the Company made net cash settlement
payments of $1,620 and received net cash settlement payments of $2,325 under
these contracts in fiscal 1997 and 1998, respectively, which are reflected in
additional paid-in-capital. If the arrangements were settled on a net cash basis
at January 2, 1999, the Company would be obligated to pay $15,114 based on the
closing market price of the Company's common stock.
NOTE 13 - EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------
JANUARY 4, JANUARY 3, JANUARY 2,
1997(1) 1998(1) 1999
------- ------- ----
<S> <C> <C> <C>
Numerator for basic and diluted earnings (loss) per
share -- Income (loss) before cumulative effect of change
in accounting............................................. $(31,409) $(12,319) $ 14,097
Cumulative effect of change in accounting................... -- -- (46,250)
-------- -------- --------
Net income (loss)........................................... $(31,409) $(12,319) $(32,153)
======== ======== ========
Denominator for basic earnings (loss) per share -- weighted
average shares............................................ 51,308 52,814 61,362
Effect of dilutive securities:
Employee stock options.................................. -- -- 821
Restricted stock shares................................. -- -- 473
Shares under put option contracts....................... -- -- 349
-------- -------- --------
Dilutive potential common shares............................ -- -- 1,643
-------- -------- --------
Denominator for diluted earnings (loss) per share --weighted
average adjusted shares................................... 51,308 52,814 63,005
======== ======== ========
Basic earnings (loss) per share before cumulative effect of
change in accounting...................................... $ (0.61) $ (0.23) $ 0.23
======== ======== ========
Diluted earnings (loss) per share before cumulative effect
of change in accounting................................... $ (0.61) $ (0.23) $ 0.22
======== ======== ========
</TABLE>
- ---------
(1) Fiscal 1996 and 1997 have been revised as described in Note 1.
Options to purchase 1,900,556 and 7,456,708 shares of common stock were
outstanding during fiscal 1997 and 1998, respectively. These shares were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
The fiscal 1998 options, which expire from April 2006 to November 2008, were
still outstanding at the end of fiscal 1998. Incremental shares issuable on the
assumed conversion of the Preferred Securities (1,653,177 shares) were not
included in the fiscal 1997 and 1998 computation of diluted earnings per share
as the impact would have been antidilutive for each period presented. Options to
purchase 5,217,500 shares of common stock at a price of $25.25 per share were
granted on January 4, 1999. Such options expire on January 4, 2009.
NOTE 14 - LEASE COMMITMENTS
During fiscal 1997, the Company sold certain fixed assets for net book value
of approximately $33,223. The assets were leased back from the purchaser, under
the terms of an operating lease, over a six-year period. In fiscal 1998, the
Company sold certain equipment for cash proceeds of $21,713, which
F-36
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
approximated net book value. The equipment was leased back from the purchaser
under an operating lease with an initial term of three years and a one-year
renewal option. Under the terms of certain operating leases, the Company
guarantees a portion of the residual value loss, if any, incurred by the lessors
in remarketing or disposing the related assets upon lease termination or
expiration. The Company believes, based on existing facts and circumstances and
current values of such equipment, that a material payment pursuant to such
guarantee is unlikely.
Rental expense was $19,923, $24,492 and $35,534 for the years ended January
4, 1997, January 3, 1998 and January 2, 1999, respectively.
The following is a schedule of future minimum rental payments required under
operating leases with terms in excess of one year, as of January 2, 1999:
<TABLE>
<CAPTION>
RENTAL PAYMENTS
-----------------------
REAL ESTATE EQUIPMENT
----------- ---------
<S> <C> <C>
1999................................... $19,687 $13,445
2000................................... 19,437 13,397
2001................................... 15,542 13,458
2002................................... 15,457 17,849
2003................................... 11,492 2,733
2004 and thereafter.................... 28,126 8,171
</TABLE>
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Revolving, term loans and other borrowings. The carrying amounts of the
Company's outstanding balances under its various Bank Credit Agreements and
other outstanding debt approximate the fair value because the interest rate on
the outstanding borrowings is variable and there are no prepayment penalties.
Redeemable preferred securities. These securities are publically traded on
the New York Stock Exchange. The fair market value was determined based on the
closing price on December 31, 1998, the last trading date prior to the end of
the fiscal year.
Interest rate swap agreements. The Company has entered into interest rate
swap agreements which have the effect of converting the Company's floating rate
obligations to fixed rate obligations. The fair value of the Company's interest
rate swap agreements at January 2, 1999 and January 3, 1998 are based upon
quotes from brokers and represent the cash requirement if the existing
agreements had been settled at year-end.
Letters of credit. Letters of credit collateralize the Company's obligations
to third parties and have terms ranging from 30 days to one year. The face
amount of the letters of credit are a reasonable estimate of the fair value
since the value for each is fixed over its relatively short maturity.
Equity option arrangements. These arrangements can be settled, at the
Company's option, by the purchase of shares, on a net basis in shares of the
Company's common stock or on a net cash basis. To the extent that the market
price of the Company's common stock on the settlement date is higher or lower
than the forward purchase price, the net differential can be paid or received by
the Company.
