WARNACO GROUP INC /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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 5, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 1-10857

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THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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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: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS

Class A Common Stock, par value $0.01 per share
Convertible Trust Originated Preferred Securities*
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* Issued by Designer Finance Trust. Payments of distributions and payment on
liquidation or redemption are guaranteed by the registrant.

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 [ ] No [x]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]

The aggregate market value of the Class A Common Stock, the only voting
stock of the registrant issued and outstanding, held by non-affiliates of the
registrant as of July 5, 2002, was approximately $2,242,731.

The number of shares outstanding of the registrant's Class A Common Stock as
of July 5, 2002: 52,936,206.

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PART I

ITEM 1. BUSINESS.

INTRODUCTION

The Warnaco Group, Inc., a Delaware corporation, was organized in 1986 for
the purpose of acquiring the outstanding shares of Warnaco Inc., a Delaware
corporation ('Warnaco'). As a result of the Company's acquisition of Warnaco,
Warnaco became a wholly-owned subsidiary of the Company.

The Warnaco Group, Inc. and its subsidiaries (collectively, the 'Company')
design, manufacture and market a broad line of (i) women's intimate apparel,
such as bras, panties, sleepwear, shapewear and daywear; (ii) men's apparel,
such as sportswear, jeanswear, khakis, underwear and accessories; (iii) women's
and junior's apparel, such as sportswear and jeanswear; and (iv) active apparel,
such as swimwear, swim accessories and fitness apparel. The Company's products
are sold to wholesale accounts or directly to consumers through the Company's
Retail Stores Division under a variety of internationally recognized brand names
which are either owned or licensed by the Company.

(A) PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE AND DEBTOR-IN-POSSESSION
FINANCING

On June 11, 2001 (the 'Petition Date'), the Company and certain of its
subsidiaries (each a 'Debtor' and, collectively, the 'Debtors') each filed a
petition for relief under Chapter 11 of the U.S. Bankruptcy Code, 11 U.S.C.
'SS'SS'101-1330, as amended (the 'Bankruptcy Code'), in the United States
Bankruptcy Court for the Southern District of New York (the 'Bankruptcy Court')
(collectively, the 'Chapter 11 Cases'). The Company, 37 of its 38 U.S.
subsidiaries and one of Warnaco's Canadian subsidiaries, Warnaco of Canada
Company ('Warnaco Canada'), are Debtors in the Chapter 11 Cases. The remainder
of the Company's foreign subsidiaries are not debtors in the Chapter 11 Cases,
nor are they subject to foreign bankruptcy or insolvency proceedings. However,
certain debt obligations of the Company's foreign subsidiaries are subject to
standstill agreements with the Company's pre-petition lenders.

On June 11, 2001, the Company entered into a Debtor-in-Possession Financing
Agreement (the 'DIP') with a group of banks which was approved by the Bankruptcy
Court in an interim amount of $375,000,000. On July 9, 2001, the Bankruptcy
Court approved an increase in the amount of borrowing available to the Company
to $600,000,000. The DIP was subsequently amended as of August 27, 2001,
December 27, 2001, February 5, 2002 and May 15, 2002 (the 'Amended DIP'). The
amendments, among other things, amend certain definitions and covenants, permit
the sale of certain of the Company's assets and businesses, extend deadlines
with respect to certain asset sales and certain filing requirements with respect
to a plan of reorganization and reduce the size of the facility to reflect the
Debtors' revised business plan. See 'Risk Factors'.

The Amended DIP (when originally executed) provided for a $375,000,000
non-amortizing revolving credit facility (which includes a letter of credit
facility of up to $200,000,000) ('Tranche A') and a $225,000,000 revolving
credit facility ('Tranche B'). On December 27, 2001, the Tranche B commitment
was reduced to $100,000,000. The Company eliminated the Tranche B commitment
completely on April 19, 2002. On May 28, 2002, the Company voluntarily reduced
the amount of borrowing available under the Amended DIP to $325,000,000. The
Amended DIP terminates on the earlier of June 11, 2003 or the effective date of
a plan of reorganization. For a further discussion of the Amended DIP see
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- 'Liquidity and Capital Resources'. See also Note 15 of
Notes to Consolidated Financial Statements.

Pursuant to the Bankruptcy Code, pre-petition obligations of the Debtors,
including obligations under debt instruments, generally may not be enforced
against the Debtors, and any actions to collect pre-petition indebtedness are
automatically stayed, unless the stay is lifted by the Bankruptcy Court. In
addition, as debtors-in-possession, the Debtors have a right, subject to
Bankruptcy Court approval and certain other limitations, to assume or reject
executory contracts and unexpired leases. In this context, 'assumption' means
the Debtors agree to perform their obligations under the lease or contract and
to cure all defaults, and 'rejection' means that the Debtors are relieved from
their obligation to perform under the contract or lease, but are subject to
damages for the breach thereof. Any damages resulting

from such a breach will be treated as unsecured claims in the Chapter 11 Cases.
The Debtors are in the process of reviewing their executory contracts and
unexpired leases. Through January 5, 2002, the Debtors have identified and
rejected a number of executory contracts and unexpired leases. As of January 5,
2002, the Company had accrued approximately $20.6 million related to rejected
leases and contracts which is included in liabilities subject to compromise on
the consolidated balance sheets. The Company continues to evaluate its business
operations and expects to reject additional contracts and leases prior to filing
its plan of reorganization. Although the Debtors have attempted to estimate the
ultimate amount of liability that may result from rejected contracts and leases,
additional leases may be rejected in the future. Such rejections could result in
additional liabilities subject to compromise that the Company has not
anticipated. In connection with the consummation of a confirmed plan or plans of
reorganization, the Company will elect to assume certain of its leases and
executory contracts. The success of any plan of reorganization is dependent upon
the Bankruptcy Court's approval of the Company's assumption of certain of these
executory contracts, including certain license agreements.

As a result of the Chapter 11 Cases and the circumstances leading to the
filing thereof, as of January 5, 2002, the Company was not in compliance with
certain financial and bankruptcy covenants contained in certain of its license
agreements. Under applicable provisions of the Bankruptcy Code, compliance with
such terms and conditions in executory contracts generally are either excused or
suspended during the Chapter 11 Cases.

In the Chapter 11 Cases, substantially all of the Debtors' unsecured
liabilities as of the Petition Date are subject to compromise or other treatment
under a plan or plans of reorganization which must be confirmed by the
Bankruptcy Court after obtaining the requisite amount of votes by affected
parties. For financial reporting purposes, those liabilities have been
segregated and classified as liabilities subject to compromise in the
consolidated balance sheets. Generally, all actions to enforce or otherwise
obtain repayment of pre-petition liabilities and all pending litigation against
the Debtors are stayed while the Debtors continue their business operations as
debtors-in-possession. The Debtors have filed unaudited schedules with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the Petition Date as reflected in the Debtors' accounting records. The monthly
operating reports that the Debtors are required to file with the U.S. Trustee
have also been filed with the Securities and Exchange Commission on Forms 8-K.
The ultimate amount of and settlement terms for such liabilities are subject to
a confirmed plan or plans of reorganization and, accordingly, are not presently
determinable.

The Bankruptcy Code provides that the Debtors have exclusive periods during
which only they may file and solicit acceptances of a plan of reorganization.
The Debtors requested and, on July 12, 2002, were granted an extension of time
until August 30, 2002 to file their exclusive plan of reorganization and until
October 31, 2002 to solicit acceptances of such plan. If the Debtors fail to
file a plan of reorganization or fail to obtain additional extensions of time to
file a plan of reorganization by the extension date, or if the Debtors' plan is
not accepted by the Bankruptcy Court, impaired classes of creditors and equity
holders or any party-in-interest (including a creditor, equity holder, a
committee of creditors or equity holders or an indenture trustee) may file their
own plan of reorganization for the Debtors.

After a plan of reorganization has been filed with the Bankruptcy Court, the
plan and a disclosure statement approved by the Bankruptcy Court will be sent to
classes of creditors whose acceptances will be solicited as part of the plan.
Following the solicitation period, the Bankruptcy Court will consider whether to
confirm the plan. In order to confirm the plan, the Bankruptcy Court is required
to find that (i) with respect to each impaired class of creditors and equity
holders, each holder in such class has accepted the plan or will, pursuant to
the plan, receive at least as much as such holder would have received in a
liquidation, (ii) each impaired class of creditors and equity holders has
accepted the plan by the requisite vote (except as described below) and
(iii) confirmation of the plan is not likely to be followed by a liquidation or
a need for further financial reorganization unless the plan proposes such
measures. If any impaired class of creditors or equity holders does not accept
the plan, then, assuming that all of the other requirements of the Bankruptcy
Code are met, the proponent of the plan may invoke the 'cram-down' provisions of
the Bankruptcy Code. Under these provisions, the Bankruptcy Court may approve a
plan notwithstanding the non-acceptance of the plan by an impaired class of

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creditors or equity holders if certain requirements are met. These requirements
include payment in full for a dissenting senior class of creditors before
payment to a junior class can be made. Under the priority scheme established by
the Bankruptcy Code, absent agreement to the contrary, certain post-petition
liabilities and pre-petition liabilities need to be satisfied before
shareholders can receive any distribution. As a result of the amount and
character of the Company's pre-petition indebtedness, the shortfall between the
Company's projected enterprise value and the amount necessary to satisfy the
claims, in full, of its secured and unsecured creditors and the impact of the
provisions of the Bankruptcy Code applicable to confirmation of a plan or plans
of reorganization, the Company believes that it is highly unlikely that current
holders of common stock or preferred securities of the Company will receive any
distribution under any plan of reorganization or liquidation of the Company.
Accordingly, investment in the Company's common stock or preferred securities is
highly speculative. Certain of the Company's financial instruments (e.g.,
pre-petition secured debt) trade in markets for debt securities and other
instruments. The Company expects that holders of the Company's financial
instruments will receive substantially less than face value in any plan or plans
of reorganization approved by the Bankruptcy Court. Because of the likelihood
that holders of these instruments will receive substantially less than face
value, investment in these instruments is highly speculative. See 'Risk
Factors'.

Management is in the process of stabilizing the business of the Debtors and
evaluating the Company's operations as part of the development of a plan of
reorganization. After developing a plan of reorganization, the Debtors will seek
the acceptance and confirmation of the plan in accordance with the provisions of
the Bankruptcy Code.

During the course of the Chapter 11 Cases, the Debtors may seek Bankruptcy
Court authorization to sell assets and settle liabilities for amounts other than
those reflected in the consolidated financial statements. The Debtors are in the
process of reviewing their operations and identifying assets available for
potential disposition, including entire business units of the Company. However,
there can be no assurance that the Company will be able to consummate such
transactions at prices the Company or the Company's creditor constituencies will
find acceptable. Since the Petition Date, through January 5, 2002, the Company
has sold certain personal property, certain owned buildings and land and other
assets for approximately net book value, generating net proceeds of
approximately $6.2 million. In the first quarter of fiscal 2002, the Company
sold additional assets generating net proceeds of approximately $4.0 million
(collectively the 'Asset Sales'). Substantially all of the net proceeds from the
Asset Sales were used to reduce outstanding borrowings under the Amended DIP. In
addition, in the first quarter of fiscal 2002, the Company sold the businesses
and substantially all of the assets of GJM Manufacturing Ltd. ('GJM'), a private
label manufacturer of women's sleepwear and Penhaligon's Ltd. ('Penhaligon's'),
a United Kingdom based retailer of perfumes, soaps, toiletries and other
products. The sales of GJM and Penhaligon's generated approximately $20.1
million of net proceeds in the aggregate. Proceeds from the sale of GJM and
Penhaligon's were used to (i) reduce amounts outstanding under certain of the
Company's debt agreements ($4.8 million), (ii) reduce amounts outstanding under
the Amended DIP ($4.2 million), (iii) create an escrow fund (subsequently
disbursed in June 2002) for the benefit of pre-petition secured lenders ($9.4
million), and (iv) create an escrow fund for the benefit of the purchasers for
potential indemnification claims and for any working capital valuation
adjustments ($1.7 million). In the second quarter of fiscal 2002, the Company
began the process of closing 25 of its outlet stores. The closing of the stores
and the related sale of inventory at approximately net book value generated
approximately $12 million of net proceeds which were used to reduce amounts
outstanding under the Amended DIP in fiscal 2002.

Administrative and reorganization expenses resulting from the Chapter 11
Cases will unfavorably affect the Debtors and, consequently, the Company's
consolidated results of operations. Future results of operations may also be
adversely affected by other factors relating to the Chapter 11 Cases. See 'Risk
Factors' below.

(B) RESTATEMENT OF FINANCIAL STATEMENTS

In June 2001, during the course of reviewing its business operations, the
Company became aware of certain accounting errors involving the recording of
inter-company pricing arrangements, the recording of accounts payable primarily
related to the purchase of inventory from suppliers and the accrual of

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certain liabilities. The errors were related to the Company's Designer Holdings
Ltd. ('Designer Holdings') subsidiary. The correction of these errors, together
with additional errors primarily related to the recording of accounts payable
and inventory discovered in certain of the Company's European subsidiaries in
connection with the Company's year-end closing for fiscal 2001, has caused the
Company to restate its previously issued financial statements for the years
ended January 1, 2000 and December 30, 2000 (fiscal 1999 and fiscal 2000,
respectively), its previously issued financial results for each of the quarterly
periods in fiscal 1999 and fiscal 2000 and for the fiscal 2001 quarter ended
April 7, 2001. The Company reduced previously reported net income by $4,132,000
(net of income tax benefit of $2,703,000), or $0.07 per share, for fiscal 1999,
increased its previously reported net loss by $45,788,000 (net of income tax
benefit of $137,000), or $0.87 per share, for fiscal 2000 and increased its
previously reported net loss by $1,116,000 (no income tax effect), or $0.02 per
share, for the fiscal 2001 quarter ended April 7, 2001 (collectively, the
'Restatements'). The components of the Restatements and their effect on
previously issued financial statements are set forth in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
Note 2 and Note 25 of Notes to Consolidated Financial Statements.

The Company began an internal investigation of the suspected accounting
errors in June 2001. In August 2001, after reviewing the preliminary results of
the internal investigation, the Audit Committee of the Board of Directors of the
Company retained the law firm Dewey Ballantine LLP ('Dewey Ballantine') to
investigate the suspected accounting errors at Designer Holdings. In addition,
Dewey Ballantine retained FTI Consulting, Inc. ('FTI') to assist in the
investigation and provide accounting expertise to Dewey Ballantine. Dewey
Ballantine issued its report to the Audit Committee on February 6, 2002. Since
the discovery of the accounting errors at Designer Holdings and at certain of
the Company's European subsidiaries, the Company has replaced certain financial
staff and has taken several steps to improve the accounting for inter-company
purchases and the reconciliation of inter-company accounts.

The Company estimates that the total cost of conducting the investigation
into this matter, consisting primarily of professional fees, will be
approximately $1,000,000. Approximately $681,000 of the cost of the
investigation is included in the Company's results of operations for the year
ended January 5, 2002 and the remaining $319,000 will be included in the results
of operations in the first quarter of fiscal 2002.

(C) GENERAL DEVELOPMENT OF BUSINESS

The Company's strategy is to capitalize on its brand names worldwide while
broadening its channels of distribution and improving manufacturing efficiencies
and cost controls. The Company operates in three business segments:
(i) Intimate Apparel, (ii) Sportswear and Accessories and (iii) Retail Stores,
which accounted for 37%, 52% and 11%, respectively, of net revenues in fiscal
2001, and 33%, 46% and 21%, respectively, of the Company's gross profit for the
same period. For additional information on the Company's net revenues and gross
profit, see Item 6. Selected Financial Data.

Intimate Apparel. The Intimate Apparel Division designs, manufactures,
imports and markets moderate to premium priced intimate apparel and other
products for women under the Warner's'r', Olga'r', Calvin Klein'r', Lejaby,'r'
Rasurel'r' and Bodyslimmers'r' brand names. In addition, the Intimate Apparel
Division designs, manufactures, imports and markets men's underwear under the
Calvin Klein'r' brand name. The Intimate Apparel Division licenses and provides
design support for White Stag women's sportswear. The Warner's and Olga brand
names, which are owned by the Company, have been utilized for 128 and 61 years,
respectively. All of the Company's continuing intimate apparel brands are owned.

Sportswear and Accessories. The Sportswear and Accessories Division designs,
manufactures, imports and markets (i) moderate to premium priced men's apparel
and accessories under the Chaps by Ralph Lauren'r', Calvin Klein'r' and
Catalina'r' brand names; (ii) 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
(iii) moderate to better priced swimwear and activewear under the Speedo'r',
Speedo'r' Authentic Fitness'r', Catalina'r', Anne Cole'r', Cole of
California'r', Lauren'r'/Ralph Lauren'r', Ralph'r'/Ralph Lauren'r', Ralph
Lauren'r', Polo Sport Ralph Lauren'r', Polo Sport-RLX'r', Sunset Beach'r' and
Sandcastle'r' brand names. During

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fiscal 1999, the Company acquired Authentic Fitness Corporation ('Authentic
Fitness') which designs, manufactures and markets swimwear, swim accessories and
active fitness apparel under the brand names identified in (iii) above and
activewear and swimwear under the Catalina brand name. In fiscal 1999, the
Company also acquired A.B.S. Clothing Collections, Inc. ('ABS'), a contemporary
designer of casual sportswear and dress lines sold through better department and
specialty stores, and Chaps by Ralph Lauren -- Canada ('Chaps Canada'), the
Canadian licensee for Chaps by Ralph Lauren ('Chaps') men's sportswear.

Retail Stores. The Retail Stores Division is comprised of both outlet stores
and full-price retail stores which sell the Company's products to the general
public.

Outlet Stores. 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's outlet stores are situated in areas where
they generally do not compete with the Company's principal channels of
distribution. As of January 5, 2002, the Company operated 86 outlet stores (64
in the U.S., seven in Canada, 13 in the United Kingdom, one in France and one in
Spain). The Company opened one store and closed 47 stores during fiscal 2001.
The Company closed 13 stores in the first four months of fiscal 2002 and
currently plans to close 25 more stores during fiscal 2002. In May 2002, the
Company contracted with a third party and sold the inventory of these 25 retail
outlet stores at approximately net book value. The third party is selling the
inventory, fixtures and other assets related to such stores. The Company
generated approximately $12 million of net proceeds from this transaction.

Full-price Retail Stores. The Company also 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 throughout the year. As of January 5, 2002, the
Company operated 95 Speedo Authentic Fitness full-price retail stores (93 in the
U.S. and two in Canada). The Company closed 39 Speedo Authentic Fitness stores
in 2001.

The Company has continued to pay rent on individual outlet and full-price
stores through the date the stores were closed in accordance with the terms of
the individual leases. Substantially all of the closed stores had leases that
expire after the date the store was closed. The Company has estimated the
liability for these rejected retail leases consistent with the provisions of the
Bankruptcy Code. Accrued rent related to the rejected leases is included in
liabilities subject to compromise. Although the Company has made every effort to
include all liabilities related to the rejected leases in the January 5, 2002
consolidated balance sheets, the ultimate amount of claims that are allowed as
part of the Chapter 11 Cases may differ from the amounts recorded by the
Company. The Company will continue to evaluate additional store closures and
asset dispositions.

Other. In fiscal 1998 and fiscal 1999, the Company invested $7.6 million to
acquire a 3% equity interest in InterWorld Corporation, a 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. The Company realized a pre-tax gain of $42.8 million upon the
sale of this investment.

The Company operates through its wholly-owned subsidiaries in Canada,
Mexico, Europe and Asia. Export sales are not material. International operations
generated $328.4 million, or 19.6%, of the Company's net revenues in fiscal
2001, compared with $357.7 million, or 15.9%, of the Company's net revenues in
fiscal 2000, and $338.3 million, or 16.0%, of the Company's net revenues in
fiscal 1999.

The Company's products are distributed to approximately 20,000 customers
operating approximately 50,000 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, The May Department
Stores, J.C. Penney, Kohl's, 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, and to leading Mexican retailers such as Palacio de Hierro and
Liverpool.

No customer accounted for 10% or more of the Company's net revenues in any
one of the three years in the period ended January 5, 2002.

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(D) NARRATIVE DESCRIPTION OF BUSINESS.

Intimate Apparel

The Company's Intimate Apparel Division designs, manufactures, and markets
women's intimate apparel, which includes bras, panties, shapewear and daywear.
The Company also designs and markets men's underwear. The Company has
historically focused its intimate apparel products on the upper moderate to
premium price range distributed through leading department and specialty stores.

The intimate apparel division markets its lines under the following brand
names:

The Company owns the Warner's, Olga, Calvin Klein (underwear and intimate
apparel), Lejaby, Rasurel, Bodyslimmers and White Stag brand names and
trademarks which accounted for approximately 88% of the Company's Intimate
Apparel Division's net revenues in fiscal 2001. The Company also manufactures
intimate apparel on a private and exclusive label basis for certain specialty
and department stores. The Warner's and Olga brands have been utilized for 128
years and 61 years, respectively. In fiscal 2001, the Company also marketed
intimate apparel under the licensed Fruit of the Loom and Weight Watchers
labels, which accounted for approximately 2.9% of the Intimate Apparel
division's net revenues in fiscal 2001.

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, and in Costa Rica, the Dominican Republic and
Honduras in Central America. International sales accounted for approximately
35.5% of the Intimate Apparel Division's net revenues in fiscal 2001 compared
with 32.0% in fiscal 2000 and 28.7% in fiscal 1999. 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. Net revenues attributable to the international
divisions of the Intimate Apparel Division were $222.6 million, $257.8 million
and $270.9 million in fiscal 2001, 2000 and 1999, respectively.

The Company's intimate apparel products for the Warner's, Olga, Lejaby and
Bodyslimmers labels are manufactured principally in the Company's facilities in
North America, Central America, the Caribbean, France and Ireland and sourced
from Tunisia. The Company's Calvin Klein products are primarily sourced from
Morocco, Tunisia and the Far East. In fiscal 2000, as part of its restructuring
initiatives, the Company closed five manufacturing facilities and one cutting
center. See Note 5 of Notes to Consolidated Financial Statements. As part of the
reorganization of the Company related to the Chapter 11 Cases, the Company
expects to close additional facilities during fiscal 2002.

The Intimate Apparel Division generally markets its product lines for three
retail-selling seasons (spring, fall and holiday). Its revenues are generally
consistent throughout the year, with 45.9%, 49.6% and 45.6% of the Intimate
Apparel Division's net revenues occurring in the first half of fiscal 2001, 2000
and 1999, respectively.

Sportswear and Accessories

The Sportswear and Accessories Division designs, manufactures, imports and
markets men's and boy's jeanswear, khakis, swimwear and sportswear, men's
accessories, and women's, junior's sportswear and jeanswear, active apparel and
swimwear.

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The Sportswear and Accessories Division markets its lines under the
following brand names:

The Calvin Klein, Chaps by Ralph Lauren, Speedo, Anne Cole, Ralph Lauren,
Polo Sport Ralph Lauren, Polo Sport-RLX, Lauren/Ralph Lauren and Ralph/Ralph
Lauren brand names are licensed on an exclusive basis by the Company. See 'Risk
Factors'.

The Company acquired (i) Designer Holdings during the fourth quarter of
1997, (ii) a 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, (iii) a 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, (iv) ABS during the third quarter of fiscal 1999, (v) a
license for Chaps Canada in the second quarter of fiscal 1999 and
(vi) Authentic Fitness during the fourth quarter of fiscal 1999.

International sales accounted for approximately 8.7% of net revenues of the
Sportswear and Accessories Division in fiscal 2001, compared with 6.2% and 4.3%
in fiscal 2000 and 1999, respectively. Net revenues attributable to
international operations of the Sportswear and Accessories Division were $75.5
million, $75.6 million and $44.4 million in fiscal 2001, 2000 and 1999,
respectively. This increase in international sales since fiscal 1999 reflects
the acquisition of Authentic Fitness and sales growth in Chaps and Calvin Klein
jeans in Mexico and Canada.

Sportswear apparel (knit shirts, sweaters and other apparel) is sourced
principally from suppliers based in Hong Kong, China and throughout Asia.
Jeanswear is sourced principally from the United States, Mexico and Asia.
Accessories are sourced from the United States, Europe and Asia. Swimwear is
produced in the Company's manufacturing facilities in the United States and
Mexico and is sourced from suppliers in the United States, Mexico, Central
America and Asia.

The Sportswear and Accessories Division, similar to the Intimate Apparel
Division, generally markets its 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
selling season. Approximately 56.6% of the Sportswear and Accessories Division's
products were sold in the first half of fiscal 2001. The Authentic Fitness
business unit accounted for 35.8% of the Sportswear and Accessories Division's
net revenues in fiscal 2001. Approximately 78.1% of Authentic Fitness (primarily
swim and fitness related products) total fiscal 2001 net revenues were generated
in the first half of fiscal 2001.

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Retail Stores

The Retail Stores Division is comprised of both outlet stores and full-price
retail stores which sell 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's outlet stores are situated in areas where they generally do not
compete with the Company's principal channels of distribution. As of January 5,
2002 the Company operated 86 retail outlet stores. The Company closed 13 stores
in the first four months of 2002 and currently plans to close 25 more stores
during fiscal 2002. In May 2002, the Company contracted with a third party and
sold the inventory of the 25 retail outlet stores to be closed at approximately
net book value. The third party is also selling the fixtures and other assets
related to such stores. The Company generated approximately $12 million of net
proceeds from this transaction.

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 throughout the year. As of January 5, 2002, the Company operated 95
Speedo Authentic Fitness full-price retail stores (93 in the U.S. and two in
Canada). The Company will continue to evaluate additional store closings and
asset dispositions.

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, which engage
in sales, manufacturing and marketing activities. See Note 8 of Notes to
Consolidated Financial Statements. The Company's results of 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, Western Europe and Hong Kong are
subject to risks that are significantly different from those of the domestic
operations. See 'Risk Factors'. Mexico has historically been subject to high
rates of inflation and currency restrictions that may, from time to time, affect
the Mexican operation. The Company also sells directly to customers in Mexico.
Net revenues from these shipments represented approximately 2.5% of the
Company's net revenues in fiscal 2001.

The Company maintains manufacturing facilities in Mexico, Honduras, Costa
Rica, Ireland and France. The Company maintains warehousing facilities in
Canada, Mexico, the United Kingdom, France and in the Netherlands (through a
joint venture). The Intimate Apparel Division operates manufacturing facilities
in Mexico and in the Caribbean pursuant to duty-advantaged (commonly referred to
as 'Item 807') programs. During fiscal 2000, the Company closed five
manufacturing facilities, one cutting facility and seven warehouses. The Company
expects to close or sell additional facilities during fiscal 2002. Because the
Company has many potential sources of manufacturing, 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 or Hong Kong dollars (which
currently fluctuates with the United States dollar) and, therefore, are not
subject to currency fluctuations.

Sales and Marketing

The Intimate Apparel and Sportswear and Accessories Divisions sell to
approximately 20,000 customers operating 50,000 department, mass merchandise and
men's and women's specialty stores throughout North America and Europe.

The Company's retail customers are served by approximately 300 sales
representatives. 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.

8

The Company utilizes various forms of advertising media. In fiscal 2001, the
Company spent approximately $138.4 million, or 8.3% of net revenues, for
advertising, marketing and promotion of its various product lines, compared with
$141.3 million, or 6.3% of net revenues in fiscal 2000, and $118.0 million or
5.6% of net revenues in fiscal 1999. 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. See 'Risk Factors'. In addition to competition from other
branded apparel manufacturers, the Company competes in certain product lines
with department store private label programs. The Company also competes with
foreign producers.

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 Divisions are available from
multiple sources.

Import Quotas

A substantial portion of the Company's Sportswear and Accessories Division's
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. 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 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 not, therefore, 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,
Central America, the Caribbean and Europe. The Company's policy is to have many
manufacturing sources so that a disruption at any one facility will not
significantly impact the Company; however, there can be no guarantee that a
disruption will not occur in the future. See 'Risk Factors'.

Employees

As of January 5, 2002, the Company and its subsidiaries employed 18,026
employees. Approximately 1.5% 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's exclusive worldwide license agreement with
Calvin Klein, Inc. to produce Calvin Klein men's accessories expires June 30,
2004. See 'Risk Factors' and Item 3. Legal Proceedings -- 'Calvin Klein
Litigation'.

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

9

including swimwear, sportswear and a wide variety of other products using the
Speedo trademark and certain other trademarks including Speedo, Surf Walker'r',
and Speedo Authentic Fitness. The Company's license to use the Speedo trademark
and such other trademarks was granted in perpetuity subject to certain
conditions and is exclusive in the United States, its territories and
possessions, Canada, Mexico and the Caribbean. 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
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. The
Company has certain rights to sublicense the Speedo trademark within the
geographic regions covered by the licenses. See Item 3. Legal Proceedings --
'Speedo Litigation'.

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 name and service
mark, which rights are in addition to the rights under the license agreements
with Speedo International, Ltd. See Item 3. Legal Proceedings -- 'Speedo
Litigation'.

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 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. Anne Cole
and Anne Cole Design Studio Ltd. have the right to approve products bearing the
licensed trademark, as set forth in the license.

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 brand
name. The agreement granting the exclusive right to use the Oscar de la Renta
trademark was valid for a term up to and including March 31, 2002 and provided
for the payment of certain minimum royalty payments to be credited against
earned royalty payments for each year of the agreement. The license was not
renewed upon its expiration on March 31, 2002.

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, Polo
Sport Ralph Lauren and Polo Sport-RLX 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. Shipments under
this license agreement began in January 1999. Effective January 1, 2001 the
Lauren/Ralph Lauren and Ralph/Ralph Lauren marks were added to the license. The
initial term of these agreements expire June 30, 2003; the Company is currently
in negotiations to extend the license beyond its current expiration in 2003.

In fiscal 1999, the Company entered into an exclusive licensing agreement
for an initial term of five years, extendable for a further term of five 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 rejected this license agreement in connection with the
Chapter 11 Cases. Amounts due to Weight Watchers International, Inc. as of the
Petition Date are included in liabilities subject to compromise as of
January 5, 2002.

Through December 31, 2001, the Company had an exclusive license agreement to
use the Fruit of the Loom trademark in the United States, its territories and
possessions, Canada and Mexico. The Company terminated the Fruit of the Loom
license agreement prior to the Petition Date.

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

10

net sales. Such license agreements also generally grant the licensor the right
to approve any designs marketed by the licensee.

As noted above, certain of the Company's license agreements with third
parties will expire by their terms over the next several years. There can be no
assurance that the Company will be able to negotiate and conclude extensions of
such agreements on economic terms. See 'Risk Factors.'

The Company owns or has other ownership rights in 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, Lejaby, Rasurel,
Bodyslimmers, 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 Wal-Mart
for sportswear and other products. These agreements require the licensee to pay
royalties and fees to the Company. 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 $16.1 million, $16.5 million and $17.7 million in
fiscal 2001, 2000 and 1999, 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.

(E) 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 8 of Notes to Consolidated Financial Statements.

(F) RISK FACTORS

This Annual Report may contain '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, that reflect when made,
the Company's expectations or beliefs concerning future events that involve
risks and uncertainties, including the sufficiency of the Amended DIP financing,
the ability of the Company to satisfy the conditions and requirements of its
credit facilities, the effects of the Chapter 11 Cases on the operation of the
Company, the Company's ability to obtain court approval with respect to motions
in the Chapter 11 Cases prosecuted by it from time to time, the ability of the
Company to develop, prosecute, confirm and consummate one or more plans of
reorganization with respect to the Chapter 11 Cases, the effect of national,
international 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, financial difficulties encountered by customers, the ability of
the Company to attract, motivate and retain key executives and employees and the
ability of the Company to attract and retain 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 and Results of Operations,' 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. The Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. These
forward-looking statements may contain the words 'believe,' 'anticipate,'
'expect,' 'estimate,' 'project,' 'will be,' 'will continue,' 'will likely
result,' or other similar words

11

and phrases. Forward-looking statements and the Company's plans and expectations
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those anticipated, and the Company's business
in general is subject to certain risks that could affect the value of the
Company's stock. These risks include, but are not limited to, the following:

The Company faces significant challenges in connection with its bankruptcy
reorganization.

On June 11, 2001, the Company, 37 of 38 of its U.S. subsidiaries and Warnaco
Canada filed voluntary petitions for relief under Chapter 11 of the Bankruptcy
Code in the Bankruptcy Court. The Chapter 11 Cases are being jointly
administered for procedural purposes. Since the Petition Date, the Debtors have
been operating their business as debtors-in-possession pursuant to the
Bankruptcy Code. There can be no assurance that the Company will be successful
in reorganizing under the Chapter 11 Cases. If the Company is not successful in
reorganizing under the Chapter 11 Cases, it could face liquidation.

The Company's financial statements assume it will continue as a 'going concern'.
Because of the Chapter 11 Cases there is substantial doubt in this regard.

Based on current and anticipated levels of operations and assuming
consummation of a plan of reorganization, management believes that the Company
will continue as a 'going concern'. Accordingly, the Company's consolidated
financial statements included herein have been prepared assuming the Company
will continue as a 'going concern'. Because of the Company's recurring losses
from operations, stockholder's capital deficiency and the Chapter 11 Cases and
the circumstances leading to the filing thereof, there is substantial doubt
about the Company's ability to continue as a 'going concern'. The continuation
of the Company as a 'going concern' is contingent upon, among other things,
(i) its ability to formulate a plan of reorganization that will gain the
approval of the parties required by the Bankruptcy Code and be confirmed by the
Bankruptcy Court, (ii) the Company's ability to comply with the terms of the
Amended DIP, (iii) its ability to return to profitability and (iv) its ability
to generate sufficient cash flows from operations and obtain financing to meet
future obligations. These matters create substantial doubt about the Company's
ability to continue as a 'going concern'. If the 'going concern' basis was not
appropriate for the Company's consolidated financial statements, then
significant adjustments would be necessary in the carrying value of assets and
liabilities, the revenues and expenses reported, and the balance sheet
classifications used.

The amounts reported in the consolidated financial statements included
elsewhere in this Annual Report do not reflect all of the adjustments to the
carrying value of assets or the amount and classification of liabilities that
ultimately may be necessary as the result of the adoption of a plan of
reorganization. Adjustments necessitated by the plan of reorganization could
materially change the amounts reported in the consolidated financial statements
included herein.

The Company's capital resources are limited and the Company has limited access
to additional financing.

Based on current and anticipated levels of operations and assuming
consummation of a plan or plans of reorganization on or prior to June 11, 2003,
the Company believes that the Company's cash flows from operations, together
with amounts available under the Amended DIP, will be adequate to meet its
anticipated cash requirements during the pendency of the Chapter 11 Cases. The
Amended DIP will terminate on the earlier of June 11, 2003 or the effective date
of a plan or plans of reorganization. If a plan or plans of reorganization are
not consummated in accordance with their terms on or prior to June 11, 2003, the
Company would be required to extend the term of the Amended DIP or obtain
alternative financing. The Company can provide no assurance that such an
extension would be granted or that alternative financing would be available on
acceptable terms. As a result of the Chapter 11 Cases and the circumstances
leading to the filing thereof, the Company's access to alternative financing in
such a scenario would be very limited. Furthermore, in the event that cash
flows, together with available borrowings under the Amended DIP or alternative
financing arrangements, are not sufficient to meet the Company's cash
requirements, the Company may be required to reduce planned capital
expenditures, sell additional assets and seek other sources of capital. The
Company can provide no assurance that such actions would be sufficient to cover
any cash shortfalls. Management believes that, assuming consummation of a plan
or plans of reorganization in accordance with its terms and

12

achievement of the Debtors' business plan and strategy, the reorganized Company
will have sufficient liquidity for the reasonably foreseeable future.

The Company is subject to restrictions on the conduct of its business.

The Debtors are operating their businesses as debtors-in-possession pursuant
to the Bankruptcy Code. Under applicable bankruptcy law, during the pendency of
the Chapter 11 Cases, the Debtors are required to obtain the approval of the
Bankruptcy Court prior to engaging in any transaction outside the ordinary
course of business. In connection with any such approval, creditors and other
parties in interest may raise objections to such approval and may appear and be
heard at any hearing with respect to any such approval. Accordingly, although
the Debtors may sell assets and settle liabilities (including for amounts other
than those reflected on the Debtors' consolidated financial statements) with the
approval of the Bankruptcy Court, there can be no assurance that the Bankruptcy
Court will approve any sales or settlements proposed by the Debtors. The
Bankruptcy Court also has the authority to oversee and exert control over the
Debtors' ordinary course operations.

In addition, the Amended DIP contains restrictive covenants that require the
Company to maintain minimum levels of EBITDAR (earnings before interest, taxes,
depreciation, amortization, restructuring charges and other items as set forth
in the agreement), restrict investments, limit the annual amount of capital
expenditures, prohibit paying dividends and prohibit the Company from incurring
material additional indebtedness. The Company has secured extensions of
deadlines with respect to certain asset sales and certain filing requirements
through August 30, 2002. There can be no assurance that the Company will satisfy
the covenants as extended or that further extensions will be granted. Certain
restrictive covenants are subject to adjustment in the event the Company sells
certain business units and/or assets. In addition, the Amended DIP provides that
the net proceeds of asset sales outside the ordinary course of business will be
used to repay amounts borrowed under the Amended DIP.

As a result of the restrictions described above, the ability of the Company
to respond to changing business and economic conditions may be significantly
restricted, and the Company may be prevented from engaging in transactions that
might otherwise be considered beneficial.

The Chapter 11 Cases may have a material adverse effect on relationships with
suppliers or vendors.

While the Company has not experienced any significant disruption in its
relationships with its suppliers or vendors, the Company may have difficulty
maintaining existing or creating new relationships with suppliers or vendors as
a result of the Chapter 11 Cases. The Company's suppliers and vendors could stop
providing supplies or services to the Company or provide such supplies or
services only on 'cash on delivery,' 'cash on order,' or other terms that could
have an adverse impact on the Company's short-term cash flows.

The Company may have difficulty attracting and retaining key personnel.

The Company believes that its future success will be dependent upon its
ability to attract and retain skilled managers and other personnel. Since the
Petition Date, the Company has been able to retain many of its key employees
through retention programs and has attracted new employees to several key
positions. However, no assurance can be given that the Company will be able to
continue to attract and retain such personnel in the future.

The Company's reorganization will require substantial effort by management.

