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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 1, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10857
The Warnaco Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4032739
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Park Avenue
New York, New York 10016
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 661-1300
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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 $0.01 per share New York Stock Exchange
Convertible Trust Originated Preferred Securities* New York Stock Exchange
* Issued by Designer Finance Trust. Payments of distributions and payment on
liquidation or redemption are guaranteed by the registrant.
Securities registered pursuant to Section 12(g) of the act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Class A Common Stock, the only voting
stock of the registrant issued and outstanding, held by non-affiliates of the
registrant as of March 29, 2000, was approximately $522,594,325.
The number of shares outstanding of the registrant's Class A Common Stock
as of March 29, 2000: 53,229,388.
Documents incorporated by reference: The definitive Proxy Statement of The
Warnaco Group, Inc. relating to the 2000 Annual Meeting of Stockholders is
incorporated by reference in Part III hereof.
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PART I
Item 1. Business.
(a) General Development of Business.
The Warnaco Group, Inc. (the "Company"), a Delaware corporation, was
organized in 1986 for the purpose of acquiring the outstanding shares of Warnaco
Inc. ("Warnaco"). As a result of the Company's acquisition of Warnaco, Warnaco
became a wholly-owned subsidiary of the Company.
The Company and its subsidiaries design, manufacture and market a broad
line of women's intimate apparel, such as bras, panties, sleepwear, shapewear
and daywear; men's apparel, such as sportswear, jeanswear, khakis, underwear and
accessories, women's and junior's apparel, such as sportswear and jeanswear and
active apparel, such as swimwear, swim accessories and fitness apparel all of
which are sold under a variety of internationally recognized owned and licensed
brand names. During fiscal 1999, the Company acquired Authentic Fitness
Corporation ("Authentic Fitness") which designs, manufactures and markets
swimwear, swim accessories and active fitness apparel under the Speedo'r',
Speedo Authentic Fitness'r', Catalina'r', Anne Cole'r', Cole of California'r',
Ralph Lauren'r', Polo Sport Ralph Lauren'r', Polo Sport-RLX'r', Oscar de la
Renta'r', Sunset Beach'r', and Sandcastle'r' brand names and activewear and
swimwear under the White Stag'r' brand name. In fiscal 1999, the Company also
acquired Penhaligon's Ltd., a United Kingdom based retailer of perfumes, soaps,
toiletries and other products for men and women; IZKA'r', a French retailer of
seam-free and seamless women's intimate apparel products; A.B.S. by Allen
Schwartz'r', a leading contemporary designer of casual sportswear and dress
lines, sold through better department and specialty stores and Chaps Canada, the
Canadian Chaps licensee for men's sportswear. In 1999, the Company also entered
into an exclusive license agreement with Weight Watchers International, Inc.,
("Weight Watchers") to market shapewear and activewear for the mass market under
the Weight Watchers'r' label, successfully launching its Shapewear line in June
1999. During fiscal 1998, the Company acquired the sub-license to produce Calvin
Klein'r' jeans and jeans-related products for children in the United States,
Mexico and Central and South America. The Company also acquired the sub-license
to distribute Calvin Klein jeans, jeans-related products and khakis for men and
women in Mexico, Central America and Canada. In addition, the Company
discontinued several underperforming product lines and styles. During fiscal
1997, the Company acquired Designer Holdings Ltd. ("Designer Holdings"), which
develops, manufactures and markets designer jeanswear and sportswear for men,
women and juniors, and holds a 40-year extendable license from Calvin Klein,
Inc. to develop, manufacture and market designer jeanswear, khakis and jeans
related sportswear collections in North, South and Central America under the
Calvin Klein Jeans'r', CK/Calvin Klein Jeans'r' and CK/Calvin Klein/Khakis'r'
labels.
The Company's growth strategy is to continue to capitalize on its highly
recognized brand names worldwide while broadening its channels of distribution
and improving manufacturing efficiencies and cost controls. The Company
attributes the strength of its brand names to the quality, fit and design of its
products which have developed a high degree of consumer loyalty and a high level
of repeat business. The Company operates in three business segments, Intimate
Apparel, Sportswear and Accessories and Retail Stores, which accounted
for 44.6%, 48.4% and 7.0%, respectively, of net revenues in fiscal 1999, and
47.4%, 46.7% and 5.9%, respectively, of the Company's gross profit for the same
period.
The Intimate Apparel Division designs, manufactures and markets moderate to
premium priced intimate apparel for women under the Warner's'r', Olga'r', Calvin
Klein'r', Lejaby'r', Van Raalte'r', Weight Watchers'r', Fruit of the Loom'r' and
Bodyslimmers'r' brand names. In addition, the Intimate Apparel Division designs,
manufactures and markets men's underwear under the Calvin Klein brand name. The
Intimate Apparel Division is the leading marketer of women's bras to department
and specialty stores in the United States, as measured by the NPD Group, Inc.
("NPD"), accounting for 39.0% of the women's bra
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market share in the 1999 calendar year, up 1.5% over 1998's 37.5%. The Warner's
and Olga brand names, which are owned by the Company, have been in business for
126 and 59 years, respectively. All of the Company's Intimate Apparel brands
are owned with the exception of Fruit of the Loom bras and Weight Watchers,
which are licensed.
The Intimate Apparel Division's strategy is to increase its channels of
distribution and expand its highly recognized brand names worldwide. In February
1996, the Company purchased the GJM Group of Companies ("GJM") from Cygne
Designs, Inc. GJM is a private label maker of sleepwear and intimate apparel.
The acquisition provided the Company with design, marketing and manufacturing
expertise in the sleepwear business, broadening the Company's product line and
contributing to the Company's base of low cost manufacturing capacity. In June
1996, the Company purchased Bodyslimmers which also increased the Company's
presence in a growing segment of the intimate apparel market. Bodyslimmers is
a leading designer and manufacturer of body slimming undergarments targeted at
aging baby boomers, In July 1996, the Company acquired the Lejaby/Euralis Group
of Companies ("Lejaby"). Lejaby is a leading maker of intimate apparel in
Europe. The Lejaby acquisition increased the size of the Company's operations
in Western Europe and provides the Company with an opportunity to expand the
distribution of its products in the critical European market.
In 1991, the Company entered into a license agreement with Fruit of the
Loom, Inc. for the design, manufacture and marketing of moderate priced bras,
daywear and other related items to be distributed through mass merchandisers,
such as Wal-Mart and KMart, under the Fruit of the Loom brand name and has
built its market share to 4.4% in the mass merchandise market as measured by
NPD. This license was renewed by the Company in 1994 and was further extended
and renewed in 1998. In late 1994, the Company purchased the Van Raalte
trademark for $1.0 million and launched an intimate apparel line through Sears
stores in July 1995. In fiscal 1999, the Company entered into the license
agreement with Weight Watchers to design, manufacture and market of shapewear
and activewear under the Weight Watchers brand name.
The Sportswear and Accessories Division designs, manufactures, imports and
markets moderate to premium priced men's apparel and accessories under the Chaps
by Ralph Lauren'r', Calvin Klein and Catalina brand names; better to premium
priced women's and junior's apparel under the Calvin Klein and A.B.S. by Allen
Schwartz'r' brand names; and moderate to better active apparel under the Speedo,
Speedo Authentic Fitness, Catalina, Anne Cole, Cole of California, Ralph Lauren,
Polo Sport Ralph Lauren, Polo Sport-RLX, Oscar de la Renta, Sunset Beach and
Sandcastle brand names. During fiscal 1999, the Company acquired Authentic
Fitness Corporation which designs, manufactures and markets swimwear, swim
accessories and active fitness apparel under the above listed brand names and
activewear and swimwear under the White Stag brand name. In fiscal 1999, the
Company also acquired A.B.S. by Allen Schwartz, a leading contemporary designer
of casual sportswear and dress lines, sold through better department and
specialty stores and Chaps Canada, the Canadian Chaps licensee for men's
sportswear. In December 1997, the Company completed the acquisition of Designer
Holdings which develops, manufactures and markets designer jeanswear and jeans
related sportswear for men, women and juniors under the Calvin Klein Jeans,
CK/Calvin Klein Jeans and CK/Calvin Klein/Khakis labels. The Calvin Klein Jeans,
CK/Calvin Klein Jeans and CK/Calvin Klein/Khakis brands complement the Company's
existing product lines, including Calvin Klein underwear for men and women and
Calvin Klein men's accessories. During fiscal 1998, the Company expanded the
Calvin Klein jeanswear business by acquiring the sub-license to produce Calvin
Klein jeans and jeans-related products for children in the United States, Mexico
and Central and South America. In addition, the Company acquired the sub-license
to distribute Calvin Klein jeans, jeans-related products and khakis for men and
women in Mexico, Central America and Canada. Chaps by Ralph Lauren has increased
its net revenues by approximately 700% since 1991 from $39.0 million to $317.4
million in 1999, predominantly by expanding product classifications and updating
its styles. In 1995, the Company extended its Chaps by Ralph Lauren license
through December 31, 2008. The Sportswear and Accessories Division's strategy is
to build on the
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strength of its brand names and eliminate those businesses which generate a
profit contribution below the Company's required return. Consistent with this
strategy, the Company has eliminated several underperforming brands since 1992,
including its Hathaway business, which was sold to a group of investors in
November 1996.
The Company has been expanding its brand names throughout the world by
increasing the activities of its wholly-owned operating subsidiaries in Canada,
Mexico, Europe and Asia. International operations generated $338.2 million, or
16% of the Company's net revenues in fiscal 1999, compared with $319.7 million,
or 16.5%, of the Company's net revenues in fiscal 1998, and $290.4 million, or
20.2%, of the Company's net revenues in fiscal 1997.
The Company's business strategy with respect to the outlet stores in its
Retail Stores Division is to provide a channel for disposing of the Company's
excess and irregular inventory. The Company does not manufacture or source
products exclusively for its outlet stores. The Company had 124 outlet stores
at the end of fiscal 1999 (including 9 stores in Canada, 12 stores in the
United Kingdom, one in France, and one in Spain) compared with 114 stores at
the end of fiscal 1998 and 106 stores at the end of fiscal 1997. During fiscal
1998, the Company announced plans to close 13 underperforming stores which
were all closed by the second quarter of 1999. In fiscal 1997, 35 stores were
added as a result of the acquisition of Designer Holdings. As a result of the
acquisition of Authentic Fitness in fiscal 1999, the Company operates 142
Speedo Authentic Fitness'r' stores. The Company's strategy for its full-price
Speedo Authentic Fitness stores is to offer a complete line of Speedo and
Speedo Authentic Fitness products that sell throughout the year.
The Company continues to expand its channels of distribution to include
electronic channels of distribution and is planning to commence marketing of its
products on the Internet in fiscal 2000. To facilitate this opportunity, the
Company in fiscal 1998 and fiscal 1999 invested $7.7 million to acquire a 3%
equity interest in Interworld Corporation, a leading provider of E-Commerce
software systems and other applications for electronic commerce sites. This
investment was sold during the first quarter of fiscal 2000 for approximately
$50.4 million, realizing a $42.7 million gain.
The Company's products are distributed to over 16,000 customers operating
more than 26,000 department, specialty and mass merchandise stores, including
such leading retailers in the United States as Dayton-Hudson, Macy's and other
units of Federated Department Stores, J.C. Penney, The May Department Stores,
Kohl's, Dillards, Sears, Kmart and Wal-Mart and such leading retailers in Canada
as The Hudson Bay Company and Zeller's. The Company's products are also
distributed to such leading European retailers as House of Fraser, Harrods,
Galeries Lafayette, Au Printemps, Karstadt, Kaufhof and El Corte Ingles.
(b) Financial Information about Industry Segments.
The Company operates within three business segments. One customer
accounted for 10.2% of the Company's net revenues in the three years ended in
fiscal 1999. While important, the loss of such customer would not have a
material adverse effect on the Company taken as a whole. See Note 6 to the
Consolidated Financial Statements.
(c) Narrative Description of Business.
The Company designs, manufactures and markets a broad line of women's
intimate apparel, and men's apparel and accessories sold under a variety of
internationally recognized brand names owned or licensed by the Company. The
Company operates three divisions, Intimate Apparel, Sportswear and Accessories
and Retail Stores, which accounted for 44.6%, 48.4% and 7.0% respectively, of
net revenues in fiscal 1999.
4
Intimate Apparel
The Company's Intimate Apparel Division designs, manufactures and markets
women's intimate apparel, which includes bras, panties, sleepwear, shapewear and
daywear. The Company also designs and markets men's underwear. The Company's bra
brands accounted for 39.0% of women's bra market share in the 1999 calendar year
in department and specialty stores in the United States, up 1.5% over 1998's
37.5% as measured by NPD. Management considers the Intimate Apparel Division's
primary strengths to include its strong brand recognition, product quality and
design innovation, low cost production, strong relationships with department and
specialty stores and its ability to deliver its merchandise rapidly. Building
on the strength of its brand names and reputation for quality, the Company has
historically focused its intimate apparel products on the upper moderate to
premium priced range distributed through leading department and specialty
stores.
The intimate apparel division markets its lines under the following brand
names:
Brand Name Price Range Type of Apparel
---------- ----------- ---------------
Lejaby better to premium intimate apparel
Bodyslimmers better to premium intimate apparel
Calvin Klein better to premium intimate apparel/men's underwear
Olga better intimate apparel
Warner's upper moderate to better intimate apparel
White Stag moderate intimate apparel
Van Raalte moderate intimate apparel
Fruit of the Loom moderate intimate apparel
Weight Watchers moderate intimate apparel
The Company owns the Warner's, Olga, Calvin Klein (underwear and intimate
apparel), Lejaby, Bodyslimmers and Van Raalte brand names and trademarks which
account for approximately 84% of the Company's Intimate Apparel net revenues.
The Company licenses the other brand names under which it markets its product
lines, primarily on an exclusive basis. The Company also manufactures intimate
apparel on a private and exclusive label basis for certain leading specialty and
department stores. The Warner's and Olga brands have been in business for 126
years and 59 years, respectively.
In August 1991, the Company entered into an exclusive license agreement
with Fruit of the Loom, Inc. ("Fruit of the Loom") for the design, manufacture
and marketing of moderate priced bras which are distributed through mass
merchandisers, such as Wal-Mart and Kmart, under the Fruit of the Loom brand
name. The license agreement has since been extended to include bodywear,
coordinating panties, fashion sleepwear, as well as coordinated fashion sets
(bras and panties) and certain control bottoms. The Company began shipping Fruit
of the Loom products in June 1992 and has built its current market share to 4.4%
as measured by NPD in the mass merchandise market. The agreement with Fruit of
the Loom has allowed the Company to enter the mass merchandise market, which is
growing at a rate faster than the department and specialty store market.
In March 1994, the Company acquired the worldwide trademarks, rights and
business of Calvin Klein men's underwear, and effective January 1, 1995, the
worldwide trademark, rights and business of Calvin Klein women's intimate
apparel. The purchase price was approximately $60.9 million and consisted of
cash payments of $33.1 million in fiscal 1994, $5.0 million in fiscal 1995 and
the issuance of 1,699,492 shares of the Company's common stock with a then fair
market value of $22.8 million for such shares. Since that time, the Company has
acquired the business of several former international licensees and distributors
of Calvin Klein underwear products including those in Canada, Germany, Italy,
Portugal,
5
Scandinavia and Spain. In addition, the Company entered into an exclusive
worldwide license agreement to produce men's accessories and small leather goods
under the Calvin Klein label. The Calvin Klein underwear brand accounted for net
revenues of $331.1 million in fiscal 1999, an increase of 7.3% over the $308.7
million recorded in fiscal 1998, due to higher men's sales in the U.S. market.
In fiscal 1996, the Company acquired GJM, a private label maker of
sleepwear and intimate apparel. The acquisition provided the Company with
design, marketing and manufacturing expertise in the sleepwear business,
broadening the Company's product line and contributing to the Company's base of
low cost manufacturing capacity. In June 1996, the Company purchased
Bodyslimmers, a leading designer and manufacturer of body slimming undergarments
targeted at aging baby boomers. The purchase of Bodyslimmers increased the
Company's presence in a growing segment of the intimate apparel market. In July
1996, the Company acquired Lejaby. Lejaby is a leading maker of intimate apparel
in Europe. The Lejaby acquisition increased the size of the Company's operations
in Western Europe and provides the Company with an opportunity to expand the
distribution of its products, including Calvin Klein, in the critical
European market. These three divisions contributed $196.3 million in net
revenues for fiscal 1999, or 20.8% of the Company's Intimate Apparel net
revenues, compared to $170.3 million or 18.0% of the Company's Intimate Apparel
net revenue in fiscal 1998. In fiscal 1999, the Company entered into the Weight
Watchers license agreement.
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, seamless molded cups for smooth look bras, the cotton-Lycra bra
and the sports bra. The Company also introduced the use of hangers and
certain point-of-sale hang tags for in-store display of bras, which was
a significant change from marketing bras in boxes, and enabled women, for
the first time, to see the product in the store. The Company's product
innovations have become standards in the industry.
The Company believes that a shift in consumer attitudes is stimulating
growth in the intimate apparel industry. Women increasingly view intimate
apparel as a fashion-oriented purchase rather than as a purchase of a basic
necessity. The shift has been driven by the expansion of intimate apparel
specialty stores and catalogs, and an increase in space allocated to intimate
apparel by department stores. The Company believes that it is well-positioned to
benefit from increased demand for intimate apparel due to its reputation for
forward-looking design, quality, fit and fashion and to the breadth of its
product lines at a range of price points. Over the past five years, the Company
has further improved its position by continuing to introduce new products under
its Warner's and Olga brands in the better end of the market, by obtaining the
license from Weight Watchers to produce shapewear and activewear, by acquiring
the Calvin Klein trademarks for premium priced women's intimate apparel and
better priced men's underwear, by purchasing the Van Raalte trademark for
introduction of an intimate apparel line through Sears stores in July 1995, and
by making strategic acquisitions to expand product lines and distribution
channels such as GJM, Lejaby and Bodyslimmers in 1996. The Company has further
improved its position by continuing to strengthen its relationships with its
department store, specialty store and mass merchandise customers.
The Intimate Apparel Division's net revenues have increased at a compound
annual growth rate of 13.6% since 1991, to $943.4 million in fiscal 1999, as the
Company has increased its penetration with existing accounts, expanded sales to
new customers such as Van Raalte to Sears and Fruit of the Loom and Weight
Watchers to mass merchandisers such as Wal-Mart and Kmart and broadened its
product lines to include men's underwear. The Company believes that it is one of
the lowest-cost producers of intimate apparel in the United States, producing
approximately eight million dozen intimate apparel products per year.
6
The Company also sees opportunities for continued growth in the Intimate
Apparel Division for bras specifically designed for the "full figure" market, as
well as in its panty and daywear product lines. To meet the needs of the
customer profile of this market acquired Bodyslimmers in June 1996 to provide
important brand name recognition in this growing segment of the intimate apparel
market for department and specialty stores and entered into the license
agreement with Weight Watchers to market shapewear for the mass market,
and in June 1999 began shipping product.
The Intimate Apparel Division has subsidiaries in Canada and Mexico in
North America, in the United Kingdom, France, Belgium, Ireland, Spain, Italy,
Austria, Switzerland and Germany in Europe, in Costa Rica, the Dominican
Republic and Honduras in Central America and in the Philippines, Sri Lanka, the
People's Republic of China, Japan and Hong Kong in Asia. International sales
accounted for approximately 28.7% of the Intimate Apparel Division's net
revenues in fiscal 1999 compared with 31.1% in fiscal 1998 and 30.1% in fiscal
1997. The decrease in International revenues in fiscal 1999 is primarily due to
the Company's decision to discontinue business with Marks & Spencer in the
U.K. market, and the full year effect of lower shipment levels for Calvin Klein
products in Russia and the Far East due to currency devaluation and economic
downturns. The increase in International revenues in fiscal 1998 is due to
higher Lejaby and Bodyslimmers revenues partially offset by lower shipment
levels for Calvin Klein products in Russia and the Far East. The Company has
acquired the businesses of several former distributors and licensees of its
Calvin Klein underwear products in previous years, including those in Canada,
Germany, Italy, Portugal, Scandinavia and Spain. The Company's objective in
acquiring its former licensees and distributors is to expand its business in
foreign markets through a coordinated set of product offerings, marketing and
pricing strategies and by consolidating distribution to obtain economies of
scale. Net revenues attributable to the international divisions of the Intimate
Apparel Division were $270.9 million, $293.4 million and $282.9 million in
fiscal 1999, 1998 and 1997, respectively. Management's strategy is to increase
its market penetration in Europe and to open additional channels of
distribution.
The Company's intimate apparel products are manufactured principally in
the Company's facilities in North America, Central America, the Caribbean Basin,
the United Kingdom, France, Ireland, Morocco (joint venture), the Philippines,
Sri Lanka and the People's Republic of China (joint venture). Over the last six
years, the Company has opened or expanded 12 manufacturing facilities. A new
cutting facility and distribution facility in Mexico will be opened in fiscal
2000. In connection with the start-up of these facilities, the Company incurred
substantial direct and incremental plant start-up costs to recruit and train
over 39,000 workers.
Although the Intimate Apparel Division generally markets its product lines
for three retail selling seasons (spring, fall and holiday), its revenues are
somewhat seasonal. Approximately 54% of the Intimate Apparel Division's net
revenues and 47% of the division's operating income were generated during the
second half of the 1999 fiscal year.
Sportswear and Accessories
The Sportswear and Accessories Division designs, manufactures, imports and
markets moderate to better priced men's and boy's jeanswear, khakis and
sportswear, better to premium priced men's accessories, moderate to better
priced dress shirts and neckwear, better to premium priced women's and junior's
sportswear and jeanswear and moderate to better active apparel. Management
considers the Sportswear and Accessories Division's primary strengths to
include its strong brand recognition, product quality, reputation for fashion
styling, strong relationships with department and specialty stores and its
ability to deliver merchandise rapidly.
7
The Sportswear and Accessories Division markets its lines under the
following brand names:
Brand Name Price Range Type of Apparel
---------- ----------- ---------------
Calvin Klein better/premium Men's, women's, juniors and children's
designer jeanswear, khakis and jeans related
sportswear and men's accessories
A.B.S by Allen Schwartz better/premium Women's and junior's casual sportswear and
dresses
Ralph Lauren better/premium Women's and girls swimwear
Polo Sport Ralph Lauren better/premium Women's and girls swimwear
Polo Sport-RLX better/premium Women's and girls swimwear
Oscar de la Renta better/premium Women's swimwear
Anne Cole better/premium Women's swimwear
Speedo better Men's and women's competitive swimwear and
swim accessories, men's swimwear and
coordinating T-shirts, women's fitness
swimwear, Speedo Authentic Fitness
activewear and children's swimwear
Cole of California upper moderate/better Women's swimwear
Sandcastle upper moderate/better Women's swimwear
Sunset Beach upper moderate/better Junior's swimwear
Chaps by Ralph Lauren upper moderate Dress shirts, neckwear, knit and woven
sport shirts, sweaters, sportswear and
bottoms
Catalina moderate Men's and women's sportswear
Women's swimwear
White Stag moderate Women's swimwear and activewear
The Calvin Klein, Chaps by Ralph Lauren, Speedo, Oscar de la Renta,
Anne Cole, Ralph Lauren, Polo Sport Ralph Lauren and Polo Sport-RLX brand
names are licensed on an exclusive basis by the Company.
The Sportswear and Accessories Division's strategy is to build on the
strength of its brand names, strengthen its position as a global apparel company
and eliminate those businesses which generate a profit contribution below the
Company's required return. In order to improve profitability, the Company (i)
sold its Hathaway dress shirt business in November 1996, (ii) acquired Designer
Holdings during the fourth quarter of 1997, (iii) acquired the sub-license to
produce Calvin Klein jeans and jeans-related products for children in the United
States, Mexico and Central and South America in June 1998, (iv) acquired the
sub-license to distribute Calvin Klein jeans, jeans-related products and khakis
for men and women in Mexico, Central America and Canada in June 1998, (v)
acquired A.B.S by Allen Schwartz during the third quarter of fiscal 1999, (vi)
acquired the licensee for Chaps Canada in the second quarter of fiscal 1999, and
(vii) acquired Authentic Fitness during the fourth quarter of fiscal 1999. The
Company recorded losses associated with exiting the Hathaway business of
approximately $47.4 million in 1996 and $14.5 million in fiscal 1997, consisting
of losses related to the write-down of the Hathaway assets, including intangible
assets and operating losses incurred prior to the disposition. The acquisition
of Designer Holdings contributed $634.1 million and $537.8 million to net
revenues in fiscal 1999 and 1998, respectively.
Despite its strategic decisions to discontinue underperforming brands
which account for approximately $140.0 million of annualized net revenues since
1991, the Sportswear and Accessories Division's net revenues have increased at a
compound annual growth rate of 24.2% since 1991 to
8
$1,022.8 million in fiscal 1999. The reduction in net revenues from discontinued
brands has been more than offset by the success of the Chaps by Ralph Lauren
brand which has increased its net revenues by approximately 700% since fiscal
1991 to $317.4 million in fiscal 1999, and the addition of the Calvin Klein
jeanswear and jeans related sportswear brands in 1997 and 1998.
Sportswear. In 1989, the Company began repositioning its Chaps by Ralph
Lauren product lines by updating its styling, which has generated significant
net revenue increases, as mentioned above. In 1993, the Company entered into a
license agreement to design men's and women's sportswear and men's dress shirts
and furnishings bearing the Catalina trademark. Catalina products are sold
through the mass merchandise segment of the market, generating royalty income of
approximately $4.4 million and $4.9 million in fiscal 1999 and 1998,
respectively. In 1997, the Company acquired Designer Holdings Ltd., which
develops, manufactures and markets Calvin Klein designer jeanswear and
sportswear for men, women and juniors in North, South and Central America.
During 1998, the Company expanded upon the Calvin Klein jeanswear business by
acquiring sub-licenses to distribute Calvin Klein jeans and jeans-related
products for children in the United States, Mexico and Central and South America
and Calvin Klein jeans, jeans-related products and khakis for men and women in
Mexico, Central America and Canada.
In 1999, the Company acquired Authentic Fitness which designs,
manufacturers and markets swimwear, swim accessories and active fitness apparel
for men, women and children in North America under the Speedo brand and
worldwide under all of its other brands. In addition, the Company also acquired
A.B.S. by Allen Schwartz which designs, manufactures and markets women's and
junior's casual sportswear and dresses and Chaps Canada which imports and
markets men's sportswear for the Canadian market under the Chaps by Ralph Lauren
brand name.
Accessories. The Sportswear and Accessories Division markets men's small
leather goods and belts and soft side luggage under the Calvin Klein brand name
pursuant to a worldwide license. The first shipments of Calvin Klein accessories
were made in the third quarter of fiscal 1995 to United States customers. The
line has already grown significantly, accounting for approximately $22.3 million
and $19.3 million of net revenues in fiscal 1999 and 1998, respectively.
Management believes that one of the strengths of its accessories lines is the
high level of international consumer recognition associated with the Calvin
Klein label. The Company's strategy is to expand the accessories business, which
has consistently generated higher margins than other sportswear products.
