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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 8, 1994
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 1-4715
THE WARNACO GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4032739
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 661-1300
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Common Stock, par value New York Stock Exchange
$0.01 per share
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 knowledge of the registrant, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment of this Form 10-K. (X)
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 25, 1994 was approximately
$528,934,000.
The number of shares outstanding of the registrant's Class A
Common Stock as of March 25, 1994: 20,166,575
Documents incorporated by reference: The definitive Proxy
Statement of The Warnaco Group, Inc. relating to the 1994 Annual Meeting
of Stockholders is incorporated by reference in Part III hereof.
PART I
ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS.
The Warnaco Group, Inc. ("Company"), a Delaware corporation, was
organized in 1986 for the purpose of acquiring Warnaco Inc. ("Warnaco")
a publicly traded apparel company. As a result, Warnaco became a wholly
owned subsidiary of the Company. The Company designs, manufactures and
markets a broad line of women's intimate apparel, such as bras, panties
and sleepwear, and men's dress shirts, neckwear, sportswear and
accessories, including jewelry and small leather goods, all of which are
sold under a variety of internationally recognized owned and licensed
brand names. On March 14, 1994, the Company acquired the worldwide
trademarks, rights and business of Calvin Klein (registered trademark)
Men's Underwear and licensed the Calvin Klein trademark for men's
accessories. In addition, the acquisition includes the worldwide
trademarks and rights of Calvin Klein Women's Intimate Apparel upon the
expiration of an existing license on December 31, 1994. The
Company's strategy is to build on the strength of its brand names with
consumer oriented marketing programs in its existing department and
specialty store channels of distribution and to expand its distribution on
a selective basis with specific product lines in mass merchandisers. 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 three
divisions, Intimate Apparel, Menswear and Retail Outlet Stores, which
accounted for 60%, 35% and 5%, respectively, of net revenues in fiscal 1993
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(registered trademark), Olga(registered trademark), Valentino
Intimo(registered trademark), Scaasi(registered trademark),
Blanche(registered trademark), White Stag(registered trademark) and Fruit
of the Loom(registered trademark) brand names. The Intimate Apparel
Division is the leading marketer of women's bras to department and
specialty stores in the United States, accounting for over 34% of such
women's bra sales in 1993, nearly twice its nearest competitor. The
Warner's and Olga brand names, which are owned by the Company, are 120 and
53 years old, respectively. Calvin Klein Women's Intimate Apparel will
become part of this division upon the expiration of an existing license
on December 31, 1994.
The Intimate Apparel Division's strategy is to increase its channels
of distribution and expand its highly recognized brand names worldwide. 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 Kmart, under the Fruit of the Loom
brand name. The Company began shipping Fruit of the Loom products in June
of 1992. Fruit of the Loom bras, daywear and other related items accounted
for approximately $33 million or 5% of the Company's net revenues in fiscal
1993. Additionally, in late 1993, the Company signed a 3-year distribution
agreement with Avon Products, Inc. to distribute Warner's and Fruit of the
Loom bras on an exclusive basis and Scaasi sleepwear on an exclusive basis
throughout the United States.
The Menswear Division designs, manufactures, imports and markets
moderate to premium-priced men's apparel and accessories under the Chaps by
Ralph Lauren(registered trademark), Hathaway(registered trademark),
Christian Dior(registered trademark), Thane(registered trademark) and
Golden Bear by Jack Nicklaus(registered trademark), brand names. Chaps by
Ralph Lauren has increased its net revenues by approximately 290% since
1989 from $23 million to $89 million in 1993, by refocusing its products to
the age 25 to 50 consumer and predominantly by using natural fibers in its
products. The Division's activities expanded in 1994 with the acquisition
of Calvin Klein Men's Underwear business and license of the Calvin Klein
trademark for men's accessories. The Menswear 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 whose profit
contribution is below the Company's required return.
The Company licenses certain of its brand names throughout the
world and has been expanding the activities of its wholly owned
operating subsidiaries in Canada, Europe and Mexico. International
operations generated $98.6 million of net revenues in fiscal year 1993
or 14.0% of the total Company, compared to $91.8 million in fiscal year
1992 or 14.7% of the total Company.
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, thereby limiting its exposure to
off-price retailers. The Company had 48 stores in 1993 and 52 stores in
1992.
The Company's products are distributed to over 5,000 customers
operating more than 15,000 department specialty and mass merchandising
stores, including such leading retailers in the United States as
Dayton-Hudson, Dillard's Department Stores, Federated Department Stores,
J.C. Penney, Kmart, The Limited and Victoria's Secret, Macy's, The May
Department Stores and Wal-Mart and such leading retailers in Canada as
Eaton's and The Hudson Bay Company. The Company's products are also
distributed to such leading European retailers as Marks & Spencer, House
of Fraser, Harrods, Galeries Lafayette and Au Printemps.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company operates within one dominant industry segment, the
manufacture and distribution of wearing apparel, and has no customer which
accounted for 10% or more of its net revenues in fiscal 1993. (See Note 6
of Notes to Consolidated Financial Statements on pages 38 and 39.)
(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 owned and licensed brand names. The
Company operates three divisions, Intimate Apparel, Menswear and Retail
Outlet Stores, which accounted for 60%, 35% and 5%, respectively, of net
revenues in fiscal 1993.
INTIMATE APPAREL
The Company designs, manufactures and markets intimate apparel
which includes bras, panties, sleepwear and daywear. The Company's bra
brands accounted for over 34% of women's bra sales in department and
specialty stores in the United States in 1993, nearly twice its nearest
competitor. 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 the Company entered into a license
agreement with Fruit of the Loom, Inc., and in June 1992, the Company
began to distribute moderate priced bras, daywear and other related
items under this license through the mass merchandise market.
Additionally, in late 1993, the Company signed a 3-year distribution
agreement with Avon Products, Inc. to distribute Warner's and Fruit of the
Loom bras on an exclusive basis and Scaasi sleepwear
throughout the United States. The Intimate Apparel Division markets its
lines under the following brand names:
BRAND NAME PRICE RANGE TYPE OF APPAREL
---------- ----------- ---------------
Warner's ............ upper moderate to better intimate apparel
Olga ................ better intimate apparel
Valentino Intimo .... premium intimate apparel
Scaasi .............. premium sleepwear
Blanche ............. better to premium sleepwear
Fruit of the Loom ... moderate intimate apparel
White Stag........... moderate intimate apparel
The Company owns the Warner's, Olga, and Blanche brand names and
trademarks. The Company has a license in perpetuity for White Stag for
Women's Sportswear. The Company licenses the other brand names under
which it markets its product lines. The Company also manufactures
intimate apparel on a private and exclusive label basis for certain
leading specialty and department stores. The Intimate Apparel
Division's revenues are primarily generated by sales of the Company's
own brand names. Warner's brand is 120 years old and the Olga brand is
53 years old and commanded approximately 22% and 12%, respectively, of
women's bra sales in United States department and specialty stores in
1993.
In August 1991, the Company entered into a license agreement with
Fruit of the Loom, Inc. 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 daywear, full
slips, half slips, culottes and petticoats as well as coordinated
fashion sets (bras and panties) and certain control bottoms and
sleepwear. The Company began shipping Fruit of the Loom products in
June 1992. The agreement with Fruit of the Loom, Inc. has allowed the
Company to enter the mass merchandise market, which is growing faster
than the department and specialty store market.
On March 14, 1994, the Company acquired the worldwide rights and
businesses of Calvin Klein Women's Intimate Apparel upon the expiration
of an existing license on December 31, 1994.
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 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, the cotton-lycra bra
and the sports bra. The Company also introduced the use of hangers and
certain point of sale hangtags 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.
Growth in the intimate apparel industry is benefiting from a shift
in consumer attitudes. Specifically, because 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 such as
Victoria's Secret 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
obtaining the licenses to produce intimate apparel under the Valentino
Intimo and Scaasi names in the premium end of the market, by continuing
to introduce new products under the Warner's and Olga brands in the
better end of the market and by obtaining the license from Fruit of the
Loom, Inc. to produce bras, daywear and other related items and
producing White Stag bras for the mass merchandise segment of the market.
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 revenues have increased at a 12%
compounded annual growth rate since 1989, to $423.2 million in fiscal
1993, as the Company increased its penetration with existing accounts
and expanded sales to new customers by capitalizing on the high growth in
such specialty stores as Victoria's Secret and sales of Fruit of the Loom
to mass merchandisers such as Wal-Mart and Kmart. The Company's strong
sales increase was accomplished despite the softening of the general
retail market due to poor economic conditions and the bankruptcy,
reorganization or liquidation of certain major retail store customers
during this period. The Intimate Apparel Division has reduced operating
expenses as a percentage of net revenue by narrowing its product lines,
controlling selling, administrative and general expenses and improving
manufacturing efficiency. The Company believes that it is one of the
lowest-cost producers of intimate apparel in the United States,
producing nearly eight million dozen bras in 1993 per year.
The Company's bras are sold primarily in the department and
specialty stores that have been the Company's traditional customer base
for intimate apparel. In June of 1992, the Company expanded into a new
channel of distribution, mass merchandisers, with its new 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
the panties and daywear product lines.
The Intimate Apparel Division has subsidiaries in Canada and Mexico
in North America and in the United Kingdom, France, Belgium, Ireland,
Spain and Germany in Europe. International sales accounted for
approximately 20% of the Intimate Apparel Division's net revenues in
fiscal 1993. Net revenues attributable to the international divisions of
the Intimate Apparel Division were $79.1 million, $79.1 million and $84.5
million in fiscal years 1991, 1992 and 1993, respectively. The 1993
increase was generated despite a $7.5 million negative effect on foreign
exchange. Management's strategy is to increase its market penetration
in the United Kingdom, France, Belgium and Germany. In addition, the
Company will begin distributing its products directly in Spain, Portugal
and Italy in 1994, having taken back these territories from its previous
licensee. In addition to the international marketing of its product
lines, the Company has licensed its intimate apparel brand names to
manufacturers in several other foreign countries.
The Company's intimate apparel products are manufactured in North
America, Central America, the Caribbean Basin, Ireland and the United
Kingdom.
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 with
approximately 53% of net revenues and 55% of operating income generated
during the second half of the fiscal year.
MENSWEAR
The Menswear Division designs, manufactures, imports and markets
moderate to better-priced dress shirts and neckwear, sportswear and
men's accessories. On March 14, 1994, the Company acquired the
worldwide trademarks and businesses of Calvin Klein Men's Underwear and
licensed the Calvin Klein trademark for men's accessories. Management
considers the Menswear 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 Menswear Division markets its lines under
the following brand names:
BRAND NAME PRICE RANGE TYPE OF APPAREL
- ---------- ----------- ---------------
Christian Dior . . . . . better dress shirts, neckwear
and men's accessories
Hathaway . . . . . better dress shirts,
neckwear, knit and
woven sportshirts and
sweaters
Calvin Klein . . . . . . . better underwear, accessories
Chaps by Ralph Lauren . . upper moderate dress shirts, neckwear,
knit and woven
sportshirts, sweaters
and sportswear
Puritan and Thane (1) . moderate sweaters, knit shirts
and sportswear
Golden Bear by Jack sweaters and knit
Nicklaus (2) . . . . . moderate shirts
(1) In December 1993, the Puritan brand name in the United States was sold
to Wal-Mart.
(2) The Company will not extend its Golden Bear by Jack Nicklaus agreement
which expires in June 1994.
The Hathaway, Calvin Klein Men's Underwear, Puritan and Thane brand
names are owned by the Company, and Chaps by Ralph Lauren, Christian
Dior and Golden Bear by Jack Nicklaus are licensed by the Company.
The Menswear 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 whose profit contribution is below the
Company's required return. To improve profitability in this Division,
the Company (1) is discontinuing a portion of its manufactured dress
shirt and neckwear business segment (see Note 3 of Notes to Consolidated
Financial Statements on page 37) (2) has sold the Puritan label in the
United States to Wal-Mart in December 1993 and (3) will not renew its
Golden Bear by Jack Nicklaus license which expires in June 1994.
The Menswear Division's net revenue has increased from $213.9
million in fiscal year 1989 to $243.2 in fiscal year 1993, despite being
adversely affected during this period by weak retail demand due to poor
economic conditions and the bankruptcy, reorganization or liquidation of
several of its major retail store customers. During this period, the
Company has discontinued several underperforming product lines such as
Pringle, Christian Dior Sportswear, Valentino Garavani Accessories, Puritan
and Golden Bear by Jack Nicklaus. Excluding those product lines, net sales
would have increased 36% from $146.3 million to $199.5 million. In
addition, the division had been hurt by a shift in consumer preferences
away from apparel made with synthetic or blended fibers, particularly orlon
sweaters, and by substantial liquidations of dress shirt, knit shirt and
sweater inventories at low prices by certain of the Company's competitors
as a result of their financial difficulties. However, this has been offset
by the tremendous success of the Chaps by Ralph Lauren brand which has
increased its net revenues by approximately 290% since 1989 to $89 million
while increasing operating profits over 400% to $13 milllion.
Dress Shirts and Neckwear. The Menswear Division designs,
manufactures, imports and markets three principal lines of dress shirts:
basic, intermediate-fashion and fashion. The average full retail prices
of the dress shirts, which are marketed under the Christian Dior,
Hathaway and Chaps by Ralph Lauren brand names, range from $29 to $45.
Substantially all of the division's dress shirts and neckwear are
manufactured at Company owned or leased facilities in North America and
the Caribbean Basin. The Menswear Division is in the process of
discontinuing a portion of its manufactured dress shirt and neckwear
business segment in an effort to lower its cost of manufacturing and
improve profitability in this segment.
Sportswear. The Menswear Division has substantially revised its
sportswear product lines over the past several years. The Chaps by
Ralph Lauren and Thane lines have eliminated many synthetic and blended
fabrics from their products. In 1989, the Company began repositioning
its Chaps by Ralph Lauren product lines by changing to the use of all
natural fibers and updating its styling, which has generated significant
net revenue increases as mentioned above. The Company sold, for $7.7
million, its Puritan label in the United States to Wal-Mart in 1993, due
to the difficult price points for men's sportswear in the mass
merchandise market. In addition, the Company will not renew its Golden
Bear by Jack Nicklaus License which expires in June 1994 due to the
declining demand of the product line.
Accessories. The Menswear Division markets men's small leather
goods and men's jewelry and belts under the Christian Dior brand name in
the United States and will add a new line of accessories under the
Calvin Klein label worldwide by the end of 1994. Management believes
that one of the strengths of its accessories lines is its
internationally recognized brand names. The Company's strategy is to
expand this business, which on a consistent basis has generated higher
margins than other menswear products.
