<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10857
----------------------------
THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------------------
<TABLE>
<S> <C>
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(212) 661-1300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------------------
COPIES OF ALL COMMUNICATIONS TO:
THE WARNACO GROUP, INC.
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: VICE PRESIDENT AND GENERAL COUNSEL
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes [ ] No
The number of shares outstanding of the registrant's Class A Common Stock
as of May 15, 1998 is as follows: 63,201,082
________________________________________________________________________________
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1998 1998
RESTATED RESTATED
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 13,905 $ 12,009
Accounts receivable -- net....................................................... 360,415 296,378
Inventories:
Finished goods.............................................................. 363,366 298,161
Work in process............................................................. 55,343 54,580
Raw materials............................................................... 78,091 78,444
---------- ----------
Total inventories................................................................ 496,800 431,185
Other current assets............................................................. 40,692 45,228
---------- ----------
Total current assets........................................................ 911,812 784,800
Property, plant and equipment (net of accumulated depreciation of $108,492 and
$101,982, respectively)............................................................. 153,499 130,400
Other assets:
Excess of cost over net assets acquired -- net................................... 308,207 349,235
Other assets -- net.............................................................. 455,418 386,683
---------- ----------
Total other assets.......................................................... 763,625 735,918
---------- ----------
$1,828,936 $1,651,118
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under foreign credit facilities........................................ $ 29,477 $ 12,751
Current portion of long-term debt................................................ 10,437 7,850
Accounts payable................................................................. 264,175 289,817
Accrued liabilities.............................................................. 85,729 116,892
Income taxes payable............................................................. 6,116 5,203
---------- ----------
Total current liabilities................................................... 395,934 432,513
---------- ----------
Long-term debt........................................................................ 578,417 354,263
Other long-term liabilities........................................................... 12,855 14,022
Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Designer
Finance Trust Holding Solely Convertible Debentures................................. 101,016 100,758
Stockholders' equity:
Preferred Stock; $.01 par value.................................................. -- --
Common Stock; $.01 par value..................................................... 685 633
Additional paid-in capital....................................................... 937,666 940,461
Cumulative translation adjustment................................................ (10,498) (14,838)
Accumulated deficit.............................................................. (122,023) (122,421)
Treasury stock, at cost.......................................................... (50,374) (38,567)
Notes receivable for common stock issued and unearned stock compensation......... (14,742) (15,706)
---------- ----------
Total stockholders' equity.................................................. 740,714 749,562
---------- ----------
$1,828,936 $1,651,118
========== ==========
</TABLE>
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
APRIL 4, APRIL 5,
1998 1997
RESTATED RESTATED
-------- --------
(UNAUDITED)
<S> <C> <C>
Net revenue............................................................................... $419,208 $251,526
Cost of goods sold........................................................................ 299,658 169,735
-------- --------
Gross profit.............................................................................. 119,550 81,791
Selling, general and administrative expenses.............................................. 96,163 53,214
-------- --------
Income before interest and income taxes................................................... 23,387 28,577
Interest expense.......................................................................... 13,633 9,813
-------- --------
Income before income taxes................................................................ 9,754 18,764
Provision for income taxes................................................................ 3,666 7,428
-------- --------
Income before cumulative effect of accounting change...................................... 6,088 11,336
Cumulative effect of accounting change.................................................... (46,250) --
-------- --------
Net income (loss)......................................................................... $(40,162) $ 11,336
======== ========
Basic earnings (loss) per common share:
Income (loss) before accounting change............................................... $ 0.10 $0.22
Cumulative effect of accounting change............................................... (0.75) --
-------- --------
Net income (loss).................................................................... $(0.65) $0.22
======== ========
Diluted earnings (loss) per common share:
Income (loss) before accounting change................................................ $ 0.10 $0.21
Cumulative effect of accounting change................................................ (0.73) --
-------- --------
Net income (loss)..................................................................... $(0.63) $0.21
======== ========
Cash dividends per share of common stock.................................................. $ 0.09 $0.08
======== ========
Weighted average number of shares of common stock outstanding:
Basic................................................................................ 62,112 51,218
======== ========
Diluted.............................................................................. 63,743 53,201
======== ========
</TABLE>
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
APRIL 4, APRIL 5,