International sales accounted for approximately 4.3% of net revenues of
the Sportswear and Accessories Division in fiscal 1999, compared with 1.6% and
1.0% in fiscal 1998 and 1997, respectively. Net revenues attributable to
international operations of the Sportswear and Accessories Division were $44.4
million, $14.0 million and $4.1 million in fiscal 1999, 1998 and 1997,
respectively. The increase in international sales in fiscal 1999 and 1998
reflects the continued expansion of Calvin Klein Accessories as well as the
acquisition of Calvin Klein Jeans in Mexico. The Company expects to generate
future revenue from international sales of basic Calvin Klein jeanswear,
khakis, jeans related sportswear and accessories.
Sportswear apparel (knit shirts, sweaters and other apparel) is sourced
principally from the Far East. Dress shirts are sourced from the Far East and
the Caribbean Basin. Accessories are sourced from the United States, Europe and
the Far East. Neckwear is sourced primarily from the United States.
The Sportswear and Accessories Division, similar to the Intimate Apparel
Division, generally markets its apparel products for three retail selling
seasons (spring, fall and holiday). New styles, fabrics and colors are
introduced based upon consumer preferences, market trends and to coincide with
the appropriate retail selling season. Sales of the Sportswear and Accessories
Division's product lines follow individual seasonal shipping patterns ranging
from one season to three seasons, with multiple releases in some of the
division's more fashion-oriented lines. Consistent with industry and consumer
buying
9
patterns, approximately 57.0% of the Sportswear and Accessories Division's net
revenues and 56% of the Sportswear and Accessories Division's operating income
were generated in the second half of 1999, reflecting the strength of the fall
and holiday shopping seasons.
Retail Stores Division
The Retail Stores Division is comprised of both outlet stores as well as
full-price retail stores, selling the Company's products to the general public.
The Company's business strategy with respect to its outlet stores is to
provide a channel for disposing of the Company's excess and irregular inventory.
The Company does not manufacture or source products exclusively for the retail
outlet stores. The Company's outlet stores are situated in areas where
they generally do not conflict with the Company's principal channels of
distribution. As of January 1, 2000, the Company operated 124 outlet stores, 101
in the U.S., nine in Canada, 12 in the United Kingdom, one in France and one in
Spain. In addition, the Company operates Speedo Authentic Fitness full-price
retail stores designed to appeal to participants in water and land based fitness
activities, and to offer a complete line of Speedo and Speedo Authentic
Fitness products that sell throughout the year. As of January 1, 2000, the
Company operated 142 full-price retail stores, 139 in the U.S. and three in
Canada.
In fiscal 1999, the Company acquired Penhaligon's Ltd., a United Kingdom
based retailer of perfumes, soaps, toiletries and other products for men and
women and also acquired IZKA, a French retailer of seam-free and seamless
intimate apparel products.
International Operations
The Company has subsidiaries in Canada and Mexico in North America and in
the United Kingdom, France, Belgium, Ireland, Spain, Italy, Austria,
Switzerland, the Netherlands and Germany in Europe and Hong Kong and Japan in
Asia, which engage in sales, manufacturing and marketing activities. The results
of the Company's operations in these countries are influenced by the movement of
foreign currency exchange rates. With the exception of the fluctuation in the
rates of exchange of the local currencies in which these subsidiaries conduct
their business, the Company does not believe that the operations in Canada and
Western Europe are subject to risks which are significantly different from those
of the domestic operations. Mexico has historically been subject to high rates
of inflation and currency restrictions which may, from time to time, impact the
Mexican operation. The Company also sells directly to customers in Mexico. Net
revenues from these shipments represent approximately 1.7% of the Company's net
revenues.
The Company maintains manufacturing facilities in Mexico, Honduras, Costa
Rica, the Dominican Republic, Canada, Ireland, the United Kingdom, France,
Morocco (joint venture), Sri Lanka, the People's Republic of China (joint
venture) and the Philippines. The Company maintains warehousing facilities in
Canada, Mexico, the United Kingdom, Spain, Belgium, Italy, Austria, Switzerland,
France and Germany and contracts for warehousing in the Netherlands. The
Intimate Apparel Division operates manufacturing facilities in Mexico and in the
Caribbean Basin pursuant to duty-advantaged (commonly referred to as "Item 807")
programs. Over the last six years, the Company has opened or expanded 12
manufacturing facilities. A new cutting facility and distribution facility in
Mexico will be opened in fiscal 2000. The Company's policy is to have many
potential sources of manufacturing so that a disruption at any one facility
will not significantly impact the Company.
The majority of the Company's purchases which are imported into the United
States are invoiced in United States dollars and, therefore, are not subject to
currency fluctuations. The majority of the transactions denominated in foreign
currencies are denominated in the Hong Kong dollar, which currently is pegged to
the United States dollar and therefore does not create any currency risk.
10
Sales and Marketing
The Intimate Apparel and Sportswear and Accessories Divisions sell to over
16,000 customers operating more than 26,000 department, mass merchandise and
men's and women's specialty store doors throughout North America and Europe.
The Company's retail customers are served by approximately 300 sales
representatives. The Company also employs marketing coordinators who work with
the Company's customers in designing in-store displays and planning the
placement of merchandise. The Company has implemented Electronic Data
Interchange ("EDI") programs with most of its retailing customers which permit
the Company to receive purchase orders electronically and, in some cases, to
transmit invoices electronically. These innovations assist the Company in
providing products to customers on a timely basis.
The Company utilizes various forms of advertising media. In fiscal 1999,
the Company spent approximately $118.0 million, or 5.6% of net revenues, for
advertising and promotion of its various product lines, compared with $102.6
million, or 5.3% of net revenues in fiscal 1998, and $86.2 million or 6.0% of
net revenues in fiscal 1997. The increase in advertising costs in fiscal 1999
compared with fiscal 1998 reflects the Company's desire to maintain its strong
market position in Calvin Klein underwear, jeanswear and accessories, Chaps by
Ralph Lauren sportswear and Warner's, Olga, and Fruit of the Loom intimate
apparel. The Company participates in advertising on a cooperative basis with
retailers, principally through newspaper advertisements.
Competition
The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, some of which have greater resources
than the Company.
The Company also competes with foreign producers, but to date, such
foreign competition has not materially affected the Intimate Apparel or
Sportswear and Accessories Divisions. In addition to competition from other
branded apparel manufacturers, the Company competes in certain product lines
with department store private label programs. The Company believes that its
manufacturing skills, coupled with its existing Central American and Caribbean
Basin manufacturing facilities and selective use of off-shore sourcing, enable
the Company to maintain a cost structure competitive with other major apparel
manufacturers.
The Company believes that it has a significant competitive advantage
because of high consumer recognition and acceptance of its owned and licensed
brand names and its strong presence and market share in the major department,
specialty and mass merchandise store chains.
A substantial portion of the Company's sales are of products, such as
intimate apparel and men's underwear, that are basic and not very susceptible to
rapid design changes. This relatively stable base of business is a significant
contributing factor to the Company's favorable competitive and cost position in
the apparel industry.
11
Raw Materials
The Company's raw materials are principally cotton, wool, silk, synthetic
and cotton-synthetic blends of fabrics and yarns. Raw materials used by the
Intimate Apparel and Sportswear and Accessories Division are available from
multiple sources.
Import Quotas
Substantially all of the Company's Sportswear and Accessories Division's
sportswear products, as well as Calvin Klein men's and women's underwear, are
manufactured by contractors located outside the United States. These products
are imported and are subject to federal customs laws, which impose tariffs as
well as import quota restrictions established by the Department of Commerce.
While importation of goods from certain countries may be subject to embargo by
United States Customs authorities if shipments exceed quota limits, the Company
closely monitors import quotas through its Washington, D.C. office and can, in
most cases, shift production to contractors located in countries with available
quotas or to domestic manufacturing facilities. The existence of import quotas
has, therefore, not had a material effect on the Company's business.
Substantially all of the Company's Intimate Apparel Division's products, with
the exception of Calvin Klein men's and women's underwear, are manufactured in
the Company's facilities located in Mexico, the Caribbean Basin, Europe and
Asia. The Company's policy is to have many potential manufacturing sources so
that a disruption at any one facility will not significantly impact the Company.
Employees
As of January 1, 2000, the Company and its subsidiaries employ
approximately 23,039 employees. Approximately 25.5% of the Company's employees,
all of whom are engaged in the manufacture and distribution of its products, are
represented by labor unions. The Company considers labor relations with
employees to be satisfactory and has not experienced any significant
interruption of its operations due to labor disagreements.
Trademarks and Licensing Agreements
The Company has license agreements permitting it to manufacture and market
specific products using the trademarks of others. The Company's exclusive
license and design agreements for the Chaps by Ralph Lauren trademark expire on
December 31, 2008. These licenses grant the Company an exclusive right to use
the Chaps by Ralph Lauren trademark in the United States, Canada and Mexico. The
Company's license to develop, manufacture and market designer jeanswear and
jeans related sportswear under the Calvin Klein trademark in North, South and
Central America extends for an initial term expiring on December 31, 2034 and is
extendable at the Company's option for a further 10 year term expiring on
December 31, 2044. The Company has an exclusive license agreement to use the
Fruit of the Loom trademark in the United States of America, its territories and
possessions, Canada and Mexico through December 31, 2004, subject to the
Company's compliance with certain terms and conditions. The Company also has the
right of first opportunity and negotiation with respect to other products and
territories. The Company's exclusive worldwide license agreement with Calvin
Klein, Inc. to produce Calvin Klein men's accessories expires June 30, 2004.
The Company has license agreements in perpetuity with Speedo
International, Ltd. which permit the Company to design, manufacture and market
certain men's, women's and children's apparel including swimwear, sportswear and
a wide variety of other products using the Speedo trademark and certain
12
other trademarks including Speedo'r', Surf Walker'r', and Speedo Authentic
Fitness'r'. The Company's license to use the Speedo'r' trademark and such other
trademarks was granted in perpetuity subject to certain conditions and is
exclusive in the United States, it territories and possessions, Canada, Mexico
and the Caribbean Islands. Speedo International, Ltd. retains the right to use
or license such brand names in other jurisdictions and actively uses or licenses
such brand names throughout the world outside of the Company's licensed areas.
The agreements provide for minimum royalty payments to be credited against
future royalty payments based on a percentage of net sales. The license
agreements may be terminated, with respect to a particular territory only in
the event the Company does not pay royalties, or abandons, the trademark in such
territory. Also, the license agreements may be terminated in the event the
Company manufactures or is controlled by a company that manufactures
racing/competitive swimwear, swimwear caps or swimwear accessories, under a
different trademark, as specifically defined in the license agreements. In
addition, the Company has certain rights to sublicense the Speedo trademark
within the geographic regions covered by the licenses.
In 1992, the Company entered into an agreement with Speedo Holdings B.V.,
and its successor Speedo International, Ltd. granting certain irrevocable rights
to the Company relating to the use of the Authentic Fitness'r' name and service
mark, which rights are in addition to the rights under the license agreements
with Speedo International, Ltd.
In October 1993, the Company entered into a worldwide license agreement
with Anne Cole and Anne Cole Design Studio Ltd. Under the worldwide licensing
agreement, the Company obtained the exclusive right in perpetuity to use the
Anne Cole'r' trademark for women's swimwear, activewear, beachwear and
children's swimwear, subject to certain terms and conditions. Under the license,
the licensee is required to pay certain minimum guaranteed annual royalties, to
be credited against earned royalties, based on a percentage of net sales. The
licensor has the right to approve products bearing the licensed trademark as
defined in the agreement.
In 1993, the Company entered into a worldwide license agreement with Oscar
de la Renta Licensing Corporation for the design, manufacture and marketing of
women's and girls' swimwear and activewear under the Oscar de la Renta'r' brand
name. The agreement granting the exclusive right to use the Oscar de la Renta'r'
trademark is valid for a term up to and including March 31, 2001 and provides
for the payment of certain minimum royalty payments to be credited against
earned royalty payments for each agreement year.
On February 1, 1998, the Company entered into an exclusive worldwide
license agreement with The Polo/Lauren Company, L.P. and PRL USA, Inc. and a
design services agreement with Polo/Ralph Lauren Corporation for Ralph Lauren'r'
, Polo Sport Ralph Lauren'r' and Polo Sport-RLX'r' brand swimwear for women and
girls. Under the license, the Company produces and markets swimsuits, bathing
suits and coordinating cover-ups, tops and bottoms for women and girls. First
shipments under this license agreement occurred in January 1999.
In fiscal 1999, the Company entered into an exclusive licensing agreement
for an initial term of 5 years, extendable for a further term of 5 years through
July 2009 with Weight Watchers International, Inc., to manufacture and market
shapewear and activewear for the mass market in the United States and Canada.
The Company also has the right of first opportunity and negotiation with respect
to other products and territories.
Although the specific terms of each of the Company's license agreements
vary, generally such agreements provide for minimum royalty payments and/or
royalty payments based on a percentage of net sales. Such license agreements
also generally grant the licensor the right to approve any designs marketed by
the licensee.
13
The Company owns other trademarks, the most important of which are
Warner's, Olga, Calvin Klein men's underwear and sleepwear, Calvin Klein women's
intimate apparel and sleepwear, Van Raalte, Lejaby, Rasurel'r', and
Bodyslimmers, Penhaligon's, White Stag, Catalina, A.B.S by Allen Schwartz,
Sunset Beach, Sandcastle and Cole of California..
The Company sub-licenses the White Stag and Catalina brand names to
domestic and international licensees for a variety of products. These agreements
generally require the licensee to pay royalties and fees to the Company based on
a percentage of the licensee's net sales. The Company regularly monitors product
design, development, quality, merchandising and marketing and schedules meetings
throughout the year with third-party licensees to assure compliance with the
Company's overall marketing, merchandising and design strategies, and to ensure
uniformity and quality control. The Company, on an ongoing basis, evaluates
entering into distribution or license agreements with other companies that would
permit such companies to market products under the Company's trademarks.
Generally, in evaluating a potential distributor or licensee, the Company
considers the experience, financial stability, manufacturing performance and
marketing ability of the proposed licensee. Royalty income derived from
licensing was approximately $17.7 million, $21.2 million and $12.2 million in
fiscal 1999, 1998 and 1997, 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.
14
(d) Financial Information About Foreign and Domestic Operations and Export
Sales.
The information required by this portion of Item 1 is incorporated herein
by reference to Note 6 to the Consolidated Financial Statements on pages F-1 to
F-34.
Item 2. Properties.
The principal executive offices of the Company are located at 90 Park
Avenue, New York, New York 10016 and are occupied pursuant to a lease that
expires in 2004. In addition to its executive offices, the Company leases
offices in Connecticut, California, Washington, D.C. and New York, pursuant
to leases that expire between 2000 and 2008.
The Company has twenty-four domestic manufacturing and warehouse
facilities located in Alabama, California, Connecticut, Georgia, Nevada, New
Jersey, Pennsylvania, South Carolina and Tennessee, and 48 international
manufacturing and warehouse facilities located in Austria, Belgium, Canada,
Costa Rica, the Dominican Republic, France, Germany, Holland, Honduras, Ireland,
Italy, Mexico, Morocco (joint-venture), People's Republic of China (joint
venture), the Philippines, Spain, Sri Lanka, Switzerland, and the United
Kingdom. Certain of the Company's manufacturing and warehouse facilities are
also used for administrative and retail functions. The Company owns six of its
domestic and six of its international facilities. The balance of the facilities
are leased. Lease terms, except for month-to-month leases, expire between 2000
and 2020. No material facility is underutilized.
The Company leases sales offices in a number of major cities, including
Atlanta, Dallas, Los Angeles and New York in the United States; Brussels,
Belgium; Toronto, Canada; Paris, France; Dusseldorf and Frankfurt, Germany; Hong
Kong; Milan, Italy; and Lausanne, Switzerland. The sales office leases expire
between 2000 and 2008 and are generally renewable at the Company's option. The
Company also occupies offices in London, England subject to a freehold lease
which expires in 2114. The Company leases 124 outlet store locations and
142 Speedo Authentic Fitness retail stores sites. Outlet store and retail store
leases, except for two month-to-month leases, expire between 2000 and 2008 and
are generally renewable at the Company's option.
All of the Company's production and warehouse facilities are located in
appropriately designed buildings, which are kept in good repair. All such
facilities have well maintained equipment and sufficient capacity to handle
present volumes.
Item 3. Legal Proceedings.
The Company is not a party to any litigation, other than routine litigation
incidental to the business of the Company, that individually or in the aggregate
is material to the business of the Company.
Between October 12, and October 13, 1999, six putative class action
complaints were filed in Delaware Chancery Court against the Company, Authentic
Fitness Corporation and certain of their officers and directors in connection
with the Company's proposed acquisition of Authentic Fitness.
On December 20, 1999, an Amended Class Action Complaint ("Amended Complaint")
was filed and on January 6, 2000 the court designated the Amended Complaint
as the operative complaint for a consolidated action captioned: In Re
Authentic Fitness Corporation Shareholders Litigation, C.A. No. 17464-NC
(consolidated). In the Amended Complaint (and all six complaints made virtually
identical claims), plaintiffs allege an unlawful scheme by certain of the
defendants, in breach of their fiduciary duties, to allow the Company to
acquire Authentic Fitness shares for inadequate consideration. Plantiffs are
seeking to have the court declare the action a proper class action, to
declare that the defendants have breached their fiduciary duties to the class,
and in the event the transaction is consummated, recission thereof and damages
awarded to the Class. The Company believes the claims to be without merit and
intends to vigorously defend these actions.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
15
Executive Officers of the Company
The executive officers of the Company, their age and their position are
set forth below.
Name Age Position
---- --- --------
Linda J. Wachner 54 Director, Chairman of the Board,
President and Chief Executive
Officer
William S. Finkelstein 51 Director, Senior Vice President
and Chief Financial Officer
Philippe de La Chapelle 58 Senior Vice President - Legal
and Human Resources
Lawrence E. Kreider, Jr. 52 Senior Vice President - Finance
Stanley P. Silverstein 47 Vice President, General Counsel
and Secretary
Carl J. Deddens 47 Vice President and Treasurer
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 Applied Graphics Technologies,
Inc. and The New York Stock Exchange.
Mr. Finkelstein has been Senior Vice President of the Company since May
1992 and Chief Financial Officer and Director of the Company since May 1995. Mr.
Finkelstein served as Vice President and Controller of the Company from November
1988 until his appointment as Senior Vice President. Mr. Finkelstein served as
Vice President of Finance of the Company's Activewear and Olga Divisions from
March 1988 until his appointment as Controller of the Company. Mr. Finkelstein
served as Vice President and Controller of SPI Pharmaceuticals Inc. from
February 1986 to March 1988 and held various financial positions, including
Assistant Corporate Controller with Max Factor and Company, between 1977 and
1985.
Mr. de La Chapelle has been Senior Vice President Legal-Human Resources
since February 2000. Prior to joining the Company, from 1966 to 1985 Mr. de La
Chapelle served as international counsel for W.R. Grace & Co., Assistant General
Counsel for Norton Simon Inc., Senior Vice President and General Counsel for
MasterCard Inc. and Senior Executive--International for Warner Communications
Inc. From 1985 to February 2000 Mr. de La Chapelle was affiliated with various
private investment banking firms.
Mr. Kreider has been Senior Vice President, Finance of the Company since
July, 1999. Prior to joining the Company, Mr. Kreider served as Senior Vice
President, Controller and Chief Accounting Officer of Revlon Inc. since 1994 and
was Vice President and Controller of Revlon, Inc. since 1992. Mr. Kreider served
as Vice President and held various other financial positions with MacAndrews &
Forbes from 1988 through 1992, including Controller of MacAndrews & Forbes from
1987 to 1998.
Mr. Silverstein has been Vice President, General Counsel and Secretary of
the Company since December 1990. Mr. Silverstein served as Assistant Secretary
of the Company from June 1986 until his appointment as Secretary in January
1987.
Mr. Deddens has been Vice President and Treasurer of the Company since
March 1996. Prior to joining the Company, Mr. Deddens served as Vice President
and Treasurer of Revlon, Inc. from 1991 to 1996 and as Assistant Treasurer from
1987 to 1991. Mr. Deddens held various financial positions with Allied-Signal
Corporation and Union Texas Petroleum Corporation from 1981 to 1987.
16
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
The Company's Class A Common Stock, $0.01 par value per share (the "Common
Stock"), is listed on the New York Stock Exchange under the symbol "WAC". The
table below sets forth, for the periods indicated, the high and low sales prices
of the Company's Common Stock, as reported on the New York Stock Exchange
Composite Tape.
Dividend
Period High Low Declared
------ ---- --- --------
1998:
First Quarter $39-9/16 $30 $.09
Second Quarter $43-15/16 $39 $.09
Third Quarter $44-7/16 $18-1/2 $.09
Fourth Quarter $28-15/16 $19-1/8 $.09
1999:
First Quarter $27-1/4 $20-1/8 $.09
Second Quarter $30-1/16 $24-5/16 $.09
Third Quarter $27-3/8 $17-9/16 $.09
Fourth Quarter $19-1/8 $10-7/16 $.09
2000:
First Quarter (thru
March 29, 2000) $13-7/8 $9-5/8 $.09(a)
(a) On February 17, 2000, the Company declared its regular quarterly cash
dividend of $0.09 per share payable on April 4, 2000 to stockholders of
record as of March 9, 2000.
--------------------------
As of March 29, 2000, there were 223 holders of the Common Stock, based
upon the number of holders of record and the number of individual participants
in certain security position listings.
In fiscal 1995, the Company initiated a regular cash dividend of $0.28 per
share per annum. The initial cash dividend was paid on June 30, 1995. On
February 20, 1997, the Company's Board of Directors approved an increase in the
Company's quarterly cash dividend to $0.08 per share. On November 21, 1997, the
Company's Board of Directors approved an increase in the quarterly cash dividend
to $0.09 per share.
Item 6. Selected Financial Data.
Set forth below is consolidated statement of income data with respect to
the fiscal years ended January 3, 1998, January 2, 1999 and January 1, 2000, and
consolidated balance sheet data at January 2, 1999 and January 1, 2000. The
selected financial data is derived from, and qualified by reference to, the
audited consolidated financial statements included herein and such data should
be read in conjunction with those financial statements and notes thereto. The
consolidated statement of income data for the fiscal years ended January 6, 1996
and January 4, 1997 and the consolidated balance sheet data at January 6, 1996,
January 4, 1997 and January 3, 1998 are derived from audited consolidated
financial statements not included herein.
17
Fiscal Year Ended
-----------------------------------------------------------------------
January 6, January 4, January 3, January 2, January 1,
1996(a)(b) 1997(c)(d) 1998(d)(e) 1999(f)(g) 2000(h)
-----------------------------------------------------------------------
Statement of Income Data:
Net revenues $ 916.2 $ 1,063.8 $ 1,435.7 $ 1,950.3 $ 2,114.2
Gross profit 309.7 289.7 375.2 537.2 701.0
Operating income (loss) 113.9 (12.0) 25.8 85.6 229.9
Interest expense 33.9 32.4 45.9 63.8 81.0
Income (loss) before extraordinary items
and cumulative effect of change
in accounting principle 49.6 (31.4) (12.3) 14.1 97.8
Extraordinary item (3.1) - - - -
Cumulative effect of change in
accounting principle - - - (46.3) -
Net income (loss) applicable to
Common Stock 46.5 (31.4) (12.3) (32.2) 97.8
Dividends on Common Stock 9.5 14.5 17.3 22.4 20.3
Per Share Data:
Income (loss) before cumulative effect
of change in accounting principle
Basic $ 1.12 $ (0.61) $ (0.23) $ 0.23 $ 1.75
Diluted $ 1.10 $ (0.61) $ (0.23) $ 0.22 $ 1.72
Net income (loss):
Basic $ 1.05 $ (0.61) $ (0.23) $ (0.52) $ 1.75
Diluted $ 1.03 $ (0.61) $ (0.23) $ (0.51) $ 1.72
Dividends declared $ 0.14 $ 0.28 $ 0.32 $ 0.36 $ 0.36
Shares used in computing earnings
per share:
Basic 44,214,690 51,308,017 52,813,982 61,361,843 55,910,371
Diluted 45,278,177 51,308,017 52,813,982 63,005,358 56,796,203
Divisional Summary Data:
Net revenues:
Intimate Apparel $ 689.2 $ 802.0 $ 941.2 $ 944.8 $ 943.4
Sportswear and Accessories 185.7 214.4 425.9 875.3 1,022.8
Retail Stores 41.3 47.4 68.6 130.2 148.0
---------- ---------- --------- --------- ---------
$ 916.2 $ 1,063.8 $ 1,435.7 $ 1,950.3 $ 2,114.2
========== ========== ========= ========= =========
Percentage of net revenues:
Intimate Apparel 75.2% 75.4% 65.6% 48.4% 44.6%
Sportswear and Accessories 20.3% 20.2% 29.7% 44.9% 48.4%
Retail Stores 4.5% 4.4% 4.7% 6.7% 7.0%
---------- ---------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========= ========= =========
Balance Sheet Data:
Working capital $ 307.5 $ 172.6 $ 352.3 $ 28.4 $ 318.2
Total assets 941.1 1,119.8 1,651.1 1,783.1 2,763.0
Long-term debt (excluding
current maturities) 194.3 215.8 354.3 411.9 1,188.0
Mandatorily Redeemable
Convertible Preferred
Securities
Stockholders' equity 500.3 452.5 749.6 578.1 563.3
18
(a) In fiscal 1995, the Company entered into a new bank credit agreement and
wrote-off deferred financing costs related to a prior bank credit
agreement. The write-off resulted in an extraordinary item of $3.1 million
(net of income tax benefits of $1.9 million or $0.07 per diluted share)
due to the early extinguishment of debt.
(b) Effective with the 1995 fiscal year, the Company adopted the provisions of
SOP 93-7 which requires, among other things, that certain advertising
costs which had previously been deferred and amortized against future
revenues be expensed when the advertisement first runs. The Company
incurred a pre-tax charge for advertising costs, previously deferrable, of
$11.7 million ($7.3 million net of income tax benefits, or $0.16 per
diluted share) in the fourth quarter of fiscal 1995.
(c) Fiscal 1996 includes pre-tax charges related to the sale of the Company's
Hathaway dress shirt operations of $38.7 million, consolidation and
realignment of the Company's Intimate Apparel Division of $78.1 million
and other items of $13.1 million. Total non-recurring items were $129.9
million ($83.2 million net of income tax benefits, or $1.62 per diluted
share). In addition, fiscal 1996 includes operating losses of the Hathaway
dress shirt operation of $8.6 million ($5.4 million net of income tax
benefits, or $0.10 per diluted share).
(d) The fiscal 1996 and 1997 financial statements were restated (in fiscal
1998) to reflect $38.0 million ($23.2 million net of income tax benefit
or $0.45 per diluted share) and $57.0 million ($35.4 million net of
income tax benefit or $0.67 per diluted share), respectively, of charges
related to an adjustment for inventory production and inefficiency costs.
(e) Fiscal 1997 reflects the acquisition of Designer Holdings during the
fourth quarter and includes pre-tax charges related to the merger and
integration of 1996 and 1997 acquisitions and the completion in 1997 of
certain consolidation and restructuring actions announced in 1996. Total
non-recurring items were $125.7 million ($77.9 million net of income tax
benefits, or $1.48 per diluted share). In addition, fiscal 1997 includes
operating losses of the Hathaway dress shirt operation of $4.0 million and
non-recurring losses of GJM of $1.1 million for a total of $5.1 million
($3.2 million net of income tax benefits, or $0.06 per diluted share).