Foreign currency transactions. During 1998, the Company entered into various
foreign currency forward and option contracts which were used as hedges for
various commercial transactions. As of January 2, 1999, the Company did not have
any open foreign currency forward contracts. The fair value of open foreign
currency option contracts is based upon quotes from brokers and reflects the
cash benefit if the existing contracts had been sold.
F-37
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The carrying amounts and fair value of the Company's financial instruments
as of January 3, 1998 and January 2, 1999, are as follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998 JANUARY 2, 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Accounts receivable....................... $296,378 $296,378 $199,369 $199,369
Revolving loans........................... 303,860 303,860 353,097 353,097
Term loans................................ 60,727 60,727 79,926 79,926
Other long term debt...................... 10,277 10,277 9,094 9,094
Redeemable preferred securities........... 100,758 100,800 101,836 86,400
Interest rate swaps....................... -- (4,716) -- (24,324)
Letters of credit......................... -- 64,037 -- 129,802
Equity option arrangement................. -- (539) -- (15,114)
Foreign currency option contracts......... -- -- 83 151
</TABLE>
NOTE 16 - CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------
JANUARY 4, JANUARY 3, JANUARY 2,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash paid (received) during the year for:
Interest, including $1,897, $0 and $0 capitalized
in fiscal 1998, 1997 and 1996.................. $ 32,008 $ 42,932 $ 61,088
Income taxes, net of refunds received............ 8,672 13,578 (12,538)
Supplemental Non-Cash Investing and Financing
Activities:
Details of acquisitions:
Fair value of assets acquired................ $176,497 $ 607,609 $ 60,918
Liabilities assumed.......................... (78,200) (254,209) (7,800)
Stock issued................................. -- (353,400) --
-------- --------- --------
Cash paid.................................... 98,297 -- 53,118
Less cash acquired........................... (12,649) (55,800) --
-------- --------- --------
Net cash paid (acquired)......................... $ 85,648 $ (55,800) $ 53,118
======== ========= ========
</TABLE>
NOTE 17 - LEGAL MATTERS
The Company is not a party to any litigation or other claims or uncertainty,
other than routine litigation incidental to the business of the Company, that
individually or in the aggregate is material to the business of the Company.
F-38
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 2, 1999
-----------------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER FOURTH
RESTATED RESTATED RESTATED QUARTER
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net revenues........................................ $419,208 $438,874 $544,125 $548,044
Gross profit........................................ 119,550 131,496 160,392 125,777
Net income (loss) before cumulative effect of
accounting change................................. 6,088 12,940 26,944 (31,875)
Cumulative effect of accounting change.............. (46,250) -- -- --
-------- -------- -------- --------
Net income (loss)................................... $(40,162) $ 12,940 $ 26,944 $(31,875)
======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) before accounting change.......... $ 0.10 $ 0.21 $ 0.44 $ (0.54)
Cumulative effect of accounting change.......... (0.75) -- -- --
-------- -------- -------- --------
Net income (loss)............................... $ (0.65) $ 0.21 $ 0.44 $ (0.54)
======== ======== ======== ========
Diluted earnings (loss) per common share:
Income (loss) before accounting change.......... $ 0.10 $ 0.20 $ 0.43 $ (0.54)
Cumulative effect of accounting change.......... (0.73) -- -- --
-------- -------- -------- --------
Net income (loss)............................... $ (0.63) $ 0.20 $ 0.43 $ (0.54)
======== ======== ======== ========
</TABLE>
Note: The sum of the quarters' per share amounts do not equal the full year
amounts.
The Company's fiscal 1998 quarterly results of operations have been restated
with respect to the effects of the early adoption of SOP 98-5 and for a charge
related to an inventory adjustment, as described in Note 1. Gross profit, before
restatements for the first, second, third and fourth quarters was $148,353,
$150,930, $186,931 and $141,425, respectively. The restatements decreased gross
profit by $28,803, $19,434, $26,539 and $15,648 and resulted in restated gross
profit of $119,550, $131,496, $160,392 and $125,777 for the first, second, third
and fourth quarters, respectively. Income (loss) before cumulative effect of a
change in accounting before restatements for the first, second, third and fourth
quarters was $24,723 ($0.39 per diluted share), $25,514 ($0.40 per diluted
share), $44,115 ($0.70 per diluted share), and $(21,751) ($0.37 per diluted
share), respectively. The restatements decreased income before the cumulative
effect of a change in accounting by $18,635 ($0.29 per diluted share), $12,574
($0.20 per diluted share), $17,171 ($0.27 per diluted share) and $10,124 ($0.17
per diluted share) and resulted in restated income (loss) before the cumulative
effect of a change in accounting of $6,088 ($0.10 per diluted share), $12,940
($0.20 per diluted share), $26,944 ($0.43 per diluted share) and $(31,875)
($0.54 per diluted share) for the first, second, third and fourth quarters,
respectively. Net income (loss) before restatements for the first, second, third
and fourth quarters was $24,723 ($0.39 per diluted share), $25,514 ($0.40 per
diluted share), $44,115 ($0.70 per diluted share) and $(21,751) ($0.37 per
diluted share), respectively. The restatements changed net income (loss) by
$64,885 ($1.02 per diluted share), $12,574 ($0.20 per diluted share), $17,171
($0.27 per diluted share) and $10,124 ($0.17 per diluted share) and resulted in
a restated net loss of $40,162 ($0.63 per diluted share) for the first quarter
and restated net income of $12,940 ($0.20 per diluted share) and $26,944 ($0.43
per diluted share) for the second and
F-39
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
third quarters and a restated net loss of $31,875 ($0.54 per diluted share) for
the fourth quarter, respectively.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 2, 1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
RESTATED RESTATED RESTATED RESTATED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues........................................ $251,526 $290,204 $333,413 $560,587
Gross profit........................................ 81,791 84,296 110,023 99,094
Net income (loss)................................... 11,336 7,849 23,413 (54,917)
Basic net income (loss) per common share............ $ 0.22 $ 0.15 $ 0.46 $ (0.96)
======== ======== ======== ========
Diluted net income (loss) per common share.......... $ 0.21 $ 0.15 $ 0.44 $ (0.96)
======== ======== ======== ========
</TABLE>
Note: The sum of the quarters' per share amounts do not equal the full year
amounts.