The Company has strengthened its management by hiring a new Chief Executive
Officer and a new Chief Financial Officer. In addition, the Company has hired
Presidents for several of its key business groups and/or units including the
Intimate Apparel, Sportswear and Swimwear Divisions. The Company has also
supplemented its management staff where appropriate. Nonetheless, the Company's
senior management has been and may continue to be required to expend a
substantial amount of time and effort in connection with the reorganization
process which could have a disruptive impact on management's ability to focus on
the operation of the Company's business.

13

The Company's reorganization may effect changes in management.

The bankruptcy and reorganization process could affect the composition of
the board of directors and senior management following the consummation of a
plan or plans of reorganization.

The Company's financial success is linked to the success of its customers,
commitment to the Company's products and its ability to satisfy and maintain its
customers.

The Company's financial success is directly related to the success of its
customers and the willingness of these customers, in particular the Company's
major customers, to continue buying the Company's products. Sales to the
Company's five largest customers represented approximately 29.3%, 31.6% and
36.3% of net revenues during fiscal 2001, 2000 and 1999, respectively.

The Company does not have long-term contracts with any of its customers.
Sales to customers are generally on an order-by-order basis and are subject to
rights of cancellation and rescheduling by the customer or the Company.
Accordingly, the number of unfilled orders at any given time is not indicative
of the number that will eventually be shipped. If the Company cannot fill
customers' orders on time, relationships with customers may suffer, and this
could have an adverse effect on the Company, especially if the relationship is
with a major customer. Furthermore, if any of the Company's major customers
experiences a significant downturn in its business, or fails to remain committed
to the Company's programs or brands, such customer(s) may reduce or discontinue
purchases from the Company. The loss of a major customer or reduction in the
amount of the Company's products purchased by several of the Company's major
customers could have a material adverse effect on the Company's business,
results of operations and financial condition.

Adverse retail industry conditions may have a negative effect on the Company's
business, financial condition and results of operations.

The Company sells its products to a number of major retailers that have
experienced financial difficulties during past years. Some of these retailers
have previously sought protection under the Bankruptcy Code. In addition, some
of the Company's current retail customers may seek protection under the
Bankruptcy Code or state insolvency laws in the future. As a result of these
financial difficulties and bankruptcy and insolvency proceedings, the Company
may be unable to collect some or all amounts owed by these retail customers. In
addition, all or part of the operations of a retail customer that seeks
bankruptcy or other debtor protection may be discontinued, or sales of the
Company's products to the customer may be curtailed or terminated as a result of
bankruptcy or insolvency proceedings. There can be no assurance that the Company
will not be adversely affected by retail industry conditions in the future.

The Company competes with manufacturers and retailers in the highly competitive
apparel industry.

The Company's products compete with many designer and non-designer product
lines. The Company's products compete primarily on the basis of price, quality
and the Company's ability to satisfy customer orders in a timely manner. Failure
to satisfy any one of these factors could cause the Company's customers to
purchase products from its competitors. Many of the Company's competitors and
potential competitors have greater financial, manufacturing and distribution
resources than the Company. If manufacturers or retailers become more successful
in competing with the Company, it could have a material adverse effect on the
Company's business, results of operations and financial condition.

Fluctuations in the price, availability and quality of fabrics or other raw
materials could increase the Company's cost of sales and reduce its ability to
meet customers' demands.

The principal fabrics used in the Company's apparel consist of cotton, wool,
silk, synthetic and cotton-synthetic blends of fabrics and yarns. The price paid
for these fabrics is mostly dependent on the market prices for the raw materials
used to produce them, namely cotton, wool, silk, rayon and polyester. Depending
on a number of factors, including crop yields and weather patterns, the market
price of these raw materials may fluctuate significantly. While raw materials
are available to the Company from various sources of supply, any disruption in
the Company's ability to obtain raw

14

materials of usable quality in sufficient quantities could have a material
adverse effect on the Company's business, operating results, and financial
condition.

The Company's ability to successfully conduct assembly and production operations
in facilities in foreign countries depends on many factors beyond its control.

The Company maintains manufacturing facilities in Mexico, Honduras, Costa
Rica, Ireland and France. In addition, the Company sources products from
contractors located in Mexico, Central America, Morocco, Tunisia, China
(including Hong Kong) and Asia. Manufacturing in foreign countries requires the
Company to order products further in advance to account for transportation time.
If the Company overestimates customer demand, it may have to hold goods in
inventory, and may be unable to sell these goods at the same margins as in the
past. On the other hand, if the Company underestimates customer demand, it may
not be able to fill orders on time.

Other problems the Company may encounter by manufacturing in foreign
countries include, but are not limited to, work stoppages, transportation delays
and interruptions, delays and interruptions from natural disasters, political
instability, economic disruptions, expropriation, nationalization, imposition of
tariffs, imposition of import and export controls and changes in government
policies.

Because the Company owns foreign facilities, it is subject to additional
risks associated with owning and operating manufacturing facilities abroad. For
example, a facility operated in a foreign country may become subject to labor
laws and government regulations in the foreign country. If the laws are
unfavorable to the Company's operations in any foreign country, the Company
could experience a loss in revenues, customer orders and customer goodwill.

The Company's imported products are subject to certain restrictions and tariffs.

The Company's import operations may be subject to bilateral textile
agreements between the United States and a number of other countries. These
agreements establish quotas for the amount and type of goods that can be
imported into the United States from these countries. These agreements also
allow the United States, in certain circumstances, to impose restraints at any
time on the importation of additional or new categories of merchandise. Future
bilateral textile agreements may also contain similar restraints. Excluding the
countries covered under Caribbean Basin Trade Partnership Act ('CBTPA') and
North American Free Trade Agreement ('NAFTA'), the Company's imported products
are also subject to U.S. customs duties. The United States and the countries in
which the Company manufactures its products may adjust quotas, duties, tariffs
or other restrictions currently in effect. There can be no assurance that any
adjustments would benefit the Company. These same countries may also impose new
quotas, duties, tariffs or other restrictions. Furthermore, the United States
may bar imports of products that are made by convicts or forced or indentured
labor. The United States may also withdraw the 'most favored nation' status of
certain countries which could result in the imposition of higher tariffs on
products imported from those countries. Any of these changes could have a
material adverse effect on the Company's business, results of operations and
financial condition.

Fluctuations in foreign exchange rates will affect the Company's operating
results and financial position.

Fluctuations between the U.S. dollar and the currencies of each of the
countries in which the Company operates have affected and will continue to
affect the results of international operations reported in U.S. dollars and the
value of such operations' net assets reported in U.S. dollars. The results of
operations and financial condition of the Company's businesses will be affected
by the relative strength of the currencies in countries where its products are
currently sold. The Company's results of operations and financial condition may
be adversely affected by fluctuations in foreign currencies and by translations
of the financial statements of the Company's foreign subsidiaries from local
currencies into U.S. dollars.

15

The Company's success depends in part on predicting fashion trends and
successfully developing new products to meet consumer demand.

The apparel industry is subject to rapidly changing consumer demands and
preferences. The Company believes that its success depends on its ability to
anticipate, gauge and respond in a timely manner to changing consumer demands
and fashion trends. There can be no assurance that the Company will be
successful in this regard. If fashion trends shift away from the Company's
products, or if the Company otherwise misjudges the market for its product
lines, resulting in a decline in sell-through rates at retail, the Company may
be faced with conditions which could have a negative effect on the Company's
financial condition and results of operations.

Changing consumer demands and fashion trends also require the Company to
continually design and deliver new products and new product lines. As is typical
with new products, demand for and market acceptance of new products introduced
by the Company are subject to uncertainty. There can be no assurance that the
Company's efforts will be successful. In addition, the failure of new products
or new product lines to gain sufficient market acceptance could negatively
affect consumer demand for the Company's other products.

The Company's use of its trademarks and licenses to use other trademarks may
subject the Company to claims or challenge.

The Company uses many trademarks and product designs in its business, some
of which have been registered with the United States Patent and Trademark Office
and others of which are used under license from third parties or have been
purchased from third parties. The Company believes these registered and common
law trademarks, designs and other proprietary rights are important to its
competitive position and success. The use and registration of the Company's
trademarks, patents and product designs may be challenged periodically.

Despite efforts to the contrary, the Company's trademarks, patents, designs
and proprietary rights may violate the proprietary rights of others. If any of
the Company's trademarks or other proprietary rights are found to violate the
proprietary rights of others or are subjected to some other challenge, there can
be no assurance that the Company will be permitted to continue using these
particular trademarks or other proprietary rights. Furthermore, if the Company
is sued for alleged infringement of another's proprietary rights, the party
claiming infringement might have greater resources than the Company to pursue
its claims and the Company could be forced to incur substantial costs to defend
the litigation. Moreover, if the party claiming infringement prevails, the
Company could be forced to discontinue the use of the trademark, patent or
design and/or pay significant damages, or to enter into expensive royalty or
licensing arrangements with the prevailing party.

Pursuant to licensing agreements, the Company also has exclusive rights to
use trademarks owned by other companies in promoting, distributing and selling
their products. The Company has periodically been involved in disputes or
litigation regarding these licensing agreements. See Item 3. Legal Proceedings.
There can be no assurance that these licensing agreements will remain in effect.
In addition, any future disputes concerning these licenses may cause the Company
to incur significant litigation costs or force the Company to suspend use of the
trademarks. The Company anticipates that it will seek to assume certain licenses
under applicable provisions of the Bankruptcy Code. See 'Narrative Description
of Business -- Trademarks and Licensing Agreements'. However, there can be no
assurance that such assumptions will be approved by the Bankruptcy Court.

Certain of the Company's licensing agreements with third parties will expire
by their terms over the next several years. There can be no assurance that the
Company will be able to negotiate and conclude extensions of such agreements on
economic terms.

As a result of the Chapter 11 Cases and the circumstances leading to the
filing thereof, as of January 5, 2002, the Company was not in compliance with
certain financial and bankruptcy covenants contained in certain of its license
agreements. Under applicable provisions of the Bankruptcy Code, compliance with
such terms and conditions in executory contracts generally are either excused or
suspended during the Chapter 11 Cases.

16

The Company expects to assume certain of its license agreements as part of
its plan or plans of reorganization. The assumption of any executory contracts,
including licenses, is subject to the approval of the Company's plan or plans of
reorganization by the Bankruptcy Court or other order of the court. There can be
no assurance that the Company will be successful in its efforts to assume these
licenses.

Investments in the Company's common stock and other financial instruments are
highly speculative.

As a result of the amount and character of the Company's pre-petition
indebtedness, the shortfall between the Company's projected enterprise value and
the amount necessary to satisfy the claims, in full, of its secured and
unsecured creditors and the impact of the provisions of the Bankruptcy Code
applicable to confirmation of a plan or plan of reorganization, the Company
believes that it is highly unlikely that current holders of common stock or
preferred securities of the Company or its subsidiaries will receive any
distribution under any plan of reorganization or liquidation of the Company.

Certain of the Company's financial instruments (for example, pre-petition
debt) trade in markets for debt securities and other instruments. The Company
expects that holders of the Company's financial instruments will receive
substantially less than face value in any plan or plans of reorganization
approved by the Bankruptcy Court. Because of the likelihood that holders of
these instruments will receive substantially less than face value, investment in
these instruments continues to be highly speculative.

ITEM 2. PROPERTIES.

The principal executive offices of the Company are located at 90 Park
Avenue, New York, New York 10016 and are occupied pursuant to a lease that
expires in 2004. In addition to its executive offices, the Company leases
offices in Connecticut, California and New York, pursuant to leases that expire
between 2003 and 2008.

The Company has five domestic manufacturing and warehouse facilities located
in California, Georgia and Pennsylvania and 46 international manufacturing and
warehouse facilities located in Canada, Costa Rica, France, Honduras, Ireland,
Mexico, the Netherlands (through a joint venture) and the United Kingdom.
Certain of the Company's manufacturing and warehouse facilities are also used
for administrative and retail functions. The Company owns four of its domestic
and three of its international facilities. The owned facilities are subject to
certain liens. The rest of the facilities are leased. Lease terms, except for
month-to-month leases, expire between 2002 and 2020. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- 'Fiscal 2001 -- Reorganization Items'.

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; Mexico City, Mexico; Paris, France; Cologne, Germany;
Hong Kong; Milan, Italy; and Lausanne, Switzerland. The sales office leases
expire between 2002 and 2008 and are generally renewable at the Company's
option. The Company also occupies office space in London, England subject to a
freehold lease which expires in 2114. The Company currently leases 86 outlet
store locations and 95 Speedo Authentic Fitness retail stores sites. Outlet
store and retail leases, expire between 2002 and 2008 and are generally
renewable at the Company's option. See also Item 1. Business -- 'General
Development of Business -- Retail Stores'.

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.

As a consequence of the Chapter 11 Cases, all pending claims and litigation
against the Company and its filed subsidiaries have been automatically stayed
pursuant to Section 362 of the Bankruptcy Code absent further order of the
Bankruptcy Court. Below is a summary of legal proceedings the Company believes
to be material.

Calvin Klein Litigation. On May 30, 2000, Calvin Klein, Inc. ('CKI') and the
Calvin Klein Trademark Trust filed a complaint in the U.S. District Court in the
Southern District of New York

17

(Calvin Klein Trademark Trust, et al. v. The Warnaco Group, Inc., et al.,
No. 00 CIV. 4052 (JSR) (S.D.N.Y.)) against The Warnaco Group, Inc., various
other Warnaco entities and Linda Wachner alleging, inter alia, claims for breach
of contract and trademark violations.

Certain defendants filed counterclaims against CKI for, inter alia, breach
of the jeanswear and men's accessories licenses and breach of fiduciary duty,
and against CKI and Calvin Klein personally for tortious interference with
business relations, defamation and trade libel. CKI subsequently filed
additional claims against CKJ Holdings, Inc. and Calvin Klein Jeanswear Company
in the Supreme Court of the State of New York.

On January 22, 2001, the parties entered into a confidential settlement
agreement whereby they agreed, inter alia, to the dismissal of all claims and
counterclaims asserted in both actions with prejudice and without the payment of
any sum of money by any party to any other party.

Speedo Litigation. On September 14, 2000, Speedo International Limited
('SIL') filed a complaint in the U.S. District Court for the Southern District
of New York, styled Speedo International Limited v. Authentic Fitness Corp., et
al., No. 00 Civ. 6931 (DAB) (the 'Speedo Litigation'), against The Warnaco
Group, Inc. and various other Warnaco entities (the 'Warnaco Defendants')
alleging claims, inter alia, for breach of contract and trademark violations
(the 'Speedo Claims'). The complaint seeks, inter alia, termination of certain
licensing agreements, injunctive relief and damages.

On November 8, 2000, the Warnaco Defendants filed an answer and
counterclaims against SIL seeking, inter alia, a declaration that the Warnaco
Defendants have not engaged in trademark violations and are not in breach of the
licensing agreements, and that the licensing agreements at issue (the 'Speedo
Licenses') may not be terminated.

On or about October 30, 2001, SIL filed a motion in the Bankruptcy Court
seeking relief from the automatic stay to pursue the Speedo Litigation in the
District Court, and have its rights determined there through a jury trial (the
'Speedo Motion'). The Debtors opposed the Speedo Motion, and oral argument was
held on February 21, 2002. On June 11, 2002, the Bankruptcy Court denied the
Speedo Motion on the basis that, inter alia, (i) the Speedo Motion was
premature, and (ii) the Bankruptcy Court has core jurisdiction over resolution
of the Speedo Claims. Accordingly, the material issues raised by the Speedo
Claims will likely be decided by the Bankruptcy Court in the context of
assumption or rejection of the Speedo Licenses or the confirmation of the
Company's plan or plans of reorganization.

The Company believes the Speedo Claims to be without merit and intends to
vigorously dispute them and pursue its counterclaims.

Wachner Claim. On January 18, 2002, Mrs. Linda J. Wachner, former President
and Chief Executive Officer of the Company filed a proof of claim in the
Chapter 11 Cases related to the post-petition termination of her employment with
the Company. See Part III. Item 11. Executive Compensation -- 'Employment
Agreements'.

Shareholder Class Actions. Between August 22, 2000 and October 26, 2000,
seven putative class action complaints were filed in the U.S. District Court for
the Southern District of New York against the Company and certain of its
officers and directors (the 'Shareholder I Class Action'). The complaints, on
behalf of a putative class of shareholders of the Company who purchased Company
stock between September 17, 1997 and July 19, 2000 (the 'Class Period'), allege,
inter alia, that the defendants violated the Securities Exchange Act of 1934, as
amended (the 'Exchange Act') by artificially inflating the price of the
Company's stock and failing to disclose certain information during the Class
Period.

On November 17, 2000, the Court consolidated the complaints into a single
action, styled In Re The Warnaco Group, Inc. Securities Litigation, No.
00-Civ-6266 (LMM), and appointed a lead plaintiff and approved a lead counsel
for the putative class. A second amended consolidated complaint was filed on
May 31, 2001. On October 5, 2001, the defendants other than the Company filed a
motion to dismiss based upon, among other things, the statute of limitations,
failure to state a claim and failure to plead fraud with the requisite
particularity. On April 25, 2002, the Court granted the motion to dismiss this
action based on the statute of limitations. On May 10, 2002, the plaintiffs
filed a motion for reconsideration in the District Court. On May 24, 2002, the
plaintiffs filed a notice of appeal. On July 23, 2002, plaintiffs' motion for
reconsideration was denied.

The Shareholder I Class Action has been stayed against the Company pursuant
to Section 362 of the Bankruptcy Code and is not expected to have a material
impact on the Company's financial statements.

Between April 20, 2001 and May 31, 2001, five putative class action
complaints against the Company and certain of its officers and directors were
filed in the U.S. District Court for the Southern

18

District of New York (the 'Shareholder II Class Action'). The complaints, on
behalf of a putative class of shareholders of the Company who purchased Company
stock between September 29, 2000 and April 18, 2001 (the 'Second Class Period'),
allege, inter alia, that defendants violated the Exchange Act by artificially
inflating the price of the Company's stock and failing to disclose negative
information during the Second Class Period.

On August 3, 2001, the Court consolidated the actions into a single action,
styled In Re The Warnaco Group, Inc. Securities Litigation (II), No. 01 CIV 3346
(MCG), and appointed a lead plaintiff and approved a lead counsel for the
putative class. A consolidated amended complaint was filed against certain
current and former officers and directors of the Company, which expanded the
Second Class Period to encompass August 16, 2000 to June 8, 2001. The amended
complaint also dropped the Company as a defendant, but added as defendants
certain outside directors. On April 18, 2002, the Court dismissed the amended
complaint, but granted plaintiffs leave to replead. On June 7, 2002, the
plaintiffs filed a second amended complaint, which again expanded the Second
Class Period to encompass August 15, 2000 to June 8, 2001. On June 24, 2002 the
defendants filed motions to dismiss the second amended complaint, which motions
are pending.

Shareholder Derivative Suits. On October 13, 2000, a shareholders'
derivative complaint was filed on behalf of the Company in the U.S. District
Court for the Southern District of New York, styled Widdicombe, derivatively on
behalf of The Warnaco Group, Inc. v. Linda J. Wachner, et al., No. 00 Civ. 7816
(LMM), naming certain of the Company's officers and directors as defendants (the
'Individual Defendants') and the Company as a nominal defendant. The complaint
filed on October 13, 2000 asserted claims on the Company's behalf for, inter
alia, breach of fiduciary duty, corporate waste and unjust enrichment, and
sought, inter alia, damages, punitive damages, and the imposition of a
constructive trust upon the assets of the Individual Defendants. The complaint
was subsequently withdrawn voluntarily.

SEC Investigation. As previously disclosed, the staff of the Securities and
Exchange Commission (the 'SEC') has been conducting an investigation to
determine whether there have been any violations of the Exchange Act in
connection with the preparation and publication of various financial statements
and other public statements. The Company has cooperated in that investigation.
On July 18, 2002, the SEC staff informed the Company that it intends to
recommend that the SEC authorize an enforcement action against the Company and
certain persons who have been employed by or affiliated with the Company since
prior to January 3, 1999 alleging violations of the federal securities laws. The
SEC staff has invited the Company to make a Wells Submission describing the
reasons why no such action should be brought. The Company intends to make a
Wells Submission. The Company does not expect the resolution of this matter as
to the Company to have a material effect on the Company's financial condition,
results of operation or business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

19

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'), was traded on the New York Stock Exchange (the 'NYSE') under the symbol
'WAC' until the NYSE suspended trading of the Common Stock on June 11, 2001. The
table below sets forth, for the periods indicated through June 11, 2001, the
high and low sales prices of the Common Stock, as reported on the New York Stock
Exchange Composite Tape and the high and low sales prices of the Common Stock as
reported on the over-the-counter electronic bulletin board (the 'OTCBB') from
June 12, 2001 through June 28, 2002.

- ---------
(a) Since June 11, 2001, the Common Stock has traded on the OTCBB under the
symbol 'WACGQ.PK'. The quotations reflect inter-dealer prices without
retail mark-up, markdown or commission and may not represent actual
transactions.

-------------------

As of July 30, 2002, there were 304 holders of the Common Stock, based upon
the number of holders of record and the number of individual participants in
certain security position listings.
From January 2000 through December 2000 the Company paid a quarterly cash
dividend of $0.09 per share. The Company suspended payment of its quarterly cash
dividend in December 2000. The Amended DIP prohibits the Company from paying
dividends or making distributions in respect of the Common Stock.
As a result of the amount and character of the Company's pre-petition
indebtedness, the shortfall between the Company's projected enterprise value and
the amount necessary to satisfy the claims, in full, of its secured and
unsecured creditors and the impact of the provisions of the Bankruptcy Code
applicable to confirmation of a plan or plan of reorganization, the Company
believes that it is highly unlikely that current holders of common stock or
preferred securities of the Company or its subsidiaries will receive any
distribution under any plan of reorganization or liquidation of the Company. See
Item 1. Business -- 'Risk Factors'.

ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is selected consolidated financial information for the five
years in the period ended January 5, 2002. The selected financial information
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial
statements and notes thereto included elsewhere in this Annual Report. The
Company's statements of operations and balance sheets for the 1999 and 2000
fiscal years and for the first quarter of fiscal 2001 have been restated. See
Management's Discussion and Analysis of Financial Position and Results of
Operations and Notes 2 and 25 of Notes to Consolidated Financial Statements.
In fiscal 2000, the Company restated its ending balance sheet for fiscal
1997 by adjusting stockholders' equity as of January 3, 1998. This restatement
reflects adjustments to accounts receivable and other items and did not have an
impact on net income (loss) for any subsequent period. The Company's previous
independent auditors did not issue a consent with respect to the inclusion of
their report on the consolidated financial statements for fiscal 1997 and fiscal
1998 in the Company's Annual Report on Form 10-K for the year ended December 30,
2000. As a result, the selected financial information included below for the
years ended January 3, 1998 and January 2, 1999 are unaudited.
The historical results presented below may not be indicative of future
results.

20

21

(footnotes from previous page)

(a) The fiscal 1997 financial statements were restated in fiscal 1998 to
reflect $57.0 million ($35.4 million net of income tax benefit or $0.67
per diluted share) of charges related to an adjustment for inventory
production and inefficiency costs. The restatement resulted from flaws in
the Company's Intimate Apparel Division inventory costing control systems.
(b) 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
restructuring and special charges were $131.8 million. In addition, fiscal
1997 includes operating losses of the discontinued 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.
(c) Fiscal 1998 includes restructuring and special charges of $89.9 million
relating to the continuing strategic review of facilities, products and
functions and other items. In addition, fiscal 1998 includes operating
losses of discontinued product lines and styles of $5.3 million. 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 (d) below of $40.8 million and charges related to an adjustment for
inventory production and inefficiency costs of $49.6 million.
(d) Effective fiscal 1998, 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.
(e) The fiscal 1997 balance sheet has been restated reducing stockholders'
equity by $26 million. This restatement reflects adjustments to accounts
receivable and other items and has no effect on reported net income in any
subsequent year. The Company's previous independent auditors did not issue
a consent for the Company's consolidated financial statements for fiscal
1997 and 1998. As a result, the selected financial information for the
years ended January 3, 1998 and January 2, 1999 is unaudited.
(f) Fiscal 2000 includes special charges of $269.6 million relating to the
Company's initiatives to consolidate operations and discontinue
unprofitable product lines. Also included in fiscal 2000 is investment
income of $36.9 million resulting from a $42.8 million gain on the
Company's sale of its investments in the InterWorld Corporation, net of
losses from its Equity Agreements of $5.9 million.
(g) Fiscal 2000 includes the impact of a change in accounting of $13.1 million
(net of income tax benefit of $8.6 million) or $0.25 per diluted share
related to a change in the method of valuation of inventory in the
Company's retail outlet stores.
(h) Fiscal 2000 includes a tax provision for the U.S. deferred tax asset
valuation reserve allowance of $129.2 million or $2.45 per diluted share.
(i) The fiscal 1999 financial statements have been restated for the correction
of errors in the Company's recording of certain inter-company pricing
arrangements, the recording of accounts payable primarily related to the
purchase of inventory from suppliers and the accrual of certain
liabilities. The restatement reduced previously reported net income by $4.1
million (net of income tax benefit of $2.7 million) or $.07 per diluted
share. See Note 2 of Notes to Consolidated Financial Statements.
(j) The fiscal 2000 financial statements have been restated for the correction
of errors in the Company's recording of certain inter-company pricing
arrangements, the recording of accounts payable primarily related to the
purchase of inventory from suppliers and the accrual of certain
liabilities. The restatement increased previously reported net loss by
$45.8 million (net of income tax benefit of $0.1 million) or $0.87 per
diluted share. See Note 2 of Notes to Consolidated Financial Statements.
(k) Includes reorganization items related to the Chapter 11 Cases of $177.8
million, impairment charges of $101.8 million and the tax provision of
$151.0 million primarily related to the increase in the valuation allowance
related to future income tax benefits. See Notes 1, 4 and 9 of Notes to
Consolidated Financial Statements.
(l) Does not include liabilities subject to compromise.
(m) Included in liabilities subject to compromise.

22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

On the Petition Date the Debtors each filed a petition for relief under
Chapter 11 of the Bankruptcy Code. The Company, 37 of its 38 U.S. subsidiaries
and Warnaco Canada are Debtors in the Chapter 11 Cases. The remainder of the
Company's foreign subsidiaries are not Debtors in the Chapter 11 Cases, nor are
they subject to foreign bankruptcy or insolvency proceedings. The Debtors are
managing their businesses and properties as debtors-in-possession.

Management is in the process of stabilizing the business of the Debtors and
evaluating the Company's operations as part of the development of a plan of
reorganization. After developing a plan of reorganization, the Debtors will seek
the acceptance and confirmation of the plan by the Bankruptcy Court in
accordance with the provisions of the Bankruptcy Code.

During the course of the Chapter 11 Cases, the Debtors may seek Bankruptcy
Court authorization to sell assets and settle liabilities for amounts other than
those reflected in the consolidated financial statements. The Debtors are in the
process of reviewing their operations and identifying assets available for
potential disposition, including entire business units of the Company. However,
there can be no assurance that the Company will be able to consummate such
transactions at prices the Company or the Company's creditor constituencies will
find acceptable. Since the Petition Date, through June 30, 2002, the Company
sold certain assets including its GJM and Penhaligon's business units generating
net proceeds of approximately $31 million in the aggregate. See Item 1.
Business -- 'Proceedings under Chapter 11 of the Bankruptcy Code and
Debtor-in-Possession Financing'.

Administrative and reorganization expenses resulting from the Chapter 11
Cases will unfavorably affect the Debtors and consequently, the Company's
consolidated results of operations. Future results of operations may also be
adversely affected by other factors relating to the Chapter 11 Cases. See
Item 1. Business -- 'Risk Factors'.

BASIS OF PRESENTATION

The Company's consolidated financial statements included in this Annual
Report have been prepared on a 'going concern' basis in accordance with U.S.
Generally Accepted Accounting Principles ('GAAP'). The 'going concern' basis of
presentation assumes that the Company will continue in operation for the
foreseeable future and will be able to realize upon its assets and discharge its
liabilities in the normal course of business. Because of the Chapter 11 Cases
and the circumstances leading thereto, there is substantial doubt about the
appropriateness of the use of the 'going concern' assumption. Furthermore, the
Company's ability to realize the carrying value of its assets and discharge its
liabilities is subject to substantial doubt. If the 'going concern' basis was
not used in the preparation of the Company's consolidated financial statements,
significant adjustments would be necessary in the carrying value of assets and
liabilities, the classification of assets and liabilities and the amount of
revenue and expenses reported. Continuation of the Company as a 'going concern'
is contingent upon, among other things, (i) its ability to formulate a plan of
reorganization that will gain the approval of the parties required by the
Bankruptcy Code and be confirmed by the Bankruptcy Court, (ii) the Company's
ability to comply with the terms of the Amended DIP, (iii) its ability to return
to profitability and (iv) its ability to generate sufficient cash flows from
operations and obtain financing to meet future obligations. These matters create
substantial doubt about the Company's ability to continue as a 'going concern'.

RESTATEMENT OF FINANCIAL STATEMENTS

In June 2001, during the course of reviewing its business operations, the
Company became aware of certain accounting errors involving the recording of
inter-company pricing arrangements, the recording of accounts payable, primarily
related to the purchase of inventory from suppliers and the accrual of certain
liabilities. The errors were related to Designer Holdings. The correction of
these errors, together with additional errors primarily related to the recording
of accounts payable and inventory discovered in certain of the Company's
European subsidiaries in connection with the Company's year-end closing

23

for fiscal 2001, has caused the Company to restate its previously issued
financial statements for the years ended January 1, 2000 and December 30, 2000
(fiscal 1999 and fiscal 2000, respectively), its previously issued financial
results for each of the quarterly periods in fiscal 1999 and fiscal 2000 and for
the fiscal 2001 quarter ended April 7, 2001. The Company has reduced previously
reported net income by $4,132,000 (net of income tax benefit of $2,703,000), or
$0.07 per share, for fiscal 1999, increased its previously reported net loss by
$45,788,000 (net of income tax benefit of $137,000), or $0.87 per share, for
fiscal 2000 and increased its previously reported net loss by $1,116,000 (no
income tax effect), or $0.02 per share, for the fiscal 2001 quarter ended
April 7, 2001. The components of the Restatements and their effect on previously
issued financial statements are set forth below and in Note 2 and Note 25 of
Notes to Consolidated Financial Statements. The accompanying Management's
Discussion and Analysis of Financial Condition and Results of Operations gives
effect to the Restatements.

The Company began an internal investigation of the suspected accounting
errors in June 2001. In August 2001, after reviewing the preliminary results of
the internal investigation, the Audit Committee of the Board of Directors of the
Company retained the law firm Dewey Ballantine to investigate the suspected
accounting errors at Designer Holdings. In addition, Dewey Ballantine retained
FTI to assist in the investigation and provide accounting expertise to Dewey
Ballantine. Dewey Ballantine issued its report to the Audit Committee on
February 6, 2002. Since the discovery of the accounting errors at Designer
Holdings and at certain of the Company's European subsidiaries, the Company has
replaced certain financial staff and has taken several steps to improve the
accounting for inter-company purchases and the reconciliation of inter-company
accounts.

The Company estimates that the total cost of conducting the investigation
into this matter, consisting primarily of professional fees, will be
approximately $1,000,000. Approximately $681,000 of the cost of the
investigation is included in the Company's results of operations for the year
ended January 5, 2002 and the remaining $319,000 will be included in the results
of operations in the first quarter of fiscal 2002.

A summary of the significant effects of the Restatements for fiscal 1999 and
fiscal 2000 are set forth below. See Notes 2 and 25 of Notes to Consolidated
Financial Statements.

24

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

The SEC released Financial Reporting Release No. 60, which encourages
companies to include a discussion of critical accounting policies or methods
used to prepare financial statements. In addition, Financial Reporting Release
No. 61 was released by the SEC to encourage companies to include a discussion
addressing, among other matters, liquidity, off-balance sheet arrangements and
contractual obligations and commercial commitments. The Company's significant
accounting policies and methods used in preparation of the consolidated
financial statements are discussed in Note 1 of Notes to Consolidated Financial
Statements. The following are the Company's critical accounting policies and a
brief discussion of each.

Use of estimates. The Company uses estimates and assumptions in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America. 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.
Those estimates and assumptions also affect the reported amounts of revenues and
expenses. Actual results could materially differ from

25

these estimates. The estimates the Company makes are based upon historical
factors, current circumstances and the experience and judgment of the Company's
management. The Company evaluates its assumptions and estimates on an on-going
basis and may employ outside experts to assist in the Company's evaluations. The
Company believes that the use of estimates affects the application of all of the
Company's accounting policies and procedures.

The Company has estimated the amount that its creditors will be entitled to
claim in the Chapter 11 Cases as liabilities subject to compromise. The
determination of the amount of these claims is subject to the provisions of
various contracts, license agreements and leases. In addition, the amount of
claims is subject to review and approval by the Bankruptcy Court. The ultimate
amount of claims that will be allowed by the Bankruptcy Court and the amount
that the claims will be settled for cannot be determined at this time.

The Company has identified reorganization items related to the Chapter 11
Cases. The determination of certain of the amounts included in reorganization
items involves the estimation of amounts that will ultimately be realized from
the sales of assets and the amounts that will ultimately be claimed by certain
of the Company's creditors in the Chapter 11 Cases. The actual amounts that will
ultimately be realized or claimed may differ significantly from the amounts
originally estimated by the Company. The Company reviews its estimates of
reorganization items on a monthly basis and adjustments to the previously
estimated amounts are recorded when it becomes evident that a particular item
will ultimately be settled for more or less than was originally estimated.

In fiscal 2000, the Company has recorded special charges related to the
closing of facilities, discontinuing under-performing product lines, write-down
of assets and reduction of its production, distribution and administrative
workforce. The determination of the amount of special items involves the
estimation of amounts that will be realized from the sales of assets and the
amount of liabilities that will be incurred in the future. The actual amounts
that may be realized from asset sales or costs that will be incurred may differ
significantly from the amounts originally estimated by the Company. The Company
reviews its estimates of special items on an on-going basis. Adjustments to the
previously accrued amounts are recorded when it becomes evident that a
particular item will ultimately be settled for more or less than was originally
estimated.

Revenue recognition. The Company recognizes revenue when goods are shipped
to customers and title has passed, net of allowances for returns and other
discounts. The Company recognizes revenue from its retail stores when goods are
sold to customers. The Company maintains an allowance for estimated amounts that
the Company does not expect to collect from its trade customers. The allowance
for doubtful accounts includes amounts the Company expects its customers to
deduct for advertising allowances, trade discounts, other promotional activity,
amounts for accounts that go out of business or seek the protection of the
Bankruptcy Code and amounts related to charges in dispute with customers. The
Company's estimate of the allowance amounts that are necessary includes amounts
for specific deductions the Company has authorized and an amount for estimated
losses. The amount of the provision for accounts receivable allowances is
affected by the overall economy, the financial condition of the Company's
customers and many other factors. The determination of the amount of the
allowance accounts is subject to judgment and estimation by the Company's
management. If circumstances or economic conditions change, the Company may need
to adjust the allowance for doubtful accounts. In fiscal 2001, the Company
increased its general allowance for doubtful accounts by approximately 2% of
gross sales compared to the amounts recorded in fiscal 2000. The increase in
allowances was attributable, in part, to changes in the level of customer
deductions which occurred when many department stores in the United States
experienced a reduction in same store sales, incurred operating losses and/or
were in poor financial condition which affected the Company's accounts
receivable reserves and collectibility. The Company purchases credit insurance
to help mitigate the potential losses it may incur from the bankruptcy,
reorganization or liquidation of certain of its customers.

Inventories. The Company values its inventories at the lower of cost,
determined on a first-in first-out basis, or market value. The Company evaluates
all inventories to determine excess units or slow moving styles based upon
quantities on hand, orders in house and expected future orders. For those items
of which the Company believes it has an excess supply or for styles or colors
that are out of date, the Company estimates the net amount that the Company
expects to realize from the sale of such items.

26

The Company's objective is to recognize projected inventory losses at the time
the loss is evident rather than when the goods are ultimately sold.

Long-lived assets. The Company reviews its long-lived assets for potential
impairment when changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. Assumptions and estimates used in the
evaluation of impairment may affect the carrying value of long-lived assets,
which could result in impairment charges in future periods. In addition,
depreciation and amortization expense is affected by the Company's determination
of the estimated useful lives of the related assets. See Note 1 of Notes to
Consolidated Financial Statements.

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. A valuation allowance is provided when the Company
determines that it is more likely than not that a portion of the deferred tax
asset balance will not be realized. As of January 5, 2002, unremitted earnings
of non-U.S. subsidiaries were approximately $149,800. Since it is the Company's
intention to permanently reinvest these earnings, no U.S. taxes have been
provided. Management believes that there would be no additional tax liability on
the statutory earnings of foreign subsidiaries, if remitted.

FISCAL 2001 -- REORGANIZATION ITEMS

In connection with the Chapter 11 Cases, the Company initiated several
strategic and organizational changes during fiscal 2001 to streamline the
Company's operations, focus on its core businesses and return the Company to
profitability. Many of the strategic actions are long-term in nature and, though
initiated in fiscal 2001, will not be completed until the end of fiscal 2002 or
later. In connection with these strategies, the Company has reorganized its
Retail Stores Division by closing 86 of the 267 retail stores it operated at the
beginning of fiscal 2001. The Company has closed 37 stores to date in fiscal
2002 and plans to close at least 25 additional stores in fiscal 2002.

The Debtors are in the process of reviewing their operations and identifying
assets available for potential disposition including entire business units of
the Company. However, there can be no assurance that the Company will be able to
consummate any such transactions at prices the Company or the Company's creditor
constituencies will find acceptable.

In the first quarter of fiscal 2002, the Company sold the assets of
Penhaligon's and GJM for net proceeds of approximately $20.1 million in the
aggregate. The Company recorded an impairment loss of $26.8 million related to
the write-down of GJM goodwill in fiscal 2001.

The amount of proceeds that will be realized, if any, and the effect of any
additional asset sales on the Company's proposed plan or plans of reorganization
cannot presently be determined. The Company has recorded reductions to the
estimated net realizable value for those assets that the Company believes will
not be fully realized when they are sold or abandoned.

Since the Petition Date through the second quarter of fiscal 2002, the
Company has sold certain personal property, surplus land, vacated buildings and
other assets generating net proceeds of approximately $10 million (approximately
$6.2 million of which was generated as of January 5, 2002). The Company has
vacated certain leased premises, and rejected those leases (many related to its
Retail Stores Division) under the provisions of the Bankruptcy Code.