International sales accounted for approximately 6% of net revenues
of the Menswear Division in l993. Net revenues attributable to
international divisions of the menswear division were $12.4 million,
$12.7 million and $14.1 million in fiscal years 1991, l992 and 1993,
respectively.
The Menswear Division's sportswear, primarily consisting of knit
shirts and sweaters, is sourced principally from the Far East. The
Menswear Division manufactures its dress shirts and neckwear in North
America and sources certain styles of dress shirts in the Far East and
in the Caribbean Basin. Accessories are sourced in the United States,
Europe and the Far East.
The Menswear Division, like the Intimate Apparel Division,
generally markets its apparel products for three retail selling seasons
(spring, fall and holiday). The Menswear Division introduces new
styles, fabrics and colors based upon consumer preferences and market
trends and to coincide with the appropriate retail selling season. The
sales of the 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 60%
of the Menswear Division's net revenues and 75% of the Division's
operating profit are generated in the second half of the calendar year,
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, thereby
limiting its exposure to off-price retailers. The Company's retail
outlet stores are situated in areas where they generally do not conflict
with the Company's principal channels of distribution. The Company's
newer retail outlet stores are principally intimate apparel stores
located in off-price shopping malls. The Company has found that it has
improved margins by operating retail outlet stores that sell products of
only one of the Company's divisions, and has converted most of its
outlets to the exclusive sale of intimate apparel. The operating profit
in fiscal 1993 improved 66% over fiscal 1992 to $2.0 million. The
Company operates 48 stores, of which 28 carry intimate apparel only, 3
carry Menswear only and 17 carry both lines. The Company plans to open 9
additional intimate apparel outlet stores in 1994.
INTERNATIONAL OPERATIONS
The Company has subsidiaries in Canada and Mexico in North America
and in the United Kingdom, Ireland, Belgium, France, Spain and Germany
in Europe which engage in sales and marketing activities. With the
exception of the fluctuation of local currencies against the United
States dollar, the Company does not believe that the operations in
Canada and western Europe are subject to risks which are significantly
different from domestic operations. Mexico has historically been
subject to high rates of inflation and currency restrictions which may,
from time to time, limit the ability of certain of the Company's Mexican
subsidiaries to pay dividends to the Company. The Mexican operations
produce intimate apparel for the U.S. market and also sell directly to
customers in Mexico. Sales to customers in Mexico are a small
percentage of the Company's operations and, therefore, the Company does
not consider these risks to be material.
The Company maintains manufacturing facilities in Puerto Rico,
Mexico, Honduras, Costa Rica, the Dominican Republic, Canada, Ireland
and the United Kingdom and warehousing facilities in Canada, Mexico
and the United Kingdom and contracts warehousing in Spain. 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. The Company's manufacturing policy
is to have many potential sources of manufacturing so that a disruption
of production at any one facility will not cause a significant problem.
The majority of the Company's imported purchases are invoiced in
United States dollars and, therefore, are not subject to short-term
currency fluctuations.
SALES AND MARKETING
The Intimate Apparel and Menswear Divisions sell to over 5,000
customers operating more than 15,000 department, mass merchandise and
men's and women's specialty stores throughout North America and Europe.
While certain of the Company's department store customers are under
common ownership, none of these corporate groups accounted for more than
10% of the Company's net revenues during fiscal 1993.
The Company's retail customers are served by approximately 200
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 (commonly referred to as "EDI") programs
with certain of its retailing customers which permit the Company to
receive purchase orders electronically from these customers and, in some
cases, to transmit invoices electronically.
The Company utilizes various forms of advertising media. In l993,
the Company spent approximately $32 million or 4.5% of net sales for
advertising and promotion of its various product lines. This compares
to $20 million or 3.2% of net sales in 1992. This significant increase
was made in order to maintain the Company's strong market position in
the recession in Warner's and Olga and increase penetration in Fruit of the
Loom. The Company participates on a cooperative basis with retailers,
principally through newspaper advertisements.
COMPETITION
The apparel industry is highly competitive. The Company's
competitors include apparel manufacturers of all sizes, some of which
have substantially 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
Menswear Divisions. 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. 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 it has a significant competitive
advantage because of high consumer recognition and acceptance of its
brand names and its strong presence and strong share of market in the
major department and specialty store chains.
A substantial portion of the Company's sales are of products, such
as intimate apparel, that are 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 Menswear Divisions are
available from multiple sources.
IMPORT QUOTAS
A substantial portion of the Company's products 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 U.S. 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.
EMPLOYEES
The Company and its subsidiaries employ approximately 13,700
employees. Approximately 21% 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 significant
interruption of 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 current
terms of the Company's exclusive licenses to use the Christian Dior
trademark in the United States of America, its territories and
possessions expire on December 31, l999. The Company's exclusive
licenses to use the Christian Dior trademark in Canada expire on
December 31, 1994. The Company terminated its license agreement with
Christian Dior for the production of sportswear in 1992. The Company's
exclusive license and design agreements for the Chaps by Ralph Lauren
trademark expire on December 31, 1995 and the Company fully expects to
extend this license agreement beyond that date. These licenses grant
the Company an exclusive right to use the Chaps by Ralph Lauren
trademark in the United States of America. The Company's license to
use the Valentino Intimo trademark for intimate apparel in the United
States of America, its territories and possessions, Puerto Rico and Canada,
expires on December 31, l997 and, subject to certain conditions, is
renewable at the Company's option, for an additional five-year term. The
Company has an exclusive license to use the Scaasi trademark in the United
States of America, its territories and possessions, Puerto Rico, Canada,
Mexico, and numerous Caribbean Islands until December 31, l994. This
license is also renewable, subject to certain conditions, at the Company's
option, for an additional five-year term. The Company's exclusive license
agreement to use the Fruit of the Loom trademark in the United States of
America, its territories and possessions, Canada and Mexico expires on
December 31, 1994 and, subject to certain conditions, which the Company has
met, is renewable at the Company's option for an additional two-year term
through December 31, 1996. On March 14, 1994, the Company entered into a
license agreement with Calvin Klein, Inc. to produce Calvin Klein men's
accessories for a period of 5 years thru March 14, 1999 and a renewable 5
year period thru March 14, 2004, solely at the option of the Company. The
Company's joint venture agreement with Golden Bear by Jack Nicklaus, Inc.
grants the Company the right to use the Golden Bear by Jack Nicklaus
trademark in the United States of America, Puerto Rico, and Mexico June,
1994.
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, Hathaway, and
Blanche. The Company has a license in perpetuity for White Stag Women's
Sportswear.
The Company licenses the Warner's and Hathaway 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 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 license agreements with other companies that would permit
such companies to market products under the Warner's, Hathaway and other
trademarks. Generally, in evaluating a potential licensee, the Company
considers the experience, financial stability, manufacturing performance
and marketing ability of the proposed licensee. Royalties derived from
such licensing were approximately $7.0 million (including an assignment
fee received in connection with the transfer of a license of $3.5
million), $5.6 million (including assignment fees received in connection
with the termination of certain licenses of $3.0 million) and $11.5
million (including the sale of the Puritan trademark in the United
States for $7.7 million) in fiscal years 1991, 1992 and 1993,
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 of Notes to Consolidated Financial
Statements on pages 38 and 39.
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 and California, pursuant to leases
that expire in 1999 and 1995, respectively.
The Company has approximately 18 domestic manufacturing and
warehouse facilities located in Alabama, Connecticut, Georgia, Kentucky,
Pennsylvania, Maine, California, New York, Tennessee and Puerto Rico and
approximately 20 international manufacturing and warehouse facilities
located in Costa Rica, the Dominican Republic, Honduras, Mexico, Canada,
the United Kingdom and Ireland. Certain of the Company's manufacturing
and warehouse facilities are also used for administrative and retail
functions. The Company owns eight of its domestic and three of its
international facilities. The balance of the facilities are leased.
Lease terms, except for two month-to-month leases, expire from 1994 to
2007.
The Company also leases sales offices in a number of major cities,
including Chicago, Dallas, Los Angeles and New York in the United
States; Brussels, Belgium; Toronto, Canada; London, England; Madrid,
Spain and Paris, France. The sales office leases expire between 1994
and 1995 and are renewable at the Company's option.
Substantially all of the properties owned by the Company, as well
as substantially all of the Company's other assets, are pledged to
various lenders. (See Note 10 of Notes to Consolidated Financial
Statements on pages 46 to 48.)
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. No significant facility
is materially under-utilized. The Company has recently expanded its
production capacity in the Caribbean Basin and anticipates additional
expansion in Mexico to support the Company's continued growth.
In December 1993, the Company sold its Checotah, Oklahoma, Manufacturing
facility to Authentic Fitness Corporation, a related party, (See Note 5
of Notes to Consolidated Financial Statements on page 38) for its
appraised fair market value. Prior to the sale, the facility was being
100% utilized as a contract facility for Authentic Fitness Corporation.
In January 1994, the Olga company warehouse located in Sylmar,
California suffered significant structural damage and has been closed
ever since. The Company was able to recover substantially all of its
inventory, transfer the inventory to other locations, and begin shipping
at normal levels in March, 1994. The Company does not intend to re-open
Sylmar whose lease expires in 1994 and has ceased making rental payments
on the facility since the earthquake. The Company has earthquake
insurance and, other than a deductible of approximately $3 million, will
fully recover its losses. Accordingly, management does not believe that
this event will have a material effect on the consolidated financial
position of the Company nor significantly impact its results of
operations or cash flows. (See Note 14 of Notes to Consolidated Financial
Statements on page 51.)
ITEM 3. LEGAL PROCEEDINGS.
The Company has sued VF Corporation and its Spanish subsidiary for
breach of contract, violation of Federal Trademark Laws and
conspiracy in connection with the termination of a licensing agreement
in Spain, Portugal and Italy. The Company is seeking damages amounting
to $45 million for VF Corporation's deliberate and malicious actions to
injure the Warner's brand in these countries. Otherwise, the Company is
not a party to any litigation, other than routine litigation incidental
to the business of the Company, which is individually or in the
aggregate not 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 ages and their
positions are set forth below.
NAME AGE POSITION
Linda J. Wachner . . . . . . 48 Director, Chairman of the
Board, President and Chief
Executive Officer
Dariush Ashrafi . . . . . . . 47 Director, Senior Vice
President and Chief
Financial Officer
William S. Finkelstein . . . . 45 Senior Vice President and
Controller
Stanley P. Silverstein . . . . 41 Vice President, General
Counsel and Secretary
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, 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 The Travelers Inc., Castle & Cooke Homes, Inc.
and Authentic Fitness Corporation.
Mr. Ashrafi was elected a Director in May 1992 and has been Senior
Vice President and Chief Financial Officer of the Company since July
1990. Prior to joining the Company, Mr. Ashrafi was a partner with the
international accounting and auditing firm of Ernst & Young beginning in
1983, where he was a member of the Financial Services Group specializing
in mergers and acquisitions and was responsible for audits of major
clients, including those in the apparel industry.
Mr. Finkelstein has been Senior Vice President of the Company since
May 1992 and Controller of the Company since November 1988. Mr.
Finkelstein served as Vice President of the Company between November
1988 and May 1992 and 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. 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.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's 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.
PERIOD HIGH LOW
------ ---- ---
1991:
Fourth Quarter (Inception of IPO) $30 1/2 $21
1992:
First Quarter . . . . . . . . . . . $38 $24 3/8
Second Quarter . . . . . . . . . . . 38 27 1/2
Third Quarter . . . . . . . . . . . 36 1/4 28
Fourth Quarter . . . . . . . . . . . 41 32 3/4
1993:
First Quarter . . . . . . . . . . . $39 1/4 $26 5/8
Second Quarter . . . . . . . . . . . 37 7/8 29 5/8
Third Quarter . . . . . . . . . . . 34 1/8 28 3/4
Fourth Quarter . . . . . . . . . . . 35 5/8 28 1/2
A recent last sales price for the shares of Common Stock as
reported on the New York Stock Exchange Composite Tape was $31-1/8 on
March 25, 1994. On March 23, 1994 there were 165 holders of Class A
Common Stock, based upon the number of holders of record and the number
of individual participants in certain security position listings.
The Company has not paid dividends on its Common Stock since the
Acquisition and is currently restricted from paying dividends on its
Common Stock under certain covenants contained in the Company's debt
agreements.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read
in conjunction with the Consolidated Financial Statements and the notes
thereto included elsewhere herein. The consolidated statement of
operations data set forth below with respect to the fiscal years ended
January 4, 1992, January 2, 1993 and January 8, 1994 and the
consolidated balance sheet data at January 2, 1993 and January 8, 1994
are derived from, and are qualified by reference to, the audited
consolidated financial statements included herein and should be read in
conjunction with those financial statements and notes thereto. The
consolidated statement of operations data for the fiscal years ended
December 30, 1989 and January 5, 1991 and the consolidated balance sheet
data at December 30, 1989, January 5, 1991 and January 4, 1992 are
derived from audited consolidated financial statements not included
herein.