The Company's fiscal 1997 quarterly results of operations have been restated
with respect to a charge related to an inventory adjustment as described in Note
1. Gross profit, before restatements for the first, second, third and fourth
quarters was $92,742, $99,305, $124,003 and $116,171, respectively. The
restatements decreased gross profit by $10,951, $15,009, $13,980 and $17,077,
respectively and resulted in restated gross profit of $81,791, $84,296, $110,023
and $99,094 for the first, second, third and fourth quarters, respectively. Net
income (loss) before restatements for the first, second, third and fourth
quarters was $18,126, ($0.34 per diluted share), $17,155 ($0.32 per diluted
share), $32,081 ($0.60 per diluted share) and ($44,330) ($0.77 per diluted
share), respectively. The restatements decreased net income (loss) by $6,790
($0.13 per diluted share), $9,306 ($0.17 per diluted share), $8,668 ($0.16 per
diluted share) and $10,587 ($0.19 per diluted share) and resulted in restated
net income (loss) of $11,336 ($0.21 per diluted share), $7,849 ($0.15 per
diluted share), $23,413 ($0.44 per diluted share) and ($54,917) ($0.96 per
diluted share), for the first, second, third and fourth quarters, respectively.
F-40
<PAGE>
SCHEDULE II
THE WARNACO GROUP, INC
VALUATION & QUALIFYING ACCOUNTS & RESERVES(4)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES(1) ADDITIONS(2) DEDUCTIONS(3) END OF YEAR
- ----------- ----------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended January 4, 1997
Receivable allowances......... $ 5,135 $ 78,851 $ 3,393 $ (76,042) $11,337
======= ======== ======= ========= =======
Inventory reserves............ $-- $ 25,320 $-- $ (25,320) $--
======= ======== ======= ========= =======
Year Ended January 3, 1998
Receivable allowances......... $11,337 $139,469 $30,510 $(135,192) $46,124
======= ======== ======= ========= =======
Inventory reserves............ $-- $ 57,298 $19,248 $ (37,371) $39,175
======= ======== ======= ========= =======
Year Ended January 2, 1999
Receivable allowances......... $46,124 $166,347 $21,500 $(197,303) $36,668
======= ======== ======= ========= =======
Inventory reserves............ $39,175 $ 25,442 $ 3,000 $ (50,716) $16,901
======= ======== ======= ========= =======
</TABLE>
- --------------
(1) Includes bad debts, cash discounts, allowances and sales returns.
(2) Reserves related to assets acquired including fair value adjustments -- See
Note 2.
(3) Amounts written-off, net of recoveries.
(4) See Notes 2 and 3 for other restructuring related activity and Note 7 for
tax valuation allowance information.
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE WARNACO GROUP, INC. FOR THE YEAR ENDED JANUARY 2,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 9,495
<SECURITIES> 0
<RECEIVABLES> 236,037
<ALLOWANCES> 36,668
<INVENTORY> 472,019
<CURRENT-ASSETS> 707,504
<PP&E> 344,151
<DEPRECIATION> 119,891
<TOTAL-ASSETS> 1,783,133
<CURRENT-LIABILITIES> 679,149
<BONDS> 411,886
101,836
0
<COMMON> 652
<OTHER-SE> 577,481
<TOTAL-LIABILITY-AND-EQUITY> 1,783,133
<SALES> 1,950,251
<TOTAL-REVENUES> 1,950,251
<CGS> 1,413,036
<TOTAL-COSTS> 1,780,916
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 83,760
<INTEREST-EXPENSE> 63,790
<INCOME-PRETAX> 21,785
<INCOME-TAX> 7,688
<INCOME-CONTINUING> 14,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (46,250)
<NET-INCOME> (32,153)
<EPS-BASIC> (0.52)
<EPS-DILUTED> (0.51)
</TABLE>