As a direct result of the Chapter 11 Cases, the Company has recorded certain
liabilities, incurred certain legal and professional fees, written-down certain
assets and accelerated the recognition of certain deferred charges. The
transactions were recorded consistent with the provisions of the American
Institute of Certified Public Accountants Statement of Position 90-7 Financial
Reporting by Entities in Reorganization under the Bankruptcy Code ('SOP 90-7').

Reorganization items included in the consolidated statements of operations
in fiscal 2001 are $177.8 million. Included in reorganization items are certain
non-cash asset impairment provisions and accruals for items that have been, or
will be, paid in cash. In addition, certain accruals are included in liabilities
subject to compromise under the provisions of the Bankruptcy Code. The Company
has recorded these

27

accruals at the estimated amount the creditor is entitled to claim under the
provisions of the Bankruptcy Code. The ultimate amount of and settlement terms
for such liabilities are subject to determination in the bankruptcy process,
including the terms of a confirmed plan or plans of reorganization and
accordingly are not presently determinable. However, the Company believes that
these claims will ultimately be discharged under a confirmed plan of
reorganization for amounts that are substantially less than the carrying amount
of the related liability. See Note 4 of Notes to Consolidated Financial
Statements.

FISCAL 2000 -- SPECIAL CHARGES

The Company recorded special charges throughout fiscal 2000 in an amount
equal to $269.6 million, of which $171.3 million represents non-cash asset
write-downs. Of the total amount, $201.3 million is reflected in cost of goods
sold and $68.3 million is reflected in selling, administrative and general
expenses. See Note 5 of Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS

The consolidated statements of operations for the Company are summarized
below.

SELECTED DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)

28

DIVISIONAL SUMMARY
(DOLLARS IN MILLIONS)

- ---------

(a) Cost of goods sold, and provision for income taxes have been restated for
fiscal 1999 and fiscal 2000. (See Notes 2 and 25 of Notes to Consolidated
Financial Statements.)

COMPARISON OF FISCAL 2001 TO FISCAL 2000

NET REVENUES

Net revenues in fiscal 2001 decreased $578.6 million or 25.7% to $1,671.3
million from $2,249.9 million in fiscal 2000. The decrease reflects a decrease
in revenues from the Intimate Apparel Division of $180.5 million, a decrease in
the Sportswear and Accessories Division's net revenues of $358.1 million and a
decrease in the Retail Stores Division's net revenues of $40.0 million. Net
revenues for fiscal 2001 were negatively affected by the disruption in the
Company's business caused by the Chapter 11 Cases and the overall decrease in
retail traffic and sales experienced by the Company's core department and
specialty store customers in part related to the events of September 11, 2001
and the downturn in the United States economy. Due to the poor retail selling
environment, particularly in the Company's core department and specialty stores,
and its deteriorating experience relating to discounts, allowances and customer
deductions, the Company increased its estimate of the reserves required for
expected sales returns, discounts and allowances. The increase in the Company's
reserve estimate resulted in a decrease of approximately $35 million in net
revenues in fiscal 2001 compared to fiscal 2000. The Company also made a
strategic decision during fiscal 2001 to improve the quality of its sales to its
customers. As a result of this strategy the Company's off-price sales volume for
fiscal 2001 decreased by $158.1 million compared to fiscal 2000. The Company
believes that the decrease in off-price sales will benefit the Company by
reducing the amount of sales allowances granted to and returns received from
customers in the future, and by improving the quality of its business with its
customers.

Intimate Apparel Division. Net revenues decreased $180.5 million or 22.4% to
$626.3 million in fiscal 2001 compared to $806.8 million in fiscal 2000. All
brands experienced significant sales declines. The Company's intimate apparel
brands are sold primarily to department stores in the United States, Canada and
Europe. Overall retail sales in department stores decreased significantly in
fiscal 2001 compared to fiscal 2000, adversely affecting the Company's intimate
apparel business. The Intimate Apparel Division increased its estimate of
reserves necessary for customer returns and allowances to 13.6% in fiscal 2001
from 13.1% in fiscal 2000. The increased estimate resulted in a decrease of
approximately $4.0 million in net revenues compared to fiscal 2000. Warner's net
revenues decreased $52.6 million or 29.1% to $128.1 million in fiscal 2001 from
$180.7 million in fiscal 2000. Warner's net revenues decreased in all geographic
areas. The Fruit of the Loom and Weight Watchers brands were discontinued during
fiscal 2001, resulting in a $18.8 million decrease in net revenues in fiscal
2001 compared to fiscal 2000. Olga net revenues decreased $30.5 million or 26.2%
to $85.7 million in fiscal 2001 from $116.2 million in fiscal 2000. Calvin Klein
underwear net revenues decreased $67.0 million or 22.8% to $226.5 million from
$293.5 million in fiscal 2000. Calvin Klein net revenues decreased in all

29

geographic regions. Lejaby net revenues were $80.2 million in fiscal 2001
compared to $83.4 million in fiscal 2000. The decrease in Lejaby net revenues
is primarily related to a decrease of $2 million in Lejaby sales in the United
States. Bodyslimmers net revenues decreased $8.3 million or 34.8% to $15.5
million in fiscal 2001 from $23.8 million in fiscal 2000. The White Stag
division earned royalty income of $16.1 million in fiscal 2001 compared to
$15.7 million in fiscal 2000. The increase in royalty income in fiscal 2001
compared to fiscal 2000 reflects the relative strength of Wal-Mart's retail
business. Wal-Mart experienced same store sales growth in fiscal 2001 compared
to the substantial same store sales decreases experienced by many of the
Intimate Apparel Division's department store customers.

Sportswear and Accessories Division. Net revenues decreased $358.1 million
or 29.2% to $869.4 million in fiscal 2001 from $1,227.5 million in fiscal 2000.
Consistent with the Intimate Apparel Division, the Sportswear and Accessories
Division was also adversely affected by the poor retail environment and the
overall Company strategy to reduce off-price sales, as noted above. The
Sportswear and Accessories Division increased its estimate of reserves necessary
for customer returns and allowances from 9.5% of gross sales in fiscal 2000 to
12.6% of gross sales in fiscal 2001. The increased reserves estimate resulted in
a decrease of approximately $31.5 million in fiscal 2001 net revenues compared
to fiscal 2000. Calvin Klein jeans net revenues decreased $194.8 million or
38.4% to $312.5 million in fiscal 2001 from $507.3 million in fiscal 2000. The
decrease in Calvin Klein jeans net revenues includes a decrease in net revenues
of $74.6 million in fiscal 2001 compared to fiscal 2000 to certain discount and
membership club customers. Calvin Klein kids net revenues decreased by $24
million in fiscal 2001 compared to fiscal 2000. Authentic Fitness net revenues
decreased $43.4 million or 12.2% to $311.8 million in fiscal 2001 from $355.2
million in fiscal 2000. The decrease in Authentic Fitness net revenues is
attributable to the Company's inability to deliver customer orders on a timely
basis and to increased allowances to swim team dealers. Designer swimwear net
revenues decreased $4.7 million or 3.5% to $127.6 million in fiscal 2001
compared to $132.3 million in fiscal 2000 primarily from the increase in returns
and allowances reserves attributed to overall weakness of the department store
business. Chaps net revenues decreased $63.6 million or 25.0% to $190.9 million
in fiscal 2001 from $254.5 million in fiscal 2000. ABS net revenues decreased
$16.9 million or 38.0% to $27.5 million in fiscal 2001 from $44.4 million in
fiscal 2000. Chaps and ABS were negatively affected by the overall poor retail
environment for department and specialty stores noted above.

Retail Stores Division. Net revenues decreased $40.0 million or 18.6% to
$175.6 million in fiscal 2001 from $215.6 million in fiscal 2000. During fiscal
2001 the Company closed 86 of the 267 or 32% of the retail stores it was
operating at the beginning of the 2001 fiscal year. The Company has closed 37
stores to date in fiscal 2002 and has plans to close 25 additional stores during
fiscal 2002. The Company sold the inventory in the 25 outlet stores to be closed
to a third party in May 2002 for approximately net book value generating $12
million in net proceeds. Net revenues in the Retail Stores Division will be
substantially reduced in fiscal 2002 and in future years due to the Company's
strategy to reduce the number of retail outlet stores the Company operates.

GROSS PROFIT

Gross profit decreased $107.6 million or 26.6% to $296.9 million in fiscal
2001 from $404.5 million in fiscal 2000. The Intimate Apparel Division's gross
profit increased $38.7 million, the Sportswear and Accessories Division's gross
profit decreased $134.3 million and the Retail Stores Division's gross profit
decreased $12.0 million. Gross profit as a percentage of net revenues was 17.8%
in fiscal 2001 compared to 18.0% in fiscal 2000. The decrease in gross profit
primarily reflects the lower net revenues noted above. Gross profit was
adversely affected in both 2001 and 2000 by inventory liquidations, plant
closings, inventory markdown and other charges. The Company recorded
approximately $36.0 million of additional inventory reserves in May and June of
fiscal 2001 to reflect its revised strategy of disposing of its excess and
obsolete inventory at the end of each selling season.

Intimate Apparel Division. Gross profit increased $38.7 million or 65.5% to
$97.8 million in fiscal 2001 from $59.1 million in fiscal 2000 despite the 22.4%
decrease in net revenues. Gross profit as a percentage of net revenues was 15.6%
in fiscal 2001 compared to 7.3% in fiscal 2000. The increase in gross profit was
driven by the absence of $143.1 million of restructuring charges incurred in
fiscal 2000 related to plant closings, inventory markdowns and other items (see
Note 5 of Notes to Consolidated

30

Financial Statements), as well as improvements in the Calvin Klein underwear
business where gross profit as a percentage of net revenues increased by over
10 percentage points of net revenue in fiscal 2001 compared to fiscal 2000.

Sportswear and Accessories Division. Gross profit decreased $134.3 million
or 49.8% in fiscal 2001 to $135.3 million compared to $269.6 million in fiscal
2000. Gross profit as a percentage of net revenues decreased to 15.6% in fiscal
2001 from 22.0% in fiscal 2000. Authentic Fitness gross profit decreased
reflecting the generally weak retail environment and the effect of inventory
reserves of $9.2 million recorded in the second quarter of fiscal 2001. The
Chaps and Calvin Klein accessories businesses recorded higher gross profit as a
percentage of net revenues in fiscal 2001 compared to fiscal 2000 due primarily
to reduced off-price sales. Calvin Klein jeans gross profit as a percentage of
net revenues decreased approximately 2% in fiscal 2001 compared to fiscal 2000
due primarily to lower sales volume and the reduction in the Calvin Klein kids
business noted above.

Retail Stores Division. Gross profit decreased $12.0 million or 15.8% to
$63.8 million in fiscal 2001 compared to $75.8 million in fiscal 2000. Gross
profit as a percentage of net revenues increased to 36.3% of net revenues in
fiscal 2001 from 35.2% in fiscal 2000. The decrease in gross profit reflects the
lower sales volume. The improvement in gross profit as a percentage of net
revenues in fiscal 2001 compared to fiscal 2000 reflects the Company's strategic
decision to close marginal retail outlet stores. The Company's decision to close
39 of its less profitable Speedo Authentic Fitness stores in fiscal 2001 also
contributed to the Retail Stores Division's improvement in gross profit as a
percentage of net revenues.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased $26.8 million or 4.3%
to $598.2 million in fiscal 2001 compared to $625.0 million in fiscal 2000.
Marketing and advertising expenses decreased slightly in fiscal 2001 to $138.4
million or 8.3% of net revenues compared to $141.3 million or 6.3% of net
revenue in fiscal 2000. Marketing expense for fiscal 2001 includes $15.7 million
related to the Company's review of the amounts necessary for customer
co-operative advertising claims. The increase in cooperative advertising claims
was caused, in part, by the decrease in retail traffic and sales experienced by
the Company's core department and specialty store customers due to the events of
September 11, 2001 and the downturn in the United States economy. Selling
expenses decreased $23 million in fiscal 2001 compared to fiscal 2000. The
decrease in selling expenses in fiscal 2001 compared to fiscal 2000 is primarily
a result of lower variable selling costs on the lower sales volumes noted above
and the consolidation of the Company's distribution operations into its most
efficient locations. Selling, general and administrative expenses for fiscal
2001 include the write-down of $30.7 million related to certain barter assets.
Depreciation and amortization expense was $97.8 million in fiscal 2001 compared
to $102.1 million in fiscal 2000.

IMPAIRMENT CHARGE

In the fourth quarter of fiscal 2001 the Company recorded impairment charges
related to the write-down of certain intangible assets and goodwill in the
amount of $101.8 million. The impairment charge is separately identified in
operating loss in the consolidated statement of operations. See Note 1 of Notes
to Consolidated Financial Statements.

REORGANIZATION ITEMS

Due to the Chapter 11 Cases during fiscal 2001, the Company has recorded
certain items directly related to the Chapter 11 Cases including legal and
professional fees, asset write-downs, lease termination costs, employee
retention costs, retail store closure provisions and other items totaling $177.8
million. Reorganization items are separately identified in operating loss in the
consolidated statement of operations. See Note 4 of Notes to Consolidated
Financial Statements.

31

OPERATING PROFIT

The operating loss for fiscal 2001 was $580.9 million compared to an
operating loss of $220.5 million in fiscal 2000. The increased operating loss is
a result of the lower gross profit of $107.6 million discussed above, the effect
of the impairment charge of $101.8 million and reorganization items of $177.8
million also noted above, partially offset by lower selling, general and
administrative expenses.

Intimate Apparel Division. Operating loss decreased $35.6 million to $95.1
million in fiscal 2001 from $130.7 in fiscal 2000 reflecting increased gross
profit of $38.7 million.

Sportswear and Accessories Division. Operating profit (loss) decreased
$230.4 million to an operating loss of $(163.1) million in fiscal 2001 from
operating income of $67.3 million in fiscal 2000. Operating loss for fiscal 2001
reflects a gross profit decline of $134.3 million and an impairment loss of
approximately $52.0 million from the write-down of CK kids goodwill.

Retail Stores Division. Operating loss improved $10.3 million to $19.3
million in fiscal 2001 compared to $29.6 million in fiscal 2000. The reduction
in operating loss reflects the Company's efforts to close less profitable retail
doors, which commenced in fiscal 2000.

INTEREST EXPENSE

Interest expense decreased $49.4 million to $122.8 million in fiscal 2001
from $172.2 million recorded in fiscal 2000. The reduction in interest expense
primarily reflects the impact of the Chapter 11 Cases. The Company stopped
accruing interest in accordance with the provisions of SOP 90-7 on the Petition
Date on approximately $2.2 billion (including $351.4 million of trade drafts
payable) of outstanding debt that is subject to compromise. Interest expense in
fiscal 2001 has also been favorably affected by an overall decrease in market
interest rates since the beginning of fiscal 2001. Certain of the Company's
foreign subsidiaries (non-filed entities in the Chapter 11 Cases) are parties to
debt agreements that are subject to standstill agreements and intercreditor
agreements. The Company has recorded $4.1 million of interest on these debt
agreements for the year ended January 5, 2002. Consummation of a plan or plans
of reorganization may require the payment of such interest. Such interest is
classified with liabilities subject to compromise in the consolidated balance
sheet at January 5, 2002.

INCOME TAXES

The provision for income taxes in fiscal 2001 was $151.0 million, which
consists of foreign income taxes of $16.0 million and $135.0 million of domestic
tax expense. The provision for domestic income taxes primarily reflects an
increase in the valuation allowance. The increase in the valuation allowance
relates to an increase in the net operating loss and other deferred tax assets
that may not be realized. In addition, the Company was unable to implement
certain tax planning strategies resulting in a further increase to the valuation
allowance. At January 5, 2002, the Company has estimated U.S. net operating loss
carryforwards of $1,173.2 million and foreign net operating loss carryforwards
of $95.3 million available to offset future taxable income. The estimated U.S.
net operating loss carryforwards have been adjusted for certain carryback
claims, restatements and other adjustments. The U.S. and foreign net operating
loss carryforwards expire, in varying amounts, between 2003 and 2021.

The Company expects that the consummation of a plan or plans of
reorganization will result in the forgiveness of a substantial amount of the
Company's pre-petition debt and other liabilities subject to compromise. In the
event that a plan or plans of reorganization are consummated, considering
the amount and nature of the Company's pre-petition liabilities, the Company
expects to utilize a substantial portion of its net operating loss
carryforwards to offset taxable income generated from such debt forgiveness.
The ability of the Company to consummate a plan or plans of reorganization
is subject to uncertainty. See 'Risk Factors'. In addition, after the
Company consummates a plan or plans of reorganization, which includes the
forgiveness of pre-petition debt and other liabilities subject to compromise,
the provisions of the U.S. tax code will limit the Company's ability to
utilize any remaining net operating loss carryforwards.

32

NET LOSS

Net loss before cumulative effect of a change in accounting principle
increased to $861.2 million ($16.28 per common share) in fiscal 2001 compared to
$376.9 million ($7.14 per common share) in fiscal 2000. The increased net loss
in fiscal 2001 is primarily a result of the decreased gross profit of $107.6
million noted above, the impact of the reorganization expenses of $177.8 million
and the impairment loss of $101.8 million.

COMPARISON OF FISCAL 2000 TO FISCAL 1999

NET REVENUES

Net revenues increased $135.7 million or 6.4% to $2,249.9 million in fiscal
2000 compared with $2,114.2 million in fiscal 1999. Included in fiscal 2000 net
revenues are the results of Authentic Fitness and ABS, which were acquired in
December 1999 and September 1999, respectively. Excluding these acquisitions,
net revenues in fiscal 2000 were down $271.4 million or 13.2% compared to fiscal
1999. The decrease versus fiscal 1999 primarily resulted from the Company's loss
of certain major retail customers such as Uptons, Eatons, Mercantile and SRI
through bankruptcy and consolidations (over $150 million of lost revenues). The
Company also believes that its business was adversely affected by the negative
publicity surrounding its litigation with CKI. Fiscal 2000 revenues in its
Calvin Klein businesses decreased $134.8 million to $934.2 million from $1,069.0
million in fiscal 1999.

Intimate Apparel Division. Net revenues decreased $136.6 million or 14.5% to
$806.8 million in fiscal 2000 compared with $943.4 million in fiscal 1999. The
decrease in net revenues resulted from a soft retail environment where many of
the Company's customers significantly reduced their purchases as several of the
Company's major accounts filed for bankruptcy or were consolidated, as discussed
above. Calvin Klein Underwear net revenues decreased 11.4% to $293.5 million in
fiscal 2000. Warner's/Olga core businesses decreased 14.6% to $296.8 million.
Sleepwear decreased 10.2% to $61.4 million. The Bodyslimmers and Weight Watchers
shapewear brands decreased 26.3% to $33.7 million. Fruit of the Loom decreased
34.0% to $27.4 million. Lejaby, the Company's European product offering,
decreased 13.0% to $83.4 million primarily due to the fluctuation of the Euro in
fiscal 2000. However, despite these revenue decreases, the Company remained a
market leader for intimate apparel in department and specialty stores with a
35.7% share in bras, 26.2% share in panties and 20.9% share in shapewear.

Sportswear and Accessories Division. Net revenues increased $204.7 million
or 20.0% to $1,227.5 million in fiscal 2000, compared with $1,022.8 million in
fiscal 1999. Incremental net revenues contributed by the 1999 Authentic Fitness
($318.8 million) and ABS ($30.7 million) acquisitions were $349.5 million.
Excluding these acquisitions, net revenues decreased $144.8 million. The
decrease in net revenues in the Sportswear and Accessories Division was also
reflective of the soft retail environment, heavy markdowns required to keep pace
with the actions of competitors, the lost retail accounts previously mentioned,
as well as the adverse effect on the Calvin Klein businesses from the Company's
litigation with CKI. Calvin Klein Jeanswear net revenues decreased 13.5% to
$544.2 million. Chaps net revenues decreased 19.8% to $254.5 million and Calvin
Klein Accessories net revenues increased 7.6% to $24.0 million.

Retail Stores Division. Net revenues increased $67.6 million or 45.7% to
$215.6 million in fiscal 2000 compared to $148.0 in fiscal 1999. Incremental net
revenues in fiscal 2000 contributed by the Authentic Fitness acquisition were
$57.6 million. Excluding the acquisitions, Retail Stores were up 6.9%, primarily
in the outlet stores where the Company was liquidating excess inventory to
generate cash flow.

GROSS PROFIT

Gross profit decreased $277.3 million or 40.7% to $404.5 million in fiscal
2000 compared to $681.8 million in fiscal 1999. Gross margins decreased to 18.0%
from 32.2%. Included in cost of goods sold in fiscal 2000 are restructuring and
special charges of $201.3 million, see Note 5 of Notes to Consolidated Financial
Statements. The decrease in gross profit and gross margin resulted from the
increased markdowns taken throughout the year to reduce inventory and improve
cash flow and the impact of the restructuring and special charges noted above.

33

Intimate Apparel Division. Gross profit decreased $263.0 million or 81.7% to
$59.1 million in fiscal 2000 compared with $322.1 million in fiscal 1999. Gross
margins were 7.3% in 2000 compared with 34.1% in 1999. The decrease in gross
profit and gross margin resulted from the decrease in net revenues, the
incremental markdowns mentioned above and the special charges as outlined above
of $143.1 million.

Sportswear and Accessories Division. Gross profit decreased $48.6 million or
15.3% to $269.6 million in fiscal 2000, compared with $318.2 million in fiscal
1999. The decrease in gross profit was attributable to the Calvin Klein Jeans
business offset by increases due to the Authentic Fitness and ABS acquisitions.
Gross margins were 21.9% in fiscal 2000 compared with 31.1% in fiscal 1999.
This decrease was attributable to incremental inventory markdowns as previously
discussed. In addition, special charges included in gross profit in fiscal
2000 were $38.4 million in fiscal 2000.

Retail Stores Division. Gross profit increased $34.3 million or 82.7% to
$75.8 million in fiscal 2000 compared with $41.5 million in fiscal 1999. Gross
margins in fiscal 2000 were 35.2% compared to 28.0% in fiscal 1999. The
significant increase in gross profit and gross margin in fiscal 2000 is
attributable to the addition of the Speedo Authentic Fitness full-price retail
stores, with gross margins of 63.7%, which accounted for an incremental $36.7
million of gross profit. In addition, special charges included in gross profit
were $19.8 million in fiscal 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased $148.6 million or
31.2% in fiscal 2000 to $625.0 million compared with $476.4 million in fiscal
1999. Selling, general and administrative expenses as a percentage of net
revenues were 27.8% in fiscal 2000 compared with 22.5% in fiscal 1999. Included
in selling, general and administrative expenses in fiscal 2000 are special
charges of $68.3 million. See Note 5 of Notes to Consolidated Financial
Statements. Amortization of goodwill and intangibles related to the Authentic
Fitness and ABS acquisitions was $15.0 million. In addition, Authentic Fitness
retail stores incurred $59.5 million of selling, general and administrative
expenses, which is 46.2% of net revenues, significantly higher than the
Company's wholesale divisions.

OPERATING PROFIT

Intimate Apparel Division. Operating profit (loss) decreased $270.0 million
to a loss of $(130.7) million in fiscal 2000, compared with $136.3 million in
fiscal 1999. This was attributable to the decrease in net revenues, associated
with the lost accounts and soft retail environment and decrease in gross margin
due to the additional markdowns taken to reduce inventory levels and improve
cash flow. In addition, fiscal 2000 includes special charges as outlined above
in the amount of $171.5 million.

Sportswear and Accessories Division. Operating profit decreased $74.2
million to $67.3 million in fiscal 2000 compared with $141.5 million in fiscal
1999. This decrease reflects the decrease of $48.6 million in gross profit noted
above and special charges as outlined above in the amount of $44.1 million.

Retail Stores Division. Operating profit (loss) decreased $39.6 million to a
loss of $(29.6) million in fiscal 2000 compared to a profit of $10.0 million in
fiscal 1999. The decrease in operating profit resulted from the markdowns taken
and other costs incurred to reduce inventories and improve cash flow. In
addition, fiscal 2000 includes special charges as outlined above in the amount
of $25.6 million.

OTHER INCOME

Investment income in the amount of $36.9 million was recorded in the first
quarter of fiscal 2000 to record the Company's gain on the sale of its
investment in InterWorld Corporation and the loss related to the Company's
Equity Agreements which were marked to market.

INTEREST EXPENSE

Interest expense increased $91.2 million to $172.2 million in fiscal 2000
compared with $81.0 million in fiscal 1999. The increase is attributable to
borrowings incurred in connection with the Company's acquisitions of Authentic
Fitness and ABS, as well as the Company's stock buy-back program in fiscal

34

1999 and an increase in the Company's effective borrowing rate commencing in the
fourth quarter of fiscal 2000.

INCOME TAXES

Income taxes in fiscal 2000 were $21.0 million, which includes a $152.0
million valuation allowance on the Company's net deferred tax asset ($146.8
million U.S. and $5.2 million foreign), offset by an income tax benefit of
$131.0 million related to the Company's pre-tax loss of $355.8 million, or
an effective tax rate of 36.8%. This compares to an income tax provision in
fiscal 1999 of $30.7 million, or an effective tax rate of 24.7%. The fiscal
2000 and 1999 income taxes have been adjusted to reflect the Restatements
described in Note 2 of Notes to Consolidated Financial Statements.

NET LOSS

Net loss before cumulative effect of a change in accounting principle is
$376.9 million, or a loss of $7.14 per diluted share in fiscal 2000. This
compares to net income in fiscal 1999 of $93.7 million or $1.68 per diluted
share.

RESULTS OF OPERATIONS -- COMPARISON OF INTERIM PERIODS FISCAL 2001 TO FISCAL
2000

FIRST QUARTER OF FISCAL 2001 COMPARED TO THE FIRST QUARTER OF FISCAL 2000

NET REVENUES

The Company's consolidated results of operations for the first quarter of
fiscal 2001 included 14 weeks of operations compared to 13 weeks in the first
quarter of fiscal 2000.

Net revenues decreased $107.9 million, or 17.8%, to $499.2 million in the
first fiscal quarter of 2001 compared with $607.1 million in the first fiscal
quarter of 2000.

Intimate Apparel Division. Net revenues decreased $33.7 million or 16.9% to
$166.1 million in the first quarter of fiscal 2001 compared with $199.8 million
in the first quarter of fiscal 2000. $18.9 million of the decrease was
attributable to Calvin Klein underwear and $11.0 million was attributable to
Warner's and Olga. The Calvin Klein underwear business was down primarily in
off-price sales. In addition, the Calvin Klein underwear business suffered from
the litigation with CKI. Warner's and Olga were down due to the soft retail
market in general and continued destocking by the trade.

Sportswear and Accessories Division. Net revenues decreased $67.8 million or
18.9% to $291.5 million in the first quarter of fiscal 2001 compared with $359.3
million in the first quarter of fiscal 2000. The decrease in net revenues was
attributable to Chaps ($24.9 million) and Calvin Klein Jeans ($48.4 million),
partially offset by increases in Authentic Fitness ($14.1 million). The Calvin
Klein Jeans business continued to suffer from the negative publicity associated
with the Company's litigation with CKI. Chaps was down in part due to a
significant reduction in off-price sales. Authentic Fitness was up due to
increases in Catalina, Speedo (including goggles), partially offset by a decline
in Anne Cole.

Retail Stores Division. Net revenues decreased $6.4 million or 13.3% to
$41.6 million in the first quarter of fiscal 2001 compared with $48.0 million in
the first quarter of fiscal 2000. The decrease reflects the store closings
discussed above during fiscal 2001 as part of the Company's restructuring
programs and a reduction in off-price sales.

GROSS PROFIT

Gross profit decreased $31.4 million or 17.8% to $145.3 million in the first
quarter of fiscal 2001 compared with $176.7 million in the first quarter of
fiscal 2000. Gross margin was 29.1% in the first quarter of fiscal 2001 and in
the first quarter of fiscal 2000.

Intimate Apparel Division. Gross profit decreased $12.0 million or 21.5% to
$43.7 million in the first quarter of fiscal 2001 compared with $55.7 million in
the first quarter 2000. Gross margins were 26.3% in the first quarter of fiscal
2001 compared with 27.9% in the first quarter of fiscal 2000.

35

Sportswear and Accessories Division. Gross profit decreased $21.0 million or
20.2% to $83.0 million in the first quarter of fiscal 2001 compared with $104.0
million in the first quarter 2000. Gross margins were 28.5% in the first quarter
fiscal 2001 compared with 28.9% in the first quarter of fiscal 2000.

Retail Stores Division. Gross profit increased $1.6 million or 9.4% to $18.6
million in the first quarter of fiscal 2001 compared with $17.0 million in the
first quarter fiscal 2000. Gross margins were 44.7% in the first quarter fiscal
2001 compared with 35.4% in the first quarter fiscal 2000. The increase is due
to less merchandise being moved through the stores at discounted prices.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased $9.0 million or 6.0%
to $142.0 million compared with $151.0 million in first quarter fiscal 2000.
Selling, general and administrative expenses as a percentage of net revenue were
28.4% in the first quarter of fiscal 2001 compared with 24.9% in the first
quarter fiscal 2000.

OPERATING PROFIT

Intimate Apparel Division. Operating profit decreased $13.3 million or 61.9%
to $8.2 million in the first quarter of fiscal 2001 compared to $21.5 million in
the first quarter fiscal 2000. The decrease is attributable to lower sales
partially offset by the improved margins from the Calvin Klein underwear
business.

Sportswear and Accessories Division. Operating profit decreased $15.4
million or 32.0% to $32.7 million in the first quarter of fiscal 2001 compared
to $48.1 million in the first quarter fiscal 2000. The decrease is related to
the lower revenue and higher production costs partially offset by the improved
sales mix of the Company's Chaps business.

Retail Stores Division. Operating loss decreased $6.5 million to $3.3
million in the first quarter of fiscal 2001 compared with $9.8 million in the
first quarter fiscal 2000. The decreased loss is due to better margins on
merchandise sold through the stores.

The Company recorded a gain of $42.7 million in the first quarter fiscal
2000 from the sale of its investment in InterWorld Corporation compared to an
investment loss of $3.0 million in 2001 due to its Equity Agreements which were
marked to market.

INTEREST EXPENSE

Interest expense increased $30.1 million to $63.9 million in the first
quarter of fiscal 2001 compared with $33.8 million in the first quarter of
fiscal 2000. The increase reflects increased borrowings in the first quarter of
2001 and a borrowing rate increase of approximately 300 basis points.

INCOME TAXES

The provision for income taxes for the first quarter of fiscal 2001 of $2.9
million reflects accrued taxes on foreign earnings. The Company has not provided
any tax benefit for its domestic losses incurred in the first quarter of 2001.
The provision for income taxes for the first quarter of fiscal 2000 of $12.9
million reflects accrued income taxes on worldwide earnings.

NET LOSS

Income (loss) before cumulative effect of a change in accounting principle
for the first quarter fiscal 2001 was a loss of $(63.6) million compared with
income of $21.8 million in the first quarter of fiscal 2000. The decrease in
income is due to lower operating income and a decrease in investment income.

SECOND QUARTER OF FISCAL 2001 COMPARED TO SECOND QUARTER OF FISCAL 2000

On June 11, 2001, The Warnaco Group, Inc., 37 of its 38 U.S. subsidiaries
and Warnaco Canada filed for protection under Chapter 11 of the Bankruptcy Code.

36

NET REVENUES

Net revenues decreased $234.4 million or 39.3% to $362.3 million in the
second quarter of fiscal 2001 compared to $596.7 million in the second quarter
of fiscal 2000. All divisions experienced significant sales declines. The
Company's net revenues for the second quarter of fiscal 2001 were negatively
affected by the weak retail environment, primarily related to department and
specialty stores, and uncertainty surrounding the Company due to the Chapter 11
Cases. Due to the uncertainty related to the Company's financial position, the
overall soft retail environment and slowdowns in the general economy, management
performed a review of its accounts receivable and inventory reserve accounts in
the second quarter of fiscal 2001. As a result of this review, the Company
recorded additional accounts receivable reserves of approximately $42.6 million
and additional inventory reserves of approximately $44 million in the second
quarter of fiscal 2001. These adjustments had a negative effect on the results
of operations for the second quarter of fiscal 2001.

Intimate Apparel Division. Net revenues decreased $79.3 million or 39.5% to
$121.3 million in the second quarter of fiscal 2001 compared to $200.6 million
in the second quarter of fiscal 2000. Warner's decreased $27.9 million, Olga
decreased $22.9 million, Bodyslimmers decreased $4.3 million, Sleepwear
decreased $0.5 million, Fruit of the Loom and Weight Watchers decreased $2.3
million, Calvin Klein Underwear decreased $19.0 million and Lejaby decreased
$3.8 million. White Stag royalty income increased approximately $1.3 million
reflecting the relative strength of Wal-Mart's business.

Sportswear and Accessories Division. Net revenues decreased $143.5 million
or 41.6% to $201.1 million in the second quarter of fiscal 2001 compared to
$344.6 million in the second quarter of fiscal 2000. Authentic Fitness net
revenues decreased $42.1 million, Chaps decreased $13.1 million, Calvin Klein
Jeans decreased $71.3 million, CK Kids decreased $8.5 million, CK Accessories
decreased $1.8 million and ABS and all other brands decreased $6.6 million.

Retail Stores Division. Net revenues decreased $11.6 million or 22.5% to
$39.9 million in the second quarter of fiscal 2001 compared to $51.5 million in
the second quarter of fiscal 2000 and fiscal 2001. The decrease in retail
division net revenues primarily reflects the store closings during fiscal 2001,
as discussed above.

GROSS PROFIT

Gross profit decreased $114.1 million to a gross profit (loss) of $(24.3)
million in the second quarter of fiscal 2001 compared to gross profit of $89.8
million in the second quarter of fiscal 2000. Gross profit for the second
quarter of fiscal 2001 reflects the recording of inventory reserves of $44.3
million to reflect the Company's inventory at the lower of cost or market in
connection with the Chapter 11 Cases and the Company's requirement to reduce its
inventory position and increase cash flow.

Intimate Apparel Division. Gross profit (loss) for the second quarter of
fiscal 2001 was $(27.8) million compared to gross profit (loss) of $(24.1)
million in the second quarter of fiscal 2000. The increased gross profit (loss)
of $3.7 million includes increases in inventory reserves of $22.4 million and
increases in the reserves for sales returns, allowances and doubtful accounts of
$32.8 million recorded in the second quarter of fiscal 2001. Gross profit for
the second quarter of fiscal 2000 includes $79.6 million of special charges
related to the Company's global restructuring initiatives begun in the second
quarter of fiscal 2000.

Sportswear and Accessories Division. Gross profit (loss) for the second
quarter of fiscal 2001 was $(9.8) million compared to gross profit of $98.6
million in the second quarter of fiscal 2000. The decrease in gross profit of
$108.4 million reflects increases in inventory reserves of $14.6 million and
increases in the reserves for sales returns, allowances and doubtful accounts of
$22.9 million.

Retail Stores Division. Gross profit decreased $2.0 million or 13.0% to
$13.4 million in the second quarter of fiscal 2001 compared to $15.4 million in
the second quarter of fiscal 2000. Gross profit as a percentage of net revenues
was 33.6% in the second quarter of fiscal 2001 compared to 29.9% in the second
quarter of fiscal 2000. Gross profit for the second quarter of fiscal 2001
includes increases in inventory reserves of $7.3 million.

37

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased $34.0 million or
21.5% to $192.2 million in the second quarter of fiscal 2001 compared to $158.2
million in the second quarter of fiscal 2000. Selling, general and
administrative expenses were $142.0 million in the first quarter of fiscal 2001.
The increase in selling, general and administrative expenses in the second
quarter of fiscal 2001 compared to the second quarter of fiscal 2000 primarily
reflects increased legal fees and royalty expenses associated with license
audits, asset write-downs and other accruals of approximately $17.0 million.
Selling, general and administrative expenses for the second quarter of
fiscal 2001 include $15.7 million of marketing expense related to the Company's
review of the amounts necessary for co-operative advertising claims.

REORGANIZATION ITEMS

Reorganization items related to the Chapter 11 Cases recorded in the second
quarter of fiscal 2001 were $78.2 million. Reorganization items consisted of (i)
professional fees related to the Chapter 11 Cases of $6.1 million, (ii)
adjustments to the recorded value of the Company's preferred securities of $21.4
million, (iii) write-off of certain system development costs that were abandoned
at the Petition Date of $33.1 million, (iv) write-off of deferred financing fees
related to the Company's pre-petition debt agreements of $34.8 million, (v)
write-off of certain aviation assets of $1.5 million and (vi) $0.2 million of
other items. Reorganization items include the recognition of deferred income of
$18.9 million related to pre-petition interest swap agreements.

OPERATING PROFIT

The Company's operating loss increased to $(216.5) million in the second
quarter of fiscal 2001 from $(68.4) million in the second quarter of 2000. The
increased operating loss reflects decreased gross profit including the
additional accounts receivable and inventory reserves recorded in the second
quarter of fiscal 2001, as noted above, increased selling, general and
administrative expenses and reorganization items, as noted above.

INTEREST EXPENSE

Interest expense for the second quarter of fiscal 2001 was $40.5 million
compared to $35.4 million in the second quarter of fiscal 2000 and $63.9 million
in the first quarter of fiscal 2001. The increase over the second quarter of
fiscal 2000 reflects increases in the Company's base borrowing rate of 300 basis
points. The decrease in interest expense in the second quarter of fiscal 2001
compared to the first quarter of fiscal 2001 reflects the impact of the Chapter
11 Cases as the Company stopped accruing interest on approximately $2.2 billion
of pre-petition debt after the Petition Date in accordance with the provisions
of SOP 90-7.

INCOME TAXES

The provision for income taxes for the second quarter of fiscal 2001 of $3.2
million reflects accrued taxes on foreign earnings. The Company has not provided
any tax benefit for its domestic losses incurred in the second quarter of 2001.
The benefit for income taxes recorded for the second quarter of fiscal 2000 of
$34.1 million is derived from the charges related to the Company's global
restructuring initiatives which began in the second quarter.

NET LOSS

Net loss for the second quarter of fiscal 2001 was $338.4 million compared
with a loss of $68.5 million in the second quarter of fiscal 2000. The increase
in the loss was primarily related to the impact of the reorganization costs,
incremental reserves adjustments and selling and administrative expenses noted
above.