Fiscal Year Ended
December January 5, January 4, January 2, January 8,
1989 1991(d) 1992 (a) 1993 1994 (a)
-------- -------- -------- -------- --------
(In millions, except ratios and share data)
Statement of Operations Data:
Net Revenues . . . . . . . . . . . . . . . . $518.1 $548.1 $562.5 $625.1 $703.8
Gross Profit . . . . . . . . . . . . . . . . 185.7 190.8 195.4 219.3 236.4
Income before non-recurring items, interest
and income taxes . . . . . . . . . . . . . 59.5 59.9 70.8 89.8 92.2
Interest expense . . . . . . . . . . . . . . 66.0 68.0 72.3 48.8 38.9
Income (Loss) from continuing operations . . (7.9) (7.9)(e) (19.5) 47.6 53.3
Preferred stock dividends paid (b) . . . . . 5.5 5.5 5.5 2.7 --
Income (Loss) from continuing operations
applicable to common stock . . . . . . . . (13.4) (13.4) (25.0) 44.9 53.3
Net income (Loss) applicable to
common stock . . . . . . . . . . . . . . . . (26.3) (22.2) (33.9) (20.2) 24.1(f)
Per share amounts:
Income (Loss) from continuing operations . (1.70) (1.68) (2.62) 2.35 2.68
Net income (Loss) . . . . . . . . . . . . . (3.33) (2.80) (3.56) (1.06) 1.21
Weighted average number of shares of Common
Stock outstanding (c) . . . . . . . . . . . 7,894,423 7,935,898 9,529,531 19,054,725 19,885,241
Divisional Summary:
Net revenues:
Intimate Apparel . . . . . . . . . . . . $273.3 $309.1 $339.7 $384.8 $423.2
Menswear . . . . . . . . . . . . . . . . 213.8 196.3 180.8 200.0 243.2
Retail Outlet Stores . . . . . . . . . . 31.0 42.7 42.0 40.3 37.4
------ ------ ------- ------ ------
$518.1 $548.1 $562.5 $625.1 $703.8
Percentage of net revenues:
Intimate Apparel . . . . . . . . . . . . 52.7% 56.4% 60.4% 61.6% 60.1%
Menswear . . . . . . . . . . . . . . . . 41.3 35.8 32.1 32.0 34.6
Retail Outlet Stores . . . . . . . . . . 6.0 7.8 7.5 6.4 5.3
------ ------ ------- ------ ------
100.0% 100.0% 100.0% 100.0% 100.0%
Balance Sheet Data (at fiscal year end):
Working capital . . . . . . . . . . . . . . $70.7 $69.4 $109.3 $141.5 $122.0
Total assets . . . . . . . . . . . . . . . 592.9 517.3 540.5 629.6 688.6
Long term debt (excluding current
maturities) . . . . . . . . . . . . . . . 481.3 408.2 344.8 277.6 245.5
Redeemable preferred stock . . . . . . . . 41.5 41.5 41.5 -- --
Stockholders' equity (deficit) . . . . . . (71.6) (91.4) (1.7) 135.8 159.1
- -------------------
(a) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of certain non-recurring charges
incurred in fiscal 1991 and fiscal 1993. On September 4, 1991, the
Company's Board of Directors determined that the Company should
restructure its knitwear operations. The restructuring resulted in a non-
recurring charge of approximately $13 million (or $1.36 per share) in
fiscal 1991. Such charge was associated with the closing of the Company's
knitwear manufacturing facilities and the liquidation of related
Inventory. In October 1993, the Company decided to discontinue a portion
of its men's manufactured dress shirt and neckwear business segment. This
resulted in a non-recurring charge of $19.9 million. Also, the Company
incurred a $2.6 million non-recurring charge associated with the wind up
of a previously discontinued business. The total non-recurring charge
recorded in fiscal 1993 was $22.5 million (or $1.13 per share). See Note
3 of Notes to Consolidated Financial Statements.
(b) The Company has not paid any cash dividends on its Common Stock.
(c) Includes Common Stock and Common Stock equivalents.
(d) In fiscal year 1990, the Company changed its fiscal calendar to the
first Saturday after January 1st.
(e) Includes $3.5 million (or $0.44 per share) of non-recurring income
for fiscal 1990.
(f) Includes $10.5 million charge for the cumulative effect of the
Company changing its method of accounting for post retirement benefits
other than pensions. See Note 8 of Notes to Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
During the last several years, the Company has implemented a number
of strategies designed to reduce operating expenses and refocus its
business on less fashion sensitive and higher margin product lines with
world brand potential, particularly in its Intimate Apparel Division.
As a result of this strategic refocusing, and notwithstanding the
bankruptcy, reorganization or liquidation of several of the Company's
major retail customers, including B. Altman & Co., Bonwit Teller, Carter
Hawley Hale, Federated Department Stores, Miller & Rhoades, R.H. Macy &
Co., Woodward & Lathrop, and P.A. Bergner & Co., and the general
softening of the retail market as a result of the economic slowdown from
1989 through 1993, the Company has significantly increased the gross
profit of its Intimate Apparel Division. The Intimate Apparel
Division's net revenues have grown since 1989 at a compounded annual
growth rate of approximately 12%. Menswear Division net revenues have
increased modestly from $213.9 million in fiscal 1989 to $243.2 million
in fiscal 1993, which reflects strong growth in the Company's Chaps by Ralph
Lauren line partially offset by the Company's strategic decisions not to
renew its license with Pringle of Scotland in fiscal 1989 and to close
its knitwear manufacturing facilities in 1991. The Company has
strategically eliminated cash intensive businesses and businesses that
did not demonstrate the potential to achieve profitability levels
acceptable to management. (See Notes 2 and 3 of Notes to Consolidated
Financial Statements on page 37.)
RESULTS OF OPERATIONS
The consolidated results of operations for the Company are
summarized below. The Divisional Summary includes the Retail Outlet
Stores Division for reporting purposes; however, since the Company's
business strategy is to use its Retail Outlet Stores as a channel for
its excess inventory and the Company does not consider the results of
such division to be material, the Retail Outlet Stores Division is not
discussed further.
STATEMENT OF OPERATIONS
(SELECTED DATA)
FISCAL YEAR ENDED
(IN MILLIONS)
---------------------------------------------------------------------------------
% OF % OF % OF
JANUARY 4, NET JANUARY 2, NET JANUARY 8, NET
1992 REVENUES 1993 REVENUES 1994 REVENUES
---------- -------- ---------- -------- ---------- --------
Net revenues . . . . . . . . . . . . . . . . $562.5 100.0% $625.1 100.0% $703.8 100.0%
Cost of goods sold . . . . . . . . . . . . . 367.1 65.3% 405.8 64.9% 467.4 66.4%
------ ----- ------ ----- ------ -----
Gross profit . . . . . . . . . . . . . . . . 195.4 34.7% 219.3 35.1% 236.4 33.6%
Selling, administrative, and general . . . . 124.6 22.2% 129.5 20.7% 144.2 20.5%
------ ----- ------ ----- ------ -----
Income before non-recurring items, interest
and income taxes . . . . . . . . . . . . . 70.8 12.6% 89.8 14.4% 92.2 13.1%
Non-recurring items (a) . . . . . . . . . . . 13.0 -- 22.5
Interest expense . . . . . . . . . . . . . . 72.3 48.8 38.9
Income (loss) from continuing
operations . . . . . . . . . . . . . . . . (19.5) 47.6 53.3
DIVISIONAL SUMMARY
FISCAL YEAR ENDED
--------------------------------------------------------------------------------
% OF % OF % OF
JANUARY 4, GROSS JANUARY 2, GROSS JANUARY 8, GROSS
1992 PROFIT 1993 PROFIT 1994 PROFIT
--------- ------ --------- ------ --------- ------
Net revenues:
Intimate Apparel . . . . . . . . . . . . . . $339.7 $384.8 $423.2
Menswear . . . . . . . . . . . . . . . . . . 180.8 200.0 243.2
Retail Outlet Stores . . . . . . . . . . . . 42.0 40.3 37.4
------- ------ ------
Net revenues . . . . . . . . . . . . . . . . $562.5 $625.1 $703.8
====== ====== ======
Gross profit:
Intimate Apparel . . . . . . . . . . . . . . $134.3 68.7% $152.9 69.7% $167.7 70.9%
Menswear . . . . . . . . . . . . . . . . . . 43.8 22.4% 52.3 23.9% 53.7 22.7%
Retail Outlet Stores . . . . . . . . . . . . 17.3 8.9% 14.1 6.4% 15.0 6.4%
------ ----- ------ ----- ------ -----
Gross Profit . . . . . . . . . . . . . . . . $195.4 100.0% $219.3 100.0% $236.4 100.0%
====== ===== ====== ===== ====== =====
- ------------
(a) On September 4, 1991 the Company's Board of Directors determined that the Company should restructure its knitwear
operations. The restructuring resulted in a non-recurring charge of $13.0 million (or $1.36 per share) in fiscal
1991. Such charge was associated with the closing of the Company's knitwear manufacturing facilities and the
liquidation of related inventory. In October 1993, the Company decided to discontinue a portion of its Men's
manufactured dress shirt and neckwear business segment. This resulted in a non-recurring charge of $19.9 million.
Also, the Company incurred a $2.6 million non-recurring charge associated with the wind up of a previously
discontinued business. The total non-recurring charge recorded in fiscal 1993 was $22.5 million (or $1.13 per
share).
COMPARISON OF FISCAL 1993 WITH FISCAL 1992
Net revenues increased 13% from $625.1 million in fiscal 1992 to
$703.8 million in fiscal 1993. The increase in net revenues is
primarily attributable to continued growth in the Company's Intimate
Apparel Division and growth in the Chaps by Ralph Lauren line of the
Menswear Division.
INTIMATE APPAREL DIVISION. Net revenues increased 10% to $423.2
million in fiscal 1993 from the $384.8 million recorded in fiscal
1992 despite a $7.5 million negative effect on foreign exchange
translation due to the strong dollar versus the pound sterling.
The increase is attributable to continued growth in the Company's
domestic business, primarily the Warner's and Olga brands of over
8%, and the highly successful introduction of the Fruit of the Loom
brand of intimate apparel into the mass merchandise market, which
increased 115% to $32.9 million in fiscal 1993, from $15.3 million
in fiscal 1992, its first year of operation.
MENSWEAR DIVISION. Net revenues for fiscal 1993 increased 22% to
$243.2 million from the $200.0 million recorded in fiscal 1992.
The increase is primarily attributable to an increase in Chaps by
Ralph Lauren net revenues of $30 million or 51% to $89 million and
an increase in Puritan net revenues of $33 million including the
sale of the trademark in the United States to Wal-Mart for $7.7
million. This was partially offset by a $16 million or 23% decline
in the Christian Dior business.
Gross profit increased to $236.4 million in fiscal 1993 from $219.3
million in fiscal 1992. Gross profit as a percentage of net revenues
decreased to 33.6% in fiscal 1993 from 35.1% in fiscal 1992. The
decrease in gross profit as a percentage of net revenues reflects a
higher mix of menswear sales compared to the higher margin intimate
apparel business, startup costs totaling $3.5 million for three new
Intimate Apparel plants in the Caribbean basin and the Miracle Bra
program for Victoria's Secret and the selling of excess dress shirt and
neckwear inventory at lower margins.
INTIMATE APPAREL DIVISION. Intimate Apparel Division gross profit
increased 10% to $167.7 million in fiscal 1993 (39.6% of intimate
apparel net revenues) from the $152.9 million (39.7% of intimate
apparel net revenues) recorded in fiscal 1992. The increase in
gross profit primarily reflects higher net revenues noted above.
Gross profit as a percentage of net revenues is down slightly due
to the startup costs mentioned above, offset by favorable
manufacturing variances.
MENSWEAR DIVISION. Menswear Division gross profit increased 3% to
$53.7 million in fiscal 1993 (22.1% of menswear net revenues) from
$52.3 million (26.1% of menswear net revenues) recorded in fiscal
1992. The decrease in gross margin reflects a considerable
softness in the commodity dress shirt and neckwear business and the
selling of excess inventory at lower margins.
Selling, administrative and general expenses increased to $144.2
million (20.5% of net revenues) in fiscal 1993 from $129.5 million
(20.7% of net revenues) in fiscal 1992. The increase in selling,
administrative and general expenses reflects volume increases and an
increase in advertising and marketing expense to maintain the Company's
strong Intimate Apparel market position in department stores and
increased penetration of Fruit of the Loom bras in the mass merchandise
market. The decrease in selling, general and administrative expenses as
a percentage of net revenues reflects continuing efforts by the Company
to operate efficiently and control costs and the spreading of certain
fixed costs over the higher net revenue base, partially offset by the
higher level of advertising and marketing costs.
Interest expense decreased 20% to $38.9 million in fiscal 1993 from
$48.8 million recorded in fiscal 1992. The decrease in interest expense
in fiscal 1993 compared to fiscal 1992 reflects the impact of the
Company's recapitalization in March 1992, which included the sale of
5,000,000 shares of common stock and the refinancing of all of the
Company's remaining high yield debt in September 1993, which reduced the
average rate of interest on the Company's outstanding debt from nearly
14% during 1991 to 7.5% during 1992 to approximately 6% at the end of
1993. The Company's debt at the end of 1993 is substantially all bank
debt at a rate of LIBOR plus 1.25%, with $250 million or 62% of total
debt locked in at varying rates over the next 2 years. Interest expense
for fiscal 1993 includes approximately $3.3 million of non cash interest
compared to $4.3 million for fiscal 1992. The decrease in non cash
interest in fiscal 1993 compared to fiscal 1992 reflects a decrease in
accretion related to the Senior Discount Term Notes which were redeemed
in full in May 1992 and a reduction in deferred financing cost
amortization due to the early repayment of all of the Company's high
yield debt obligations during 1992.
The non-recurring expense recorded in fiscal 1993 of $22.5 million
represents a $19.9 million charge related to anticipated future losses
from operations and non-cash writedowns of assets from a portion of the
Company's men's manufactured dress shirt and neckwear business segment,
which it decided to discontinue in October, 1993 and $2.6 million of
costs associated with the windup of the Company's Canadian womenswear
business which was discontinued in a prior year.
In the fourth quarter of fiscal 1992, the Company adopted Financial
Accounting Standards Board Statement No. 109, Accounting for Income
Taxes, ("Statement No. 109") retroactive to the beginning of the fiscal
year. Statement No. 109 requires, among other things, the recognition
of deferred tax assets for the future benefit associated with net
operating loss carryforwards. Statement No. 109 further provides that
companies evaluate all deferred tax assets for the potential to realize
such benefits in future periods and to record a valuation allowance
offsetting deferred tax assets in certain circumstances.
In evaluating the Company's ability to realize the benefits
associated with its net operating loss carryforwards, the Company
considered the following:
(i) the expected impact of temporary (timing) differences between
taxable income and income reported for financial statement
purposes;
(ii) the pro forma impact on the Company's earnings for the three
years in the period ending with fiscal 1993 of the Initial
Public Offering of 6,900,000 shares of common stock in
October 1991, the sale of the 5,000,000 shares of common
stock in April 1992, and the refinancing and repayment of
certain of the Company's debt obligations during fiscal 1993
and 1992;
(iii) income from continuing operations recorded in fiscal
1993 before income taxes, non-recurring expense and
extraordinary items; and
(iv) the Company's expected future operating income.
Consistent with the provisions of Statement No. 109, the Company
reevaluated its deferred tax asset in the fourth quarter of fiscal 1993
and reversed a portion of its valuation allowance amounting to $24.7
million in addition to the $6.6 million benefit it recognized in fiscal
1992. After giving effect to the benefit from the recognition of future
net operating loss carryforwards, the Company has approximately $64
million of unrecognized net operating loss carryforwards available for
financial reporting purposes at the end of fiscal 1993. The tax
benefits that will be realized from the treatment of acquisition related
liabilities will be credited against the excess of costs over net assets
acquired in the period such benefits accrue.