(f) Fiscal 1998 includes restructuring, special charges and other
non-recurring items of $101.5 million ($65.7 million net of income tax
benefits, or $1.04 per diluted share) relating to the continuing strategic
review of facilities, products and functions and other items. In addition,
fiscal 1998 includes operating losses of the discontinued product lines
and styles of $5.3 million ($3.4 million net of income tax benefit or $0.5
per diluted share). Also included in fiscal 1998 operating earnings is the
current year impact related to the change in accounting for pre-operating
costs described in note (g) below of $40.8 million ($26.4 million net of
income tax benefits, or $ 0.42 per diluted share) (see Note 1 to the
Consolidated Financial Statements) and charges related to an adjustment
for inventory production and inefficiency costs of $49.6 million ($32.1
million net of income tax benefits, or $0.51 per diluted share).
(g) Effective with the 1998 fiscal year, the Company early adopted the
provisions of SOP 98-5 which requires, among other things, that certain
pre-operating costs which had previously been deferred and amortized be
expensed as incurred. The Company recorded the impact as the cumulative
effect of a change in accounting principle of $46.3 million, net of income
tax benefits, or $0.73 per diluted share.
(h) Fiscal 1999 includes a non-operating incremental cost of $16.0 million
($10.5 million of income tax benefit or $0.18 per diluted share), related
to the Calvin Klein Jeans distribution consolidation.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Strategic Actions
Fiscal 1998 -- Restructuring, Special Charges and Other Non-Recurring Items
As a result of a strategic review of the Company's businesses,
manufacturing and other facilities, product lines and styles and worldwide
operations following significant acquisitions in 1996 and 1997, in the fourth
quarter of 1998 the Company initiated the implementation of programs designed to
streamline operations and improve profitability. As a result of the decision to
implement these programs, the Company recorded restructuring and special charges
of approximately $48.5 million ($31.4 million net of income tax benefits)
related to costs to exit certain facilities and activities, asset impairments
and employee termination and severance benefits. Of the total amount of the 1998
charges, $22.1 million is reflected in cost of goods sold and $26.4 million is
reflected in selling, administrative and general expenses in the accompanying
consolidated statement of operations. The detail of the charges recorded in
1998, including costs incurred to-date and reserves remaining at January 1, 2000
for costs estimated to be incurred through completion of the aforementioned
programs, anticipated by the end of fiscal 2000, are summarized below:
Amounts
Total Utilized Balance
------ -------- -------
Costs to exit facilities and activities $13.3 $ 13.3 $ --
Asset Impairments 23.8 23.8 --
Employee termination and severance benefits 6.1 5.8 0.3
Prior strategic initiatives 5.3 5.3 --
------ ------- -------
$ 48.5 $ 48.2 $ 0.3
====== ======= =======
See Note 3 to the Consolidated Financial Statements for further detail.
In addition and related to the above actions, the fiscal 1998 operations
included $53.0 million ($34.3 million net of income tax benefits) related to the
first nine months of losses on discontinued product lines, severance associated
with reductions in headcount, incremental advertising, allowances and
manufacturing variances and $5.3 million ($3.4 million net of income tax
benefits) related to fourth quarter losses on discontinued product lines. Of the
total amount of $58.3 million, $27.0 million is reflected in cost of goods sold
and $31.3 million is reflected in selling, administrative and general expenses.
The total restructuring, special charges and other non-recurring items
including the associated operating losses are $106.8 million ($69.1 million, net
of income tax benefits or $1.10 per diluted share) for the year ended January 2,
1999. The Company anticipates that these programs will generate annual savings
of $15.0 million pre-tax.
Fiscal 1997 - Restructuring, Special Charges and Other Non-Recurring Items
During the fourth quarter of 1997, the Company reported a pre-tax charge
of $125.7 million related to the acquisition and integration of Designer
Holdings, the Intimate Apparel consolidation and realignment program initiated
in 1996 and other items, including the final disposition of Hathaway assets
(amounts in millions):
20
Merger related integration costs.............................. $ 44.6
Intimate Apparel consolidation and realignment................ 59.5
Other items, including final disposition of Hathaway assets... 21.6
------
125.7
Less income tax benefits...................................... (47.8)
------
$ 77.9
======
The charge consists primarily of a write-down of asset values, severance
and other employee costs, costs related to manufacturing realignment and lease
and other costs to combine existing retail outlet stores with those of Designer
Holdings.
Following the successful Intimate Apparel consolidation and realignment
program initiated in 1996, the Company initiated a new program to reexamine all
of its existing products in an effort to streamline its number of product
offerings. Accordingly, additional products and styles were discontinued and
slower moving inventory liquidated.
In addition, fiscal 1997 includes operating losses of the Hathaway dress
shirt operations of $4.0 million and non-recurring losses of the GJM operation
of $1.1 million for a total of $5.1 million ($3.2 million net of income tax
benefits). The total restructuring special charges and other non-recurring items
including the associated operating losses are $130. 8 million ($72.3 million,
net of income tax benefits) for the year ended January 3, 1998. Of the total
amount, $76.6 million is reflected in cost of goods sold and $54.2 million is
reflected in selling, administrative, and general expenses.
See Note 3 to the Consolidated Financial Statements for further detail.
DESIGNER HOLDINGS ACQUISITION
Prior to its acquisition by the Company, Designer Holdings experienced
substantial sales growth. A significant portion of this sales growth was
achieved through distribution to jobbers and off-price retailers. Additionally,
Designer Holdings had also announced a significant increase in the number of its
outlet stores. The Company viewed this growth and expansion as detrimental to
the long-term integrity and value of the brand. To sustain its growth strategy,
Designer Holdings committed to large quantities of inventories. When the primary
department store distribution channel was unable to absorb all of Designer
Holdings' committed production, it increased sales to the secondary and tertiary
distribution channels, including sales to jobbers, off-price retailers and
Designer Holdings' own outlet stores, which were expanded to serve as an
additional channel of distribution. The Company's post-acquisition strategy did
not embrace the outlet store expansion or expansion of secondary channels of
distribution, thereby significantly eliminating product distribution, resulting
in excess inventory.
The Company had a different plan from that of Designer Holdings for
realization of inventories and accounts receivable, as follows: Based
upon its strategy for the business, it had to quickly dispose of significantly
higher than desirable levels of inventory. It had to stabilize relationships
with its core department store customers. It had to collect receivable balances
from customers with whom the Company would no longer do business, and had to
respond to challenges from the core department store customers who were
adversely impacted by channel conflict and brand image issues. Finally, the
Company began a complete redesign of the product, the impact of which would not
be immediately felt at retail due to the fact that Designer Holdings had already
committed to inventory that was in production to be delivered for the ensuing
seasons.
The consequences related not only to the receivables and inventory
acquired, but also to the design, fabric and inventory purchases to which
Designer Holdings had previously committed. Immediately following the
acquisition, the Company began quickly liquidating excess inventories. Most of
these sales were below original cost. Not only did the Company fail to recover
cost (including royalties payable to the licensor), it was deprived of the
"reasonable gross profit" contemplated by APB Opinion 16 in valuing acquired
inventory. Accordingly, the Company reduced the historical carrying value of
inventory by $18 million. The $18 million fair value adjustment recorded
addressed all of these issues and represented the fair value of inventory
pursuant to APB Opinion 16.
The Company offered significant discounts (by negotiating settlements on a
customer by customer basis) to collect outstanding receivable balances in light
of product related issues raised, as well as the decision to discontinue certain
channels of distribution, realizing that these balances would become
increasingly more difficult to collect with the passage of time. In addition,
the core retail customers took substantial deductions against current invoices
for the Designer Holdings inventory in the stores, unilaterally revising the
economics of the initial sale transaction entered into by Designer Holdings.
Although these deductions relate to both the inventory acquired and
pre-acquisition accounts receivable, the decrease in asset value manifested
itself through accounts receivable as a result of these deductions. Accordingly,
the Company reduced the historical carrying value of accounts receivable by $31
million. The $31 million fair value adjustment, which was recorded pursuant to
APB Opinion 16, addresses these issues.
The Company believes that these strategies should enhance future results of
operations and cash flows, however, these fair value adjustments will result in
additional annual goodwill amortization of approximately $1.2 million.
21
Results of Operations
The consolidated statements of income for the Company are summarized
below.
Selected Data
Statement of Income
(Dollars in millions)
Fiscal Year Ended
-------------------------------------------------------------------------------
% of % of % of
January 3, net January 2, net January 1, net
1998 revenues 1999 revenues 2000 revenues
--------- ----- --------- ----- --------- -----
Net revenues $ 1,435.7 100.0% $ 1,950.3 100.0% $ 2,114.2 100.0%
Cost of goods sold (a) 1,060.5 73.9% 1,413.1 72.5% 1,413.2 66.8%
--------- ----- --------- ----- --------- -----
Gross profit (a) 375.2 26.1% 537.2 27.5% 701.0 33.2%
Selling, administrative and general
expenses (b) 349.4 24.3% 451.6 23.1% 471.1 22.3%
--------- ----- --------- ----- --------- -----
Operating income (loss) 25.8 1.8% 85.6 4.4% 229.9 10.9%
Interest expense (loss) 45.9 63.8 81.0
--------- --------- --------- -----
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (20.1) 21.8 148.9
Income taxes (benefit) (7.8) 7.7 51.1
--------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle $ (12.3) $ 14.1 $ 97.8
========= ========= =========
Divisional Summary
(Dollars in millions)
Fiscal Year Ended
-------------------------------------------------------------------------------
% of % of % of
January 3, gross January 2, gross January 1, gross
1998 profit 1999 profit 2000 profit
----------- -------- ------------ ------- ---------- ------
Net revenues:
Intimate Apparel $ 941.2 $ 944.8 943.4
Sportswear & Accessories 425.9 875.3 1022.8
Retail Stores 68.6 130.2 148.0
---------- --------- ---------
$ 1,435.7 $ 1,950.3 $ 2,114.2
========== ========= =========
Gross profit (a):
Intimate Apparel $ 259.8 69.2% $ 255.3 47.5% $ 332.5 47.4%
Sportswear & Accessories 90.7 24.2% 241.4 44.9% 327.0 46.7%
Retail Stores 24.7 6.6% 40.5 7.6% 41.5 5.9%
---------- ------ --------- ------ -------- ------
$ 375.2 100.0% $ 537.2 100.0% $ 701.0 100.0%
========== ====== ========= ====== ======== ======
22
(a) Includes restructuring, special charges and other non-recurring items of
$76.6 million in fiscal 1997 related to the acquisition of Designer
Holdings and the completion of the Intimate Apparel restructuring actions
and $49.1 million in fiscal 1998 related to the continuing strategic
review of facilities, products and functions. Also included in fiscal 1998
is the current year impact related to the change in accounting for
pre-operating costs of $40.8 million and a charge for an inventory
adjustment related to production and inefficiency costs in fiscal 1997 and
1998 of $57.0 million and $49.6 million, respectively.
(b) Includes restructuring, special charges and other non-recurring items of
$54.2 million in fiscal 1997 related to the acquisition of Designer
Holdings and the completion of the Intimate Apparel restructuring actions
and $57.7 million in fiscal 1998 related to the continuing strategic
review of facilities, products and functions. Also, fiscal 1997 includes
$3.5 million attributable to minority interests in the income of Designer
Holdings applicable to the period of less than 100% ownership by the
Company.
Comparison of Fiscal 1999 to Fiscal 1998
Net revenues increased $163.9 million or 8.4% to $2,114.2 million in
fiscal 1999 compared with $1,950.3 million in fiscal 1998. Net revenues
contributed by the 1999 acquisitions of Authentic Fitness ($40.6), Penhaligon's
($7.9), IZKA ($0.2), Chaps Canada ($5.7) and ABS ($13.7) amounted to $68.1
million. In addition, the Company discontinued several underperforming brands
during 1998. These discontinued brands accounted for a reduction in net revenues
of $18.4 million in fiscal 1999. Excluding the impact of these items, net
revenues from continuing brands were up 5.8%.
Intimate Apparel Division. Net revenues decreased $1.4 million or 0.1% to
$943.4 million in fiscal 1999 compared with $944.8 million in fiscal 1998.
Discontinued brands accounted for a reduction in net revenues of $18.4 million
in fiscal 1999. Excluding the impact of the discontinued brands, net revenues
increased 1.9%, despite losing three major customers (Uptons, Eaton's and
Mercantile) which accounted for a loss of $30.0 million of net revenues in
fiscal 1999. Calvin Klein underwear net revenue increased $22.4 million or 7.3%
over fiscal 1998, driven by strong growth in the U.S. Men's business. Sleepwear
net revenues increased $16.7 million or 32.4% due to the addition of several new
customers, including Wal-Mart. The Bodyslimmers and Weight Watchers shapewear
brands increased $21.6 million or 89.6% due to the continued strength of the
Bodyslimmers line in department and specialty stores and the successful launch
of Weight Watchers in the mass market. These strong performances were partially
offset by core Warner's, Olga and private label business decreasing $42.1
million or 10.9% compared to fiscal 1998 results, due to the loss of the
customers previously mentioned. Bra market share in department and specialty
stores for the year was 39.0% compared with 37.5% in 1998.
Sportswear and Accessories Division. Net revenues increased $147.5 million
or 16.9% to $1,022.8 million in fiscal 1999 compared with $875.3 million in
fiscal 1998. Net revenues contributed by the 1999 Authentic Fitness ($36.4),
Chaps Canada ($5.7) and ABS ($13.7) acquisitions amounted to $55.8 million.
Excluding these acquisitions, net revenues increased $91.7 million or a strong
10.5%. The increase in net revenue was generated by the Calvin Klein Jeanswear
Division which increased $128.5 million or a very solid 25.7%, driven primarily
by the men's and women's business. This increase was partially offset by Chaps
which decreased $33.6 million or 9.6% due primarily to the lost accounts
mentioned above which attributed to over $25.0 million of their decrease.
Retail Stores Division. Net revenues increased $17.8 million or 13.7% in
fiscal 1999. Net revenues in 1999 contributed by the Authentic Fitness ($4.2),
Penhaligon's ($7.9) and IZKA ($0.2) acquisitions was $12.3 million, while the
core Warnaco and Calvin Klein outlet stores increased $5.5 million or 4.2%.
23
Gross profit increased $163.8 million or 30.5% to $701.0 million in fiscal
1999 compared with $537.2 million in fiscal 1998. Gross margins improved 5.7% to
33.2% from 27.5%. Included in cost of sales in fiscal 1998 are restructuring and
special charges of $23.2 million, other non-recurring items of $25.9 million
(see discussion of Strategic Actions on pages 20-21), the current year impact of
the early adoption of SOP 98-5 of $40.8 million and a charge for an inventory
adjustment related to production and inefficiency costs of $49.6 million.
Excluding these 1998 items totaling $139.5 million, gross profit increased
$24.3 million or 3.6%. Gross margins on this basis were 33.2% in 1999
compared with 34.7% in 1998. The decrease in gross margins from fiscal 1998
was caused by $30.0 million of additional markdowns required to 1) liquidate
inventory planned for lost customers, 2) reduce inventory levels in Intimate
Apparel primarily from training new employees in start-up plants and 3) softness
in the Calvin Klein Junior Jeans business; and $10.0 million additional plant
start-up costs in the Company's new Intimate Apparel manufacturing facilities
in Mexico.
Intimate Apparel Division. Gross profit (excluding all non-recurring items
described above) decreased $46.1 million or 12.2% to $332.5 million in fiscal
1999 compared with $378.6 million in fiscal 1998. Gross margins on this basis
were 35.2% in 1999 compared with 40.1% in 1998. The decrease in margins resulted
from the incremental markdowns and additional plant start-up costs mentioned
above.
Sportswear and Accessories Division. Gross profit (excluding all
non-recurring items described above) increased $69.4 million or 26.9% to $327.0
million in fiscal 1999 compared with $257.6 million in fiscal 1998. The increase
in gross profit was due to the increase in net revenues mentioned above. Gross
margins in 1999 were 32.0% compared with 29.4% in 1998 with the improvement due
to sourcing efficiencies and cost reductions.
Retail Stores Division. Gross profit increased $1.0 million or 2.5% to
$41.5 million in fiscal 1999 compared with $40.5 million in fiscal 1998. Gross
margins in fiscal 1999 was 28.0% compared to 31.1% in fiscal 1998, with the
decrease caused by additional markdowns to liquidate excess inventories.
Selling, administrative and general expenses increased $19.5 million to
$471.1 million in fiscal 1999 compared with $451.6 million in fiscal 1998.
Selling, administrative and general expenses as a percentage of sales was 22.3%
in 1999 compared with 23.2% in 1998. Included in fiscal 1998 results are
restructuring and special charges of $30.6 million and other non-recurring items
of $27.1 million (see discussion of Strategic Actions on pages 20-21). The
Company anticipates that these programs will generate annual savings of
approximately $15.0 million pre-tax. Excluding restructuring, special charges
and other non-recurring items in 1998, selling, administrative and general
expenses were $471.1 million (22.3% of net revenues) in 1999 compared with
$393.9 million (20.2% of net revenues) in 1998. The increase in selling,
administrative and general expenses as a percentage of net revenues, primarily
attributable to 1) $16.0 million of non-operating incremental costs related to
the Calvin Klein Jeans distribution consolidation, 2) a 30 basis-point increase
of $15.4 in marketing spending to 5.6% of net revenues and 3) incremental data
processing costs related to Year 2000 conversion as well as the implementation
of new systems.
Operating Profit
Intimate Apparel Division. Operating profit decreased $35.1 million or
17.5% to $165.0 million in fiscal 1999 compared with $200.1 million in
fiscal 1998. This was attributable to the additional markdowns and plant
start-up costs mentioned above. In addition, fiscal 1998 includes
restructuring, non-recurring and special charges as outlined above of
$75.5 million and the effect of adopting SOP 98-5 of $40.8 million and a
charge for an inventory adjustment related to production and
inefficiency costs of $49.6 million.
24
Sportswear and Accessories Division. Operating profit increased $14.3
million or 9.9% to $159.0 million in fiscal 1999 compared with $144.7
million in fiscal 1998. This was attributable to the 16.9% net revenue
increase mentioned above, partially offset by the $16.0 million
non-operating incremental cost related to the Calvin Klein Jeans
distribution consolidation. In addition, restructuring, non-recurring and
special charges as outlined above were $5.2 million in fiscal 1998.
Retail Stores Division. Operating profit decreased $6.6 million to $9.0
million in fiscal 1999 from $15.6 million in fiscal 1998, with the
decrease attributable to markdowns required to liquidate excess inventory.
In addition, restructuring, non-recurring and special charges as outlined
above were $4.8 million in fiscal 1998.
Interest expense increased $17.2 million to $81.0 million in fiscal 1999
compared with $63.8 million in fiscal 1998. The increase was caused primarily by
additional borrowings to finance the Company's stock buyback program and its
acquisitions in fiscal 1998 and 1999. (See Note 2 to the Consolidated Financial
Statements.)
The income tax provision in fiscal 1999 was $51.1 or an overall effective
tax rate of 34.3%. This compares to an income tax benefit in fiscal 1998 of
$17.5 million consisting of a $7.7 million income tax expense on continuing
operations and a $25.2 million income tax benefit on the cumulative effect
of an accounting change, or an overall effective tax rate of 35.3%. The
decrease in the effective tax rate from 35.3% in fiscal 1998 to 34.3% in fiscal
1999 was due to a shift in the amount of income in foreign jurisdictions with
lower tax rates. The difference between the United States federal statutory rate
of 35.0% and the Company's effective tax rate of 34.3% primarily reflects the
impact of state income taxes (net of federal benefits), and the impact of
non-deductible intangible amortization, favorably offset by a shift in income to
foreign jurisdictions with lower tax rates than the U.S. The Company has
estimated United States net operating loss carryforwards of approximately $421.3
million at January 1, 2000 and foreign net operating loss carryforwards of
approximately $33.7 million available to offset future taxable income. The
United States and foreign loss carryforwards, which the Company expects to fully
utilize, should result in future cash tax savings of approximately $133.6
million at current United States income tax rates and $1.0 million at current
foreign income tax rates, respectively. The net operating loss carryforwards
expire between 2002 and 2018.
Income before cumulative effect of a change in accounting principle
improved $83.7 million to $97.8 million or $1.72 per diluted share in fiscal
1999 compared with $14.1 million or $0.22 per diluted share in fiscal 1998 due
to the charges included in fiscal 1998 as mentioned above.
Comparison of Fiscal 1998 to Fiscal 1997
Net revenues increased $514.6 million or 35.8% to $1,950.3 million in
fiscal 1998 compared with $1,435.7 million in fiscal 1997. Incremental net
revenues contributed by the 1997 and 1998 acquisitions of Calvin Klein Jeanswear
and Kidswear were $415.5 million. In addition, the Company discontinued several
underperforming brands during 1998. These discontinued brands accounted for a
reduction in net revenues of $30.9 million in fiscal 1998. Excluding the impact
of these items, net revenues from continuing brands were up 9.4%.
Intimate Apparel Division. Net revenues increased $3.6 million or 0.4% to
$944.8 million in fiscal 1998 compared with $941.2 million in fiscal 1997.
Discontinued brands accounted for a reduction in net revenues of $30.9 million
in fiscal 1998. Excluding the impact of the discontinued brands, net revenues
increased 3.9%. Core Warner's, Olga and private label business increased $29.3
million or 8.1% over fiscal 1997 results. Bra market share in department and
specialty stores for the year was 37.5% compared
25
with 34.0% in 1997. Fiscal 1998 net revenues were negatively affected by
hurricanes in Costa Rica and Honduras which disrupted shipments during the 1998
fourth quarter. Calvin Klein net revenues declined 3.1% primarily on lower
international shipments in Russia of $6.3 million and the Far East of $0.8
million due to currency devaluation and economic downturns.
Sportswear and Accessories Division. Net revenues increased $449.4 million
or 105.5% to $875.3 million in fiscal 1998 compared with $425.9 million in
fiscal 1997. Incremental net revenues in 1998 contributed by the 1997 and 1998
Calvin Klein Jeanswear and Kidswear acquisitions were $366.8 million. Excluding
these acquisitions, net revenues increased $82.6 million or 28.2%. Improvements
were recorded across all brands with Chaps up $78.7 million or 28.9% and
Accessories up $2.0 million or 11.6%.
Retail Stores Division. Net revenues increased $61.6 million or 89.8% in
fiscal 1998. Incremental net revenues in 1998 contributed by the 1997 Designer
Holdings acquisition was $48.7 million. Excluding the acquisition, net revenues
increased $12.9 million or 22.4%.
Gross profit increased $162.0 million or 43.2% on an as-reported basis to
$537.2 million in fiscal 1998 compared with $375.2 million in fiscal 1997. The
increase is due primarily to the 1997 and 1998 Calvin Klein acquisitions. Gross
margins improved 1.4% to 27.5% from 26.1% resulting from a more favorable
regular to off-price mix across all brands. Included in cost of sales in fiscal
1998 are restructuring and special charges of $23.2 million, other non-recurring
items of $25.9 million (see discussion of Strategic Actions on pages 20-21) and
the current year impact of the early adoption of SOP 98-5 of $40.8 million
and a charge for an inventory adjustment related to production and inefficiency
costs of $49.6 million. Included in cost of sales in fiscal 1997 are
restructuring, special charges and other non-recurring items of $76.6 million
(see strategic actions on pages 20-21) and charges relating to an inventory
adjustment for production and inefficiency costs of $57.0 million. Excluding
these items, gross profit increased $167.9 million or 33.0% to $676.7 million
compared with $508.8 million in fiscal 1997. Gross margins on this basis were
34.7% in 1998 compared with 35.4% in 1997. The decrease in gross margins from
fiscal 1997 was caused by a higher mix of jeanswear and Chaps net revenues,
which has lower gross margins than Intimate Apparel.
Intimate Apparel Division. Gross profit (excluding all non-recurring items
described above) increased $11.1 million or 3.0% to $378.6 million in fiscal
1998 compared with $367.5 million in fiscal 1997. Gross margins were 40.1% in
1998 compared with 39.0% in 1997. The improvement in margins resulted from a
better regular price sales mix and cost savings initiatives implemented during
the year.
Sportswear and Accessories Division. Gross profit (excluding all
non-recurring items described above) increased $141.0 million or 120.9% to
$257.6 million in fiscal 1998 compared with $116.6 million in fiscal 1998. The
increase in gross profit was due to the 1997 and 1998 Calvin Klein acquisitions,
which contributed an incremental $121.9 million of gross profit. Excluding
acquisitions, gross profit was up $19.1 million compared with 1997 with most of
the increase in Chaps. Gross margins in 1998 were 29.4% compared with 27.4% in
1997 with the improvement due to the addition of Calvin Klein Jeanswear.
Retail Stores Division. Gross profit increased $15.8 million or 64.0% to
$40.5 million in fiscal 1998 compared with $24.7 million in fiscal 1997, with
the increase attributable to the Designer Holdings acquisition.
Selling, administrative and general expenses increased $102.2 million to
$451.6 million in fiscal 1998 compared with $349.4 million in fiscal 1997.
Selling, administrative and general expenses as a percentage of sales improved
to 23.1% in 1998 compared with 24.3% in 1997. Included in fiscal 1998 results
are restructuring and special charges of $30.6 million and other non-recurring
items of $27.1 million (see discussion of Strategic Actions on pages 20-21). The
Company anticipates that these programs will
26
generate annual savings of approximately $15.0 million pre-tax. Included in
fiscal 1997 are restructuring, special charges and other non-recurring items of
$54.2 million. Excluding restructuring, special charges and other non-recurring
items in 1998 and 1997, selling, administrative and general expenses were $393.9
million (20.2% of net revenues) in 1998 compared with $295.2 million (20.6% of
net revenues) in 1997. The improvement in selling, administrative and general
expenses is attributable to the leverage attained through increased net revenues
of Calvin Klein Jeanswear.
Operating Profit
Intimate Apparel Division. Operating profit before special items increased
$4.6 million or 2.4% to $200.1 million in fiscal 1998 compared with $195.5
million in fiscal 1997. This was attributable to the increase in net
revenues and gross profit mentioned above. In addition, restructuring,
non-recurring and special charges as outlined above were $75.5 million in
fiscal 1998 and $68.0 million in fiscal 1997. The SOP 98-5 start-up costs
were $40.8 million in fiscal 1998 and a charge for an inventory adjustment
related to production and inefficiency costs was $49.6 million in fiscal
1998 and $57.0 million in fiscal 1997.
Sportswear and Accessories Division. Operating profit before special items
increased $82.9 million or 134.1% to $144.7 million in fiscal 1998
compared with $61.8 million in fiscal 1997. This was attributable to the
1997 and 1998 Calvin Klein acquisitions and the increased Chaps net
revenues mentioned above. In addition, restructuring, non-recurring and
special charges as outlined above were $5.2 million in fiscal 1998 and
$40.2 million in fiscal 1997.
Retail Stores Division. Operating profit before special items increased
$8.5 million or 119.7% to $15.6 million in fiscal 1998 compared with $7.1
million in fiscal 1997, with the increase attributable to the additional
stores acquired in the Designer Holdings acquisition. In addition,
restructuring, non-recurring and special charges as outlined above were
$4.8 million in fiscal 1998 and $18.7 million in fiscal 1997.