38

THIRD QUARTER OF FISCAL 2001 COMPARED TO THIRD QUARTER OF FISCAL 2000

NET REVENUES

Net revenues decreased $102.4 million or 20.5% to $397.7 million in the
third quarter of fiscal 2001 compared to net revenues of $500.1 the third
quarter of fiscal 2000. All divisions experienced decreases in net revenues.

Intimate Apparel Division. Net revenues decreased $19.6 million or 10.2% to
$172.8 million in the third quarter of fiscal 2001 compared to $192.4 million in
the third quarter of fiscal 2000. Warner's decreased $2.3 million, Olga
increased $1.1 million, Bodyslimmers decreased $0.4 million, Sleepwear
increased $1.9 million, Fruit of the Loom and Weight Watchers decreased $5.8
million, Calvin Klein Underwear decreased $15.4 million and Lejaby and all other
brands collectively increased $1.0 million. White Stag royalty income increased
approximately $0.1 million.

Sportswear and Accessories Division. Net revenues decreased $68.7 million or
27.6% to $180.2 million in the third quarter of fiscal 2001 compared to $248.9
million in the third quarter of fiscal 2000. Authentic Fitness net revenues
decreased $6.0 million, Chaps decreased $3.7 million, Calvin Klein Jeans
decreased $46.2 million, CK Kids decreased $4.6 million, CK Accessories
decreased $1.3 million and ABS and all other brands decreased $6.9 million.

Retail Stores Division. Net revenues decreased $14.2 million or 24.1% to
$44.6 million in the third quarter of fiscal 2001 compared to $58.8 million in
the third quarter of fiscal 2000. The decrease in retail division net revenues
primarily reflects the closing of 86 stores during fiscal 2000 and fiscal 2001.

GROSS PROFIT

Gross profit increased $36.1 million or 70.2% to $87.5 million in the third
quarter of fiscal 2001 compared to $51.4 million in the third quarter of fiscal
2000. Gross profit for the third quarter of fiscal 2000 includes $66.5 million
of charges related to the Company's global restructuring initiated in the second
quarter of fiscal 2000. Gross margin was 22.0% in the third quarter of fiscal
2001 compared to gross margin (before the special charges) of 23.6% in the third
quarter of fiscal 2000.

Intimate Apparel Division. Gross profit increased $30.1 million to $41.2
million in the third quarter of fiscal 2001 compared to $11.1 million in the
third quarter of fiscal 2000. Gross profit for the third quarter of fiscal 2000
includes $35.6 million of special charges. Gross margin for the third quarter of
fiscal 2001 was 23.9% compared to gross margin of 24.3% (as adjusted for special
charges) in the third quarter of fiscal 2000.

Sportswear and Accessories Division. Gross profit increased $6.6 million or
33.8% to $26.1 million in the third quarter of fiscal 2001 compared to $19.5
million in the third quarter of fiscal 2000. Gross profit for the third quarter
of fiscal 2000 includes approximately $25.1 million of special charges. Gross
margin was 14.5% for the third quarter of fiscal 2001 compared to 17.9% (as
adjusted for the special charges) in the third quarter of fiscal 2000. Gross
profit was adversely affected in the third quarter of fiscal 2001 by uncertainty
related to the Chapter 11 Cases and the difficulty experienced by many of the
Company's department store customers.

Retail Stores Division. Gross profit decreased $0.6 million to $20.2 million
in the third quarter of fiscal 2001 compared to $20.8 million in the third
quarter of fiscal 2000. Gross profit for the third quarter of fiscal 2000
includes approximately $5.9 million of restructuring charges. Gross margin in
the third quarter of fiscal 2001 was 45.3% compared to 45.4% (as adjusted for
special charges) in the third quarter of fiscal 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased to $114.2 million in
the third quarter of fiscal 2001 compared to $166.4 million in the third quarter
of fiscal 2000. The third quarter of fiscal 2000 includes restructuring charges
of $31.5 million related to the restructuring plan initiated in the second
quarter of fiscal 2000. The decrease in selling, general and administrative
expenses in the third quarter of fiscal 2001 compared to the third quarter

39

of fiscal 2000 reflects expense reductions completed as part of the Chapter 11
Cases and the reduction in the number of retail stores compared to the prior
year.

OPERATING PROFIT

Operating loss decreased to $(26.7) million in the third quarter of fiscal
2001 compared to $(115.0) million in the third quarter of fiscal 2000. Operating
loss for the third quarter of fiscal 2001 includes approximately $1.0 million of
incremental losses from discontinued brands (Fruit of the Loom and Weight
Watchers). Operating loss for the third quarter of fiscal 2000 includes the
impact of the restructuring program initiated in the second quarter of fiscal
2000.

REORGANIZATION ITEMS

Reorganization items were $25.7 million in the third quarter of fiscal 2001
and included $8.4 million of legal and professional fees, $12.1 million of costs
related to the closing of certain of the Company's retail stores, $5.5 million
of lease termination accruals and $0.7 million of other costs. These items were
partially offset by gains from the sales of certain real estate and other assets
of $1.0 million.

INTEREST EXPENSE

Interest expense for the third quarter of fiscal 2001 was $8.4 million
compared to $43.6 million in the third quarter of fiscal 2000. Interest expense
for the third quarter of fiscal 2001 consists primarily of interest related to
the Amended DIP of $6.3 million and amounts accrued under certain debt
agreements of the Company's foreign subsidiaries of $2.1 million that are
subject to standstill agreements. Accrued interest related to the standstill
agreements is classified as a liability subject to compromise.

INCOME TAXES

The provision for income taxes for the third quarter of fiscal 2001 of $3.3
million reflects accrued taxes on foreign earnings. The Company has not provided
any tax benefit for its domestic losses incurred in the third quarter of 2001.
The benefit for income taxes recorded for the third quarter of fiscal 2000 of
$83.4 million is derived from the restructuring charges recorded by the Company
during the quarter.

NET LOSS

Net loss for the third quarter fiscal 2001 was $64.2 million compared with a
loss of $100.0 million in the third quarter of fiscal 2000. The increased loss
in fiscal 2000 was primarily related to the restructuring charges recorded by
the Company during the quarter.

RESULTS OF OPERATIONS -- COMPARISON OF INTERIM PERIODS FISCAL 2000 TO FISCAL
1999

FIRST QUARTER OF FISCAL 2000 COMPARED TO FIRST QUARTER OF FISCAL 1999

NET REVENUES

Net revenues in the first quarter of fiscal 2000 were $607.1 million, an
increase of $165.5 million or 37.5% over the $441.6 million recorded in the
first quarter of fiscal 1999. The increase is primarily a result of the
acquisitions of Authentic Fitness and ABS in 1999 which accounted for $143.7
million of net revenues in the first quarter of fiscal 2000 compared to none in
the first quarter of fiscal 1999.

Intimate Apparel Division. Net revenues decreased 4.4% to $199.8 million in
the first quarter of fiscal 2000 compared to $208.9 million in the first quarter
of fiscal 1999 primarily due to unit volume decreases in Warner's and Olga
business. Warner's net revenues decreased 15.6%, Olga decreased 11.6% and
Bodyslimmers decreased 2.5%. The decreases in these brands reflects the loss of
business to Upton's, Eaton's and Mercantile stores in 2000 compared to 1999.
Sleepwear net revenues decreased 10.0% primarily due to decreases in business
with Victoria's Secret. The introduction of Weight

40

Watchers contributed $2.9 million of net revenues in the first quarter of fiscal
2000 compared to none in the first quarter of fiscal 1999. Calvin Klein
underwear net revenues increased 5.7% to $75.3 million in the first quarter of
fiscal 2000 compared to $71.3 million in the first quarter of fiscal 1999.
Lejaby net revenues decreased 11.2% to $27.6 million in the first quarter of
fiscal 2000 compared to $31.1 million in the first quarter of fiscal 1999.

Sportswear and Accessories Division. Net revenues increased $151.8 million
or 73.2% to $359.3 million in the first quarter of fiscal 2000 compared to
$207.5 million in the first quarter of fiscal 1999. The increase in net revenues
is primarily attributable to the acquisitions of Authentic Fitness and ABS which
contributed $143.7 million of net revenues in the first quarter of fiscal 2000
(none in the first quarter of fiscal 1999) and the acquisition of the
Chaps -- Canada license which contributed $3.2 million of net revenues in the
first quarter of fiscal 2000. Chaps net revenues increased 11.9% to $68.4
million in the first quarter of fiscal 2000 compared to $61.1 million in the
first quarter of fiscal 1999. Calvin Klein jeans net revenues, including CK
Kids, decreased 2.7% to $137.7 million in the first quarter of fiscal 2000
compared to $141.5 million in the first quarter of fiscal 1999 and Calvin
Klein Accessories net revenues increased over 100% to $8.2 million in the
first quarter of fiscal 2000 compared to $3.9 million in the first quarter
of fiscal 1999.

Retail Stores Division. Net revenues increased $22.9 million or 90.9% to
$48.1 million in the first quarter of fiscal 2000 compared to $25.2 million in
the first quarter of fiscal 1999. The acquisition of Authentic Fitness retail
stores accounted for $14.2 million of the increased net revenues in the first
quarter of fiscal 2000. Outlet stores net revenues increased 34.7% or $8.7
million in the first quarter of fiscal 2000 compared to the first quarter of
fiscal 1999. The increase is a result of the Company's strategy to liquidate
excess inventory during the first quarter of fiscal 2000.

GROSS PROFIT

Gross profit increased $27.5 million or 18.4% to $176.7 million in the first
quarter of fiscal 2000 compared with $149.2 million in the first quarter of
fiscal 1999. Gross margin was 29.1% in the first quarter of fiscal 2000 compared
with 33.8% in the first quarter of fiscal 1999. The decrease in gross margin is
attributable to markdowns taken in the first quarter of fiscal 2000 to reduce
inventories and improve cash flow.

Intimate Apparel Division. Gross profit decreased $21.3 million or 27.7% to
$55.7 million in the first quarter of fiscal 2000 compared with $77.0 million in
the first quarter 1999. Gross margins were 27.9% in the first quarter fiscal
2000 compared with 36.9% in the first quarter of fiscal 1999. The decrease in
gross margin is due to markdowns taken in the first quarter of fiscal 2000 to
reduce inventories and improve cash flow.

Sportswear and Accessories Division. Gross profit increased $41.1 million or
65.3% to $104.0 million in the first quarter of fiscal 2000 compared with $62.9
million in the first quarter of 1999. Gross margin was 28.9% in the first
quarter fiscal 2000 compared with 30.3% in the first quarter of fiscal 1999. The
decrease in gross margin is due to markdowns and lower margins primarily to
reduce Calvin Klein juniors inventories.

Retail Stores Division. Gross profit increased $7.6 million or 80.9% to
$17.0 million in the first quarter of fiscal 2000 compared with $9.4 million in
the first quarter of fiscal 1999. Gross margins were 35.4% in the first quarter
of fiscal 2000 compared with 37.3% in the first quarter of fiscal 1999. The
decrease in gross margin is primarily due to markdowns taken in the first
quarter of fiscal 2000 to move excess inventory.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased $47.8 million or
46.3% to $151.0 million in the first quarter of fiscal 2000 compared to $103.2
million in the first quarter of fiscal 1999. Selling, general and administrative
expenses as a percentage of net revenues were 24.9% in the first quarter of
fiscal 2000 compared with 23.4% in the first quarter of fiscal 1999. The
increase in selling, general and administrative expenses includes $6.5 million
of severance and employee termination costs recorded in

41

the first quarter of fiscal 2000, $9.3 million of additional depreciation and
amortization costs primarily related to the acquisitions of Authentic Fitness
and ABS completed in the fourth quarter of fiscal 1999 and the impact of the
additional selling, general and administrative expenses from the above
mentioned acquisitions.

OPERATING PROFIT

Operating income decreased $24.6 million or 53.4% to $21.5 million in the
first quarter of fiscal 2000 compared to $46.1 million in the first quarter of
fiscal 1999. The decrease in operating profit reflects the increased selling,
general and administrative expense increases noted above as well as losses
in the Company's retail store divisions, primarily reflecting markdowns
necessary to sell excess inventory.

The Company recorded a pre-tax profit of $42.7 million ($25.9 net of taxes)
in the first quarter of fiscal 2000 from the sale of its equity investment in
InterWorld Corporation.

INTEREST EXPENSE

Interest expense increased $17.0 million to $33.8 million in the first
quarter of fiscal 2000 compared with $16.8 million in the first quarter of
fiscal 1999. The increase reflects incremental borrowings of over $800 million
compared to the first quarter of fiscal 1999 related to the acquisitions of
Authentic Fitness and ABS as well as the funding of the Company's stock buyback
program.

INCOME TAXES

The provision for income taxes for the first quarter of fiscal 2000 was
$12.9 million compared to the provision for income taxes for the first quarter
of fiscal 1999 of $7.3 million. The tax provision for fiscal 2000 is higher due,
in part, to an increase in non-deductible goodwill resulting from the Company's
1999 acquisitions of Authentic Fitness and ABS.

NET INCOME

Net income for the first quarter fiscal 2000 was $21.8 million compared with
net income of $22.0 million in the first quarter of fiscal 1999. In fiscal 2000,
the Company changed its method of accounting for the valuation of inventory in
its retail outlet stores. The cumulative effect of the change in accounting
resulted in a charge of $13.1 million (net of income tax benefit of $8.6
million) in the first quarter of fiscal 2000.

SECOND QUARTER OF FISCAL 2000 COMPARED TO SECOND QUARTER OF FISCAL 1999

NET REVENUES

Net revenues in the second quarter of fiscal 2000 increased $104.4 million
or 21.2% to $596.7 million compared to $492.3 million in the second quarter of
fiscal 1999. Net revenues contributed by the 1999 acquisitions of Authentic
Fitness ($155.3 million) and ABS ($10.6 million) amounted to $165.9 million.
These increases were offset by a decrease in net revenues of the Intimate
Apparel Division.

Intimate Apparel Division. Net revenues decreased $22.1 million or 9.9% to
$200.6 million in the second quarter of fiscal 2000 compared to $222.7 million
in the second quarter of fiscal 1999. Warner's and Olga decreased $5.7 million
to $83.1 million from $88.8 million primarily due to the loss of three major
customers (Uptons, Eaton's and Mercantile). Calvin Klein underwear decreased
$6.2 million to $65.1 million in the second quarter of fiscal 2000 from $71.3
million in the second quarter of fiscal 1999 primarily in Sleepwear. Lejaby
increased $0.5 million to $24.0 million despite a $2.7 million negative effect
related to the weakness of the Euro against the U.S. dollar.

Sportswear and Accessories Division. Net revenues increased $109.2 million
or 46.4% to $344.6 million in the second quarter of fiscal 2000 compared to
$235.4 million in the second quarter of fiscal 1999. Net revenues contributed by
the 1999 acquisitions of Authentic Fitness ($139.5 million) and ABS ($10.6
million) amounted to $150.1 million. Excluding acquisitions, net revenues of
$194.5 million were

42

17.4% lower than the second quarter of fiscal 1999. Chaps net revenue was
$55.5 million, down 37.0% from $88.1 million in the second quarter of fiscal
1999. The decrease in net revenues is primarily due to Chaps being adversely
affected by the discounted pricing policy of its competitors as well as the
loss of certain customers including SRI and Uptons due to bankruptcy or
liquidation. Shipments resumed to SRI subsequent to July 1, 2000. In addition,
Calvin Klein Jeans division net revenues were down $8.3 million to $132.3
million in the second quarter of fiscal 2000 compared to $140.6 million
in the second quarter of fiscal 1999 primarily in the Junior division.

Retail Stores Division. Net revenues increased $17.3 million or 50.7% to
$51.4 million in the second quarter of fiscal 2000 compared with $34.1 million
in the second quarter of fiscal 1999. The acquisition of Authentic Fitness
contributed $15.9 million to net revenues in the second quarter of fiscal
2000 (none in the second quarter of fiscal 1999).

GROSS PROFIT

Gross profit decreased $82.2 million or 47.8% to $89.8 million in the second
quarter of fiscal 2000 compared with $172.0 million in the second quarter of
fiscal 1999. Gross margin was 15.1% in the second quarter of fiscal 2000
compared with 34.9% in the second quarter of fiscal 1999. Included in cost of
sales in the second quarter of fiscal 2000 is $88.9 million of charges related
to the global restructuring initiated by the Company in the second quarter of
fiscal 2000. These charges include the write-down of inventories and other
assets of $55.7 million, facility shutdown and reconfiguration costs of $15.6
million, severance and termination costs related to 1,502 manufacturing
employees of $8.2 million and retail outlet store closing costs of $9.3 million.
Gross margin without the impact of the global restructuring charge was 29.9%.
The decreased gross margin in the first quarter of fiscal 2000 compared to the
first quarter of 1999 primarily reflects higher level of off-price sales and
increased markdowns necessary to sell excess inventory.

Intimate Apparel Division. Gross profit (loss) decreased $112.1 million to a
loss of $(24.1) million in the second quarter of fiscal 2000 compared with a
profit of $88.0 million in the second quarter of fiscal 1999. Gross margins were
27.7% (before restructuring charges) in the second quarter of fiscal 2000
compared with 39.5% in the second quarter of fiscal 1999.

Sportswear and Accessories Division. Gross profit increased $24.8 million or
33.6% to $98.6 million in the second quarter of fiscal 2000 compared to $73.8
million in the second quarter of fiscal 1999. Gross margins were 28.6% in the
second quarter of fiscal 2000 compared with 31.4% in the second quarter of
fiscal 1999.

Retail Stores Division. Gross profit increased $5.1 million or 49.5% to
$15.4 million in the second quarter of fiscal 2000 compared with $10.3 million
in the second quarter of fiscal 1999. Gross profit for the second quarter of
fiscal 2000 includes approximately $9.3 million of charges related to the global
initiatives discussed above. Gross margin before the special charges was 48.1%
in the second quarter of fiscal 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased $46.2 million or
41.3% to $158.2 million compared to $112.0 million in the second quarter of
fiscal 1999. Selling, general and administrative expenses include the
incremental expenses associated with the acquisition of Authentic Fitness and
ABS. In addition selling, general and administrative expenses in the second
quarter of fiscal 2000 include $12.9 million of charges related to the global
restructuring initiated by the Company including $4.6 million related to the
termination of certain contracts, $6.2 million of employee severance and
termination costs affecting 521 distribution and administrative employees, $1.1
million related to the closing of certain retail outlet stores and $1.0 million
of legal expenses.

Depreciation and amortization expense was $23.5 million in the second
quarter of fiscal 2000 compared to $14.7 million in the second quarter of fiscal
1999. The increase in depreciation and amortization reflects the amortization of
goodwill and intangible assets related to the Authentic Fitness and ABS
acquisitions, which were completed in the fourth quarter of fiscal 1999 and
increased

43

depreciation expense related to computer system upgrades completed in
fiscal 1999 to ensure that the Company's systems were Y2K compliant.

OPERATING PROFIT

Operating income (loss) decreased $128.5 million to an operating loss of
$(68.4) million in the second quarter of fiscal 2000 from $60.1 million in the
second quarter of fiscal 1999. The reduction in operating income reflects the
global restructuring charges of $101.9 million noted above as well as the higher
selling, general and administrative expenses.

INTEREST EXPENSE

Interest expense increased $15.8 million to $34.5 million in the second
quarter of fiscal 2000 compared to $18.7 million in the second quarter of fiscal
1999. The increase primarily reflects interest expense related to the
acquisitions of Authentic Fitness and ABS in the fourth quarter of fiscal 1999
and interest on funds borrowed to effect the Company's stock buy-back program.

INCOME TAXES

The benefit for income taxes recorded during the second quarter of fiscal
2000 was $34.1 million as compared to the provision for income taxes in the
second quarter of fiscal year 1999 of $12.3 million. The benefit in 2000 is
derived from charges related to the Company's global restructuring initiatives.
Excluding the restructuring items, the tax provision is higher compared to the
second quarter of fiscal 1999 due, in part, to an increase in non-deductible
goodwill resulting from the 1999 acquisitions of Authentic Fitness and ABS.

NET LOSS

Net income (loss) for the second quarter of fiscal 2000 was $(68.6) million
compared with net income of $29.0 million in the second quarter of fiscal 1999.
The net loss in 2000 is the result of charges related to the Company's global
restructuring initiatives, which began in the second quarter.

THIRD QUARTER OF FISCAL 2000 COMPARED TO THIRD QUARTER OF FISCAL 1999

NET REVENUES

Net revenues in the third quarter of fiscal 2000 decreased $77.0 million or
13.3% to $500.1 million from the $577.1 million recorded in the third quarter of
fiscal 1999. Incremental revenues contributed by the 1999 acquisition of
Authentic Fitness ($38.1 million) and ABS ($9.0 million) amounted to $47.1
million but were more than offset by decreases in the Intimate Apparel and
Calvin Klein Jeanswear divisions.

Intimate Apparel Division. Net revenues decreased $54.2 million or 22.0% to
$192.4 million in the third quarter of fiscal 2000 compared to $246.6 million in
the third quarter of fiscal 1999. Warner's and Olga decreased $23.1 million to
$64.0 million from $87.1 million primarily due to the loss of three major
customers (Uptons, Eaton's and Mercantile) and poor sell through of the
Company's products at retail. Calvin Klein underwear decreased $18.7 million in
the third quarter of fiscal 2000 primarily in Sleepwear to $79.8 million from
$98.5 million in the third quarter of fiscal 1999. Lejaby decreased $4.9 million
to $16.1 million primarily related to the weakness of the Euro against the U.S.
dollar (foreign exchange).

Sportswear and Accessories Division. Net revenues decreased $40.2 million or
13.9% to $248.9 million in the third quarter of fiscal 2000 compared to $289.1
million in the third quarter of fiscal 1999. Incremental revenues contributed by
the 1999 acquisitions of Authentic Fitness ($21.3 million) and ABS ($9.0
million) amounted to $30.3 million. Excluding acquisitions, net revenues of
$218.6 million were 24.4% lower than the fiscal quarter of 1999. Chaps net
revenues in the third quarter of fiscal 2000 were $61.0 million, down 37.0% from
$96.8 million in the third quarter of fiscal 1999. The decrease in net revenues
is primarily due to Chaps being adversely affected by the discounted pricing
policy of its

44

competitors as well as customers lost due to bankruptcy. In addition Calvin
Klein Jeans division revenues were $146.9 million down $36.5 million or 19.9%
from $183.4 million in the third quarter of fiscal 1999 in the Juniors and
Kids divisions primarily resulting from the negative effect of the Calvin
Klein litigation.

Retail Stores Division. Net revenues increased $17.4 million or 42.0% to
$58.8 million in the third quarter of fiscal 2000 compared with $41.4 million in
the third quarter of fiscal 1999. The acquisition of Authentic Fitness
contributed $16.7 million to net revenues. Excluding net revenues of Authentic
Fitness, net revenues increased $0.7 million or 1.7%.

GROSS PROFIT

Gross profit decreased $145.3 million to $51.4 million in the third quarter
of fiscal 2000 compared with $196.7 million in the third quarter of fiscal 1999.
Gross margin was 10.2% in the third quarter of fiscal 2000 compared with 34.0%
in the third quarter of fiscal 1999. The decrease in gross margin in the third
quarter of fiscal 2000 compared to fiscal 1999 is attributable to higher
off-price sales and increased markdowns taken in the third quarter of fiscal
2000 to reduce inventories and improve cash flow. Also included in cost of sales
in the third quarter of fiscal 2000 is $66.5 million related to the global
restructuring initiatives discussed above. The charges include $46.1 million
related to inventory markdowns and fixed asset write-downs, $10.7 million
related to facility shutdown and lease obligation costs, $3.1 million of
severance and employee termination costs relating to 767 manufacturing related
employees, $5.7 million related to the closing of 15 retail outlet stores and
$0.9 million of other costs.

Intimate Apparel Division. Gross profit decreased $77.7 million or 87.5% to
$11.1 million in the third quarter of fiscal 2000 compared with $88.8 million in
the third quarter of fiscal 1999. Gross margins were 5.8% in the third quarter
of fiscal 2000 compared with 36.0% in the third quarter of fiscal 1999. Gross
profit for the third quarter of fiscal 2000 includes $35.6 million of charges
related to the Company's global restructuring initiatives begun in the second
quarter of fiscal 2000. Gross margin adjusted for the impact of the charges was
24.3% in the third quarter of fiscal 2000.

Sportswear and Accessories Division. Gross profit decreased $75.1 million or
79.4% to $19.5 million in the third quarter of fiscal 2000 compared with $94.6
million in the third quarter of fiscal 1999. Gross margins were 7.8% in the
third quarter of fiscal 2000 compared with 32.7% in the third quarter of fiscal
1999. Gross profit for the third quarter of fiscal 2000 includes approximately
$25.1 million of charges related to the Company's global restructuring
initiatives begun in the second quarter of fiscal 2000. Gross margin adjusted
for the impact of the charges was 17.9% in the third quarter of fiscal 2000.

Retail Stores Division. Gross profit increased $7.5 million or 56.4% to
$20.8 million in the third quarter of fiscal 2000 compared with $13.3 million in
the third quarter of fiscal 1999. Gross profit for the third quarter of fiscal
2000 includes $5.9 million of charges related to the Company's global
restructuring initiatives begun in the second quarter of fiscal 2000. Gross
margin adjusted for the impact of the charges was 45.4% in the third quarter of
fiscal 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased $53.8 million or
47.8% to $166.4 million compared to $112.6 million in third quarter of fiscal
1999. The increased selling, general and administrative expenses are due to an
increase in the Company's Retail Stores Division's business (primarily Authentic
Fitness), and higher depreciation and amortization expense related to additional
goodwill and intangible amortization expense related to the 1999 acquisitions of
Authentic Fitness and ABS and depreciation for systems implemented in fiscal
1999. Also included in selling, general and administrative expenses is $31.5
million for the third quarter of fiscal 2000 related to the global operating
initiatives discussed above consisting of fixed asset write-downs of $14.2
million, facility shutdown costs of $2.4 million, severance and employee
termination costs of $5.2 million related to 903 distribution and administrative
employees, retail outlet store closing costs of $3.8 million and legal fees,
primarily related to the Calvin Klein litigation, of $5.9 million.

45

OPERATING PROFIT

Operating profit (loss) decreased $199.1 million to $(115.0) million in the
third quarter of fiscal 2000 from $84.1 million in the third quarter of fiscal
1999. The operating loss in the third quarter of fiscal 2000 primarily reflects
the charges from the global restructuring initiatives, noted above and the
higher depreciation and amortization expenses also noted above.

INTEREST EXPENSE

Interest expense increased $22.7 million to $43.6 million in the third
quarter of fiscal 2000 compared to $20.9 million in the third quarter of fiscal
1999. The increased interest expense in the third quarter of fiscal 2000
compared to the third quarter of fiscal 1999 primarily reflects interest on
amounts borrowed to consummate the acquisitions of Authentic Fitness and ABS
as well as amounts borrowed to repurchase the Company's common stock.

INCOME TAXES

The benefit for income taxes recorded during the third quarter of fiscal
2000 was $83.4 million compared to the provision for income taxes in the third
quarter of fiscal 1999 of $19.9 million. The benefit in 2000 is derived from
charges related to the Company's global restructuring initiatives. Excluding the
restructuring items, the tax provision is higher compared to the third quarter
of fiscal 1999 due, in part, to an increase in non-deductible goodwill resulting
from the 1999 acquisitions of Authentic Fitness and ABS.

NET LOSS

Net income (loss) for the third quarter of fiscal 2000 was $(100.0) million
compared with net income of $43.3 million in the third quarter of fiscal 1999.
The net loss in 2000 is the result of charges for the Company's global
restructuring initiatives, which began in the second quarter.

LIQUIDITY AND CAPITAL RESOURCES

DEBTOR-IN-POSSESSION FINANCING ARRANGEMENT

On June 11, 2001, the Company entered into the DIP with a group of banks
which was approved by the Bankruptcy Court in an interim amount of $375,000,000.
On July 9, 2001, the Bankruptcy Court approved an increase in the amount of
borrowing available to the Company to $600,000,000. The DIP was subsequently
amended as of August 27, 2001, December 27, 2001, February 5, 2002 and May 15,
2002. The amendments, among other things, amend certain definitions and
covenants, permit the sale of certain of the Company's assets and businesses,
extend deadlines with respect to certain asset sales and certain filing
requirements with respect to a plan of reorganization and reduce the size of the
facility to reflect the Debtors' revised business plan.

The Amended DIP (when originally executed) provided for a $375,000,000
non-amortizing revolving credit facility (which includes a letter of credit
facility of up to $200,000,000) and a $225,000,000 revolving credit facility. On
December 27, 2001, the Tranche B commitment was reduced to $100,000,000. On
April 19, 2002, the Company elected to eliminate the Tranche B facility based
upon its determination that the Company's liquidity position had improved
significantly since the Petition Date and the Tranche B facility would not be
needed to fund the Company's on-going operations. On May 28, 2002, the Company
voluntarily reduced the amount of borrowing available under the Amended DIP to
$325,000,000. The Amended DIP terminates on the earlier of June 11, 2003 or the
effective date of a plan of reorganization.

Borrowing under the Amended DIP bears interest at either the London Inter
Bank Offering Rate (LIBOR) plus 2.75% (4.8% on January 5, 2002) or at the
Citibank N.A. Base Rate plus 1.75% (6.5% at January 5, 2002). In addition, the
fees for the undrawn amounts are .50% for Tranche A. During fiscal 2001 and
through its termination on April 19, 2002, the Company did not borrow any funds
under Tranche B. The Amended DIP contains restrictive covenants that require the
Company to maintain

46

minimum levels of EBITDAR (earnings before interest, taxes, depreciation,
amortization, restructuring charges and other items as set forth in the
agreement), restrict investments, limit the annual amount of capital
expenditures, prohibit paying dividends and prohibit the Company from incurring
material additional indebtedness. Certain restrictive covenants are subject to
adjustment in the event the Company sells certain business units and/or assets.
In addition, the Amended DIP requires that proceeds from the sale of certain
business units and/or assets are to be used to reduce the outstanding balance of
Tranche A. The maximum borrowings under Tranche A are limited to 75% of eligible
accounts receivable, 25% to 67% of eligible inventory, and 50% of other
inventory covered by outstanding trade letters of credit.

Amounts outstanding under the Amended DIP at January 5, 2002 were $155.9
million with a weighted average interest rate of 4.8%. In addition, the Company
had stand-by and documentary letters of credit outstanding under the Amended DIP
at January 5, 2002 of approximately $60.0 million. The total amount of
additional credit available to the Company at January 5, 2002 was $159.1
million. As of July 5, 2002, the Company had repaid all outstanding cash
borrowings under the Amended DIP and had approximately $61 million of cash
available as collateral against outstanding trade and stand-by letters of
credit.

The Amended DIP is secured by substantially all of the domestic assets of
the Company.

LIQUIDITY

The Company is operating under the provisions of the Bankruptcy Code which
has had a direct effect on the Company's cash flows. By operating under the
protection of the Bankruptcy Court, making improvements in the Company's
operations and selling certain assets, the Company has improved its cash
position subsequent to the Petition Date. The Company is not permitted to pay
any pre-petition liabilities without approval of the Bankruptcy Court, including
interest or principal on its pre-petition debt obligations (approximately $2.2
billion of pre-petition debt outstanding, including approximately $351.4 million
of trade drafts) and approximately $100.0 million of accounts payable and
accrued liabilities. Since the Petition Date through January 5, 2002, the
Company sold certain personal property, certain owned buildings and land and
other assets for approximately $6.2 million. In the first quarter of fiscal
2002, the Company sold additional assets generating net proceeds of
approximately $4.0 million. Substantially all of the net proceeds from these
sales were used to reduce outstanding borrowings under the Amended DIP. In
addition, in the first quarter of fiscal 2002, the Company sold the business and
substantially all of the assets of GJM and Penhaligon's. The sales of GJM and
Penhaligon's generated approximately $20.1 million of net proceeds in the
aggregate. Proceeds from the sale of GJM and Penhaligon's were used to
(i) reduce amounts outstanding under certain of the Company's debt agreements
($4.8 million), (ii) reduce amounts outstanding under the Amended DIP ($4.2
million), (iii) create an escrow fund for the benefit of pre-petition secured
lenders ($9.4 million) (subsequently disbursed in June 2002) and (iv) create an
escrow fund for the benefit of the purchasers for potential indemnification
claims and for any working capital valuation adjustments ($1.7 million). In the
second quarter of fiscal 2002, the Company began the process of closing 25 of
its outlet stores. In May 2002, the Company contracted with a third party and
sold the inventory in these stores for approximately net book value generating
approximately $12 million of net proceeds which were used to reduce amounts
outstanding under the Amended DIP. The Company expects that the sale of the
assets and businesses will have a positive effect on both the profitability and
cash flows of the Company in fiscal 2002 and in future years.

At January 5, 2001, the Company had working capital of $448.4 million,
excluding $2,439.4 million of pre-petition liabilities that are subject to
compromise.

The Debtors are in the process of reviewing their operations and identifying
assets available for potential disposition, including entire business units of
the Company. However there can be no assurance that the Company will be able to
consummate such transactions at prices the Company or the Company's creditor
constituencies will find acceptable.

47

CASH FLOWS

For the year ended January 5, 2002 cash used in operating activities was
$422.8 million compared to cash used in operating activities of $10.7 million in
fiscal 2000 and cash provided by operating activities of $10.0 million in fiscal
1999. The change in cash used in operations in fiscal 2001 compared to fiscal
2000 is primarily a result of the Company's net loss of $861.2 million in fiscal
2001. In addition, the Company terminated its accounts receivable securitization
agreement on the Petition Date and repurchased the outstanding accounts
receivable for approximately $186.2 million, including $1.2 million of interest
and fees.

Net cash used in investing activities was $21.4 million during fiscal 2001.
Cash used in investing activities primarily reflects capital expenditures offset
by net proceeds from the sale of fixed and other assets.

Cash provided from financing activities for fiscal 2001 was $474.6 million,
primarily from borrowing under the Company's pre-petition debt agreements and
funds borrowed under the Amended DIP. Amounts outstanding under the Amended DIP
at January 5, 2002 were $155.9 million. In addition, the Company had stand-by
and documentary letters of credit outstanding under the Amended DIP at
January 5, 2001 of $60.0 million. The total amount of additional credit
available to the Company at January 5, 2002 was $159.1 million. The Company had
cash in operating accounts of approximately $39.6 million at January 5, 2002.
Cash in operating accounts primarily represents lock-box receipts not yet
cleared or available to the Company, cash held by foreign subsidiaries and
compensating balances required under various trade, credit and other
arrangements. As of July 5, 2002, the Company had repaid all outstanding amounts
borrowed under the Amended DIP and had approximately $221.5 million of
additional credit available under the Amended DIP. In addition, the Company had
approximately $61 million of cash available for use as collateral against
outstanding documentary and stand-by letters of credit. The cash available of
$61 million does not include lock-box receipts and compensating balances.

PRE-PETITION DEBT

The Company was in default of substantially all of its U.S. pre-petition
credit agreements as of January 5, 2002. All pre-petition debt of the Debtors
has been reclassified with liabilities subject to compromise in the consolidated
balance sheet at January 5, 2002. In addition, the Company stopped accruing
interest on all domestic pre-petition credit facilities and outstanding balances
on June 11, 2001. The Company has continued to accrue interest on certain
foreign credit agreements that are subject to standstill and intercreditor
agreements. Consummation of a plan or plans of reorganization may require the
payment of such interest. Such interest is included in liabilities subject to
compromise at January 5, 2002. A brief description of each pre-petition credit
facility and the terms thereof is included below.

AMENDMENT AGREEMENT

On October 6, 2000, the Company and the lenders under its credit facilities
entered into an Amendment, Modification, Restatement and General Provisions
Agreement (the 'Amendment Agreement') and an Intercreditor Agreement. Pursuant
to the Amendment Agreement, the Company's credit facilities were modified so
that each contains identical representations and warranties, covenants,
mandatory prepayment obligations and events of default. The Amendment Agreement
also amended uncommitted credit facilities and those which matured prior to
August 12, 2002 so that they would mature on August 12, 2002 (the maturity dates
of the credit facilities due after August 12, 2002 were unaffected).

The Amendment Agreement made the margins added to a base rate or Eurodollar
rate loan uniform under the credit facilities and determined according to the
debt rating of the Company. As of December 30, 2000, the applicable margin for
base rate advances under the credit facilities was 2.5% and the applicable
margin for Eurodollar rate advances under the credit facilities was 3.5%. The
Amendment Agreement also made the fee charged based on the letters of credit
outstanding and a commitment fee charged based on the undrawn amount of the
credit facilities consistent across the credit facilities. Both of these fees
also varied according to the Company's debt rating.

48

As part of the signing of the Amendment Agreement, obligations under each of
the credit facilities were guaranteed by the Company, by all of its domestic
subsidiaries and, on a limited basis, by all of its subsidiaries located in
Canada, the United Kingdom, France, Germany, the Netherlands, Mexico, Belgium,
Hong Kong and Barbados. The Company and each of such entities have granted liens
on substantially all of their assets to secure these obligations. As a result of
the Amendment Agreement, as of December 30, 2000, the Company had committed
credit facilities in an aggregate amount of $2.6 billion, all of which were to
mature on or after August 12, 2002 with substantially no debt amortization until
then. All obligations under the Amendment Agreement are in default under the
Chapter 11 Cases. The Company has not accrued interest on these obligations
since the Petition Date, except for interest on certain foreign credit
agreements as previously noted. Creditors under the Amendment Agreement are
considered secured creditors in the Chapter 11 Cases, and as such will receive
a higher priority than other classes of creditors. Amounts outstanding under
the Amendment Agreement, not including accrued interest, at the Petition Date
were approximately $2.2 billion, including $351.4 million of trade drafts. The
Company has classified these obligations as liabilities subject to compromise.
The Company has not completed its plan of reorganization under the Chapter 11
Cases and, as a result, the Company cannot yet determine the amount that the
creditors under the Amendment Agreement will ultimately receive.

$600,000,000 REVOLVING CREDIT FACILITY

The Company is the borrower under a $600 million Revolving Credit Facility,
which includes a $100 million sub-facility available for letters of credit. This
facility was scheduled to expire 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 were borrowed at
either base rate or at an interest rate based on the Eurodollar rate plus a
margin determined under the Amendment Agreement. As of December 30, 2000, the
amount of borrowings outstanding under this facility was $425.7 million.
Additionally, as of December 30, 2000, the amount of letters of credit
outstanding under this facility was $4.7 million. The weighted-average interest
rate under this facility as of December 30, 2000 was 10.34%. As of January 5,
2002, $595.1 million was outstanding under this facility, all of which is
included in liabilities subject to compromise at January 5, 2002.