1998 1997
RESTATED RESTATED
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flow from operations:
Net income.............................................................................. $ 6,088 $ 11,336
Non-cash items included in net income:
Depreciation and amortization...................................................... 13,888 8,044
Amortization of unearned stock compensation........................................ 964 750
Increase in deferred income taxes.................................................. 1,557 3,391
Other changes in operating accounts................................................ (165,399) (91,505)
Cash expenses related to non-recurring charges.......................................... (2,467) (1,640)
--------- ---------
Net cash used in operations............................................................. (145,369) (69,624)
--------- ---------
Cash flow from investing activities:
Proceeds from sale of fixed assets................................................. 1,781 51
Purchase of property, plant & equipment............................................ (31,611) (9,891)
Payment of assumed liabilities and acquisition accruals............................ -- (6,215)
Increase in intangible and other assets............................................ (18,306) (16,483)
--------- ---------
Net cash used in investing activities................................................... (48,136) (32,538)
--------- ---------
Cash flow from financing activities:
Borrowing under revolving credit facilities........................................ 245,893 116,503
Proceeds from the exercise of stock options and repayment of notes receivable from
employees......................................................................... 32,902 798
Purchase of treasury shares ....................................................... (9,357) (4,762)
Payment of withholding tax on option exercises..................................... (38,095) (575)
Increase in other assets and deferred financing costs.............................. (32,200) (131)
Repayments of debt................................................................. (1,432) (8,261)
Dividends paid..................................................................... (4,690) (3,668)
--------- ---------
Net cash provided from financing activities............................................. 193,021 99,904
--------- ---------
Effect on cash due to currency translation.............................................. 2,380 --
--------- ---------
Increase (decrease) in cash............................................................. 1,896 (2,258)
Cash at beginning of period............................................................. 12,009 11,840
--------- ---------
Cash at end of period................................................................... $ 13,905 $ 9,582
========= =========
Other changes in operating accounts:
Accounts receivable................................................................ $ (63,333) $ (27,835)
Inventories........................................................................ (65,098) (34,205)
Other current assets............................................................... 4,478 4,790
Accounts payable and accrued liabilities........................................... (56,752) (34,665)
Accrued income taxes............................................................... 984 948
Other.............................................................................. 14,322 (538)
--------- ---------
$(165,399) $ (91,505)
========= =========
</TABLE>
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim financial
information. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, the accompanying
consolidated condensed financial statements contain all adjustments (all of
which were of a normal recurring nature) necessary to present fairly the
financial position of the Company as of April 4, 1998 as well as its results of
operations and cash flows for the periods ended April 4, 1998 and April 5, 1997.
Operating results for interim periods may not be indicative of results for the
full fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended January 3, 1998.
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's 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
implementation of a new inventory costing process during 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, prior period consolidated financial statements have been
restated to reflect additional costs of goods sold. The amount of the
restatement affecting the first quarter of fiscal 1998 and 1997 was $14,481
and $10,951, respectively. 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.
The fiscal 1998 first quarter results were also restated to reflect the early
adoption of SOP 98-5, regarding the write-off of deferred start-up costs. The
amount of the restatement in the first quarter of fiscal 1998 was $14,322.
Certain amounts for prior periods have been reclassified to be comparable with
the current period presentation.
NOTE 2 -- CAPITAL STOCK
On February 19, 1998, the Company's Board of Director's declared a
quarterly cash dividend of $0.09 per share to be paid on April 9, 1998 to
shareholders of record as of March 12, 1998. In addition, the Board of Directors
authorized the repurchase of an additional 10.0 million shares to supplement its
previously authorized 2.42 million share stock repurchase program. During the
three months ended April 4, 1998, the Company repurchased approximately 349,000
shares under equity option arrangements at a cost of approximately $11.8
million. A total of approximately 1.4 million shares have been repurchased under
the current authorization of 12.42 million shares leaving approximately 11.0
million shares available to repurchase. In addition, the Company has options
outstanding on approximately 1.9 million shares at an average forward price of
$36.25 per share at April 4, 1998. These option arrangements expire between May
1998 and December 1998. After accounting for these options, the Company has
approximately 9.1 million shares available to repurchase. As of April 4, 1998,
treasury stock includes approximately 1,725,000 shares at a cost of $50.4
million. The change in additional paid-in capital during the three months ended
April 4, 1998 primarily relates to stock options exercised in which shares were
tendered for payment of the exercise price of the options and the related
employee withholding taxes, net of related tax benefits to the Company.
NOTE 3 -- NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, 'Earnings per Share,' (SFAS No. 128)
which requires the dual presentation of basic and diluted earnings per share.