The Company has total net operating loss carryforwards available to
offset future taxable income amounting to approximately $170 million at
January 8, 1994, a portion of which will be applied to the excess of
cost over net assets acquired. These carryforwards, if fully utilized,
would result in a future tax saving of approximately $60 million at
current U.S. corporate income tax rates. The net operating loss
carryforwards expire beginning in 2001 and fully expire in 2007.
The principal differences between net operating loss carryforwards
for financial reporting and tax purposes are related to liabilities
accrued at the date of the Acquisition and the difference in basis for
tax and financial reporting purposes of the Activewear Division, which
was sold in 1990.
As a result of the Common Stock offering in 1991 and 1992 and other
ownership changes occurring during the prior three year period, a change
of ownership occurred under Internal Revenue Code Section 382, which
will effectively limit the rate at which the Company may utilize its net
operating loss carryforwards. The Company believes that it will
ultimately realize all of the benefits attributable to its net operating
loss carryforwards; however, the amount of such benefits that the
Company will realize and the period in which any benefit is realized are
subject to several factors including the general level of economic
activity, the level of earnings, future changes in U.S. corporate income
tax laws and regulations, potential Internal Revenue Service audit
adjustments and limitations on the ability of the Company to utilize net
operating tax carryforwards under the Internal Revenue Code. (See Note
7 of Notes to Consolidated Financial Statements on pages 39 to 42.)
Income from continuing operations for fiscal 1993 was $53.3 million
compared to income from continuing operations of $47.6 million in fiscal
1992. The increase in income from continuing operations of $5.7
million or 12% is attributable to increased operating income, lower
interest expense and the income tax benefit recorded partially offset by
the $22.5 million non-recurring expense noted above.
Extraordinary losses of $(18.6) million (without income tax
benefit) recorded in fiscal 1993 and $(57.6) million (without income tax
benefit) recorded in fiscal 1992 primarily relate to premium payments
and the write-off of deferred financing costs associated with the early
extinguishment of debt.
In January 1993, the Company adopted Financial Accounting Standards
Board Statement No. 106, Accounting for Postretirement Benefits other
than Pensions ("Statement No. 106") and accordingly recorded a $(10.5)
million non-cash charge associated with the cumulative effect of
adopting Statement No. 106.
Net income for fiscal 1993 of $24.1 million reflects income from
continuing operations of $53.3 million, partially offset by
extraordinary charges of $(18.6) million and the $(10.5) million
cumulative effect noted above.
Net loss for fiscal 1992 of $(17.5) million reflects income from
continuing operations of $47.6 million offset by the extraordinary
losses for early extinguishment of debt of $(57.6) million and the loss
from discontinuing the women's accessories business of $(7.4) million.
COMPARISON OF FISCAL 1992 WITH FISCAL 1991
Net revenues increased 11.1% from $562.5 million in fiscal 1991 to
$625.1 million in fiscal 1992. The increase in net revenues is
primarily attributable to continued growth in the Company's Intimate
Apparel Division and growth in the Chaps by Ralph Lauren and Dior
accessory marketing units of the Menswear Division.
INTIMATE APPAREL DIVISION. Net revenues increased 13.3% to $384.8
million in fiscal 1992 from the $339.7 million recorded in fiscal
1991. The increase is attributable to continued growth in the
Company's Warner's and Olga brands of over 9%, and the highly
successful introduction of the Fruit of the Loom brand of intimate
apparel into the mass merchandise market.
MENSWEAR DIVISION. Net revenues for fiscal 1992 increased 10.6% to
$200.0 million from the $180.8 million recorded in fiscal 1991.
The increase is primarily attributable to an increase in Chaps by
Ralph Lauren net revenues of over 50% and an increase in Dior
accessories net revenues of over 27%. Puritan net revenues
decreased reflecting the Company's decision, in fiscal 1991, to
restructure and reposition its knit shirt and sweater business for
the mass merchandise market. The Company's dress shirt business
reversed previous year trends with an increase in net revenues in
fiscal 1992 compared to fiscal 1991. In addition, the Company's
dress shirt brands increased their market share in fiscal 1992.
Gross profit increased to $219.3 million in fiscal 1992 from $195.4
million in fiscal 1991. Gross profit as a percentage of net revenues
increased to 35.1% in fiscal 1992 from 34.7% in fiscal 1991. The
increase in gross profit as a percentage of net revenues reflects a
higher mix of intimate apparel sales compared to menswear as well as
gross margin improvements in both the Intimate Apparel and Menswear
Divisions.
INTIMATE APPAREL DIVISION. Intimate Apparel Division gross profit
increased 13.8% to $152.9 million in fiscal 1992 (39.7% of intimate
apparel net revenues) from the $134.3 million (39.5% of intimate
apparel net revenues) recorded in fiscal 1991. The increase in
gross profit primarily reflects higher net revenues noted above.
The increase in gross profit as a percentage of net revenues
reflects manufacturing efficiencies related to the higher number of
units produced.
MENSWEAR DIVISION. Menswear Division gross profit increased 19.4%
to $52.3 million in fiscal 1992 (26.1% of menswear net revenues)
from $43.8 million (24.2% of menswear net revenues) recorded in
fiscal 1991. The increase in gross profit reflects increased sales
volume as noted above and a more favorable mix of higher margin
men's accessory and Chaps by Ralph Lauren business than in fiscal
1991.
Selling, administrative and general expenses increased to $116.5
million (18.6% of net revenues) in fiscal 1992 from $110.8 million
(19.7% of net revenues) in fiscal 1991. The increase in selling,
administrative and general expenses reflects volume increases and an
increase in advertising and marketing expense supporting new product
introductions. The decrease in selling, general and administrative
expenses as a percentage of net revenues reflects continuing efforts by
the Company to operate efficiently and control costs and the spreading
of certain fixed costs over the higher net revenue base.
Interest expense decreased 33% to $48.8 million in fiscal 1992 from
$72.3 million recorded in fiscal 1991. The decrease in interest expense
in fiscal 1992 compared to fiscal 1991 reflects the impact of the
Company's sale of 11,900,000 shares of Common Stock, which yielded net
proceeds to the Company of over $285 million, and the application of
such proceeds to reduce the Company's outstanding indebtedness as well
as the refinancing of substantially all of the Company's remaining debt
obligations which reduced the average rate of interest on the Company's
outstanding debt from nearly 14% during 1991 to approximately 7.5% at
the end of 1992. Interest expense for fiscal 1992 includes
approximately $4.3 million of non cash interest compared to $8.5 million
for fiscal 1991. The decrease in non cash interest in fiscal 1992
compared to fiscal 1991 reflects a decrease in accretion related to the
Senior Discount Term Notes which were redeemed in full in May 1992 and a
reduction in deferred financing cost amortization due to the early
repayment of all of the Company's high yield debt obligations in the
fourth quarter of 1991 and during 1992.
As noted previously, in the fourth quarter of fiscal 1992, the
Company adopted Statement No. 109, retroactive to the beginning of the
fiscal year and accordingly recorded an income tax benefit of $6.6
million in fiscal 1992. This tax benefit compares to a $5 million tax
provision recorded in 1991 which primarily related to foreign taxes.
Income from continuing operations for fiscal 1992 was $47.6 million
(including the tax benefits noted above) compared to a loss from
continuing operations of $(19.5) million in fiscal 1991. The increase
in income from continuing operations of $67.1 million is attributable to
increased operating income, lower interest expense and the tax benefit
noted above. In addition, the fiscal 1991 loss includes a non recurring
charge of $13.0 million related to the restructuring of the Company's
knitwear operations.
Extraordinary losses of $(57.6) million (without income tax
benefit) recorded in fiscal 1992 relate to premium payments and the
write-off of deferred financing costs associated with the early
extinguishment of debt.
During the fourth quarter of fiscal 1992, the Company decided to
discontinue the operations of its women's accessories business. The
loss from discontinued operations of $(7.4) million includes the
estimated charges to terminate certain license agreements, close the
division's facility, make severance payments, write off certain existing
assets and dispose of the remaining inventory.
Net loss for fiscal 1992 reflects income from continuing operations
of $47.6 million offset by the extraordinary losses for early
extinguishment of debt of $(57.6) million and the loss from
discontinuing the women's accessories business of $(7.4) million.
CAPITAL RESOURCES AND LIQUIDITY
On April 2, 1992 the Company completed the sale of 5,000,000 shares
of Common Stock to the public (the "Offering") at an offering price of
$34.50 per share. Net proceeds from the Offering were approximately
$161.3 million. In conjunction with the Offering, the Company also
entered into a financing agreement underwritten by General Electric
Capital Corporation, Union Bank of Switzerland and Bank of Nova Scotia
(the "Financing") that provided for a revolving loan of up to $125
million and a term loan in the principal amount of $225 million ($200
million at January 2, 1993) with a LIBOR option at a rate of LIBOR plus
2.5% for the revolving loan and LIBOR plus 3.0% for the term loan
reduced to LIBOR plus 2.75% when certain financial tests are met. The
proceeds of the Offering and the Financing were used to (i) redeem all
outstanding Class A $14.50 Cumulative Preferred Stock and Class B $10.00
Cumulative Preferred Stock of the Company, (ii) repay all of Warnaco's
indebtedness under the Amended and Restated Credit Agreement dated as of
April 19, 1991 among Warnaco and the lenders and agents named therein,
(iii) redeem the entire principal amount outstanding of the Company's
8.6464% Senior Discount Term Notes (these notes were issued at a
discount from their face value which resulted in an effective annual
interest cost of approximately 18%), (iv) redeem the entire principal
amount outstanding of the Company's 12 1/4% Senior Subordinated Notes
due 1993-96, (v) redeem the entire principal amount of the Company's 12
3/8% mortgage notes, (vi) repay certain capital lease obligations and
(vii) pay related premiums and expenses associated with the retirement
or redemption of the obligations noted above. Interest expense and
preferred stock dividends (assuming interest rates) will be
reduced approximately $30 million per year as a result of these
transactions. Because these transactions were completed in April 1992,
the Company realized a pro rata portion of such savings in fiscal 1992.
On October 1, 1992, the Company amended its Financing Agreement
with General Electric Capital Corporation, Union Bank of Switzerland,
The Bank of Nova Scotia and Citibank, N.A. to increase the principal
amount of the Company's term loan by $100 million in order to allow the
Company to redeem all $90 million of its 12 1/2% Subordinated Debentures
(which represents the final tranche of its high yield debt) six years
ahead of schedule. Interest expense (assuming current interest rates)
will be reduced by an additional $4 million per year as a result of the
redemption and increase in the term loan principal amount.
On May 27, 1993, the Company amended its Financing Agreement to
increase the maximum amount of borrowing available under its revolving
loan to $200 million.
On October 14, 1993, the Company refinanced its Financing Agreement
with a new $500 million facility underwritten and co-managed by the Bank
of Nova Scotia and Citibank, N.A., with General Electric Capital
Corporation, Credit Suisse, and the Union Bank of Switzerland, as co-
agents, all of whom were existing lenders to the Company. The new
facility reduced the borrowing rate to the Company from LIBOR plus 2.75%
to LIBOR plus 1.25%, a 150 basis point or $8 million a year savings.
The facility also contains agreements that further reduce the interest
rate to LIBOR plus .75% as the Company improves its credit rating in the
future. The Company has received three credit rating upgrades in the
past two years, with the latest upgrade from Standard and Poor's
assigning a BB+ implied senior debt rating.
Certain provisions in the Company's debt agreements require the
Company to fix the LIBOR rates on up to $250 million of the Company's
$500 million facility. As a result, the Company entered into agreements
which effectively fix the LIBOR rate on $100 million at 5.690%, $50
million at 4.665%, and $100 million at 4.290%. Each agreement is for a
term of two years expiring in April 1994, October 1994, and January
1996, respectively.
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
arising at the end of the second quarter and beginning of 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 quarter and fourth quarter shipments and the sale of
inventory built during the first half of the fiscal year. (See
"--Seasonality".)
Cash provided by operating activities for the 1993 fiscal year
totaled approximately $11.9 million compared to a use of $35.8 million
in fiscal 1992. The significant improvement is primarily attributable
to an improvement in both inventory and accounts receivable efficiencies
resulting in a decrease in net working capital changes of $51.5 million
compared to 1992.
Interest expense for fiscal 1993 totalled $38.9 million, a
reduction of 20% from the $48.8 million recorded in fiscal 1992.
Interest includes approximately $3.3 million and $4.3 million of
non-cash interest in fiscal 1993 and fiscal 1992, respectively.
Non-cash interest includes amortization of deferred debt issue costs.
The Company expects that interest expense will further decrease in
fiscal 1994 compared to fiscal 1993 reflecting the favorable impact of
reducing the Company's average interest rate on outstanding debt from
nearly 7.5% in fiscal 1992 to approximately 6% in December 1993. The
actual level of interest expense that the Company will incur in fiscal
1994 is dependent on several factors, including the overall level of
interest rates, the general level of economic activity, the level of
retail sales and the Company's need for working capital to fund growth
in its operations.
On February 1, 1993 the Company entered into an agreement with the
Bank of Nova Scotia to provide the Company with a $40 million line of
credit to be used for the issuance of commercial letters of credit (the
"L/C Facility"). Letters of credit issued under the L/C Facility are
secured by the applicable inventory until such letters of credit have
been paid. The facility was subsequently increased to $55 million, with
a 90 day term draft acceptance sub-facility of $30 million.
On March 14, 1994, the Company acquired the Calvin Klein Men's
Underwear business and trademarks worldwide and the worldwide license
for Calvin Klein Men's Accessories (a five-year initial term with a five-
year option exercisable solely at the Company's option). In addition, the
Company will acquire the Calvin Klein trademark for women's intimate
apparel upon expiration of an existing license agreement on December 31,
1994. The total purchase price was $62.5 million and was financed by cash
in the amount of $38.5 million drawn from the existing bank facility and
$24.0 million (the fair market value of 849,746 shares) in the Company's
common stock. (See Note 14 of Notes to Consolidated Financial Statements
on page 51.)
At January 8, 1994, the Company had approximately $95.2 million of
additional borrowing available under its bank facilities. The Company
believes that funds available under its bank facilities together with
funds 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
foreseeable future.