$450,000,000 REVOLVING CREDIT FACILITY

The Company is also a borrower under a $450 million Revolving Credit
Facility, which was reduced to $423.6 million under the Amendment Agreement. The
credit agreement governing this facility, dated November 17, 1999, provided that
the term of the facility will expire on November 17, 2004. Amounts borrowed
under this facility were subject to interest at a base rate or at an interest
rate based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. As of December 30, 2000, the amount of borrowings outstanding under
this facility was $284.7 million with a weighted average interest rate of
10.47%. As of January 5, 2002, $423.6 million was outstanding under this
facility, all of which is included in liabilities subject to compromise.

$587,548,000 TERM LOAN

The Company is also a borrower under a $600 million Term Loan, dated
November 17, 1999, which was reduced to approximately $587.5 million under the
Amendment Agreement. The maturity of this loan was also extended until
August 12, 2002 in connection with the Amendment Agreement. Amounts borrowed
under this facility were subject to interest at a base rate or an interest rate
based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. As of December 30, 2000 and January 5, 2002, $587.5 million was
outstanding under this facility all of which is included in liabilities subject
to compromise at January 5, 2002.

FRENCH FRANC FACILITIES

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

49

and November 1999, include a term loan facility in an original amount of 370
million French Francs and a revolving credit facility of 480 million French
Francs, which was reduced to 441.6 million French Francs pursuant to the
Amendment Agreement. Amounts borrowed under these facilities are subject
to interest at an interest rate based on the Eurodollar rate plus a margin
determined under the Amendment Agreement. The term loan was being repaid in
annual installments, which began in July 1997, with a final installment due on
December 31, 2001. In conjunction with the Amendment Agreement the annual
installments were eliminated and the maturity of the loan was extended to
August 12, 2002. As of December 30, 2000, $36.3 million equivalent of the
term loan was outstanding with a weighted average interest rate of 8.79%.
The revolving portion of this facility provides for multi-currency revolving
loans to be made to the Company and a number of its European subsidiaries.
As of December 30, 2000, approximately $54.2 million equivalent of revolving
advances were outstanding under this facility with a weighted average interest
rate of 9.94%. As of January 5, 2002 the total amount outstanding under these
facilities was $59.5 million equivalent, all of which is included in liabilities
subject to compromise.

$400,000,000 TRADE CREDIT FACILITY

On October 6, 2000, in conjunction with signing the Amendment Agreement, the
Company entered into a new $400 million Trade Credit Facility which provided
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'). Amounts drawn under this facility were subject to interest at an
interest rate based on the Eurodollar rate plus a margin determined under the
Amendment Agreement. The Company classified the 180-day Trade Drafts in trade
accounts payable. As of December 30, 2000, the amount of Trade Drafts
outstanding under this facility was $163.9 million. Also at December 30, 2000,
the Company had outstanding letters of credit under this facility totaling
approximately $81.1 million. At January 5, 2002, the Company had approximately
$351.4 million of Trade Drafts outstanding under this facility, all of which is
included in liabilities subject to compromise.

OTHER FACILITIES

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 December 30, 2000 was
$17.0 million. This loan was due to be repaid in equal installments with a final
maturity date of July 4, 2002. Amounts outstanding under this agreement as of
the Petition Date of $34.6 million are included in liabilities subject to
compromise at January 5, 2002.

The Company issued $40.4 million of notes in conjunction with the amendment
of its Equity Agreements with two of its banks. Amounts borrowed under these
notes are subject to interest at a rate based on the Eurodollar rate plus a
margin determined under the Amendment Agreement. These notes were to mature on
August 12, 2002. As of December 30, 2000, $50.1 million was outstanding under
this facility. The Company has recorded adjustments to the amount outstanding
under the Equity Agreements through January 5, 2002 of $6.6 million resulting in
a total amount outstanding under the Equity Agreements of $56.7 million as of
January 5, 2002. Loans related to the Equity Agreements outstanding are included
in liabilities subject to compromise at January 5, 2002.

FOREIGN CREDIT 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 December 30, 2000 and January 5, 2002,
the total outstanding amounts of the Foreign Credit Facilities were
approximately $16.3 million and $83.7 million, respectively. The foreign
subsidiaries are not parties to the Chapter 11 Cases. Certain of the Company's
foreign subsidiaries are parties to debt agreements that are subject to
standstill and intercreditor agreements. The Company has recorded interest of
$4.1 million in fiscal 2001 on certain of these foreign credit facilities. The
consummation of a plan or plans of reorganization may require the repayment of
such interest. Accrued interest relating to these facilities is included in
liabilities subject to compromise at January 5, 2002.

50

RESTRICTIVE COVENANTS

Pursuant to the terms of the Amendment Agreement the Company was required to
maintain certain financial ratios and was prohibited from paying dividends. On
March 29, 2001, lenders under the Amendment Agreement waived compliance with the
financial ratios until April 16, 2001. On April 13, 2001, the lenders extended
this waiver until May 16, 2001 and on May 16, 2001, the lenders extended the
waiver to June 15, 2001. The Company filed for protection under Chapter 11 of
the Bankruptcy Code on June 11, 2001.

COMMITMENTS AND CONTINGENCIES

Prior to the Petition Date, the Company utilized a bankruptcy remote special
purpose entity for the purpose of securitizing its outstanding accounts
receivable. Pursuant to the terms of the Amended DIP, the securitization
facility was terminated and all outstanding amounts due under the securitization
facility were repaid on June 11, 2001. See Note 6 of Notes to Consolidated
Financial Statements. As of January 5, 2002, the Company is not engaged in
off-balance sheet arrangements through unconsolidated, limited purpose entities.
There are no material guarantees of debt or other commitments, other than those
mentioned herein related to trade and standby letters of credit issued under the
Amended DIP, existing at January 5, 2002.

The Company has entered into operating lease agreements for manufacturing,
distribution and administrative facilities and retail stores. Substantially all
of those agreements are subject to assumption or rejection under the provisions
of the Bankruptcy Code. The Company has provided amounts for the estimated total
amount of claims the Company expects to receive related to all rejected and
other leases as of January 5, 2002. In addition, the Company has entered into
operating leases for equipment and other assets. Substantially all of those
leases are also subject to assumption or rejection under the provisions of the
Bankruptcy Code.

Future contractual obligations of the Company, as of January 5, 2002 are
summarized below:

- ---------

(a) Does not include approximately $2.4 billion of liabilities subject to
compromise in the Chapter 11 Cases (including $120.0 million payable under
Company-obligated mandatorily redeemable convertible preferred securities).

(b) The Amended DIP matures on June 11, 2003. No amounts were outstanding under
the Amended DIP as of July 5, 2002.

(c) Includes all operating leases, all of which may be rejected under the
provisions of the Bankruptcy Code. In June 2002 the Bankruptcy Court
approved the Company's settlement of certain operating lease agreements.
The leases had original terms of from three to seven years and were secured
by certain equipment, machinery, furniture, fixtures and other assets. The
total amount payable to the lessor under the settlement agreement is
$15,200 of which $4,400 had been paid by the Company through May 30, 2002.
The remaining balance of $10,800 will be paid by the Company in equal
installments of $550 through the date of the consummation of a confirmed
plan of reorganization and $750 per month thereafter until the balance is
fully paid. See Note 20 of Notes to Consolidated Financial Statements.

(d) Includes all minimum royalty obligations.

(footnotes continued on next page)

51

(footnotes continued from previous page)

(e) Certain of the Company's license agreements have no expiration date or
extend beyond 20 years. The duration of these agreements for the purposes
of this item are assumed to be 20 years.

(f) Trade letters of credit represent obligations to suppliers for inventory
purchases. The trade letters of credit generally have maturities of six
months or less and will only be paid upon satisfactory delivery of the
inventory by the supplier.

(g) The Company also has contingent liabilities under standby letters of credit
in the amount of $8,413 representing guarantees of performance under
various contractual obligations. These commitments will only be drawn if
the Company fails to meet its obligations under the related contract.

The Company paid a quarterly cash dividend on its common stock from June
1995 through December 2000. Total dividends paid in fiscal 1999 and fiscal 2000
were $20.6 million and $14.4 million, respectively. The Company suspended
payment of its cash dividend in December 2000. Under the terms of the Amended
DIP, the Company is prohibited from paying dividends or making distributions to
stockholders. See Item 5. 'Market for the Company's Common Equity and Related
Stockholder Matters'.

ECONOMIC AND MONETARY UNION ('EMU') COMPLIANCE

Within Europe, the EMU introduced a new currency, the Euro, on January 1,
1999. The new currency is in response to the EMU's policy of economic
convergence to harmonize trade policy, eliminate business costs associated with
currency exchange and to promote the free flow of capital, goods and services.

On January 1, 1999, the participating countries adopted the Euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash transactions such as banking. The existing local currencies, or
legacy currencies, remained legal tender through December 31, 2001. As of
July 1, 2002, the participating countries withdrew all legacy currencies and
exclusively used the Euro.

In anticipation of the establishment of the European EMU and the
introduction of the Euro on January 1, 1999, the Company formed a Steering
Committee in December 1997 to (i) identify the related issues and their
potential effect on the Company, and (ii) 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, the Company was EMU compliant. During fiscal 1999, 2000 and 2001, the
Company experienced no adverse effects on its business as a result of the
introduction of the Euro and does not expect the Euro to have a material effect
on the Company's financial condition or results of operations.

SEASONALITY

The operations of the Company are somewhat seasonal. In fiscal 2001,
approximately 46.7% of the Company's net revenues were generated in the first
half of the fiscal year. The Company's Authentic Fitness business, which is
included in the Sportswear and Accessories Division, consists primarily of
swimwear and swim related products. The swimwear business is seasonal;
approximately 78% of Authentic Fitness net revenues were generated in the first
half of the 2001 fiscal year. The working capital needs of Authentic Fitness
partially offset the working capital needs of the remaining businesses of the
Company. Sales and earnings from the Company's other divisions and business
units are generally expected to be somewhat higher in the second half of the
fiscal year.

The following sets forth the net revenues, operating income and net cash
flow from operating activities generated for each quarter of fiscal 2001 and
fiscal 2000.

52

- ---------

(a) as restated

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 No. 133, Accounting for Derivative
Activities and Hedging Activities ('SFAS 133'). SFAS 133 was amended by SFAS 137
and SFAS 138. SFAS 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company adopted the
provisions of SFAS 133 as of December 31, 2000. The Company adopted SFAS 133
effective with the first quarter of fiscal 2001. As a result of the adoption of
SFAS 133, the Company recorded a transition adjustment of $21,744 primarily
related to the reclassification of a gain on the sale of certain interest rate
swaps from other liabilities to other comprehensive income. The adoption of
SFAS 133 did not have a material impact on the Company's cash flows or its
results of operations.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 Business Combinations ('SFAS 141') and Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets ('SFAS 142'). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated or completed after June 30, 2001. SFAS 141 specifies
criteria for the recognition of certain intangible assets apart from goodwill.
SFAS 141 did not have an impact on the Company's financial statements.

SFAS 142 eliminates the amortization of goodwill and certain other
intangible assets with indefinite lives effective for the Company's 2002 fiscal
year. SFAS 142 requires that indefinite lived assets be tested for impairment at
least annually. SFAS 142 further requires that intangible assets with finite
useful lives be amortized over their useful lives and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets ('SFAS 144').

SFAS 142 requires that the Company evaluate its existing goodwill and other
intangible assets with indefinite useful lives. In addition, the Company will
reassess the useful lives of its intangible assets and will test indefinite
lived intangible assets for impairment in accordance with the provisions of
SFAS 142 during the first quarter of fiscal 2002. The Company is in the process
of evaluating the impact of SFAS 142 on its financial statements.

At January 5, 2002 the Company had goodwill and other intangible assets net
of accumulated amortization of approximately $944 million. Based upon
preliminary evaluations of the fair value of the Company's business units
prepared in connection with preparing the Company's plan of reorganization, the
Company believes that the carrying value of the Company's goodwill and
intangible assets will exceed the fair value of those assets by approximately
$600-700 million. In addition, amortization expense related to goodwill and
intangible assets for the year ended January 5, 2002 was approximately $36.9
million. The Company estimates that after the adoption of SFAS 142 and the
write-down of
53

intangible assets noted above, amortization expense for the 2002 fiscal year
will be substantially reduced. See Note 1 of Notes to Consolidated Financial
Statements.

In June 2001, the FASB issued Statement of Financial Accounting Standard
No. 143, Accounting for Asset Retirement Obligations ('SFAS 143'). SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs.
The Company plans to adopt the provisions of SFAS 143 for its 2003 fiscal year
and does not expect the adoption of SFAS 143 to have a material impact on the
Company's financial position or results of operations.

In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ('SFAS
144'). SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company is required to adopt the
provisions of SFAS 144 for its 2002 fiscal year. The Company does not expect the
adoption of SFAS 144 to have a material impact on the Company's financial
position or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ('SFAS 145'). SFAS 145 rescinds the
provisions of SFAS No. 4 that require companies to classify certain gains and
losses from debt extinguishments as extraordinary items, eliminates the
provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980
and amends the provisions of SFAS No. 13 to require that certain lease
modifications be treated as sale leaseback transactions. The provisions of SFAS
145 related to classification of debt extinguishment is effective for fiscal
years beginning after May 15, 2002. The provisions of SFAS 145 related to lease
modifications is effective for transactions occurring after May 15, 2002.
Earlier application is encouraged. The adoption of SFAS 145 is not expected to
have a material impact on the financial position or results of operations of the
Company.

In April 2001, the FASB's Emerging Issues Task Force ('EITF') reached a
final consensus on EITF Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,
which was later codified along with the other similar issues, into EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products ('EITF 01-09'). EITF 01-09 will be effective for the
Company in the first quarter of 2002. EITF 01-09 clarifies the income statement
classification of costs incurred by a vendor in connection with the reseller's
purchase or promotion of the vendor's products, resulting in certain cooperative
advertising and product placement costs previously classified as selling
expenses to be reflected as a reduction of revenues earned from that activity.
The Company does not expect the adoption of EITF 01-09 to have a material impact
on the Company's 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. Prior to the Petition Date the Company
selectively used financial instruments to manage these risks. The Company has
not entered any financial instruments for hedging or other purposes since the
Petition Date and the effect of potential changes in such financial instruments
entered into prior to the Petition Date will not affect the Company's future
financial position or results of operations due to the Chapter 11 Cases.

INTEREST RATE RISK

The Company is subject to market risk from exposure to changes in interest
rates based primarily on its financing activities. Prior to the Petition Date
the Company had entered into interest rate swap agreements to reduce the impact
of interest rate fluctuations on cash flow and interest expense. In the first
quarter of fiscal 2001, the Company sold its interest in the interest rate swap
arrangements that were outstanding at the end of fiscal 2000, resulting in a
gain $26.1 million. The Company has not been a party to any interest rate swap
agreements since June 2001. Pursuant to the provisions of the Bankruptcy Code
the Company has not accrued interest on domestic pre-petition debt since the
Petition Date. Therefore, there is no risk of interest rate fluctuation to the
Company on pre-petition debt. Interest payable on the outstanding balance of
borrowing under the Amended DIP is adjusted

54

based on changes in interest rates, specifically LIBOR and the U.S. prime rate.
A hypothetical increase of 1% in either of these interest rates would increase
the Company's annual interest expense by approximately $1.5 million based on
the amounts outstanding under the Amended DIP at January 5, 2002. Changes in
interest rates will not have a significant impact on the Company's operations
as of July 5, 2002 as the Company had repaid all outstanding borrowings under
the Amended DIP. As of December 30, 2000, the net fair value of all financial
instruments (primarily interest rate swap agreements) with exposure to interest
rate risk was approximately $0.5 million. As of December 30, 2000 the Company
had approximately $1,655.1 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 December 30,
2000 would have had a $16.8 million unfavorable impact on the Company's pre-tax
earnings and cash flow over a one-year period.

FOREIGN EXCHANGE RISK

The Company has foreign currency exposures related to buying, selling and
financing in currencies other than its functional currencies. These exposures
are primarily concentrated in the Canadian dollar, Mexican peso, Hong Kong
dollar, British pound, Euro, Costa Rican colon, Honduran lempira and the Chinese
renminbi. Prior to the Petition Date, the Company entered into foreign currency
forward and option contracts to mitigate the risk of doing business in foreign
currencies. Since the Petition Date the Company has not entered into any new
foreign currency hedge or forward contracts. All hedge agreements outstanding as
of the Petition Date have matured or been cancelled as of January 5, 2002. As of
December 30, 2000, the net fair value of financial instruments with exposure to
foreign currency risk, which included currency option and forward contracts, was
approximately $.03 million. The potential decrease in fair value resulting from
a hypothetical 10% adverse change in quoted foreign currency exchange rates
would be approximately $0.5 million.

EQUITY PRICE RISK

Prior to the Petition Date, the Company was subject to market risk from
changes in its stock price as a result of the Equity Agreements. Amounts due
under the Equity Agreements are included in liabilities subject to compromise.
The price of the Company's common stock at January 5, 2002 was approximately
$0.05 per share. The Company has recorded the total amount due under the Equity
Agreements at January 5, 2002 of $56.7 million as liabilities subject to
compromise.

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 Annual Report
on Form 10-K. See Item 14 of Part IV.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.

None.

55

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The directors and executive officers of the Company, their age and their
position as of July 22, 2002 are set forth below.

- ---------

(1) Effective November 16, 2001, Stuart D. Buchalter succeeded Linda J. Wachner
as Chairman of the Board.

(2) Effective November 16, 2001, Antonio C. Alvarez II succeeded Linda J.
Wachner as Chief Executive Officer.

(3) Effective December 20, 2001, James P. Fogarty succeeded Philip Terenzio as
Chief Financial Officer.

(4) Effective March 1, 2001, Philip Terenzio succeeded William S. Finkelstein as
Chief Financial Officer.

-------------------

Mr. Buchalter currently serves as Non-Executive Chairman of the Board of
Directors for the Company and is a member of the Board's Restructuring
Committee. Mr. Buchalter joined the Company in February 2000 as a Director. Mr.
Buchalter is Of Counsel to the California law firm of Buchalter, Nemer, Fields &
Younger P.C. He served as Chairman of the Board of Standard Brands Paint
Company, which successfully reorganized under Chapter 11 of the U.S. Bankruptcy
Code, through June 15, 1993. He serves as director of City National Corporation
and Earl Scheib, Inc. He also serves as the Chairman of the Board of Trustees of
Otis College of Art & Design. Mr. Buchalter did his undergraduate work at the
University of California at Berkeley, receiving a B.A. in 1959, and attended
Harvard Law School, earning an L.L.B. in 1962.

Mr. Alvarez was elected President and Chief Executive Officer of the Company
on November 16, 2001 and was elected to the Board of Directors on March 19,
2002. Mr. Alvarez is a member of the Board's Restructuring Committee. Prior to
his election to these positions, Mr. Alvarez served the Company as Chief
Restructuring Officer from June 11, 2001 to November 16, 2001 and as Chief
Restructuring Advisor to the Company (while employed by Alvarez & Marsal, Inc.)
from April 30, 2001 to June 11, 2001. Mr. Alvarez serves as Non-Executive
Chairman of the Board of Wherehouse Entertainment, Inc. ('Wherehouse'). Mr.
Alvarez served as Chairman of the Board and Chief Executive Officer of
Wherehouse from January 1997 until October 2001. Mr. Alvarez is a founding
Managing Director of Alvarez & Marsal, Inc., a consulting firm that specializes
in crisis management and the restructuring of troubled companies ('A&M'). Over
the last 18 years as a founding Managing Director of A&M, Mr. Alvarez has served
as restructuring officer, consultant or operating officer of numerous troubled
companies. Mr. Alvarez served as Phar-Mor, Inc.'s President and Chief Operating
Officer from September 1992 through February 1993, as acting Chief Financial
Officer from August

56

1992 to December 1992, and as Chief Executive Officer from February 1993 through
Phar-Mor's emergence from Chapter 11 in October 1995.

Mr. Fogarty was elected Senior Vice President Finance and Chief Financial
Officer of the Company on December 20, 2001. Prior to his election to these
positions, Mr. Fogarty served the Company as Senior Vice President from
June 11, 2001 to December 20, 2001 and served as an advisor to the Company,
(while employed by A&M) from April 30, 2001 to June 11, 2001. Mr. Fogarty has
been associated with A&M since August 1994. As part of his work with A&M, Mr.
Fogarty has held management positions with Bridge Information Systems, DDS
Partners LLC, AM Cosmetics, Inc. and Color Tile, Inc. In addition, Mr. Fogarty
provided restructuring advisory services to Fruehauf Trailer and Homeland
Stores, Inc. Mr. Fogarty was associated with the accounting firm KPMG from June
1990 until July 1994. Mr. Fogarty holds a B.A. degree in Economics and Computer
Science from Williams College, a MS in Accounting from the Leonard Stern School
of Business at New York University and a MBA in Finance and Accounting from the
Leonard Stern School of Business at New York University.

Mr. Silverstein has served as Vice President, General Counsel and Secretary
of the Company since December 1990. Mr. Silverstein was elected Chief
Administrative Officer of the Company in December 2002. Mr. Silverstein served
as Assistant Secretary of the Company from June 1986 until his appointment as
Secretary in January 1987.

Mr. Terenzio served as Senior Vice President and Chief Financial Officer of
the Company from March 1, 2001 until December 20, 2001. Mr. Terenzio has served
as President of the International Division of the Company since December 2001.
Prior to joining the Company, Mr. Terenzio served as Vice President and
Controller at Best Foods, Inc. from 1998 until March 2001. From 1971 to 1998,
Mr. Terenzio was associated with KPMG, independent public accountants, where he
left as a Partner of the firm.

Mr. Califano has been a Director of the Company since March 1992. Mr.
Califano is Chairman and President of The National Center on Addiction and
Substance Abuse at Columbia University. He is a Director of Automatic Data
Processing, Inc. Mr. Califano is a Trustee of New York-Presbyterian Hospital,
The Century Foundation, The Urban Institute and The American Ditchley
Foundation, Trustee Emeritus of The John F. Kennedy Center for the Performing
Arts, and a member of the Advisory Council of the American Foundation for AIDS
Research and the Council on Foreign Relations. He is Founding Chairman of the
Board of the Institute for Social and Economic Policy in the Middle East at the
Kennedy School of Government at Harvard University. Mr. Califano served as
Secretary of the United States Department of Health, Education, and Welfare from
1977 to 1979. He was Special Assistant for Domestic Affairs to the President of
the United States from 1965 to 1969. He is the author of nine books.

Mr. Drapkin has been a Director of the Company since July 1999. He has been
a Director and Vice Chairman of MacAndrews and Forbes Holdings, Inc. and several
of its affiliates since 1987. Mr. Drapkin was a partner in the law firm of
Skadden, Arps, Slate, Meagher & Flom LLP for more than five years prior to 1987.
Mr. Drapkin is also a Director of the following corporations which file reports
pursuant to the Exchange Act of 1934: Anthracite Capital, Inc., Black Rock Asset
Investors, The Molson Companies Limited, Panavision, Inc, Playboy.com, Inc.,
Playboy Enterprises, Inc., Revlon Consumer Products Corporation, Revlon, Inc.
and SIGA Technologies, Inc.

Richard Karl Goeltz has been a Director of the Company since July 2002. Mr.
Goeltz served as Vice Chairman and Chief Financial Officer of the American
Express Company from 1996 to 2000. Previously, Mr. Goeltz was Group Chief
Financial Officer and a member of the Board of Directors of NatWest Group
('NatWest'), the parent company of National Westminister Bank Plc. Prior to
joining NatWest, Mr. Goeltz served The Seagram Company for over 20 years in a
variety of management positions. Mr. Goeltz previously held various financial
positions in the treasurer's department of Exxon Corporation in New York and
Central America. Mr. Goeltz is a director of the New Germany Fund, a member of
the Board of Overseers of Columbia Business School, a director of Opera
Orchestra of New York, a member of the Council on Foreign Relations and a member
of the Court of Governors of the London School of Economics and Political
Science. Mr. Goeltz received his M.B.A. from Columbia Business School, his B.A.
in economics from Brown University and also studied at the London School of
Economics and New York University.

57

Mr. Golub has been a Director of the Company since January 2001. Mr. Golub
is a member of the Board's Restructuring Committee. Mr. Golub served as a member
of the Board of Directors of American Express Company from September 1990 until
his retirement in April 2001, as Chairman of American Express Company from
August 1993 until April 2001 and as Chief Executive Officer from January 1993 to
January 2001. Mr. Golub serves as a Director of Campbell Soup Company and Dow
Jones & Co., and as the Chairman of Airclic Inc., Chairman of ClientLogic and
Chairman of TH Lee Putnam Ventures. Mr. Golub also serves on the Boards of
Lincoln Center for the Performing Arts, the American Enterprise Institute and
the New York-Presbyterian Hospital. Mr. Golub serves as a Senior Advisor to
Lazard Freres.

Dr. Pacheco has been a Director of the Company since August 1999. He has
been President of the University of Missouri since 1997. He served on the Board
of Directors of ASARCO until its sale in 1999, and currently serves on the
Boards of PNM Resources, Inc., Boy Scouts of America, The Higher Education
Center for Alcohol and Other Drug Prevention, Nelson-Atkins Museum of Art,
University of Arizona Science and Technology Park and The National Center on
Addiction and Substance Abuse. He has a Presidential appointment to the National
Security Education Program Board, serves on the Provost's External Advisory
Board on Teaching at Ohio State University and is a Trustee of the University of
Kansas City.

Mrs. Wachner has been a Director of the Company since March 1986. Mrs.
Wachner served as President of the Company from March 1986 until November 2001,
as Chief Executive Officer of the Company from August 1987 until November 2001
and as Chairman of the Board of Directors from August 1991 until November 2001.
Mrs. Wachner held various positions, including President and Chief Executive
Officer, with Max Factor and Company from December 1978 to October 1984.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who own more than
ten percent of the Company's Common Stock, to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater
than ten percent stockholders are required by SEC regulations to furnish the
Company with copies of all such Section 16(a) forms that they file.

Based solely on a review of the copies of such reports furnished to the
Company, the Company believes that, during the fiscal year ended January 5,
2002, all Section 16(a) filing requirements applicable to the Company's
executive officers and directors and greater than ten percent shareholders were
complied with.

ITEM 11. EXECUTIVE COMPENSATION.

The following discloses summary information regarding the compensation of
(i) Antonio C. Alvarez II, the Chief Executive Officer; (ii) the four most
highly compensated officers serving at January 5, 2002 other than Mr. Alvarez,
namely James P. Fogarty, Senior Vice President Finance and Chief Financial
Officer; Stanley P. Silverstein, Vice President, General Counsel and Secretary
and Chief Administrative Officer; Philip Terenzio, President International and
Former Senior Vice President and Chief Financial Officer; Carl J. Deddens,
Former Vice President and Treasurer; and (iii) William S. Finkelstein, Former
Senior Vice President and Chief Financial Officer; and Linda J. Wachner, former
Chief Executive Officer, each of whom would have been one of the four most
highly compensated officers of the Company but for the fact that Mr. Finkelstein
and Mrs. Wachner were not executive officers of the Company at the end of fiscal
2001 (collectively the 'Named Executives').

58

- ---------

(a) Mr. Alvarez was elected President and Chief Executive Officer of the
Company on November 16, 2001. Prior to his election to these positions, Mr.
Alvarez served the Company as Chief Restructuring Officer from June 11,
2001 to November 16, 2001 and as Chief Restructuring Advisor from
April 30, 2001 to June 11, 2001 pursuant to a contract between the Company
and A&M. See Item 13. Certain Relationships.

(b) Mr. Fogarty was elected Chief Financial Officer of the Company on December
20, 2001. Prior to his election to this position, Mr. Fogarty served the
Company as Senior Vice President from June 11, 2001 to December 20, 2001
and served as an advisor to the Company (while employed by A&M) from
April 30, 2001 to June 11, 2001.

(c) Other Annual Compensation was less than $50,000 or 10% of such officers'
annual salary and bonus for such year.

(d) Represents retention bonus paid pursuant to the Company's Key Domestic
Employee Retention Plan implemented as a result of the Chapter 11 Cases.

(e) Represents the dollar value of restricted stock awarded pursuant to the
Supplemental Incentive Compensation Plan based on the Company's financial
results and achievement of a return on equity that exceeded the Company's
peer group median in fiscal 1998. Fifty percent of such shares were vested
on May 6, 2001, the remaining 50% vest 25% per year until fully vested on
May 6, 2003. Participants are entitled to receive dividends attributable to
the restricted shares.

(f) Mrs. Wachner's employment with the Company was terminated on November 16,
2001. She continues to serve the Company as a director.

(g) Includes $92,971, $350,000 and $350,000 in reimbursement for certain
expenses incurred in connection with the Company's business in 2001, 2000
and 1999, respectively. Mrs. Wachner personally paid the Company $0,
$18,507 and $42,703 for use of Company aircraft in 2001, 2000 and 1999,
respectively.

(h) Represents the dollar value of restricted stock awarded pursuant to the
Supplemental Incentive Compensation Plan based on the Company's financial
results and achievement of a return on equity
(footnotes continued on next page)

59

(footnotes continued from previous page)
that exceeded the Company's peer group median in fiscal 1998. Fifty percent
of such shares were vested on May 6, 2001. In accordance with the terms of
the The Warnaco Group, Inc. Amended and Restated 1993 Stock Plan and The
Warnaco Group, Inc. 1997 Stock Plan 119,250 unvested shares of restricted
stock were returned to the Company's treasury in connection with the
termination of Mrs. Wachner's employment in November 2001.

(i) Includes 18,038 restoration options granted automatically upon the exercise
of stock options pursuant to the original option granted under the Amended
and Restated 1998 Stock Plan.

(j) Mr. Finkelstein resigned his positions as Senior Vice President and Chief
Financial Officer on March 1, 2001 but continues in the employ of the
Company.

(k) Mr. Terenzio was elected Chief Financial Officer on March 1, 2001. On
December 20, 2001, Mr. Fogarty succeeded Mr. Terenzio as Chief Financial
Officer and Mr. Terenzio was named President of the Company's International
Division.

(l) Mr. Deddens voluntarily terminated his employment with the Company on
March 28, 2002.

(m) Represents employer matching contributions under the Company's Employee
Savings Plan.

OPTION/SAR GRANTS IN THE LAST FISCAL YEAR

The following table provides information on option grants in fiscal 2001 to
the Named Executives.

- ---------

(a) Twenty-five percent of such options vested on February 28, 2002. The
remaining 75% of such options vest 25% per year until fully vested on
February 28, 2005. Such options have stock-for-stock exercise and tax
withholding features, which allow the holder, in lieu of paying cash for
the exercise price and tax withholding, to have the Company commensurately
reduce the number of shares of Common Stock to which the holder would
otherwise be entitled upon exercise of such options.

(b) The dollar amounts in these columns are the result of calculations at 5%
and 10% rates prescribed by the SEC and, therefore, are not intended to
forecast possible future appreciation, if any, of the Company's Common
Stock.

(c) No gain to the option holder is possible without an increase in stock price
appreciation, which would benefit all shareholders commensurately. A zero
percent gain in stock appreciation will result in zero dollars for the
option holder.

60

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

The following table provides information on option/SAR exercises in fiscal
2001 by the Named Executives and the values of such officers' unexercised
options at January 5, 2002.

PENSION PLAN

The preceding table sets forth the annual pension benefits payable at age 65
pursuant to the Company's Employee Retirement Plan, which provides such pension
benefits to all qualified personnel based on the average highest twelve
consecutive calendar years' compensation multiplied by the years of credited
service. Such benefits payable are expressed as straight life annuity amounts
and are not subject to reduction for social security or other offset. As of
January 5, 2002, the credited years of service under the plan for the Named
Executives are: Mr. Fogarty, one year; Mr. Silverstein, seventeen years, nine
months; Mr. Terenzio, ten months; Mrs. Wachner, fifteen years, eight months; Mr.
Finkelstein, thirteen years, ten months; and Mr. Deddens, five years, eleven
months. Mr. Alvarez is not entitled to participate in the Company's pension plan
pursuant to the terms of his employment agreement with the Company. The current
maximum remuneration covered by the Company's Employee Retirement Plan for each
such individual is $170,000. Such amounts are included in the Summary
Compensation Table under 'Salary' and 'Bonus'.

COMPENSATION OF DIRECTORS

The Company does not pay any additional remuneration to employees for
serving as directors of the Company. Mr. Buchalter is paid an annual fee of
$500,000, payable semi-monthly, for his service as Non-Executive Chairman of the
Board. Other directors of the Company who are not employees receive an annual
retainer fee of $50,000, payable quarterly, plus fees of $1,500 per day for
attendance at meetings of the Board of Directors and $1,000 per day for
attendance at meetings of its committees. Directors of the Company are also
reimbursed for out-of-pocket expenses incurred in connection with attendance at
Board and committee meetings.

During fiscal 2001, each of Messrs. Buchalter, Califano, Drapkin, Golub and
Pacheco were granted an option under the 1998 Stock Plan for Non-Employee
Directors ('Director Stock Plan') to purchase 20,000 shares of Common Stock at
an exercise price of $0.67 per share, the fair market value at the date of
grant. In addition, upon his election to the Board in fiscal 2001, Mr. Golub was
granted an option to

61

purchase 30,000 shares of Common Stock at an exercise price of $2.88 pursuant to
the terms of the Director Stock Plan.

EMPLOYMENT AGREEMENTS

Antonio C. Alvarez II. Mr. Alvarez's services to the Company were initially
governed by a contract with A&M, dated April 30, 2001, pursuant to which Mr.
Alvarez served as the Company's Chief Restructuring Advisor. See Item 13.
Certain Relationships. The Company then entered into an employment agreement
with Mr. Alvarez, effective June 11, 2001, pursuant to which Mr. Alvarez served
as the Company's Chief Restructuring Officer. The employment agreement was
amended in connection with his election to the positions of President and Chief
Executive Officer in November 2001 (the employment agreement, as amended, the
'Alvarez Agreement'). The Alvarez Agreement, as further amended, was
subsequently approved by the Bankruptcy Court on February 21, 2002. The term of
the Alvarez Agreement was further amended as of July 16, 2002, to extend through
the earlier of April 30, 2003 or consummation of a plan of reorganization for
all or substantially all of the Debtors in the Chapter 11 Cases. The Alvarez
Agreement provides for Mr. Alvarez's employment as President and Chief Executive
Officer of the Company at a monthly base salary of $125,000. Under the Alvarez
Agreement, Mr. Alvarez is not entitled to participate in the Company's benefit
plans or programs, including its pension or group health care programs. The
Alvarez Agreement provides that Mr. Alvarez will be entitled to earn an
incentive bonus of not less than $2.25 million (the 'Minimum Bonus'), which will
be payable following the 'Final Payment Date', which is defined as the earlier
of (i) the expiration of the Alvarez Agreement, (ii) the date on which there is
a complete disposition of the Company (whether by a sale of substantially all of
the Company's stock or assets or otherwise), (iii) the date on which a plan of
reorganization is consummated or (iv) the date on which Mr. Alvarez's employment
is terminated either by the Company without 'Cause' or by Mr. Alvarez for 'Good
Reason' (each term as defined in the Alvarez Agreement). All or part of the
Minimum Bonus may become payable earlier than the Final Payment Date if certain
financial targets are met. Mr. Alvarez is also entitled to earn an incremental
bonus (the 'Incremental Bonus') based upon the value of the pool of funds
available for distribution to creditors under the Company's plan or plans of
reorganization (the Constituency Payment Pool or 'CPP' as defined in the Alvarez
Agreement). No Incremental Bonus is payable until the CPP exceeds $625 million.
The amount of the Incremental Bonus will be calculated as an escalating
percentage of the amount by which the CPP exceeds $625 million. The Incremental
Bonus, if earned, is payable following the Final Payment Date, but portions of
the Incremental Bonus may be paid earlier than the Final Payment Date if certain
financial targets are met. The Alvarez Agreement provides that the Incremental
Bonus will be paid in cash, debt or securities in the same proportions as the
CPP, except that no less than $2.25 million of the Incremental Bonus will be
paid in cash. If the Final Payment Date occurs because of a complete disposition
of the Company and then, during the term of the Alvarez Agreement, a plan of
reorganization is consummated, Mr. Alvarez will be entitled to receive an
additional payment of the Minimum Bonus and Incremental Bonus which will equal
the excess of (a) over (b), where (a) is the Minimum Bonus and Incremental Bonus
calculated as of the consummation of the plan of reorganization and (b) is the
amount of Minimum Bonus and Incremental Bonus already paid to Mr. Alvarez. The
sum of the Incremental Bonus and the Minimum Bonus cannot exceed $10 million.

Under the Alvarez Agreement, if the Company terminates his employment for
other than Cause or if Mr. Alvarez terminates his employment for Good Reason,
Mr. Alvarez will be entitled to receive a lump sum equal to his base salary of
$125,000 per month times the lesser of 12 and the number of months (including
fractional months) remaining until the date on which the term of the Alvarez
Agreement would otherwise have expired. Should Mr. Alvarez's employment be
terminated by the Company for Cause or by Mr. Alvarez without Good Reason, Mr.
Alvarez will be entitled to receive his base salary through the termination
date. In order to receive severance payments under the Alvarez Agreement,
Mr. Alvarez will be required to execute a release. In addition, if a plan of
reorganization is substantially consummated within six months following the date
on which Mr. Alvarez's employment under the Alvarez Agreement is terminated
either by the Company without Cause or by Mr. Alvarez for Good Reason,
Mr. Alvarez will be entitled to receive an additional portion of the Minimum
Bonus and Incremental Bonus which will equal the excess of (a) over (b), where
(a) is the Minimum Bonus

62

and Incremental Bonus calculated as of the consummation of the plan of
reorganization and (b) is the amount of Minimum Bonus and Incremental Bonus
already paid to Mr. Alvarez. Following the termination of his employment under
the Alvarez Agreement for any reason, Mr. Alvarez will be subject to certain
post-employment no-hire and non-solicitation covenants.