The Company adopted SFAS No. 128 in the fourth quarter of 1997. All share and
earnings per share amounts for all prior periods have been restated to conform
to the SFAS No. 128 requirements.
The Company adopted Statement of Financial Accounting Standards No. 130,
'Reporting Comprehensive Income' (SFAS No. 130) effective with the beginning of
fiscal 1998. SFAS No. 130 establishes standards for reporting and display of
changes in equity from nonowner sources in the financial statements; however,
the adoption of SFAS No. 130 has no impact on the Company's net earnings or
stockholders equity. SFAS No. 130 requires, among other things, foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income.
Total comprehensive income was $27.5 million and $17.1 million for the
quarters ending April 4, 1998 and April 5, 1997, respectively.
5
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- RESTRUCTURING
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 in fiscal 1998, including costs incurred
and reserves remaining for costs estimated to be incurred through completion
of the aforementioned program are as follows:
<TABLE>
<CAPTION>
LEASE CONSOLIDATION TERMINATIONS
TERMINATION INVENTORY OF CREDIT AND
COST WRITE-DOWNS FUNCTIONS SEVERANCE TOTAL
----------- ----------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balance as of January 4, 1998. $ 2,190 $ 4,802 $ -- $ 55 $ 7,047
1998 Provision................ -- 800 2,500 -- 3,300
Cash reductions............... (1,248) -- -- (55) (1,303)
Non-cash reductions........... -- (2,239) (2,500) -- (4,739)
------- ------- ------- ---- -------
Balance as of April 4, 1998... $ 942 $ 3,363 $ -- $ -- $ 4,305
======= ======= ======= ==== =======
</TABLE>
6
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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 in fiscal 1998, including costs incurred
and reserves remaining for costs estimated to be incurred through completion
of the aforementioned program, are as follows:
<TABLE>
<CAPTION>
EMPLOYEE
INVENTORY TERMINATION
WRITE-DOWNS AND SEVERANCE TOTAL
----------- ------------- -----
<S> <C> <C> <C>
Balance as of January 4, 1998....... $ 21,015 $ 1,464 $ 22,479
Cash reductions..................... -- (1,464) (1,464)
Non-cash reductions................. (20,383) -- (20,383)
-------- ------- --------
Balance as of April 4, 1998......... $ 632 $ -- $ 632
======== ======= ========
</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.
As of January 4, 1998, $674 of such severance costs remained to be incurred,
with all $674 incurred in the quarter ended April 4, 1998.
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.
As of January 4, 1998, $828 of such reserve remained to be incurred relating
to lease termination costs, with $194 incurred in the quarter ended April 4,
1998. The remaining $634 is expected to be incurred by the end of fiscal 1998.
7
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- DEBT
The Company uses derivative financial instruments in the management of
interest rate and foreign currency exposures. The Company does not use
derivative financial instruments for trading or speculative purposes. During the
fiscal quarter ended April 4, 1998, the Company entered into an amended interest
rate swap agreement with certain of its lenders to convert variable rate
borrowings of $450.0 million to a fixed rate of 4.99%. The agreements mature in
March 2001 with regard to borrowings of $250.0 million and September 2002 with
regard to borrowings of $200.0 million. The agreements are extendable at the
option of the lenders expiring from March 2006 through September 2009 at fixed
rates ranging from 5.87% to 6.28% on borrowings of $575.0 million.
NOTE 6 -- SUMMARIZED FINANCIAL INFORMATION
The following is summarized unaudited financial information of the
Company's wholly-owned subsidiary, Designer Holdings as of April 4, 1998 and
January 3, 1998 and for the fiscal quarters ended April 4, 1998 and March 31,
1997, respectively, which is presented as required by reason of the public
preferred securities issued by Designer Holdings. Designer Holdings, acquired
by the Company in the fourth quarter of 1997, develops, manufactures and
markets designer jeanswear and sportswear for men, women and juniors and holds
a 40-year extendable license from Calvin Klein, Inc. to develop, 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/Khaki'r' labels.