Capital expenditures for new facilities, improvements to existing
facilities and for machinery and equipment were approximately $6.1
million, $13.7 million and $12.4 million in the 1991, 1992 and 1993
fiscal years, respectively. Depreciation expense was $11.0 million,
$10.4 million and $9.2 million in the 1991, 1992 and 1993 fiscal years,
respectively.
SEASONALITY
The operations of the Company are somewhat seasonal, with
approximately 56% of net revenues, 58% of income before non-recurring
items and substantially all of the Company's cash flow from operating
activities generated in the second half of the fiscal 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,
income before non-recurring items and cash flow from operating
activities generated for each quarter of fiscal 1992 and fiscal 1993.
THREE MONTHS ENDED
-------------------------------------------------------------------------------
(IN MILLIONS)
APR 4, JUL 4, OCT 3, JAN 2, APR 3, JUL 3, OCT 2, JAN 8,
1992 1992 1992 1993 1993 1993 1993 1994
---- ---- ---- ---- ---- ---- ---- ----
Net revenues . . . . . . . . $130.5 $139.2 $170.3 $185.1 $ 156.8 $ 158.3 $184.0 $ 204.7
Income before non-
recurring items . . . . . . 20.7 14.0 26.7 28.4 22.1 16.3 28.2 25.6
Cash flow from operating
activities . . . . . . . . $(38.2) $(44.3) $ (3.7) $50.4 $(23.4) $(22.7) $(1.4) $59.4
INFLATION
The Company does not believe that the relatively moderate levels of
inflation which have been experienced 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 efficiency. Mexico historically has been subject to
high rates of inflation; however, the effects of high rates of inflation
on the operation of the Company's Mexican subsidiaries have not had a
material impact on the results of operations of the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
The Company adopted Financial Accounting Standards Board Statement
No. 106 Employers Accounting for Postretirement Benefits other than
Pensions ("Statement No. 106"). In accordance with the provisions of
Statement No. 106 the Company adopted Statement No. 106 effective with
the first quarter of fiscal 1993. Adoption of Statement No. 106
resulted in a one time non-cash charge for the cumulative effect for
postretirement benefits of $(10.5) million which was recorded in the
results of operations in the first quarter of 1993. Adoption of
Statement No. 106 is not expected to have a material effect on the
results of operations in any other future period. (See Note 8 of Notes to
Consolidated Financial Statements on pages 42 to 45.)
The Company adopted Financial Accounting Standards Board Statement
No. 109 Accounting for Income Taxes ("Statement No. 109") in the fourth
quarter of fiscal 1992, retroactive to the first quarter of fiscal 1992.
(See "--Results of Operations" on pages 16 to 20 and Note 7 of Notes to
Consolidated Financial Statements on pages 39 to 42.)
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 ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference
from page 12 of Item 4 of Part I included herein and from the Proxy
Statement of The Warnaco Group, Inc.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is hereby incorporated by
reference from the Proxy Statement of The Warnaco Group, Inc.
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.
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.
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.
Page
Report of Independent Auditors . . . . . . . . . . . . . . . . . . 30
Consolidated Balance Sheets as of January 2, 1993
and January 8, 1994 . . . . . . . . . . . . . . . . . . . . . . . 31
Consolidated Statements of Operations for the Years Ended
January 4, 1992, January 2, 1993 and January 8, 1994 . . . . . . 33
Consolidated Statement of Stockholders' Equity for the
Years Ended January 4, 1992, January 2, 1993
and January 8, 1994 . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Cash Flow for the Years Ended
January 4, 1992, January 2, 1993 and January 8, 1994 . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . . . . 36
2. Financial Statement Schedules:
VIII Valuation and Qualifying Accounts and Reserves 52
IX Short-Term Borrowings . . . . . . . . . . . . 53
X Supplementary Statement of Operations .
Information . . . . . . . . . . . . . . . . . 54
Schedules 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.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 33-45877.)
3.2 Bylaws of the Company. (Incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1, No. 33-45877.)
10.1 Amended and Restated Credit Agreement dated as of October 1,
1992 (the "Credit Agreement") among the Company, Warnaco,
General Electric Capital Corporation, as Agent, Union Bank
of Switzerland, as Co-Agent, the Bank of Nova Scotia, as
Paying Agent, and certain other lenders named therein.
(Incorporated by reference to Form 10-K filed March 31, 1993
under exhibit number 10.1)
10.2 Amendment No. 1 to the Credit Agreement dated as of December
21, 1992. (Incorporated by reference to Form 10-K filed March
31, 1993 under exhibit number 10.2)
10.3 Amendment No. 2 to the Credit Agreement dated as of January
21, 1993. (Incorporated by reference to Form 10-K filed March
31, 1993 under exhibit number 10.3)
10.4 Amendment No. 3 to the Credit Agreement dated as of May 27,
1993. (Incorporated by reference to Form 10-Q filed August 11,
1993 under reference number 10-10)
10.5 Credit Agreement dated as of October 14, 1993 (the "1993
Financing") among the Company, Warnaco, The Bank of Nova
Scotia, as managing agent and paying agent, Citicorp U.S.A.,
as co-managing agent and documentation and collateral agent,
and certain other lenders named therein.
(Incorporated by reference to Form 10-Q filed November 16, 1993
under reference number 10-1)
.
10.6 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.)
10.7 Incentive Compensation Plan. (Incorporated by reference to
Exhibit 3.1 to the Company's Registration on Form S-1, No.
32-45877.)
10.8 1991 Stock Option Plan. (Incorporated herein by reference
to Exhibit 10.9 to the Company's Registration Statement on
Form S-1, No. 33-42641.)
10.9 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.
33-42641.)
10.10 Warnaco Employee Retirement Plan. (Incorporated herein by
reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, No. 33-42641.)
10.11 Executive Management Agreement dated as of May 9, 1991
between the Company, Warnaco and The Spectrum Group, Inc.
(Incorporated herein by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, No. 33-42641.)
10.12 1993 Stock Plan for non employee directors (the "Director,
Stock Plan") incorporated herein by reference to Company's
Proxy Statement.
11.1 Calculation of Income (Loss) per common share.
22.1 Subsidiaries of the Company. (Incorporated herein by
reference to Exhibit 22.1 to the Company's Registration
Statement on Form S-1, No. 33-41798.)
24.1(a) Consent of Independent Auditors
24.1(b) Consent of Independent Auditors
- --------------------
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant in the last
quarter of the 1993 fiscal year.
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 7th day of
April, 1994.
THE WARNACO GROUP, INC.
By: /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.
Signature Title Date
--------- ----- ----
LINDA J. WACHNER Chairman of the Board; April 7, 1994
- --------------------- Director; President and Chief
(Linda J. Wachner) Executive Officer (Principal
Executive Officer)
DARIUSH ASHRAFI Director; Senior Vice April 7, 1994
- ------------------------ President and Chief Financial
(Dariush Ashrafi) Officer (Principal Financial
Officer)
WILLIAM S. FINKELSTEIN Senior Vice President and April 7, 1994
- ------------------------ Controller (Principal
(William S. Finkelstein) Accounting Officer)
JOSEPH A. CALIFANO, JR. Director April 7, 1994
- ------------------------
(Joseph A. Califano, Jr.)
ANDREW G. GALEF Director April 7, 1994
- ------------------------
(Andrew G. Galef)
STEWART A. RESNICK Director April 7, 1994
- ------------------------
(Stewart A. Resnick)
ROBERT D. WALTER Director April 7, 1994
- ------------------------
(Robert D. Walter)
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Warnaco Group, Inc.
We have audited the accompanying consolidated balance sheets of The
Warnaco Group, Inc. as of January 2, 1993 and January 8, 1994, and the
related consolidated statements of operations, stockholders' equity and
cash flow for each of the three years in the period ended January 8,
1994. Our audits also included the financial statement schedules listed
in the Index at Item 14(a). These financial statements and schedules
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of The Warnaco Group, Inc. at January 2, 1993 and
January 8, 1994, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended January 8,
1994, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Notes 7 and 8 to the consolidated financial
statements, the Company changed its method of accounting for income
taxes in 1992 and changed its method of accounting for postretirement
benefits other than pensions in 1993.
ERNST & YOUNG
New York, New York
February 21, 1994
THE WARNACO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
JANUARY 2, JANUARY 8,
1993 1994
---------- ---------
ASSETS
Current assets:
Cash, restricted $1,266 - 1992 and
$886 - 1993 . . . . . . . . . . . . . $ 3,763 $ 4,651
Accounts receivable, less allowance for
doubtful accounts of $1,770 - 1992
and $1,413 - 1993 . . . . . . . . . . . 122,894 126,507
Inventories . . . . . . . . . . . . . . . 209,297 239,503
Prepaid expenses . . . . . . . . . . . . 20,029 22,148
-------- --------
Total current assets . . . . . . . . 355,983 392,809
-------- --------
Property, plant and equipment, at cost:
Land and land improvements . . . . . . . 5,809 5,676
Buildings and building improvements . . . 59,724 59,505
Machinery and equipment . . . . . . . . . 64,618 73,712
-------- --------
130,151 138,893
Less: accumulated depreciation and
amortization . . . . . . . . . . . . . 56,166 65,257
-------- --------
Net property, plant and
equipment . . . . . . . . . . . . . 73,985 73,636
-------- --------
Other assets:
Deferred financing costs, less
accumulated amortization of $2,218 -
1992 and $356 - 1993 . . . . . . . . . 16,535 5,626
Licenses, trademarks, intangible and
other assets, at cost, less
accumulated amortization of $41,893 -
1992 and $47,253 - 1993 . . . . . . . . 50,290 62,722
Excess of cost over net assets
acquired, less accumulated
amortization of $24,012 - 1992 and
$27,725 - 1993 . . . . . . . . . . . . 126,264 122,551
Deferred income tax asset . . . . . . . .
6,589 31,289
-------- --------
Total other assets . . . . . . . . . 199,678 222,188
-------- --------
$629,646 $688,633
======== =======
THE WARNACO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
JANUARY 2, JANUARY 8,
1993 1994
---------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . $ 4,290 $ 5,819
Borrowing under revolving credit facility . . . . 61,944 100,523
Current portion of long-term debt . . . . . . . . 44,533 49,171
Accounts payable . . . . . . . . . . . . . . . . 75,628 86,403
Accrued compensation . . . . . . . . . . . . . . . 10,307 4,807
Accrued interest . . . . . . . . . . . . . . . . . 4,974 5,755
Other accrued liabilities . . . . . . . . . . . . 11,944 15,592
Federal and other income taxes . . . . . . . . . . 910 2,778
-------- --------
Total current liabilities . . . . . . . . . 214,530 270,848
-------- --------
Long-term debt . . . . . . . . . . . . . . . . . . . 277,601 245,518
Other long-term liabilities . . . . . . . . . . . . . 1,673 13,132
Stockholders' equity:
Preferred Stock; $.01 par value, none authorized
in 1992; 10,000,000 shares authorized, none
issued in 1993 . . . . . . . . . . . . . . . . . - -
Class A Common Stock; $.01 par value, 40,000,000
shares authorized in 1992; 65,000,000 shares
authorized in 1993; 20,195,450 and 20,166,575
shares issued and outstanding in 1992 and 1993,
respectively . . . . . . . . . . . . . . . . . . 202 202
Capital in excess of par value . . . . . . . . . . 315,411 315,270
Cumulative translation adjustment . . . . . . . . 1,960 279
Accumulated deficit . . . . . . . . . . . . . . . (171,341) (147,225)
Notes receivable for common stock issued . . . . . (10,390) (9,391)
-------- --------
Total stockholders' equity . . . . . 135,842 159,135
-------- --------
$629,646 $688,633
======== ========
This statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED
---------------------------------------
JANUARY 4, JANUARY 2, JANUARY 8,
1992 1993 1994
---------- ---------- ----------
Net revenues . . . . . . . . . . . . . . . . . . . . $562,529 $625,064 $703,769
-------- -------- --------
Cost of goods sold . . . . . . . . . . . . . . . . . 367,135 405,750 467,362
Selling, administrative and general expenses
including $ 500 with related parties in each year 124,623 129,502 144,219
Non recurring expense . . . . . . . . . . . . . . . 13,003 - 22,500
-------- -------- --------
Income before interest and income taxes . . . . . . . 57,768 89,812 69,688
Interest expense . . . . . . . . . . . . . . . . . . 72,276 48,848 38,935
-------- -------- --------
Income (loss) from continuing operations before (14,508) 40,964 30,753
income taxes . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . 5,006 (6,600) (22,500)
-------- -------- --------
Income (loss) from continuing operations . . . . . . (19,514) 47,564 53,253
Loss from discontinued operations . . . . . . . . . . (6,076) (7,443) -
Extraordinary items . . . . . . . . . . . . . . . . . (2,859) (57,576) (18,637)
Cumulative effect of change in method of accounting
for postretirement benefits other than pensions . . . - - (10,500)
-------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . ($28,449) ($17,455) $24,116
======== ======== ========
Net income (loss) applicable to common stockholders . ($33,949) ($20,205) $24,116
======== ======== ========
Income (loss) per common share:
Income (loss) from continuing operations . . . . . ($2.62) $2.35 $2.68
Loss from discontinued operations . . . . . . . . . (.64) (.39) -
Extraordinary items . . . . . . . . . . . . . . . (.30) (3.02) (.94)
Cumulative effect of change in method of
accounting for postretirement benefits other
than pensions . . . . . . . . . . . . . . . . . - - (.53)
-------- -------- --------
Net income (loss) per common share . . . . . . . . . ($3.56) ($1.06) $1.21
======== ======== ========
Weighted average number of common shares outstanding 9,530 19,055 19,885
======== ======== ========
This statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
NOTES
CLASS A CAPITAL IN CUMULATIVE RECEIVABLE
COMMON EXCESS OF TRANSLATION ACCUMULATED FOR COMMON
STOCK PAR VALUE ADJUSTMENT DEFICIT STOCK TOTAL
------- --------- ---------- --------- ------- -----
Balance January 5, 1991 . . $62 $20,603 $6,134 ($117,187) ($969) ($91,357)
Sold 2,179,000 shares of Class
A common stock to employees . 22 10,178 (10,193) 7
Repurchased 59,400 shares of
Class A common stock from
employees . . . . . . . . (297) 297
Sold 6,900,000 shares of Class
A common stock net of expenses
of $14,265 . . . . . . . . . 69 123,666 123,735
Net loss . . . . . . . . . . (28,449) (28,449)
Preferred dividends . . . . . (5,500) (5,500)
Change in cumulative
translation adjustment . . (144) (144)
---- ------- ------- -------- ------- ------
Balance January 4, 1992 153 154,150 5,990 (151,136) (10,865) (1,708)
Sold 5,000,000 shares of
Class A common stock net
of expenses of $11,190 . . 50 161,260 161,310