James P. Fogarty. Mr. Fogarty's services to the Company were initially
governed by the contract with A&M, dated April 30, 2001, pursuant to which
Mr. Fogarty served as an advisor to the Company. See Item 13. Certain
Relationships. On June 11, 2001, the Company entered into an employment
agreement with Mr. Fogarty (the 'Fogarty Agreement') which sets forth the terms
and conditions of Mr. Fogarty's employment. The term of the Fogarty Agreement
was amended as of July 16, 2002, to extend through the earlier of April 30, 2003
or consummation of a plan of reorganization for all or substantially all of the
Debtors in the Chapter 11 Cases. The Fogarty Agreement may be terminated by
either party upon 30 days written notice. The Fogarty Agreement provides for Mr.
Fogarty's employment as Senior Vice President Finance at an annual base salary
of $375,000 as well as certain other benefits and reimbursement of expenses. Mr.
Fogarty was elected to the additional position of Chief Financial Officer on
December 20, 2001. Mr. Fogarty is entitled to participate in all of the
Company's employee benefit plans and programs, including its pension and group
health benefit plans.

Linda J. Wachner. In 1991, the Company entered into an employment agreement
with Mrs. Wachner (the 'Wachner Agreement'), which set forth the terms and
conditions of Mrs. Wachner's employment. Mrs. Wachner's employment was
terminated by the Company on November 16, 2001. The Wachner Agreement provided
for Mrs. Wachner's employment as Chairman, President and Chief Executive Officer
at an annual base salary, which was initially established at $1.7 million per
year (subject to adjustment for changes in the cost of living), as well as
certain other benefits and reimbursement of expenses. Mrs. Wachner's annual base
salary for 2001 was $2,878,890. The Wachner Agreement provided for increases in
the rate of base salary from time to time, as determined by the Company. Her
base salary in prior years was as set forth in the table on page 59. The Wachner
Agreement also provided that Mrs. Wachner would receive an annual bonus based
upon the Company's achievement of an annually increasing minimum EBITDA
(earnings before interest, taxes, depreciation and amortization). Under this
bonus arrangement, Mrs. Wachner was entitled to receive a bonus in the amount by
which EBITDA exceeded the threshold EBITDA for such year, subject to a maximum
bonus amount of $1.3 million. Threshold EBITDAs were established at the time the
contract was entered into and were to increase annually from the initial date of
the arrangement. The Wachner Agreement also provided for supplemental bonuses in
the Company's discretion.

Under the Wachner Agreement, Mrs. Wachner was entitled to certain severance
benefits if the Company terminated her employment other than for 'Cause' or if
Mrs. Wachner terminated her employment for 'Good Reason' (as each term is
defined in the Wachner Agreement). The definition of good reason included a
change of control of the Company. If the Company terminated Mrs. Wachner's
employment without cause or if Mrs. Wachner terminated her employment for good
reason, she was entitled to receive a lump sum payment equal to five times the
sum of her highest annual base salary and the average annual bonus paid to her
pursuant to the Wachner Agreement with respect to the preceding three fiscal
years. In the event that any amount of benefit paid to Mrs. Wachner became
subject to the excise tax imposed under Section 4999 of the Internal Revenue
Code, the Company would pay to Mrs. Wachner an additional amount such that after
the payment of all income and excise taxes, she would be in the same after-tax
position as if no excise tax had been imposed.

On November 16, 2001, Mrs. Wachner's employment was terminated. The Company
has rejected the Wachner Agreement in the Bankruptcy Court. On January 18, 2002,
Mrs. Wachner filed a proof of claim in the Chapter 11 Cases asserting an
administrative priority claim for an amount in excess of $25 million based upon
the post-petition termination of Mrs. Wachner's employment (the 'Wachner
Claim'). The Debt Coordinators for the Company's pre-petition lenders, the
Official Committee of Unsecured Creditors and the Company have objected to the
Wachner Claim. Discovery with respect to the Wachner Claim is proceeding and a
hearing will be scheduled in the Bankruptcy Court regarding the Wachner Claim.

63

KEY DOMESTIC EMPLOYEE RETENTION PLAN

In connection with the Chapter 11 Cases, the Company instituted a Key
Domestic Employee Retention Plan (the 'Retention Plan') which has been approved
by the Bankruptcy Court. The Retention Plan provides for stay bonuses, severance
protection and discretionary transaction bonus opportunities during the Chapter
11 Cases. The stay bonuses provided under the Retention Plan replace the
Company's existing bonus and other cash incentive compensation programs for the
participants. Approximately 245 key domestic employees, including Messrs.
Silverstein, Terenzio and Finkelstein, are covered under the Retention Plan.
Maximum stay bonuses under the Retention Plan for Mr. Silverstein, Mr. Terenzio
and Mr. Finkelstein (the 'Named Participants') total $562,500, $562,500 and
$220,000, respectively. Under the Retention Plan, Mr. Deddens received a stay
bonus of $56,250 prior to his voluntary termination. One third of the stay bonus
was paid to each of the Named Participants on December 10, 2001, one third was
paid to each of the Named Participants on June 10, 2002 and one third will be
paid upon the date a plan of reorganization is consummated in the Chapter 11
Cases, so long as the Named Participant remains employed by the Company. The
final retention payment may be made earlier to Retention Plan participants who
work for a particular division of the Company if that division is sold prior to
the date a plan of reorganization is consummated. The Retention Plan also
provides for severance of up to six months' base salary continuation for each
Named Participant should the Named Participant be terminated involuntarily for a
reason other than Cause (as defined in the Retention Plan) or in the event the
entire Company or a Named Participant's business unit is sold and the Named
Participant is not offered equivalent employment with the buyer. Certain of the
Retention Plan participants are also eligible to receive a discretionary
transaction bonus in the event certain transactions are consummated during the
term of the Chapter 11 Cases. No discretionary transaction bonuses have been
paid to date to the Named Participants.

As a condition to participating in the Retention Plan, all participants are
required to execute an Employee Waiver, Release and Discharge of Claims which
releases the Company and its affiliates from claims by the participants against
the Company (except with respect to certain indemnification rights and claims
arising under the Company's retirement and savings plans).

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 2001, the members of the Compensation Committee were Mr.
Califano, Mr. Drapkin and Mr. Golub, Chairman, all of whom were non-employee
directors.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of May 15, 2002 by (i)
each of the Company's directors, (ii) each of the Company's executive officers,
(iii) all directors and executive officers as a group and (iv) each person who
is known by the Company to own five percent or more of any class of the
Company's voting securities at the end of fiscal 2001.

64

- ---------

* Less than 1%

(a) The business address of each of the directors and officers is c/o The
Warnaco Group, Inc., 90 Park Avenue, New York, New York 10016. The number
of shares beneficially owned by the following officers (or former officers)
includes vested but unexercised options in the following amounts: Mr.
Deddens 65,000; Mr. Finkelstein 1,061,129; Mr. Silverstein 729,577; and Mr.
Terenzio 62,500.

(b) Includes vested but unexercised options to purchase 70,000 shares of Common
Stock granted pursuant to the 1998 Stock Plan for Non-Employee Directors.

(c) Includes vested but unexercised options to purchase 80,000 shares of Common
Stock granted pursuant to the 1998 Stock Plan for Non-Employee Directors
and vested but unexercised options to purchase 70,000 shares of Common
Stock pursuant to the 1993 Stock Plan for Non-Employee Directors.

(d) Includes vested but unexercised options to purchase 50,000 shares of Common
Stock granted pursuant to the 1998 Stock Plan for Non-Employee Directors.

(e) Includes 418 shares of Common Stock held by the Linda J. Wachner Charitable
Trust of which Mrs. Wachner is the Trustee. Mrs. Wachner has the sole power
to vote and no power to dispose of such 418 shares.

(f) Information based solely on a Schedule 13G dated December 31, 2001 filed
with the SEC by Goldman, Sachs & Co. and The Goldman Sachs Group, Inc.
(collectively 'Goldman Sachs'), 85 Broad Street, New York, NY 10004,
reporting the beneficial ownership of the shares of Common Stock set forth
in the table. According to the Schedule 13G Goldman Sachs has shared voting
power and shared dispositive power with respect to all such shares.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

From April 30, 2001 to June 11, 2001, the Company paid consulting fees to
A&M of $1,256,000 pursuant to a consulting agreement. Under this agreement,
several individuals who are now employed by the Company (including
Messrs. Alvarez and Fogarty) provided services as advisors to the Company.
Mr. Alvarez is a founding Managing Director and Mr. Fogarty is a Director of
A&M. The A&M consulting agreement was terminated on June 11, 2001. See Part III
Item 11. Executive Compensation.

65

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.

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.

66

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).*

2.3 Sale and Purchase Agreement, dated December 18, 2001, between Mullion International
Limited and Royal Holdings, Inc.'D'

2.4 Deed of Variation, dated February 8, 2002, among Mullion International Limited, Royal
Holdings, Inc. and Cradle Penhaligon's Limited.'D'

2.5 Stock and Asset Sale Agreement, dated as of December 21, 2001, by and among Warnaco Inc.,
Warner's (U.K.) Ltd., Warnaco (HK) Ltd. and Luen Thai Overseas Limited.'D'

2.6 Consent and Waiver, dated as of January 21, 2002, by and among Warnaco Inc., Warner's
(U.K.) Ltd., Warnaco (HK) Ltd. and Luen Thai Overseas Limited.'D'

2.7 Consent and Waiver, dated as of February 1, 2002, by and among Warnaco Inc., Warner's
(U.K.) Ltd., Warnaco (HK) Ltd. and Luen Thai Overseas Limited.'D'

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 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).*

4.2 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).*

4.3 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).*

4.4 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).*

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).*

67

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).*

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)).*

68

10.22 Amendment to the Calvin Klein License Agreement, dated as of
April 22, 1996 (incorporated by reference to Exhibit 10.38
to Designer Holdings, Ltd.'s Registration Statement on Form
S-1 (File No. 333-2236)).*

10.23 Amendment No. 1, dated as of July 31, 1998, to the Credit
Agreement dated as of August 12, 1997, among Warnaco Inc.
and The Warnaco Group, Inc., as Borrowers, and The Bank of
Nova Scotia, as Managing Agent and Administrative Agent and
Citibank N.A., as Managing Agent, and certain other lenders
named therein. (incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-Q filed August 18, 1998).*

10.24 Amendment No. 1, dated as of July 31, 1998, to the Credit
Agreement dated as of November 26, 1997, among Warnaco Inc.
and The Warnaco Group, Inc., as Borrowers, and The Bank of
Nova Scotia, as Managing Agent and Administrative Agent and
Citibank N.A., as Managing Agent, and certain other lenders
named therein. (incorporated herein by reference to Exhibit
10.2 to the Company's Form 10-Q filed August 18, 1998).*

10.25 Fifth Amended and Restated Credit Agreement, dated as of
July 31, 1998, among Warnaco Inc., as the U.S. Borrower,
Designer Holdings, Ltd. and other wholly-owned domestic
subsidiaries as designated from time to time, as the
Sub-Borrowers, Warnaco (HK) Ltd., Warnaco B.V., Warnaco
Netherlands B.V., as the Foreign Borrowers, the Warnaco
Group, Inc., as a Guarantor, and Societe Generale, as the
Documentation Agent, Citibank, N.A., as the Syndication
Agent, and The Bank of Nova Scotia, as the Administrative
Agent, and certain other lenders named therein.
(incorporated herein by reference to Exhibit 10.3 to the
Company's Form 10-Q filed August 18, 1998).*

10.26 Amended and Restated Master Agreement of Sale, dated as of
September 30, 1998, among Warnaco Inc., as Originator, and
Gregory Street, Inc., as Buyer and Servicer. (incorporated
herein by reference to Exhibit 10.4 to the Company's Form
10-Q filed November 7, 1998).*

10.27 Master Agreement of Sale, dated as of September 30, 1998,
among Calvin Klein Jeanswear Company, as Originator, and
Gregory Street, Inc., as Buyer and Servicer. (incorporated
herein by reference to Exhibit 10.5 to the Company's Form
10-Q filed November 7, 1998).*

10.28 Purchase and Sale Agreement, dated as of September 30, 1998,
among Gregory Street, Inc., as Seller and initial Servicer
and Warnaco Operations Corporation, as Buyer. (incorporated
herein by reference to Exhibit 10.6 to the Company's Form
10-Q filed November 7, 1998).*

10.29 Parallel Purchase Commitment, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller and
certain commercial lending institutions, as the Banks, and
Gregory Street, Inc., as the initial Servicer and The Bank
of Nova Scotia, as Agent (incorporated herein by reference
to Exhibit 10.7 to the Company's Form 10-Q filed November 7,
1998).*

10.30 Receivables Purchase Agreement, dated as of September 30,
1998, among Warnaco Operations Corporation, as Seller,
Gregory Street, Inc., as Servicer, Liberty Street Funding
Corp., and Corporate Asset Funding Company, Inc. as
Investors and The Bank of Nova Scotia, as Agent, and
Citicorp North America, Inc., as Co-Agent. (incorporated
herein by reference to Exhibit 10.8 to the Company's Form
10-Q filed November 7, 1998).*

10.31 1998 Stock Plan for Non-Employee Directors (incorporated
herein by reference to Exhibit 10.31 to the Company's Form
10-K405 filed April 2, 1999).*

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 14D-1
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).*

69

10.34 U.S. $600,000,000 Amended and Restated Credit Agreement,
dated as of November 17, 1999, among Warnaco Inc. as
Borrower, The Bank of Nova Scotia as Administrative Agent,
and Citibank, N.A. as Syndication Agent amending Credit
agreement dated August 12, 1997 (incorporated herein by
reference to Exhibit 10.34 to the Company's Form 10-K filed
April 3, 2000).*

10.35 Five-Year Credit Agreement, dated as of November 17, 1999,
among Warnaco Inc. as Borrower, The Bank of Nova Scotia as
Administrative Agent, Citibank, N.A. as Syndication Agent
and Societe Generale and CommerzBank AG as Co-Documentation
Agents (incorporated herein by reference to Exhibit 10.35 to
the Company's Form 10-K filed April 3, 2000).*

10.36 Sixth Amended and Restated Credit Agreement, dated as of
November 17, 1999, among Warnaco Inc., as the U.S. Borrower,
Designer Holdings, Ltd., as the Sub Borrower, Those
Wholly-owned Domestic Subsidiaries Designated From Time To
Time, as the Warnaco Sub Borrowers, Warnaco (HK) Ltd.,
Warnaco B.V., Warnaco Netherlands B.V. and Warnaco Holland
B.V., as the Foreign Borrowers, The Warnaco Group, Inc., as
a Guarantor, Certain Financial Institutions, as the Lenders,
and The Bank of Nova Scotia, as the Administrative Agent for
the Lenders (incorporated herein by reference to Exhibit
10.36 of the Company's Form 10-K filed April 3, 2000).*

10.37 Amendment, Modification, Restatement and General Provisions
Agreement, dated as of October 6, 2000, among The Warnaco
Group, Inc., Warnaco Inc., the Other Subsidiaries of The
Warnaco Group, Inc. party thereto, The Bank of Nova Scotia
and Citibank, N.A., as Debt Coordinators, The Bank of Nova
Scotia, as Administrative Agent and State Street Bank and
Trust Company, as Collateral Trustee.'D'

10.38 Intercreditor Agreement, dated as of October 6, 2000, among
The Warnaco Group, Inc., Warnaco Inc., the Other
Subsidiaries of The Warnaco Group, Inc. party thereto, The
Bank of Nova Scotia, as Administrative Agent, The Bank of
Nova Scotia and Salomon Smith Barney Inc., as Lead
Arrangers, The Bank of Nova Scotia and Citibank, N.A., as
Debt Coordinators, The Bank of Nova Scotia, Salomon Smith
Barney Inc., Morgan Guaranty Trust Company of New York,
Commerzbank A.G., New York Branch, and Societe Generale, as
Arrangers, Societe Generale, as Security Agent, the Other
Financial Institutions From Time to Time parties thereto and
State Street Bank and Trust Company, as Collateral
Trustee.'D'

10.39 Offer Letter and Employee Waiver, Release and Discharge of
Claims pursuant to the Key Domestic Employee Retention Plan
for Carl Deddens, dated November 26, 2001.'D'

10.40 Offer Letter and Employee Waiver, Release and Discharge of
Claims pursuant to the Key Domestic Employee Retention Plan
for Philip Terenzio, dated November 26, 2001.'D'

10.41 Offer Letter and Employee Waiver, Release and Discharge of
Claims pursuant to the Key Domestic Employee Retention Plan
for Stanley Silverstein, dated November 26, 2001.'D'

10.42 Amended Employment Agreement, dated as of June 11, 2001,
between The Warnaco Group, Inc. and Antonio Alvarez.'D'

10.43 Senior Secured Super-Priority Debtor in Possession Revolving
Credit Agreement, dated as of June 11, 2001, among Warnaco
Inc., as Debtor and Debtor In Possession, as Borrower and
The Warnaco Group, Inc., and the Subsidiaries of The Warnaco
Group, Inc., party thereto, as Debtors and Debtors In
Possession, as Guarantors and the Lenders and Issuers From
Time to Time Party thereto and Citibank, N.A., as
Administrative Agent and Salomon Smith Barney Inc., J.P.
Morgan Securities, Inc. and The Bank of Nova Scotia as Joint
Lead Arrangers.'D'

10.44 Amendment and Waiver to the Senior Secured Super-Priority
Debtor In Possession Revolving Credit Agreement, dated as of
August 27, 2001.'D'

10.45 Amendment No. 2 to the Senior Secured Super-Priority Debtor
In Possession Revolving Credit Agreement, dated as of
December 21, 2001.'D'

10.46 Amendment No. 3 and Waiver to the Senior Secured
Super-Priority Debtor In Possession Revolving Credit
Agreement, dated as of February 5, 2002.'D'

10.47 Amendment No. 4 and Waiver to the Senior Secured
Super-Priority Debtor In Possession Revolving Credit
Agreement, dated as of May 15, 2002.'D'

70

10.48 Employment Agreement, dated as of June 11, 2001, between The
Warnaco Group, Inc. and James P. Fogarty.'D'

10.49 Consent and Amendment No. 1 to the Facility Agreement, dated
as of February 5, 2002.'D'

10.50 Amendment No. 1 to the Intercreditor Agreement, dated as of
June 8, 2001.'D'

10.51 Summary of Key Domestic Employee Retention Plan.'D'

10.52 Letter Agreement, dated April 30, 2001, between The Warnaco
Group, Inc. and Alvarez & Marsal, Inc.'D'

10.53 Employment Agreement, dated as of June 11, 2001, between The
Warnaco Group, Inc. and Antonio Alvarez.'D'

10.54 Agreement to Extend Amended Employment Agreement between The
Warnaco Group, Inc. and Antonio Alvarez, dated July 16,
2002.'D'

10.55 Agreement to Extend Employment Agreement between The Warnaco
Group, Inc. and James P. Fogarty, dated July 19, 2002.'D'

10.56 Offer Letter and Employee Waiver, Release and Discharge of
Claims pursuant to the Key Domestic Employee Retention Plan
for William Finkelstein, dated November 26, 2001.'D'

10.57 Settlement Agreement, dated January 22, 2001, by and between
Calvin Klein Trademark Trust, Calvin Klein, Inc. and Calvin
Klein and Linda Wachner, The Warnaco Group, Inc., Warnaco
Inc., Designer Holdings, Ltd, CKJ Holdings, Inc., Jeanswear
Holdings Inc., Calvin Klein Jeanswear Company and Outlet
Holdings, Inc.#

21 Subsidiaries of the Company.'D'

23.1 Consent of Deloitte & Touche LLP'D'

- ---------

* Previously filed

'D' Filed herewith

# Certain information omitted pursuant to a request for confidential treatment
filed separately with the Securities and Exchange Commission.

(b) Reports on Form 8-K.

On July 22, 2002, the Company filed a Current Report on Form 8-K dated
July 22, 2002. The Form 8-K reported at Item 5 the issuance of a press release
announcing the election of Richard Karl Goeltz to the Company's Board of
Directors.

On June 25, 2002, the Company filed a Current Report on Form 8-K dated
June 25, 2002. The Form 8-K reported at Item 5 the financial results of the
Debtors as filed with the Bankruptcy Court for the period commencing April 7,
2002 and ending on May 4, 2002.

On June 14, 2002, the Company filed a Current report on Form 8-K dated
June 14, 2002. The Form 8-K reported at Item 5 the financial results of the
Debtors as filed with the Bankruptcy Court for each of the monthly periods
commencing June 3, 2001 and ending April 6, 2002.

On December 27, 2001, the Company filed a Current Report on Form 8-K dated
December 27, 2001. The Form 8-K reported at Item 5 the issuance of a press
release announcing approval of a motion to amend the Company's
Debtor-in-Possession financing agreement by the Bankruptcy Court.

On November 16, 2001, the Company filed a Current Report on Form 8-K dated
November 16, 2001. The Form 8-K reported at Item 5 the issuance of a press
release announcing the appointment of Antonio C. Alvarez, II and Stuart D.
Buchalter as Chief Executive Officer and Chairman of the Board, respectively.

On August 24, 2001, the Company filed a Current Report on Form 8-K dated
August 23, 2001. The Form 8-K reported at Item 5 the issuance of a press release
announcing the restatement of the Company's financial statements for the last
three fiscal years.

On July 9, 2001, the Company filed a Current Report on Form 8-K dated
July 9, 2001. The Form 8-K reported at Item 5 the issuance of a press release
announcing the entry of a final order by the Bankruptcy Court approving the full
amount of the Company's Debtor-in-Possession financing arrangement.

71

On June 11, 2001, the Company filed a Current Report on Form 8-K dated
June 11, 2001. The Form 8-K reported at Item 5 the following: (i) the issuance
of a press release announcing the filing of the Chapter 11 Cases; (ii) the
issuance of a press release announcing the Bankruptcy Court's approval, on an
interim basis, of the Company's Debtor-in-Possession financing arrangement; and
(iii) the suspension of trading and institution of delisting procedures on the
Company's common stock by the New York Stock Exchange.

On May 23, 2001, the Company filed a Current Report on Form 8-K dated
May 23, 2001. The Form 8-K reported at Item 5 the issuance of two press
releases. The first press release announced the Company's financial results for
the first quarter of fiscal 2001. The second press release announced the
resolution of a lawsuit between the Company and Fruit of the Loom, Inc.

72

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 on the 31st day of
July, 2002.

THE WARNACO GROUP, INC.

By: /s/ ANTONIO C. ALVAREZ II
.................................
ANTONIO C. ALVAREZ II
DIRECTOR, PRESIDENT AND CHIEF
EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

S-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
The WARNACO GROUP, INC.
New York, New York

We have audited the accompanying consolidated balance sheets of The Warnaco
Group Inc. (Debtor-in-Possession) and its subsidiaries (the 'Company') as of
January 5, 2002 and December 30, 2000, and the related consolidated statements
of operations, stockholders' equity (deficiency) and comprehensive income (loss)
and of cash flows for each of the three years in the period ended January 5,
2002. Our audits also included the financial statement schedule 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 audits.

We conducted our audits 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 audits provide 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.
(Debtor-in-Possession) and subsidiaries as of January 5, 2002 and December 30,
2000, and the results of their operations and their cash flows for each of the
three years in the period ended January 5, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, 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.

As discussed in Note 1 to the consolidated financial statements, effective
January 2, 2000 the Company changed its method of accounting for its retail
outlet store inventory.

As discussed in Note 1, the Company and certain of its subsidiaries have
filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The
accompanying consolidated financial statements do not purport to reflect or
provide for the consequences of the bankruptcy proceedings. In particular, such
financial statements do not purport to show (a) as to assets, their net
realizable value on a liquidation basis or their availability to satisfy
liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed
for claims or contingencies, or the status or priority thereof; (c) as to
stockholder accounts, the effect of any changes that may be made in the
capitalization of the Company or; (d) as to operations, the effect of any
changes that may be made in its business.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1, the Company's recurring losses from operations, stockholders' capital
deficiency and Chapter 11 filings raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also discussed in Note 1. The consolidated financial statements do not include
adjustments that might result from the outcome of this uncertainty.

As discussed in Note 2, the accompanying consolidated financial statements
for the years ended December 30, 2000 and January 1, 2000 have been restated.

DELOITTE & TOUCHE LLP
New York, New York

May 30, 2002
(June 9, 2002 as to Note 20,
July 5, 2002 as to Note 15,
July 12, 2002 as to Note 1 and
July 18, 2002 as to Note 23)

F-1

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCLUDING SHARE DATA)

See Notes to Consolidated Financial Statements

F-2

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCLUDING PER SHARE DATA)

See Notes to Consolidated Financial Statements

F-3

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCLUDING SHARE DATA)

See Notes to Consolidated Financial Statements

F-4

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See Notes to Consolidated Financial Statements

F-5

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization: The Warnaco Group, Inc. 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 Warnaco Group, Inc. and its subsidiaries
(collectively, the 'Company') design, manufacture and market a broad line of
(i) women's intimate apparel, such as bras, panties, sleepwear, shapewear and
daywear; (ii) men's apparel, such as sportswear, jeanswear, khakis, underwear
and accessories; (iii) women's and junior's apparel, such as sportswear and
jeanswear; and (iv) active apparel, such as swimwear, swim accessories and
fitness apparel. The Company's products are sold under a variety of
internationally recognized brand names which are either owned or licensed by the
Company. 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. The Company also sells directly to
consumers through its Retail Stores Division.

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 1, 2000 ('Fiscal 1999'), December 30, 2000
('Fiscal 2000'), and January 5, 2002 ('Fiscal 2001'). All significant
inter-company accounts and transactions are eliminated in consolidation.

On June 11, 2001 (the 'Petition Date'), the Company and certain of its
subsidiaries (each a 'Debtor' and, collectively, the 'Debtors') each filed a
petition for relief under Chapter 11 of the U.S. Bankruptcy Code, 11 U.S.C.
'SS'SS' 101-1330, as amended (the 'Bankruptcy Code'), in the United States
Bankruptcy Court for the Southern District of New York (the 'Bankruptcy Court')
(collectively the 'Chapter 11 Cases'). The Company, 37 of its 38 U.S.
subsidiaries and one of Warnaco's Canadian subsidiaries, Warnaco of Canada
Company ('Warnaco Canada') are Debtors in the Chapter 11 Cases. The remainder of
the Company's foreign subsidiaries are not debtors in the Chapter 11 Cases, nor
are they subject to foreign bankruptcy or insolvency proceedings. However,
certain debt obligations of the Company's foreign subsidiaries are subject to
standstill agreements with the Company's pre-petition lenders.

On June 11, 2001, the Company entered into a Debtor-In-Possession Financing
Agreement (the 'DIP') with a group of banks, which was approved by the
Bankruptcy Court in an interim amount of $375,000. On July 9, 2001, the
Bankruptcy Court approved an increase in the amount of borrowing available to
the Company to $600,000. The DIP was subsequently amended as of August 27, 2001,
December 27, 2001, February 5, 2002 and May 15, 2002 (the 'Amended DIP'). The
amendments, among other things, amend certain definitions and covenants, permit
the sale of certain of the Company's assets and businesses, extend deadlines
with respect to certain asset sales and certain filing requirements with respect
to a plan of reorganization and reduce the size of the facility to reflect the
Debtor's revised business plan. On May 28, 2002, the Company voluntarily reduced
the amount of borrowing available to the Company under the Amended DIP to
$325,000. Borrowings outstanding under the Amended DIP were $155,915 as of
January 5, 2002.

Pursuant to the Bankruptcy Code, pre-petition obligations of the Debtors,
including obligations under debt instruments, generally may not be enforced
against the Debtors, and any actions to collect pre-petition indebtedness are
automatically stayed, unless the stay is lifted by the Bankruptcy Court. In
addition, as debtors-in-possession, the Debtors have a right, subject to
Bankruptcy Court approval and certain other limitations, to assume or reject
executory contracts and unexpired leases. In this context, 'assumption' means
the Debtors agree to perform their obligations under the lease or contract and
to cure all defaults, and 'rejection' means that the Debtors are relieved from
their obligation to perform under the contract or lease, but are subject to
damages for the breach thereof. Any damages resulting from such a breach will be
treated as unsecured claims in the Chapter 11 Cases. The Debtors are in the

F-6

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

process of reviewing their executory contracts and unexpired leases. Through
January 5, 2002, the Debtors have identified and rejected a number of executory
contracts and unexpired leases. As of January 5, 2002, the Company had accrued
approximately $20,600 related to rejected leases and contracts which is included
in liabilities subject to compromise on the consolidated balance sheets. The
Company continues to evaluate its business operations and expects to reject
additional contracts and leases prior to filing its plan of reorganization.
Although the Debtors have attempted to estimate the ultimate amount of liability
that may result from rejected contracts and leases, additional leases may be
rejected in the future. Such rejections could result in additional liabilities
subject to compromise that the Company has not anticipated. In connection with
the consummation of a confirmed plan or plans of reorganization, the Company
will elect to assume certain of its leases and executory contracts. The success
of any plan of reorganization is dependent upon the Bankruptcy Court's approval
of the Company's assumption of certain of these executory contracts, including
certain license agreements.

As a result of the Chapter 11 Cases and the circumstances leading to the
filing thereof, as of January 5, 2002, the Company was not in compliance with
certain financial and bankruptcy covenants contained in certain of its license
agreements. Under applicable provisions of the Bankruptcy Code, compliance with
such terms and conditions in executory contracts generally are either excused or
suspended during the Chapter 11 Cases.

In the Chapter 11 Cases, substantially all of the Debtors' unsecured
liabilities as of the Petition Date are subject to compromise or other treatment
under a plan or plans of reorganization which must be confirmed by the
Bankruptcy Court after obtaining the requisite amount of votes by affected
parties. For financial reporting purposes, those liabilities have been
segregated and classified as liabilities subject to compromise in the
consolidated balance sheets. The ultimate amount of and settlement terms for
such liabilities are subject to a confirmed plan or plans of reorganization and,
accordingly, are not presently determinable.

The Bankruptcy Code provides that the Debtors have exclusive periods during
which only they may file and solicit acceptances of a plan of reorganization.
The Debtors requested and, on July 12, 2002, were granted an extension of time
until August 30, 2002 to file their exclusive plan of reorganization and until
October 31, 2002 to solicit acceptances of such plan. If the Debtors fail to
file a plan of reorganization or fail to obtain additional extensions of time to
file a plan of reorganization by the extension date, or if the Debtors' plan is
not accepted by the Bankruptcy Court, impaired classes of creditors and equity
holders or any party-in-interest (including a creditor, equity holder, a
committee of creditors or equity holders or an indenture trustee) may file their
own plan of reorganization for the Debtors.

After a plan of reorganization has been filed with the Bankruptcy Court, the
plan and a disclosure statement approved by the Bankruptcy Court will be sent to
classes of creditors whose acceptances will be solicited as part of the plan.
Following the solicitation period, the Bankruptcy Court will consider whether to
confirm the plan. In order to confirm the plan, the Bankruptcy Court is required
to find that (i) with respect to each impaired class of creditors and equity
holders, each holder in such class has accepted the plan or will, pursuant to
the plan, receive at least as much as such holder would have received in a
liquidation, (ii) each impaired class of creditors and equity holders has
accepted the plan by the requisite vote (except as described below) and
(iii) confirmation of the plan is not likely to be followed by a liquidation or
a need for further financial reorganization unless the plan proposes such
measures. If any impaired class of creditors or equity holders does not accept
the plan, then, assuming that all of the other requirements of the Bankruptcy
Code are met, the proponent of the plan may invoke the 'cram-down' provisions of
the Bankruptcy Code. Under these provisions, the Bankruptcy Court may approve a
plan notwithstanding the non-acceptance of the plan by an impaired class of
creditors or equity holders if certain requirements are met. These requirements
include payment in full

F-7

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

for a dissenting senior class of creditors before payment to a junior class can
be made. Under the priority scheme established by the Bankruptcy Code, absent
agreement to the contrary, certain post-petition liabilities and pre-petition
liabilities need to be satisfied before shareholders can receive any
distribution. As a result of the amount and character of the Company's
pre-petition indebtedness, the shortfall between the Company's projected
enterprise value and the amount necessary to satisfy the claims, in full, of its
secured and unsecured creditors and the impact of the provisions of the
Bankruptcy Code applicable to confirmation of a plan or plans of reorganization,
the Company believes that it is highly unlikely that current holders of common
stock or preferred securities of the Company will receive any distribution under
any plan of reorganization or liquidation of the Company. Certain of the
Company's financial instruments (e.g., pre-petition secured debt) trade in
markets for debt securities and other instruments. The Company expects that
holders of the Company's financial instruments will receive substantially less
than face value in any plan or plans of reorganization approved by the
Bankruptcy Court.

Management is in the process of stabilizing the business of the Debtors and
evaluating the Company's operations as part of the development of a plan of
reorganization. After developing a plan of reorganization, the Debtors will seek
the acceptance and confirmation of the plan in accordance with the provisions of
the Bankruptcy Code.

During the course of the Chapter 11 Cases, the Debtors may seek Bankruptcy
Court authorization to sell assets and settle liabilities for amounts other than
those reflected in the consolidated financial statements. The Debtors are in the
process of reviewing their operations and identifying assets available for
potential disposition, including entire business units of the Company. However,
there can be no assurance that the Company will be able to consummate such
transactions at prices the Company or the Company's creditor constituencies will
find acceptable. Since the Petition Date, through January 5, 2002, the Company
has sold certain personal property, certain owned buildings and land and other
assets for approximately net book value, generating net proceeds of
approximately $6,213. Reorganization items include the write-down of the related
assets to net realizable value. The total loss related to asset sales and
abandonments, included in reorganization items was $3,656 for the year ended
January 5, 2002. In the first quarter of fiscal 2002, the Company sold
additional assets for approximately the net book value generating net proceeds
of approximately $4,000 (collectively the 'Asset Sales'). Substantially all of
the net proceeds from the Asset Sales were used to reduce outstanding borrowings
under the Amended DIP. In addition, in the first quarter of fiscal 2002, the
Company sold the businesses and substantially all of the assets of GJM
Manufacturing Ltd. ('GJM'), a private label manufacturer of women's sleepwear
and Penhaligon's Ltd. ('Penhaligon's'), a United Kingdom based retailer of
perfumes, soaps, toiletries and other products. The sales of GJM and
Penhaligon's generated approximately $20,100 of net proceeds in the aggregate
during the first quarter of fiscal 2002. Proceeds from the sale of GJM and
Penhaligon's were used to (i) reduce amounts outstanding under certain of the
Company's debt agreements ($4,800), (ii) reduce amounts outstanding under the
Amended DIP ($4,200), (iii) create an escrow fund (subsequently disbursed in
June 2002) for the benefit of pre-petition secured lenders ($9,400) and
(iv) create an escrow fund for the benefit of the purchasers for potential
indemnification claims and for any working capital valuation adjustments
($1,700). In the second quarter of fiscal 2002, the Company began the process of
closing 25 of its outlet stores. The closing of the stores and the related sale
of inventory at approximately net book value generated approximately $12,000 of
net proceeds which were used to reduce amounts outstanding under the Amended DIP
in fiscal 2002.

Administrative and reorganization expenses resulting from the Chapter 11
Cases will unfavorably affect the Debtors and, consequently, the Company's
consolidated results of operations. Future results of operations may also be
adversely affected by other factors relating to the Chapter 11 Cases.
Reorganization and administrative expenses related to the Chapter 11 Cases have
been separately identified in the consolidated statements of operations as
reorganization items.

F-8

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

The accompanying consolidated financial statements have been prepared in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7 Financial Reporting by Entities in Reorganization under the
Bankruptcy Code ('SOP 90-7') assuming the Company will continue as a going
concern. The Company is currently operating under the jurisdiction of the
Bankruptcy Code and the Bankruptcy Court. Continuation of the Company as a going
concern is contingent upon, among other things, (i) its ability to formulate a
plan of reorganization that will gain approval of the parties required by the
Bankruptcy Code and be confirmed by the Bankruptcy Court, (ii) the Company's
ability to continue to comply with the terms of the Amended DIP, (iii) its
ability to return to profitable operations, and (iv) its ability to generate
sufficient cash flows from operations and obtain financing sources to meet
future obligations. These matters, along with the Company's recurring losses
from operations and stockholders' capital deficiency raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any of the adjustments relating
to the recoverability and classification of recorded assets or the amounts and
classifications of liabilities that might result from the outcome of these
uncertainties.

Use of Estimates: The Company uses estimates and assumptions in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America. 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 materially
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 (deficiency)
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.

Marketable Securities: Marketable securities are stated at fair value based
on quoted market prices. Marketable securities are classified as
available-for-sale with any unrealized gains or losses, net of tax, included as
a component of stockholders' equity (deficiency) and included in other
comprehensive income (loss).

Accounts Receivable: Accounts receivable consist principally of amounts owed
to the Company by trade customers, net of allowances for discounts, allowances
and doubtful accounts. 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 its customers within agreed upon limits
and exclusions.

Inventories: The Company values its inventories at the lower of cost
determined principally on a first-in, first-out basis, or market.

Assets held for sale: The Company classifies assets to be sold as assets
held for sale. Assets held for sale are reported at the lower of their carrying
amount or estimated fair value less selling costs. Assets held for sale at
January 5, 2002 include accounts receivable, inventories, prepaid expenses,
fixed assets and other assets of GJM and Penhaligon's and other assets
identified for disposition.

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:

F-9

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Buildings...................................... 20 - 40 years
Building improvements.......................... 2 - 20 years
Machinery and equipment........................ 3 - 10 years
Furniture and fixtures......................... 7 - 10 years
Computer hardware.............................. 3 - 5 years
Computer software.............................. 3 - 7 years

Depreciation and amortization expense was $36,671, $62,148 and $60,890 for
fiscal years 1999, 2000 and 2001, respectively.

Computer Software Costs: Internal and external costs incurred in developing
or obtaining computer software for internal use are capitalized in property,
plant and equipment in accordance with SOP 98-1 Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use and related guidance
and are amortized on a straight-line basis, 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 and Other 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, using the interest method and included in interest
expense. Deferred financing costs, net of accumulated amortization, were $43,132
and $8,971 as of December 30, 2000 and January 5, 2002, respectively. Deferred
financing costs relating to pre-petition debt of the Company were written-off as
of the Petition Date resulting in a charge to reorganization items of $34,599 in
the second quarter of fiscal 2001. Licenses and trademarks, net of accumulated
amortization, were $269,595 and $250,917 as of December 30, 2000 and January 5,
2002, respectively. Licenses are amortized on a straight line basis over the
remaining life of the license, which range between 5 and 40 years. Trademarks
are amortized on a straight line basis over the remaining life of the trademark
not to exceed 20 years. Other intangible assets are amortized on a straight line
basis over their estimated useful lives which range from 8 to 20 years. Other
assets of $46,430 at December 30, 2000 and $11,612 at January 5, 2002 include
long-term investments, other non-current assets and deposits. During fiscal
2001, the Company reviewed other long-term assets for potential impairment. As a
result of this review, in the fourth quarter the Company wrote down the carrying
amount of certain barter credits by $30,734 to $2,006 based upon the Company's
plans to utilize such credits in the future.