BALANCE SHEET SUMMARY:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
APRIL 4, JANUARY 3,
1998 1998
-------- ----------
<S> <C> <C>
Current assets................................................................. $137,565 $129,285
Noncurrent assets.............................................................. 460,030 497,557
Current liabilities............................................................ 64,057 104,458
Noncurrent liabilities......................................................... 59,800 59,800
Redeemable preferred securities................................................ 101,016 100,758
Stockholders' equity........................................................... 372,722 361,826
</TABLE>
INCOME STATEMENT SUMMARY:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
APRIL 4, MARCH 31,
1998(a) 1997(b)
-------- ----------
<S> <C> <C>
Net revenues................................................................... $109,153 $122,508
Cost of goods sold............................................................. 74,318 85,902
Net income..................................................................... 10,896 7,440
</TABLE>
-----------------
(a) Excludes net revenues of $10.7 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 net revenues cannot be separately identified.
(b) The summarized income statement information for the three months ended
March 31, 1997 is presented on a historical basis and does not reflect the
effect of the acquisition by the Company. Certain amounts have been
reclassified to cost of goods sold to conform to the current year
presentation.
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.
In conjunction with the allocation of purchase price of Designer
Holdings to assets acquired and liabilities assumed, 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 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 TOTAL
------------------ --------------- --------
<S> <C> <C> <C>
Balance as of January 4, 1998 $9,831 $ 170 $10,001
Total provisions -- -- --
Cash Reductions (1,505) -- (1,505)
================ ================= =======
Balance as of April 4, 1998 $8,326 $ 170 $ 8,496
================ ================= =======
</TABLE>
The $8,496 reserve at April 4, 1998 relates principally to certain facility
exit costs and employee severance costs, representing the remaining severance
costs for terminated employees, anticipated to be utilized by the end of
fiscal 1999.
8
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- CASH FLOW INFORMATION
INCOME STATEMENT SUMMARY:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
APRIL 4, APRIL 5,
1998 1997
-------- --------
<S> <C> <C>
Cash paid for:
Interest................................................................... $ 13,653 $8,696
Income taxes, net of refunds received...................................... 3,308 3,089
</TABLE>
NOTE 8 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
APRIL 4, APRIL 5,
1998 1997
-------- --------
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Income before cumulative effect of accounting change............................. $ 6,088 $ 11,336
======== ========
Denominator for basic earnings per share -- weighted average shares.............. 62,112 51,218
-------- --------
Effect of dilutive securities:
Employee stock options........................................................... 1,199 1,560
Restricted stock shares.......................................................... 432 423
-------- --------
Dilutive potential common shares...................................................... 1,631 1,983
-------- --------
Denominator for diluted earnings per share -- weighted average adjusted shares........ 63,743 53,201
======== ========
Basic earnings per share.............................................................. $ 0.10 $ 0.22
======== ========
Diluted earnings per share............................................................ $ 0.10 $ 0.21
======== ========
</TABLE>
Options to purchase 6,229,102 shares of common stock at prices ranging from
$35.50 to $36.44 per share were outstanding during the first quarter of fiscal
1998 but were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common shares. The options, which expire in February 2008, were still
outstanding as of April 4, 1998.
Incremental shares issuable on the assumed conversion of the preferred
securities (1,653,177 shares) were not included in the computation of diluted
earnings per share as the impact would have been antidilutive.
NOTE 9 -- SUBSEQUENT EVENT
In May 1998, the Company entered into an agreement to reacquire its Calvin
Klein Jeanswear childrens sub-license and purchase certain inventory and other
assets from Commerce Clothing Company LLC for approximately $41.0 million. In
addition, in May 1998 the Company agreed to reacquire the Calvin Klein Jeanswear
sub-license in Mexico and purchase certain assets from Macro Jeans S.A. de C.V.
for approximately $4.0 million.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS (SELECTED DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
APRIL 4, APRIL 5,
1998 1997
-------- --------
(AMOUNTS IN MILLIONS OF
DOLLARS)
(UNAUDITED)
<S> <C> <C>
Net revenues................................................................. $419.2 $251.5
Cost of goods sold........................................................... 299.6 169.7
-------- --------
Gross profit................................................................. 119.6 81.8
% of net revenues......................................................... 28.5% 32.5%
Selling, general and administrative expenses................................. 96.2 53.2
-------- --------
Income before interest, income taxes and cumulative
effect of accounting change............................................... 23.4 28.6
% of net revenues......................................................... 5.6% 11.3%
Interest expense............................................................. 13.6 9.8
Provision for income taxes................................................... 3.7 7.5
-------- --------
Income before cumulative effect of accounting change ........................ $ 6.1 $ 11.3
======== ========
</TABLE>
Net revenues in the first quarter of fiscal 1998 were $419.2 million,
$167.7 million or 66.7% higher than the $251.5 million recorded in the first
quarter of fiscal 1997. Net revenue for 1998 includes $119.9 million associated
with the acquisition of Designer Holdings, completed in the fourth quarter of
1997. Net revenues increased $47.8 million or 19.0% excluding the Designer
Holdings acquisition, with year over year improvements across all divisions.