Repayments of employee notes
receivable . . . . . . . . . (1) 1 475 475
Net loss . . . . . . . . . . (17,455) (17,455)
Preferred dividends . . . . . (2,750) (2,750)
Change in cumulative
translation adjustment . . (4,030) (4,030)
---- ------- ------- -------- ------- -------
Balance January 2, 1993 . . . 202 315,411 1,960 (171,341) (10,390) 135,842
Repurchased 28,875 shares of
Class A common stock from
employees . . . . . . . . (141) 141
Repayments of employee notes
receivable . . . . . . . . 858 858
Net Income . . . . . . . . . 24,116 24,116
Change in cumulative
translation adjustment . . (1,681) (1,681)
---- ------- ------- -------- ------- -------
Balance January 8, 1994 . . . $202 $315,270 $ 279 ($147,225) ($9,391) $159,135
==== ======== ====== ========= ======= ========
This statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH
(IN THOUSANDS OF DOLLARS)
FOR THE YEAR ENDED
----------------------------------------------
JANUARY 4, JANUARY 2, JANUARY 8,
1992 1993 1994
------ ------ ------
Cash flow from operations:
Net income (loss) . . . . . . . . . . . . . . . . . . ($28,449) ($17,455) $24,116
Non-cash items included in net income (loss):
Depreciation and amortization . . . . . . . . . . 20,827 19,770 18,525
Interest . . . . . . . . . . . . . . . . . . . . . 8,476 4,266 3,309
Extraordinary items . . . . . . . . . . . . . . . 2,859 57,576 18,637
Cumulative effect of accounting change . . . . . . - - 10,500
Writedown of fixed assets included in non-recurring
expense . . . . . . . . . . . . . . . . . . . . . - - 1,159
Increase in deferred income tax asset . . . . . . - (6,589) (24,700)
Income taxes paid . . . . . . . . . . . . . . . . . . (5,350) (3,387) (1,008)
Other changes in operating accounts . . . . . . . . . (40,222) (90,105) (38,661)
Change in net assets of discontinued operations . . . 2,680 161 -
-------- ------- --------
Net cash provided from (used in) operations . . . . . . (39,179) (35,763) 11,877
-------- ------- --------
Cash flow from investing activities:
Proceeds from the sale of fixed assets . . . . . . . 2,460 475 1,739
Increase in intangibles and other assets . . . . . . (4,112) (551) (7,467)
Purchase of property, plant & equipment . . . . . . . (6,092) (13,651) (12,438)
-------- ------- --------
Cash used in investing activities . . . . . . . . . . (7,744) (13,727) (18,166)
-------- ------- --------
Cash flow from financing activities:
Proceeds from sale of Class A Common Stock and
repayment of notes receivable from employees . . . . 123,742 161,785 858
Borrowings (repayments) under credit facility . . . . (20,645) 62,572 37,774
Proceeds from other debt . . . . . . . . . . . . . . 39,970 334,132 428,721
Repayments of debt and redemption of Preferred Stock (84,609) (485,838) (453,832)
Preferred stock dividends paid . . . . . . . . . . . (5,500) (2,750) --
Increase in deferred financing costs . . . . . . . . (9,850) (18,716) (8,360)
Other . . . . . . . . . . . . . . . . . . . . . . . . (104) (1,651) 2,016
-------- ------- --------
Cash provided from financing activities . . . . . . . 43,004 49,534 7,177
-------- ------- --------
Increase (decrease) in cash . . . . . . . . . . . . . . (3,919) 44 888
Cash at beginning of year . . . . . . . . . . . . . . . 7,638 3,719 3,763
-------- ------- --------
Cash at end of year . . . . . . . . . . . . . . . . . . $3,719 $3,763 $ 4,651
======== ======= ========
Other changes is operating accounts:
Accounts receivable . . . . . . . . . . . . . . . . . ($10,381) ($35,714) ( 3,613)
Inventories . . . . . . . . . . . . . . . . . . . . . (28,583) (49,899) (30,206)
Prepaid expenses . . . . . . . . . . . . . . . . . . (2,709) (8,404) (2,119)
Accounts payable and accrued liabilities . . . . . . (3,411) 8,010 7,139
Federal and other income taxes . . . . . . . . . . . 5,006 (68) 2,876
Other . . . . . . . . . . . . . . . . . . . . . . . . (144) (4,030) (12,738)
-------- ------- --------
($40,222) ($90,105) ($38,661)
======== ======= ========
This statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: The Warnaco Group, Inc. (the "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.
Basis of Consolidation and Presentation: The accompanying
consolidated financial statements include the accounts of The Warnaco
Group, Inc. and all subsidiary companies for the years ended January 4,
1992, January 2, 1993 and January 8, 1994. The 1993 fiscal year
included 53 weeks of operations. The impact of the additional week of
operations was not material to the operations of the Company. Certain
amounts have been reclassified to conform to the current year
presentation.
Translation of Foreign Currencies: Cumulative translation
adjustments arise primarily from consolidating foreign operations and
are applied directly to stockholders' equity.
Inventories: Inventories are stated at the lower of cost,
determined on a first-in-first-out basis, or market.
Depreciation and Amortization: Provision is made for depreciation
of property, plant and equipment computed over the estimated useful
lives of the assets using the straight-line method, as summarized below:
Buildings . . . . . . . . . . . . . . . . . 20-40 years
Building improvements . . . . . . . . . . . 2-20 years
Machinery and equipment . . . . . . . . . . 3-10 years
Licenses, trademarks and other intangible assets are amortized over
the estimated economic life of the assets. The excess of cost over net
assets acquired is amortized over 40 years. The carrying value of the
excess of cost over net assets acquired will be reviewed if facts and
circumstances suggest that it may be impaired. If such a determination
is made, the Company will reduce the carrying value of this asset.
Deferred financing costs are amortized over the life of the related
debt, using the debt outstanding method.
Employee Retirement Plans: The Company has non-contributory
pension and profit sharing retirement plans for the benefit of
qualifying employees. Contributions are deposited with fund managers
who invest the assets of the plans.
Income Taxes: The Company adopted Statement of Financial Accounting
Standards No. 109 effective with its 1992 fiscal year. Income taxes
were accounted for under the provisions of Statement of Financial
Accounting Standards No. 96 for fiscal 1991.
Capitalized Leases: The asset values and related amortization of
capitalized leases are included with property, plant and equipment and
accumulated depreciation and the associated debt is included with
long-term debt.
Revenue Recognition: The Company recognizes revenue when goods are
shipped to customers.
Income (Loss) Per Common Share: Income (loss) per common share is
based on weighted average common shares outstanding after deducting
preferred stock dividends and taking into account potential dilution
from common stock equivalents.
NOTE 2 - DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 1992, the Company made a
strategic decision to discontinue the operations of its women's
accessories business. Operating losses for the division for the year
ending January 2, 1993 were approximately $2,299,000. Net revenues were
$764,000 and $1,835,000 for the years ended January 4, 1992 and January
2, 1993. Total losses related to the women's accessories business also
included anticipated losses related to the disposal of assets and losses
and expenses associated with the disposal of inventories, termination of
employees and remaining minimum royalty obligations of $3,085,000 and
$2,059,000, respectively.
In 1991, the Company finalized its evaluation of discontinued
operations related to its Activewear Division sold in 1990 to a newly
formed company ("Buyer") and recorded a loss of $6,076,000. At January
2, 1993 and January 8, 1994, the only remaining asset related to the
Activewear Division is the Company's equity interest in the Buyer,
valued at $5,000,000, which is included in other assets and is equal to
its fair market value. Revenues included in discontinued operations
related to the Activewear Division were approximately $10,531,000 in the
year ended January 4, 1992. Certain Officers and/or Directors of the
Company are also Officers and/or Directors of the Buyer and own, in the
aggregate, 8.6% of the fully diluted shares of the Buyer.
NOTE 3 - NON-RECURRING EXPENSE
On October 3, 1993, the Company made a strategic decision to
discontinue a portion of its men's manufactured dress shirt and neckwear
business segment. Net revenues for the year ended January 8, 1994
approximated $33,500,000 for this operation. Non recurring expense
includes a $19,900,000 charge for fourth quarter losses and anticipated
future losses from operations through the estimated date of disposal and
losses and expenses associated with the disposal of assets, liquidation
of inventories and termination of employees.
In addition, non-recurring expense for the year ended January 8,
1994 includes $2,600,000 of costs associated with the final wind up of
the Company's Canadian womenswear business, which had been discontinued
in a prior year.
Non-recurring expense of $13,003,000 recorded in the year ended
January 4, 1992 represents restructuring costs associated with the
Company's knitwear business. These costs consist primarily of
write-offs associated with the closing of the Company's knitwear
manufacturing facilities and the liquidation of related inventory.
NOTE 4 - EXTRAORDINARY ITEMS
In October 1993, in conjunction with the 1993 Financing, as more
fully described in Note 10, the Company recorded non cash extraordinary
charges of $18,637,000 to write off deferred financing charges under the
previous agreement and record losses under related interest rate swap
agreements.
On April 2, 1992 the Company completed a restructuring of its debt
obligations which resulted in the (i) redemption of all outstanding
shares of Class A and Class B Preferred Stock of the Company, (ii)
repayment of all outstanding indebtedness under the Company's Amended
and Restated Bank Credit Agreement, (iii) redemption of the entire
principal amount outstanding of the Company's 8.64% Senior Discount Term
Notes, (iv) redemption of the entire principal amount outstanding of the
Company's 121/4 Senior Subordinated Notes, (v) redemption of the entire
principal amount outstanding of the Company's 12 3/8% mortgage notes and
(vi) repayment of certain capital lease obligations. The repayment of
the above noted debt obligations prior to their maturity resulted in an
extraordinary charge of $46,454,000 due to early extinguishment of debt.
On October 1, 1992 the Company amended its Financing Agreement (see
Note 10). On November 15, 1992 proceeds from the amended Financing
Agreement were used to redeem the entire outstanding principal amount of
the Company's 121/2% subordinated debentures. The repayment of the
debentures, prior to their maturity, resulted in an extraordinary charge
of $11,122,000 due to early extinguishment of debt.
On April 19, 1991, the Company amended and restated its Bank Credit
Agreement. The change in the agreement and the extension of the
maturity, resulted in an extraordinary charge of $1,800,000 due to early
extinguishment of debt.
In November 1991, the Company retired the entire $83,000,000
outstanding principal balance of Senior Discount Notes. The repayment
of $55,000,000 of such notes prior to their maturity in 1992 resulted in
an extraordinary charge of $1,059,000 due to early extinguishment of
debt.
Due to the Company's existing net operating loss carryforwards (see
Note 7), none of the extraordinary items resulted in any income tax
benefit.
NOTE 5 - RELATED PARTY TRANSACTIONS
In December 1993, the Company sold its Checotah, Oklahoma
manufacturing facility to Authentic Fitness Corporation, a Company in
which certain directors and officers are also officers and directors of
the Company. The sales price of $3,317,000 was determined by an
independent appraisal, and resulted in a gain of $901,000 to the
Company.
A Director and a stockholder of the Company is the sole
stockholder, President and a Director of The Spectrum Group, Inc.
("Spectrum") and the President of Spectrum/Air Incorporated. Spectrum
and the Company are parties to an agreement under which Spectrum
provides consulting services to the Company. The Spectrum consulting
agreement was amended on May 9, 1991 to provide for annual fees of
$350,000 or such higher amount, including expenses, not to exceed
$500,000 (plus cost of living increases) for a period of five years.
The contract expires on May 9, 1996. Amounts charged to expense
pursuant to these agreements were $500,000 in each of the three fiscal
years ended January 8, 1994.
In 1991, the Company sold a condominium including furnishings to
the Chairman, President and Chief Executive Officer of the Company for
an aggregate purchase price of $2,100,000.
NOTE 6 - SEGMENT REPORTING
The Group operates within one industry segment--the marketing and
manufacturing of apparel. The Group has no customer which accounts for
ten percent or more of its total revenues. The Group operates in
several geographic areas.
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CANADA AND
FOR THE YEAR ENDED JANUARY 4, 1992 UNITED STATES LATIN AMERICA EUROPE CONSOLIDATED
- ---------------------------------------------- ------------- ------------- ------ ------------
Net revenues . . . . . . . . . . . . . . . . . $471,033 $41,839 $49,657 $562,529
======== ======= ======= ========
Operating profit . . . . . . . . . . . . . . . $ 70,375 $ 8,551 $ 6,820 $85,746
======== ======= =======
General corporate expense - net . . . . . . . . (27,978)
Interest expense . . . . . . . . . . . . . . . (72,276)
--------
Income (loss) from continuing operations
before income taxes . . . . . . . . . . . . ($ 14,508)
========
FOR THE YEAR ENDED JANUARY 2, 1993
- ----------------------------------------------
Net revenues . . . . . . . . . . . . . . . . . $533,280 $42,575 $49,209 $625,064
======== ======= ======= ========
Operating profit . . . . . . . . . . . . . . . $ 98,449 $ 7,978 $ 2,910 $109,337
======== ======= =======
General corporate expense - net . . . . . . . . (19,525)
Interest expense . . . . . . . . . . . . . . . (48,848)
--------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . $ 40,964
========
Identifiable assets at January 2, 1993 . . . . $520,747 $29,783 $29,960 $580,490
======== ======= =======
Corporate assets . . . . . . . . . . . . . . . 49,156
--------
Total Assets at January 2, 1993 . . . . $629,646
========
FOR THE YEAR ENDED JANUARY 8, 1994
- ----------------------------------------------
Net revenues . . . . . . . . . . . . . . . . . $605,124 $52,945 $45,700 $703,769
======== ======= ======= ========
Operating profit . . . . . . . . . . . . . . . $105,438 $ 6,366 $ 3,441 $115,245
======== ======= =======
General corporate expense - net . . . . . . . . (45,557)
Interest expense . . . . . . . . . . . . . . . (38,935)
--------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . $ 30,753
========
Identifiable assets at January 8, 1994 . . . . $561,012 $37,072 $27,354 625,438
======== ======= =======
Corporate assets . . . . . . . . . . . . . . . 63,195
-------
Total Assets at January 8, 1994 . . . . $688,633
========
Operating profit is total revenue less operating expenses. In
computing operating profit, none of the following items has been added
or deducted: general corporate expenses-net, interest expense and income
taxes. Non-recurring expense of $13,003,000 in fiscal 1991 and
$22,500,000 in fiscal 1993 is included in general corporate expense-net.