Amortization expense related to goodwill and intangible assets, included in
selling, administrative and general expenses was $24,285, $39,931, and $36,928
for fiscal 1999, fiscal 2000 and fiscal 2001, respectively.

The Company reviews any potential impairment of long-lived assets 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 goodwill may not be recoverable. Under these
circumstances, the Company estimates future undiscounted cash flows as a basis
for determining any impairment loss. If undiscounted cash flows are less than
the carrying amount of the asset then impairment charges are recorded to adjust
the carrying value of long-lived assets to the estimated fair value. The Company
recorded an impairment charge of $101,772 for the write-off of goodwill related
to Bodyslimmers, CK Kids and ABS of $96,171 and the write-off of certain other
intangible assets of $5,601 in the fourth quarter of fiscal 2001.

Advertising Costs: Advertising costs are included in selling, general and
administrative expenses and are expensed when the advertising or promotion is
published or presented to consumers.

F-10

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Cooperative advertising allowances provided to customers are charged to
operations as earned and are included in selling, general expenses and
administrative. The amounts charged to operations for advertising ( including
cooperative advertising), marketing and promotion expenses during fiscal 1999,
2000 and 2001 were $118,029, $141,340, and $138,407, respectively.

Reorganization items: Reorganization items relate to expenses incurred and
amounts accrued as a direct result of the Chapter 11 Cases and include certain
impairment losses, professional fees, facility shutdown costs, employee
severance payments, employee retention payments, lease termination accruals, and
other items. Reorganization items are separately identified on the consolidated
statement of operations.

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. A valuation allowance is provided when the Company
determines that it is more likely than not that a portion of the deferred tax
asset balance will not be realized. As of January 5, 2002, unremitted earnings
of non-U.S. subsidiaries were approximately $149,800. Since it is the Company's
intention to permanently reinvest these earnings, no U.S. taxes have been
provided. Management believes that there would be no additional tax liability on
the statutory earnings of foreign subsidiaries, if remitted.

Revenue Recognition: The Company recognizes revenue when goods are shipped
and title has passed to customers, net of allowances for returns and other
discounts. The Company recognizes revenue from its retail stores when goods are
sold to customers.

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 were used by the
Company in the management of its interest rate and foreign currency exposures
prior to the Petition Date. The Company also used 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, prior to the Petition Date, were
deferred and recognized when the offsetting gains and losses are recognized on
the related hedged items. Income and expense were recorded in the same category
as that arising from the related asset or liability being hedged. Periodic
accruals of amounts to be received or paid under interest rate swap agreements
were recognized as interest expense. Gains and losses realized prior to the
Petition Date on termination of interest rate swap contracts were deferred and
amortized over the remaining terms of the original hedging relationship.

A number of major international financial institutions are counter-parties
to the Company's financial instruments, including derivative financial
instruments. The Company monitors its positions with, and the credit quality of,
these counter-party financial institutions and does not anticipate non-
performance of these counter-parties. Management believes that the Company would
not suffer a material loss in the event of nonperformance by these
counter-parties.

Equity Instruments Indexed to the Company's Common Stock: Prior to September
19, 2000, equity instruments indexed to the Company's common stock were recorded
at fair value. Proceeds received under net share settlements or amounts paid
upon the purchase of such equity instruments were recorded as a component of
stockholders' equity. Subsequent changes in the fair value of the Equity
Agreements were not recorded. Repurchases of common stock pursuant to the terms
of the Equity Agreements were recorded as treasury stock. On September 19, 2000,
the Company amended its Equity Agreements and elected to cash settle a portion
of its obligation to the bank through notes payable. As a result, the Company
recorded notes payable ('Equity Agreement Notes') in an amount equal to the
difference between the forward equity price of the Company's common stock and
the fair value of the Company's common stock. The recognition of the Equity
Agreement Notes was recorded as an adjustment to stockholders'
equity. On October 6, 2000, the Company amended its outstanding credit
agreements and recorded an adjustment to increase the balance of the Equity
Agreement Notes based upon the change in fair value of the Company's common
stock. Changes in the fair value of the equity instruments after
October 6, 2000 through the Petition Date were recorded as a component of
operating income (loss) and as a change in the carrying amount of the related
Equity Agreement Notes. Subsequent to October 6, 2000, the Company was required
to cash settle the Equity Agreements. Since the Petition Date, no changes in the
fair value of the Equity Agreement Notes have been recorded. Equity Agreement
Notes are classified in liabilities subject to compromise as of January 5, 2002.
(See Note 18)

F-11

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Comprehensive Income (Loss): Comprehensive income (loss) consists of net
income (loss), unrealized gain/(loss) on marketable securities (net of tax),
unfunded minimum pension liability and cumulative foreign currency translation
adjustments. Because such cumulative translation adjustments are considered a
component of permanently invested un-remitted earnings of subsidiaries outside
the United States, no income taxes are provided on such amounts.

Start-Up Costs: Pre-operating costs relating to the start-up of new
manufacturing facilities, product lines and businesses are expensed as incurred.

Change in accounting principle: Effective January 2, 2000, the Company
changed its accounting method for valuing its retail outlet store inventory.
Prior to the change, the Company valued its retail inventory using average cost.
Under its new method, the Company values its retail inventory using the actual
cost method. The Company believes its new method is preferable because it
results in a better matching of revenue and expense and is consistent with the
method used for its other inventories. The cumulative effect of the change as of
January 1, 2000 was to reduce net income by $13,110, net of tax of $8,600.

Reclassifications: Certain fiscal 1999 and 2000 amounts have been
reclassified to conform to the current year presentation.

Recent accounting pronouncements: In June 1998, the Financial Accounting
Standards Board ('FASB') issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Activities and Hedging Activities ('SFAS
133'). SFAS 133 was amended by SFAS 137 and SFAS 138. SFAS 133, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company adopted the provisions of SFAS 133 as of
December 31, 2000. The Company adopted SFAS 133 effective with the first quarter
of fiscal 2001. As a result of the adoption of SFAS 133, the Company recorded a
transition adjustment of $21,744 primarily related to the reclassification of a
gain on the sale of certain interest rate swaps from other liabilities to other
comprehensive income. The adoption of SFAS 133 did not have a material impact on
the Company's cash flows or its results of operations.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations, ('SFAS 141') and Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets,
('SFAS 142'). SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated or completed after June 30, 2001.
SFAS 141 specifies criteria for the recognition of certain intangible assets
apart from goodwill. SFAS 141 did not have an impact on the Company's financial
statements.

SFAS 142 eliminates the amortization of goodwill and certain other
intangible assets with indefinite lives effective for the Company's 2002 fiscal
year. SFAS 142 requires that indefinite lived assets be tested for impairment at
least annually. SFAS 142 further requires that intangible assets with finite
useful lives be amortized over their useful lives and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets ('SFAS 144').

SFAS 142 requires that the Company evaluate its existing goodwill and other
intangible assets with indefinite useful lives. In addition, the Company will
reassess the useful lives of its intangible assets and will test indefinite
lived intangible assets for impairment in accordance with the provisions of
SFAS 142. The Company is in the process of evaluating the impact of SFAS 142 on
its financial statements.

As of January 5, 2002 the Company had goodwill and other intangible assets
net of accumulated amortization of approximately $944,000. Based upon
preliminary evaluations of the fair value of the Company's business units
obtained in connection with preparing the Company's plan of reorganization,

F-12

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

the Company believes that the carrying value of the Company's goodwill and
intangible assets will substantially exceed the fair value of those assets. As a
result, the Company will write-off a significant amount of its goodwill and
intangible assets upon the adoption of SFAS 142. In addition, amortization
expense related to goodwill and intangible assets for the year ended January 5,
2002 was approximately $36,900. The Company estimates that after the adoption of
SFAS 142 and the write-down of intangible assets noted above, amortization
expense for the 2002 fiscal year will also be reduced significantly.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations ('SFAS 143'). SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs.
The Company plans to adopt the provisions of SFAS 143 for its 2003 fiscal year
and does not expect the adoption of SFAS 143 to have a material impact on the
Company's financial position or results of operations.

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
('SFAS 144'). SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company is required to adopt
the provisions of SFAS 144 for its 2002 fiscal year. The Company does not expect
the adoption of SFAS 144 to have a material impact on the Company's financial
position or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ('SFAS 145'). SFAS 145 rescinds the
provisions of SFAS No. 4 that requires companies to classify certain gains and
losses from debt extinguishments as extraordinary items, eliminates the
provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980
and amends the provisions of SFAS No. 13 to require that certain lease
modifications be treated as sale leaseback transactions. The provisions of SFAS
145 related to classification of debt extinguishment is effective for fiscal
years beginning after May 15, 2002. The provisions of SFAS 145 related to lease
modifications is effective for transactions occurring after May 15, 2002.
Earlier application is encouraged. The adoption of SFAS 145 is not expected to
have a material impact on the financial position or results of operations of the
Company.

In April 2001, the FASB's Emerging Issues Task Force ('EITF') reached a
final consensus on EITF Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,
which was later codified along with the other similar issues, into EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products ('EITF 01-09'). EITF 01-09 will be effective for the
Company in the first quarter of 2002. EITF 01-09 clarifies the income statement
classification of costs incurred by a vendor in connection with the reseller's
purchase or promotion of the vendor's products, resulting in certain cooperative
advertising and product placement costs previously classified as selling
expenses to be reflected as a reduction of revenues earned from that activity.
The Company does not expect the adoption of EITF 01-09 to have a material impact
on the Company's results of operations or its financial position.

NOTE 2 -- RESTATEMENT OF FINANCIAL STATEMENTS

In June 2001, during the course of reviewing its business operations, the
Company became aware of certain accounting errors involving the recording of
inter-company pricing arrangements, the recording of accounts payable primarily
related to the purchase of inventory from suppliers and the accrual of certain
liabilities. The errors were related to the Company's Designer Holdings Ltd.
('Designer Holdings') subsidiary. The correction of these errors, together with
additional errors primarily related to the recording of accounts payable and
inventory discovered in certain of the Company's European

F-13

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

subsidiaries in connection with the Company's year-end closing for fiscal 2001,
has caused the Company to restate its previously issued financial statements for
the years ended January 1, 2000 and December 30, 2000 (fiscal 1999 and fiscal
2000, respectively), its previously issued financial results for each of the
quarterly periods in fiscal 1999 and fiscal 2000 and for the fiscal 2001 quarter
ended April 7, 2001. The Company reduced previously reported net income by
$4,132 (net of income tax benefit of $2,703), or $0.07 per share, for fiscal
1999, increased its previously reported net loss by $45,788 (net of income tax
benefit of $137), or $0.87 per share, for fiscal 2000 and increased its
previously reported net loss by $1,116, (no income tax effect), or $0.02 per
share, for the fiscal 2001 quarter ended April 7, 2001 (collectively, the
'Restatements').

The Company began an internal investigation of the suspected accounting
errors in June 2001. In August 2001, after reviewing the preliminary results of
the internal investigation, the Audit Committee of the Board of Directors of the
Company retained the law firm Dewey Ballantine LLP ('Dewey Ballantine') to
investigate the suspected accounting errors at Designer Holdings. In addition,
Dewey Ballantine retained FTI Consulting, Inc. ('FTI') to assist in the
investigation and provide accounting expertise to Dewey Ballantine. Dewey
Ballantine issued its report to the Audit Committee on February 6, 2002. Since
the discovery of the accounting errors at Designer Holdings and at certain of
the Company's European subsidiaries, the Company has replaced certain financial
staff and has taken several steps to improve the accounting for inter-company
purchases, and the reconciliation of inter-company accounts.

The Company estimates that the total cost of conducting the investigation
into this matter, consisting primarily of professional fees, will be
approximately $1,000. Approximately $681 of the cost of the investigation is
included in the Company's results of operations for the year ended January 5,
2002 and the remaining $319 will be included in the results of operations in the
first quarter of fiscal 2002.

F-14

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

A summary of the significant effects of the Restatements is as follows:

See Note 25 of Notes to Consolidated Financial Statements for restated
quarterly information for fiscal 1999, fiscal 2000 and the first quarter of
fiscal 2001.

NOTE 3 -- ACQUISITIONS

AUTHENTIC FITNESS CORPORATION

In December 1999, the Company acquired all of the outstanding common stock
of Authentic Fitness Corporation ('Authentic Fitness') for $437,100 (all of
which was financed), excluding debt assumed of approximately $154,170 and other
costs incurred in the acquisition of $3,255. 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 allocation of the total purchase price, exclusive of cash
acquired of approximately $7,000, to the fair value of the net assets acquired
and liabilities assumed is summarized as follows:

Fair Value of assets acquired..................... $674,256
Liabilities assumed............................... (79,731)
--------
Purchase price -- net of cash balance............. $594,525
--------
--------

Goodwill as of December 30, 2000 and January 5, 2002 includes $417,526 and
$390,219, respectively, related to the Authentic Fitness acquisition which is
being amortized over 40 years.

F-15

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

The following summarized unaudited pro forma information combines financial
information of the Company with Authentic Fitness for fiscal year 1999 assuming
the acquisition had occurred as of January 3, 1999. The unaudited pro-forma
information does not reflect any cost savings or other benefits anticipated by
the Company's management as a result of the acquisition. The unaudited pro-forma
information reflects interest expense on the additional financing of $437,100
incurred for the acquisition and the amortization of goodwill using a 40-year
life.

A.B.S. CLOTHING COLLECTION, INC.

In September 1999, the Company acquired the outstanding common stock of
A.B.S. Clothing Collection, Inc. ('ABS'). ABS is a designer of casual sportswear
and dresses sold through better department and specialty stores. The purchase
price consisted of a cash payment of $29,500, shares of the Company's common
stock with a fair market value of $2,200 and a deferred cash payment of $22,800
and other costs incurred in the acquisition of approximately $1,208. The
acquisition was accounted for as a purchase. The allocation of the purchase
price to the fair value of assets acquired and liabilities assumed is summarized
as follows:

Fair Value of assets acquired...................... $59,720
Liabilities assumed................................ (3,730)
-------
Purchase price -- net of cash balance.............. $55,990
-------
-------

The acquisition did not have a material impact on 1999 consolidated
earnings. Goodwill related to the ABS acquisition was $54,136 as of
December 30, 2000. As part of the Company's evaluation of potential impairment
of long-lived assets, the Company determined that the goodwill associated with
ABS was impaired, and as a result (Note 1), the Company recorded an impairment
charge of $36,803 in the fourth quarter of fiscal 2001. Goodwill related to the
ABS acquisition, after giving effect to the impairment charge, was $10,974 at
January 5, 2002.

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 1999 consolidated earnings. The excess
purchase price over fair value of the net assets acquired and liabilities
assumed on these acquisitions was approximately $5,000 as of December 30, 2000.
As part of the Company's evaluation of potential impairment of long lived assets
(Note 1), the Company determined that the goodwill associated with these
acquisitions was impaired, and as a result, the Company recorded an impairment
charge of $4,826 during the fourth quarter of fiscal 2001 which is included in
reorganization items.

NOTE 4 -- REORGANIZATION ITEMS

In connection with the Chapter 11 Cases, the Company initiated several
strategic and organizational changes during fiscal 2001 to streamline the
Company's operations, focus on its core businesses, and return the Company to
profitability. Many of the strategic actions are long-term in nature and, though
initiated in fiscal 2001, will not be completed until the end of fiscal 2002. In

F-16

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

connection with these strategies, the Company has reorganized its Retail Stores
Division by closing 86 of the 267 or 32% of the retail stores it operated at the
beginning of fiscal 2001.

The Debtors are in the process of reviewing their operations and identifying
assets available for potential disposition including entire business units of
the Company. However, there can be no assurance that the Company will be able to
consummate any such transactions at prices the Company, or the Company's
creditor constituencies will find acceptable.

In the first quarter of fiscal 2002, the Company sold the assets of
Penhaligon's and GJM for net proceeds of approximately $20,100 in the aggregate.
The Company recorded an impairment loss of $26,842 related to the write-down of
GJM goodwill in fiscal 2001.

The amount of proceeds that will be realized, if any, and the effect of any
additional asset sales on the Company's proposed plan or plans of reorganization
cannot presently be determined. The Company has recorded reductions to the
estimated net realizable value for those assets that the Company believes will
not be fully realized when they are sold or abandoned.

During fiscal 2001, the Company sold certain personal property, vacated
buildings, surplus land and other assets generating net proceeds of
approximately $6,213 since the Petition Date. The loss related to the write-down
of these assets was $3,656 for the year ended January 5, 2002. The Company has
vacated certain leased premises, and rejected those leases (many related to its
Retail Stores Division) under the provisions of the Bankruptcy Code.

As a direct result of the Chapter 11 Cases, the Company has recorded certain
liabilities, incurred certain legal and professional fees, written-down certain
assets and accelerated the recognition of certain deferred charges. The
transactions were recorded consistent with the provisions of SOP 90-7.

Reorganization items included in the consolidated statements of operations
in fiscal 2001 are $177,791. Included in reorganization items are certain
non-cash asset impairment provisions and accruals for items that have been, or
will be, paid in cash. In addition, certain accruals are included in liabilities
subject to compromise under the provisions of the Bankruptcy Code. The Company
has recorded these accruals at the estimated amount the creditor is entitled to
claim under the provisions of the Bankruptcy Code. The ultimate amount of and
settlement terms for such liabilities are subject to determination in the
bankruptcy process, including the terms of a confirmed plan or plans of
reorganization and accordingly are not presently determinable. However, the
Company believes that these claims will ultimately be discharged under a
confirmed plan of reorganization for amounts that are substantially less than
the carrying amount of the related liability. The components of reorganization
items for fiscal 2001 are:

F-17

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Legal and professional fees....................... $ 24,206
Company-obligated mandatorily redeemable preferred
securities(a)................................... 21,411
Facility shutdown accruals........................ 8,440
Write-down to net realizable value:
Fixed assets.................................. 3,656
Goodwill...................................... 31,668
Intangible assets............................. 382
Investments................................... 1,355
Deferred financing costs -- pre-petition debt..... 34,599
Systems development abandoned..................... 33,066
Lease terminations................................ 20,591
Employment contracts and retention................ 8,728
Other employee costs.............................. 821
Interest rate swap gain........................... (18,887)
Retail store closure provisions................... 6,105
Aviation and other assets......................... 1,650
--------
$177,791
--------
--------

- ---------

(a) Includes original issue discount and deferred bond issue costs of $4,798
net of accumulated amortization.

For the year ended January 5, 2002, cash reorganization items were $36,893
and non-cash reorganization items were $140,898. Certain accruals are included
in liabilities subject to compromise. The ultimate amount of cash payments for
all reorganization items are subject to the provisions of a confirmed plan or
plans of reorganization and therefore cannot be determined.

NOTE 5 -- SPECIAL CHARGES -- FISCAL 2000

The Company performed a strategic review of its worldwide businesses,
manufacturing, distribution and other facilities, and product lines and styles
and initiated a global implementation of programs designed to create cost
efficiencies through plant consolidations, workforce reductions and
consolidation of the finance, manufacturing and operations organizations within
the Company and the discontinuation of product lines and styles that were
unprofitable. As a result of these initiatives which commenced in fiscal 2000
and continued into fiscal 2001, the Company recorded special charges of $269,626
during fiscal 2000 related to costs to exit certain facilities and activities
and consolidate such operations, including charges related to inventory
write-downs and other asset write-offs, facility shutdown and lease obligation
costs, employee termination and severance costs, retail outlet store closings
and other related costs. The non-cash portion of the charge was originally
estimated to be $171,317 and the cash portion was originally estimated to be
$98,309. As of January 5, 2002, $6,336 of accruals remained related primarily to
severance obligations and expected payments under discontinued licenses. Actual
cash charges through January 5, 2002 were $90,589. Non-cash charges were
$172,574. Of the total amount of charges, $201,279 is reflected in cost of goods
sold and $68,347 is reflected in selling, general and administrative expenses in
the 2000 fiscal year. The detail of the charge, including costs incurred and
reserves remaining for costs the Company expects to incur through completion of
the aforementioned programs are summarized below:

F-18

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

- ---------

(1) Other adjustments represent reversals of over accruals related to facility
shutdowns and additional legal costs. The net effect of other adjustments is
included in selling, general and administrative expenses in fiscal 2001.

(2) Includes $2,211 of liabilities subject to compromise.

INVENTORY WRITE-DOWNS AND OTHER ASSET WRITE-OFFS $(154,851)

Management's strategic review of the Company's manufacturing, distribution
and administrative facilities and product lines and styles resulted in the
decision to close seven manufacturing plants, twelve distribution facilities and
two administrative facilities as well as the closure of 26 outlet stores. In
addition, the Company discontinued the manufacturing of certain raw materials
and product styles and wrote-off shop and fixture costs no longer in service at
certain of its customer's retail locations. Included in the above amount are
charges for inventory write-downs of $127,825 and write-off of fixed assets and
other assets of $27,026. Of the total charge, $134,901 is included in cost of
sales and $19,950 is included in selling, general and administrative expenses.

FACILITY SHUTDOWN AND CONTRACT TERMINATION COSTS $(53,261)

Costs associated with the shutdown of the facilities mentioned above include
plant reconfiguration and shutdown costs of $47,751, which were expensed as
incurred and lease obligation costs of $5,510. Of the total charge, $40,281 is
included in cost of sales and $12,980 is included in selling, administrative and
general expenses in fiscal 2000. Accruals amounting to $6,057 for future lease
and contract payments remain at January 5, 2002.

EMPLOYEE TERMINATION AND SEVERANCE COSTS $(25,772)

The Company recorded charges of $11,729 to cost of goods sold related to
providing severance and benefits to 3,589 manufacturing related employees
terminated as a result of the closure of certain facilities in fiscal 2000. The
Company also recorded charges of $14,043 to selling, administrative and general
expenses related to providing severance and benefits to 816 distribution and
administrative

F-19

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

employees who were terminated in fiscal 2000. The Company expects to pay the
$279 remaining at January 5, 2002 to terminated employees over the next 12
months.

RETAIL OUTLET STORE CLOSINGS $(20,037)

During fiscal 2000, the Company announced plans to close 26 retail outlet
stores. Included in the charge are costs for the write-down of inventory of
discontinued product lines and styles which the Company intends to liquidate
through these stores of $13,697, the write-off of fixed assets associated with
these stores of $1,793 and the costs of terminating leases of $1,653. Of the
total charge, $13,697 is included in cost of sales and $6,340 is included in
selling, general and administrative expenses in fiscal 2000.

LEGAL AND OTHER RELATED COSTS $(15,705)

Also included in the charge are $12,490 of legal expenses related to the
Calvin Klein litigation and global initiatives mentioned above and $3,215 of
other costs in fiscal 2000. Of the total charge, $671 is included in cost of
sales and $15,034 is included in selling, general and administrative expenses in
fiscal 2000.

NOTE 6 -- ACCOUNTS RECEIVABLE SECURITIZATION

In October 1998, the Company entered into a revolving accounts receivable
securitization facility, to mature on August 12, 2002, whereby it could obtain
up to $200,000 of funding from the securitization of eligible United States
trade accounts receivable through a bankruptcy remote special purpose
subsidiary. The facility was amended in March 2000 to provide up to $300,000 of
funding. In fiscal 1999 the Company securitized $383,827 of accounts receivable
(gross) for which it received cash proceeds of $195,900. In fiscal 2000, the
Company securitized $454,862 of accounts receivable (gross) for which it
received cash proceeds of $249,600. In fiscal 2001, prior to the Petition Date,
the Company securitized $366,233 of accounts receivable (gross) for which it
received cash proceeds of approximately $185,000. The Company retains the
interest in and subsequent realization of the excess of amounts securitized over
the proceeds received and provides allowances as appropriate on the entire
balance. Accounts receivable at December 30, 2000 are presented net of the
$249,600 of proceeds from trade receivables securitized, with the remaining
$205,262 included in accounts receivable. Accounts receivable were $282,387 at
January 5, 2002 compared to $377,541 at December 30, 2000 after adjusting for
accounts receivable securitized. The securitization is reflected as a reduction
of accounts receivable at December 30, 2000 and the proceeds received are
included in cash flow from operating activities in the consolidated statement of
cash flows. Fees for this program were paid monthly and were based on variable
rates indexed to commercial paper and are included in selling, general and
administrative expense. On June 11, 2001, concurrent with the completion of the
DIP, the Company terminated the revolving accounts receivable securitization
agreement by repaying $186,214 previously received under the account receivable
securitization facility. The repayment of the account receivable securitization
facility included $1,214 of fees and accrued interest. Consequently, none of the
Company's outstanding trade accounts receivable are securitized at January 5,
2002. The termination of the accounts receivable securitization agreement did
not have a material effect on the Company's financial position as of January 5,
2002 or its results of operations for fiscal 2001.

NOTE 7 -- 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 1999, Authentic Fitness paid the Company $24,614 for
certain occupancy services

F-20

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

related to leased facilities, computer services, laboratory testing,
transportation and contract production services. In fiscal 1999, the Company
paid Authentic Fitness approximately $865 for certain design and occupancy
services. The Company also purchased inventory from Authentic Fitness for sale
in its retail outlet stores of $16,833 in fiscal 1999. 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 $10 in fiscal 1999.

A former director of the Company is the sole stockholder, President and a
director of The Spectrum Group, Inc. ('Spectrum'). The Company recognized
consulting expenses of $560, $560 and $0 in fiscal 1999, 2000 and 2001,
respectively, pursuant to a consulting agreement with Spectrum that was
terminated effective December 31, 2000.

The Company leases certain real property from an entity controlled by an
employee and the former owner of ABS. The lease expires on May 31, 2005 and
includes four five-year renewal options. Rent expense related to this lease for
fiscal 1999, fiscal 2000 and fiscal 2001 was $60, $345 and $458, respectively.

From April 30, 2001 to June 11, 2001, the Company incurred consulting fees
to Alvarez & Marsal, Inc. ('A&M') of $1,256 pursuant to a consulting agreement.
The President and Chief Executive Officer and the Chief Financial Officer of the
Company are affiliated with A&M. The A&M consulting agreement was terminated on
June 11, 2001.

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 8 -- BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION

BUSINESS SEGMENTS

The Company operates in three segments: Intimate Apparel, Sportswear and
Accessories and Retail Stores.

The Company designs, manufactures and markets apparel within the Intimate
Apparel and Sportswear and Accessories markets and operates a Retail Stores
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, imports and markets
moderate to premium priced intimate apparel for women under the Warner's, Olga,
Calvin Klein, Lejaby, Rasurel and Bodyslimmers brand names, and men's underwear
under the Calvin Klein brand name.

The Sportswear and Accessories Division designs, manufactures, imports and
markets moderate to premium priced men's, women's, junior's and children's
sportswear and jeanswear, men's accessories and men's, women's, junior's and
children's active apparel under the Chaps by Ralph Lauren, Calvin Klein,
Catalina, A.B.S by Allen Schwartz, Speedo, Anne Cole, Cole of California,
Sandcastle, Sunset Beach, Ralph Lauren, Polo Sport Ralph Lauren, Polo Sport RLX
and White Stag brand names.

The Retail Stores Division which is comprised of both outlet as well as
full-price retail stores, principally sells the Company's products to the
general public through stores under the Speedo Authentic Fitness name as well as
the Company's outlet stores for the disposition of excess and irregular
inventory. The Company had 95 Speedo Authentic Fitness and 86 outlet stores open
as of January 5, 2002.

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 operating income
(loss) before

F-21

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

interest, taxes, amortization of intangibles and deferred financing costs and
special charges, as well as the effect of the adoption of new accounting
pronouncements or other changes in accounting. Information by business segment
is set forth below:

(1) Operating income (loss) for the years ended January 1, 2000 and December
30, 2000 have been restated to reflect the Restatements. See Note 2.
Operating income loss does not include corporate expenses not allocated
to divisions of $82,511, $127,377 and $125,610 in fiscal 1999, 2000 and
2001, respectively, and Reorganization Items of $177,791 in fiscal 2001.

A reconciliation of segment operating income (loss) to consolidated income
(loss) before provision for income taxes and cumulative effect of a change in
accounting principle for fiscal years ended January 1, 2000, December 30, 2000
and January 5, 2002 is as follows:

(footnote on next page)

F-22

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(footnote from previous page)

* 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.

GEOGRAPHIC INFORMATION

Included in the consolidated financial statements are the following amounts
relating to geographic locations:

INFORMATION ABOUT MAJOR CUSTOMERS

In fiscal 1999, 2000 and 2001 no customer accounted for more than 10% of the
Company's net revenues

NOTE 9 -- INCOME TAXES

The following presents the United States and foreign components of income
from continuing operations before income taxes and cumulative effect of change
in accounting principle and the total provision for United States federal and
other income taxes:

F-23

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

The following presents the reconciliation of the provision for income taxes
to United States federal income taxes computed at the statutory rate:

F-24

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

The components of deferred tax assets and liabilities as of December 30,
2000 and January 5, 2002 are as follows:

The Company has estimated United States net operating loss carryforwards of
approximately $1,173,225 and foreign net operating loss carryforwards of
approximately $95,250 at January 5, 2002. The United States net operating loss
carryforwards, if they remain unused, expire as follows:

The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized. The valuation allowance
increased to $582,249 (of which $28,041 relates to foreign entities) in fiscal
2001 from $178,657 (of which $15,005 relates to foreign entities) in fiscal
2000. The provision primarily represents an increase in the valuation allowance.
The increase in the valuation allowance relates to an increase in the net
operating loss and other net deferred tax assets that may not be realized. In
addition, the Company was unable to implement certain tax planning strategies
resulting in a further increase in the valuation allowance of approximately
$126.0 million.

The Company expects that the consummation of a plan or plans of reorganization
will result in the forgiveness of a substantial amount of the Company's
pre-petition debt and other liabilities subject to compromise. In the event
that a plan or plans of reorganization are consummated, considering the amount
and nature of the Company's pre-petition liabilities, the Company expects to
utilize a substantial portion of its net operating loss carryforwards to
offset taxable income generated from such debt forgiveness. The ability of
the Company to consummate a plan or plans of reorganization is subject to
uncertainty. In addition, after the Company consummates a plan or plans of
reorganization, which includes the forgiveness of pre-petition debt and other
liabilities subject to compromise, the provisions of the U.S. tax code will
limit the Company's ability to utilize any remaining net operating loss
carryforwards. Since the ultimate outcome of the Chapter 11 Cases cannot be
determined at this time and there is substantial doubt about the Company's
ability to continue as a going concern, the Company has provided a valuation
allowance for all U.S. deferred tax assets.

A portion of the valuation allowance in the amount of approximately $19,026
(of which $4,841 relates to foreign entities) at January 5, 2002 relates to net
deferred tax assets which were recorded in

F-25

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

purchase accounting. The recognition of such amount in future years will be
allocated to reduce the excess purchase price over the net assets acquired and
other non-current intangible assets.

At January 5, 2002, prepaid expenses and other current assets includes
current income taxes receivable of $19,500 of which $3,200 relates to foreign
entities and current liabilities include income taxes payable of $14,505 of
which $13,900 relates to foreign entities.

At December 30, 2000 prepaid and other current assets includes current
income tax receivable of $4,023 of which $2,090 relates to foreign entities and
current liabilities include income taxes payable of $13,630 of which $13,042
relates to foreign entities.

NOTE 10 -- EMPLOYEE RETIREMENT PLANS

The Company has a defined benefit pension plan, which covers substantially
all non-union domestic employees (the 'Pension Benefit Plan'). The Pension
Benefit 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, in most cases,
contributory with retiree contributions adjusted annually.

The components of net periodic benefit cost is as follows:

A reconciliation of the balance of the benefit obligations is as follows:

F-26

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

A reconciliation of the change in the fair value of plan assets is as
follows:

Pension Benefit Plan assets include fixed income securities and marketable
equity securities, including 673,100 shares of the Company's Class A Common
Stock, which had a fair market value of $13,554 and $37 at December 30, 2000 and
January 5, 2002, respectively. The Company contributes to a multi-employer
defined benefit pension plan on behalf of union employees of its two
manufacturing facilities and a warehouse and distribution facility, which
amounts are not significant for the periods presented.

The weighted-average assumptions used in the actuarial calculations were as
follows:

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 12% for 2001 and decreases by 0.5% each year from 2002 to 2015 to 5%.
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:

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 $1.35 in one year.
Employees vest in the Company contribution over four years. Company
contributions to the defined contribution plan totaled $388, $552 and $483 for
fiscal years 1999, 2000 and 2001, respectively.

In the second quarter of fiscal 2002, the Company closed two manufacturing
plants. Plant employees were covered under a multi-employer pension plan. The
Company recorded a termination

F-27

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

liability related to the closing of the plants amounting to approximately $900
in the second quarter of fiscal 2002.

NOTE 11 -- MARKETABLE SECURITIES

The Company receives marketable securities from time to time in connection
with the settlement of obligations due to the Company. Securities received are
recorded at estimated fair market value at the date they are received. During
fiscal 1999, the Company received securities with a fair market value of $875 in
exchange for the early termination of a non-compete agreement with the former
principal stockholder of Designer Holdings. The receipt of such securities was
recorded as a reduction of goodwill. The fair market value of such securities
was $259 and $231 at December 30, 2000 and January 5, 2002, respectively. During
fiscal 2001, the Company received securities as settlement of amounts owed to
the Company by certain bankrupt customers. The receipt of the securities was
recorded as a recovery of bad debts. The securities had a fair market value of
approximately $200 at the time of settlement. The fair market value of such
securities was $662 at January 5, 2002. Marketable securities are classified
with other assets in the consolidated balance sheet.

During 1998 and 1999, the Company made investments, aggregating $7,650, to
acquire an interest in InterWorld Corporation, a provider of E-Commerce software
systems and other applications for electronic commerce sites. These investments
were classified as available-for-sale securities and recorded at fair value
based on quoted market prices at January 1, 2000. In the first quarter of fiscal
2000, the Company sold its investment in InterWorld resulting in a realized
pre-tax gain of $42,782 ($25,862 net of taxes), which is recorded as investment
income.

NOTE 12 -- INVENTORIES

NOTE 13 -- PROPERTY, PLANT AND EQUIPMENT

- ---------

(a) Reduction in construction in progress includes $33,066 related to computer
system developments costs written-off as a reorganization item in fiscal
2001.

F-28

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 14 -- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) as of
January 1, 2000, December 30, 2000 and January 5, 2002 are summarized below.

NOTE 15 -- DEBT

Total debt does not include $169,142 of trade drafts outstanding as of December
30, 2000. Trade drafts outstanding as of January 5, 2002 of $351,367 are
included in liabilities subject to compromise.

DEBTOR-IN-POSSESSION FINANCING

On June 11, 2001, the Company entered into a Debtor-In-Possession Financing
Agreement (the 'DIP') with a group of banks, which was approved by the
Bankruptcy Court in an interim amount of $375,000. On July 9, 2001, the
Bankruptcy Court approved an increase in the amount of borrowing available to
the Company to $600,000. The DIP was subsequently amended as of August 27, 2001,
December 27, 2001, February 5, 2002 and May 15, 2002. The amendments, among
other things, amend certain definitions and covenants, permit the sale of
certain of the Company's assets and businesses, extend deadlines with respect to
certain asset sales and certain filing requirements with respect to a plan of
reorganization and reduce the size of the facility to reflect the Debtors'
revised business plan.

The Amended DIP (when originally executed) provided for a $375,000
non-amortizing revolving credit facility (which includes a letter of credit
facility of up to $200,000) ('Tranche A') and a $225,000

F-29

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

revolving credit facility ('Tranche B'). On December 27, 2001, the Tranche B
commitment was reduced to $100,000. On April 19, 2002, the Company elected to
eliminate the Tranche B facility based upon its determination that the Company's
liquidity position had improved significantly since the Petition Date and the
Tranche B facility would not be needed to fund the Company's on-going
operations. On May 28, 2002, the Company voluntarily reduced the amount of
borrowing available under the Amended DIP to $325,000. The Amended DIP
terminates on the earlier of June 11, 2003 or the effective date of a plan of
reorganization.

Borrowing under the Amended DIP bears interest at either the London Inter
Bank Offering Rate (LIBOR) plus 2.75% (4.8% on January 5, 2002) or at the
Citibank N.A. Base Rate plus 1.75% (6.5% at January 5, 2002). In addition, the
fees for the undrawn amounts are .50% for Tranche A. During fiscal 2001 and
through its termination on April 19, 2002, the Company did not borrow any funds
under Tranche B. The Amended DIP contains restrictive covenants that require the
Company to maintain minimum levels of EBITDAR (earnings before interest, taxes,
depreciation, amortization, restructuring charges and other items as set forth
in the agreement), restrict investments, limit the annual amount of capital
expenditures, prohibit paying dividends and prohibit the Company from incurring
material additional indebtedness. Certain restrictive covenants are subject to
adjustment in the event the Company sells certain business units and/or assets.
In addition, the Amended DIP requires that proceeds from the sale of certain
business units and/or assets are to be used to reduce the outstanding balance of
Tranche A. The maximum borrowings under Tranche A are limited to 75% of eligible
accounts receivable, 25% to 67% of eligible inventory, and 50% of other
inventory covered by outstanding trade letters of credit.

Amounts outstanding under the Amended DIP at January 5, 2002 were $155,915
with a weighted average interest rate of 4.8%. In addition, the Company had
stand-by and documentary letters of credit outstanding under the Amended DIP at
January 5, 2002 of approximately $60,031. The total amount of additional credit
available to the Company at January 5, 2002 was $159,054. As of July 5, 2002,
the Company had repaid all outstanding borrowings under the Amended DIP and had
approximately $61,000 of cash available as collateral against outstanding trade
and stand-by letters of credit.

The Amended DIP is secured by substantially all of the domestic assets of
the Company.