Interest expense increased $17.9 million to $63.8 million in fiscal 1998
compared with $45.9 million in fiscal 1997. The increase was caused primarily by
the company's stock buyback program and the Calvin Klein Jeanswear and Kidswear
acquisitions in fiscal 1997 and 1998.
The income tax benefit in fiscal 1998 was $17.5 million consisting of a
$7.7 million income tax expense on continuing operations and a $25.2 million
income tax benefit on the cumulative effect of an accounting change, or an
overall effective tax rate of 35.3%. The difference between the United States
federal statutory rate of 35.0% and the Company's effective tax rate of 35.3%
primarily reflects the impact of state income taxes (net of federal benefits),
foreign income taxes at rates other than the U. S. statutory rate, the impact of
non-deductible intangible amortization, offset by the realization of a $10.8
million deferred tax asset, principally related to a realization of a capital
loss carryover during the fourth quarter of fiscal 1998, previously subject to a
valuation allowance. The Company has estimated United States net operating loss
carryforwards of approximately $496.2 million at January 2, 1999 and foreign net
operating loss carryforwards of approximately $18.3 million available to offset
future taxable income. The United States and foreign loss carryforwards, which
the Company expects to fully utilize, should result in future cash tax savings
of approximately $130.7 million at current United States income tax rates. The
net operating loss carryforwards expire between 2002 and 2018.
Income before cumulative effect of the early adoption of SOP 98-5 improved
$26.4 million to $14.1 million or $0.22 per diluted share in fiscal 1998
compared with a loss of $12.3 million or $0.23 per diluted share in fiscal 1997.
Income before the effects of restructuring and special charges of $34.8 million,
other non-recurring items of $34.3 million and the current year impact of the
early adoption of SOP 98-5 and a charge for an inventory adjustment related to
production and inefficiency costs of $58.5 million, was $141.7 million or $2.25
per diluted share.
27
Compared with fiscal 1997 net income (excluding non-recurring charges of $81.1
million and a charge for an inventory adjustment related to production and
inefficiency costs of $35.4 million) of $104.1 million or $1.87 per diluted
share, this represents an improvement of $37.6 million, or $0.38 per
diluted share.
Capital Resources and Liquidity
The Company's liquidity requirements arise primarily from its debt service
and the funding of working capital needs, primarily inventory and accounts
receivable and capital improvements programs. The Company's borrowing
requirements are seasonal, with peak working capital needs generally arising at
the end of the second quarter and during the third quarter of the fiscal year.
The Company typically generates a substantial amount of its operating cash flow
in the fourth quarter of the fiscal year, reflecting third and fourth quarter
shipments and the sale of inventory built during the first half of the fiscal
year.
During fiscal 1999, the Company acquired Authentic Fitness Corporation
acquired Penhaligon's Ltd., IZKA, A.B.S. by Allen Schwartz, and Chaps Canada.
During fiscal 1998, the Company acquired certain inventory and other assets
as well as the sub-license to produce Calvin Klein jeans and jeans-related
products for children in the United States, Mexico and Central and South America
and the sub-license to produce Calvin Klein jeans and related products for
children in Canada. Also during fiscal 1998, the Company acquired certain assets
as well as the sub-license to distribute Calvin Klein jeans, jeans-related
products and khakis for men and women in Mexico, Central America and Canada. The
total purchase price of these acquisitions was approximately $53.1 million.
In December 1997, the Company completed the acquisition of Designer
Holdings, which develops, manufactures and markets designer jeanswear and
sportswear under a license from Calvin Klein, Inc. The purchase price consisted
of the issuance of 10,413,144 shares of the Company's stock valued at $353.4
million. Net assets acquired included $55.8 million of cash of Designer
Holdings.
In the third and fourth quarters of fiscal 1996, the Company acquired
Lejaby, a leading European intimate apparel manufacturer, for approximately $79
million, including certain fees and expenses and assumed liabilities. Funds to
consummate the transaction were provided by members of the Company's bank credit
group. The terms of the bank loans are substantially the same as the terms of
the Company's existing credit agreements and included a term loan totaling 370
million French Francs and revolving loan facilities totaling 150 million French
Francs (the "1996 Bank Credit Agreements").
Cash provided from operating activities in fiscal 1999 was $10.0 million
compared to $333.7 million in fiscal 1998. The decrease in cash flow from
operating activities from fiscal 1998 primarily resulted from 1) the favorable
impact of securitizing accounts receivable in fiscal 1998 ($145.1 million) and
2) the decrease in accounts payable and accrued expenses ($199.4 million)
primarily attributable to extended terms negotiated in fiscal 1998 which
favorably affected last year's cash flow. Cash flow from operating activities in
fiscal 1998 of $333.7 million increased $189.8 million compared with fiscal 1997
of $143.9 million as a result of 1) an increase in accounts payable and accrued
expenses of $118.5 million relating to extended payment terms negotiated in
fiscal 1998 and 2) the favorable impact of the accounts receivable
securitization of $170.5 million. Depreciation and amortization expense was
$61.0 million, $46.5 million and $47.4 million in fiscal 1999, 1998 and 1997
respectively. The increase in depreciation and amortization expense in fiscal
1999 reflects amortization of intangible assets acquired in fiscal 1998 and
1999.
28
The provision for receivable allowances was $206.1 million, $166.3 million
and $139.5 million in fiscal 1999, 1998 and 1997 respectively. The increase in
fiscal 1999 over fiscal 1998 represents additional markdowns and allowances as
previously mentioned. The increase in fiscal 1998 over fiscal 1997 represents
the 35.9% sales increase primarily related to the Designer Holdings acquisition.
The provision for inventory write-downs was $6.2 million in fiscal 1999, $25.4
million in fiscal 1998 and $57.3 million in fiscal 1997. The decrease in fiscal
1999 and 1998 compared to fiscal 1997 reflected the Intimate Apparel
restructuring in fiscal 1998 and 1997 (see Note 3 to the Consolidated Financial
Statements.)
Cash used in investing activities was $736.5 million in fiscal 1999
compared with $221.8 million in fiscal 1998 and $22.0 million in fiscal 1997.
The increase is fiscal 1999 compared to fiscal 1998 relates to an increase in
acquisition of businesses of $572.4 million primarily related to the Authentic
Fitness acquisition in December 1999. The increase in fiscal 1998 compared to
fiscal 1997 reflects an increase in property, plant and equipment of $85.4
million primarily related to new MIS systems and store fixtures and an increase
in acquisition of businesses of $108.9 million, which includes a use of cash in
fiscal 1998 of $53.1 million primarily related to the Calvin Klein Kidswear
acquisition in fiscal 1998 compared to receiving $55.8 million of cash
acquired in connection with the acquisition of Designer Holdings for company
stock in fiscal 1997.
Cash (used in) provided by financing activities was $724.7 million,
$(116.3) million and $(125.2) million in fiscal 1999, 1998 and 1997
respectively. The increase in the cash provided from financial activities in
fiscal 1999 compared to fiscal 1998 reflects borrowing under an acquisition loan
facility of $586.2 million to acquire Authentic Fitness and an increase in
borrowings under the Company's credit facilities of $265.8 million to fund the
Company's stock buy-back program and purchase of property, plant and equipment.
During the year ended January 1, 2000, the Company repurchased 6.2 million
shares of its common stock at a cost of $144.7 million and paid cash dividends
of $20.6 million. During the year ended January 2, 1999, the Company repurchased
4.8 million shares of its common stock at a cost of $135.4 million and paid cash
dividends of $22.3 million. For the year ended January 3, 1998, the Company
repurchased 0.8 million shares of its common stock at a cost of $26.5 million
and paid cash dividends of $16.2 million. In exchange for shares received from
option holders with a fair market value of $2.6 million, $38.1 million and $0.6
million in fiscal years 1999, 1998 and 1997, respectively, the Company paid $2.6
million, $38.1 million and $0.6 million in fiscal years 1999, 1998 and 1997,
respectively, of withholding taxes on options that were exercised during the
year.
In November 1999 the Company entered into a $600 million, 364-day credit
facility with certain members of its bank credit group in order to consummate
the Authentic Fitness acquisition and refinance borrowings outstanding under
Authentic Fitness' bank credit agreement. Amounts borrowed under this facility
are subject to interest at a base rate or an interest rate based on the
Eurodollar rate plus a margin, which varies according to the Company's debt
rating. As of January 1, 2000, $586,200 was outstanding under this facility at a
weighted average interest rate of 7.15%. The terms of this facility are
substantially the same as the terms of the Company's existing credit agreements.
In November 1999, in conjunction with the Authentic Fitness acquisition,
and to replace its $200 million 364-day credit facility expiring in November
1999, the Company entered into a new $450 million revolving credit facility.
This new facility matures in November 2004 and carries terms that are
substantially the same as the terms of the Company's existing credit agreements.
Amounts borrowed under this facility are subject to interest at a base rate or
an interest rate based on the Eurodollar rate plus a margin, which varies
according to the Company's debt rating. As of January 1, 2000, there were no
borrowings outstanding under this facility.
Also in November 1999 the Company increased the amount of its Trade Letter
of Credit Facility (the "L/C Facility") from $450 million to $500 million to
refinance amounts outstanding under Authentic Fitness' Trade Letter of Credit
Facility.
29
In April 1998, the Company amended its 1996 Bank Credit Agreements (the
"Agreement") to increase its revolving loan facilities to 480 million French
Francs from 120 million French Francs. Borrowings under the Agreement bear
interest at LIBOR plus 35% and mature on April 17, 2003. In July 1998, the
Company amended its $300 million the L/C Facility to increase the size of the
facility to $450 million, to extend the borrowing period for amounts due under
the maturing letters of credit from 120 days to 180 days, to extend the maturity
of the L/C Facility to July 29, 1999 and to eliminate certain restrictions
relating to debt and investments. The amount of borrowings available under the
L/C Facility was increased to accommodate the internal growth of the Company's
business as well as the increased demand for finished product purchases stemming
from the acquisition of Designer Holdings in the fourth quarter of 1997 and the
acquisition of the Calvin Klein Kids business in the second quarter of 1998. In
conjunction with the amendment of the L/C Facility, the Company also amended its
$600 million revolving credit facility and its $200 million 364-day credit
facility to allow for the increase in the L/C Facility and the elimination of
certain restrictions relating to debt and investments. In July 1999, the L/C
Facility was extended until July 27, 2000.
In October 1998, the Company entered into a $200 million revolving
accounts receivable securitization facility. Under this facility, the Company
entered into agreements to sell, for a period of up to five years, undivided
participation interests in designated pools of U.S. trade receivables.
Participation interests in new receivables may be sold as collections reduce
previously sold participation interests. The participation interests are sold at
a discount to reflect normal dilution. Net proceeds to the Company from the
initial funding were $200 million, and were used primarily to temporarily repay
long-term debt. At January 1, 2000, approximately $195.9 million was advanced
under this facility.
The Company has paid a quarterly cash dividend since June 1995. The
dividend payment was raised to $0.08 per share from $0.07 per share in February
1997 and increased to $0.09 per share in January 1998.
At January 1, 2000, the Company had approximately $469.2 million of
additional borrowing availability under the revolving loan portions of its
United States bank facilities. The Company also has bank credit agreements in
Canada, Europe and Asia. At January 1, 2000, the Company had approximately $53.1
million of additional borrowing availability under these agreements. The Company
believes that funds available under its various bank facilities, together with
cash flow to be generated from future operations, will be sufficient to meet the
capital expenditure requirements and working capital needs of the Company,
including interest and debt principal payments for the next twelve months and
for the next several years.
Year 2000 and Economic and Monetary Union ("EMU") Compliance
The Company is fully Year 2000 compliant with respect to all of its
operating systems. The Company did not experience any year 2000 related issues.
30
In anticipation of the establishment of the European EMU and the
introduction of a single European unit of currency (the "Euro") scheduled for
January 1, 1999, Warnaco formed a Steering Committee in December 1997 to (1)
identify the related issues and their potential effect on Warnaco, and (2)
develop an action plan for EMU compliance.
The steering committee completed development of and implemented an action
plan which included preparation of banking arrangements for use of the Euro,
development of dual currency price lists and invoices, modification of prices to
mitigate the potential effects of price transparency and implementing necessary
computer-related remediation steps. As a result of this plan, as of January 1,
1999, Warnaco was EMU compliant. During 1999, the Company experienced no adverse
effects on its business as a result of the introduction of the Euro.
Statement Regarding Forward-looking Disclosure
This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including those associated with the effect of national and
regional economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements other than
statements of historical facts included in this Annual Report, including,
without limitation, the statements under 'Management's Discussion and Analysis
of Financial Condition,' are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct.
Seasonality
The operations of the Company are somewhat seasonal. In fiscal 1999,
approximately 56% of net revenues, 50% of operating income, and substantially
all of the Company's net cash flow from operating activities were generated in
the second half of the year. Generally, the Company's operations during the
first half of the year are financed by increased borrowings. The following sets
forth the net revenues, operating income and net cash flow from operating
activities generated for each quarter of fiscal 1998 and fiscal 1997.
31
Three Months Ended
(in millions)
Apr. 4, July 4, Oct. 3, Jan. 2 Apr. 3, July 3, Oct. 2, Jan. 1,
1999 1998 1998 1999 1999 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
Net revenues $ 419.2 $438.9 $544.1 $548.1 $444.1 $484.7 $579.6 $605.8
Operating income(loss) $ 23.4 $ 35.5 $ 56.0 $ (29.3) $52.2 $62.6 $90.2 $24.9
Cash flow from (used in)
operating activities $(145.4) $ 22.4 $162.2 $294.5 $(127.0) $(44.0) $2.7 $178.3
Inflation
The Company does not believe that the relatively moderate levels of
inflation in the United States, Canada and Western Europe have had a significant
effect on its net revenues or its profitability. Management believes that, in
the past, the Company has been able to offset such effects by increasing prices
or by instituting improvements in productivity. Mexico historically has been
subject to high rates of inflation; however, the effects of inflation on the
operation of the Company's Mexican subsidiaries have not had a material impact
on the results of the Company.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 was effective for
financial statements for fiscal years beginning after June 15, 1999. However, in
June 1999, the FASB issued SFAS 137 "Deferral of the effective date of FASB
Statement No. 133" delaying the effective date of SFAS 133 until fiscal years
beginning after June 15, 2000. The Company is evaluating the application of the
new statement and the impact on the Company's consolidated financial position,
liquidity, cash flows and results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, and selectively uses financial instruments
to manage these risks. The Company does not enter into financial instruments for
speculation or for trading purposes.
Interest Rate Risk
The Company is subject to market risk from exposure to changes in interest
rates based primarily on its financing activities. The Company enters into
interest rate swap agreements to reduce the impact of interest rate fluctuations
on cash flow and interest expense. As of January 1, 2000, approximately $691.5
million of the Company's $1,904.3 million of interest-rate sensitive obligations
were swapped to fixed rates. Of the total amount swapped, $610 million were
swapped to a fixed rate of 5.99% while $81.5 million were swapped to fixed rates
between 6.60% and 6.66%, thereby limiting the Company's risk to any future shift
in interest rates. As of January 1, 2000, the net fair value asset of all
financial instruments (primarily interest rate swap agreements) with exposure to
interest rate risk was approximately $22.1 million. As of January 1, 2000 the
Company had approximately $1,212.8 million of obligations subject to variable
interest rates in excess of such obligations that had been swapped to achieve a
fixed rate. A hypothetical 10% adverse change in interest rates as of January 1,
2000 would have had an $8.1 million unfavorable impact on the Company's pre-tax
earnings and cash flow over a one-year period.
32
Foreign Exchange Risk
The Company has foreign currency exposures related to buying, selling and
financing in currencies other than the functional currency in which it operates.
These exposures are primarily concentrated in the Canadian dollar, Mexican peso,
Hong Kong dollar, British pound, Euro, Costa Rican colon, Honduran lempira,
Dominican Republic peso and the Chinese renminbi. The Company enters into
foreign currency forward and option contracts to mitigate the risk of doing
business in foreign currencies. The Company hedges currency exposures of firm
commitments and anticipated transactions denominated in non-functional
currencies to protect against the possibility of diminished cash flow and
adverse impacts on earnings. As of January 1, 2000, the net fair value asset of
financial instruments with exposure to foreign currency risk, which included
currency option and forward contracts, was $0.1 million. The potential decrease
in fair value resulting from a hypothetical 10% adverse change in quoted foreign
currency exchange rates would be approximately $1.3 million.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report. See
Item 14 of Part IV.
Item 9. Changes in and Disagreements with Independent Accountants on Accounting
and Financial Disclosure.
Previous Independent Accountants
On November 18, 1999, the Audit Committee of the Board of Directors of
the Company approved the appointment of Deloitte & Touche LLP as its independent
auditors for fiscal 1999. PricewaterhouseCoopers LLP, the Company's previous
auditors, were dismissed.
The reports of PricewaterhouseCoopers LLP on the financial statements for
the last two fiscal years contained no adverse opinion or disclaimer of opinion,
and were not qualified or modified as to uncertainty, audit scope or accounting
principles.
In connection with its audits for the two most recent fiscal years
and through November 18, 1999, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers
LLP to make reference thereto in their report on the consolidated
financial statements for such years.
During the two most recent fiscal years and through November 18, 1999,
there have been no reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K.), except that in connection with the audit of the fiscal 1998
consolidated financial statements, PricewaterhouseCoopers LLP informed
management that the intimate apparel division manufacturing cost system may
not function to reduce to a relatively low level the risk that errors may
occur and not be detected within a timely period. The Company took actions
in fiscal 1998 which it believes have effectively addressed these matters.
The Registrant requested and PricewaterhouseCoopers LLP furnished it with
a letter addressed to the Securities and Exchange Commission (the "SEC")
stating whether or not it agreed with the above statements. Such letter dated
November 26, 1999 was filed as an exhibit to the Company's Form 8-K filed
November 26, 1999.
New Independent Accountants
The Registrant engaged Deloitte & Touche LLP as its new independent
accountants on November 18, 1999. During the two most recent fiscal years
and through November 18, 1999, the Registrant had not consulted with Deloitte
& Touche LLP on any of the matters or events set forth in Item 304(a) 2(i)
and (ii) of Regulation S-K.
33
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is incorporated by reference from page
15 of Item 4 of Part I included herein and from the Proxy Statement of The
Warnaco Group, Inc., to be filed with the Securities and Exchange Commission
within 120 days of the fiscal 1999 year-end relating to the 2000 Annual Meeting
of Stockholders.
Item 11. Executive Compensation.
The information required by Item 11 is hereby incorporated by reference
from the Proxy Statement of The Warnaco Group, Inc., to be filed with the
Securities and Exchange Commission within 120 days of the fiscal 1999 year-end,
relating to the 2000 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is hereby incorporated by reference
from the Proxy Statement of The Warnaco Group, Inc., to be filed with the
Securities and Exchange Commission within 120 days of the fiscal 1999 year-end,
relating to the 2000 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is hereby incorporated by reference
from the Proxy Statement of The Warnaco Group, Inc., to be filed with the
Securities and Exchange Commission within 120 days of the fiscal 1999 year-end,
relating to the 2000 Annual Meeting of Stockholders.
34
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
----
Reports of Independent Accountants........................................ F-1 - F-2
Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000..... F-3
Consolidated Statements of Operations for the Years Ended January 3, 1998,
January 2, 1999 and January 1, 2000....................................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For the Years Ended January 3, 1998, January 2, 1999 and January 1, 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended January 3, 1998,
January 2, 1999 and January 1, 2000.................................... F-6
Notes to Consolidated Financial Statements................................ F-7 - F-[OPEN]
2. Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts and Reserves............. S-1
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission which are
not included with this additional financial data have been omitted because
they are not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
3. List of Exhibits:
2.1 Tender Offer Statement on Schedule 14D-1, dated November 17, 1999
(incorporated herein by reference to Exhibit 2.1 to the Company's
Form 8-K filed January 18, 2000).
2.2 Amendment No.1 to Schedule 14D-1 and Schedule 13D, dated December 16, 1999
(incorporated herein by reference to Exhibit 2.2 to the Company's
Form 8-K filed January 18, 2000).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the Company's Form
10-Q filed May 16, 1995)
3.2 Amended Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Form 10-K filed April 4, 1997).
4.1 Registration Rights Agreement dated March 14, 1994 between the Company and
Calvin Klein, Inc. ("CK") (incorporated herein by reference to Exhibit 4.1
to the Company's Form 10-Q filed May 24, 1994).
4.2 Amended and Restated Declaration of Trust of Designer Finance Trust, dated
as of November 6, 1996, among Designer Holdings, as Sponsor, IBJ Schroder
Bank & Trust Company, as Property Trustee, Delaware Trust Capital
Management, Inc. as Delaware Trustee and Merril M. Halpern and Arnold H.
Simon, as Trustees (incorporated herein by reference to Exhibit 4.1 to the
Company's Form 10-Q filed November 12, 1997).
4.3 First Supplemental Indenture dated as of March 31, 1998, between Designer
Holdings, The Warnaco Group, Inc. and IBJ Schroder Bank & Trust Company,
as Trustee (incorporated herein by reference to Exhibit 4.3 to the
Company's Form 10-K filed April 3, 1998)
4.4 Preferred Securities Guarantee Agreement dated as of March 31, 1998,
between The Warnaco Group, Inc., as Guarantor and IBJ Schroder Bank &
Trust Company, as Preferred Guarantee Trustee, with respect to the
Preferred Securities of Designer Finance Trust (incorporated herein by
reference to Exhibit 4.4 to the Company's Form 10-K filed April 3, 1998).
4.5 Rights Agreement, dated as of August 19, 1999 between the Warnaco Group,
Inc. and the Bank of New York (incorporated herein by reference to Exhibit
4.5 to the Company's Form 8-K filed August 20, 1999.
35
10.1 Credit Agreement, dated as of August 12, 1997 (the 'U.S. $600,000,000
Credit Agreement'), among Warnaco Inc., as Borrower, and The Bank of Nova
Scotia and Citibank, N.A. as Managing Agents, Citibank, N.A. as
Documentation Agent, the Bank of Nova Scotia as Administrative Agent,
Competitive Bid Agent, Swing Line Bank and an Issuing Bank and certain
other lenders named therein (incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-Q filed November 12, 1997)
10.2 Second Amended and Restated Credit Agreement, dated as of August 12, 1997
(the 'U.S. $300,000,000 Credit Agreement'), among Warnaco Inc., as the
U.S. Borrower, Warnaco (HK) Ltd., as the Foreign Borrower, Citibank, N.A.,
as the Documentation Agent, The Bank of Nova Scotia, as the Administrative
Agent, and certain other lenders named therein (incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q filed November 12,
1997).
10.3 First Amendment to the U.S. $300,000,000 Credit Agreement, dated as of
October 14, 1997 among Warnaco Inc., as the U.S. Borrower, Warnaco (HK)
Ltd. as the Foreign Borrower, Citibank, N.A., as the Documentation Agent,
The Bank of Nova Scotia, as Administrative Agent, and certain other
lenders party thereto (incorporated herein by reference to Exhibit 10.3 to
the Company's Form 10-Q filed November 12, 1997).
10.4 Employment Agreement, dated as of January 6, 1991, between the Company and
Linda J. Wachner (incorporated herein by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1, No. 33-42641).
10.5 Incentive Compensation Plan (incorporated herein by reference to Exhibit
10.8 to the Company's Registration on Form S-1, No. 33-45877).
10.6 1991 Stock Option Plan (incorporated herein by reference to Exhibit 10.9
to the Company's Registration Statement on Form S-1, No. 33-45877).
10.7 Amended and Restated 1988 Employee Stock Purchase Plan, as amended
(incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1, No. 33-45877).
10.8 Warnaco Employee Retirement Plan (incorporated herein by reference to
Exhibit 10.11 to the Company's Registration Statement on Form S-1, No.
33-4587
10.9 Executive Management Agreement, dated as of May 9, 1991, as extended,
between the Company, Warnaco Inc. and The Spectrum Group, Inc.
(incorporated herein by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1, No. 33-45877
10.10 1993 Non-Employee Director Stock Plan (incorporated herein by reference to
the Company's Proxy Statement for its 1994 Annual Meeting of
Stockholders).
10.11 Amended and Restated 1993 Stock Plan (incorporated herein by reference to
the Company's Proxy Statement for its 1994 Annual Meeting of
Stockholders).
10.12 The Warnaco Group, Inc. Supplemental Incentive Compensation Plan
(incorporated herein by reference to the Company's Proxy Statements for
its 1994 and 1999 Annual Meetings of Stockholders).
10.13 Amended and Restated License Agreement dated as of January 1, 1996,
between Polo Ralph Lauren, L.P. and Warnaco Inc. (incorporated herein by
reference to Exhibit 10.4 to the Company's Form 10-Q filed November 12,
1997).
10.14 Amended and Restated Design Services Agreement dated as of January 1,
1996, between Polo Ralph Lauren Enterprises, L.P. and Warnaco Inc.
(incorporated herein by reference to Exhibit 10.5 to the Company's Form
10-Q filed November 12, 1997).
10.15 Agreement and Plan of Merger dated as of September 25, 1997 among The
Warnaco Group, Inc., WAC Acquisition Corporation and Designer Holdings
Ltd. (incorporated herein by reference to Exhibit 2, attached as Appendix
A to the Joint Proxy Statement/Prospectus to the Company's Registration
Statement on Form S-4, No. 333-40207).
36
10.16 Stock Exchange Agreement dated as of September 25, 1997 among The Warnaco
Group, Inc, New Rio, L.L.C. and each of the members of New Rio signatory
hereto (incorporated herein by reference to Exhibit 10.1, attached as
Appendix B to the Joint Proxy Statement/Prospectus to the Company's
Registration Statement on Form S-4, No. 333-40207).
10.17 1997 Stock Option Plan (incorporated herein by reference to Exhibit 10.17
to the Company's Form 10-K filed April 3, 1998).
10.18 License Agreement dated as of August 4, 1994 between Calvin Klein, Inc.
and Calvin Klein Jeanswear Company; incorporated by reference to Exhibit
10.20 to Designer Holdings, Ltd.'s Registration Statement on Form S-1
(File No. 333-2236).
10.19 Amendment to the Calvin Klein License Agreement dated as of December 7,
1994; incorporated by reference to Exhibit 10.21 to Designer Holdings,
Ltd.'s Registration Statement on Form S-1 (File No. 333-2236).
10.20 Amendment to the Calvin Klein License Agreement dated as of January 10,
1995; incorporated by reference to Exhibit 10.22 to Designer Holdings,
Ltd.'s Registration Statement on Form S-1 (File No.333-2236).
10.21 Amendment to the Calvin Klein License Agreement dated as of February 28,
1995; incorporated by reference to Exhibit 10.23 to Designer Holdings,
Ltd.'s Registration Statement on Form S-1 (File No. 333-2236).
10.22 Amendment to the Calvin Klein License Agreement dated as of April 22,
1996; incorporated by reference to Exhibit 10.38 to Designer Holdings,
Ltd.'s Registration Statement on Form S-1 (File No. 333-2236).
10.23 Amendment No. 1, dated as of July 31, 1998, to the Credit Agreement dated
as of August 12, 1997, among Warnaco Inc. and The Warnaco Group, Inc., as
Borrowers, and The Bank of Nova Scotia, as Managing Agent and
Administrative Agent and Citibank N.A., as Managing Agent, and certain
other lenders named therein. (incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-Q filed August 18, 1998).