Identifiable assets are those assets of the Company that are
associated with the operations in each geographic area. Corporate
assets are principally property and equipment, deferred financing costs,
deferred income tax asset and other assets.
NOTE 7 - INCOME TAXES
During the fourth quarter of fiscal 1992, retroactive to the
beginning of fiscal 1992, the Company adopted Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes
("Statement No. 109"). The adoption of Statement No. 109 resulted in
the recognition of a deferred tax asset amounting to approximately
$42,500,000 related to the benefit associated with net operating loss
carryforwards to be realized in future periods as of the beginning of
fiscal 1992. The deferred tax asset was offset in its entirety by a
valuation allowance. During 1992, the Company issued 5,000,000 shares
of common stock generating net proceeds of approximately $161,310,000
(the "Offering"), refinanced or redeemed all of its outstanding high
yield debt and repaid certain other debt obligations (the "Refinancing")
(see Notes 10 and 11). The completion of the Offering and Refinancing
reduced the Company's annual interest expense and preferred stock
dividends, on a pro forma basis, by approximately $34,000,000. As a
result of these transactions, in the fourth quarter of 1992, the Company
re-evaluated its deferred tax asset and reversed a portion of the
valuation allowance related to this asset amounting to $6,589,000.
In 1993, the Company recognized an additional deferred tax asset of
$1,541,000 (offset in its entirety by a valuation allowance) related to
an increase in the Company's statutory tax rate resulting from tax
legislation passed in 1993. In the fourth quarter of 1993, the Company
reevaluated its deferred tax asset and reversed an additional portion of
its valuation allowance amounting to $24,700,000 related to this asset.
At January 2, 1993 and January 8, 1994, the Company had a deferred income tax
asset of $52,383,000 and $53,924,000, respectively, offset by a
valuation allowance of $45,794,000 and $22,635,000, respectively.
The following presents the U.S. and foreign components of income
(loss) from continuing operations before income taxes:
FOR THE YEAR ENDED
------------------------------------------
JANUARY 4, JANUARY 2, JANUARY 8,
1992 1993 1994
---------- ---------- ----------
(IN THOUSANDS)
U.S. income (loss) from continuing operations
before income taxes . . . . . . . . . . . . . . . ($20,236) $40,699 $29,750
Foreign income before taxes . . . . . . . . . . . . . 5,728 265 1,003
-------- ------ --------
Income (loss) from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . ($14,508) $40,964 $30,753
======== ======= =======
The provision for income taxes included in the Consolidated
Statements of Operations amounts to:
FOR THE YEAR ENDED
------------------------------------------
JANUARY 4, JANUARY 2, JANUARY 8,
1992 1993 1994
---------- ---------- ----------
(IN THOUSANDS)
Federal . . . . . . . . . . . . . . . . . . . . . . . $ -- $13,838 $10,413
State . . . . . . . . . . . . . . . . . . . . . . . . 756 (952) 343
Puerto Rico . . . . . . . . . . . . . . . . . . . . . 225 300 300
Foreign . . . . . . . . . . . . . . . . . . . . . . . 4,025 641 1,557
Recognition of current NOL benefit . . . . . . . . . -- (13,838) (10,413)
Recognition of future NOL benefit - net of
valuation allowances . . . . . . . . . . . . . . . -- (6,589) (24,700)
----- ------- ---------
$5,006 ($6,600) ($22,500)
====== ======= ========
Loss from discontinued operations includes tax benefits related to
operating losses incurred in foreign locations that were used to offset
foreign income taxes of $1,307,000 in the year ended January 4, 1992
(none in the year ended January 2, 1993 or January 8, 1994).
The Company has received grants from the Commonwealth of Puerto
Rico which allows the Company to exempt up to 87.5% of income earned in
Puerto Rico from taxation. The grants expire December 1, 2003. Tax
benefits realized amounted to approximately $800,000 ($0.08 per share),
$1,315,000 ($0.07 per share), and $733,000 ($0.03 per share) for the
years ended January 4, 1992, January 2, 1993, and January 8, 1994,
respectively.
The U.S. Statutory rate was: 1991, 34%; 1992, 34%; and 1993, 35%.
The following presents the reconciliation of the provision for
income taxes to U.S. Federal income taxes computed at the statutory
rate:
FOR THE YEAR ENDED
------------------------------------------
JANUARY 4, JANUARY 2, JANUARY 8,
1992 1993 1994
---------- ---------- ----------
(IN THOUSANDS)
Income (loss) from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . ($14,508) $40,964 $30,753
======== ======= =======
Provision (benefit) for income taxes @ the
statutory rate . . . . . . . . . . . . . . . . . . (4,932) 13,928 10,764
Foreign income taxes @ rates in excess of the
statutory rate . . . . . . . . . . . . . . . . . 2,077 551 1,206
State income taxes (benefit) . . . . . . . . . . . . 756 (952) 343
Puerto Rico income taxes . . . . . . . . . . . . . . 225 300 300
U.S. losses without tax benefit . . . . . . . . . . . 6,880 -- --
Current benefit for U.S. NOL carrryforward . . . . . -- (13,838) (10,413)
Future benefit for U.S. NOL carryforward . . . . . . -- (6,589) (24,700)
------ ------- --------
Provision (benefit) for income taxes . . . . . . . . $ 5,006 ($6,600) ($22,500)
======= ======= =========
At January 8, 1994, the Company had unrecognized U.S. net operating
loss carryforwards for financial reporting purposes of approximately
$64,000,000. For tax purposes, the Company has estimated U.S. net
operating loss carryforwards of approximately $170,000,000 which expire
from 2001 through 2007.
The principal differences between tax and financial reporting net
operating loss carryforwards are related to liabilities accrued at the
date of the Acquisition, the difference in basis for tax and financial
reporting purposes of the Activewear Division which was sold in 1990,
and the recognition of future benefits related to the utilization of
U.S. net operating loss carryforwards. The tax benefits that will be
realized from the treatment of acquisition related liabilities will be
credited against the excess of costs over net assets acquired in the
period such benefits accrue.
As a result of the 1992 public stock offering, the 1991 initial
public offering and other ownership changes occurring during the prior
three-year period, a change of ownership occurred under Internal Revenue
Code Section 382, which effectively limits the rate at which the Company
may utilize its net operating loss carryforwards. Nevertheless, the
Company expects that it will be able to utilize substantially all of the
net operating loss carryforwards it would have used, absent any Section
382 limitation.
NOTE 8 - EMPLOYEE RETIREMENT PLANS
PENSIONS
--------
The Company has a defined benefit pension plan which covers
substantially all non-union domestic employees (the "Plan"). The Plan
is noncontributory and benefits are based upon years of service and
average earnings for the five highest consecutive calendar years of
compensation during the ten years immediately preceding retirement.
Pension contributions are also made to foreign plans and directly to
union sponsored plans.
The funding policy for the Plan is to make, as a minimum
contribution, the equivalent of the minimum required by the Employee
Retirement Income Security Act of 1974 (ERISA).
Pension costs were:
FOR THE YEAR ENDED
------------------------------------------
JANUARY 4, JANUARY 2, JANUARY 8,
1992 1993 1994
---------- ---------- ----------
(IN THOUSANDS)
Benefits earned . . . . . . . . . . . . . . . . . . . $1,804 $1,865 $2,004
Interest cost on projected benefits . . . . . . . . . 6,780 7,185 7,367
Actual return on investments . . . . . . . . . . . . (15,552) (7,038) (12,834)
Net amortization/deferral . . . . . . . . . . . . . . 7,652 (2,000) 3,899
------ ------- -------
Cost of Company plan . . . . . . . . . . . . . . . . 684 12 436
Cost of other plans . . . . . . . . . . . . . . . . . 700 277 343
------ ------ ------
Net pension cost . . . . . . . . . . . . . . . . . . $1,384 $ 289 $ 779
====== ====== ======
The Plan had assets in excess of projected benefit obligations at
January 8, 1994. Plan investments include insurance contracts, fixed
income securities and marketable equity securities, including 35,000
shares of the Company's Class A common stock, which has a fair market
value of $1,063,000 at January 8, 1994 and 49,000 shares of Authentic
Fitness Corporation's common stock which has a fair market value of
$1,378,000 at January 8, 1994. No such shares were held at January 2,
1993.
The following table presents a reconciliation of the funded status
of the Plan at January 2, 1993 and January 8, 1994.
THE WARNACO GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 2, January 8,
1993 1994
---------- ----------
(in thousands)
Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . $94,787 $100,974
======= ========
Actuarial present value of benefit obligation:
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,311 90,567
Non-vested . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,731 1,718
------- -------
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . 81,042 92,285
Effect of projected future salary increases . . . . . . . . . . . . 6,630 8,396
------- ------
Projected benefit obligation . . . . . . . . . . . . . . . . . . . 87,672 100,681
------- -------
Plan assets in excess of projected benefit obligation . . . . . . . 7,115 293
Unrecognized net gain . . . . . . . . . . . . . . . . . . . . . . . 8,822 2,436
------ -------
Accrued pension cost of Company plan . . . . . . . . . . . . . . . 1,707 2,143
Accrued pension and profit sharing plan - others . . . . . . . . . 126 121
------- -------
Amounts accrued for employee retirement plans . . . . . . . . . . . $ 1,833 $ 2,264
======= =======
Assumptions used for Company pension plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . 8.75% 7.75%
Rate of increase in compensation levels . . . . . . . . . . . . 5.5% 5.25%
The actuarial assumption for long term rate of return on plan
assets is 9% for all periods presented.
OTHER POSTEMPLOYMENT BENEFITS
- -----------------------------
In addition to providing pension benefits, the Company has
defined benefit health care and life insurance planS that provide
postretirement benefits to retired employees and former directors. The
plans are contributory, with retiree contributions adjusted annually,
and contain cost sharing features including deductibles and
co-insurance. The Company does not fund postretirement benefits.
Effective January 3, 1993, the Company adopted Statement on
Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions ("SFAS No. 106") and, as a
result, recorded an expense for the cumulative effect of a change in the
method of accounting for postretirement benefits of $10,500,000 (without
income tax benefit). The periodic postretirement benefit cost for the
year ended January 8, 1994 consisted of service cost of $103,000 and
interest cost of $897,000. Previously, these benefits were expensed on
an as incurred basis. Such expense amounted to $700,000 in 1992 and
$762,000 in 1991.
The funded status of the plans as of January 2, 1993 (had the
company restated its opening balance sheet) and January 8, 1994 is as
follows:
January 2, January 8,
1993 1994
---- ----
(in thousands)
Accumulated postretirement
benefit obligation
Retirees $ 8,639 $ 8,764
Actives, fully eligible 186 218
Actives, not fully eligible 1,675 1,964
------- -------
Accumulated postretirement
benefit obligation 10,500 10,946
Unrecognized net loss from
experience differences and
change in assumptions - (398)
------- -------
Amount accrued for post-
retirement benefit costs $10,500 $10,548
======= =======
The weighted average annual assumed rate of increase in the per
capita costs of covered benefits (health care cost trend rate) is 13%
for years 1-4, 10% for years 5-9 and 5% for years thereafter. A 1%
increase in the trend rate assumption would increase the cumulative
effect adjustment by approximately $442,000 and would increase the
periodic postretirement benefit cost for the year ended January 8, 1994
by approximately $44,000. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation is 8.75%,
at January 2, 1993 and 7.75% at January 8, 1994, which is consistent
with the discount rates used in valuing the Company's pension plans.
Also, the Company sponsors defined contribution plans for
substantially all of its employees. Employees can contribute to the
plans, on a pre-tax basis, a percentage of their qualifying compensation
up to the legal limits allowed. No Company contributions are made to
such plans.
NOTE 9 - INVENTORIES
Inventories consist of the following:
January 2, January 8,
1993 1994
--------- ---------
(in thousands)
Finished goods . . . . . . . . . . . . . . . $ 104,973 $ 120,203
Work in process . . . . . . . . . . . . . . . 57,217 65,285
Raw materials . . . . . . . . . . . . . . . . 47,107 54,015
--------- ---------
$ 209,297 $ 239,503
========= =========
NOTE 10 - DEBT
Long-term debt consists of the following:
January 2, January 8,
1993 1994
---------- ----------
(in thousands)
Term Note due 1993-1999 .. . . . . . . . $300,000 $272,000
Capital lease Obligations. . . . . . . . 5,300 6,356
Other . . . . . . . . . .. . . . . . . . 16,834 16,333
-------- --------
322,134 294,689
Less: amounts due within one year . . . 44,533 49,171
-------- --------
$277,601 $245,518
======== ========
Approximate maturities of long-term debt are as follows:
AMOUNT
YEAR (IN THOUSANDS)
1994 . . . . . . . . . . . . . . . $ 49,171
1995 . . . . . . . . . . . . . . . 47,894
1996 . . . . . . . . . . . . . . . 47,845
1997 . . . . . . . . . . . . . . . 53,946
1998 . . . . . . . . . . . . . . . 50,791
1999-Thereafter . . . . . . . . . . . . 45,042
On October 14, 1993 the Company entered into a New Financing
Agreement (the "1993 Financing"), with substantially the same lenders as
those in the Company's previous financing agreement. The 1993 Financing
provides for a revolving loan of up to $200 million and a term note of
$300 million at the lender's base rate plus 0.5%. It also provides for
a LIBOR option at a rate of LIBOR plus 1.25%. LIBOR and base interest
rates change as the Company's debt ratings from S&P or Moody's ("Rating
Agencies") change.
Certain provisions in the 1993 refinancing require the Company to fix
the interest rate on up to $250 million of the Company's $500 million
facility. As a result, the Company entered into agreements which
effectively fix the LIBOR rate on $100 million at 5.690%, $50 million at
4.665%, and $100 million at 4.290%. Each agreement is for a term of two
years expiring in April 1994, October 1994, and January 1996, respectively.
The differential to be paid or received is accrued as interest rates change
and is recognized over the life of the agreements. The risk associated
with these agreements is the cost of replacing them at current market
rates, in the event of default by the counterparties. Management believes
that such risk is remote. In the event that the Company had to replace
such agreements, the cost to the Company would approximate $1,041,000.