PRE-PETITION DEBT AGREEMENTS -- SUBJECT TO COMPROMISE

The Company was in default of substantially all of its U.S. pre-petition
credit agreements as of January 5, 2002. All pre-petition debt of the Debtors
has been reclassified with liabilities subject to compromise in the consolidated
balance sheet at January 5, 2002. In addition, the Company stopped accruing
interest on all domestic pre-petition credit facilities and outstanding balances
on June 11, 2001 except for interest on certain foreign credit agreements that
are subject to standstill and intercreditor agreements. A brief description of
each pre-petition credit facility and its terms is included below.

AMENDMENT AGREEMENT

On October 6, 2000 the Company and the lenders under its credit facilities
entered into an Amendment, Modification, Restatement and General Provisions
Agreement (the 'Amendment Agreement') and an Intercreditor Agreement. Pursuant
to the Amendment Agreement, the Company's credit facilities were modified so
that each contains identical representations and warranties, covenants,
mandatory prepayment obligations, and events of default. The Amendment Agreement
also amended uncommitted credit facilities and those which matured prior to
August 12, 2002 so that they would mature on August 12, 2002 (maturity dates of
the credit facilities due after August 12, 2002 were unaffected).

F-30

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

The Amendment Agreement made the margins added to a base rate or Eurodollar
rate loan uniform under the credit facilities, and determined according to the
debt rating of the Company. As of December 30, 2000, the applicable margin for
base rate advances under the credit facilities was 2.5% and the applicable
margin for Eurodollar rate advances under the credit facilities was 3.5%. The
Amendment Agreement also made the fee charged based on the letters of credit
outstanding and a commitment fee charged based on the undrawn amount of the
credit facilities consistent across the credit facilities. Both of these fees
also varied according to the Company's debt rating.

As part of the signing of the Amendment Agreement, obligations under the
credit facilities were guaranteed by the Company, by all of its domestic
subsidiaries and, on a limited basis, by all of its subsidiaries located in
Canada, the United Kingdom, France, Germany, the Netherlands, Mexico, Belgium,
Hong Kong and Barbados. The Company and each of such entities have granted liens
on substantially all of their assets to secure these obligations. As a result of
the Amendment Agreement, as of December 30, 2000, the Company had committed
credit facilities in an aggregate amount of $2,609,000 all of which were to
mature on or after August 12, 2002 with substantially no debt amortization until
then. All obligations under the Amendment Agreement are in default under the
Chapter 11 Cases. The Company has not accrued interest on these obligations
since the Petition Date, except for interest on certain foreign credit
agreements. Creditors under the Amendment Agreement are considered secured
creditors in the Chapter 11 Cases, and as such will receive a higher priority
than other classes of creditors. Amounts outstanding under the Amendment
Agreement, not including accrued interest, at the Petition Date were
approximately $2,190,493, including $351,367 of trade drafts. The Company has
classified these obligations as liabilities subject to compromise. The Company
has not completed its plan of reorganization under the Chapter 11 Cases and, as
a result, the Company cannot yet determine the ultimate amount that the
creditors under the Amendment Agreement will ultimately receive.

$600,000 REVOLVING CREDIT FACILITY

The Company is the borrower under a $600,000 Revolving Credit Facility,
which includes a $100,000 sub-facility available for letters of credit. This
facility was scheduled to expire 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 were borrowed at
either base rate or at an interest rate based on the Eurodollar rate plus a
margin determined under the Amendment Agreement. As of December 30, 2000, the
amount of borrowings outstanding under this facility was $425,680. Additionally,
as of December 30, 2000, the amount of letters of credit outstanding under this
facility was $4,739. The weighted-average interest rate under this facility as
of December 30, 2000 was 10.34%. As of January 5, 2002, $595,119 was outstanding
under this facility, all of which is included in liabilities subject to
compromise at January 5, 2002.

$450,000 REVOLVING CREDIT FACILITY

The Company is also a borrower under a $450,000 Revolving Credit Facility,
which was reduced to $423,600 under the Amendment Agreement. 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 were subject to interest at a base rate or at an interest rate
based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. As of December 30, 2000, the amount of borrowings outstanding under
this facility was $284,711 with a weighted average interest rate of 10.47%. As
of January 5, 2002, $423,600 was outstanding under this facility, all of which
is included in liabilities subject to compromise.

F-31

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

$587,548 TERM LOAN

The Company is also a borrower under a $600,000 Term Loan, dated
November 17, 1999, which was reduced to approximately $587,548 under the
Amendment Agreement. The maturity of this loan was also extended until
August 12, 2002 in conjunction with the Amendment Agreement. Amounts borrowed
under this facility were subject to interest at a base rate or an interest rate
based on the Eurodollar rate plus a margin determined under the Amendment
Agreement. As of December 30, 2000 and January 5, 2002, $587,548 was outstanding
under this facility all of which is included in liabilities subject to
compromise at January 5, 2002.

FRENCH FRANC FACILITIES

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, include a term
loan facility in an original amount of 370 million French Francs and a revolving
credit facility of 480 million French Francs, which was reduced to 441.6 million
French Francs pursuant to the Amendment Agreement. Amounts borrowed under these
facilities are subject to interest at an interest rate based on the Eurodollar
rate plus a margin determined under the Amendment Agreement. The term loan was
being repaid in annual installments, which began in July 1997, with a final
installment due on December 31, 2001. In conjunction with the Amendment
Agreement the annual installments were eliminated and the maturity of the loan
was extended to August 12, 2002. As of December 30, 2000, $36,282 equivalent of
the term loan was outstanding with a weighted average interest rate of 8.79%.
The revolving portion of this facility provides for multi-currency revolving
loans to be made to the Company and a number of its European subsidiaries. As of
December 30, 2000, approximately $54,152 equivalent of revolving advances were
outstanding under this facility with a weighted average interest rate of 9.94%.
As of January 5, 2002, the total amount outstanding under these facilities was
$59,545 equivalent, all of which is included in liabilities subject to
compromise.

$400,000 TRADE CREDIT FACILITY

On October 6, 2000, in conjunction with signing the Amendment Agreement, the
Company entered into a new $400,000 Trade Credit Facility which provided
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'). Amounts drawn under this facility were subject to interest at an
interest rate based on the Eurodollar rate plus a margin determined under the
Amendment Agreement. The Company classified the 180-day Trade Drafts in trade
accounts payable. As of December 30, 2000, the amount of Trade Drafts
outstanding under this facility was $163,947. Also at December 30, 2000, the
Company had outstanding letters of credit under this facility totaling
approximately $81,062. At January 5, 2002, the Company had approximately
$351,367 of Trade Drafts outstanding under this facility, all of which is
included in liabilities subject to compromise.

OTHER FACILITIES

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 December 30, 2000 was
$17,025. This loan was due to be repaid in equal installments with a final
maturity date of July 4, 2002. Amounts outstanding under this agreement as of
the Petition Date of $27,161 are included in liabilities subject to compromise
at January 5, 2002.

On September 19, 2000 the Company issued Equity Agreement Notes payable to
certain banks in an initial aggregate amount of $40,372 related to the Company's
Equity Forward Purchase Agreements.

F-32

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Amounts due under such Equity Agreement Notes were $50,121 and $56,677 at
December 30, 2000 and January 5, 2002, respectively.

PRE-PETITION DEBT AGREEMENTS -- SUBJECT TO STANDSTILL AGREEMENTS

FOREIGN CREDIT 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 December 30, 2000 and January 5, 2002,
the total outstanding amounts of the Foreign Credit Facilities were
approximately $16,263 and $83,894, respectively. The foreign subsidiaries are
not parties to the Chapter 11 Cases. Certain of the Company's foreign
subsidiaries are parties to debt agreements which are subject to standstill and
intercreditor agreements. The Company has recorded interest of $4,110 in fiscal
2001 on certain of these foreign credit facilities. Consummation of a plan or
plans of reorganizaton may provide for the payment of such interest.

RESTRICTIVE COVENANTS

Pursuant to the terms of the Amendment Agreement the Company was required to
maintain certain financial ratios and was prohibited from paying dividends. On
March 29, 2001, lenders under Amendment Agreement waived compliance with the
financial ratios until April 16, 2001. On April 13, 2001, the lenders extended
this waiver until May 16, 2001 and on May 16, 2001, the lenders extended the
waiver to June 15, 2001. The Company filed for protection under Chapter 11 of
the Bankruptcy Code on June 11, 2001.

INTEREST RATE SWAPS

As of December 30, 2000, the Company had four interest rate swap agreements
in place which were used to convert variable interest rate borrowings of
$329,500 to fixed interest rates. The counter-parties to all of the Company's
interest rate swap agreements were banks who were lenders in the Company's bank
credit agreements. The fair value of these swaps based on quoted market prices
at December 30, 2000 was $512 less than the carrying amount. Due to the
Chapter 11 Cases the Company's outstanding swap agreement maturing in June 2006
were cancelled as of the Petition Date at a cost to the Company of $420.

As of December 30, 2000, the Company's in-place swap agreements were as
follows:

The Company's agreements in place as of January 1, 2000 in the amounts of
$75,000, $210,000, $150,000 and $250,000 were terminated in March 2000 for a
cash gain of $26,076 which was being amortized over the life of the agreements.
Unamortized deferred swap income of $21,744 was reclassified to other
comprehensive income as a transition adjustment upon the adoption of SFAS 133 in
the first quarter of fiscal 2001. In conjunction with the Chapter 11 Cases the
Company suspended interest payments on the outstanding debt obligations of the
Debtors, and as a result, realized the deferred income as of the Petition Date.
The unamortized amount of $18,887 is included in reorganization items for the
year ended January 5, 2002.

F-33

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Differences between the fixed interest rate on each swap and the one month
or three month LIBOR rate were settled at least quarterly between the Company
and each counter-party. Pursuant to its interest rate swap agreements, the
Company made payments totaling $4,853 in the year ended January 1, 2000 and made
payments totaling $372 in the year ended December 30, 2000 (none in the year
ended January 5, 2002).

The Company's average interest rate on its outstanding debt, after giving
effect to the interest rate swap agreements, was approximately 10.19% at
December 30, 2000.

NOTE 16 -- LIABILITIES SUBJECT TO COMPROMISE

The principal categories of obligations classified as liabilities subject to
compromise are identified below. The amounts set forth below may vary
significantly from the stated amounts of proofs of claim as filed with the
Bankruptcy Court and may be subject to future adjustments depending on future
Bankruptcy Court action, further developments with respect to disputed claims,
determination as to the value of any collateral securing claims, or other
events. In addition, other claims may result from the rejection of additional
leases and executory contracts by the Debtors. The following summarizes the
amount of liabilities subject to compromise at January 5, 2002:

Current liabilities:
Accounts payable(a)..................................... $ 386,711
Accrued liabilities..................................... 61,961
Accrued interest........................................ 4,110

Debt:
$600 million term loan.................................. 587,548
Foreign credit facilities............................... 143,439
Revolving credit facilities............................. 1,018,719
Term loan agreements.................................... 27,161
Capital lease obligations............................... 5,582
Equity option note...................................... 56,677

Company-obligated mandatorily redeemable convertible
preferred securities...................................... 120,000

Other liabilities........................................... 27,485
----------
$2,439,393
----------
----------

(a) Accounts payable includes $351,367 of trade drafts payable. As a result
of the Chapter 11 Cases, no principal or interest payments will be made on
unsecured pre-petition debt without Bankruptcy Court approval or until a plan of
reorganization providing for the repayment terms has been confirmed by the
Bankruptcy Court and becomes effective. Therefore, interest expense on domestic
pre-petition unsecured obligations has not been accrued after the Petition Date.
The Company's foreign subsidiaries (non-filed entities) are parties to certain
debt agreements that are subject to standstill and intercreditor agreements. The
Company has recorded $4,110 of interest expense related to these agreements in
the year ended January 5, 2002. Consummation of a plan or plans of
reorganization may provide for the payment of such interest.

NOTE 17 -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE 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

F-34

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

in the assets of Designer Finance Trust ('Trust'), a statutory business trust
formed under the laws of the State of Delaware in 1996. Designer Holdings owns
all of the common securities representing undivided beneficial interests of the
assets of the Trust. Accordingly, the Trust is included in the consolidated
financial statements of the Company. The Trust exists for the sole purpose of
(i) issuing the Preferred Securities and common securities (together with the
Preferred Securities, the 'Trust Securities'), (ii) investing the gross proceeds
of the Trust Securities in 6% Convertible Subordinated Debentures of Designer
Holdings due 2016 ('Convertible Debentures') and (iii) engaging in only those
other activities necessary or incidental thereto. The Company indirectly owns
100% of the voting common securities of the Trust, which is equal to 3% of the
Trust's total capital.

Each Preferred Security is convertible at the option of the holder thereof
into 0.6888 of a share of Common Stock, par value $.01 per share, of the
Company, or 1,653,177 shares of the Company's Common Stock in the aggregate, at
an effective conversion price of $72.59 per share of common stock, subject to
adjustments in certain circumstances.

The holders of the Preferred Securities are entitled to receive cumulative
cash distributions at an annual rate of 6% of the liquidation amount of $50.00
per Preferred Security, payable quarterly in arrears. The distribution rate and
payment dates correspond to the interest rate and interest payment dates on the
Convertible Debentures, which are the sole assets of the Trust. As a result of
the acquisition of Designer Holdings by the Company, the Preferred Securities
were adjusted to their estimated fair value at the date of acquisition of
$100,500, resulting in a decrease in their recorded value of approximately
$19,500. This decrease was being amortized, using the effective interest rate
method to maturity of the Preferred Securities. As of December 30, 2000, the
unamortized balance was $16,613. Such distributions and accretion to redeemable
value were included in interest expense. As of the Petition Date the Company
suspended payments due under the Convertible Debentures and wrote off the
original issue discount related to the Convertible Debentures and the related
bond issue costs, net of accumulated amortization, as of the Petition Date
totalling $21,411. This amount is included in reorganization items and the
nominal value of the Convertible Debentures of $120,000 is included in
liabilities subject to compromise as of January 5, 2002.

The Company had 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 did 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 Company deferred the interest payments
under these instruments that were due on December 31, 2000 and March 31, 2001.
The deferred interest and distributions through the Petition Date amounting to
$4,975 are included in liabilities subject to compromise at January 5, 2002.

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 claims of the holders of the Convertible Debentures are subordinate to the
secured creditors and other preferred creditors under

F-35

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

the Chapter 11 Cases and are structurally subordinated to general unsecured
claims. Certain post-petition liabilities and pre-petition liabilities need to
be satisfied before holders of the Convertible Debentures can receive any
distribution. The ultimate recovery, if any, to holders of the Convertible
Debentures will not be determined until confirmation of a plan or plans of
reorganization. As a result of the amount and character of the Company's
pre-petition indebtedness the shortfall between the Company's enterprise value
and the amount necessary to satisfy the claims of its secured and unsecured
creditors and the impact of the provisions of the Bankruptcy Code, the Company
believes that it is highly unlikely that current holders of the Preferred
Securities will receive any distribution under any plan of reorganization.

The following is summarized financial information of Designer Holdings and
its subsidiaries as of December 30, 2000 and January 5, 2002 and for each of the
three fiscal years in the period ended January 5, 2002.

- ---------

(a) Excludes Retail Store division net revenues of $87,000, $72,456 and $53,146
for fiscal 1999, 2000 and fiscal 2001 respectively, and cost of goods sold
of $58,050, $49,025 and $38,643 for fiscal 1999, fiscal 2000 and fiscal
2001, respectively. As a result of the integration of Designer Holdings
into the operations of the Company, net income associated with these
revenues cannot be separately identified. Excludes special charges of
$18,074 in fiscal 2000 as described in Note 5.

(b) Net income (loss) includes a charge of $54,752 and $38,842 of general
corporate expenses for fiscal 2000 and 2001, respectively.

NOTE 18 -- STOCKHOLDERS' EQUITY (DEFICIENCY)

Total dividends declared during fiscal years 1999 and 2000 were $20,250
($0.36 per share) and $12,958 ($0.27 per share), respectively. In December 2000,
the Company suspended payment of its quarterly cash dividend. The Amended DIP
prohibits the Company from the paying dividends or making distributions to the
holders of common stock.

The Company has 10,000,000 shares of authorized and unissued preferred stock
with a par value of $0.01 per share.

F-36

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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
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 December 31, 2000 and
January 5, 2002, 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.

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 Option 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 four 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
190,680 shares of restricted stock to certain employees, including certain
officers of the Company, during the fiscal year ended January 1, 2000. During
fiscal 2000 and 2001, there were no restricted stock grants. The restricted

F-37

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

shares vest over four years. The fair market value of the restricted shares was
$5,458 at the date of grant. The Company recognizes compensation expense equal
to the fair value of the restricted shares over the vesting period. Compensation
expense for the 1999, 2000 and 2001 fiscal years was $6,246, $4,643 and $1,999,
respectively. During 1999 and 2000, there were no restricted shares cancelled.
During fiscal 2001, 119,250 unvested restricted shares were cancelled and the
unearned stock compensation of $3,929 was reversed in stockholders' equity
(deficiency). Unearned stock compensation at January 1, 2000, December 30, 2000
and January 5, 2002 was $10,984, $6,341 and $413, respectively, and is a
reduction to stockholders' equity (deficiency).

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
shareholder's 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.

F-38

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

A summary of the status of the Company's stock option plans are presented
below:

In fiscal 1999, fiscal 2000 and fiscal 2001, in exchange for shares received
from option holders with a fair value of $2,640, $702 and $49, respectively, the
Company paid $2,640, $702 and $49, 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 or vesting.

Summary information related to options outstanding and exercisable at
January 5, 2002 is as follows:

The Company has reserved 10,442,646 shares of Class A Common Stock for
issuance under the Director Plan, Stock Plan and Option Plan as of January 5,
2002. In addition, as of January 5, 2002 there are 12,242,629 shares of Class A
Common Stock in treasury stock available for issuance under the 1997 Plan.

The fair value for these stock options was estimated at the date of grant
using a Black-Scholes option-pricing model with the following assumptions:

F-39

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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 stock
outstanding as of January 1, 2000, December 30, 2000 and January 5, 2002.

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 1999, the Company
repurchased 6,182,088 shares of its common stock under the repurchase programs
at a cost of $144,688. At January 5, 2002, 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 counter-party 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
counter-party at the same price at the same future date.

F-40

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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.

In connection with the Company's stock repurchase program, the Company
entered into Equity Forward Purchase Agreements ('Equity Agreements') on
December 10, 1999 and February 10, 2000, with two banks for terms of up to two
and one-half years. The Equity Agreements provided for the purchase by the
Company of up to 5.2 million shares of the Company's Common Stock. The Equity
Agreements were required to be settled by the Company, in a manner elected by
the Company, on a physical settlement, cash settlement or net share settlement
basis within the duration of the Equity Agreements. As of December 30, 2000, the
banks had purchased 5.2 million shares under the Equity Agreements. On
September 19, 2000, the Equity Agreements were amended and supplemented to
reduce the price at which the Equity Agreements could be settled from $12.90 and
$10.90, respectively to $4.50 a share. In return for this reduction the banks
received interest bearing notes payable on August 12, 2002 in an aggregate
amount of $40,372 which resulted in a corresponding charge to shareholders
equity. As of January 5, 2002 and December 30, 2000, the price at which the
Company could effect physical settlement or settle in cash or net shares with
the two banks under the Equity Agreements was $4.50. Losses related to the
Equity Agreements are included with investment income (loss) in the consolidated
statements of operations for the years ended December 30, 2000 and January 5,
2002 were $5,900 and $6,556, respectively. Amounts due to the banks under these
agreements totalled $56,677 at January 5, 2002 and are included in liabilities
subject to compromise.

NOTE 19 -- EARNINGS (LOSS) PER SHARE

(footnotes on next page)

F-41

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(footnotes from previous page)

(a) The effect of dilutive securities was not included in the computation of
diluted earnings (loss) per share for the fiscal years ended December 30,
2000 and January 5, 2002 because the effect would have been anti-dilutive.
Dilutive securities included options outstanding to purchase 15,741,796
and 6,011,639 shares of common stock, unvested restricted stock of 260,950
and 19,424, and 5.200,000 of shares under Equity Agreements at December 30,
2000 and January 5, 2002, respectively.

Additionally, incremental shares issuable on the assumed conversion of the
Preferred Securities of 1,653,177 were not included in the fiscal 1999,
2000, or 2001 computation of diluted earnings per share as the impact
would have been anti-dilutive for each period presented.

(b) There are no outstanding in-the-money stock options at or for the year
ended January 5, 2002.

NOTE 20 -- LEASE AND OTHER COMMITMENTS

In fiscal 1999, the Company sold certain equipment for cash proceeds of
$23,185, 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, upon lease
termination the Company has the option to acquire the related assets at the then
fair value. If the Company does not exercise its option, it guaranteed to repay
a portion of the residual value loss, if any, incurred by the lessors in
remarketing or disposing of such assets upon lease termination or expiration.
The Company is a party to various lease agreements for equipment, real estate,
furniture, fixtures and other assets which expire at various dates through 2020.
Under these agreements the Company is required to pay various amounts including
property taxes, insurance, maintenance fees, and other costs. The following is a
schedule of future minimum rental payments required under operating leases with
terms in excess of one year, as of January 5, 2002:

Rent expense included in the consolidated statements of operations for the
years ended January 1, 2000, December 31, 2000 and January 5, 2002 was $61,152,
$70,827 and $56,519, respectively.

The Company's domestic lease agreements are subject to the provisions of the
Bankruptcy Code and may be confirmed or rejected by the Company. The Company has
estimated the total amount of claims for rejected leases. Accrued rent for
rejected leases totalled $20,600 at January 5, 2002. The total amount that will
ultimately be paid on these items is subject to a confirmed plan or plans of
reorganization and may differ from the amounts the Company has recorded at
January 5, 2002.

On June 9, 2002, the Bankruptcy Court approved the Company's settlement of
certain operating lease agreements. The leases had original terms of from three
to seven years and were secured by certain equipment, machinery, furniture,
fixtures and other assets. The total amount payable to the lessor under the
settlement agreement is $15,200 of which $4,400 had been paid by the Company
through May 30, 2002. The remaining balance of $10,800 will be paid by the
Company in equal installments of $550 through the date of the consummation of a
confirmed plan of reorganization and

F-42

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

$750 per month thereafter until the balance is fully repaid. Future obligations
under operating leases as of January 5, 2002 after giving effect to the
settlement are summarized below:

2002........................................................ $ 8,065
2003........................................................ 7,725
2004........................................................ 972
2005........................................................ 615
2006........................................................ 533

In connection with the Chapter 11 Cases, the Company instituted a Key Domestic
Employee Retention Plan (the 'Retention Plan') which has been approved by the
Bankruptcy Court. The Retention Plan provides for stay bonuses, severance
protection and discretionary bonuses during the Chapter 11 Cases. Approximately
245 domestic employees are covered under the Retention Plan. Participants must
meet certain criteria to receive payments under the Retention Plan. The Company
incurred $5,763 of expenses related to the Retention Plan in the year ended
January 5, 2002, representing approximately one-third of the total amount due
under the Retention Plan. Retention Plan payments are included in reorganization
items for the year ended January 5, 2002. On June 10, 2002 the Company made the
second payment of $4,654 amounting to one-third of amounts due to employees
under the Retention Plan. The payment of the final installment of amounts due
under the Plan will be made when a plan or plans of reorganization are
consummated or upon the liquidation of the Company and are estimated to be
approximately $5,879.

The Company has entered into an employment agreement with an executive of
the Company. The agreement, as amended, provides for a monthly salary of
$125 payable through April 30, 2003 or the consummation of a plan of
reorganization for all or substantially all of the Debtors in the Chapter 11
Cases. In addition to the employee's monthly salary the employee is entitled to
earn an incentive bonus of not less than $2,250. The employee may earn
additional incentive bonus amounts based upon criteria established in the
agreement up to an additional $7,750. The minimum bonus is payable upon the
earlier of the expiration of the agreement, the date a plan of reorganization is
consummated, the date of a complete disposition of the Company or the date the
employee's employment is terminated under certain circumstances. Additional
bonus amounts may be paid to the employee prior to the payment of the minimum
bonus if certain financial criteria are met. Total bonus payments cannot exceed
$10,000.

As a result of the Chapter 11 Cases and the circumstances leading to the
filing thereof, as of January 5, 2002, the Company was not in compliance with
certain financial and bankruptcy covenants contained in certain of its license
agreements. Under applicable provisions of the Bankruptcy Code, compliance with
such terms and conditions in executory contracts generally are either excused or
suspended during the Chapter 11 Cases.

The Company expects to assume certain of its license agreements as part of
its plan or plans of reorganization. The assumption of any executory contracts,
including licenses, is subject to the approval of the Company's plan or plans of
reorganization by the Bankruptcy Court or other order of the court. There can be
no assurance that the Company will be successful in its efforts to assume these
licenses.

NOTE 21 -- 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.

Pre-petition revolving loans, term loans and other borrowings. The carrying
amounts of the Company's outstanding balances under its various pre-petition
Bank Credit Agreements are recorded at the nominal amount plus accrued interest
and fees through the Petition Date and are included in

F-43

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

liabilities subject to compromise at January 5, 2002. The ultimate amount of and
settlement terms for these liabilities are subject to a confirmed plan or plans
of reorganization and accordingly are not presently determinable.

Amended DIP. The carrying amounts under the Amended DIP are recorded at the
nominal amount which approximates its fair value because the interest rate on
the outstanding debt is variable and there are no prepayment penalties.

Redeemable preferred securities. These securities were publicly traded on
the New York Stock Exchange prior to the petition date. The fair market value
was determined based on the closing price on the last trading date prior to
December 30, 2000. At January 5, 2002 the redeemable preferred securities are
recorded at their nominal value of $120,000 and are included in liabilities
subject to compromise.

Interest rate swap agreements. Prior to the Petition Date the Company
entered into interest rate swap agreements, which had 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 December 30, 2000 were
based upon quotes from brokers and represent the cash requirement if the
existing agreements had been settled at year-end. There are no swap agreements
outstanding at January 5, 2002.

Letters of credit -- post petition. Letters of credit collateralize the
Company's obligations to third parties and have terms ranging from 30 days to
one year. The face amounts 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.

Letters of credit -- pre-petition. Letters of credit collateralize the
Company's obligations to third parties and have terms ranging from 30 days to
one year. The face amounts 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. Pre-petition letters of credit are recorded at their face amount.
Pre-petition letters of credit were satisfied by the Company's lenders or by the
Company during fiscal 2001.

Equity Agreements. These arrangements could 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 prior to the Petition Date. To the extent
that the market price of the Company's common stock on the settlement date was
higher or lower than the forward purchase price, the net differential could have
been paid or received by the Company in cash or in the Company's common stock.
Amounts payable under the Equity Agreements are included in liabilities subject
to compromise at January 5, 2002.

Foreign currency transactions. Prior to the Petition Date the Company
entered into various foreign currency forward and option contracts to hedge
certain commercial transactions. The fair value of open foreign currency forward
and option contracts was based upon quotes from brokers and reflects the cash
benefit if the existing contracts had been sold. At December 30, 2000 the
Company had foreign currency forward contracts outstanding with a carrying
amount of $26 which approximated fair value. The Company has no foreign currency
forward contracts outstanding as of January 5, 2002. The Company had no foreign
currency option contracts outstanding at December 30, 2000 and January 5, 2002.

The carrying amounts and fair value of the Company's financial instruments
as of December 30, 2000 and January 5, 2002, are as follows:

F-44

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

- ---------

(a) Amounts outstanding under these debt agreements are subject to compromise
under the Chapter 11 Cases and as a result the fair value cannot be
estimated.

FOREIGN CURRENCY-RISK MANAGEMENT

The Company's international operations are subject to certain risks,
including currency fluctuations and government actions. The Company closely
monitors its operations in each country so that it can respond to changing
economic and political environments and to fluctuations in foreign currencies.
Accordingly, prior to the Petition Date the Company utilized foreign currency
option contracts and forward contracts to hedge its exposure on anticipated
transactions and firm commitments, primarily for receivables and payables
denominated in currencies other than the entities' functional currencies.
Foreign currency instruments generally had maturities that did not exceed twelve
months.

The Company had foreign currency instruments, primarily denominated in
Canadian dollars, British pounds, Euros and Mexican pesos. At January 1, 2000
and December 30, 2000, the Company had $39,417 and $4,996 in foreign currency
instruments outstanding, respectively. For 1999 and 2000 the net realized gains
or losses associated with these types of instruments were not material. The net
unrealized gain (loss) as of January 1, 2000 and December 30, 2000, based on the
fair market value of the instruments, were not material to each respective
period.

The Company did not have any foreign currency hedge contracts at January 5,
2002.

F-45

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 22 -- CASH FLOW INFORMATION

The following table sets forth supplemental cash flow information for fiscal
1999, 2000 and 2001:

- ---------

(a) Represents deferred cash payment related to the acquisition of ABS of which
$18,724 was outstanding at January 5, 2002 and is included in liabilities
subject to compromise.

NOTE 23 -- LEGAL MATTERS

As a consequence of the Chapter 11 Cases, all pending claims and litigation
against the Company and its filed subsidiaries have been automatically stayed
pursuant to Section 362 of the Bankruptcy Code absent further order of the
Bankruptcy Court. Below is a summary of legal proceedings the Company believes
to be material.

Calvin Klein Litigation. On May 30, 2000, Calvin Klein, Inc. ('CKI') and the
Calvin Klein Trademark Trust filed a complaint in the U.S. District Court in the
Southern District of New York (Calvin Klein Trademark Trust, et al. v. The
Warnaco Group, Inc., et al., No. 00 CIV. 4052 (JSR) (S.D.N.Y.)) against The
Warnaco Group, Inc., various other Warnaco entities, and Linda Wachner alleging,
inter alia, claims for breach of contract and trademark violations.

Certain defendants filed counterclaims against CKI for, inter alia, breach
of the jeanswear and men's accessories licenses and breach of fiduciary duty,
and against CKI and Calvin Klein personally for tortious interference with
business relations, defamation and trade libel. CKI subsequently filed
additional claims against CKJ Holdings, Inc. and Calvin Klein Jeanswear Company
in the Supreme Court of the State of New York.

On January 22, 2001, the parties entered into a confidential settlement
agreement whereby they agreed, inter alia, to the dismissal of all claims and
counterclaims asserted in both actions with prejudice and without the payment of
any sum of money by any party to any other party.

Speedo Litigation. On September 14, 2000, Speedo International Limited
('SIL') filed a complaint in the U.S. District Court for the Southern District
of New York, styled Speedo International Limited v. Authentic Fitness Corp., et
al., No. 00 Civ. 6931 (DAB) (the 'Speedo Litigation'), against The Warnaco
Group, Inc. and various other Warnaco entities (the 'Warnaco Defendants')
alleging claims, inter alia,

F-46

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

for breach of contract and trademark violations (the 'Speedo Claims'). The
complaint seeks, inter alia, termination of certain licensing agreements,
injunctive relief and damages.

On November 8, 2000, the Warnaco Defendants filed an answer and
counterclaims against SIL seeking, inter alia, a declaration that the Warnaco
Defendants have not engaged in trademark violations and are not in breach of the
licensing agreements, and that the licensing agreements at issue (the 'Speedo
Licenses') may not be terminated.

On or about October 30, 2001, SIL filed a motion in the Bankruptcy Court
seeking relief from the automatic stay to pursue the Speedo Litigation in the
District Court, and have its rights determined there through a jury trial (the
'Speedo Motion'). The Debtors opposed the Speedo Motion, and oral argument was
held on February 21, 2002. On June 11, 2002, the Bankruptcy Court denied the
Speedo Motion on the basis that, inter alia, (i) the Speedo Motion was
premature, and (ii) the Bankruptcy Court has core jurisdiction over resolution
of the Speedo Claims. Accordingly, the material issues raised by the Speedo
Claims will likely be decided by the Bankruptcy Court in the context of
assumption or rejection of the Speedo Licenses or the confirmation of the
Company's plan or plans of reorganization.

The Company believes the Speedo Claims to be without merit and intends to
vigorously dispute them and pursue its counterclaims.

Wachner Claim. On January 18, 2002, Mrs. Linda J. Wachner, former President
and Chief Executive Officer of the Company filed a proof of claim in the
Chapter 11 Cases related to the post-petition termination of her employment with
the Company.

Shareholder Class Actions. Between August 22, 2000 and October 26, 2000,
seven putative class action complaints were filed in the U.S. District Court for
the Southern District of New York against the Company and certain of its
officers and directors (the 'Shareholder I Class Action'). The complaints, on
behalf of a putative class of shareholders of the Company who purchased Company
stock between September 17, 1997 and July 19, 2000 (the 'Class Period'), allege,
inter alia, that the defendants violated the Securities Exchange Act of 1934, as
amended (the 'Exchange Act') by artificially inflating the price of the
Company's stock and failing to disclose certain information during the Class
Period.

On November 17, 2000, the Court consolidated the complaints into a single
action, styled In Re The Warnaco Group, Inc. Securities Litigation, No.
00-Civ-6266 (LMM), and appointed a lead plaintiff and approved a lead counsel
for the putative class. A second amended consolidated complaint was filed on
May 31, 2001. On October 5, 2001, the defendants other than the Company filed a
motion to dismiss based upon, among other things, the statute of limitations,
failure to state a claim and failure to plead fraud with the requisite
particularity. On April 25, 2002, the Court granted the motion to dismiss this
action based on the statute of limitations. On May 10, 2002, the plaintiffs
filed a motion for reconsideration in the District Court. On May 24, 2002, the
plaintiffs filed a notice of appeal. On July 23, 2002, plaintiffs' motion for
reconsideration was denied.

The Shareholder I Class Action has been stayed against the Company pursuant
to Section 362 of the Bankruptcy Code and is not expected to have a material
impact on the Company's financial statements.

Between April 20, 2001 and May 31, 2001, five putative class action
complaints against the Company and certain of its officers and directors were
filed in the U.S. District Court for the Southern District of New York (the
'Shareholder II Class Action'). The complaints, on behalf of a putative class of
shareholders of the Company who purchased Company stock between September 29,
2000 and April 18, 2001 (the 'Second Class Period'), allege, inter alia that
defendants violated the Exchange Act by artificially inflating the price of the
Company's stock and failing to disclose negative information during the Second
Class Period.

On August 3, 2001, the Court consolidated the actions into a single action,
styled In Re The Warnaco Group, Inc. Securities Litigation (II), No. 01 CIV 3346
(MCG), and appointed a lead plaintiff and approved a lead counsel for the
putative class. A consolidated amended complaint was filed against certain
current and former officers and directors of the Company, which expanded the
Second Class

F-47

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Period to encompass August 16, 2000 to June 8, 2001. The amended complaint also
dropped the Company as a defendant, but added as defendants certain outside
directors. On April 18, 2002, the Court dismissed the amended complaint, but
granted plaintiffs leave to replead. On June 7, 2002, the plaintiffs filed a
second amended complaint, which again expanded the Second Class Period to
encompass August 15, 2000 to June 8, 2001. On June 24, 2002 the defendants filed
motions to dismiss the second amended complaint, which motions are pending.

Shareholder Derivative Suits. On October 13, 2000, a shareholders'
derivative complaint was filed on behalf of the Company in the U.S. District
Court for the Southern District of New York, styled Widdicombe, derivatively on
behalf of The Warnaco Group, Inc. v. Linda J. Wachner, et al., No. 00 Civ. 7816
(LMM), naming certain of the Company's officers and directors as defendants (the
'Individual Defendants') and the Company as a nominal defendant. The complaint
filed on October 13, 2000 asserted claims on the Company's behalf for, inter
alia, breach of fiduciary duty, corporate waste and unjust enrichment, and
sought, inter alia, damages, punitive damages, and the imposition of a
constructive trust upon the assets of the Individual Defendants. The complaint
was subsequently withdrawn voluntarily.

SEC Investigation. As previously disclosed, the staff of the Securities and
Exchange Commission (the 'SEC') has been conducting an investigation to
determine whether there have been any violations of the Exchange Act in
connection with the preparation and publication of various financial statements
and other public statements. The Company has cooperated in that investigation.
On July 18, 2002, the SEC staff informed the Company that it intends to
recommend that the SEC authorize an enforcement action against the Company and
certain persons who have been employed by or affiliated with the Company since
prior to January 3, 1999 alleging violations of the federal securities laws. The
SEC staff has invited the Company to make a Wells Submission describing the
reasons why no such action should be brought. The Company intends to make a
Wells Submission. The Company does not expect the resolution of this matter as
to the Company to have a material effect on the Company's financial condition,
results of operation or business.

F-48

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 24 -- SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION

The following condensed financial statements of The Warnaco Group, Inc., 37
of its 38 U.S. subsidiaries and Warnaco Canada represent the condensed
consolidated financial position, results of operations and cash flows for the
Debtors as of January 5, 2002 and for the year ended January 5, 2002.

F-49

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

F-50

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

F-51

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOTE 25 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The Company's fiscal 1999 and fiscal 2000 quarterly results of operations
have been restated to reflect the correction of certain accounting errors
involving the recording of inter-company pricing arrangements, the recording of
accounts payable primarily related to the purchase of inventory from suppliers
and the accrual of certain liabilities. See Note 2.

F-52

THE WARNACO GROUP, INC.
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(a) Effective January 2, 2000, the Company changed its accounting method for
valuing its retail outlet store inventory. Prior to the change, the Company
valued its retail inventory using average cost. Under its new method, the
Company values its retail inventory using the actual cost method. The
Company believes its new method is preferable because it results in a better
matching of revenue and expense and is consistent with the method used for
its other inventories.

(a) Impairment charges represent the write-down of certain intangible assets to
estimated fair value, see Note 1.

(b) Reorganization items represent costs and expenses related to the
Chapter 11 Cases, see Note 4.
- ---------

The fourth quarter of fiscal 2001 includes a provision for income taxes of
$141,548 primarily related to the increase in the valuation allowance for future
income tax benefits.

F-53

SCHEDULE II

THE WARNACO GROUP, INC.

VALUATION & QUALIFYING ACCOUNTS & RESERVES(5)
(DOLLARS IN THOUSANDS)

(1) Includes bad debts, cash discounts, allowances and sales returns.

(2) Reserves related to assets acquired including fair value
adjustments -- See Note 3.

(3) Reclassifications of reserve amounts for assets held for sale.

(4) Amounts written-off, net of recoveries.

(5) See Note 9 for income tax valuation allowance information.

A-1

STATEMENT OF DIFFERENCES
------------------------

The registered trademark symbol shall be expressed as.................. 'r'
The dagger symbol shall be expressed as................................ 'D'