Intimate apparel division net revenues increased $23.2 million or 11.9% to
$218.0 million in the first quarter of fiscal 1998 from $194.8 million in the
first quarter of fiscal 1997. The increase in net revenues compared with fiscal
1997 reflects the success of the recently introduced Naked Truth and Simply
Perfect lines of intimate apparel. Net revenues in the Company's core Warner and
Olga brands increased $22.4 million or 34.5% in the fiscal 1998 first quarter
compared with 1997. International shipments in the first quarter of fiscal 1998
for the intimate apparel division increased $4.8 million or 7.5% to $69.2
million from $64.4 million in the first quarter of fiscal 1997. Partially
offsetting the increase in net revenues was a $4.0 million impact of foreign
currency translation. Excluding the foreign exchange impact, international sales
increased 13.7% in the first quarter. International sales accounted for 31.7% of
total divisional net sales in the first quarter of fiscal 1998 compared with
33.1% of total divisional net sales in the first quarter of fiscal 1997.
Sportswear division (formerly Menswear division) net revenues increased
$129.3 million or 272.2% to $176.8 million in the first quarter of fiscal 1998
from $47.5 million in the first quarter of fiscal 1997. The Designer Holdings
acquisition added $109.2 million to net revenues in the current fiscal quarter.
Excluding those revenues, the increase was $20.1 million or 42.3%. Chaps net
revenues increased $18.2 million or 41.6% in the current fiscal quarter compared
with 1997 due to its continued strong sell-thrus and the introduction in 1998 of
golf apparel.
Gross profit increased $37.8 million or 46.2% to $119.6 million in the
first quarter of fiscal 1998 from $81.8 million in the first quarter of fiscal
1997. Gross margin was 28.5% in the first quarter of fiscal 1998 compared with
32.5% in the first quarter of fiscal 1997. The decline in gross margin is a
result of the inclusion of Calvin Klein jeans sales, which carry a lower gross
margin, as well as $14.3 million in fiscal 1998 related to the early adoption
of SOP 98-5, the write-off of deferred start-up costs.
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.
Selling, general and administrative expenses increased $43.0 million or
80.7% to $96.2 million (22.9% of net revenues) in the first quarter of fiscal
1998 compared with $53.2 million (21.1% of net revenues) in the first quarter of
fiscal 1997. The increase in selling, general and administrative expenses
10
<PAGE>
primarily reflects an increase in marketing expenses for the intimate apparel
division and higher corporate expenses related to information systems and year
2000 implementations.
Interest expense increased $3.8 million to $13.6 million in the first
quarter of fiscal 1998 compared with $9.8 million in the first quarter of fiscal
1997. The increase reflects the funding of the Company's recent acquisitions and
stock buyback program.
The provision for income taxes for the first quarter of fiscal 1998
reflects an estimated effective income tax rate of approximately 37.0% for the
1998 fiscal year.
Income before cumulative effect of accounting change for the first quarter
of fiscal 1998 was $6.1 million, a decrease of $5.2 million compared with net
income of $11.3 million in the first quarter of fiscal 1997. The decrease in net
income reflects the early adoption of SOP 98-5 as mentioned above.
CAPITAL RESOURCES AND LIQUIDITY
The Company's liquidity requirements arise primarily from its debt service
requirements and the funding of the Company's working capital needs, primarily
inventory and accounts receivable. The Company's borrowing requirements are
seasonal, with peak working capital needs generally arising at the end of the
second quarter and during the third quarter of the fiscal year. The Company
typically generates nearly all of its operating cash flow in the fourth quarter
of the fiscal year reflecting third and fourth quarter shipments and the sale of
inventory built during the first half of the fiscal year.
Cash used in operations before the payment of accruals related to the
non-recurring charges was $142.9 million in the first quarter of fiscal 1998
compared with $68.0 million in the first quarter of fiscal 1997. The increase in
cash used in operating activities reflects higher seasonal working capital usage
primarily due to the 66.7% higher sales.
Cash used in investing activities was $48.1 million for the first quarter
of fiscal 1998 compared with $32.5 million in the first quarter of fiscal 1997.