Amounts drawn under the revolving credit facility are not limited
by any borrowing base, as the previous financing agreement required; and
although substantially all of the Company's assets continue to be
pledged as security against various financing agreements, the 1993
Financing provides for automatic and complete release of all collateral
upon the Company's achievement of investment grade ratings from the
Rating Agencies. The Company is also required to pay a .375% commitment
fee to the bank on its unused portion of the revolving credit facility
which at January 8, 1994, amounted to $95,168,000.
The 1993 Financing contains various covenants concerning capital
expenditures and additional debt and requires the Company to meet
certain defined financial tests, which as of January 8, 1994, were as
follows: (1) interest coverage ratio of 3 to 1; (2) minimum adjusted
net worth - $150,000,000; (3) fixed charge coverage ratio of 1.25 to 1;
(4) leverage ratio of 0.7 to 1 and (5) minimum earnings before interest,
taxes, depreciation and amortization (EBITDA) of $102,000,000. At
January 8, 1994, the Company was in compliance with all of the covenants
under the 1993 Financing.
The Company believes that the fair market value of its outstanding
variable rate debt is approximately equal to the outstanding principal
amount thereof as (i) substantially all of the Company's debt bears
interest at floating rates (market) and (ii) there are no prepayment
premiums required by any of the Company's material debt agreements.
On April 2, 1992 the Company entered into a Financing Agreement
(the "Financing") that provides for a revolving loan of up to $125
million and a term loan of $225 million (subsequently increased to $325
million) at the lender's base rate plus 1.5% for advances under the
revolving credit facility and base rate plus 2% for advances under the
term loan. The Financing also provides for a LIBOR option at a rate of
LIBOR plus 2.5% for the revolving loan (average interest rate
approximately 6.2% at January 2, 1993) and LIBOR plus 3% for the term
loan (average interest rate approximately 7.2% at January 2, 1993). The
revolving credit facility replaced the Amended and Restated Credit
Agreement dated April 19, 1991.
On October 1, 1992 the Company amended the Financing Agreement by
increasing the total term loan by $100 million to $325 million.
Proceeds from the term loan increase were used to redeem the entire
principal amount outstanding of the Company's 12 1/2% subordinated
debentures.
On May 27, 1993 the Company amended and restated its credit
agreement to increase the maximum amount of borrowing available under
its revolving loan from $125,000,000 to $200,000,000. Amounts drawn
under the facility may not exceed a borrowing base amount calculated by
reference to certain percentages of eligible inventories and accounts
receivable. Borrowings under the revolving loan bear interest at LIBOR
plus 2.5%.
Cash interest paid amounted to $66,517,000, $44,535,000 and
$37,069,000 in the years ended January 4, 1992, January 2, 1993 and
January 8, 1994, respectively.
The Company issues stand-by and commercial letters of credit
guaranteeing the Company's performance under certain purchase
agreements. The letters of credit are issued under the terms of the
1993 Financing and the L/C Facility (discussed below). Certain
obligations for letters of credit reduce amounts available under the
revolving loan portion of the 1993 Financing. At January 2, 1993 and
January 8, 1994 the Company had outstanding letters of credit totalling
approximately $18,589,000 and $16,159,000, respectively, of which
$18,589,000 and $4,309,000, respectively, reduce amounts available under
the revolving credit facilities outstanding at those dates.
In addition, on February 1, 1993 the Company entered into an
agreement with a bank to provide the Company with an additional credit
facility of $40,000,000 for the issuance of commercial letters of credit
(the "L/C Facility"). This facility was subsequently increased to $55
million, with a 90 day term draft acceptance sub-facility of $30
million. Letters of credit issued under the L/C Facility are secured by
the applicable inventory until such letters of credit are paid and
amounted to $11,850,000 at January 8, 1994. The L/C Facility is for a
term of one year and does not require the Company to pay a commitment
fee on the unused portion.
The Company is required to maintain compensating balances securing
certain credit arrangements. Such balances amounted to $111,000 and
$112,000 at January 2, 1993 and January 8, 1994, respectively. In
addition, the Company classifies lock box receipts not available until
the next business day as restricted cash. Such balances amounted to
$1,155,000 and $774,000 at January 2, 1993 and January 8, 1994,
respectively.
NOTE 11 - CAPITAL STOCK
On May 14, 1993, the stockholders of the Company approved
amendments to the Company's Amended and Restated Certificate of
Incorporation which authorized the issuance of up to 10,000,000 shares
of preferred stock with a par value of $.01 and increased the authorized
number of shares of common stock from 40,000,000 to 65,000,000.
On April 2, 1992, in conjunction with the Financing the Company
sold 5,000,000 shares of Class A Common Stock to the public at an
offering price of $34.50 per share. Net proceeds of the offering were
approximately $161,310,000 and were used to repay certain indebtedness
and redeem the Company's Class A and Class B Preferred Stock.
On October 21, 1991 the Company sold 6,900,000 shares of Class A
Common Stock to the public at an initial offering price of $20 per
share. Net proceeds from the offering totalled approximately
$123,735,000 and were used to repay the $83,000,000 of outstanding
Senior Discount Notes and reduce borrowings under the Restated Credit
Agreement.
Dividends to common stockholders are currently restricted
under certain covenants of the debt agreements, which require the
Company to achieve certain investment grade ratings from the Ratings
Agencies, prior to such dividends being declared and paid.
In 1988, the Company adopted the 1988 Employee Stock Purchase Plan
(the "Stock Purchase Plan"). The Stock Purchase Plan provides for sales
of up to 2,400,000 shares of Class A Common Stock of the Company to
certain key employees. At January 2, 1993 and January 8, 1994,
2,295,450 and 2,266,575 shares were issued and outstanding pursuant to
grants under the Stock Purchase Plan, respectively. The Stock Purchase
Plan is administered by the Employee Stock Purchase Plan Administrative
Committee of the Board of Directors which has full authority to
determine the number of shares granted or sold, vesting requirements,
voting requirements and conditions of any stock purchase agreement
between the Company and a key employee.
All shares were sold at amounts determined to be equal to the fair
market value of the shares. The shares are subject to vesting
requirements and restrictions on the transfer of ownership. In
addition, certain employees elected to pay for the shares granted by
executing a Promissory Note payable to the Company. Notes totalling
$8,394,000 at January 2, 1993 and January 8, 1994 are non-interest
bearing, while the balance earn interest at approximately 8%. The note
maturities range from five to ten years. Notes receivable from
employees are deducted from stockholders' equity and are principally
owed by officers and directors of the Company.
During 1991, the Company established The Warnaco Group, Inc. 1991
Stock Option Plan (the "Option Plan") and authorized the issuance of up
to 750,000 shares of Class A Common Stock to cover grants to be made
under the plan. The Option Plan is administered by a committee of the
Board of Directors of the Company which determines the number of stock
options to be granted under the Option Plan, and the terms and
conditions of such grants. The Option Plan provides for the granting of
qualified stock options within the meaning of Internal Revenue Code
Section 422 and non-qualified stock options. In addition, the Option
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 Option Plan. On February
14, 1992, the Company granted options pursuant to the Option Plan for
406,000 shares of Class A Common Stock at an exercise price of $34.625
per share, which was the fair market value at that date. On February
14, 1993, 264,000 options vested. The remainder vest over a three year
period. On February 11, 1993 the Company granted options pursuant to
the Option Plan for 325,000 shares of common stock at an exercise price
of $36.625 per share, which was the fair market value at that date.
Options to purchase 200,000 shares vested immediately. The remainder
vest over a four year period.
On May 14, 1993, the stockholders approved the adoption of The
Warnaco Group, Inc. 1993 Stock Plan ("Stock Plan"). The Stock Plan
provides for the issuance of up to 1,000,000 shares of common stock of
the Company through awards of stock options, stock appreciation rights,
performance awards, restricted stock units and stock unit awards. The
Compensation Committee of the Board of Directors has the sole and
complete authority to make awards under the Stock Plan and to determine
the specific terms and conditions of such awards, except that the
exercise price of any award may not be less than the fair market value
of the Company's common stock at the date of the grant.
On August 12, 1993, the Company granted options pursuant to the
option plan for 880,000 shares of common stock at an exercise price of
$31.625 per share, which was the fair market value at that date.
Options to purchase 500,000 shares vested immediately. The remainder
vest over a four-year period. At January 8, 1994, no options had been
exercised under the Option and Stock Plans. The Company has reserved
1,838,425 shares of Class A common stock for the above plans.
NOTE 12 - LEASES
Rental expense was $11,720,000, $13,942,000 and $14,213,000 for the
years ended January 4, 1992, January 2, 1993 and January 8, 1994,
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 8, 1994.
Rental Payments
-------------------
(in thousands)
Real Estate Equipment
----------- ---------
1994 . . . . . . . . . . $ 8,785 $2,804
1995 . . . . . . . . . . 7,454 2,416
1996 . . . . . . . . . . 6,258 1,999
1997 . . . . . . . . . . 5,423 1,601
1998 . . . . . . . . . . 5,392 1,441
1999-thereafter . . . . . . . 23,650 5,745
NOTE 13 - QUARTERLY RESULTS OF OPERATIONS
The following summarizes the unaudited quarterly results of operations
of the Company for the 1992 and 1993 fiscal years.
Year ended January 2, 1993
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Net revenues . . . . . . . . . . . . . . . . . . . $130,518 $139,201 $170,300 $185,045
Gross profit . . . . . . . . . . . . . . . . . . . 49,262 44,932 62,318 62,802
Income from continuing operations . . . . . . . . . 4,415 1,823 15,432 25,894
Discontinued operations . . . . . . . . . . . . . . --- --- --- (7,443)
Extraordinary items . . . . . . . . . . . . . . . . (46,454) --- --- (11,122)
Net income (loss) . . . . . . . . . . . . . . . . . ($42,039) $ 1,823 $ 15,432 $ 7,239
Income from continuing operations per common share $ 0.20 $ 0.02 $ 0.76 $ 1.27
Amounts have not been restated to reflect the women's accessories
business as discontinued as such amounts are not material to the results
of operations for any of the first three quarters of fiscal 1992.
Year ended January 8, 1994
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Net revenues . . . . . . . . . . . . . . . . . . . $156,750 $158,329 $183,957 $204,733
Gross profit . . . . . . . . . . . . . . . . . . . 54,797 48,095 62,699 70,816
Income from continuing operations . . . . . . . . . 10,752 5,519 17,206 19,776
Extraordinary items . . . . . . . . . . . . . . . . --- --- --- (18,637)
Cumulative effect of change in method of accounting
for postretirement benefits . . . . . . . . . . . . (10,500) --- --- ---
======== ======== ======== ========
Net income . . . . . . . . . . . . . . . . . . . . $ 252 $ 5,519 $ 17,206 $ 1,139
======== ======== ======== ========
Income from continuing
operations per common share . . . . . . . . . . . $0.54 $0.28 $0.87 $1.00
======== ======== ======== ========
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED)
On January 17, 1994, one of the Company's distribution facilities
suffered damage resulting from an earthquake. The Company had obtained
insurance coverage which will substantially cover the losses from this
damage, therefore management does not believe that this event will have a
material effect on the consolidated financial position of the Company nor
significantly impact its results of operations or cash flows.
On March 14, 1994, the Company acquired certain assets and worldwide
trademarks of Calvin Klein, Inc's. men's underwear business and licensed
the trademark for men's accessories. In addition, certain assets and
worldwide trademarks of Calvin Klein Inc.'s women's intimate apparel
business will be acquired by the Company upon the expiration of an
existing license which expires on December 31, 1994. Also, the Company
acquired a 5-year license to manufacture Calvin Klein Men's accessories.
The license has a five-year renewal period exercisable solely at the
Company's option. The total consideration to Calvin Klein, Inc.
approximates $62,500,000 including $38,500,000 in cash and $24,000,000 in
common stock.
THE WARNACO GROUP, INC.
VALUATION & QUALIFYING ACCOUNTS & RESERVES
(in thousands)
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions(1) Other End of Year
- ----------- ------- -------- ------------- ----- -----------
Year Ended January 4, 1992
Allowance for doubtful accounts . . . . . $ 874 $1,920 $ 801 $ $1,993
====== ====== ====== ====== ======
Year Ended January 2, 1993
Allowance for doubtful accounts . . . . . $1,993 $ 913 $1,136 $ $1,770
====== ====== ====== ====== ======
Year Ended January 8, 1994
Allowance for doubtful accounts . . . . . $1,770 $1,199 $1,556 $ $1,413
====== ====== ====== ====== ======
_________________________
(1) Uncollectible accounts written off, net of recoveries.
The above reserves are deducted from the related assets in the
consolidated balance sheets.
SCHEDULE IX
THE WARNACO GROUP, INC.
SHORT-TERM BORROWINGS
A summary of information relative to the Group's short-term
borrowings (notes payable to banks) follows:
Year Ended Year Ended Year Ended
January 4, January 2, January 8,
1992 1993 1994
------------ ------------ ------------
(in thousands)
Balance at end of year . . . . . . . . $5,712 $66,234 $106,342
Maximum borrowings . . . . . . . . . . 8,370 99,841 143,672
Average borrowings . . . . . . . . . . 5,218 74,705 114,561
Average interest rate for the year . . 17.1% 7.8% 6.7%
Average rate at end of year . . . . . . 15.6% 6.3% 4.9%
Average borrowings are calculated based upon balances outstanding
at month end. Average interest rate is calculated by dividing interest
expense by average borrowing.
The borrowings noted above for the year ended January 4, 1992
represent revolving credit agreements for the Company's European and
Mexican subsidiaries.
The borrowings noted above for the years ended January 2, 1993 and
January 8, 1994 include borrowings under the Company's United States
revolving credit facility and borrowings by the Company's European and
Mexican subsidiaries.
SCHEDULE X
THE WARNACO GROUP, INC.
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
All amounts set forth were charged to costs and expenses:
Year Ended Year Ended Year Ended
January 4, January 2, January 8,
1992 1993 1994
------------ ------------ ------------
(in thousands)
Depreciation . . . . . . . . . . . . $10,993 $10,352 $ 9,210
Royalties . . . . . . . . . . . . . . 9,273 10,558 13,406
Advertising costs . . . . . . . . . . 16,704 20,255 30,383
Amortization of intangible assets . . 9,834 9,418 9,315
Amounts for maintenance and repairs and real and personal property
taxes are not presented as such amounts are each less than 1% of total
net revenues.
Exhibit Sequentially
Number Exhibit Description Numbered Page
- -------- ------------------- -------------
11.1 Calculation of Income (Loss) per common
share.
24.1(a) Consent of Independent Auditors
24.1(b) Consent of Independent Auditors