10.24 Amendment No. 1, dated as of July 31, 1998, to the Credit Agreement dated
as of November 26, 1997, among Warnaco Inc. and The Warnaco Group, Inc.,
as Borrowers, and The Bank of Nova Scotia, as Managing Agent and
Administrative Agent and Citibank N.A., as Managing Agent, and certain
other lenders named therein. (incorporated herein by reference to Exhibit
10.2 to the Company's Form 10-Q filed August 18, 1998).
10.25 Fifth Amended and Restated Credit Agreement, dated as of July 31, 19988,
among Warnaco Inc., as the U.S. Borrower, Designer Holdings, Ltd. and
other wholly-owned domestic subsidiaries as designated from time to time,
as the Sub-Borrowers, Warnaco (HK) Ltd., Warnaco B.V., Warnaco Netherlands
B.V., as the Foreign Borrowers, the Warnaco Group, Inc., as a Guarantor,
and Societe Generale, as the Documentation Agent, Citibank, N.A., as the
Syndication Agent, and The Bank of Nova Scotia, as the Administrative
Agent, and certain other lenders named therein. (incorporated herein by
reference to Exhibit 10.3 to the Company's Form 10-Q filed August 18,
1998).
10.26 Amended and Restated Master Agreement of Sale, dated as of September 30,
1998, among Warnaco Inc., as Originator, and Gregory Street, Inc., as
Buyer and Servicer. (incorporated herein by reference to Exhibit 10.4 to
the Company's Form 10-Q filed November 7, 1998).
10.27 Master Agreement of Sale, dated as of September 30, 1998, among Calvin
Klein Jeanswear Company, as Originator, and Gregory Street, Inc., as Buyer
and Servicer. (incorporated herein by reference to Exhibit 10.5 to the
Company's Form 10-Q filed November 7, 1998).
10.28 Purchase and Sale Agreement, dated as of September 30, 1998, among Gregory
Street, Inc., as Seller and initial Servicer and Warnaco Operations
Corporation, as Buyer. (incorporated herein by reference to Exhibit 10.6
to the Company's Form 10-Q filed November 7, 1998).
10.29 Parallel Purchase Commitment, dated as of September 30, 1998, among
Warnaco Operations Corporation, as Seller and certain commercial lending
institutions, as the Banks, and Gregory Street, Inc., as the initial
Servicer and The Bank of Nova Scotia, as Agent.
37
(incorporated herein by reference to Exhibit 10.7 to the Company's Form
10-Q filed November 7, 1998).
10.30 Receivables Purchase Agreement, dated as of September 30, 1998, among
Warnaco Operations Corporation, as Seller, Gregory Street, Inc., as
Servicer, Liberty Street Funding Corp., and Corporate Asset Funding
Company, Inc. as Investors and The Bank of Nova Scotia, as Agent, and
Citicorp North America, Inc., as Co-Agent. (incorporated herein by
reference to Exhibit 10.8 to the Company's Form 10-Q filed November 7,
1998).
10.31 1998 Stock Plan for Non-Employee Directors.
10.32 Agreement and Plan of Merger dated as of November 15, 1999 by and among
The Warnaco Group, Inc., A Acquisition Corp. and Authentic Fitness
Corporation (incorporated herein by reference to Exhibit C, to the
Company's Schedule 14D1 filed November 17, 1999).
10.33 U.S. $600,000,000 364-Day Credit Agreement, dated as of November 17, 1999
among Warnaco Inc., as Borrower, Morgan Guaranty Trust Company of New York
as Documentation Agent, The Bank of Nova Scotia as Administration Agent
and certain other lenders party thereto (incorporated herein by reference
to Exhibit B to the Company's Schedule 14D-1 filed November 17, 1999).
21 Subsidiaries of the Company (incorporated herein by reference to Exhibit
21 to the Company's Form 10-K filed April 3, 1998).
23.1 Consent of Independent Accountants.
23.2 Consent & PricewaterhouseCooopers LLP
27 Financial Data Schedule.
99.1 Designer Holdings, Ltd. Annual Report on Form 10-K for the year ended
December 31, 1996 (incorporated herein by reference -- Commission file
number 1-11707).
99.2 Authentic Fitness Corporation Annual Report on Form 10-K for the fiscal
year ended July 3, 1999 (incorporated herein by reference -- Commission
file number 1-11202).
(b) Reports on Form 8-K.
The Company filed reports on Form 8-K on August 20, 1999 and November 26,
1999.
38
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 31st day of March, 2000.
THE WARNACO GROUP, INC.
/s/ LINDA J. WACHNER
--------------------
Linda J. Wachner
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ LINDA J. WACHNER Chairman of the Board; Director; March 31, 2000
- -------------------------------------- President and Chief Executive
Linda J. Wachner Officer (Principal Executive Officer)
/s/ WILLIAM S. FINKELSTEIN Director; Senior Vice President, and March 31, 2000
- -------------------------------------- Chief Financial Officer (Principal
William S. Finkelstein Financial and Accounting Officer)
/s/ STUART D. BUCHALTER Director March 31, 2000
- --------------------------------------
Stuart D. Buchalter
/s/ JOSEPH A CALIFANO, JR. Director March 31, 2000
- --------------------------------------
Joseph A. Califano, Jr.
/s/ DONALD G. DRAPKIN Director March 31, 2000
- --------------------------------------
Donald G. Drapkin
/s/ JOSEPH H. FLOM, ESQ. Director March 31, 2000
- --------------------------------------
Joseph H. Flom, Esq.
/s/ ANDREW G. GALEF Director March 31, 2000
- --------------------------------------
Andrew G. Galef
/s/ WALTER F. LOEB Director March 31, 2000
- --------------------------------------
Walter F. Loeb
/s/ DR. MANUEL T. PACHECO Director March 31, 2000
- --------------------------------------
Dr. Manuel T. Pacheco
/s/ STEWART A. RESNICK Director March 31, 2000
- --------------------------------------
Stewart A. Resnick
39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Warnaco Group, Inc.
We have audited the accompanying consolidated balance sheet of The Warnaco Group
Inc. and its subsidiaries as of January 1, 2000 and the related consolidated
statements of operations, stockholders' equity and comprehensive income and cash
flows for the year then ended. Our audit also included the financial statement
schedule for the year ended January 1, 2000 listed in the Index at Item 14(a) 2.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Warnaco Group, Inc. and
subsidiaries as of January 1, 2000, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule for the year ended January 1, 2000,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
New York, New York
March 3, 2000
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Warnaco Group, Inc.
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page 35 present fairly, in all
material respects, the financial position of The Warnaco Group, Inc. and its
subsidiaries at January 2, 1999, and the results of their operations and their
cash flows for each of the two fiscal years in the period ended January 2, 1999,
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As described in Note 1 to the fiscal 1998 consolidated financial statements,
pursuant to the adoption of SOP 98-5 the Company changed its accounting for
deferred start-up costs effective the beginning of fiscal 1998. Also as
described in Note 1 to the fiscal 1998 consolidated financial statements, the
Company restated its fiscal 1997 and 1996 consolidated financial statements with
respect to accounting for inventory production and inefficiency costs.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 2, 1999
F-2
THE WARNACO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, excluding share data)
January 2, January 1,
1999 2000
------------ -----------
ASSETS
Current assets:
Cash $ 9,495 $ 9,328
Accounts receivable, less reserves of $36,668 - 1998 and $32,872 - 1999 199,369 314,961
Marketable securities -- 72,921
Inventories 472,019 734,439
Prepaid expenses and other current assets 26,621 66,015
----------- -----------
Total current assets 707,504 1,197,664
----------- -----------
Property, plant and equipment, at cost:
Land and land improvements 7,060 8,158
Building and building improvements 81,928 113,974
Machinery and equipment 255,163 357,166
----------- -----------
344,151 479,298
Less: Accumulated depreciation and amortization (119,891) (152,946)
----------- -----------
Net property, plant and equipment 224,260 326,352
Other assets:
Licenses, trademarks, intangible and other assets, at cost, less
accumulated amortization of $78,116 -- 1998 and $86,606 -- 1999 306,932 337,997
Excess of cost over net assets acquired, less accumulated amortization
of $51,297 - 1998 and $66,551 - 1999 417,782 842,262
Deferred income taxes 126,655 58,710
----------- -----------
Total other assets 851,369 1,238,969
----------- -----------
$ 1,783,133 $ 2,762,985
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,387 $ 11,052
Short-term debt 20,844 133,752
Accounts payable 503,326 599,768
Accrued liabilities 128,248 111,262
Accrued income taxes payable 3,068 16,217
Deferred income taxes 14,276 7,468
----------- -----------
Total current liabilities 679,149 879,519
----------- -----------
Long-term debt 411,886 1,187,951
----------- -----------
Other long-term liabilities 12,129 29,295
----------- -----------
Commitment and Contingencies (Note 8, 11, 15 and 18) Company-Obligated
Mandatorily Redeemable Convertible Preferred
Securities ($120,000-par value) of Designer Finance Trust Holding
Solely Convertible Debentures 101,836 102,904
Stockholders' equity:
Class A Common Stock, $0.01 par value, 130,000,000 shares authorized,
65,172,608 and 65,393,038 issued in 1998 and 1999 652 654
Additional paid-in capital 953,512 961,368
Accumulated other comprehensive income (loss) (15,703) 24,877
Accumulated deficit (176,997) (99,461)
Treasury stock, at cost - 6,087,674 shares -1998 and 12,163,650 shares - 1999 (171,559) (313,138)
Unearned stock compensation (11,772) (10,984)
----------- -----------
Total stockholders' equity 578,133 563,316
----------- -----------
$ 1,783,133 $ 2,762,985
=========== ===========
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
F-3
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, excluding per share data)
For the Year Ended
-----------------------------------------------------
January 3, January 2, January 1,
1998 1999 2000
----------------- ---------------- ---------------
Net revenues $ 1,435,730 $ 1,950,251 $ 2,114,156
Cost of goods sold 1,060,526 1,413,036 1,413,149
Selling, administrative and general expenses 349,431 451,640 471,108
----------- ----------- -----------
Operating income 25,773 85,575 229,899
Interest expense 45,873 63,790 80,976
----------- ----------- -----------
Income (loss) before income taxes and cumulative effect of
change in accounting principle (20,100) 21,785 148,923
Provision (benefit) for income taxes (7,781) 7,688 51,137
----------- ----------- -----------
Income (loss) before cumulative effect of a change in
accounting principle (12,319) 14,097 97,786
Cumulative effect of change in accounting for deferred
start-up costs, net -- (46,250) --
----------- ----------- -----------
Net income (loss) $ (12,319) $ (32,153) $ 97,786
=========== =========== ===========
Basic earnings (loss) per common share:
Income (loss) before accounting change $ (0.23) $ 0.23 $ 1.75
Cumulative effect of accounting change -- (0.75) --
----------- ----------- -----------
Net income (loss) $ (0.23) $ (0.52) $ 1.75
=========== =========== ===========
Diluted earnings (loss) per common share:
Income (loss) before accounting change $ (0.23) $ 0.22 $ 1.72
Cumulative effect of accounting change -- (0.73) --
----------- ----------- -----------
Net income (loss) $ (0.23) $ (0.51) $ 1.72
=========== =========== ===========
Shares used in computing earnings per share:
Basic 52,814 61,362 55,910
=========== =========== ===========
Diluted 52,814 63,005 56,796
=========== =========== ===========
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
F-4
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands, excluding share data)
Accumulated
Other
Class A Additional Comprehensive
Common Paid-in Income Accumulated
Stock Capital (Loss) Deficit
---------- ------------ ------------- -----------
Balance at January 4, 1997 $ 524 $ 575,691 $ (3,307) $ (92,837)
---------- ------------ ------------- -----------
Net loss (12,319)
Translation adjustments (11,531)
Comprehensive income (loss)
Issuance of 137,135 shares of
restricted stock 1 3,600
Dividends declared (17,265)
Employee stock options exercised
and payment of employee
notes receivable 4 9,498
Net cash settlements under equity
option arrangements (1,620)
Amortization of unearned stock
compensation
Purchase of 839,319 shares of
treasury stock
Issuance of 10,413,144 shares for the
acquisition of Designer Holdings Ltd. 104 353,292
---------- ------------ ------------- ------------
Balance at January 3, 1998 633 940,461 (14,838) (122,421)
---------- ------------ ------------- ------------
Net loss (32,153)
Translation adjustments (865)
Comprehensive income (loss)
Employee stock options exercised
and payment of employee
note receivable 17 3,046
Net cash settlements under equity
option arrangements 2,325
Issuance of 182,903 shares of
restricted stock 2 7,680
Dividends declared (22,423)
Amortization of unearned stock
compensation
Purchase of 4,794,699 shares of
treasury stock
---------- ------------ ------------- -----------
Balance at January 2, 1999 652 953,512 (15,703) (176,997)
---------- ------------ ------------- -----------
Net income 97,786
Translation adjustments 1,614
Unrealized gain on marketable securities 38,966
Comprehensive income
Employee stock options exercised 3,131
Issuance of 190,680 shares of
restricted stock 2 5,456
Dividends declared (20,250)
Amortization of unearned stock
compensation
Purchase of 6,182,088 shares of
treasury stock
Issuance of 100,000 shares of
treasury stock for acquisition of ABS (731)
---------- ------------ ------------- -----------
Balance at January 1, 2000 $ 654 $ 961,368 $ 24,877 $ (99,461)
========== ============ ============= ===========
Treasury Unearned Stock
Stock Compensation Total
------------- ------------- ----------
Balance at January 4, 1997 $(12,030) $ (15,497) $ 452,544
------------- ------------- ----------
Net loss (12,319)
Translation adjustments (11,531)
----------
Comprehensive income (loss) (23,850)
Issuance of 137,135 shares of
restricted stock (3,601) -
Dividends declared (17,265)
Employee stock options exercised
and payment of employee
notes receivable 70 9,572
Net cash settlements under equity
option arrangements (1,620)
Amortization of unearned stock
compensation 3,322 3,322
Purchase of 839,319 shares of
treasury stock (26,537) (26,537)
Issuance of 10,413,144 shares for the
acquisition of Designer Holdings Ltd. 353,396
-------------- -------------- ----------
Balance at January 3, 1998 (38,567) (15,706) 749,562
-------------- -------------- ----------
Net loss (32,153)
Translation adjustments (865)
----------
Comprehensive income (loss) (33,018)
Employee stock options exercised
and payment of employee
note receivable 2,424 5,971 11,458
Net cash settlements under equity
option arrangements 2,325
Issuance of 182,903 shares of
restricted stock (7,682) -
Dividends declared (22,423)
Amortization of unearned stock
compensation 5,645 5,645
Purchase of 4,794,699 shares of
treasury stock (135,416) (135,416)
------------- ------------- ----------
Balance at January 2, 1999 (171,559) (11,772) 578,133
------------- ------------- ----------
Net income 97,786
Translation adjustments 1,614
Unrealized gain on marketable securities 38,966
----------
----------
Comprehensive income 138,366
Employee stock options exercised 178 3,309
Issuance of 190,680 shares of
restricted stock (5,458) -
Dividends declared (20,250)
Amortization of unearned stock
compensation 6,246 6,246
Purchase of 6,182,088 shares of
treasury stock (144,688) (144,688)
Issuance of 100,000 shares of
treasury stock for acquisition of ABS 2,931 2,200
------------- ------------- ----------
Balance at January 1, 2000 $(313,138) $ (10,984) $ 563,316
============= ============= ==========
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
F-5
THE WARNACO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Year Ended
----------------------------------------------------
January 3, January 2, January 1,
1998 1999 2000
--------------- ------------------ ----------------
Cash flow from operating activities:
Net income (loss) $ (12,319) $ (32,153) $ 97,786
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 47,385 46,500 60,956
Provision for receivable allowances 139,469 166,347 206,098
Provision for inventory write-downs 57,298 25,442 6,247
Cumulative effect of accounting change - 46,250 -
Amortization of unearned stock compensation 3,322 4,978 6,246
Non-recurring items 48,806 95,143 -
Deferred income taxes (13,906) (74,616) 34,151
Sale of accounts receivable - 170,500 25,400
Accounts receivable (145,652) (250,109) (268,767)
Inventories (71,944) (87,404) (153,491)
Prepaid expenses and other current assets 26,377 15,433 (17,791)
Accounts payable and accrued expenses 94,015 212,549 13,182
Cash portion of non-recurring items (28,972) (5,200) -
---------- ---------- ----------
Net cash from operating activities 143,879 333,660 10,011
---------- ---------- ----------
Cash flow from investing activities:
Proceeds from sale/leaseback transaction 33,223 21,713 23,185
Disposal of fixed assets 1,704 3,966 4,726
Increase in intangibles and other assets (26,964) (7,849) (29,813)
Purchase of property, plant and equipment (57,399) (142,787) (109,088)
Acquisition of businesses, net of cash acquired 55,800 (53,118) (625,515)
Payment of assumed liabilities and acquisition accruals (28,346) (43,765) -
---------- ---------- ----------
Net cash from investing activities (21,982) (221,840) (736,505)
---------- ---------- ----------
Cash flow from financing activities:
Proceeds from sale of common stock, sale of treasury
shares and payment of notes receivables from employees 7,270 46,476 3,309
Net borrowings (repayments) under credit facilities (153,394) 49,237 315,075
Borrowings under term loan agreements - 20,706 -
Borrowings under acquisition loan facility - - 586,200
Proceeds from debt issuance 291,109 2,027 -
Repayments of debt (224,281) (6,094) (9,387)
Cash dividends paid (16,220) (22,284) (20,631)
Payment of withholding taxes on option exercises (575) (38,095) (2,640)
Purchase of treasury shares and net cash settlements under
equity option arrangements (27,582) (132,992) (142,048)
Other (1,492) (35,280) (5,165)
---------- ---------- ----------
Net cash from financing activities (125,165) (116,299) 724,713
---------- ---------- ----------
Effect on cash due to currency translation 3,437 1,965 1,614
---------- ---------- ----------
Increase (decrease) in cash 169 (2,514) (167)
Cash at beginning of year 11,840 12,009 9,495
---------- ---------- ----------
Cash at end of year $ 12,009 $ 9,495 $ 9,328
========== ========== ==========
F-6
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Organization: The Warnaco Group, Inc. (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.
Nature of Operations: The Company designs, manufactures and markets a
broad line of women's intimate apparel, designer jeanswear, khakis and jeans
related sportswear for men, women, juniors and children, men's underwear and
men's sportswear, accessories and dress furnishings and active apparel for men,
women and children under a number of owned and licensed brand names. The
Company's products are sold to department and specialty stores, chain stores,
mass merchandise stores, sporting goods stores, and catalog and other retailers
throughout the world.
Basis of Consolidation and Presentation: The accompanying consolidated
financial statements include the accounts of the Company and all subsidiary
companies for the years ended January 3, 1998 ("Fiscal 1997"), January 2, 1999
("Fiscal 1998") and January 1, 2000 ("Fiscal 1999"). All significant
intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates: The Company utilizes estimates and assumptions in the
preparation of financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. These estimates and
assumptions also affect the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Translation of Foreign Currencies: Cumulative translation adjustments,
arising primarily from consolidating the net assets and liabilities of the
Company's foreign operations at current rates of exchange as of the respective
balance sheet date, are applied directly to stockholders' equity and are
included as part of accumulated other comprehensive income (loss). Income and
expense items for the Company's foreign operations are translated using monthly
average exchange rates.
Cash and Cash equivalents: Cash and cash equivalents represent cash and
short-term, highly liquid investments with original maturities of three months
or less.
Marketable Securities: Marketable securities are stated at fair value
based on quoted market prices. All investments were classified as
available-for-sale with any unrealized gains or losses, net of tax, included as
a component of stockholders' equity and included in other comprehensive income.
Inventories: Inventories are stated at the lower of cost or market, cost
being determined principally on a first-in, first-out basis.
Property, plant and equipment: Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided over the lesser of the estimated useful lives of the
assets or term of the lease, using the straight-line method, as summarized
below:
Buildings............................... 20-40 years
Building improvements................... 2-20 years
Machinery and equipment................. 3-10 years
Computer software ...................... 3- 7 years
F-7
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Assets under capital lease and related amortization of capitalized leases
are included in property, plant and equipment and accumulated depreciation and
the associated liability is included in debt. Depreciation expense was $21,865,
$23,931 and $36,671 for fiscal years 1997, 1998 and 1999, respectively.
Computer Software Costs: Internal and external direct and incremental
costs incurred in developing or obtaining computer software for internal use are
capitalized in property, plant and equipment and amortized, under the
straight-line method, over the estimated useful life of the software, generally
3 to 7 years. General and administrative costs related to developing or
obtaining such software are expensed as incurred.
Intangible Assets: Intangible assets consist of goodwill, licenses,
trademarks, deferred financing costs and other intangible assets. Goodwill
represents the excess of cost over net assets acquired from business
acquisitions, and is amortized on a straight-line basis over the estimated
useful life, not exceeding 40 years. Deferred financing costs are amortized
over the life of the related debt and included in interest expense. Deferred
financing costs were $8,620 and $13,399 in fiscal years 1998 and 1999,
respectively. Licenses and trademarks were $272,894 in fiscal 1999 and
$243,400 in fiscal 1998. Licenses are amortized over the remaining life
of the license, which range between 5 and 40 years and trademarks are
amortized over the remaining life of the trademark not to exceed 20 years.
Other assets of $51,704 in fiscal 1999 and $54,912 in fiscal 1998 include
long-term investments, other non-current assets and deposits. Amortization
of intangible assets, included in selling, administrative and general expenses
was $10,021, $22,569 and $24,285 for fiscal years 1997, 1998 and 1999,
respectively.
The Company reviews impairment when changes in circumstances, which
include, but are not limited to, the historical and projected operating
performance of business operations, specific industry trends and general
economic conditions, indicate that the carrying value of business specific
intangibles or enterprise level goodwill may not be recoverable. Under these
circumstances, the Company estimates future cash flows using the recoverability
method (undiscounted and including related interest charges), as a basis for
recording any impairment loss. An impairment loss would then be recorded to
adjust the carrying value of intangibles to the recoverable amount. The
impairment loss taken would be no greater than the amount by which the carrying
value of the net assets of the business exceeds its fair value. No such
impairment losses have been recorded.
Advertising Costs: Advertising costs are included in selling,
administrative and general expenses and expensed as incurred. Cooperative
advertising allowances provided to customers are charged to operations, as
earned, and are included in selling, administrative and general expenses. The
amounts charged to operations for advertising costs and cooperative advertising
during fiscal 1997, 1998 and 1999 were $86,200, $102,600, and $118,029,
respectively.
Income Taxes: The provision for income taxes, income taxes payable and
deferred income taxes are determined using the liability method. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
enacted tax rates and laws to taxable years in which such differences are
expected to reverse. As of January 1, 2000, unremitted earnings of non-U.S.
subsidiaries were approximately $125,000. Since it is the Company's intention to
permanently reinvest these earnings, no U.S. taxes have been provided.
Management believes that the amount of additional taxes that might be payable on
the statutory earnings of foreign subsidiaries, if remitted, would be partially
offset by foreign tax credits, however, the determination of these additional
taxes is not practicable.
F-8
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Revenue Recognition: The Company recognizes revenue when goods are shipped
to customers, net of estimates for normal returns, discounts and allowances.
Stock Options: The Company accounts for options granted using the
intrinsic value method. Because the exercise price of the Company's options
equals the market value of the underlying stock on the date of grant, no
compensation expense has been recognized for any period presented.
Financial Instruments: Derivative financial instruments are used by the
Company in the management of its interest rate and foreign currency exposures.
The Company also uses derivative financial instruments to execute purchases of
its shares under its stock buyback program. The Company does not use derivative
financial instruments for speculation or for trading purposes. Gains and losses
resulting from effective hedges of existing assets, liabilities or firm
commitments are deferred and recognized when the offsetting gains and losses are
recognized on the related hedged items. Income and expense are recorded in the
same category as that arising from the related asset or liability being hedged.
Changes in amounts to be received or paid under interest rate swap agreements
are recognized as interest expense. Gains and losses realized on termination of
interest rate swap contracts are deferred and amortized over the remaining terms
of the original hedged instrument.
A number of major international financial institutions are counterparties
to the Company's financial instruments, including derivative financial
instruments. The Company monitors its positions with, and the credit quality of,
these counterparty financial institutions and does not anticipate
non-performance of these counterparties. Management believes that the Company
would not suffer a material loss in the event of nonperformance by these
counterparties.
Equity Instruments Indexed to the Company's Common Stock: Equity
instruments are originally recorded at fair value. Proceeds received upon the
sale of equity instruments and amounts paid upon the purchase of equity
instruments are recorded as a component of stockholders' equity. Subsequent
changes in the fair value of the equity instrument contracts are not recognized.
Repurchases of common stock pursuant to the terms of the equity instruments are
recorded as treasury stock, at cost. If the contracts are ultimately settled in
cash, the amount of cash paid or received is recorded in additional paid-in
capital.
Concentration of Credit Risk: The Company sells its products to department
stores, specialty stores, chain stores, sporting goods stores, catalogs, direct
sellers and mass merchandisers. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require collateral.
The Company has credit insurance covering these customers within agreed upon
limits. Credit losses have been within management's expectations.
Comprehensive Income: Comprehensive income consists of net income,
unrealized gain/(loss) on marketable securities (net of tax), and cumulative
foreign currency translation adjustments. Because such cumulative translation
adjustments are considered a component of permanently invested unremitted
earnings of subsidiaries outside the United States, no income taxes are provided
on such amounts.
Start-Up Costs: In the fourth quarter of fiscal 1998, retroactive to the
beginning of the year, the Company early adopted the provisions of SOP 98-5
requiring that pre-operating costs relating to the start-up of new manufacturing
facilities, product lines and businesses be expensed as incurred. The Company
recognized $46,250, after taxes ($71,484 pre-tax), as the cumulative effect of a
change in accounting to reflect the new accounting and write-off the balance of
unamortized deferred start-up costs as of the beginning of 1998. In addition,
in fiscal 1998 the Company recognized a charge to earnings of approximately
$40,823, before taxes, related to current year costs that would have been
deferred under the Company's start-up accounting policy prior to the adoption of
SOP 98-5. Prior to the early adoption
F-9
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
of SOP 98-5, start-up costs were deferred and amortized using the straight line
method, principally over five years.
Reclassifications: Certain 1998 and 1997 amounts have been reclassified in
the 1999 consolidated financial statements to conform to the current
presentation.
Recent accounting pronouncements: In June 1998, the FASB issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
was originally effective for fiscal years beginning after June 15, 1999.
However, in June 1999, the FASB Issued SFAS No. 137 "Deferral of the effective
date of FASB Statement No. 133" delaying the effective date of SFAS No. 133
until fiscal years beginning after June 15, 2000. The Company is evaluating the
application of the new statement and the impact on the Company's consolidated
financial position, liquidity, cash flows and results of operations.
Note 2 - Acquisitions
Authentic Fitness
In December 1999, the Company acquired all of the outstanding common stock
of Authentic Fitness Corporation ("Authentic Fitness") for $437,100 (all of
which was financed), excluding debt assumed of approximately $154,170. The
acquisition was accounted for as a purchase. Accordingly, the accompanying
consolidated financial statements include the results of operations for
Authentic Fitness commencing on December 16, 1999. The preliminary allocation of
the total purchase price, exclusive of cash of approximately $7,000, to the
fair value of the net assets acquired and liabilities assumed is summarized as
follows:
Fair value of assets acquired............................. $ 674,256
Liabilities assumed....................................... (79,731)
-------
Purchase price -- net of cash balance..................... $ 594,525
-------
-------
Included in intangible and other assets for the Authentic Fitness
acquisition is $377,600 of goodwill. The final assessment of the purchase
accounting will be completed during fiscal 2000.