Capital expenditures were $31.6 million in the first quarter of fiscal 1998 and
included amounts for information systems related to year 2000 compliance and
store fixture programs for Calvin Klein Jeans 'shop in shops' compared to $9.9
million in the first quarter of fiscal 1997.
Cash provided from financing activities was $193.0 million in the first
quarter of fiscal 1998 compared with $99.9 million in the first quarter of
fiscal 1997. The increase in the Company's revolving credit balance during the
first quarter of the fiscal year was $245.9 million compared with $116.5 million
in the first quarter of fiscal 1997 due to the increased working capital
requirements on the higher sales and the Company's stock repurchase program. The
Company paid approximately $47.5 million for the repurchase of shares and
withholding taxes on option exercises in the first quarter of fiscal 1998. The
Company repaid $1.4 million of long term debt in the first quarter of fiscal
1998 compared with $8.3 million in the first quarter of fiscal 1997.
The Company believes that funds available under its existing credit
arrangements and cash flow to be generated from future operations will be
sufficient to meet working capital and capital expenditure needs of the Company,
including dividends and interest and principal payments on outstanding debt
obligations for the next twelve months and for the next several years.
YEAR 2000 AND ECONOMIC AND MONETARY UNION ('EMU') COMPLIANCE
Following a comprehensive review of current systems and future requirements
to support international growth, the Company initiated a program to replace
existing capabilities with enhanced hardware and software applications. The
objectives of the program are to achieve competitive benefits for the Company,
as well as assuring that all information systems will meet 'year 2000' and EMU
compliance. Full implementation of this program is expected to require
expenditures, primarily capital, of approximately $60.0 million over the next
three years. 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. Approximately
$13.0 million has been incurred through April 4, 1998 and such amounts are
included in property and equipment.
11
<PAGE>
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes 'forward-looking statements' within the meaning of
Section 27A of Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including those associated with the effect of national and
regional economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements other than
statements of historical facts included in this quarterly report, including,
without limitation, the statements under Management's Discussion and Analysis
of Financial Condition, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, and selectively uses financial instruments
to manage these risks. The Company does not enter into financial instruments for
speculation or trading purposes. The Company has interest rate agreements with
several financial institutions to limit exposure to interest rate volatility.
Additionally, the Company enters into foreign currency forward and option
contracts to mitigate the risks of doing business in foreign currencies. The
Company hedges currency exposures of firm commitments and anticipated
transactions denominated in non-functional currencies to protect against the
possibility of diminished cash flow and adverse impact on earnings. The
Company's currency exposures vary, but are primarily concentrated in the
Canadian dollar, Mexican peso, British pound, German mark and French franc.
The value of market risk sensitive instruments is subject to change as a
result of movement in market rates and prices. Based on a hypothetical
(one-percentage point) increase in interest rates, the potential losses in
future earnings, fair value and cash flows are immaterial.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<S> <C>
27.1 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the first quarter of fiscal 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WARNACO GROUP, INC.
Date: May 16, 2000 By: /S/ WILLIAM S. FINKELSTEIN
...................................
WILLIAM S. FINKELSTEIN
DIRECTOR, SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER
Date: May 16, 2000 By: /S/ STANLEY P. SILVERSTEIN
...................................
STANLEY P. SILVERSTEIN
VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as.................. 'r'
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE WARNACO GROUP, INC. FOR THE QUARTER ENDED
APRIL 4, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> APR-04-1998
<CASH> 13,905
<SECURITIES> 0
<RECEIVABLES> 392,833
<ALLOWANCES> 32,418
<INVENTORY> 496,800
<CURRENT-ASSETS> 911,812
<PP&E> 261,991
<DEPRECIATION> 108,492
<TOTAL-ASSETS> 1,828,936
<CURRENT-LIABILITIES> 395,934
<BONDS> 578,417
101,016
0
<COMMON> 685
<OTHER-SE> 740,029
<TOTAL-LIABILITY-AND-EQUITY> 1,828,936
<SALES> 419,208
<TOTAL-REVENUES> 419,208
<CGS> 299,658
<TOTAL-COSTS> 299,658
<OTHER-EXPENSES> 93,363
<LOSS-PROVISION> 2,800
<INTEREST-EXPENSE> 13,633
<INCOME-PRETAX> 9,754
<INCOME-TAX> 3,666
<INCOME-CONTINUING> 6,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (46,250)
<NET-INCOME> (40,162)
<EPS-BASIC> (0.65)
<EPS-DILUTED> (0.63)
</TABLE>