The following summarized unaudited pro forma information combines financial
information of the Company with Authentic Fitness for fiscal years 1998 and 1999
assuming the acquisition had occurred as January 4, 1998. The Unaudited Pro
Forma Combined Statements of Income combine Warnaco's results for its fiscal
years ended January 2, 1999 and January 1, 2000 with Authentic Fitness' results
for the twelve month periods ended January 2, 1999 and January 1, 2000. The
unaudited pro forma information does not reflect any cost savings or other
benefits anticipated by the Company's management as a result of the acquisition.
The unaudited pro forma information does reflect interest expense on the
additional financing of $437,100 incurred for the acquisition and the
amortization of goodwill using a 40-year life.
F-10
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
For the Year Ended
---------------------------
January 2, January 1,
Statement of Income Data: 1999 2000
------------ -------------
Net revenues $ 2,313,280 $ 2,473,771
Income before cumulative effect of change 8,550 65,994
in accounting principle
Net income (loss) $ (37,700) $ 65,994
=========== ===========
Basic earnings per common share before
accounting change $ 0.14 $ 1.18
=========== ===========
Diluted earnings per common share before
accounting change $ 0.14 $ 1.16
=========== ===========
The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined companies, had the acquisition
occurred on the dates specified above, nor is it indicative of future results of
operations for the combined companies at any future date or for any future
periods.
A.B.S. Clothing Collections, Inc.
In September 1999, the Company acquired all of the outstanding common
stock of A.B.S. Clothing Collection, Inc. ("ABS"). ABS is a leading contemporary
designer of casual sportswear and dresses sold through better department and
specialty stores. The purchase price consisted of a cash payment of $29,500,
shares of the Company's common stock with a fair market value of $2,200, a
deferred cash payment of $22,800 and other costs incurred in the acquisition
of approximately $1,028. The acquisition was accounted for as a purchase. The
preliminary allocation of the purchase price to the fair market value of
assets acquired is summarized as follows:
Fair value of asets acquired $59,720
Liabilities assumed 3,901
--------
Purchase price $55,708
=======
The acquisition did not have a material pro-forma impact on fiscal 1999
consolidated earnings. Included in intangible and other assets for the ABS
acquisition is $54,068 of goodwill which is being amortized over 20 years.
Other Acquisitions - 1999
During 1999, the Company acquired two other companies and certain
other licenses to sell products in Canada which were not significant and did not
have a significant pro forma impact on fiscal
F-11
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
1999 consolidated earnings. The excess purchase price over fair value of the net
assets acquired and liabilities assumed on these acquisitions was approximately
$5.0 million.
Other Acquisitions - 1998
During 1998, the Company acquired certain inventory and other assets as
well as the sub-license to produce Calvin Klein jeans and jeans-related products
for children in the United States, Mexico and Central and South America and the
sub-license to produce Calvin Klein jeans and related products for children in
Canada. Also during 1998, the Company acquired certain assets as well as the
sub-license to distribute Calvin Klein jeans, jeans-related products and khakis
for men and women in Mexico, Central America and Canada. The total cost of these
acquisitions, including related costs and expenses, was $53,100. The allocation
of the purchase prices to the fair value of the assets acquired as of January 2,
1999 is summarized below:
Inventories................................... $ 2,300
Other current assets.......................... 300
Fixed assets.................................. 300
Intangible and other assets................... 58,000
Accrued liabilities........................... (7,800)
----------
Purchase price................................ $ 53,100
==========
The acquisition which was accounted for as a purchase did not have a
material pro-forma effect on 1998 consolidated results of operations.
Designer Holdings Ltd.
In October 1997, the Company acquired 51.3% of Designer Holdings Ltd.
("Designer Holdings") outstanding common stock in exchange for 5,340,773 shares
of the Company's common stock and agreed, subject to shareholder approval, to
acquire the remaining shares outstanding at the same exchange ratio. In December
1997, the Company acquired the remaining 48.7% of the outstanding common stock
of Designer Holdings in exchange for 5,072,371 shares of the Company's common
stock. Designer Holdings develops, manufactures and markets designer jeanswear,
khakis and jeans related sportswear for men, women and juniors, and has a
40-year extendable license from Calvin Klein, Inc. to develop, manufacture and
market designer jeanswear, khakis and sportswear collections in North, South and
Central America under the Calvin Klein Jeans'r', CK/Calvin Klein Jeans'r' and
CK/Calvin Klein/Khakis'r' labels.
The acquisition was accounted for as a purchase. Accordingly, the
accompanying consolidated financial statements include the results of operations
for Designer Holdings commencing in October 1997. The minority interest for
periods of less than 100% ownership by the Company have been included in
selling, administrative and general expenses. In connection with this
acquisition, the Company issued a total of 10,413,144 shares of its common
stock, with a fair market value of $353,396. The allocation of the total
purchase price, exclusive of cash received of approximately $55,800 to the fair
value of the net assets acquired is summarized as follows:
Accounts receivable................................... $ 76,600
Inventories .......................................... 74,300
Prepaid and other current assets...................... 41,000
Property and equipment................................ 4,100
Intangible and other assets........................... 355,809
Accounts payable and accrued liabilities.............. (127,325)
Deferred income taxes................................. (25,884)
Other liabilities..................................... (500)
Mandatorily redeemable preferred securities........... (100,500)
--------
Purchase price -- net of cash balances................ $ 297,600
=========
Included in intangible and other assets for the Designer Holdings
acquisition are $163,600 for licenses and $171,500 of goodwill.
The following summarized unaudited pro forma information combines
financial information of the Company with Designer Holdings for fiscal year 1997
assuming the acquisition had occurred as of January 5, 1997. The unaudited pro
forma information does not reflect any cost savings or other benefits
anticipated by the Company's management as a result of the acquisition.
F-12
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
For the Year Ended
January 3,
1998
----
Statement of Income Data:
Net revenues.................................................. $1,800,800
Income (loss) before extraordinary item....................... (16,700)
Net income (loss)............................................. (16,700)
Income (loss) per common share:
Basic......................................................... $ (0.34)
===========
Diluted....................................................... $ (0.36)
===========
The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred on the dates specified above, nor is it indicative of future results of
operations for the combined companies at any future date or for any future
periods.
In conjunction with the allocation of purchase price of Designer Holdings,
the Company recorded accruals of approximately $48,313. These charges relate
generally to employee termination and severance benefits, facility exit costs,
including lease termination costs (representing future lease payments on
abandoned facilities) and contract termination costs. The details of the charges
recorded in the fourth quarter of fiscal 1997 and in fiscal 1998 and subsequent
activity, are summarized below:
Prior to its acquisition by the Company, Designer Holdings experienced
substantial sales growth. A significant portion of this sales growth was
achieved through distribution to jobbers and off-price retailers. Additionally,
Designer Holdings had also announced a significant increase in the number of its
outlet stores. The Company viewed this growth and expansion as detrimental to
the long-term integrity and value of the brand. To sustain its growth strategy,
Designer Holdings committed to large quantities of inventories. When the primary
department store distribution channel was unable to absorb all of Designer
Holdings' committed production, it increased sales to the secondary and tertiary
distribution channels, including sales to jobbers, off-price retailers and
Designer Holdings' own outlet stores, which were expanded to serve as an
additional channel of distribution. The Company's post-acquisition strategy did
not embrace the outlet store expansion or expansion of secondary channels of
distribution, thereby significantly eliminating product distribution, resulting
in excess inventory.
The Company had a different plan from that of Designer Holdings for
realization of inventories and accounts receivable, as follows: Based
upon its strategy for the business, it had to quickly dispose of significantly
higher than desirable levels of inventory. It had to stabilize relationships
with its core department store customers. It had to collect receivable balances
from customers with whom the Company would no longer do business, and had to
respond to challenges from the core department store customers who were
adversely impacted by channel conflict and brand image issues. Finally, the
Company began a complete redesign of the product, the impact of which would not
be immediately felt at retail due to the fact that Designer Holdings had already
committed to inventory that was in production to be delivered for the ensuing
seasons.
The consequences related not only to the receivables and inventory
acquired, but also to the design, fabric and inventory purchases to which
Designer Holdings had previously committed. Immediately following the
acquisition, the Company began quickly liquidating excess inventories. Most of
these sales were below original cost. Not only did the Company fail to recover
cost (including royalties payable to the licensor), it was deprived of the
"reasonable gross profit" contemplated by APB Opinion 16 in valuing acquired
inventory. Accordingly, the Company reduced the historical carrying value of
inventory by $18 million. The $18 million fair value adjustment recorded
addressed all of these issues and represented the fair value of inventory
pursuant to APB Opinion 16.
The Company offered significant discounts (by negotiating settlements on a
customer by customer basis) to collect outstanding receivable balances in light
of product related issues raised, as well as the decision to discontinue certain
channels of distribution, realizing that these balances would become
increasingly more difficult to collect with the passage of time. In addition,
the core retail customers took substantial deductions against current invoices
for the Designer Holdings inventory in the stores, unilaterally revising the
economics of the initial sale transaction entered into by Designer Holdings.
Although these deductions relate to both the inventory acquired and
pre-acquisition accounts receivable, the decrease in asset value manifested
itself through accounts receivable as a result of these deductions. Accordingly,
the Company reduced the historical carrying value of accounts receivable by $31
million. The $31 million fair value adjustment, which was recorded pursuant to
APB Opinion 16, addresses these issues.
The Company believes that these strategies should enhance future results of
operations and cash flows, however, these fair value adjustments will result in
additional annual goodwill amortization of approximately $1.2 million.
F-13
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Severance and Facility
Other Employee Exit
Fiscal 1997 - 4th Quarter Related Costs Costs Other Total
----------- --------- ---------- --------
Total Provisions $ 20,631 $ 3,470 $ 900 $ 25,001
Cash Reductions (10,800) (3,300) (900) (15,000)
-------- -------- -------- --------
Balance as of January 3, 1998 9,831 170 -- 10,001
-------- -------- -------- --------
Total Provisions 5,957 17,300 55 23,312
Cash Reductions (6,266) (4,762) (55) (11,083)
-------- -------- -------- --------
Balance as of January 2, 1999 9,522 12,708 $ -- 22,230
========
Cash reductions (4,515) (1,839) (6,354)
Reversals (4,798) (10,869) (15,667)
------- -------- --------
Balance as of January 1, 2000 $ 209 $ -- $ 209
======== ======== ========
Severance and other employee related costs - $26,588 (as detailed below)
- ------------------------------------------------------------------------
Contractual employee obligations - $19,000
The former CEO of Designer Holdings and nine senior executives of
Designer Holdings were terminated by the Company. The amounts represent
contractual obligations under their contracts with Designer Holdings.
The Company, in fiscal 1999 was able to negotiate an exit from its
distribution facility, as contemplated by the exit plan, without
incurring severance and unfunded pension liability by concluding
an agreement with a successor or employer. As a result of these
developments the Company, in fiscal 1999, reversed by $4.8 million in
unused accruals as a reduction of goodwill.
Other employee severance and related benefit payments - $7,588
Represents $5,200 of severance and unfunded pension liabilities for 506
bargaining unit employees of Designer Holdings in the two factories and
a distribution facility that were closed in accordance with the
Company's exit plan and $2,388 of severance for 90 Designer Holdings'
headquarters and 40 Designer Holdings' Hong Kong office employees.
The Company, in fiscal 1999 was able to negotiate an exit from its
distribution facility, as contemplated by the exit plan, without
incurring certain facility exit costs by concluding an agreement with
a successor employer. As a result of these developments the company in
fiscal 1999 reversed $10.8 million in unused accruals as a reduction
of goodwill.
As of January 1, 2000, the remaining accrual of $209 represents the remaining
severance costs for employees of Designer Holdings terminated prior to fiscal
1999, anticipated to be utilized by early fiscal 2000.
Facility exit costs - $20,770
Represents $9,000 for the anticipated lease buyout and the cost associated
with the unused portion of a distribution center, $5,000 of property, equipment
and leasehold improvements to be abandoned in connection with the two factories
and distribution facility that were closed and $6,770 for the lease buyout and
abandonment of leasehold improvements in connection with closing Designer
Holdings' headquarters and Hong Kong office.
F-14
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Contract termination costs - $9,000 (not included in the aforementioned table)
Represents fees and amounts paid in connection with terminating Designer
Holdings' accounts receivable factoring arrangement, including the settlement of
outstanding balances.
Note 3 - Restructuring, Special Charges and Other Non-Recurring Items
During 1998 and 1997, the Company recorded restructuring and restructuring
related charges of $40,000 ($25,874 net of tax benefit) and, $118,819 ($73,633
net of tax benefit), respectively.
These charges relate generally to exiting facilities, realignment of
manufacturing and distribution operations, discontinuing product lines and the
integration of businesses following acquisitions, and include charges related to
inventory write-downs, asset impairments, employee termination and severance
benefits and lease termination costs (representing future lease payments on
abandoned facilities). Any costs that do not qualify as exit costs have been
charged to expense as incurred.
Asset impairments relate principally to the write-off of unamortized
leasehold improvements for vacated locations. Any other fixed assets that were
written-down were abandoned and taken out of service at the time of the
write-down and related depreciation was discontinued at that time.
For inventory which management determined was salable, the estimated
write-down was based upon the differences between the expected net sales
proceeds of the inventory and the carrying value of the inventory. In the case
of scrapped inventory, the write-down was equal to the carrying value of the
inventory and the cost of disposal.
F-15
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
In addition, during 1998 and 1997, the Company incurred special and non-
recurring charges of $8,500 ($5,498 net of tax benefit) and, $6,846 ($4,246 net
of tax benefit), respectively.
The Company maintains a general allowance for doubtful accounts based upon
historical loss experience. The Company records specific provisions based upon
information about a particular customer when such information becomes known.
The Company regularly reviews the adequacy of its reserves and adjusts
them as appropriate based upon available information.
1998
As a result of a strategic review of the Company's businesses,
manufacturing and other facilities, product lines and styles and worldwide
operations following significant acquisitions in 1996 and 1997, in the fourth
quarter of 1998 the Company initiated the implementation of programs designed to
streamline operations and improve profitability. These programs resulted in
pre-tax charges of approximately $40,000 related to costs to exit certain
product lines and styles, as well as facilities and realignment of manufacturing
and distribution activities, including charges related to inventory write-downs
and employee termination and severance benefits.
Additionally, in the fourth quarter of fiscal 1998, the Company wrote-off
approximately $8,500 which included $8,000 of accounts receivable, consisting of
customer bankruptcies of $3,900 and other accounts receivable write-offs of $4.1
million (see Note 5 to the Consolidated Financial Statements).
Of the total $48,500 of 1998 charges, $22,100 is reflected in cost of
goods sold and $26,400 is reflected in selling, administrative and general
expenses.
The detail of the charges recorded in 1998, including costs incurred and
reserves remaining for costs estimated to be incurred through completion of the
aforementioned programs, are summarized below:
Facilities Employee
shutdowns termination
Asset and Retail outlet and
write-offs realignment store closings severance Total
------------------ ------------------ ------------------- ---------------- ----------
1998 Provision $ 15,300 $ 6,000 $ 4,800 $ 6,100 $ 32,200
Other related period costs,
charged to expense as incurred 2,500 2,500
Cash reductions (1,672) (2,500) (4,172)
Non-cash reductions (13,700) (6,000) (4,228) (23,928)
-------- -------- -------- -------- --------
Balance as of January 2, 1999 1,600 828 572 3,600 6,600
Cash reductions (828) (572) (3,263) (4,663)
Non-cash reductions (1,600) -- (1,600)
-------- -------- -------- -------- --------
Balance as of January 1, 2000 $ -- $ -- $ -- $ 337 $ 337
======== ======== ======== ======== ========
F-16
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Discontinued Product Lines and Styles and Manufacturing and Distribution
Realignment ($23,800)
Management's review of certain product lines resulted in the decision to
discontinue the manufacture and marketing of certain unprofitable product lines
during the fourth quarter of 1998, including the Valentino and Marilyn Monroe
product lines, as well as certain private label brands. The decision to
discontinue these product lines will enable the Company to focus its working
capital on more profitable product lines and styles. The Company also announced
the realignment of manufacturing and distribution operations as an effort to
reduce costs. Included in the amount above are charges for inventory write-downs
for obsolete and excess raw materials and finished goods of $13,500 (included in
cost of sales), and receivable write-offs of $1,800 (included in selling,
administrative and general expenses).
Costs for facility shutdowns of $6,000 represent the write-off of
unamortized leaseholds and fixed and other assets at the Company's former
administrative offices in Connecticut. The cost for facility realignment of
$2,500, all of which was incurred in 1998, includes charges for the relocation
of and realignment of existing factories and consolidation of warehouse and
distribution facilities.
For fiscal 1998, discontinued product lines and styles contributed net
revenues of $26,300 and operating losses of $13,400. Fourth quarter operating
losses incurred subsequent to the commitment date of the decision to discontinue
these product lines and styles were $5,300. These product lines contributed net
revenues of $56,800 and operating losses of $700 in fiscal 1997.
Retail Outlet Store Shutdowns ($4,800)
In an effort to improve the overall profitability of the retail outlet
store division, the Company announced plans to close 13 retail outlet stores.
Included in the charge are costs for the write-down of inventory of discontinued
product lines and styles which the Company intends to liquidate through these
stores at close-out prices of $4,100 and costs for terminating leases of $700.
The Company closed all of the stores by the second quarter of 1999.
Employee Termination and Severance ($6,100)
The Company recorded charges of approximately $800 related to the cost of
providing severance and benefits to approximately 381 manufacturing related
employees terminated as a result of the closure of certain facilities and $5,300
(all of which was charged to expense at the date when 123 managerial and
administrative employees were terminated) related to a reduction in work force
during the fourth quarter of 1998.
Additional Costs Related to Prior Strategic Initiatives ($5,300)
The Company expensed as incurred approximately $2,000 of additional costs,
(in part due to facilities remediation) related to the final disposition of
certain Hathaway assets that were retained following the sale of that division
in 1996.
The Company expensed as incurred approximately $3,300 of additional costs
related to the merger integration initiative undertaken in 1997 following the
Designer Holdings acquisition. These costs relate principally to settlements on
accounts receivable balances with common customers.( See 1997 chart below)
F-17
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
1997
During the fourth quarter of 1997, the Company recorded restructuring and
restructuring related pre-tax charges of $118,819. These charges related to the
integration of Designer Holdings ($44,620) following its acquisition, the
Intimate Apparel (including GJM) consolidation and realignment program
($63,699) and the disposition of certain retained Hathaway assets ($10,500).
Additionally, in the fourth quarter of fiscal 1997, the Company wrote-off
approximately $6,300 of accounts receivable, consisting of customer bankruptcies
($3,400) and other accounts receivable write-offs ($2,900) (see Note 5 to the
Consolidated Financial Statement) and incurred $546 of other non-recurring
expenses.
Of the total $125,665 of 1997 charges, $76,645 is reflected in cost of
goods sold and $49,020 is reflected in selling, administrative and general
expenses.
Merger Related Integration Costs ($44,620)
Designer Holdings (which was acquired in fiscal 1997) and the Company
previously operated retail outlets in several common locations, which the
Company elected to consolidate. As a result, the Company recorded a charge of
$18,420 as follows: $3,300 for anticipated lease termination costs related to
sixteen of its Warner's outlet stores, $1,200 for the write-off of related
leasehold improvements and $13,920 for the close-out of store inventories and
surplus stocks not considered suitable for redirected marketing efforts in the
new store format.
In addition, following the acquisition in December 1997, the Company
consolidated the credit and collection functions of the companies. In an effort
to accelerate cash collections from common customers following the Designer
Holdings acquisition, the Company initiated a program of consolidating
receivables from common customers, offering favorable settlement of prior
balances to accelerate collection efforts. This program resulted in a charge of
$21,700, which was charged to expense as incurred. The Company also charged to
expense as incurred $3,600 of special bonuses to Warnaco management and
severance and employee termination costs of $900, which were charged to expense
at the date the employees were terminated.
The detail of the charges recorded, including costs incurred and reserves
remaining at each year-end for costs estimated to be incurred through completion
of the aforementioned program are as follows:
F-18
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Lease Fixed Inventory Consolidation Terminations
termination asset write- of credit and Employee
costs write-offs downs functions severance Bonuses Total
------------ ---------- --------- --------------- ------------ -------- --------
1997 Provision $ 3,300 $ 1,200 $ 13,920 $ 900 $ 19,320
Other related period
costs, charged to
expense as incurred -- -- -- $ 21,700 -- $ 3,600 25,300
Cash reductions (1,110) -- -- -- (845) (3,600) (5,555)
Non-cash reductions -- (1,200) (9,118) (21,700) -- -- (32,018)
-------- -------- -------- -------- -------- -------- --------
Balance as of January 3, 1998 2,190 $ -- 4,802 -- 55 $ -- 7,047
======== ======== ========
1998 Provision -- 800 2,500 -- 3,300
Cash reductions (2,190) (55) (2,245)
Non-cash reductions -- (5,602) (2,500) -- (8,102)
-------- -------- -------- -------- -------- -------- --------
Balance as of January 2, 1999 $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Intimate Apparel Consolidation and Realignment ($59,499)
Following the successful Intimate Apparel consolidation and realignment
program initiated in 1996, the Company initiated a new program to re-examine all
of its existing products in an effort to streamline its number of product
offerings. Accordingly, products and styles were discontinued and slower moving
inventory liquidated, incurring markdown losses of $32,600 to accommodate the
increased volumes of higher margin merchandise and $2,246 of receivable
write-offs related to these merchandising decisions. Further reconfiguration of
manufacturing facilities and the merger of Warner's Europe with Lejaby
operations achieved a workforce reduction greater than originally anticipated
but delayed realization of anticipated efficiencies and resulted in severance
and termination costs of $7,380, which were charged to expense at the date
approximately 150 employees were terminated. The cost for facility realignment
of $17,273 all of which was incurred in 1997, includes charges for the increased
costs related to the reconfiguration of the manufacturing facilities.
The detail of the charges recorded including costs incurred and reserves
remaining at each year-end for costs estimated to be incurred through completion
of the aforementioned program, are as follows:
F-19
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Accounts Employee
Inventory receivable termination Manufacturing
write-downs write-offs and severance realignment Total
------------- ------------ -------------------- --------------- ---------
1997 Provision $ 32,600 $ 2,246 $ 7,380 $ 42,226
Other related period costs
charged to expense as incurred -- -- -- $ 17,273 17,273
Cash reductions -- -- (5,916) (17,273) (23,189)
Non-cash reductions (11,585) (2,246) -- -- (13,831)
-------- -------- -------- -------- --------
Balance as of January 3, 1998 21,015 $ -- 1,464 $ -- 22,479
======== ========
Cash reductions -- (1,464) (1,464)
Non-cash reductions (21,015) -- (21,015)
-------- -------- -------- -------- --------
Balance as of January 2, 1999 $ -- $ -- $ --
======== ======== ========
GJM ($4,200)
The Company also restructured a portion of its GJM manufacturing business,
which was acquired in 1996, resulting in charges of $4,200, $700 of which was
for severance for five employees, $2,400 for accounts receivable write-offs,
which were expensed as incurred and $1,100 for asset write-offs.
GJM incurred other non-recurring losses of $1,139 related to these
operations in fiscal 1997 .
The detail of the charges recorded in 1997, including costs incurred and
reserves remaining for costs estimated to be incurred through completion of the
aforementioned program, are as follows:
Employee
termination Accounts
and receivable Fixed asset
severance write-offs write-offs Total
----------- ---------- ----------- -----
1997 Provision $ 700 $ 2,400 $ 1,100 $ 4,200
Cash reductions (26) -- -- (26)
Non-cash reductions -- (2,400) (1,100) (3,500)
------- ------- ------- -------
Balance as of January 3, 1998 674 $ -- $ -- 674
======= =======
Cash reductions (674) (674)
------- -------
Balance as of January 2, 1999 $ -- $ --
======= =======
F-20
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Additional Costs Related to Prior Strategic Initiative ($10,500)
During fiscal 1997, the Company incurred approximately $10,500 of costs
related to the disposal of certain Hathaway assets that were retained following
the sale of that division in 1996, including $4,200 on the liquidation of
inventories, $4,600 on the disposition of fixed assets and $1,700 of other
expenses, which were charged to expense as incurred.
In addition, the operations of the retained Hathaway assets (principally
foreign locations), had losses of $4,000 for fiscal 1997.
Note 4 - Sale of Accounts Receivable
In October 1998, the Company entered into a five-year revolving
receivables securitization facility whereby it can obtain up to $200,000 of
funding from the sale of eligible U.S. trade accounts receivable through a
bankruptcy remote special purpose subsidiary. The amount of funding varies based
upon the availability of the designated pool of eligible receivables and is
directly affected by changing business volumes. At January 1, 2000, the Company
had sold $342,151 of accounts receivable for which it received proceeds of
$195,900 in cash; at January 2, 1999, the Company had sold $330,100 of accounts
receivable for which it received proceeds of $170,500 in cash; the Company
retains the interest in and subsequent realization of the excess of amounts sold
over the proceeds received and provides allowances as appropriate on the entire
balance. Accounts receivable are presented net of the $195,900 and $170,500 for
fiscal years 1999 and 1998, respectively, of proceeds from trade receivables
sold, with the remaining $146,251 and $159,600, respectively, included in
accounts receivable. The sale is reflected as a reduction of accounts receivable
and the proceeds received are included in cash flows from operating activities.
Fees for this program are paid monthly and are based on variable rates indexed
to commercial paper.
Note 5 - Related Party Transactions
Prior to the December 1999 acquisition, Authentic Fitness was considered a
related party as certain directors and officers of the Company were also
directors and officers of Authentic Fitness. From time to time, the Company and
Authentic Fitness jointly negotiated contracts and agreements with vendors and
suppliers. In fiscal 1997, 1998 and 1999, Authentic Fitness paid the Company
$5,607, $15,566 and $24,614, respectively for certain occupancy services related
to leased facilities, computer services, laboratory testing, transportation and
contract production services. In fiscal 1997, 1998 and 1999, the Company paid
Authentic Fitness approximately $1,299, $462 and $865, respectively, for certain
design and occupancy services. The Company also purchased inventory from
Authentic Fitness for sale in its retail outlet stores of $16,201, $11,223 and
$16,833 in fiscal 1997, 1998 and 1999, respectively. The net amount due to
Authentic Fitness at January 2, 1999 was $784. In fiscal 1997 the Company had
a write-off of $2,875 primarily comprised of certain inventory and
administrative charges relating to activities with Authentic Fitness that should
have been charged to the Company's operations in prior periods rather than being
inadvertently reflected as receivables. When these facts became known during the
fourth quarter of fiscal 1997, it was determined that the amount should be
written-off and the appropriate charge was taken. In connection with the
fiscal 1998 year-end closing, the Company discovered an additional $4,139
relating to activities with Authentic Fitness. The Company determined that the
$4,139
F-21
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
consisted of certain cost overruns and royalty expenses that should have been
charged to the Company's operations in prior periods. As the related amounts
were not significant to any prior periods, the entire amount of the write-offs
were recorded in the fourth quarter of fiscals 1997 and 1998, respectively.
In June 1995, the Company paid $1,000 in connection with and under a
sub-license entered into with Authentic Fitness to design, manufacture and
distribute certain intimate apparel using the Speedo brand name. The Company
recognized royalty expense of $293, $58 and $10 in fiscal 1997, 1998 and 1999,
respectively. A director and a stockholder of the Company is the sole
stockholder, President and a director of The Spectrum Group, Inc. ("Spectrum").
The Company recognized consulting expenses of $500, $560 and $560 in fiscal
1997, 1998 and 1999, respectively, pursuant to a consulting agreement with
Spectrum that expires in May 2000. A director of the Company provides consulting
services to the Company from time to time and received $125 for such services
in fiscal 1998. A director of the Company is a partner in a law firm which
provides legal services to the Company from time to time. The Company believes
that the terms of the relationships and transactions described above are at
least as favorable to the Company as could have been obtained from an
unaffiliated third party.
Note 6 - Business Segments and Geographic Information
Business Segments
The Company operates in three segments: Intimate Apparel, Sportswear and
Accessories and Retail Store divisions.
The Company designs, manufactures and markets apparel within the Intimate
Apparel and Sportswear and Accessories markets and operates a Retail Store
Division, with stores under the Speedo Authentic Fitness name, as well as
Company outlet stores for the disposition of excess and irregular inventory.
The Intimate Apparel Division designs, manufactures and markets moderate
to premium priced intimate apparel for women under the Warner's'r', Olga'r',
Calvin Klein'r', Lejaby'r', Van Raalte'r', Fruit of the Loom'r', Weight
Watchers'r' and Bodyslimmers'r' brand names, and men's underwear under the
Calvin Klein brand name.
The Sportswear and Accessories Division designs, manufactures, imports and
markets moderate to premium priced men's, women's, junior's and children's
sportwear and jeanswear, men's accessories and men's, women's, junior's and
children's active apparel under the Chaps by Ralph Lauren'r', Calvin
Klein'r', Catelina'r', S.B.S by Allen Silverto, Speedo'r', Ojar de le
Renta'r', Anne Cole'r', Cole of California'r', Sandcastle'r', Sunset Beach'r',
Ralph Lauren'r', Polo Sport Ralph Lauren'r', Polo Sport RLX'r' and White
Stag'r' brand names.
The Retail Store division which comprise of both outlet as well as
full-price retail stores, principally sells the Company's products to the
general public through 142 stores under the Speedo'r' Authentic Fitness'r'
name as well as 124 of the Company's outlet stores for the disposition of
excess and irregular inventory. The Company does not manufacture or source
products exclusively for the outlet stores.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" in Note 1. Transfers to the
Retail stores division occur at standard cost and are not reflected in net
revenues of the Intimate Apparel or Sportswear and Accessories segments. The
Company evaluates the performance of its segments based on earnings before
interest, taxes, amortization of intangibles and deferred financing costs and
restructuring, special charges and other non-
F-22
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
recurring items, as well as the effect of the early adoption of SOP 98-5 and the
charges relating to the fiscal 1998 restatment for an inventory adjustment for
production and inefficiency costs which affects fiscals 1996-1998 ("Adjusted
EBIT"). Information by business segment is set forth below :
Sportswear
Intimate and Retail
Apparel Accessories Stores Total
---------------- ----------------- ---------------- ---------------
1999 Net Revenues $ 943,383 $ 1,022,783 $ 147,990 $ 2,114,156
Adjusted EBITDA 186,000 169,600 11,600 367,200
Depreciation 21,000 10,600 2,600 34,200
Adjusted EBIT 165,000 159,000 9,000 333,000
1998 Net Revenues 944,788 875,257 130,206 1,950,251
Adjusted EBITDA 218,600 149,200 17,000 384,800
Depreciation 18,500 4,500 1,400 24,400
Adjusted EBIT 200,100 144,700 15,600 360,400
1997 Net Revenues 941,188 425,974 68,568 1,435,730
Adjusted EBITDA 209,500 64,200 8,100 281,800
Depreciation 14,000 2,400 1,000 17,400
Adjusted EBIT 195,500 61,800 7,100 264,400
A reconciliation of total segment Adjusted EBIT to total consolidated income
(loss) before taxes and cumulative effect of a change in accounting principle
for fiscal years January 3, 1998, January 2, 1999 and January 1, 2000 is as
follows:
For the Year Ended
--------------------------------------------------------
January 3, January 2, January 1,
1998 1999 2000
--------------- ------------------- -----------------
Total Adjusted EBIT for reportable segments $264,400 $ 360,400 $ 333,000
General corporate expenses not allocated 33,823 55,567 76,345
Depreciation of corporate assets and amortization 13,500 22,100 26,756
Restructuring, special and other non-recurring items 130,804 106,758 -
Effect of early adoption of SOP 98-5 - 40,800 -
Charges related to an inventory adjustment 57,000 49,600 -
Interest expense 45,873 63,790 80,976
Minority interest 3,500 - -
--------------- ------------------- -----------------
Income (loss) before income taxes and cumulative effect of a
change in accounting principle $ (20,100) $ 21,785 $ 148,923
=============== =================== =================
F-23
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Sportswear
Intimate and Retail Reconciling
Apparel Accessories Stores Items* Consolidated
----------- ---------------- ------------ ------------- -------------
Year Ended January 1, 2000
- ---------------------------------------
Total assets $ 796,614 $ 1,507,533 $ 143,056 $ 315,782 $ 2,762,985
Depreciation and amortization 25,367 22,385 2,902 10,302 $ 60,956
Capital expenditures 38,937 23,571 9,008 37,572 $ 109,088
Year Ended January 2, 1999
- ---------------------------------------
Total assets $ 832,371 $ 665,297 $ 78,557 $ 206,908 $ 1,783,133
Depreciation and amortization 20,564 15,654 1,235 9,047 46,500
Capital expenditures 41,128 30,209 7,297 64,153 142,787
Year Ended January 3, 1998
- ---------------------------------------
Total assets $ 996,457 $ 544,352 $ 39,806 $ 70,503 $ 1,651,118
Depreciation and amortization 30,338 4,160 625 12,262 47,385
Capital expenditures 26,356 14,134 3,810 13,099 57,399
* Includes Corporate items not allocated to business segments, primarily fixed
assets related to the Company's management information systems and corporate
facilities and goodwill, intangible and other assets.
F-24
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Geographic Information
Included in the consolidated financial statements are the following amounts
relating to geographic locations:
Fiscal Year Ended
----------------------------------------------------------
January 3, January 2, January 1,
1998 1999 2000
-------------- --------------- ------------
Net revenues:
United States $1,145,276 $1,630,583 $1,775,905
Canada 56,525 55,072 68,953
United Kingdom 48,933 55,774 66,496
France 42,230 41,164 44,510
Germany 54,857 41,963 34,743
Mexico 11,709 21,209 35,636
Asia 13,617 14,534 25,069
All Other 62,583 89,952 62,844
---------- ---------- ----------
$1,435,730 $1,950,251 $2,114,156
========== ========== ==========
Property, plant and equipment, net
United States $ 113,644 $ 205,428 $ 291,360
Canada 4,716 5,394 8,964
All other 12,040 13,438 26,028
---------- ---------- ----------
$ 130,400 $ 224,260 $ 326,352
========== ========== ==========
Information about Major Customers
In fiscal 1999 and 1997, no customer accounted for 10% of the Company's
net revenues. In fiscal 1998, the Company had one customer who accounted for
approximately $198,282 or 10.2% of net revenues. Such revenues are included in
the Intimate Apparel and Sportswear and accessories segments. The Company does
not believe that the loss of this one customer would have a material adverse
effect on the Company.
Note 7 - Income Taxes
The following presents the United States and foreign components of income
from operations before income taxes and the total provision (benefit) for United
States federal and other income taxes:
F-25
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Fiscal Year Ended
--------------------------------------------
January 3, January 2, January 1,
1998 1999 2000
-------------- ------------- ------------
Income(loss) from operations before income taxes
and cumulative effect of change in accounting principle:
Domestic $ (50,957) $ 1,397 $ 92,523
Foreign 30,857 20,388 56,400
-------------- ------------- ------------
Total $ (20,100) $ 21,785 $148,923
============== ============= ============
Current provision
Federal $ - $ - $ 1,436
State and local 1,269 1,187 2,350
Foreign 6,480 10,231 13,200
-------------- ------------- ------------
7,749 11,418 16,986
-------------- ------------- ------------
Deferred provision (benefit):
Federal (12,560) 12,301 34,703
State and local (2,970) (5,213) 158
Foreign - - (328)
Reversal of valuation allowance - (10,818) (382)
-------------- ------------- ------------
(15,530) (3,730) 34,151
-------------- ------------- ------------
Provision (benefit) for income taxes $ (7,781) $ 7,688 $ 51,137
============== ============= ============
The provision (benefit) for income tax is included in the financial statements
as follows:
Fiscal Year Ended
----------------------------------------------
January 3, January 2, January 1,
1998 1999 2000
---------------- ------------- ------------
Continuing operations $ (7,781) $ 7,688 $ 51,137
Cumulative effect of accounting change - (25,231) -
---------------- ------------- ------------
Total provision (benefit) $ (7,781) $ (17,543) $ 51,137
================ ============= ============
F-26
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
The following presents the reconciliation of the provision for income taxes to
United States federal income taxes computed at the statutory rate:
Fiscal Year Ended
---------------------------------------------------
January 3, January 2, January 1,
1998 1999 2000
------------- -------------- ------------
Income (loss) from operations before income taxes $ (20,100) $ (49,698)(a) $ 148,923
============= ============== ============
Provision (benefit) for income taxes at the statutory rate $ (7,035) $ (17,394) $ 52,123
Foreign income taxes at rates in excess of (lower than)
the U.S. statutory rate (3,859) 7,408 (12,214)
State income taxes, net of federal benefit (951) (2,984) 1,630
Non-deductible intangible amortization and disposals 1,829 3,198 3,582
Changes in valuation allowance - (10,818) 4,528
Other, net 2,235 3,047 1,488
------------- -------------- ------------
Provision (benefit) for income taxes $ (7,781) $ (17,543) $ 51,137
============= ============== ============
(a) Includes pre-tax impact of cumulative effect of accounting change of
$71,484.
The components of deferred tax assets and liabilities as of January 2, 1999 and
January 1, 2000 are as follows:
January 2, January 1,
1999 2000
------------ -------------
Deferred Tax Assets:
Discounts and sales allowances $ 6,646 $ 8,337
Postretirement benefits 4,222 4,137
Alternative minimum tax credit carryovers 2,237 3,674
Non deductible reserves 20,449 26,827
Net operating loss 137,484 145,915
------------ -------------
Gross deferred tax assets 171,038 188,890
------------ -------------
Valuation allowances (6,802) (11,330)
------------ -------------
Deferred tax assets - net 164,236 177,560
------------ -------------
Deferred Tax Liabilities:
Prepaid and other assets 21,597 13,258
Depreciation and amortization 54,890 71,573
Bond discount 7,519 7,097
Unrealized gain on investment in securities - 25,494
Other 8,087 8,896
------------ -------------
Deferred tax liabilities 92,093 126,318
------------ -------------
Net deferred tax asset $ 72,143 $ 51,242
============ =============
F-27
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
The Company has estimated United States net operating loss carryforwards
of approximately $421,300 and foreign net operating loss carryforwards of
approximately $33,700 at January 1, 2000, respectively. Net operating loss
carryforwards, which if unused, will expire from 2002 through 2018.
The net change in the valuation allowance of $4,528 at January 1, 2000
primarily relates to an increase in foreign net operating losses where it is
more likely than not that there would be no future utilization of these assets
prior to their expiration. The net decrease in the valuation allowance
of $10,818 at January 2, 1999 primarily relates to the utilization of a capital
loss carryover.
At January 1, 2000, other current assets include current income taxes
receivable of $26,058 (of which $1,015 relates to foreign entities) and current
liabilities include income taxes payable of $16,217 (of which $13,641
relates to foreign). At January 2, 1999, other current assets include current
income taxes receivable of $3,970 (of which $1,913 relates to foreign entities).
Note 8 - Employee Retirement Plans
The Company has a defined benefit pension plan which covers substantially
all non-union domestic employees (the "Pension Benefit Plan"). The Plan is
noncontributory and benefits are based upon years of service. The Company also
has defined benefit health care and life insurance plans that provide
postretirement benefits to retired employees and former directors ("Other
Benefit Plans"). The Other Benefit Plans are contributory with retiree
contributions adjusted annually.
The components of net periodic benefit cost is as follows:
Pension Benefit Plan Other Benefit Plans
For the Year Ended For the Year Ended
------------------------------------------- ----------------------------------------
January 3, January 2, January 1, January 3, January 2, January 1,
1998 1999 2000 1998 1999 2000
--------- ---------- ---------- ---------- --------- ----------
Service Cost $ 1,296 $ 1,732 2,279 $ 91 $ 190 $ 193
Interest Cost 7,799 8,660 8,867 672 528 394
Expected return on plan assets (9,001) (10,530) (11,586) -- -- --
Prior service cost (75) (74) (74) -- -- (33)
Recognized net actuarial gain (307) -- -- (20) (121) (163)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost (income) (288) (212) (514) 743 597 391
Cost of other plans 479 300 -- -- -- --
-------- -------- -------- -------- -------- --------
Net benefit cost (income) $ 191 $ 88 $ (514) $ 743 $ 597 $ 391
======== ======== ======== ======== ======== ========
F-28
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
A reconciliation of the balance of the benefit obligations is as follows:
Pension Benefit Plan Other Benefit Plans
----------------------- -----------------------
January 2, January 1, January 2, January 1,
1999 2000 1999 2000
---------- ---------- ---------- ----------
Change in benefit obligations
Benefit obligation at beginning of year $ 115,494 $ 128,896 $ 8,992 $ 7,523
Service cost 1,732 2,279 190 193
Interest cost 8,660 8,867 529 394
Plan participants' contribution -- -- 294 304
Plan amendments -- -- -- (506)
Change in actuarial assumptions 11,653 (11,500) (1,646) (1,795)
Benefits paid (8,643) (8,908) (836) (751)
--------- --------- --------- ---------
Benefit obligation at end of year $ 128,896 $ 119,634 $ 7,523 $ 5,362
========= ========= ========= =========
A reconciliation of the change in the fair value of plan assets is as
follows:
Pension Benefit Plan Other Benefit Plans
----------------------- -----------------------
January 2, January 1, January 2, January 1,
1999 2000 1999 2000
---------- ---------- ---------- ----------
Fair value of plan assets at beginning of year $ 115,330 $ 126,637 $ -- $ --
Actual return on plan assets 19,950 5,142 -- --
Employer's contributions -- -- 541 447
Plan participants' contributions -- -- 294 304
Benefits paid (8,643) (8,908) (835) (751)
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 126,637 $ 122,871 $ -- $ --
========= ========= ========= =========
Funded status $ (2,259) $ 3,238 $ (7,523) $ (5,362)
Unrecognized prior service cost (273) (198) -- (472)
Unrecognized net actuarial (gain) loss 1,676 (3,381) (1,484) (3,633)
--------- --------- --------- ---------
Accrued benefit cost $ (856) $ (341) $ (9,007) $ (9,467)
========= ========= ========= =========
Pension Benefit Plan assets include fixed income securities and marketable
equity securities, including 212,000, 340,000 and 1,100,800 shares of the
Company's Class A Common Stock, which had a fair market value of $8,585
and $13,554 at January 2, 1999 and January 1, 2000, respectively. The
Pension Benefit Plan also owned 502,800 shares of Authentic Fitness' common
stock at January 2, 1999. Such shares had a fair market value of $9,176 at
January 2, 1999. In December 1999 the Company acquired Authentic Fitness and
as a result the Pension Benefit Plan tendered all such shares (see Note 2 to
the Consolidated Financial Statments).
F-29
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
The Company contributes to a multi-employer defined benefit pension plan
on behalf of union employees of its two manufacturing facilities and a warehouse
and distribution facility, which amounts are not significant for the periods
presented.
The weighted-average assumptions used in the actuarial calculations were
as follows:
January 3, January 2, January 1,
1998 1999 2000
----- ---- ----
Discount rate.......................... 7.5% 7.0% 8.0%
Expected return on plan assets......... 9.0% 9.5% 9.5%
Rate of compensation increase.......... 5.0% 5.0% 5.0%
For measurement purposes, the weighted average annual assumed rate of
increase in the per capita cost of covered benefits (health care cost trend
rate) was 9% for the years through 2000 and 5% for the years 2001 and beyond.
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one-percentage-point change in assumed health
care cost trend rates would have the following effects:
One Percentage One Percentage
Point Point
Increase Decrease
-------------- -------------
Effect on total of service and interest cost
components $ 42 $ (28)
============== =============
Effect on health care component of the
accumulated postretirement benefit obligation $ 359 $ (332)
============== =============
The Company also sponsors a defined contribution plan for substantially
all of its domestic employees. Employees can contribute to the plan, on a
pre-tax and after-tax basis, a percentage of their qualifying compensation up to
the legal limits allowed. The Company contributes amounts equal to 15.0% of the
first 6.0% of employee contributions to the defined contribution plan. The
maximum Company contribution on behalf of any employee is $1,350 in one year.
Employees vest in the Company contribution over four years. Company
contributions to the defined contribution plan totaled $281, $386 and $388 for
the years ended January 3, 1998, January 2, 1999, and January 1, 2000,
respectively.
Note 9 - Marketable Securities
During the first quarter of fiscal 1999, the Company received shares of
marketable securities in exchange for the early termination of a non-compete
agreement with the former principal stockholder of its Designer Holdings
subsidiary. The fair market value of the securities received was $875, which
was recorded as a reduction of goodwill associated with the Designer Holdings
acquisition. During 1998 and 1999, the Company made investments, aggregating
$7,650, to acquire an interest in Interworld Corporation, a leading provider of
E-Commerce software systems and other applications for electronic commerce
sites. These investments are classified as available-for-sale securities and
recorded at fair value based on quoted market prices. Unrealized gains at
January 1, 2000 of $38,966 (net of deferred income taxes of $25,450), were
included as a separate component of stockholders' equity
F-30
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Note 10 - Inventories
January 2, January 1,
1999 2000
--------- ---------
Finished goods $326,794 $563,583
Work in process 92,821 89,422
Raw materials 52,404 81,434
-------- --------
$472,019 $734,439
======== ========
Note 11 - Debt
January 2, January 1,
Short-term Debt 1999 2000
- --------------- ---------- ----------
364 day facility (1) $ -- $ 99,066
Foreign credit facilities 20,844 34,686
---------- ----------
20,844 133,752
---------- ----------
Long-term Debt
- --------------
364 day facility (1) -- 487,134
Revolving credit facilities 329,446 576,667
Term loan agreements 20,706 20,855
Term notes 59,220 49,060
Capital lease obligations 5,388 9,281
Foreign credit facilities 2,807 55,803
Other 3,706 203
---------- ----------
Total long-term debt 421,273 1,199,003
Current portion 9,387 11,052
---------- ----------
Long-term debt 411,886 1,187,951
---------- ----------
Total $ 442,117 $1,332,755
========== ==========
As of Jan. 1, 2000, the Company has excluded short-term obligations totalling
$487,134 from current liabilities because it intends to refinance this
obligation on a long-term basis. The Company has the ability to consummate
the refinancing when considered necessary by utilizing long-term commitments
in place as of January 1, 2000.
Approximate maturities of long-term debt as of January 1, 2000 are as follows:
Year Amount
---- ------
2000................................................. $ 11,052
2001................................................. 45,538
2002................................................. 601,774
2003................................................. 78,150
2004................................................. 454,295
2005 and thereafter.................................. 8,194
----------
$ 1,199,003
F-31
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
$600,000 Revolving Credit Facility
The Company is a guarantor of Warnaco Inc. under a $600,000 Revolving
Credit Facility, which includes a $100,000 sub-facility available for letters of
credit. This facility expires on August 12, 2002 in accordance with the terms of
the Amended and Restated Credit Agreement, dated November 17, 1999, which
governs the facility. Amounts borrowed under this facility are subject to
interest at a base rate or at an interest rate based on the Eurodollar rate plus
a margin, which varies according to the debt rating of the Company. As of
January 1, 2000, the applicable margin under this facility was 0.375%. Under
this facility, a fee is charged based on the letters of credit outstanding as
well as a commitment fee based on the undrawn amount of the facility. Both of
these fees vary according to the Company's debt rating. As of January 2, 1999
and January 1, 2000, the amount of borrowings outstanding under this facility
was $329,446 and $576,667, respectively. Additionally, as of January 2, 1999 and
January 1, 2000, the amount of letters of credit outstanding under this facility
was $4,458 and $4,076, respectively. The weighted average interest rate under
this facility as of January 2, 1999 and January 1, 2000 was 5.71% and 6.40%,
respectively.
$450,000 Revolving Credit Facility
The Company also guarantees amounts borrowed by Warnaco Inc. under a
$450,000 Revolving Credit Facility. The credit agreement governing this
facility, dated November 17, 1999, provides that the term of the facility will
expire on November 17, 2004. Amounts borrowed under this facility are subject to
interest at a base rate or at an interest rate based on the Eurodollar rate plus
a margin, which varies according to the debt rating of the Company. As of
January 1, 2000, the applicable margin under this facility was 0.775%. Under
this facility, a commitment fee is charged based on the entire amount of the
facility which varies according to the Company's debt rating. As of January 1,
2000, there were no borrowings outstanding under this facility.
$600,000 364-Day Facility
The Company also guarantees amounts borrowed by Warnaco Inc. under a
$600,000 364-Day Facility. The credit agreement governing this facility, dated
November 17, 1999, provides that the term of the facility will expire on October
8, 2000. Amounts borrowed under this facility, which were used to finance the
Authentic Fitness acquisition, are subject to interest at a base rate or at an
interest rate based on the Eurodollar rate plus a margin, which varies
according to the debt rating of the Company. As of January 1, 2000, the
applicable margin under this facility was 1.0%. Under this facility, a
commitment fee is charged based on the undrawn amount of the facility which
varies according to the Company's debt rating. As of January 1, 2000, $586,200
was outstanding under this facility with a weighted average interest rate of
7.15%.
French Franc Facility
The Company and its subsidiaries entered into French Franc facilities in
July and August 1996 relating to its acquisition of Lejaby. These facilities,
which were amended in April 1998 and in August and November 1999, includes a
term loan facility in an original amount of 370 million French Francs and a
revolving credit facility of 480 million French Francs. Amounts borrowed under
these facilities are subject to interest at an interest rate based on the
Eurodollar rate plus a margin, which varies according to the debt rating of the
Company. As of January 1, 2000, the applicable margin under these facilities was
0.40%. The term loan is being repaid in annual installments, which began in July
1997, with a final installment due on December 31, 2001. As of January 1, 2000,
$49,100 equivalent of the term loan was outstanding. The revolving portion of
this facility provides for multi-currency revolving loans to be made to Warnaco
and a number of its European subsidiaries. As of January 1, 2000, approximately
$55,800
F-32
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
equivalent of revolving advances were outstanding under this facility with a
weighted average interest rate of 6.23%.
$500,000 Trade Credit Facility
The Company is a guarantor under a $500,000 Trade Credit Facility which
provides commercial letters of credit for the purchase of inventory from
suppliers and offers the Company extended terms, for periods of up to 180 days
("Trade Drafts"). Under the terms of the November 17, 1999 amended and restated
credit agreement governing this facility, the July 27, 2000 expiration date of
the credit agreement can be extended by the lenders upon written request.
Amounts drawn under this facility are subject to interest at an interest rate
based on the Eurodollar rate, plus a margin which varies according to the
Company's debt rating. As of January 1, 2000, the applicable margin under this
facility was 0.875%. The Company classifies the 180-day Trade Drafts in trade
accounts payable. As of January 2, 1999 and January 1, 2000 the amount of Trade
Drafts outstanding under this facility were $308,806 and $346,227, respectively.
Also at January 2, 1999 and January 1, 2000, the Company had outstanding letters
of credit under this facility totaling approximately $118,198 and $110,783,
respectively. Letters of credit issued under this facility are not recognized on
the balance sheet.
Other Facilities
The Company and certain of its foreign subsidiaries have entered into
credit agreements that provide for revolving lines of credit and issuance of
letters of credit ("Foreign Credit Facilities"). At January 2, 1999 and January
1, 2000 the total amounts of the Foreign Credit Facilities was approximately
$94,300 and $163,500, respectively of which approximately $52,000 and $35,100,
respectively was available.
In July 1998, the Company entered into a term loan agreement with a member
of its existing bank group. The balance of this loan as of January 2, 1999 and
January 1, 2000 was $20,706 and $20,855, respectively, and carried a fixed
interest rate of 6.85%. This loan is due to be repaid in installments beginning
in 2001 with a final maturity date of July 2006. During 1998 and 1999, two other
members of the existing bank group made available to the Company, on an
uncommitted basis, a total of $55,000 in short term credit facilities. The
Company had no outstanding borrowings under these facilities as of January 2,
1999 or January 1, 2000.
Restrictive Covenants
The Company's credit agreements contain various financial and
non-financial covenants related to additional debt, liens on Company property,
mergers, investments in other entities, asset sales and other items. The Company
was in compliance with all of the covenants under its credit agreements for the
three fiscal years ended January 1, 2000.
Interest Rate Swaps
As of January 1, 2000, the Company had five interest rate swap agreements
in place which were used to convert variable interest rate borrowings of
$691,500 to fixed interest rates. Under these agreements, borrowings of $610,000
were fixed at 5.99% until maturity in September 2004 and borrowings of $6,500
were fixed at 6.60% until maturity in June 2006 and, as a result of the
acquisition of Authentic Fitness during fiscal 1999, an additional agreement was
added fixing borrowings of $75,000 at 6.66% until maturity in September 2003.
F-33
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
As of January 1, 2000, the Company had five swap agreements in place, as
follows:
Notional Maturity
Amount Date
----------- --------------
$ 75.0 September 2003
$210.0 September 2004
$150.0 September 2004
$250.0 September 2004
$ 6.5 June 2006
As of January 2, 1999, the Company had four swap agreements in place, as
follows:
Notional Maturity
Amount Date
----------- --------------
$210.0 September 2004
$150.0 September 2004
$250.0 September 2004
$ 6.5 June 2006
These swaps are utilized to convert floating rate obligations, which
include bank debt and trade drafts under the letter of credit facility, to fixed
rate obligations. The outstanding variable rate obligations at January 1, 2000
exceed the notional amount of interest rate swap agreements and the Company
anticipates that they will continue to do so for at least the remaining term of
the swap agreements based upon the Company's ability and intent to refinance all
variable rate obligations as they come due. The counterparties to all of the
Company's interest rate swap agreements are banks who are lenders in the
Company's bank credit agreements.
Differences between the fixed interest rate on each swap and the one month
or three month LIBOR rate are settled at least quarterly between the Company and
each counterparty. Pursuant to its interest rate swap agreements, the Company
received payments totaling $575 in the year ended January 2, 1999 and made
payments totaling $4,853 in the year ended January 1, 2000.
The Company's average interest rate on its outstanding debt, after giving
effect to the interest rate swap agreements, was approximately 5.99% and 6.52%
at January 2, 1999 and January 1, 2000, respectively.
Note 12 - Mandatorily Redeemable Preferred Securities
In 1996, Designer Holdings issued 2.4 million Company-obligated
mandatorily redeemable convertible preferred securities of a wholly owned
subsidiary (the "Preferred Securities") for aggregate gross proceeds of
$120,000. The Preferred Securities represent preferred undivided beneficial
interests in the assets of Designer Finance Trust ("Trust"), a statutory
business trust formed under the laws of the State of Delaware in 1996. Designer
Holdings owns all of the common securities representing undivided
F-34
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
beneficial interests of the assets of the Trust. Accordingly, the Trust is
included in the consolidated financial statements of the Company. The Trust
exists for the sole purpose of (i) issuing the Preferred Securities and common
securities (together with the Preferred Securities, the "Trust Securities"),
(ii) investing the gross proceeds of the Trust Securities in 6% Convertible
Subordinated Debentures of Designer Holdings due 2016 ("Convertible Debentures")
and (iii) engaging in only those other activities necessary or incidental
thereto. The Company indirectly owns 100% of the voting common securities of the
Trust which is equal to 3% of the Trust's total capital.
Each Preferred Security is convertible at the option of the holder thereof
into 0.6888 of a share of Common Stock, par value $.01 per share, of the
Company, or 1,653,177 shares of the Company's Common Stock in the aggregate, at
an effective conversion price of $72.59 per share of common stock, subject to
adjustments in certain circumstances.
The holders of the Preferred Securities are entitled to receive cumulative
cash distributions at an annual rate of 6% of the liquidation amount of $50.00
per Preferred Security, payable quarterly in arrears. The distribution rate and
payment dates correspond to the interest rate and interest payment dates on the
Convertible Debentures, which are the sole assets of the Trust. As a result of
the acquisition of Designer Holdings by the Company, the Preferred Securities
were adjusted to their estimated fair value at the date of acquisition of
$100,500, resulting in a decrease in their recorded value of approximately
$19,500. This decrease is being amortized, using the effective interest rate
method to maturity of the Preferred Securities. As of January 1, 2000, the
unamortized balance is $17,096. Such distributions and accretion to redeemable
value are included in interest expense.
The Company has the right to defer payments of interest on the Convertible
Debentures and distributions on the Preferred Securities for up to twenty
consecutive quarters (five years), provided such deferral does not extend past
the maturity date of the Convertible Debentures. Upon the payment, in full, of
such deferred interest and distributions, the Company may defer such payments
for additional five-year periods.
The Preferred Securities are mandatorily redeemable upon the maturity of
the Convertible Debentures on December 31, 2016, or earlier to the extent of any
redemption by the Company of any Convertible Debenture, at a redemption price of
$50.00 per share plus accrued and unpaid distributions to the date fixed for
redemption. In addition, there are certain circumstances wherein the Trust will
be dissolved, with the result that the Convertible Debentures will be
distributed pro-rata to the holders of the Trust Securities.
The Company has guaranteed, on a subordinated basis, distributions and
other payments due on the Preferred Securities ("Guarantee"). In addition, the
Company has entered into a supplemental indenture pursuant to which it has
assumed, as a joint and several obligor with Designer Holdings, liability for
the payment of principal, premium, if any, and interest on the Convertible
Debentures, as well as the obligation to deliver shares of Common Stock, par
value $.01 per share, of the Company upon conversion of the Preferred Securities
as described above. The Guarantee, when taken together with the Company's
obligations in respect of the Convertible Debentures, provides a full and
unconditional guarantee of amounts due on the Preferred Securities.
The following is summarized financial information of Designer Holdings as
of January 2, 1999 and January 1, 2000 and for each of the three fiscal years
in the period ended January 1, 2000, respectively, which is presented as
required by reason of the public preferred securities issued by Designer
Holdings.
F-35
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
January 2, January 1,
1999(a) 2000
---------- ----------
Current assets $115,328 $160,296
Non-current assets 538,600 549,090
Current liabilities 123,325 107,408
Non-current liabilities 24,151 29,168
Redeemable preferred securities 101,836 102,904
Stockholder's equity 404,616 469,906
Predecessor
------------
Nine Months Three Months For the Year For the Year
Ended Ended Ended Ended
September 30, January 3, January 2, January 1,
1997 1998 1999(a) 2000(a)
------------- ------------ ------------ ------------
Net revenues $ 365,049 $ 158,276 $ 453,229 $ 547,126
Cost of goods sold 262,759 115,958 310,738 353,029
Net income before extraordinary item 274 8,430 42,790 65,290
Net income (loss) (633) 8,430 42,790 65,290
(a) Excludes net revenues of $84,500 and $87,000 million for fiscal 1998
and fiscal 1999 respectively, now reported as Retail Stores division net
revenues. As a result of the integration of Designer Holdings into the
operations of the Company, cost of goods sold and net income associated
with these revenues cannot be separately identified.
The above information is not indicative of the future operating results
primarily due to the integration of the operations of Designer Holdings with the
operations of the Company, the redirected marketing efforts in the new store
format and redirected marketing strategy.
Note 13 - Stockholders' Equity
On June 30, 1995 the Company paid its first quarterly dividend on its
Common Stock. Total dividends declared during fiscal years 1997, 1998 and 1999
were $17,265 ($0.32 per share), $22,423 ($0.36 per share) and $20,250 ($0.36 per
share), respectively.
The Company has 10,000,000 shares of authorized and unissued preferred
stock with a par value of $0.01 per share.
In August 1999, the Board of Directors of the Company adopted a rights
agreement (the "Rights Agreement"). Under the terms of the Rights Agreement, the
Company declared a dividend distribution of one right for each outstanding share
of common stock of the Company to stockholders of record on August 31, 1999.
Each right entitles the holder to purchase from the Company a unit consisting of
F-36
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
one one-thousandth of a Series A Junior Participating Preferred Stock, par value
$.01 per share at a purchase price of $100 per unit. The rights only become
exercisable, if not redeemed, ten days after a person or group has acquired 15%
or more of the Company's common stock or the announcement of a tender offer that
would result in a person or group acquiring 15% or more of the Company's common
stock. The Rights Agreement expires on August 31, 2009, unless earlier redeemed
or extended by the Company.
Stock Compensation Plans
The Board of Directors and Compensation Committee thereof are responsible
for administration of the Company's compensation plans and determine, subject to
the provisions of the plans, the number of shares to be issued, the terms of
awards, the sale or exercise price, the number of shares awarded and the rate at
which awards vest or become exercisable.
1988 Employee Stock Purchase Plan
In 1988, the Company adopted the 1988 Employee Stock Purchase Plan ("Stock
Purchase Plan") which provides for sales of up to 4,800,000 shares of Class A
Common Stock of the Company to certain key employees. At January 2, 1999 and
January 1, 2000, 4,521,300 shares were issued and outstanding pursuant to grants
under the Stock Purchase Plan. All shares were sold at amounts determined to be
equal to the fair market value. In addition, certain employees, principally owed
by an officer and director of the Company, elected to pay for the shares granted
by executing promissory notes payable to the Company. Notes totaling $5,971 were
outstanding at January 3, 1998 and were repaid during fiscal 1998.
1991 Stock Option Plan
In 1991, the Company established The Warnaco Group, Inc. 1991 Stock Option
Plan ("Option Plan") and authorized the issuance of up to 1,500,000 shares of
Class A Common Stock pursuant to incentive and non-qualified option grants to be
made under the plan. The exercise price on any stock option award may not be
less than the fair market value of the Company's Common Stock at the date of the
grant. The Option Plan limits the amount of qualified stock options that may
become exercisable by any individual during a calendar year. Options generally
expire 10 years from the date of grant and vest ratably over 4 years.
1993 Stock Plan
On May 14, 1993, the stockholders approved the adoption of The Warnaco
Group, Inc. 1993 Stock Plan ('Stock Plan') which provides for the issuance of up
to 2,000,000 shares of Class A Common Stock of the Company through awards of
stock options, stock appreciation rights, performance awards, restricted stock
units and stock unit awards. On May 12, 1994, the stockholders approved an
amendment to the Stock Plan whereby the number of shares issuable under the
Stock Plan is automatically increased each year by 3% of the number of
outstanding shares of Class A Common Stock of the Company as of the beginning of
each fiscal year. The exercise price of any stock option award may not be less
than the fair market value of the Company's Common Stock at the date of the
grant. Options generally expire 10 years from the date of grant and vest ratably
over 4 years.
In accordance with the provisions of the Stock Plan, the Company granted
182,903 and 190,680 shares of restricted stock to certain employees, including
certain officers of the Company, during the fiscal years ended January 2, 1999
and January 1, 2000, respectively. The restricted shares vest over four years.
The fair market value of the restricted shares was $7,682 and $5,458 at the
dates of grant, respectively. The Company recognizes compensation expense equal
to the fair value of the restricted
F-37
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
shares over the vesting period. Compensation expense for the fiscal years ended
January 3, 1998, January 2, 1999 and January 1, 2000 was $3,322, $4,978 and
$6,246, respectively. During 1998, 16,177 shares of non-vested restricted shares
were canceled resulting in a reduction in unearned compensation of $667. During
1999, there were no restricted shares cancelled. Unearned stock compensation at
January 2, 1999 and January 1, 2000 was $11,772 and $10,984, respectively, and
is deducted from stockholders' equity.
1993 Non-Employee Director Stock Plan and 1998 Director Plan
In May 1994, the Company's stockholders approved the adoption of the 1993
Non-Employee Director Stock Plan ("Director Plan"). The Director Plan provides
for awards of non-qualified stock options to non-employee directors of the
Company. Options granted under the Director Plan are exercisable in whole or in
part until the earlier of ten years from the date of the grant or one year from
the date on which an optionee ceases to be a Director eligible for grants.
Options are granted at the fair market value of the Company's Common Stock at
the date of the grant. In May 1998, the Board of Directors approved the adoption
of the 1998 Stock Plan for Non-Employee Directors ("1998 Director Plan", and
together with the Director Plan, "Combined Director Plan"). The 1998 Director
Plan includes the same features as the Director Plan and provides for issuance
of the Company's Common Stock held in treasury. The Combined Director Plan
provides for the automatic grant of options to purchase (i) 30,000 shares of
Common Stock upon a Director's election to the Company's Board of Directors and
(ii) 20,000 shares of Common Stock immediately following each annual
shareholders' meeting as of the date of such meeting.
1997 Stock Option Plan
In 1997, the Company's Board of Directors approved the adoption of The
Warnaco Group, Inc. 1997 Stock Option Plan ("1997 Plan") which provides for the
issuance of incentive and non-qualified stock options and restricted stock up to
the number of shares of common stock held in treasury. The exercise price on any
stock option award may not be less than the fair market value of the Company's
common stock on the date of grant. The Plan limits the amount of qualified stock
options that may become exercisable by any individual during a calendar year and
limits the vesting period for options awarded under the 1997 Plan.
A summary of the status of the Company's stock option plans are presented
below:
Fiscal 1997 Fiscal 1998 Fiscal 1999
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- --------- ----------- -------- ----------- --------
Outstanding at beginning of year 6,691,000 $ 18.57 8,817,875 $ 22.00 8,908,932 $ 32.68
Granted 2,611,500 29.91 6,674,202 36.22 5,935,338 25.30
Exercised (251,259) 16.85 (5,625,014) 20.68 (29,750) 16.93
Canceled (233,366) 23.80 (958,131) 30.95 (957,174) 31.62
----------- ----------- -----------
Outstanding at end of year 8,817,875 22.00 8,908,932 32.68 13,857,346 29.85
=========== =========== ===========
Options exercisable at end of year 4,127,594 17.76 6,755,889 33.04 10,309,122 30.33
=========== =========== ===========
Weighted average fair value of
options granted $ 10.58 $ 12.28 $ 9.69
======= ======= =======
Options available for future grant 2,700,431 2,151,308 1,850,552
=========== =========== ===========
F-38
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
In fiscal 1997, 1998 and 1999, in exchange for shares received from option
holders with a fair value of $575, $38,095 and $2,640, respectively, the Company
paid $575, $38,095 and $2,640, respectively of withholding taxes on options that
were exercised during the year. Such shares have been included in treasury at
cost, which equals fair value at date of option exercise.
Summary information related to options outstanding and exercisable at
January 1, 2000 is as follows:
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
January 1, Contractual Exercise January 1, Exercise
Range of Exercise prices 2000 Life Price 2000 Price
- ------------------------- ----------- ----------- -------- ----------- --------
(Years)
$10.01 - $20.00 834,750 4.66 $ 15.67 824,750 $ 15.63
$20.01 - $30.00 6,241,588 8.76 25.36 3,816,113 25.26
$30.01 - $40.00 6,548,258 8.16 35.52 5,610,071 35.82
$40.01 - $50.00 232,750 8.47 41.80 58,188 41.80
----------- ----------
13,857,346 8.22 29.85 10,309,122 30.33
=========== ==========
The Company has reserved 9,674,196 shares of Class A Common Stock for
issuance under the Director Plan, Stock Plan and Option Plan as of January 1,
2000. In addition, there are 12,163,650 shares of Class A Common Stock in
treasury stock available for issuance under the 1997 Plan.
The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following assumptions:
January 3, January 2, January 1,
1998 1999 2000
----- ---- ----
Risk-free interest rate.................................. 6.20% 5.60% 4.83%
Dividend yield........................................... 1.08% 1.00% 1.43%
Expected volatility of market price of Company's
Common Stock.......................................... .3197 .3069 .4164
Expected option life..................................... 5 years 5 years 5 years
The Company's pro forma information is as follows:
January 3, January 2, January 1,
1998 1999 2000
---- ---- ----
Pro forma income (loss) before cumulative effect
of accounting change in accounting principle.................... $(17,121) $ (41,814) $ 60,506
Pro forma basic income (loss) per common share
before accounting change........................................ $ (0.32) $ (0.68) $ 1.08
Pro forma diluted income (loss) per common share
before accounting change........................................ $ (0.32) $ (0.68) $ 1.07
F-39
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
These pro forma effects may not be representative of the effects on future
years because of the prospective application required by SFAS No. 123, and the
fact that options vest over several years and new grants generally are made each
year.
The following are the number of shares of common and treasury stocks as of
January 3, 1998, January 2, 1999 and January 1, 2000.
Number of Shares
---------------------------------------
January 3, January 2, January 1,
1998 1999 2000
----------- ----------- -----------
Common Stock:
Balance at beginning of year 52,398,112 63,294,423 65,172,608
Shares issued upon exercise of stock options 383,975 1,707,097 29,750
Shares issued under restricted stock grants,
net of cancellations 99,192 171,088 190,680
Shares issued for acquisition of Designer
Holdings, Ltd. 10,413,144 -- --
----------- ----------- -----------
Balance at end of year 63,294,423 65,172,608 65,393,038
=========== =========== ===========
Treasury Stock:
Balance at beginning of year 536,600 1,375,919 6,087,674
Shares issued for acquisition of ABS -- -- (100,000)
Net additions 839,319 4,711,755 6,175,976
----------- ----------- -----------
Balance at end of year 1,375,919 6,087,674 12,163,650
=========== =========== ===========
Stock Buyback Program
On November 14, 1996, the Board of Directors approved a stock buyback
program of up to 2.0 million shares. On May 14, 1997, the Company's Board of
Directors approved an increase of this program to 2.42 million shares. On
February 19, 1998 and on March 1, 1999, the Company's Board of Directors
authorized the repurchase of an additional 10.0 million shares, resulting in a
total authorization of 22.42 million shares. During fiscal 1997, 1998 and 1999,
the Company repurchased 839,319, 4,794,699 and 6,182,088 shares of its common
stock under the repurchase programs at a cost of $26,537, $135,416 and $144,688,
respectively. At January 1, 2000, there were 10,353,894 shares available for
repurchase under this program.
The Company has used a combined put-call option contract to facilitate the
repurchase of its common stock. This contract provides for the sale of a put
option giving the counterparty the right to sell the Company's shares to the
Company at a preset price at a future date and for the simultaneous purchase of
a call option giving the Company the right to purchase its shares from the
counterparty at the same price at the same future date.
At January 2, 1999, the Company held call options and had sold put options
(all covered by one contract) covering 1.5 million shares of common stock with
an average forward price of $35.35 per share. The equity instruments were
exercisable only at expiration of the contracts, with expiration dates ranging
from the first through third quarters of fiscal 1999. The equity instruments
were settled, at the election of the Company, through physical, net share or net
cash settlement. During fiscal 1998 and 1999, the Company repurchased
1,790,455 shares and 1,497,202 shares of common stock at a cost of $65,899 and
$52,919, which is reflected in treasury stock. In addition, the Company received
a net cash
F-40
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
settlement payment of $2,325 under these contracts in fiscal 1998, which was
reflected in additional paid-in-capital.
Note 14 - Earnings (Loss) per Share
For the Year Ended
------------------------------------
January 3, January 2, January 1,
1998 1999 2000
---------- ---------- ----------
Numerator for basic and diluted earnings (loss) per share -
Income (loss) before cumulative effect of change in accounting $ (12,319) $ 14,097 $ 97,786
Cumulative effect of change in accounting -- (46,250) --
--------- --------- ---------
Net income (loss) $ (12,319) $ (32,153) $ 97,786
========= ========= =========
Denominator for basic earnings (loss) per share -
Weighted average shares 52,814 61,362 55,910
--------- --------- ---------
Effect of dilutive securities:
Employee stock options -- 821 237
Restricted stock shares -- 473 462
Shares under put option contracts -- 349 187
--------- --------- ---------
Dilutive potential common shares -- 1,643 886
--------- --------- ---------
Denominator for diluted earnings (loss) per share-
Weighted average adjusted shares 52,814 63,005 56,796
========= ========= =========
Basic earnings (loss) per share before cumulative effect of
change in accounting $ (0.23) $ 0.23 $ 1.75
========= ========= =========
Diluted earnings (loss) per share before cumulative effect of
change in accounting $ (0.23) $ 0.22 $ 1.72
========= ========= =========
Options to purchase 1,900,556, 7,456,708 and 7,484,606 shares of common
stock were outstanding during fiscal years 1997, 1998 and 1999 respectively.
These shares were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common shares. The fiscal 1999 options, which expire from February 2007 to
October 2009, were still outstanding at the end of fiscal 1999. Incremental
shares issuable on the assumed conversion of the Preferred Securities of
1,653,177 shares were not included in the fiscal 1998 and 1999 computation of
diluted earnings per share as the impact would have been antidilutive for each
period presented.
F-41
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Note 15 - Lease Commitments
During fiscal 1997, the Company sold certain fixed assets for net book
value of approximately $33,223. The assets were leased back from the purchaser,
under the terms of an operating lease, over a six-year period. In fiscal 1998
and 1999, the Company sold certain equipment for cash proceeds of $21,713 and
$23,185, respectively, which approximated net book value. The equipment was
leased back from the purchaser under an operating lease with an initial term of
three years and a one-year renewal option. Under the terms of certain operating
leases, the Company guarantees a portion of the residual value loss, if any,
incurred by the lessors in remarketing or disposing the related assets upon
lease termination or expiration. The Company believes, based on existing facts
and circumstances and current values of such equipment, that a material payment
pursuant to such guarantee is unlikely.
Rental expense was $24,492, $35,534 and $37,967 for the years ended
January 3, 1998, January 2, 1999 and January 1, 2000, 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 1, 2000:
Rental Payments
------------------------------
Real Estate Equipment
--------------- -------------
2000 $ 26,709 $ 15,238
2001 23,378 15,291
2002 18,685 19,498
2003 10,629 3,990
2004 11,849 2,857
2005 and thereafter 10,680 5,437
Note 16 - Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Accounts Receivable. The carrying amount of the Company's accounts
receivables approximate fair value.
Marketable Securities. Marketable securities are stated at fair value
based on quoted market prices.
Revolving, term loans and other borrowings. The carrying amounts of the
Company's outstanding balances under its various Bank Credit Agreements and
other outstanding debt approximate the fair value because the interest rate on
the outstanding borrowings is variable and there are no prepayment penalties.
Redeemable preferred securities. These securities are publically traded on
the New York Stock Exchange. The fair market value was determined based on the
closing price on December 31, 1999, the last trading date prior to the end of
the fiscal year.
Interest rate swap agreements. The Company has entered into interest rate
swap agreements which have the effect of converting the Company's floating rate
obligations to fixed rate obligations. The fair value of the Company's interest
rate swap agreements at January 1, 2000 and January 2, 1999 are based
F-42
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
upon quotes from brokers and represent the cash requirement if the existing
agreements had been settled at year-end.
Letters of credit. Letters of credit collateralize the Company's
obligations to third parties and have terms ranging from 30 days to one year.
The face amount of the letters of credit are a reasonable estimate of the fair
value since the value for each is fixed over its relatively short maturity.
Equity option arrangements. These arrangements can be settled, at the
Company's option, by the purchase of shares, on a net basis in shares of the
Company's common stock or on a net cash basis. To the extent that the market
price of the Company's common stock on the settlement date is higher or lower
than the forward purchase price, the net differential can be paid or received by
the Company in cash or in the Company's common stock.
Foreign currency transactions. The Company enters into various foreign
currency forward and option contracts to hedge certain commercial transactions.
The fair value of open foreign currency forward and option contracts is based
upon quotes from brokers and reflects the cash benefit if the existing contracts
had been sold.
The carrying amounts and fair value of the Company's financial instruments
as of January 2, 1999 and January 1, 2000, are as follows:
January 2, 1999 January 1, 2000
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Accounts receivable $ 199,369 $ 199,369 $ 314,961 $ 314,961
Marketable securities -- -- 72,921 72,921
Revolving loans 353,097 353,097 667,156 667,156
Acquisition loan -- -- 586,200 586,200
Term loans 79,926 79,926 69,915 69,915
Other long term debt 9,094 9,094 9,484 9,484
Redeemable preferred securities 101,836 86,400 102,904 58,800
Interest rate swaps -- (24,324) -- 22,107
Letters of credit -- 129,802 -- 145,295
Equity option arrangements -- (15,144) -- --
Foreign currency purchased option
contracts 83 151 391 185
Foreign currency forward
contracts -- -- (111) (111)
F-43
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Note 17 - Cash Flow Information
For the Year Ended
------------------------------------
January 3, January 2, January 1,
1998 1999 2000
---------- ---------- ----------
Cash paid (received) during the year for:
Interest, including -0-, $1,897 and $4,038
capitalized in fiscal 1997, 1998 and 1999, respectively $ 42,932 $ 61,088 $ 82,517
Income taxes, net of refunds received 13,578 (12,538) 1,719
Supplemental Non-Cash Investing and Financing
Activities:
Details of acquisitions:
Fair value of assets acquired $ 607,609 $ 60,900 $ 740,976
Liabilities assumed (254,209) (7,800) (83,743)
Stock issued (353,400) -- (2,200)
--------- --------- ---------
Cash paid -- 53,100 655,033
Less cash acquired -- -- (7,000)
Less future cash payment (55,800) -- (22,800)
--------- --------- ---------
Net cash paid (acquired) $ (55,800) $ 53,100 $ 625,233
========= ========= =========
Note 18 - Legal Matters
The Company is not a party to any litigation or other claims or
uncertainty, other than routine litigation incidental to the business of the
Company, that individually or in the aggregate is material to the business of
the Company.
Between October 12, and October 13, 1999, six putative class action
complaints were filed in Delaware Chancery Court against the Company,
Authentic Fitness Corporation and certain of their officers and directors in
connection with the Company's proposed acquisition of Authentic Fitness.
On December 20, 1999, an Amended Class Action Complaint ("Amended
Complaint") was filed and on January 6, 2000 the court designated the Amended
Complaint as the operative complaint for the consolidated action captioned:
In Re Authentic Fitness Corporation Shareholders Litigation, C.A. No. 17464-NC
(consolidated). In the Amended Complaint (and all six complaints made virtually
identical claims), plaintiffs allege an unlawful scheme by certain of the
defendants, in breach of their fiduciary duties, to allow the Company to acquire
Authentic Fitness shares for inadequate consideration. Plaintiffs are seeking to
have the court declare the action a proper class action, to declare that the
defendants have breached their fiduciary duties to the class, and in the event
the transaction is consummated, recission thereof and damages awarded to the
Class. The Company believes the claims to be without merit and intends to
vigorously defend these actions.
Note 19 - Quarterly Results of Operations (Unaudited)
Year Ended January 1, 2000
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net revenues $444,103 $484,737 $579,612 $605,704
Gross profit 154,089 173,263 201,488 172,167
Net income $ 22,892 $ 27,846 $ 44,379 $ 2,669
======== ======== ======== ========
Basic earnings per common share: $ 0.39 $ 0.50 $ 0.80 $ 0.05
======== ======== ======== ========
Diluted earnings per common share: $ 0.39 $ 0.49 $ 0.80 $ 0.05
======== ======== ======== ========
F-44
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
Year Ended January 2, 1999
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Net revenues $ 419,208 $ 438,874 $ 544,125 $ 548,044
Gross profit 119,550 131,496 160,392 125,777
Net income (loss) before cumulative effect of
accounting change 6,088 12,940 26,944 (31,875)
Cumulative effect of accounting change (46,250) -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ (40,162) $ 12,940 $ 26,944 $ (31,875)
=========== =========== =========== ===========
Basic earnings (loss) per common share:
Income (loss) before accounting change $ 0.10 $ 0.21 $ 0.44 $ (0.54)
Cumulative effect of accounting change (0.75) -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ (0.65) $ 0.21 $ 0.44 $ (0.54)
=========== =========== =========== ===========
Diluted earnings (loss) per common share:
Income (loss) before accounting change $ 0.10 $ 0.20 $ 0.43 $ (0.54)
Cumulative effect of accounting change (0.73) -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ (0.63) $ 0.20 $ 0.43 $ (0.54)
=========== =========== =========== ===========
F-45
SCHEDULE II
THE WARNACO GROUP, INC.
VALUATION & QUALIFYING ACCOUNTS & RESERVES
(Dollars in thousands)
Additions
Balance at Charges to
Beginning Costs and Other Balance at
Description of Year Expenses(1) Additions(2) Deductions(3) End of Year
- ----------- ---------- ----------- ------------ ------------- -----------
Year Ended January 3, 1998
Receivable allowances $ 11,337 $ 139,469 $ 30,510 $(135,192) $ 46,124
======== ========= ========= ========= =========
Inventory reserves $ -- $ 57,298 $ 19,248 $ (37,371) $ 39,175
======== ========= ========= ========= =========
Year Ended January 2, 1999
Receivable allowances $ 46,124 $ 166,347 $ 21,500 $(197,303) $ 36,668
======== ========= ========= ========= =========
Inventory reserves $ 39,175 $ 25,442 $ 3,000 $ (50,716) $ 16,901
======== ========= ========= ========= =========
Year Ended January 1, 2000
Receivable allowances $ 36,668 $ 206,098 $ 4,383 $(214,277) $ 32,872
======== ========= ========= ========= =========
Inventory reserves $ 16,901 $ 6,247 $ 8,140 $ (16,914) $ 14,374
======== ========= ========= ========= =========
(1) Includes bad debts, cash discounts, allowances and sales returns.
(2) Reserves related to assets acquired including fair value adjustments--See
Note 2.
(3) Amounts written-off, net of recoveries.
(4) See Notes 2 and 3 for other restructuring related activity and Note 7 for
tax valuation allowance information.
S-1